<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
TUMBLEWEED COMMUNICATIONS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4899 94-3336053
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
BERNARD J. CASSIDY, ESQ.
GENERAL COUNSEL AND SECRETARY
TUMBLEWEED COMMUNICATIONS CORP.
700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
COPIES TO:
GREGORY C. SMITH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
525 UNIVERSITY AVENUE, SUITE 220
PALO ALTO, CALIFORNIA 94301
(650) 470-4500
JAMES A. HEISCH
PRESIDENT AND CHIEF FINANCIAL OFFICER
WORLDTALK COMMUNICATIONS CORPORATION
5155 OLD IRONSIDES DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 567-1500
GORDON K. DAVIDSON, ESQ.
FENWICK & WEST LLP
TWO PALO ALTO SQUARE
PALO ALTO, CALIFORNIA 94306
(650) 494-0600
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger of a subsidiary of the Registrant with and into
Worldtalk Communications Corporation pursuant to the Agreement and Plan of
Merger, dated as of November 18, 1999, described in the enclosed joint proxy
statement/prospectus, have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share, of
Tumbleweed................................ 4,924,460(1) N/A $186,442,890(2) $49,221(2)
</TABLE>
(1) Represents 14,519,246 outstanding shares of common stock of Worldtalk on
November 18, 1999 plus an additional 4,420,984 shares of Worldtalk common
stock reserved for issuance, multiplied by the exchange ratio of 0.26.
(2) Reflects the market price of the common stock of Worldtalk to be converted
into common stock of the Registrant in connection with the merger (set forth
in footnote (1) above) computed in accordance with Rule 457(f) and
Rule 457(c) under the Securities Act, based upon the average of the high and
low sale prices of the Worldtalk common stock as quoted on the Nasdaq
National Market on December 3, 1999. The proposed maximum aggregate offering
price is estimated solely to determine the registration fee.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
TUMBLEWEED COMMUNICATIONS CORP.
700 Saginaw Drive, Redwood City, California 94063
[ ], 2000
To Our Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Tumbleweed Communications Corp. to be held at [ ] on [ ],
2000 at 10:00 a.m., local time.
At this special meeting, you will be asked to consider and vote upon a
proposal to approve the issuance of shares of Tumbleweed common stock under the
Agreement and Plan of Merger dated as of November 18, 1999, which we refer to as
the Merger Agreement, among Tumbleweed, Keyhole Acquisition Corp., a
newly-formed, wholly-owned subsidiary of Tumbleweed, and Worldtalk
Communications Corporation, and the transactions associated with it. Under the
terms of the Merger Agreement, Keyhole would merge into Worldtalk and Worldtalk
would become a wholly-owned subsidiary of Tumbleweed. In the merger, each share
of common stock of Worldtalk outstanding immediately prior to the effective time
of the merger would be converted into 0.26 of a share of Tumbleweed common
stock. In addition, outstanding Worldtalk warrants and employee and director
stock options would be assumed by Tumbleweed.
After careful consideration, your board of directors has determined that the
Merger Agreement and the transactions associated with it, including the stock
issuance, are fair to and in the best interests of Tumbleweed and its
stockholders and has approved the Merger Agreement. In connection with the
proposed transactions, the Board retained as financial advisor Credit Suisse
First Boston Corporation, which has delivered to the Board of Directors its
written opinion to the effect that, based upon and subject to the various
considerations set forth in its opinion, as of the date of its opinion, the
exchange ratio of 0.26 is fair to Tumbleweed from a financial point of view. A
copy of the Credit Suisse First Boston opinion which sets forth, among other
things, the assumptions made, procedures followed, matters considered and
limitations set on the scope of the review undertaken, is set forth as Annex D
to the accompanying joint proxy statement/prospectus, and should be read
carefully in its entirety.
Your board of directors recommends that you vote in favor of the issuance of
shares of Tumbleweed common stock under the Merger Agreement and the
transactions associated with it.
The merger, the Merger Agreement and the stock issuance are described in the
accompanying joint proxy statement/prospectus which you should read carefully.
If you have any questions or require additional information about the special
meeting or the merger, please call our Investor Relations Department at (650)
216-2018.
<TABLE>
<S> <C>
Sincerely,
------------------------------------------------
Jeffrey C. Smith
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE>
[LOGO]
TUMBLEWEED COMMUNICATIONS CORP.
700 Saginaw Drive
Redwood City, California 94063
Telephone: (650) 216-2000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [ ], 2000
A special meeting of our stockholders will be held at [ ] on
[ ], 2000 at 10:00 a.m., local time, to vote on the issuance of
shares of Tumbleweed common stock under the Merger Agreement, pursuant to which
a subsidiary of Tumbleweed Communications Corp. would be merged with and into
Worldtalk Communications Corporation, and the transactions associated with the
Merger Agreement. In the merger, Tumbleweed would issue 0.26 of a share of
Tumbleweed common stock to Worldtalk stockholders for each share of Worldtalk
common stock that they own. In addition, outstanding Worldtalk warrants and
employee and director stock options would be assumed by Tumbleweed.
Your board of directors has determined that the Merger Agreement and the
transactions associated with it, including the stock issuance, are in your best
interests and recommends that you vote to approve the Merger Agreement and the
transactions associated with it at the special meeting.
In connection with the execution of the Merger Agreement, a group of
stockholders of Tumbleweed collectively holding 11,754,426 shares of Tumbleweed
common stock (representing approximately 54% of the outstanding Tumbleweed
common stock) have entered into voting agreements with Worldtalk, pursuant to
which these stockholders have agreed, among other things, to vote such shares of
Tumbleweed common stock to approve the stock issuance under the Merger Agreement
and the transactions associated with it at the special meeting, which vote will
assure such approval by Tumbleweed's stockholders. In addition, a group of
stockholders of Worldtalk collectively holding 6,630,165 shares of Worldtalk
common stock (representing approximately 46% of the outstanding Worldtalk common
stock) have entered into voting agreements with Tumbleweed, pursuant to which
these stockholders have agreed, among other things, to vote such shares of
Worldtalk common stock to approve the Merger Agreement and the transactions
associated with it at a special meeting of Worldtalk stockholders.
Only Tumbleweed stockholders of record at the close of business on
[ ] will be entitled to notice of, and to vote at, the Tumbleweed
special meeting and at any adjournments or postponements of that meeting. You
should refer to the attached joint proxy statement/prospectus for a more
complete description of the Merger Agreement and the transactions associated
with it. In addition, a copy of the Merger Agreement is attached to the
accompanying joint proxy statement/prospectus as Annex A. A complete list of
stockholders entitled to vote at the special meeting will be open to
examination, during ordinary business hours, at Tumbleweed's corporate
headquarters, for the 10 days prior to the special meeting by any Tumbleweed
stockholder for any relevant purpose.
It is important that your shares of Tumbleweed common stock be represented
at the special meeting, regardless of the number of shares you hold. We urge you
to mark, sign, date and return the enclosed proxy card in the enclosed business
reply envelope. No postage is required if mailed in the United States.
If your shares are not registered in your own name and you plan to attend
the special meeting and vote your shares in person, you will need to ask the
broker, trust company, bank or other nominee that holds your shares to provide
you with evidence of your share ownership on [ ] and bring that
evidence to the special meeting.
<PAGE>
Please vote as soon as possible by telephone or by completing your proxy
card and returning it in the enclosed envelope. If you decide to attend the
special meeting in person you can withdraw your proxy and vote at that time.
<TABLE>
<S> <C>
By order of the board of directors,
------------------------------------------------
Bernard J. Cassidy
CORPORATE SECRETARY
</TABLE>
Date: [ ]
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER
AGREEMENT AND THE TRANSACTIONS ASSOCIATED WITH IT WHICH ARE DESCRIBED IN DETAIL
IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS. YOUR VOTE IS IMPORTANT.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF TUMBLEWEED
COMMON STOCK PRESENT IN PERSON OR REPRESENTED BY PROXY AND ENTITLED TO VOTE AT
THE SPECIAL MEETING IS REQUIRED TO APPROVE THE ISSUANCE OF SHARES OF TUMBLEWEED
COMMON STOCK UNDER THE MERGER AGREEMENT. WE URGE YOU TO MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR TO VOTE
BY TELEPHONE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
<PAGE>
[WORLDTALK LOGO]
[ ], 2000
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Worldtalk Communications Corporation to be held on [ ] at 1:00 p.m.,
local time, at [ ]. THIS IS A VERY IMPORTANT SPECIAL MEETING THAT AFFECTS
YOUR INVESTMENT IN WORLDTALK.
At this special meeting you will be asked to vote on an Agreement and Plan
of Merger, dated as of November 18, 1999, which we refer to as the Merger
Agreement, pursuant to which a subsidiary of Tumbleweed Communications Corp.
will merge with and into Worldtalk and Worldtalk will become a wholly-owned
subsidiary of Tumbleweed. In the merger, Tumbleweed will issue to Worldtalk
stockholders 0.26 of a share of Tumbleweed common stock for each share of
Worldtalk common stock that they own. The exchange of Worldtalk common stock for
Tumbleweed common stock, other than cash paid for fractional shares, is intended
to be tax-free to Worldtalk stockholders for federal income tax purposes. In
addition, outstanding Worldtalk warrants and employee and director stock options
will be assumed by Tumbleweed.
Your board of directors has unanimously approved the merger and has
determined that the Merger Agreement and the merger are in your best interests
and recommends that you vote to approve the Merger Agreement and the
transactions associated with it at the special meeting. The Merger Agreement is
attached to the accompanying joint proxy statement/prospectus as Annex A.
In reaching this determination, your board of directors received the written
opinion of Volpe Brown Whelan & Company, LLC to the effect that, as of the date
of such opinion, the exchange ratio is fair, from a financial point of view, to
Worldtalk stockholders. A copy of this opinion which sets forth the assumptions
made, matters considered, and the scope of review undertaken, is attached to the
accompanying joint proxy statement/prospectus as Annex E, and should be read
carefully in its entirety.
We have enclosed a notice of special meeting and a joint proxy
statement/prospectus discussing the proposed merger and the related Merger
Agreement. We encourage you to read these documents carefully. Also enclosed is
a proxy card so you can vote on the Merger Agreement without attending the
meeting. Please complete, sign and date the enclosed proxy card and return it to
us as soon as possible in the stamped envelope we have provided. If you decide
to come to the special meeting, you may vote your shares in person whether or
not you have mailed us a proxy.
Thank you for your cooperation.
<TABLE>
<S> <C>
Very truly yours,
------------------------------------------------
James A. Heisch
PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
<PAGE>
[Worldtalk Logo]
WORLDTALK COMMUNICATIONS CORPORATION
5155 OLD IRONSIDES DRIVE
SANTA CLARA, CALIFORNIA 95054
TELEPHONE: (408) 567-1500
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD [ ], 2000
------------------------
A special meeting of our stockholders will be held at [ ] on [ ],
2000 at 1:00 p.m., local time. The board of directors of Worldtalk
Communications Corporation asks you to attend this important special meeting to
vote on a Merger Agreement and related transactions, pursuant to which a
subsidiary of Tumbleweed Communications Corporation will be merged with and into
Worldtalk with Worldtalk becoming a wholly-owned subsidiary of Tumbleweed. In
the merger, Tumbleweed will issue to Worldtalk stockholders 0.26 of a share of
Tumbleweed common stock for each share of Worldtalk common stock that they own.
In addition, outstanding Worldtalk warrants and employee and director stock
options will be assumed by Tumbleweed.
Your board of directors has determined that the Merger Agreement and the
merger are in your best interests and recommends that you vote to approve the
Merger Agreement and the transactions associated with it at the special meeting.
In connection with the execution of the Merger Agreement, a group of
stockholders of Worldtalk collectively holding 6,630,165 shares of Worldtalk
common stock (representing approximately 46% of the outstanding Worldtalk common
stock) have entered into voting agreements with Tumbleweed, pursuant to which
these stockholders have agreed, among other things, to vote such shares of
Worldtalk common stock to approve the Merger Agreement and the transactions
associated with it at the special meeting. In addition, a group of stockholders
of Tumbleweed collectively holding 11,754,426 shares of Tumbleweed common stock
(representing approximately 54% of the outstanding Tumbleweed common stock) have
entered into voting agreements with Worldtalk, pursuant to which these
stockholders have agreed, among other things, to vote such shares of Tumbleweed
common stock to approve the stock issuance under the Merger Agreement and the
transactions associated with it at a Tumbleweed special meeting.
Only stockholders who held their shares of Worldtalk common stock at the
close of business on [ ] will be entitled to notice of, and to vote
at, the special meeting or any adjournments or postponements. The merger cannot
be completed unless holders of a majority of the outstanding shares of Worldtalk
common stock on the record date affirmatively vote to approve the Merger
Agreement.
Accompanying this notice is a joint proxy statement/prospectus discussing
the proposed merger and the related Merger Agreement. We encourage you to read
this document carefully. Also enclosed is a proxy card so you can vote on the
Merger Agreement without attending the meeting. Please complete, sign and date
the enclosed proxy card and return it to us as soon as possible in the stamped
envelope we have provided. If you decide to come to the special meeting, you may
vote your shares in person whether or not you have mailed us a proxy. You may
also revoke your proxy at any time before the meeting.
<TABLE>
<S> <C>
By order of the board of directors,
------------------------------------------------
James A. Heisch
CORPORATE SECRETARY
</TABLE>
Date: [ ]
<PAGE>
PROXY STATEMENT/PROSPECTUS
TUMBLEWEED COMMUNICATIONS CORP.
PROXY STATEMENT
WORLDTALK COMMUNICATIONS CORPORATION
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The boards of directors of Tumbleweed Communications Corp. and Worldtalk
Communications Corporation have approved a Merger Agreement pursuant to which,
if approved by the stockholders of each of Tumbleweed and Worldtalk, a
subsidiary of Tumbleweed will be merged with and into Worldtalk and Worldtalk
will become a wholly-owned subsidiary of Tumbleweed.
Upon completion of the merger, Worldtalk stockholders will receive 0.26 of a
share of Tumbleweed common stock for each share of Worldtalk common stock that
they own. The exchange of Worldtalk common stock for Tumbleweed common stock,
other than cash paid for fractional shares, is intended to be tax-free to
Worldtalk stockholders for federal income tax purposes. In addition, holders of
Worldtalk warrants and employee and director stock options will have their
warrants and options converted into warrants and options to purchase 0.26 of a
share of Tumbleweed common stock for each share of Worldtalk common stock
subject to an existing warrant or option. The converted warrants and options
will have an exercise price per share equal to the exercise price per share of
the existing warrants and options divided by 0.26. Tumbleweed stockholders will
continue to own their existing shares after the merger.
This joint proxy statement/prospectus is also the prospectus of Tumbleweed
regarding the Tumbleweed common stock to be issued to Worldtalk stockholders in
exchange for their shares of Worldtalk common stock in connection with the
merger. Based on the number of shares of Worldtalk common stock outstanding on
[ ], Tumbleweed will issue approximately [ ] shares of
Tumbleweed common stock to Worldtalk stockholders in the merger. We estimate
that the shares of Tumbleweed common stock to be issued to Worldtalk
stockholders will represent approximately [ ]% of the outstanding common
stock of Tumbleweed after the merger. As a result, the shares of Tumbleweed
common stock held by Tumbleweed stockholders prior to the merger will represent
approximately [ ]% of the outstanding common stock of Tumbleweed after the
merger. Tumbleweed shares to be issued in connection with the merger or upon the
exercise of converted Worldtalk warrants and options will be listed, subject to
official notice of issuance, on the Nasdaq National Market under the symbol
"TMWD." Worldtalk common stock is currently listed on the Nasdaq National Market
under the symbol "WTLK."
The merger cannot be completed unless the stockholders of Worldtalk approve
the Merger Agreement and the transactions associated with it. Each company has
scheduled a special meeting for its stockholders to vote on the Merger Agreement
and the transactions associated with it and the stockholders of Tumbleweed
approve the issuance of shares of Tumbleweed common stock under the Merger
Agreement and the transactions associated with it. Each of your boards of
directors has determined that the Merger Agreement and the transactions
associated with it are in your respective best interests and recommends that you
vote to approve the Merger Agreement and the transactions associated with it.
YOUR VOTE IS VERY IMPORTANT.
Only stockholders who held their shares of Tumbleweed at the close of
business on [ ] will be entitled to notice of, and to vote at, the
special meeting of Tumbleweed and any adjournments or postponements, and only
stockholders who held their shares of Worldtalk at the close of business on
[ ] will be entitled to notice of, and to vote at, the special
meeting of Worldtalk and any adjournments or postponements.
<PAGE>
The dates, times and places of the special meetings are as follows:
FOR TUMBLEWEED STOCKHOLDERS:
[ ]
FOR WORLDTALK STOCKHOLDERS:
[ ]
This joint proxy statement/prospectus provides you with detailed information
about the proposed Merger Agreement and the transactions associated with it.
This document incorporates important business and financial information about
each of Tumbleweed and Worldtalk that is not included in or delivered with this
document. You may obtain documents that are filed with the Securities and
Exchange Commission and incorporated by reference in this document without
charge by requesting them in writing or by telephone from the appropriate party
at the addresses listed in "Where You Can Find More Information" on page [ ].
See "Risk Factors" beginning on page [ ] for a discussion of certain
factors that you should consider in determining how to vote on the Merger
Agreement and the transactions associated with it.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE TUMBLEWEED COMMON STOCK TO BE
ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT
PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus dated [ ], will be first
mailed to stockholders on or about [ ].
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION......................... vii
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. ix
SUMMARY..................................................... 1
The Companies............................................. 3
Our Reasons for the Merger................................ 3
Recommendations to Stockholders........................... 4
Stockholder Vote Required to Approve the Merger........... 4
The Merger................................................ 5
Stock Option Agreement.................................... 6
Interests of Certain Persons in the Merger................ 6
Anticipated Accounting Treatment.......................... 6
Important Federal Income Tax Consequences................. 6
Dissenters' Rights........................................ 6
Risks of the Merger....................................... 6
Opinions of Financial Advisors............................ 7
Comparative Per Share Market Price Information............ 7
Listing of Tumbleweed Common Stock........................ 7
De-listing of Worldtalk Common Stock...................... 7
Forward-Looking Statements May Prove Inaccurate........... 7
Comparative Rights of Stockholders........................ 7
Tumbleweed and Worldtalk Comparative Per Share Data....... 8
Summary Historical and Summary Pro Forma Combined
Financial Data..........................................
Tumbleweed Summary Historical Financial Information.......
Worldtalk Summary Historical Financial Information........
Tumbleweed/Worldtalk Summary Pro Forma Combined Financial
Information.............................................
RISK FACTORS................................................ 13
Risks Related to the Merger............................... 13
Risks Related to Tumbleweed............................... 14
Risks Related to Worldtalk................................ 19
Risks Related to Both Tumbleweed and Worldtalk............ 26
Risks Related to Our Industry............................. 31
THE SPECIAL MEETINGS........................................ 33
General................................................... 33
Voting Securities and Record Dates........................ 33
Purpose of Special Meetings............................... 34
Solicitation of Proxies; Expenses......................... 34
THE MERGER.................................................. 36
General................................................... 36
Background of the Merger.................................. 36
Reasons for Tumbleweed Engaging in the Merger;
Recommendation of the Tumbleweed Board.................. 36
Reasons for Worldtalk Engaging in the Merger;
Recommendation of the Worldtalk Board................... 37
Opinion of Tumbleweed's Financial Advisor................. 38
Opinion of Worldtalk's Financial Advisor.................. 42
Anticipated Accounting Treatment.......................... 47
Interests of Persons in the Merger........................ 47
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Dissenters' Rights........................................ 49
Resale Restrictions....................................... 49
Stock Exchange Listings................................... 49
Delisting and Deregistration of Worldtalk Common Stock.... 49
Treatment of Stock Certificates........................... 49
Tax-Free Reorganization................................... 49
THE MERGER AGREEMENT........................................ 50
The Merger................................................ 50
Exchange Procedures....................................... 50
Corporate Organization and Governance..................... 51
Representations and Warranties............................ 51
Covenants................................................. 53
No Solicitation of Transactions........................... 54
Access to Information..................................... 56
Indemnification and Insurance............................. 56
Cooperation and Reasonable Efforts........................ 56
Conditions to the Consummation of the Merger.............. 56
Termination............................................... 57
Termination Fee and Expenses.............................. 58
Amendment; Extension and Waiver........................... 59
THE STOCK OPTION AGREEMENT.................................. 60
THE VOTING AGREEMENTS....................................... 62
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 63
TUMBLEWEED BUSINESS......................................... 65
Overview.................................................. 65
Industry Background....................................... 65
The Tumbleweed Solution................................... 65
Strategy.................................................. 67
Products and Services..................................... 69
Customers and Markets..................................... 71
Customers Profiles........................................ 71
Sales and Marketing....................................... 74
Technology................................................ 74
Governmental Regulation................................... 76
Intellectual Property..................................... 76
Competition............................................... 77
Employees................................................. 78
Properties and Facilities................................. 78
Legal Proceedings......................................... 78
SELECTED HISTORICAL FINANCIAL DATA OF TUMBLEWEED............
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--TUMBLEWEED.....................
TUMBLEWEED MANAGEMENT....................................... 79
Executive Officers and Directors.......................... 79
Classified Board of Directors............................. 82
Board Committees.......................................... 82
Director Compensation..................................... 82
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Compensation Committee Interlocks and Insider
Participation........................................... 83
Executive Compensation.................................... 83
1993 Stock Option Plan.................................... 85
1999 Omnibus Stock Incentive Plan......................... 85
1999 Employee Stock Purchase Plan......................... 86
Employment Agreements..................................... 87
Limitation of Liability and Indemnification............... 88
Certain Relationships and Related Transactions............ 88
PRINCIPAL STOCKHOLDERS OF TUMBLEWEED........................ 90
DESCRIPTION OF TUMBLEWEED CAPITAL STOCK..................... 92
WORLDTALK BUSINESS.......................................... 93
KEYHOLE..................................................... 94
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 95
Classified Board of Directors............................. 95
Number of Directors....................................... 95
Removal of Directors; Filling Vacancies................... 96
No Stockholder Action by Written Consent; Special
Meetings................................................ 96
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals................................... 97
Authorized Capital Stock.................................. 99
Voting Rights............................................. 99
Preferred Stock........................................... 99
Amendment of the Certificate of Incorporation and
By-laws................................................. 99
Business Combinations..................................... 100
Limitation of Liability of Directors...................... 101
Indemnification of Directors and Officers................. 101
MARKET PRICE AND DIVIDEND INFORMATION....................... 103
PRINCIPAL STOCKHOLDERS OF WORLDTALK......................... 103
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL DATA OF TUMBLEWEED AND WORLDTALK................ 108
EXPERTS..................................................... 114
LEGAL MATTERS............................................... 114
STOCKHOLDER PROPOSALS....................................... 114
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ANNEXES:
A--Agreement and Plan of Merger, dated as of November 18, 1999
B--Stock Option Agreement, dated November 18, 1999
C--Forms of Voting Agreements
D--Fairness Opinion of Credit Suisse First Boston Corporation
E--Fairness Opinion of Volpe Brown Whelan & Company, LLC
v
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Tumbleweed and Worldtalk file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
either company at the Securities and Exchange Commission's public reference
rooms at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following regional offices of the Securities and Exchange Commission:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and 7 World Trade Center, Suite 1300, New York, New York 10048. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. The companies' filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the Securities and Exchange Commission at http://www.sec.gov.
Tumbleweed filed a Registration Statement on Form S-4 to register with the
Securities and Exchange Commission the Tumbleweed common stock to be issued to
Worldtalk stockholders in the merger. This joint proxy statement/prospectus is a
part of that Registration Statement and constitutes a prospectus of Tumbleweed
in addition to being a proxy statement for each of Tumbleweed and Worldtalk for
their special meetings of stockholders. As allowed by the Securities and
Exchange Commission's rules, this joint proxy statement/prospectus does not
contain all of the information you can find in the Registration Statement or the
exhibits to the Registration Statement. This joint proxy statement/prospectus
summarizes some of the documents that are exhibits to the Registration
Statement, and you should refer to the exhibits for a more complete description
of the matters covered by those documents.
The Securities and Exchange Commission allows Worldtalk to "incorporate by
reference" information into this joint proxy statement/prospectus. This means
that Worldtalk may disclose important information to you by referring you to
another document filed separately with the Securities and Exchange Commission.
The information incorporated by reference is considered to be part of this joint
proxy statement/ prospectus, except for any information modified or superseded
by information in (or incorporated by reference in) this joint proxy
statement/prospectus. This joint proxy statement/prospectus incorporates by
reference the documents set forth below that have been previously filed with the
Securities and Exchange Commission. The documents contain important information
about Worldtalk and its finances.
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999; and
3. Current Reports on Form 8-K filed July 20, 1999 and November 30, 1999.
Worldtalk is also incorporating by reference additional documents that it
may file with the Securities and Exchange Commission between the date of this
joint proxy statement/prospectus and the date of its special meeting of
stockholders to be held in connection with the merger. Statements contained in
documents incorporated by reference may be modified or superseded by later
statements in this joint proxy statement/prospectus or by statements in
subsequent documents incorporated by reference, in which case you should refer
to the later statement.
Worldtalk has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to Worldtalk, and
Tumbleweed has supplied all such information relating to Tumbleweed.
Tumbleweed or Worldtalk will provide, without charge, a copy of any or all
of their documents incorporated by reference in this joint proxy
statement/prospectus (other than exhibits to such documents, unless the exhibits
are specifically incorporated by reference in such documents). You may obtain
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<PAGE>
documents incorporated by reference in this joint proxy statement/prospectus by
requesting them in writing or by telephone from the appropriate party at the
following address:
FOR TUMBLEWEED DOCUMENTS:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, California 94063
Attention: Investor Relations Department
Telephone: (650) 216-2018
FOR WORLDTALK DOCUMENTS:
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, California 95054
Attention: Investor Relations Department
Telephone: (408) 567-1500
If you would like to request documents from either company, please do so by
[ ], 2000 to receive them before the special meetings of
stockholders.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER
AGREEMENT AND THE TRANSACTIONS ASSOCIATED WITH IT. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED
[ ]. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH
DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO
STOCKHOLDERS NOR THE ISSUANCE OF TUMBLEWEED COMMON STOCK IN THE MERGER SHALL
CREATE ANY IMPLICATION TO THE CONTRARY.
vii
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document, the documents of Tumbleweed and Worldtalk incorporated by
reference herein and other communications to stockholders of Tumbleweed and
Worldtalk, respectively, may contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to expectations concerning matters that are not historical
facts. Also, when we use words such as "believes," "expects," "anticipates" or
similar expressions, we are making forward-looking statements. Although each of
Tumbleweed and Worldtalk believes that the expectations reflected in such
forward-looking statements are reasonable, neither can give any assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
herein, in documents incorporated by reference and in other communications to
stockholders, including, without limitation, in conjunction with the
forward-looking statements included under "Risk Factors." All forward-looking
statements attributable to Tumbleweed are expressly qualified in their entirety
by those factors, which may cause actual results to differ materially from
expectations described herein. For further cautions about the risks of investing
in Tumbleweed, we refer you to the documents Tumbleweed files from time to time
with the Securities and Exchange Commission, particularly the Tumbleweed
prospectus dated August 5, 1999, and Form 10-Q filed November 15, 1999. All
forward-looking statements attributable to Worldtalk are expressly qualified in
their entirety by those factors, which may cause actual results to differ
materially from expectations described herein. For further information about the
risks relating to Worldtalk and its business, we refer you to Worldtalk's
reports filed with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the year ended December 31, 1998, the quarterly reports
on Form 10-Q for the quarters ended March 31, 1999, June 30, 1999 and
September 30, 1999, and the prospectus dated October 12, 1999.
viii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE PROPOSED MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AS
WELL AS THE ADDITIONAL DOCUMENTS TO WHICH WE REFER YOU TO. SEE "WHERE YOU CAN
FIND MORE INFORMATION" (PAGE [ ]).
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: The proposed merger offers a strategic growth opportunity for each company.
The combined companies will offer customers a single source for a fuller,
more integrated suite of business communication products and services,
including new integrated technology. Tumbleweed and Worldtalk presently each
provide solutions that address specific aspects of a complete Internet
business communication system. Tumbleweed technology enables businesses to
move traditionally paper-based applications online, through added security,
reliability and personalization. Worldtalk technology enables businesses to
control how electronic mail is used, adding virus protection, content
filtering and routing based on policies determined by business requirements.
In addition to the current product and services offered by each company, the
combined companies will offer new products based on integrated technology
that will enable:
- content filtering and policy enforcement at the e-mail switch;
- a wide range of security services;
- message personalization; and
- detailed tracking and archiving.
By combining the technology and expertise of each company, Tumbleweed will
provide customers with a single source to satisfy their business
communication requirements. The integrated technology will enable customers
to filter incoming and outgoing e-mail, add multiple levels of security,
track delivery status, archive historical transactions, and customize
content for specific recipients.
Worldtalk's installed customer base provides Tumbleweed with an additional
opportunity. The content filtering capabilities of the WorldSecure product
will be able to screen e-mail messages for sensitive content and
automatically route those messages through Tumbleweed's secure document
delivery infrastructure. Tumbleweed receives transaction revenues based on
the number of messages sent through its infrastructure, and would enhance
its revenue stream to the extent WorldSecure customers adopt the option to
use the Tumbleweed's secure delivery infrastructure.
Q: WHAT WILL WORLDTALK STOCKHOLDERS RECEIVE IN THE MERGER?
A: Worldtalk stockholders will receive 0.26 of a share of Tumbleweed common
stock in exchange for each share of Worldtalk common stock. Tumbleweed will
not issue fractional shares that they own. Worldtalk stockholders who would
otherwise be entitled to receive a fractional share instead will receive a
cash payment based on the market value of the fractional share of Tumbleweed
stock on the date of the merger.
FOR EXAMPLE:
- IF YOU CURRENTLY OWN 125 SHARES OF WORLDTALK COMMON STOCK, THEN AFTER THE
MERGER YOU WILL BE ENTITLED TO RECEIVE 32 SHARES OF TUMBLEWEED COMMON
STOCK AND A CHECK FOR THE MARKET VALUE OF THE 0.5 FRACTIONAL SHARE.
- IF YOU CURRENTLY OWN 125 SHARES OF TUMBLEWEED COMMON STOCK, THEN YOU WILL
CONTINUE TO OWN THOSE 125 SHARES AFTER THE MERGER.
Each outstanding stock option and warrant to acquire Worldtalk common stock
will be converted into an option or warrant to purchase 0.26 of a share of
Tumbleweed common stock for each share of Worldtalk common stock covered by
the option or warrant before the merger.
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Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "Risk Factors" on pages [ ] through [ ].
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as soon as possible. In addition
to stockholder approvals, we must satisfy other conditions described in the
Merger Agreement. We hope to complete the merger during the first quarter of
2000.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS?
A: The exchange of shares by Worldtalk stockholders is intended to be tax-free
to Worldtalk stockholders for Federal income tax purposes. However, Worldtalk
stockholders may have to pay taxes on cash received for fractional shares.
The merger is intended to be tax-free to Tumbleweed stockholders for Federal
income tax purposes. To review the tax consequences to stockholders in
greater detail, see page [ ].
THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR OWN SITUATION.
YOU SHOULD CONSULT YOUR TAX ADVISORS FOR A FULL UNDERSTANDING OF THESE TAX
CONSEQUENCES.
Q: WHAT WILL TUMBLEWEED'S DIVIDEND POLICY BE?
A: Tumbleweed presently anticipates that it will retain any future earnings to
finance development and expansion of its business and provide working
capital. Tumbleweed does not anticipate paying any cash dividends on
Tumbleweed common stock for the foreseeable future. Following the merger,
Tumbleweed's board of directors will use its discretion to decide whether to
declare dividends and the amount of any dividends.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: TUMBLEWEED STOCKHOLDERS: You are being asked to approve the issuance of
shares of Tumbleweed common stock under the Merger Agreement and the
transactions associated with it. If the merger is approved by you and the
Worldtalk stockholders, a subsidiary of Tumbleweed will be merged with and
into Worldtalk, and Worldtalk will become a wholly-owned subsidiary of
Tumbleweed.
Tumbleweed's board of directors has approved the Merger Agreement, and
recommends voting FOR the issuance of shares of Tumbleweed common stock
under the Merger Agreement and the transactions associated with it.
WORLDTALK STOCKHOLDERS: You are being asked to approve the Merger Agreement
and the transactions associated with it. If the merger is approved by you
and the Tumbleweed stockholders, Worldtalk will become a wholly-owned
subsidiary of Tumbleweed.
Worldtalk's board of directors has approved the Merger Agreement and
recommends voting FOR the Merger Agreement and the transactions associated
with it.
Q: WHAT DO I NEED TO DO NOW?
A: You should complete, sign and mail your signed proxy card in the enclosed
return envelope as soon as possible, so that your shares will be represented
at your special stockholders' meeting. Both the Tumbleweed and Worldtalk
meetings will take place on [ ], 2000.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Worldtalk stockholders will receive
written instructions for exchanging their stock certificates. Tumbleweed
stockholders will keep their certificates because the merger will not require
surrender of Tumbleweed stock certificates.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your Tumbleweed or Worldtalk shares only if you provide
instructions on how to vote. Without instructions your shares will not be
voted. Shares that are not voted will be counted as votes against the Merger
Agreement and the transactions associated with it.
2
<PAGE>
Q: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you would like additional copies of the joint proxy statement/prospectus,
or if you have more questions about the merger, you should contact the
appropriate party at the addresses listed in "Where You Can Find More
Information" on page [ ].
THE COMPANIES
TUMBLEWEED COMMUNICATIONS CORP.
700 Saginaw Drive
Redwood City, California 94063
Telephone: (650) 216-2000
Tumbleweed is a leading provider of secure Internet communication services
for businesses worldwide. We have developed the Tumbleweed Integrated Messaging
Exchange, or Tumbleweed IME, a comprehensive software and services solution that
combines the personal, proactive nature of e-mail with the ease of use of the
world wide web. Tumbleweed IME offers the key attributes of secure physical
delivery, e-mail and web messaging in a comprehensive, Internet-based system.
Our solution enables corporations to leverage their existing investments in
e-mail and web systems in order to shift their historically paper-based
communications to more convenient and cost-effective online alternatives.
WORLDTALK COMMUNICATIONS CORPORATION
5155 Old Ironsides Drive
Santa Clara, California 95054
(408) 567-1500
Worldtalk is a leading provider of Internet content security and policy
management solutions. Our WorldSecure policy management platform enables
organizations to define and manage electronic mail and Web security and usage
policies, reducing the risks, costs and liabilities associated with Internet
communications. We delivered the industry's first solution for managing and
enforcing e-mail security policies in September 1997. Since then, organizations
have deployed WorldSecure solutions to ensure confidentiality of their external
electronic mail communications, to protect their intellectual property and to
prevent unwanted electronic mail messages, sometimes called spam, and viruses
from entering their computer systems. Our products include WorldSecure/ Mail,
software that provides Windows NT-based electronic mail firewall and policy
management, WorldSecure Web, a Windows NT-based content security product,
WorldSecure Client, a desktop electronic mail encryption product, and NetTalk, a
Windows NT-based electronic mail and directory solution.
OUR REASONS FOR THE MERGER
The Tumbleweed and Worldtalk boards of directors have determined that the
Merger Agreement and the transactions associated with it, including, in the case
of Tumbleweed, the issuance of shares of Tumbleweed common stock to Worldtalk
stockholders, are in the best interests of their respective stockholders. In
reaching their respective decisions, the boards of directors of the two
companies considered that the combination of the companies will offer customers
a fuller, more integrated suite of business communication products and services,
including new integrated technology. Currently, Tumbleweed and Worldtalk each
provide solutions that address specific aspects of a complete Internet business
communication system. In addition to maintaining these independent solutions,
the combined company will offer new, more comprehensive solutions.
To review the reasons for the merger in greater detail, as well as related
uncertainties, see pages [ ] through [ ].
RECOMMENDATIONS TO STOCKHOLDERS
TO TUMBLEWEED STOCKHOLDERS:
The Tumbleweed board of directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
the issuance of shares of Tumbleweed common stock under the Merger Agreement and
the transactions associated with it, including the conversion of Worldtalk
warrants and employee and director stock options into warrants and options to
purchase Tumbleweed common stock.
3
<PAGE>
TO WORLDTALK STOCKHOLDERS:
The Worldtalk board of directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
the Merger Agreement and the transactions associated with it.
STOCKHOLDER VOTE REQUIRED TO APPROVE
THE MERGER
The affirmative vote of the holders of a majority of the shares of
Tumbleweed common stock present in person or represented by proxy at the
Tumbleweed special meeting is required to approve the issuance of shares of
Tumbleweed common stock under the Merger Agreement. The affirmative vote of the
holders of a majority of the issued and outstanding shares of Worldtalk common
stock is required to approve the Merger Agreement and the transactions
associated with it. As of November 30, 1999, the directors and executive
officers of Tumbleweed held approximately 47% of the outstanding shares entitled
to vote at Tumbleweed's special meeting. As of November 30, 1999, the directors
and executive officers of Worldtalk held approximately 46% of the outstanding
shares of Worldtalk entitled to vote at Worldtalk's special meeting. Your
abstention or failure to vote, or your failure to instruct your broker or
nominee as to how to vote shares that you own but that are not held in your
name, as a Worldtalk stockholder will have the effect of a vote against the
Merger Agreement and the transactions associated with it.
In connection with the execution of the Merger Agreement, a group of
stockholders of Tumbleweed collectively holding 11,754,426 shares of Tumbleweed
common stock, representing approximately 54% of the outstanding Tumbleweed
common stock, have entered into voting agreements with Worldtalk, pursuant to
which these stockholders have agreed, among other things, to vote their shares
of Tumbleweed common stock to approve the stock issuance under the Merger
Agreement and the transactions associated with it at Tumbleweed's special
meeting. A group of stockholders of Worldtalk collectively holding 6,630,165
shares of Worldtalk common stock, representing approximately 46% of the
outstanding Worldtalk common stock, have entered into voting agreements with
Tumbleweed, pursuant to which these stockholders have agreed, among other
things, to vote their shares of Worldtalk common stock to approve the Merger
Agreement and the transactions associated with it at the Worldtalk special
meeting.
To review information relating to stockholder votes in greater detail, see
"The Special Meetings--Voting Securities and Record Dates" on pages [ ] and
[ ].
THE MERGER (PAGE [ ])
The Merger Agreement is attached as Annex A at the back of this joint proxy
statement/prospectus. We encourage you to read the Merger Agreement because it
is the legal document that governs the proposed merger.
WHAT WORLDTALK STOCKHOLDERS WILL RECEIVE IN THE MERGER
As a result of the merger, Worldtalk stockholders will receive 0.26 of a
share of Tumbleweed common stock for each share of Worldtalk common stock that
they own. Worldtalk stockholders will not receive fractional shares. Instead,
they will receive a check in payment for any fractional share based on the
market value of Tumbleweed common stock on the date of the completion of the
merger.
In addition, at the time the merger is completed, holders of Worldtalk
warrants and employee and director stock options will have their warrants and
options converted into warrants or options to purchase 0.26 of a share of
Tumbleweed common stock for each outstanding share of Worldtalk common stock
subject to an existing warrant or option at that time. The exercise price of
such converted warrant or option will be adjusted to reflect the exchange ratio.
DO NOT SEND IN YOUR STOCK CERTIFICATES NOW. WHEN THE MERGER IS COMPLETED,
WORLDTALK STOCKHOLDERS WILL RECEIVE WRITTEN INSTRUCTIONS FOR EXCHANGING THEIR
WORLDTALK STOCK CERTIFICATES. TUMBLEWEED STOCKHOLDERS WILL CONTINUE TO HOLD
THEIR TUMBLEWEED STOCK CERTIFICATES.
4
<PAGE>
STATUS OF WORLDTALK FOLLOWING THE MERGER
If the merger is approved, a subsidiary of Tumbleweed will merge with and
into Worldtalk and Worldtalk will become a wholly-owned subsidiary of
Tumbleweed. Stockholders of Worldtalk before the merger will own stock in
Tumbleweed after the merger.
OWNERSHIP OF TUMBLEWEED FOLLOWING THE MERGER
The shares of Tumbleweed common stock issued to Worldtalk stockholders in
the merger will constitute approximately [ ]% of the outstanding common stock
of Tumbleweed after the merger, and the current stockholders of Tumbleweed will
hold the remaining approximately [ ]% of the outstanding common stock of
Tumbleweed after the merger.
CONDITIONS (PAGE [ ])
The merger will not be completed unless certain conditions are met,
including the approval of the Merger Agreement and the transactions associated
with it by Worldtalk stockholders and the approval of the issuance of shares of
Tumbleweed common stock by Tumbleweed stockholders. Some conditions may be
waived.
NO SOLICITATION OF TRANSACTIONS (PAGE [ ])
Worldtalk has agreed, subject to some exceptions, not to initiate or engage
in discussions with a third party regarding a business combination with the
third party while the merger is pending.
TERMINATION (PAGE [ ])
Tumbleweed and Worldtalk may together agree to terminate the Merger
Agreement without completing the merger, whether or not their respective
stockholders have approved the Merger Agreement.
The Merger Agreement may also be terminated by the board of directors of
either company in other circumstances, including:
- if the merger is not completed on or before June 30, 2000, except that
neither Tumbleweed nor Worldtalk may terminate the Merger Agreement if its
breach of the Merger Agreement is the reason the merger has not been
completed by that date;
- if the approval of the stockholders of Tumbleweed or Worldtalk is not
obtained;
- if any necessary regulatory approvals are not obtained;
- if the other party's board of directors has failed to recommend the merger
to its stockholders or has withdrawn or adversely modified or qualified
its recommendation of the merger; or
- if the other party has failed to perform its obligations under the Merger
Agreement.
TERMINATION FEE (PAGE [ ])
The Merger Agreement generally requires Worldtalk to pay to Tumbleweed a
termination fee of $4.0 million, plus an amount equal to all of the costs and
expenses incurred by Tumbleweed in connection with the Merger Agreement and the
transactions associated with it, if the agreement is terminated because:
- Worldtalk's board of directors has failed to recommend the merger to its
stockholders or has withdrawn or adversely modified or qualified its
recommendation of the merger;
- the approval of the stockholders of Worldtalk is not obtained; or
- Worldtalk materially breaches other specific obligations under the Merger
Agreement;
and, in the case of each of the above, Worldtalk subsequently enters into or
completes an alternative business combination or similar transaction with a
third party within 12 months after the termination.
STOCK OPTION AGREEMENT (PAGE [ ])
In connection with the merger, Worldtalk granted Tumbleweed an option to
purchase a number of shares of Worldtalk common stock equal to 19.9% of the
total number of shares of Worldtalk common stock issued and outstanding as of
November 18, 1999 if an event occurs which would entitle Tumbleweed to terminate
the
5
<PAGE>
Merger Agreement and which would entitle Tumbleweed to receive a termination
fee. Under this option, Tumbleweed would have the right to acquire
2,889,330 shares of Worldtalk common stock, subject to adjustment, at $10.527
per share. This option generally terminates upon the completion of the merger or
upon termination of the Merger Agreement in specified circumstances. A copy of
the option agreement is attached as Annex B at the back of this joint proxy
statement/prospectus. We encourage you to read the option agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE [ ])
In considering the boards' recommendations that you vote to approve the
merger, you should note that some of the directors and officers of Worldtalk
have continuing indemnification against specified liabilities and participate in
arrangements that provide them with interests in the merger that are different
from, or in addition to, stockholders of Worldtalk generally. These arrangements
include the automatic vesting of currently unexercisable stock options, purchase
rights and additional compensation and severance agreements. As a result, these
directors and officers could be more likely to vote to approve the Merger
Agreement than stockholders of Worldtalk generally.
ANTICIPATED ACCOUNTING TREATMENT (PAGE [ ])
We intend that the merger will be accounted for as a pooling of interests.
This means that after the merger Tumbleweed will treat the companies as if they
had always been combined for accounting and financial reporting purposes.
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES
The exchange of Worldtalk common stock for Tumbleweed common stock, other
than cash paid for fractional shares, is intended to be tax-free to Worldtalk
stockholders for Federal income tax purposes. To review the tax consequences to
stockholders in greater detail, see page [ ].
Tax matters are very complicated and the tax consequences of the merger to
you will depend on your own personal circumstances. You should consult your tax
advisors for a full understanding of all of the tax consequences of the merger
to you.
DISSENTERS' RIGHTS (PAGE [ ])
Under Delaware law, Worldtalk stockholders do not have any right to an
appraisal of the value of their Worldtalk common stock in connection with the
merger.
RISKS OF THE MERGER
In considering whether to approve the Merger Agreement, you should consider
various risks of the merger, including the risk of fluctuations in the market
price of Tumbleweed common stock, risks associated with the merger and
integrating the companies' businesses and the fact that some directors and
officers of Worldtalk may have interests in the merger that are different from
or in addition to yours. We urge you to read carefully the factors described in
"Risk Factors" on pages [ ] through [ ] in making your decision.
OPINIONS OF FINANCIAL ADVISORS
In deciding to approve the merger, the boards of directors of each of
Tumbleweed and Worldtalk considered opinions from their respective financial
advisors as to the fairness of the exchange ratio, as of the date of the
opinions, to the respective companies from a financial point of view.
The Tumbleweed board of directors received an opinion from its financial
advisor, Credit Suisse First Boston Corporation, and the Worldtalk board of
directors received an opinion from its financial advisor, Volpe Brown Whelan &
Company, LLC. These opinions, which set forth the assumptions made, procedures
followed, matters considered and limitations set on the scope of the review
undertaken are attached as Annexes D and E to this joint proxy
statement/prospectus. We encourage you to read these opinions. For more
information about the Credit Suisse First Boston opinion, see pages [ ] through
[ ], and for more information about the Volpe Brown Whelan & Company, LLC
opinion, see pages [ ] through [ ].
6
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Shares of Tumbleweed common stock and Worldtalk common stock are quoted on
the Nasdaq National Market. On November 17, 1999, the last trading day before
the announcement of the proposed merger, the Tumbleweed common stock closed at
$39.50 per share and the Worldtalk common stock closed at $8.00 per share. On
[ ], the last trading day prior to the date of this joint proxy
statement/prospectus, Tumbleweed common stock closed at $[ ] per share and
Worldtalk common stock closed at $[ ] per share. For more information about
comparative market price information, see page [ ].
LISTING OF TUMBLEWEED COMMON STOCK
The shares of Tumbleweed common stock issued in connection with the merger
will be listed on the Nasdaq National Market.
DELISTING OF WORLDTALK COMMON STOCK
Following the merger, the Worldtalk common stock will no longer be listed on
the Nasdaq National Market.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE [ ])
Each of Tumbleweed and Worldtalk has made forward-looking statements in this
document (and in documents that are incorporated by reference) that are subject
to risks and uncertainties. Forward-looking statements include expectations
concerning matters that are not historical facts. Also, when we use words such
as "believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. For more information regarding factors that could
cause actual results to differ from these expectations, you should refer to the
specific risks described under "Risk Factors" beginning on page [ ] and to the
documents referred to under "Where You Can Find More Information" on page [ ].
COMPARATIVE RIGHTS OF STOCKHOLDERS (PAGE [ ])
The rights of stockholders of both Tumbleweed and Worldtalk are currently
governed by Delaware law and the respective certificates of incorporation and
bylaws of the two companies. If the merger is completed, the rights of former
Worldtalk stockholders who become Tumbleweed stockholders will be determined by
Tumbleweed's certificate of incorporation and bylaws, which differ in some
respects from Worldtalk's certificate of incorporation and bylaws.
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<PAGE>
TUMBLEWEED AND WORLDTALK
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Tumbleweed and Worldtalk and combined per share data on an unaudited pro forma
basis after giving effect to the merger on a pooling of interests basis of
accounting, assuming that 0.26 of a share of Tumbleweed common stock is issued
in exchange for each share of Worldtalk common stock in the merger. This data
should be read in conjunction with the selected historical financial data, the
unaudited pro forma combined condensed financial information and the separate
historical financial statements of Tumbleweed and Worldtalk and notes thereto,
included elsewhere in this joint proxy statement/prospectus. The pro forma
combined financial data are not necessarily indicative of the operating result
that would have been achieved had the merger been consummated as of the
beginning of the periods presented and should not be construed as representative
of future operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1996 1997 1998 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
HISTORICAL--TUMBLEWEED:
Net loss per share.................................... $(0.33) $(1.41) $(1.74) $(1.39)
Book value per share(1)............................... 0.05 2.72
HISTORICAL--WORLDTALK:
Net loss per share.................................... $(0.68) $(0.65) $(0.48) $(0.38)
Book value per share(1)............................... 0.38 0.71
PRO FORMA COMBINED NET LOSS PER SHARE(2):
Per Tumbleweed share.................................. $(1.15) $(1.89) $(1.78) $(1.40)
Equivalent per Worldtalk share(3)..................... (0.46) (0.36)
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(4)(2):
Per Tumbleweed share........................................ $(0.20) $2.43
Equivalent per Worldtalk share(3)........................... (0.05) 0.63
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and preferred stock, on an as
if converted basis, outstanding at the end of each period.
(2) Tumbleweed and Worldtalk estimate they will incur direct transaction costs
of approximately $7.4 million associated with the merger, which will be
charged to operations upon consummation of the merger. In addition, it is
expected that after the merger, the combined companies will incur an
additional charge to operations, which is not currently reasonably
estimable, to reflect costs associated with integrating the two companies.
The pro forma combined book value per share data gives effect to the
estimated direct transactions costs, but does not include the additional
charge relating to integrating the two companies, as if such costs had been
incurred as of the respective balance sheet date. These costs and charge are
not included in the pro forma net loss per share data. See "Unaudited Pro
Forma Combined Condensed Financial Information" and accompanying notes
thereto.
(3) The Worldtalk equivalent pro forma combined per share amounts are calculated
by multiplying the Tumbleweed combined pro forma per share amounts by 0.26
of a share of Tumbleweed common stock for each share of Worldtalk common
stock.
(4) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
and preferred stock, on an as if converted basis, outstanding at the end of
each period.
8
<PAGE>
SUMMARY HISTORICAL AND SUMMARY PRO FORMA COMBINED
FINANCIAL DATA
The following summary historical financial information of Tumbleweed and
Worldtalk has been derived from each of their historical financial statements,
and should be read in conjunction with the consolidated financial statements and
the notes thereto, included elsewhere in this joint proxy statement/ prospectus.
The following summary pro forma financial information is derived from the
unaudited pro forma combined condensed financial statements, which give effect
to the merger as a pooling of interests and should be read in conjunction with
the unaudited pro forma combined condensed financial statements and the notes
thereto included in this joint proxy statement/prospectus. For purposes of the
pro forma operating data, Worldtalk's consolidated financial statements for the
fiscal years ended December 31, 1996, 1997 and 1998, and for the nine months
ended September 30, 1998 and 1999, have been combined with the Tumbleweed
financial statements for the fiscal years ended December 31, 1996, 1997, and
1998, and for the nine months ended September 30, 1998 and 1999. No dividends
have been declared or paid on Tumbleweed or Worldtalk common stock. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the merger had been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of future operating results or
financial position.
9
<PAGE>
TUMBLEWEED SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $3,578 $818 $ 597 $ 729 $ 2,015 $ 1,580 $ 3,386
Cost of revenue...................................... 211 232 139 108 931 698 1,535
Gross profit......................................... 3,367 586 458 621 1,084 882 1,851
Operating expenses(1)................................ 560 609 1,679 5,477 7,823 5,907 13,255
Operating income (loss).............................. 2,807 (23) (1,221) (4,856) (6,739) (5,025) (11,404)
Other income (expense), net.......................... (43) 7 41 165 149 155 518
Income (loss) before provision for taxes............. 2,764 (16) (1,180) (4,691) (6,590) (4,870) (10,886)
Net income (loss).................................... $2,764 $(16) $(1,180) $(4,691) $(6,590) $(4,870) $(11,022)
Net income (loss) per share- basic and diluted....... $ (0.33) $ (1.41) $ (1.74) $ (1.30) $ (1.39)
Shares used in calculating basic and diluted loss per
share.............................................. 3,598 3,331 3,797 3,739 7,951
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................................. $101 $ 81 $2,670 $6,310 $ 698 $57,744
Total assets.............................................. 119 206 2,939 7,115 1,725 65,059
Long-term obligations, excluding current installments..... -- -- -- -- 369 1,404
Total stockholders' equity................................ 91 141 2,652 6,270 501 58,702
</TABLE>
- ------------------------------
(1) Includes stock compensation expense of $24,000, $246,000, $673,000, $437,000
and $2.4 million for the years ended December 31, 1996, 1997, and 1998 and
the nine months ended September 30, 1998 and 1999, respectively.
10
<PAGE>
WORLDTALK SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue(1)..................................... $ 4,392 $ 6,705 $14,205 $11,327 $13,448 $10,371 $ 8,829
Cost of revenue................................ 1,552 1,828 3,438 3,991 3,306 2,489 1,996
Gross profit................................... 2,840 4,877 10,767 7,336 10,142 7,882 6,833
Operating expenses(2).......................... 6,674 8,548 16,547 14,361 15,600 12,213 11,966
Operating loss................................. (3,834) (3,671) (5,780) (7,025) (5,458) (4,331) (5,133)
Other income (expense), net.................... (69) 31 544 508 375 302 734 (3)
Loss before provision for taxes................ (3,903) (3,640) (5,236) (6,517) (5,083) (4,029) (4,399)
Net loss....................................... $(3,903) $(3,640) $(5,240)(4) $(6,700) $(5,084)(6) $(4,199) $(4,474)
Net loss per share--basic and diluted.......... $ (1.92) $ (3.59) $ (0.68)(5) $ (0.65) $ (0.48) $ (0.40) $ (0.38)
Shares used in calculating basic and diluted
loss per share............................... 2,038 1,014 7,669 10,355 10,584 10,559 11,886
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 198 $ 2,984 $ 7,012 $ 4,662 $ 3,858 $11,027
Total assets............................................. 2,170 5,727 21,719 17,265 11,146 16,069
Long-term obligations, excluding current installments.... 147 451 719 132 13 --
Total stockholders' equity (deficit)..................... (3,058) (11,405) 14,396 8,656 4,088 10,238
</TABLE>
- ------------------------------
(1) Includes revenue from discontinued products of $4.4 million, $6.7 million,
$14.2 million, $7.6 million, and $4.9 million, respectively, for the years
ended December 31, 1994, 1995, 1996, 1997, and 1998, and $4.1 million and
$1.5 million for the nine months ended September 30, 1998 and 1999,
respectively.
(2) Includes stock compensation expense of $44,000, $42,000 and $42,000,
respectively, for the years ended December 31, 1996, 1997, and 1998, and
$32,000 and $32,000 for the nine months ended September 30, 1998 and 1999,
respectively.
(3) Includes gain on sale of discontinued products of $443,000 for the nine
months ended September 30, 1999.
(4) Includes in-process research and development of $4.5 million and integration
expenses of $279,000 resulting from the acquisition of Deming Software, Inc.
(5) Exclusive of the expenses noted in footnote (4) above, net loss per share
would have been ($0.06).
(6) Includes an allowance for doubtful accounts for the full amount of
approximately $1,700,000 owed by i4 Corporation as a result of the
termination of the Distribution Agreement and associated non-payments.
11
<PAGE>
TUMBLEWEED/WORLDTALK
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
DATA:
Revenue from continuing products(1).......... 597 4,476 10,575 7,805 10,743
Revenue from discontinued product(1)......... 14,205 7,580 4,888 4,146 1,472
Cost of revenue.............................. 3,577 4,099 4,237 3,187 3,531
Gross profit................................. 11,225 7,957 11,226 8,764 8,684
Operating expenses(2)........................ 18,226 19,838 23,423 18,120 25,221
Operating loss............................... (7,001) (11,881) (12,197) (9,356) (16,537)
Other income (expense), net.................. 585 673 524 457 1,252(3)
Loss before provision for taxes.............. (6,416) (11,208) (11,673) (8,899) (15,285)
Net loss..................................... $(6,420) $(11,391) $(11,674) $(9,069) $(15,496)
Net loss per share--basic and diluted........ $ (1.15) $ (1.89) $ (1.78) $ (1.40) $ (1.40)
Shares used in calculating basic and diluted
loss per share............................. 5,592 6,023 6,549 6,484 11,041
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $68,771
Total assets................................................ 81,128
Long-term obligations, excluding current installments....... 1,404
Total stockholders' equity.................................. 61,590
</TABLE>
- ------------------------
(1) In July 1999, Worldtalk completed the sale of its NetJunction e-mail
connectivity and directory integration business to Wingra Technologies, LLC.
Due to the sale of the Company's NetJunction product line, the revenue has
been divided into continuing product revenue and discontinued product
revenue.
(2) Includes stock compensation expense of $66,000, $288,000 and $715,000,
respectively, for the years ended December 31, 1996, 1997, and 1998, and
$469,000 and $2.4 million for the nine months ended September 30, 1998 and
1999, respectively.
(3) Includes gain on sale of discontinued products of $443,000 for the nine
months ended September 30, 1999.
12
<PAGE>
RISK FACTORS
In considering whether to vote in favor of the Merger Agreement and the
transactions associated with it, you should consider carefully the following
matters.
RISKS RELATED TO THE MERGER
FLUCTUATIONS IN STOCK PRICES COULD DECREASE THE VALUE OF THE TUMBLEWEED COMMON
STOCK TO BE ISSUED IN THE MERGER.
Stockholders of Worldtalk will receive 0.26 of a share of Tumbleweed common
stock for each share of Worldtalk common stock that they own regardless of any
increase or decrease in the price of the common stock of either Tumbleweed or
Worldtalk. The price of Tumbleweed common stock at the time of the merger may be
higher or lower than its price as of today's date or at the date of the special
meetings of stockholders of Tumbleweed and Worldtalk. The price of Tumbleweed
common stock could change due to changes in the business, operations or
prospects of Tumbleweed or Worldtalk, market assessments of the merger,
regulatory considerations, general market and economic conditions or other
factors. As a result, there can be no assurance to Worldtalk stockholders that
the value of the 0.26 of a share of Tumbleweed common stock issuable in respect
of a share of Worldtalk common stock will equal or exceed the market value of a
share of Worldtalk common stock. Similarly, there can be no assurance to
Tumbleweed stockholders that the value of the 0.26 of a share of Tumbleweed
common stock will equal or be less than the market value of a share of Worldtalk
common stock. We urge the stockholders of Tumbleweed and Worldtalk to obtain
current market quotations for Tumbleweed common stock and Worldtalk common
stock.
THE COMBINED COMPANIES MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THEIR BUSINESS
OPERATIONS.
Although the Tumbleweed and Worldtalk boards of directors have each
determined that the merger is in the best interests of their stockholders, the
integration of the two companies will involve special risks relating to
integration of the two companies' sales forces and existing technology
infrastructures, potential market confusion concerning the companies. We may
also have difficulty retaining the customers of the combined businesses and
assimilating and retaining personnel. In addition, the integration of the
operations and systems of the two companies and the realization of potential
increased efficiencies may prove difficult and may cause management's attention
to be diverted from other business concerns. These and other difficulties
associated with the merger may lead to potential adverse effects on operating
results.
OUR PRODUCT INTEGRATION EFFORTS MAY BE HINDERED BY A VARIETY OF TECHNICAL
FACTORS.
Because Worldtalk has historically based its products on an NT platform, and
Tumbleweed has created a platform-independent architecture for its products, the
integration of products from each company may result in unanticipated
architectural incompatibilities that would require additional time and
engineering resources to resolve. The loss of key engineering personnel from
either company may increase the time and resources needed to resolve these and
other technical integration issues. To the extent that technical personnel from
each company collaborate in the future, the identification and resolution of any
previously divergent technical standards used by each company's personnel, as
well as the implementation of common product development practices and
standards, may result in unanticipated product development delays. In addition,
the installation of integrated or complementary software products at each
company's customer sites may result in difficulties associated with
customer-specific installation processes.
THE INTERESTS OF WORLDTALK OFFICERS AND DIRECTORS IN THE MERGER MAY DIFFER FROM
OTHER STOCKHOLDERS.
Some executive officers and directors may receive benefits in connection
with the merger that are different from those held by Worldtalk stockholders
generally. These benefits include the automatic vesting of currently
unexercisable stock options and additional compensation and severance
agreements. Worldtalk's officers also participate in the Worldtalk 1996 Employee
Stock Purchase Plan may also receive
13
<PAGE>
more advantageous treatment as a result of the merger. In addition, as a result
of the merger, Worldtalk directors and their affiliated funds may be able to
achieve liquidity of their investment sooner than they would be able to
otherwise. James Heisch, Jesus Ortiz and Colin Crosby, executive officers of
Worldtalk, have received offers of employment from Tumbleweed, which include
bonuses and severance arrangements. In addition, the Worldtalk officers and
directors have continuing indemnification against specified liabilities. As a
result, the Worldtalk officers and directors could be more likely to vote to
approve the Merger Agreement and the transactions associated with it than
Worldtalk stockholders generally. See "The Merger--Interests of Certain Persons
in the Merger."
RISKS RELATED TO TUMBLEWEED
BECAUSE TUMBLEWEED IS IN AN EARLY STAGE OF DEVELOPMENT AND HAS A HISTORY OF
LOSSES, IT IS DIFFICULT TO EVALUATE ITS BUSINESS AND TUMBLEWEED MAY FACE
EXPENSES, DELAYS AND DIFFICULTIES.
Tumbleweed has only a limited operating history upon which an evaluation can
be based. Accordingly, Tumbleweed's prospects must be considered in light of the
risks, expenses, delays and difficulties frequently encountered by companies in
a similarly early stage of development, particularly companies engaged in new
and rapidly evolving markets like secure online communication services. We
incurred net losses of $4.7 million and $6.6 million in the years ended
December 31, 1997 and 1998, respectively, as well as a net loss of
$11.0 million in the nine months ended September 30, 1999. As of September 30,
1999, we had incurred cumulative net losses as a C-corporation of
$23.2 million. See "Consolidated Statements of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
TUMBLEWEED ANTICIPATES CONTINUED LOSSES.
Although we believe that our success will depend in large part upon our
ability to generate sufficient revenue to achieve profitability and to
effectively maintain existing relationships and develop new relationships with
customers and strategic partners, our revenue may not increase, and we may not
achieve or maintain profitability. In particular, we intend to expend
significant financial and management resources on product development, sales and
marketing, strategic relationships and technology, and operating infrastructure.
As a result, we expect to incur additional losses and continued negative cash
flow from operations for the foreseeable future.
TUMBLEWEED'S QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we may be unable to accurately forecast our revenue
or expenses. We may be unable to recognize quarterly or annual revenue
consistent with our historical operating results or expectations. Our success is
dependent upon our ability to enter into and maintain strategic relationships
with customers and to develop and maintain volume usage of our products by our
customers and their end-users. Our revenue has fluctuated and our quarterly
operating results will continue to fluctuate based on the timing of the
execution of new customer licenses, customer transitions from pre-production to
final launch phase, and customer implementation of Tumbleweed IME in that
quarter. Our license revenue consists primarily of initial license and
distribution fees. As a result, in order to realize comparable or increased
license revenue, we must regularly and increasingly sign additional customers
with substantial initial license fees on a timely basis. Our services and
transaction revenue historically has consisted almost entirely of implementation
and consulting fees and support and maintenance fees, as actual
transaction-based revenue to date has been minimal. As a result, in order to
realize comparable or increased services revenue, we must increase our services
revenue in the short term through implementation and consulting work and
contractual transaction minimums and in the longer term through the increased
transaction volume with the use of our services, and the timing of these
transactions may also cause our quarterly operating results to fluctuate. Unless
and until we have developed a significant and recurring transaction-
14
<PAGE>
based revenue stream from communications that are sent with our services, our
revenue may continue to fluctuate significantly.
In addition, we have experienced, and expect to continue to experience,
fluctuations in revenue and operating results from quarter to quarter for other
reasons, including, but not limited to:
- disruptions in software purchases associated with Year 2000 concerns and
seasonality;
- the amount and timing of operating costs and capital expenditures relating
to our business, operations and infrastructure, including our
international operations; and
- the announcement or introduction of new or enhanced services and products
in the secure online communications or document delivery markets.
As a result of these factors, we believe that quarter-to-quarter or other
periodic comparisons of our revenue and operating results are not necessarily
meaningful, and that these comparisons may not be accurate indicators of future
performance. Because our staffing and operating expenses are based on
anticipated revenue levels, and because a high percentage of our costs are
fixed, small variations in the timing of the recognition of specific revenue
could cause significant variations in operating results from quarter to quarter.
If we are unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall, any significant revenue shortfall would likely
have an immediate negative effect on our business and operating results.
Moreover, our operating results in one or more future quarters may fail to meet
the expectations of securities analysts or investors. If this occurs, we would
expect to experience an immediate and significant decline in the trading price
of our stock.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF TUMBLEWEED'S
REVENUE AND THE FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS COULD HARM
TUMBLEWEED'S BUSINESS.
The loss of one or more of our major customers, the failure to attract new
customers on a timely basis, or a reduction in usage and revenue associated with
the existing or proposed customers would harm our business and prospects. Five
customers comprised approximately 72% of our revenue in the nine months ended
September 30, 1999, and three customers comprised approximately 91% of our
revenue in fiscal 1998. We expect that a small number of customers will continue
to account for a majority of our revenue for the foreseeable future.
TUMBLEWEED'S SERVICE PROVIDER CUSTOMERS MAY COMPETE WITH TUMBLEWEED OR FAIL TO
PROMOTE TUMBLEWEED'S PRODUCT.
To date, we have generated most of our revenue from contracts with a very
limited number of service provider customers, including Hikari Tsushin, United
Parcel Service, the U.S. Postal Service, Canada Post and France's La Poste, as
member posts of the International Post Corporation Technology, S.C., Pitney
Bowes, American Express Travel Related Services, Inc., Nippon Telegraph and
Telephone Corporation and UPAQ Ltd., which use or intend to use our products for
the communication of third-party documents and data. If these customers do not
effectively promote the use of Tumbleweed IME to their end-users, adoption of
our services and the recognition of associated revenue could be limited. Because
our contracts with our service provider customers are non-exclusive, these
customers could elect to offer competing secure online communication services to
their customers through our existing or future competitors. The service provider
customers also may compete with our secure online communication services through
their traditional physical delivery channels.
IF TUMBLEWEED DOES NOT SECURE KEY RELATIONSHIPS WITH ENTERPRISE CUSTOMERS,
TUMBLEWEED'S ACCESS TO BROADER MARKETS WILL BE LIMITED.
We expect that our enterprise customers, which use or intend to use
Tumbleweed IME for internal purposes or for distribution of internally generated
communications to their customers, will be an increasingly important source of
our future revenue. A key aspect of our strategy is to access target
15
<PAGE>
markets prior to adoption of alternative online distribution solutions by the
larger participants in these markets. The failure to secure key relationships
with new enterprise customers in targeted markets could limit or effectively
preclude our entry into these target markets, which would harm our business and
prospects.
CUSTOMERS IN A PRELIMINARY PHASE OF IMPLEMENTING TUMBLEWEED'S PRODUCT MAY NOT
PROCEED ON A TIMELY BASIS OR AT ALL.
Some of our customers are currently in a pilot or preliminary stage of
implementing Tumbleweed IME and may encounter delays or other problems in the
introduction of our services. A decision not to do so or a delay in
implementation could result in a delay or loss in related revenue or otherwise
harm our businesses and prospects. In particular, a complaint was filed with the
Postal Rate Commission earlier this year alleging that the U.S. Postal Service's
offering of the Tumbleweed IME-based service PostECS, currently in a preliminary
phase, is subject to regulation by the Postal Rate Commission. On May 3, 1999,
the Postal Rate Commission issued an order determining that it has jurisdiction
over the implementation of PostECS and is initiating formal proceedings to
consider the complaint. This order could result in a delay of the launch of our
service by the U.S. Postal Service or an election not to proceed with the
product launch. We cannot predict when any customer that is currently in a pilot
or preliminary phase will implement broader use of our services.
THE MARKETS FOR SECURE ONLINE COMMUNICATION SERVICES GENERALLY, AND THE
TUMBLEWEED IME PRODUCT SPECIFICALLY, ARE NEW AND MAY NOT DEVELOP.
The market for our products and services is new and evolving rapidly. If the
market for our products and services fails to develop and grow, or if our
products and services do not gain broad market acceptance, our business and
prospects will be harmed. In particular, our success will depend upon the
adoption and use by current and potential customers and their end-users of
secure online communication services. Our success will also depend upon
acceptance of our technology as the standard for providing these services. The
adoption and use of our products and services will involve changes in the manner
in which businesses have traditionally exchanged information. In addition, sales
and marketing of our products and services is to a large extent under the
control of our customers. In some cases, our customers have little experience
with products, services and technology like those offered by us. Our ability to
influence usage of our products and services by customers and end-users is
limited. To date, the usage of Tumbleweed IME by the end-users of our service
provider customers has been limited. We have spent, and intend to continue to
spend, considerable resources educating potential customers and their end-users
about the value of our products and services. It is difficult to assess, or to
predict with any assurance, the present and future size of the potential market
for our products and services, or its growth rate, if any. Moreover, we cannot
predict whether our products and services will achieve any market acceptance.
Our ability to achieve our goals also depends upon rapid market acceptance of
future enhancements of our products. Any enhancement that is not favorably
received by customers and end-users may not be profitable and, furthermore,
could damage our reputation or brand name.
THE TRADITIONAL AND INTERNET DELIVERY SERVICES INDUSTRIES ARE HIGHLY COMPETITIVE
AND RAPIDLY CHANGING, AND TUMBLEWEED MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
We may not be able to compete successfully against current and future
competitors, and the competitive pressures we face could harm our business and
prospects. Broadly speaking, Tumbleweed IME is an alternative to traditional
mail and courier document delivery services, such as those offered by Federal
Express Corporation, United Parcel Service or the U.S. Postal Service. Our
solution is also an alternative to general purpose e-mail applications and
services. As such, we compete with these options. In the more narrow market
segment of secure online communication services, our direct competition comes
from other small, early stage, secure online communication services providers.
Some of these providers have products that are intended to compete directly with
our products. Examples of these companies
16
<PAGE>
include Differential Inc., e-Parcel, LLC, NetDox, Inc., PostX Corporation and
The docSpace Company Inc. In addition, companies with which we do not presently
directly compete are planning to become competitors in the future. This could
occur either through the expansion of our products and services, or through
their product development in the area of secure online communication services,
or by their acquisition of companies, or relevant technology or products of our
direct competitors. These additional companies could include America Online,
Inc./Netscape Communications Corporation, International Business Machines
Corporation/Lotus Development Corporation, Microsoft Corporation and VeriSign,
Inc.
On November 4, 1999, Critical Path Inc. announced that it had entered into a
definitive agreement to acquire the docSpace Company, Inc., which may
significantly increase the competitive pressures Tumbleweed faces.
The market for secure online communication services is new, rapidly
evolving, and highly competitive. The level of competition is likely to increase
as current competitors improve their offerings and as new participants enter the
market. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, sales, marketing, technical and other resources than
Tumbleweed. Moreover, these competitors may enter into strategic or commercial
relationships with larger, more established and well-financed companies. Some of
our competitors may be able to enter into these strategic or commercial
relationships on more favorable terms. Additionally, these competitors have
research and development capabilities that may allow them to develop new or
improved products that may compete with product lines we market and distribute.
New technologies and the expansion of existing technologies also may increase
competitive pressures on us. Increased competition may result in reduced
operating margins as well as loss of market share and brand recognition. This
could result in decreased usage of our products.
TUMBLEWEED HAS A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM ITS
BUSINESS.
The inability to license our services to new customers on a timely basis or
delays by our existing and proposed customers and their end-users in the
implementation and adoption of our services could limit revenue and harm our
business and prospects. Our customers must evaluate our technology and integrate
our products and services into the products and services they provide. In
addition, our customers may need to adopt a comprehensive sales, marketing and
training program in order to effectively implement Tumbleweed IME. Finally, we
must coordinate with our customers using our product for third-party
communications in order to assist end-users in the adoption of our products in
order to generate usage fees. For these and other reasons, the cycle associated
with establishing licenses in order to generate initial license fees and
implementation of our products in order to generate material transaction-based
services revenue can be lengthy. This cycle is also subject to a number of
significant delays over which we have little or no control.
TUMBLEWEED'S EXPANSION INTO INTERNATIONAL MARKETS MAY BE DIFFICULT OR
UNPROFITABLE.
We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international markets
and have opened sales offices in France, Germany, Japan and the United Kingdom.
In the nine months ended September 30, 1999, we derived 52% of our revenue from
international operations. However, as an early-stage company, we have limited
experience in international operations and may not be able to compete
effectively in international markets. A key component of our long-term strategy
is to further expand into international markets, and we must continue to devote
substantial resources to our international operations in order to succeed in
these markets. In this regard, we may encounter difficulties such as:
- unexpected changes in regulatory requirements and trade barriers
applicable to the Internet or our business;
17
<PAGE>
- challenges in staffing and managing foreign operations, including
employment laws and practices as we expand into continental Europe;
- seasonal reductions in business activity and economic downturns, in
particular, in Europe and Asia;
- longer payment cycles and problems in collecting accounts receivable;
- problems caused by the conversion of various European currencies into a
single currency, the Euro;
- differing technology standards; and
- reduced protection for intellectual property rights in certain countries
in which we operate or plan to operate.
In addition, our expansion into international markets will increasingly
subject us to fluctuations in currency exchange rates. In the future, an
increasing number of our contracts may be denominated in currencies other than
U.S. dollars. We do not presently engage in hedging or similar transactions to
protect us from currency fluctuations. Any of the foregoing difficulties of
conducting business internationally could harm our international operations and,
consequently, our business and prospects.
IF WE DO NOT PROVIDE ADEQUATE SUPPORT SERVICES TO OUR CUSTOMERS TO IMPLEMENT
TUMBLEWEED IME, WE MAY LOSE CUSTOMERS OR REALIZE LOWER TRANSACTION VOLUME.
Our professional services organization assists our customers in implementing
Tumbleweed IME through software installation, integration with existing customer
systems, contract engineering, consulting, and training. If the professional
services organization does not adequately assess customer requirements or
address technical problems, customers may seek to discontinue their
relationships with Tumbleweed due to dissatisfaction with the product or our
customer support. Furthermore, these customers may realize lower transaction
volume than they could have otherwise achieved because they did not fully
capitalize on the product in ways that could have been addressed by our
professional services organization. Tumbleweed IME must be integrated with
existing hardware and complex software products of our customers or other third
parties, and our customers may not have significant experience with the
implementation of products similar to ours. In addition, the provision of
contract engineering and integration services is an increasingly important
aspect of Tumbleweed's strategy to strengthen customer loyalty to our product
and company. Therefore, our business and future prospects significantly depend
on the strength of our professional services organization.
TUMBLEWEED MAY ENCOUNTER SYSTEM FAILURE, AND A DISASTER COULD SEVERELY DAMAGE
ITS OPERATIONS.
The ability of our customers to provide Tumbleweed IME-based services
depends on the efficient and uninterrupted operation of the computer and
communications hardware and the software and Internet network systems that they
maintain. Although our ability to manage the effects of system failures which
occur in computer hardware, software and network systems is limited, the
occurrences of these failures could harm our reputation, business and prospects.
The Internet has experienced a variety of outages and other delays as a result
of damage to portions of its infrastructure, and the Internet could face similar
outages and delays in the future. In addition, an increasing number of our
customers require Tumbleweed to provide computer and communications hardware,
software and Internet networking systems to them as an outsourced data center
service. All data centers, whether hosted by us, our customers, or by an
independent third party to which we outsource this function, are vulnerable to
damage or interruption from fire, flood, earthquake, power loss,
telecommunications failure, or other similar events.
IF TUMBLEWEED LOSES THE SERVICES OF KEY MANAGEMENT PERSONNEL, INCLUDING
CO-FOUNDERS OR KEY SALES EXECUTIVES, TUMBLEWEED'S ABILITY TO DEVELOP ITS
BUSINESS AND SECURE CUSTOMER RELATIONSHIPS WILL SUFFER.
We are substantially dependent on the continued services and performance of
our senior management and other key personnel. The loss of the services of any
of our executive officers or other key employees,
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particularly Tumbleweed's co-founders, Jeffrey C. Smith and Jean-Christophe D.
Bandini, could significantly delay or prevent the achievement of our development
and strategic objectives. In addition, the loss of key members of our sales
organization including Donald N. Taylor and Donald R. Gammon, could harm our
ability to secure key relationships contemplated by our business plan. We do not
have long-term employment agreements with any of our key personnel, and their
employment is at will. The loss of services of any of our senior management or
other key personnel would significantly harm our business and prospects.
OUR EFFORTS TO ESTABLISH, MAINTAIN AND STRENGTHEN TUMBLEWEED'S BRANDS WILL
REQUIRE SIGNIFICANT EXPENDITURES AND MAY NOT BE SUCCESSFUL.
If the marketplace does not associate the Tumbleweed or Tumbleweed IME
brands with high quality secure Internet communication services, it may be more
difficult for us to attract new customers or introduce future products and
services. The market for our services is new. Therefore, our failure to
establish brand recognition at this stage could harm our ability to compete in
the future with other companies that successfully establish a brand name for
their services. We must succeed in our marketing efforts, provide high quality
services and increase our user base in order to build our brand awareness and
differentiate our products from those of our competitors. These efforts have
required significant expenditures to date. Moreover, we believe that these
efforts will require substantial commitments of resources in the future as our
brands become increasingly important to our overall strategy and as the market
for our services grows.
TUMBLEWEED'S BUSINESS WILL BE HARMED IF IT CANNOT MEET FUTURE CAPITAL NEEDS.
We will require substantial working capital to fund our business and achieve
our goals. We have experienced negative cash flow from operations and we expect
to continue to experience significant negative cash flow from operations for the
foreseeable future. We believe that our existing capital resources, including
the proceeds of our recent initial public offering, will enable us to maintain
our current and planned operations for at least the next 12 months. However, our
capital requirements depend upon several factors, including:
- the rate of market acceptance of our products and services, including
transaction volume;
- our ability to expand our customer base;
- our level of expenditures; and
- the cost of service and technology upgrades.
If we seek additional funding to meet our requirements, this funding may not
be available on acceptable terms, if at all. If adequate funds are not
available, we may be required to curtail significantly or defer one or more of
our operating goals or programs. If we raise additional funds through the
issuance of equity securities, the issuance could result in substantial dilution
to existing shareholders. In addition, these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
we raise additional funds through the issuance of debt securities, these new
securities would have rights, preferences and privileges senior to those of the
holders of our common stock. The terms of these debt securities could also
impose restrictions on our operations.
RISKS RELATED TO WORLDTALK
WORLDTALK'S QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
IF WORLDTALK FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR
INVESTORS, THE MARKET PRICE OF THE COMMON STOCK MAY DECREASE.
Our quarterly operating results have varied greatly in the past and will
likely vary greatly in the future depending upon a variety of factors, some of
which are beyond our control. Period to period comparisons
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of our operating results are not indicators of future performance. Our operating
results may fall below the expectations of securities analysts or investors in
some future quarter or quarters. Our failure to meet these expectations would
likely cause the market price of our common stock to decline.
Product revenues in any quarter are dependent on contracts entered into or
orders booked and shipped in that quarter. We have generally experienced a trend
toward higher order receipt, and a higher percentage of revenue, toward the end
of the last month of a quarter. The timing of closing larger orders increases
the risk of quarter-to-quarter fluctuation. If orders projected for a specific
customer for a particular quarter are not realized in that quarter, our
operating results for that quarter could be seriously harmed.
WORLDTALK HAS A HISTORY OF LOSSES AND EXPECTS TO INCUR ADDITIONAL OPERATING
LOSSES.
We have a history of losses and we expect to incur additional operating
losses in the future. We have experienced operating losses in each quarterly and
annual period since inception and we expect to incur losses in the future. If
the merger is not completed, we may have to significantly increase our sales and
marketing, product development and general and administrative expenses. With
these additional expenses, we must significantly increase our revenues in order
to become profitable. As a result, we expect to incur losses for the foreseeable
future. We may never achieve profitability, and if we do, we cannot ensure that
we will sustain or increase it.
WORLDTALK'S BUSINESS STRATEGY RELIES HEAVILY UPON WORLDSECURE PRODUCTS.
We currently derive almost all of our revenues from our WorldSecure product
line. These products are expected to continue to account for almost all of our
net revenue for the foreseeable future. Because of this concentration of
revenue, a decline in demand for or in the prices of these products could harm
our business.
In November 1999, we began offering our WorldSecure Client product free over
the Internet in an effort to increase use of this product and increase sales of
our complementary products. This strategy is likely to result in a decrease in
our revenues in the short-term and may not result in any increase in sales of
our other products, which would harm our business. We may in the future change
the prices we charge for our products or the manner and timing of license fees
for our products. Changes in our product pricing model could lead to significant
decreases in our revenues in the short term and could cause our stock price to
decline. Customer resistance to any future change in our prices or our pricing
structures could also harm our business and operating results.
If our customers or potential customers do not budget funds for the purchase
and implementation of our e-mail and Internet security products, or if our
products do not meet our customers' needs, our business and operating results
will suffer.
WORLDTALK SELLS ITS PRODUCTS THROUGH INTERMEDIARIES, WHO MAY NOT VIGOROUSLY
MARKET ITS PRODUCTS OR MAY HAVE DIFFICULTY IN TIMELY PAYING FOR PURCHASED
PRODUCTS.
We market a significant portion of our products to end-users through
intermediaries, including distributors, resellers and value-added resellers. Our
distributors may sell other products that are complementary to, or compete with,
our products. While we encourage our distributors to focus on our products
through market and support programs, these distributors may give greater
priority to products of other suppliers, including competitors.
Some of our distributors have experienced or are experiencing economic
difficulties, which may interfere with our collection of accounts receivable. We
regularly review the collectibility and credit worthiness of our distributors to
determine an appropriate allowance for doubtful accounts reserve. Our
uncollectible accounts could exceed our current or future allowance for doubtful
accounts reserve, which
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would harm our operating results. If we are unable to engage, train and retain
distributors and resellers of our products in the future, we may not be able to
sustain or grow our business.
IF THE MARKETS FOR INTERNET CONTENT SECURITY, POLICY MANAGEMENT AND E-MAIL
DIRECTORY PRODUCTS DO NOT EVOLVE AS WE ANTICIPATE, WORLDTALK'S BUSINESS COULD
SUFFER.
The markets for our Internet content security, policy management and e-mail
directory products are evolving, and their growth depends upon broader market
acceptance of this software. Although the number of personal computers, or PCs,
attached to large-area networks has increased dramatically, the Internet
security and policy management markets continue to be emerging markets. These
markets may not continue to develop or may not develop rapidly enough to benefit
our business significantly. If our customers or potential customers do not
budget sufficient resources to purchase and implement our products, our business
will suffer.
WORLDTALK IS SUBJECT TO INTENSE COMPETITION IN THE INTERNET CONTENT SECURITY AND
POLICY MANAGEMENT MARKETS AND EXPECTS TO FACE INCREASED COMPETITION IN THE
FUTURE.
The markets for our products are intensely competitive, and we expect
competition to increase in the near-term. Some of our competitors have longer
operating histories, greater name recognition, larger technical staffs,
established relationships with hardware vendors and greater financial, technical
and marketing resources than we do. These factors may provide our competitors
with an advantage in penetrating the original equipment manufacturer, or OEM,
market with our competitors' electronic mail and Internet security products. As
is the case in many segments of the software industry, we have been
encountering, and we expect to further encounter, increasing competition. This
increased competition could reduce average selling prices and sales volume of
our products.
Several companies offer products that attempt to address all or some of the
needs addressed by our products. Our principal competitors include Content
Technologies and Trend Micro, as well as numerous smaller companies and
shareware authors that may in the future develop into stronger competitors.
There may be consolidation of the e-mail and Internet security markets around a
smaller number of companies that are able to provide software and support
capabilities and large companies such as IBM and Microsoft may also become
competitors.
WORLDTALK HAS RECENTLY EXPERIENCED SIGNIFICANT TURNOVER IN SENIOR MANAGEMENT.
WORLDTALK MUST RETAIN AND ATTRACT KEY PERSONNEL.
In August 1999, Bernard Harguindeguy resigned as President and Chief
Executive Officer of Worldtalk. If the merger is not completed, we will conduct
a search for a new Chief Executive Officer and for a Vice President of
Marketing. Our ability to achieve our revenue and operating performance
objectives will depend in large part on our ability to attract and retain these
new officers and other technically qualified and highly skilled engineering,
sales, consulting, marketing and management personnel. Competition for people to
fill these positions is intense and is expected to remain so for the foreseeable
future. We may not be able to attract or retain the new officers with the
appropriate skills to achieve our corporate objectives or we may be required to
raise additional funds to provide adequate incentives to potential candidates.
In 1998 and 1999, we hired new executive officers to fill the positions of Chief
Financial Officer, Vice President, Engineering and Vice President, Sales.
Significant turnover of employees, particularly in key positions, can be
disruptive and can result in departures of other employees, which could harm our
business.
Employees of a company often are uncertain as to their future employment
during the period between the time the company enters into a merger agreement
and the time the merger is consummated. Although incentives provided by the
employer during this period may mitigate this effect, it is possible that
employees will seek employment elsewhere. Whether or not the merger occurs,
Worldtalk may not be able
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to retain some of its key employees. If any of our key employees leave, our
business, results of operations and financial condition could suffer.
WORLDTALK'S LENGTHY SALES CYCLE COULD HARM ITS QUARTERLY RESULTS.
The length of our sales cycle varies with the size of the account. As we
continue to focus a significant part of our sales efforts on the sale of our
WorldSecure products to larger companies, our sales cycle has lengthened and may
continue to lengthen. Sales of our products frequently require a long education
process and significant technical evaluation and commitment of capital and other
resources. Moreover, these sales may be subject to the risk of delays associated
with customers' internal budget and other procedures for approving large capital
expenditures, and deploying new technologies within their network. If
anticipated orders are not realized or revenues are not otherwise recognized in
a particular quarter, our operating results for that quarter could suffer.
CHANGING REGULATORY REQUIREMENTS IN THE FINANCIAL INDUSTRY COULD HARM
WORLDTALK'S BUSINESS.
Our success at licensing our products to large organizations in the
financial industry depends, in part, on our ability to respond to regulations
and standards governing this industry. If new regulations or standards are
imposed that affect the use of electronic communications or the Internet within
this industry, we may be required to modify our products to incorporate these
new regulations and standards. If we are unable to respond to these changes, or
if our response is too slow or is inadequate, we may lose customers and our
business would be harmed.
WORLDTALK'S INTERNATIONAL OPERATIONS SUBJECT IT TO A NUMBER OF RISKS INHERENT IN
DOING BUSINESS IN FOREIGN COUNTRIES.
Net revenue from international licenses represented approximately 18% of our
net revenue in the first six months of 1999, 39% of our net revenue in 1998 and
19% of our net revenue in 1997. Historically, we have relied upon independent
agents and distributors to market our products internationally. We expect that
international revenues will continue to account for a significant percentage of
net revenue. Although sales of our products are typically denominated in U.S.
dollars, there are a number of other risks that may harm our international
operations. These risks include difficulty of collecting payment, regional
economic trends and taxes and foreign regulations. Further, in countries with a
high incidence of software piracy, we may experience a higher rate of piracy of
our products.
In addition, a portion of our international revenue is expected to continue
to be generated through independent agents. Since these agents are not our
employees and are not required to offer our products exclusively, they may
discontinue marketing our products entirely.
THE CRYPTOGRAPHY TECHNOLOGY IN WORLDTALK'S PRODUCTS IS SUBJECT TO SECURITY RISKS
AND EXPORT RESTRICTIONS AND MAY BECOME OBSOLETE.
Certain of our network security products, technology and associated
assistance are subject to export restrictions imposed by the U.S. Department of
State and the U.S. Department of Commerce. These restrictions permit the export
of encryption products so long as certain requirements are met, but prohibit the
export of these products to countries deemed hostile by the U.S. Government.
U.S. export regulations regarding the export of encryption technology require
either a transactional export license or the granting of Department of Commerce
Commodity jurisdiction. As result of this regulatory regime, foreign competitors
facing less stringent controls may be able to compete more effectively than we
can in the global market. While we have obtained approval from the Department of
Commerce to export to certain end users, the U.S. Government may not approve
pending or future export license requests. Further, the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, may be revised from time to time. Failure to obtain the
required licenses or the costs of compliance could diminish our international
revenues.
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PRODUCT LIABILITY CLAIMS ASSERTED AGAINST WORLDTALK IN THE FUTURE COULD HARM ITS
BUSINESS.
Our software products are used to protect and manage computer systems and
networks that may be critical to organizations. As a result, our sale and
support of these products involves the risk of potential product liability
claims. Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
these license agreements may not be effective under the laws of certain
jurisdictions, particularly in circumstances involving unsigned licenses. A
product liability claim brought against us could harm our business, results of
operations and financial condition.
WORLDTALK FACES RISKS ASSOCIATED WITH U.S. GOVERNMENT CONTRACTING.
We expect that in the near term, a portion of our revenues will result from
contracts with agencies of the U.S. government. We believe that the willingness
of these government agencies to enter into future contracts with us will in part
be dependent upon our continued ability to meet their standards and
expectations. However, we may be unable to procure additional government
contracts. In addition, our products must be certified by the U.S. government
prior to their adoption or use by certain government agencies or departments. If
we fail to receive government certification of our products, we will have
limited opportunities to sell to government agencies and our business and
operating results may be harmed.
WORLDTALK IS SIGNIFICANTLY INFLUENCED BY ITS EXISTING STOCKHOLDERS.
Stockholders who own in excess of 5% of our stock together with our
executive officers and directors and their affiliates, beneficially own, in the
aggregate, approximately 52% of our outstanding common stock. As a result, these
stockholders will be able to control or exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of the merger, which could have the effect of delaying or preventing a
third party from acquiring control over Worldtalk.
RISKS RELATED TO BOTH TUMBLEWEED AND WORLDTALK
THE BUSINESSES OF TUMBLEWEED AND WORLDTALK MAY SUFFER IF THEY ARE UNABLE TO
PROTECT INTELLECTUAL PROPERTY.
Although both Tumbleweed and Worldtalk regard intellectual property rights
as critical to success, Tumbleweed and Worldtalk may not be able to obtain the
protection each seeks on commercially reasonable terms, if at all. It may also
be possible for unauthorized third parties to copy selected portions of
Worldtalk's and Tumbleweed's products or obtain and use information that each
regards as proprietary. In particular, Tumbleweed relies on the utility patent
Tumbleweed obtained relating to the web-based delivery method as critical to
Tumbleweed's competitive position. Attempts by competitors to utilize this or
other intellectual property could undermine Tumbleweed's and Worldtalk's
abilities to retain or secure customers on favorable terms, if at all. In
addition, competing companies could independently develop similar technology.
Worldtalk does not typically obtain signed license agreements from corporate,
government and institutional customers who license products directly. Rather,
Worldtalk includes an electronic version of a shrink-wrap license in all
electronically distributed software and a printed license in the box for
products distributed through traditional distributors in order to protect
copyrights and trade secrets in those products. Since none of these licenses are
signed by the licensee, many legal authorities believe that these types of
licenses may not be enforceable under the laws of many states and foreign
jurisdictions. Some end-user license provisions protecting against unauthorized
use, copying, transfer and disclosure of the licensed program may be
unenforceable under the laws of some jurisdictions and foreign countries. In
addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the U.S. Tumbleweed's and Worldtalk's
attempts to protect proprietary rights in the U.S. or abroad may not be
adequate. In particular, Tumbleweed is currently engaged in litigation to
enforce its intellectual property rights, which may not be successful and will
result in substantial expenditures of resources to pursue. See "Tumbleweed
Business--Legal Proceedings."
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The status of U.S. patent protection in the software industry is not well
defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. Tumbleweed's pending patent applications, as well as patents
Tumbleweed or Worldtalk may seek in the future, ultimately may not be issued
with the scope of the claims sought, if at all. In addition, because patent
applications in the U.S. are not publicly disclosed until the patent is issued,
applications may have been filed by third parties that relate to Worldtalk's or
Tumbleweed's products and services.
ANY CLAIM OF INFRINGEMENT BY THIRD PARTIES COULD BE COSTLY TO DEFEND.
Intellectual property claims can be time consuming to defend, result in
costly litigation, divert management's attention and resources and cause product
shipment delays. These claims could require Tumbleweed or Worldtalk to enter
into royalty or license agreements. A successful claim of product infringement
against Tumbleweed or Worldtalk could harm Tumbleweed's or Worldtalk's business
and prospects. Either of Tumbleweed or Worldtalk could face a claim of
infringement by third parties with respect to Tumbleweed's or Worldtalk's
current or future products or services. In addition, Tumbleweed and Worldtalk
may increasingly become subject to claims of intellectual property infringement
by third parties as the number of competitors grows and the functionality of
products and services increasingly overlap. Because each of Tumbleweed and
Worldtalk is in a new and evolving market, customers may demand features that
could increase the likelihood of infringement claims.
IF TUMBLEWEED OR WORLDTALK DOES NOT SUCCESSFULLY MANAGE GROWTH, INCREASED STRAIN
ON RESOURCES COULD HARM THE BUSINESSES.
Although Tumbleweed or Worldtalk may be unable to expand operations in the
future, the business model of the combined companies contemplates a period of
sustained and rapid operational growth. If the combined companies are unable to
manage growth efficiently, there will be inadequate resources to maintain and
secure their key relationships contemplated by the combined business plan of
Tumbleweed and Worldtalk and their businesses and prospects could be harmed.
Growth has subjected Tumbleweed to, and will continue to subject the combined
companies to, increased capital and operating commitments. For instance,
Tumbleweed has recently entered into a new operating lease for significantly
larger facilities, and Worldtalk anticipates expansion of international business
and growth in distribution. Moreover, Tumbleweed's plan for additional customer
licenses and product and service introductions and enhancements and the timing
of implementing this plan will continue to place a significant strain on the
combined companies' personnel, systems and resources. To manage further growth
of the combined companies' operations and personnel and meet present and future
commitments, the combined companies must:
- improve existing operations and implement new operations;
- maintain and enhance our customer service; and
- expand, retain, train and manage growing employee base.
Furthermore, the managements of Tumbleweed and Worldtalk will be required to
maintain and expand relationships with customers and other third parties
necessary to the growth of the combined business. The current and planned
systems and personnel levels of Tumbleweed and Worldtalk may not be adequate to
support future operations. Moreover, management may not be able to hire, train,
retain, motivate and manage required personnel or successfully identify, manage
and exploit existing and potential market opportunities.
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TUMBLEWEED AND WORLDTALK ARE DEPENDENT ON TECHNOLOGIES PROVIDED BY THIRD
PARTIES, AND THE TERMINATION OF ANY RELATIONSHIPS WITH THESE THIRD PARTIES
COULD INCREASE COSTS, DELAY PRODUCT DEVELOPMENT AND HARM TUMBLEWEED'S OR
WORLDTALK'S REPUTATION.
Tumbleweed has developed Tumbleweed IME partially based on selected
technologies developed by third parties that Tumbleweed has licensed under
non-exclusive agreements. Worldtalk has incorporated the encryption and
anti-virus technology of third parties into Worldtalk's products. The inability
to obtain new contractual relationships or maintain existing relationships could
increase Tumbleweed's or Worldtalk's cost of revenue, delay product development,
damage relationships with customers and divert resources, which could harm
Tumbleweed's or Worldtalk's business and prospects. In addition, existing
agreements may be terminated by the other parties to these contracts, or may not
be renewed on favorable terms and neither Tumbleweed nor Worldtalk may be able
to license new technologies on favorable terms, if at all.
In particular, Tumbleweed's ability to provide data security is critical to
its success. For some security algorithms, Tumbleweed uses technology licensed
in perpetuity from RSA Data Security, Inc. In addition, Tumbleweed licenses
Adobe Acrobat technology from Adobe Systems Incorporated, under a renewable
agreement that expires in April 2000.
TUMBLEWEED'S AND WORLDTALK'S COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE
TO SECURITY BREACHES.
Tumbleweed's and Worldtalk's success depends on the confidence of customers
and the end-users of those customers in Tumbleweed's and Worldtalk's abilities
to securely transmit confidential information over the Internet. Any failure to
provide secure online communication services could harm Worldtalk's or
Tumbleweed's business and reputation. Tumbleweed's and Worldtalk's products rely
on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to achieve secure transmission
of confidential information. Despite the focus on Internet security, neither
Tumbleweed nor Worldtalk may be able to stop unauthorized attempts to gain
access to or disrupt the transmission of communications by customers or their
end-users. Advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments could result in a compromise or
breach of the algorithms used by Worldtalk's or Tumbleweed's products to protect
data contained in customer databases and the information being transferred.
Although Tumbleweed and Worldtalk generally limit warranties and liabilities
relating to security in customer contracts, customers or the end-users of those
customers may seek to hold Tumbleweed or Worldtalk liable for any losses
suffered as a result of unauthorized access to communications. Tumbleweed or
Worldtalk may not have adequate insurance to cover these losses. Tumbleweed and
Worldtalk may be required to expend significant capital and other resources to
protect against these security breaches or to alleviate the problems caused.
Moreover, concerns over the security of transactions conducted on the Internet
and commercial online services, which may be heightened by any well-publicized
compromise of security, may also deter future customers and their end-users from
using Tumbleweed's and Worldtalk's products. In particular, these concerns could
cause current customers to cease using Tumbleweed's and Worldtalk's products as
a means of providing secure online communication services. In either case, this
could harm Tumbleweed's and Worldtalk's business and prospects. The security
measures of Tumbleweed and Worldtalk may not be sufficient to prevent security
breaches, and failure to prevent security breaches could harm Tumbleweed's and
Worldtalk's reputation, business and prospects.
TUMBLEWEED'S OR WORLDTALK'S COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO
VIRUSES AND OTHER DISRUPTIONS.
Despite the implementation of security measures by customers and other third
parties, customers' servers or systems may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. Tumbleweed's or
Worldtalk's products may not be able to prevent any or all of these
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disruptions, and failure to do so could limit use of those products, cause
customers to incur substantial expenses, and otherwise harm customers' business.
Specifically, computer viruses, break-ins and other disruptions could lead to
interruptions, delays, loss of data or the inability to accept and confirm the
receipt of information. Anyone who is able to circumvent security measures could
misappropriate proprietary information or cause interruptions in the operations
of Tumbleweed, Worldtalk, their customers or the end-users of those customers.
This could occur through the introduction of known or undetected errors, or
bugs, viruses or by other means. In addition to purposeful security breaches,
the inadvertent transmission of computer viruses could expose Tumbleweed and
Worldtalk to litigation or a significant loss of revenue.
PRODUCTS MAY NOT BE SATISFACTORILY DESIGNED TO MEET CUSTOMER NEEDS.
Tumbleweed's revenue depends on the number of customers who use Tumbleweed
IME to provide secure online communication services. Worldtalk's success also
depends on maintaining customer satisfaction with its WorldSecure products.
Accordingly, the satisfactory design of Tumbleweed's and Worldtalk's products
and products licensed from third parties is critical to Tumbleweed's and
Worldtalk's businesses, and any significant product design limitations or
deficiencies could harm Tumbleweed's and Worldtalk's businesses and market
acceptance. To date, the features and functionalities reflected in Tumbleweed's
products and services have been based on its internal design efforts and on
feedback from a limited number of customers and potential customers, which may
not be an adequate assessment of customer requirements. Therefore, currently
specified features and functionality of Tumbleweed's products and services may
not satisfy current or future customer demands. Similarly, Worldtalk may be
required to upgrade and update its existing products, modify and enhance
acquired products and introduce new products to meet customer demands.
Furthermore, even if Tumbleweed and Worldtalk identify the feature set required
by customers in their markets, they may not be able to design and implement
products and services incorporating features in a timely and efficient manner,
if at all.
PRODUCT DEFICIENCIES MAY BE DIFFICULT TO RESOLVE AND COULD HARM TUMBLEWEED'S AND
WORLDTALK'S BUSINESSES.
Deficiencies in product design, performance and reliability could result in
lost revenue, delays in customer acceptance or lawsuits and would be detrimental
to Tumbleweed's and Worldtalk's market reputations. Software products as complex
as those offered by Tumbleweed and Worldtalk, which incorporate products from
third parties, often contain bugs or performance problems. Serious defects are
frequently found during the period immediately following introduction of new
products or enhancements to existing products. Tumbleweed's and Worldtalk's
products, and the products incorporated from third parties, are not error-free.
Undetected errors or performance problems may be discovered in the future.
Moreover, known errors that Tumbleweed or Worldtalk consider minor may be
considered serious by the customer.
If internal quality assurance testing or customer testing reveals
performance issues and/or desirable feature enhancements, Tumbleweed or
Worldtalk could postpone the development and release of updates or enhancements
to current products, future products or improvements in services. Tumbleweed or
Worldtalk may not be able to successfully complete the development of planned or
future products in a timely manner or to adequately address product defects,
which could harm its business and prospects. In addition, product defects may
expose Tumbleweed or Worldtalk to product liability claims, for which there may
be insufficient product liability insurance. A successful suit against
Tumbleweed or Worldtalk could harm its business and financial condition.
TUMBLEWEED AND WORLDTALK MAY BE UNABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL,
WHICH COULD HARM BUSINESSES AND PRODUCT DEVELOPMENT.
Tumbleweed and Worldtalk must continue to identify, recruit, hire, train,
retain and motivate highly skilled sales, technical, managerial, editorial,
marketing and customer service personnel. Competition for
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these personnel is intense, and Tumbleweed and Worldtalk may be unable to
successfully recruit, assimilate or retain sufficiently qualified personnel. In
particular, each may encounter difficulties in recruiting a sufficient number of
sales personnel and qualified software developers, and may not be able to retain
these sales personnel and developers, which could harm relationships with
Tumbleweed's or Worldtalk's existing and future customers at a critical stage of
development. The failure to recruit and retain necessary sales, technical,
managerial, editorial, merchandising, marketing and customer service personnel
could harm business and the ability to obtain new customers and develop new
products.
POTENTIAL YEAR 2000 PROBLEMS AND PURCHASING PATTERNS COULD HARM TUMBLEWEED'S AND
WORLDTALK'S BUSINESS AND REDUCE SALES.
Tumbleweed's and Worldtalk's customers, potential customers, and end-users
may need to upgrade computer systems and software products to ensure that the
customers' installed computer systems and software products can distinguish
between 20th century dates and 21st century dates. Failure to do so could result
in a system failure or miscalculations causing disruptions of operations,
including a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Tumbleweed's and Worldtalk's computer systems use third-party equipment and
software that may not be year 2000 compliant. In addition, Tumbleweed's and
Worldtalk's products and services are integrated into the systems of their
customers involving sophisticated hardware and complex software products, that
may not be year 2000 compliant. Tumbleweed and Worldtalk have no means of
ensuring that their customers and end-users of those customers will be year 2000
ready. Moreover, year 2000 readiness among international customers and in
international operations may be relatively more problematic since fewer
resources may have been devoted to addressing these issues in other countries.
The failure of Tumbleweed's and Worldtalk's computer systems or the computer
systems of their customers or Internet service providers could cause Tumbleweed
or Worldtalk to incur significant expenses to remedy problems, could reduce
revenue or could otherwise damage business.
If significant year 2000 errors or defects are discovered, Tumbleweed and
Worldtalk could incur substantial costs and operations could be seriously
disrupted. In addition, disruptions in the economy generally resulting from year
2000 issues could also harm each of them. Tumbleweed and Worldtalk could each be
subject to litigation due to computer systems or product failure, including as a
result of equipment shutdown or failure to properly date business records.
In addition, Tumbleweed and Worldtalk believe that purchasing patterns of
customers and potential customers may be affected by year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for year 2000 compliance. These expenditures may reduce funds
available to purchase software products and services similar to those that
Tumbleweed and Worldtalk offer. To the extent that year 2000 issues cause
significant postponements or cancellations of decisions to purchase products or
services, Tumbleweed's or Worldtalk's business and prospects would suffer. The
amount of potential liability and lost revenue that could result from year 2000
issues cannot reasonably be estimated at this time.
TUMBLEWEED'S AND WORLDTALK'S BUSINESSES ARE SUBJECT TO CONTINUOUS TECHNOLOGICAL
CHANGE, AND THEY MAY NOT BE ABLE TO RESPOND SUCCESSFULLY TO THE CHANGING NEEDS
OF THEIR INDUSTRIES.
The online communication services industry and policy management industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions and
new industry standards and practices that could render Tumbleweed's and
Worldtalk's existing services, proprietary technology and systems obsolete. If
Tumbleweed or Worldtalk is unable to adapt or respond in a timely manner to
changing market conditions or customer requirements for technical, legal,
financial or other reasons, its business and prospects could be harmed.
Tumbleweed and Worldtalk must continually improve the performance, features and
reliability of their
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services, particularly in response to competitive offerings. In particular,
because the technologies of Tumbleweed's partners, such as Oracle databases,
Netscape web servers and digital certificate and encryption technology from
VeriSign and RSA provide a foundation for Tumbleweed's products, changes in
those technologies and markets could affect the demand for Tumbleweed IME.
Tumbleweed and Worldtalk must also enhance their existing services, develop
new services and technologies that address the increasingly sophisticated and
varied needs of current and prospective customers and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. New products or enhancements may not adequately address the
changing needs of the marketplace. New products with new technological
capabilities could replace or shorten the life cycle of Worldtalk's products or
cause customers to defer or cancel purchases. The development of proprietary
technology entails significant technical challenges such as integrating new
technology into an existing platform and requires substantial expenditures and
lead-time. Tumbleweed and Worldtalk may not be able to utilize new technologies
effectively or adapt their products to customer requirements or emerging
industry standards.
RISKS RELATED TO OUR INDUSTRY
BECAUSE TUMBLEWEED IME UTILIZES THE INTERNET TO ACHIEVE SECURE COMMUNICATIONS,
IF USE OF THE INTERNET DOES NOT INCREASE, THE LEVEL OF USE OF OUR PRODUCTS
WILL SUFFER.
If the Internet and other products and services necessary for the
utilization of Tumbleweed IME are not sufficiently developed, fewer customers
and end-users will use Tumbleweed IME and our business will be harmed. In
particular, the success of our products and services will depend on the
development and maintenance of adequate Internet infrastructure, such as a
reliable network backbone with the necessary speed, data capacity and other
features demanded by users. Moreover, our success will also depend on the timely
development of complementary products or services such as high speed modems for
providing reliable Internet access and services and this may not occur. Because
the online exchange of information is new and evolving, the Internet may not
prove to be a viable platform for secure online communication services in the
long term. The Internet has experienced, and is expected to continue to
experience, significant growth in the numbers of users and amount of traffic. As
the Internet continues to experience increased numbers of users and frequency of
use, or if its users require increasingly more resources, the Internet
infrastructure may not be able to support the demands placed on it. As a result,
the performance or reliability of the Internet may be harmed. This in turn could
decrease the level of Internet usage and also the level of utilization of our
products and services.
ADDITIONAL GOVERNMENT REGULATION RELATING TO THE INTERNET MAY INCREASE OUR COSTS
OF DOING BUSINESS OR REQUIRE CHANGES IN OUR BUSINESS MODEL.
We are subject to regulations applicable to businesses generally and laws or
regulations directly applicable to companies utilizing the Internet. Although
there are currently few laws and regulations directly applicable to the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. These laws could cover issues like user privacy,
pricing, content, intellectual property, distribution, antitrust, legal
liability and characteristics and quality of products and services. The adoption
of any additional laws or regulations could decrease the demand for our products
and services and increase our cost of doing business or otherwise harm our
business or prospects.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues like property ownership, sales and other taxes,
libel and personal privacy is uncertain and may take years to resolve. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce. New state tax
regulations may subject us to additional state sales and income taxes. Any 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
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existing laws and regulations to the Internet and commercial online services
could harm our ability to conduct business and our operating results.
OUR PRODUCTS ARE SUBJECT TO EXPORT CONTROLS, AND WE MAY BE UNABLE TO OBTAIN
NECESSARY EXPORT APPROVALS.
Exports of software products utilizing encryption technology are generally
restricted by the U.S. and various foreign governments. All cryptographic
products require export licenses from certain U.S. government agencies.
Tumbleweed has obtained approval to export Tumbleweed IME Desktop 1.5,
Tumbleweed IME Desktop 2, Tumbleweed IME Server 2 and versions of Tumbleweed IME
Desktop 3.1 and Tumbleweed IME Server 3.1, and we are not exporting other
products and services that are subject to export control under U.S. law.
However, the list of products and countries for which export approval is
required, and the related regulatory policies, could be revised, and we may not
be able to obtain necessary approval for the export of future products. Our
inability to obtain required approvals under these regulations could limit our
ability to make international sales. Furthermore, our competitors may also seek
to obtain approvals to export products that could increase the amount of
competition we face.
COSTS OF COMMUNICATING VIA THE INTERNET COULD INCREASE IF ACCESS FEES ARE
IMPOSED.
Certain local telephone carriers have asserted that the increasing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If these access fees are imposed, the
costs of communicating on the Internet could increase substantially, potentially
slowing the increasing use of the Internet. This could in turn decrease demand
for our services or increase our costs of doing business.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT.
As a provider of Internet communication products and services, we face
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted online. Any imposition of liability, particularly liability that is
not covered by insurance or is in excess of insurance coverage, could be costly
and could require us to implement measures to reduce our exposure to this
liability. This may require us to expend substantial resources or to discontinue
selected service or product offerings.
We do not and cannot screen all of the content generated by our users, and
we could be exposed to liability with respect to this content. Furthermore,
certain foreign governments, such as Germany, have enforced laws and regulations
related to content distributed over the Internet that are more strict than those
currently in place in the U.S. Other countries, such as China, regulate or
prohibit the transport of telephonic data in their territories. Failure to
comply with regulations in a particular jurisdiction could result in fines or
criminal penalties or the termination of our service in one or more
jurisdictions. Moreover, the increased attention focused on liability issues as
a result of lawsuits and legislative proposals could impact the growth of
Internet use. Our liability insurance may not cover claims of these types, or
may not be adequate to indemnify us for all liability that may be imposed.
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THE SPECIAL MEETINGS
GENERAL
The special meeting of Tumbleweed stockholders will be held at 10:00 a.m.,
local time, on [ ], at [ ] for the purpose set forth in
the notice of the Tumbleweed special meeting. The special meeting of Worldtalk
stockholders will be held at 1:00 p.m., local time, on [ ], at
[ ] for the purpose set forth in the notice of the Worldtalk special
meeting. This joint proxy statement/prospectus is furnished in connection with
the solicitation by the board of directors of each of Tumbleweed and Worldtalk
of proxies to be used at the special meetings and at any and all adjournments or
postponements of the special meetings. Any person executing a proxy card may
revoke it prior to its exercise by filing with the secretary of Tumbleweed or
Worldtalk, as the case may be, prior to or at the applicable special meeting, at
the address specified in "Where You Can Find More Information," either an
instrument revoking the proxy or a duly executed proxy bearing a later date.
VOTING SECURITIES AND RECORD DATES
TUMBLEWEED. At the close of business on [ ], or the Tumbleweed
record date, there were [ ] shares of common stock, par value $0.001 per
share, of Tumbleweed issued and outstanding and entitled to vote at the
Tumbleweed special meeting, [ ] of which, or approximately [ ]%, were
beneficially owned by directors and executive officers of Tumbleweed and their
affiliates, excluding shares subject to options, and no shares of preferred
stock outstanding. Each share of Tumbleweed common stock issued and outstanding
on the Tumbleweed record date entitles the stockholder of record thereof to one
vote on each matter to be voted upon at the Tumbleweed special meeting. The
presence, in person or by proxy, at the Tumbleweed special meeting of the
holders of a majority of the shares of Tumbleweed common stock issued and
outstanding and entitled to vote on the Tumbleweed record date is necessary to
constitute a quorum for the transaction of business at the Tumbleweed special
meeting. Abstentions and broker non-votes will be counted for the purpose of
determining the existence of a quorum. A broker non-vote occurs when a broker
holding shares for a beneficial owner votes on one proposal pursuant to
discretionary authority or instructions from the beneficial owner, but does not
vote on another proposal because the broker has not received instructions from
the beneficial owner and does not have discretionary power. The affirmative vote
of the holders of a majority of the shares of Tumbleweed common stock present in
person or represented by proxy at the Tumbleweed special meeting and entitled to
vote is required in order to approve the issuance of shares of Tumbleweed common
stock under the Merger Agreement, including the conversion of warrants and
options to purchase shares of Worldtalk common stock into warrants and options
to purchase shares of Tumbleweed common stock in accordance with the provisions
of the Merger Agreement.
WORLDTALK. Only holders of record of shares of common stock, par value
$0.01 per share, of Worldtalk as of the close of business on [ ], or
the Worldtalk record date, will be entitled to vote at the Worldtalk special
meeting. At that date, there were [ ] shares of Worldtalk common stock
issued and outstanding and entitled to vote, [ ] of which, or approximately
[ ]%, were beneficially owned by directors and executive officers of
Worldtalk and their affiliates excluding shares subject to warrants and options.
Stockholders of record on the Worldtalk record date are entitled to one vote for
each share of Worldtalk common stock held on all matters to be voted upon at the
Worldtalk special meeting. The presence at the Worldtalk special meeting, in
person or by proxy, of the holders of at least a majority of the shares of
Worldtalk common stock issued and outstanding and entitled to vote on the
Worldtalk record date is necessary to constitute a quorum at the Worldtalk
special meeting. The affirmative vote of the holders of a majority of the issued
and outstanding shares of Worldtalk common stock is required in order to approve
the Merger Agreement and the transactions associated with it.
A properly executed proxy marked ABSTAIN, although counted for purposes of
determining whether there is a quorum and for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote at
each of the special meetings, will not be voted. Accordingly, because the
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affirmative vote of a majority of the shares of Worldtalk common stock issued
and outstanding and entitled to vote is required for approval of the Merger
Agreement and the transactions associated with it at the Worldtalk special
meeting, a proxy marked ABSTAIN, will have the effect of a vote against this
proposal. At the special meetings, shares represented by broker non-votes will
be counted for purposes of determining the existence of a quorum but will not be
included in vote totals. Accordingly, a broker non-vote at the Worldtalk special
meeting will have the effect of a vote against the Merger Agreement and the
transactions associated with it.
PURPOSE OF SPECIAL MEETINGS
The purpose of the Tumbleweed special meeting is to consider and approve the
issuance of shares of Tumbleweed common stock, including the conversion of
warrants and options to purchase shares of Worldtalk common stock into warrants
and options to purchase shares of Tumbleweed common stock, in accordance with
the provisions of the Merger Agreement. The purpose of the Worldtalk special
meeting is to consider and approve the Merger Agreement and the transactions
associated with it, including the merger of Keyhole with and into Worldtalk with
Worldtalk as the surviving corporation. A copy of the Merger Agreement is
attached as Annex A.
SOLICITATION OF PROXIES; EXPENSES
All shares of Tumbleweed common stock represented by properly executed
proxies received prior to or at the Tumbleweed special meeting, and not duly and
timely revoked, and all shares of Worldtalk common stock represented by properly
executed proxies received prior to or at the Worldtalk special meeting, and not
duly and timely revoked, will be voted in accordance with the instructions
indicated on such proxies. If no instructions are indicated on a properly
executed returned proxy, the proxy will be voted FOR the respective proposals.
Any proxy given pursuant to this solicitation may be revoked at any time
before the proxy is voted. Attendance at the Tumbleweed special meeting or the
Worldtalk special meeting will not in and of itself constitute a revocation of a
proxy. Please note, however, that if a stockholder's shares are held of record
by a broker, bank or other nominee and the stockholder wishes to vote at the
meeting, the stockholder must bring to the meeting a letter from the broker,
bank or other nominee confirming the stockholder's beneficial ownership of the
shares and that the broker, bank or other nominee is not voting the shares.
The special meetings may be adjourned for the purpose of soliciting
additional proxies. Shares represented by proxies voting against the approval of
the Merger Agreement and the transactions associated with it will be voted
against a proposal to adjourn the relevant special meeting for the purpose of
soliciting additional proxies. Neither Tumbleweed nor Worldtalk presently
intends to seek an adjournment of its special meeting.
In addition to the use of the mail, arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxy material to
the beneficial owners of stock held of record by these persons, and Tumbleweed
and Worldtalk will, upon request, reimburse their respective stockholders for
their reasonable expenses in so doing. Each of Tumbleweed and Worldtalk will
bear its own costs of soliciting proxies and the costs and expenses incurred in
connection with the filing, printing and mailing of this joint proxy
statement/prospectus will be borne equally by Tumbleweed and Worldtalk. To the
extent necessary to ensure sufficient representation at its special meeting,
Tumbleweed or Worldtalk may request, pursuant to interviews by telephone,
facsimile or otherwise, the return of proxy cards. The extent to which this will
be necessary depends entirely upon how promptly proxy cards are returned.
Stockholders are urged to send in their proxies without delay.
NEITHER WORLDTALK STOCKHOLDERS NOR TUMBLEWEED STOCKHOLDERS SHOULD SEND IN
ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. A TRANSMITTAL FORM WITH
INSTRUCTIONS FOR THE SURRENDER OF STOCK CERTIFICATES FOR WORLDTALK COMMON STOCK
WILL BE MAILED TO WORLDTALK STOCKHOLDERS AS SOON AS PRACTICABLE AFTER THE
CONSUMMATION OF THE MERGER.
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THE MERGER
GENERAL
When the merger becomes effective, Keyhole Acquisition Corp., a wholly-owned
subsidiary of Tumbleweed, will be merged with and into Worldtalk, with Worldtalk
as the surviving corporation. Upon consummation of the merger, Worldtalk will
become a wholly-owned subsidiary of Tumbleweed. In the merger, each share of
Worldtalk common stock issued and outstanding immediately prior to the merger,
without any action on the part of the holder thereof, will be converted into the
right to receive 0.26 of a share of Tumbleweed common stock. Cash will be paid
in lieu of fractional shares of Tumbleweed common stock. The merger will become
effective when a certificate of merger has been filed with the Delaware
Secretary of State or at a later time, if agreed upon by Tumbleweed and
Worldtalk and specified in the certificate of merger.
The shares of Tumbleweed common stock issued to Worldtalk stockholders in
the merger will constitute approximately [ ]% of all of the issued and
outstanding shares of Tumbleweed common stock after the merger, and the current
Tumbleweed stockholders will hold all of the approximately [ ]%, remaining
issued and outstanding shares of Tumbleweed common stock after the merger based
on the number of shares of Tumbleweed common stock issued and outstanding on
[ ] and the number of shares of Worldtalk common stock issued and
outstanding on [ ].
When the merger becomes effective, each outstanding and unexercised stock
option and warrant to purchase shares of Worldtalk common stock will be
converted into an option or warrant to purchase 0.26 of a share of Tumbleweed
common stock for each share of Worldtalk common stock subject to the option or
warrant. Approximately 14,587,777 shares of Worldtalk common stock were
outstanding and approximately 14,291,953 shares of Worldtalk common stock were
subject to outstanding options and warrants on November 30, 1999. Based upon
this number, upon consummation of the merger, approximately 3,792,822 shares of
Tumbleweed common stock would be issued to the Worldtalk stockholders and
approximately 1,115,908 shares of Tumbleweed common stock would be subject to
converted options and warrants. The exercise price per share of Tumbleweed
common stock issuable pursuant to each converted option and warrant will equal
the exercise price per share of Worldtalk common stock issuable pursuant to each
option or warrant divided by 0.26.
BACKGROUND OF THE MERGER
On October 28, 1998 Mr. Jeffrey C. Smith, President and CEO of Tumbleweed,
met in Palo Alto, California with Mr. Bernard Harguindeguy, then President and
CEO of Worldtalk, and discussed several potential product collaborations.
In January 2 1999, Mr. Smith telephoned Mr. Harguindeguy and identified a
business opportunity for Worldtalk. Mr. Smith proposed that Worldtalk consider a
technology partnership with United Parcel Service, an investor in, and
technology partner of, Tumbleweed. Mr. Smith proposed that Worldtalk integrate
its WorldSecure products, which enable organizations to define and enforce
content security policies for their internet and e-mail communications, with
Document Exchange, a secure Internet communications service for
business-to-business commerce offered by United Parcel Service, and based on
Tumbleweed's IME technology. On January 29, 1999, Mr. Smith and
Mr. Harguindeguy met in person in Santa Clara, California and discussed
Mr. Smith's proposal in detail.
On March 11, 1999, Messrs. Smith and Harguindeguy met with Mr. Dale Hayes,
Vice President for Electronic Commerce and Technology Marketing for United
Parcel Service, at Tumbleweed headquarters in Redwood City, California and later
in Palo Alto, California. During these meeting the parties discussed in detail
the technical, financial, and marketing aspects of the proposed technology
partnership between Worldtalk and United Parcel Service.
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On June 18, 1999, Messrs. Smith and Harguindeguy met at Tumbleweed
headquarters in Redwood City and discussed Tumbleweed's planned initial public
offering and first discussed a possible combination of Tumbleweed and Worldtalk.
On August 6, 1999, representatives of Credit Suisse First Boston, an
investment bank that advises Tumbleweed, met at Worldtalk headquarters in Santa
Clara, California with Mr. Harguindeguy and Mr. Eric Colard, Vice President of
Business Development for Worldtalk. The parties discussed the potential
strategic value of a combination of Tumbleweed and Worldtalk.
On August 11, 1999, Mr. Smith met with David J. Cowan, a Worldtalk board
member, at a social event hosted by August Capital in Menlo Park, California.
Mr. Cowan is a partner of Deer III & Co., the general partner of the Bessemer
family of venture fund entities, some of which are Tumbleweed investors and some
of which are Worldtalk investors. Messrs. Smith and Cowan discussed a possible
combination of Tumbleweed and Worldtalk.
On August 12, 1999, Mr. Paul Hilal, a key investor in and board member of
Worldtalk, telephoned Mr. Smith to arrange a meeting to discuss a possible
combination of the two companies.
On August 13, 1999, Mr. Hilal met with Mr. Smith at Tumbleweed headquarters
in Redwood City and discussed at length the potential strategic value of a
combination of the two companies.
On August 18, 1999, Mr. Bernard J. Cassidy, General Counsel and Secretary of
Tumbleweed, and Mr. James A. Heisch, Chief Financial Officer of Worldtalk,
executed on behalf of each company a mutual non-disclosure agreement related to
the exchange of non-public information.
On August 24, 1999, Tumbleweed formally retained Credit Suisse First Boston
to act as its financial advisor in connection with a proposed business
combination with Worldtalk.
On August 30, 1999, Worldtalk announced the resignation of
Mr. Harguindeguy, the appointment of Mr. Hilal as Chairman of its board of
directors, and the appointment of Mr. Heisch as its President.
On September 22, 1999, Mr. Jeffrey Smith and Mr. Mark R. Pastore, Vice
President of Corporate Development for Tumbleweed, together with representatives
of Credit Suisse First Boston, met in Santa Clara with Messrs. Hilal and Heisch
of Worldtalk and Mr. John Gaitanakis, Principal of Volpe Brown & Whelan Company,
LLC. The parties conducted extensive discussions about the potential long term
product development possibilities, market opportunities, and potential operating
strategies for a combined company.
On October 21, 1999, Mr. Jeffrey Smith telephoned Mr. Hilal to arrange a
meeting to continue discussions about the possible combination of the companies.
Messrs. Smith and Hilal met in Palo Alto on October 22, 1999 and agreed to take
the steps necessary to more fully investigate a potential combination of
Tumbleweed and Worldtalk.
On November 2, 1999, Messrs. Hilal, Heisch, and Gaitanakis met at Tumbleweed
headquarters in Redwood City with Messrs. Jeffrey Smith, Pastore, Cassidy, and
Mr. Joseph C. Consul, Vice President, Finance and Chief Financial Officer of
Tumbleweed, together with representatives of Credit Suisse First Boston. The
parties discussed issues surrounding price, timing, and the form of the business
combination, as well as a proposed schedule and the logistics for accomplishing
a merger of the two companies.
On November 4, 1999, Worldtalk formally retained Volpe Brown & Whelan
Company, LLC to act as its financial advisor in connection with a proposed
merger with Tumbleweed. On November 4, 1999 Tumbleweed and Worldtalk signed an
exclusivity agreement, further defined the terms of a potential merger, and each
began its formal due diligence review of the other company.
From November 4 through 18, 1999, each company's management team, outside
counsel, and financial advisors met in person or by telephone with their
counterparts on a daily basis to conduct due
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diligence, which included management presentations, customer inquiries,
technology reviews, and extensive financial due diligence. During the same time
period each company's management team, outside counsel, and financial advisors
negotiated the terms of the merger and the transactions associated with the
merger. Worldtalk's board of directors met frequently during this period to
discuss the status of the negotiations, and the proposed terms of the Merger
Agreement with legal counsel and Worldtalk's financial advisors.
On November 17, 1999, the Tumbleweed board of directors met, considered, and
unanimously approved the Merger Agreement, the merger, and the transactions
associated with the merger. On November 18, 1999 the Worldtalk board of
directors met, considered, and unanimously approved the Merger Agreement, the
merger, and the transactions associated with the merger.
On November 18, 1999, the parties executed and delivered the Merger
Agreement and issued a joint press release announcing the proposed merger.
REASONS FOR TUMBLEWEED ENGAGING IN THE MERGER; RECOMMENDATION OF THE TUMBLEWEED
BOARD
The Tumbleweed board of directors has approved the Merger Agreement and the
merger and has determined that the terms of the Merger Agreement are fair to,
and in the best interests of, Tumbleweed and its stockholders. During the course
of its deliberations, the Tumbleweed board of directors considered, with the
assistance of management and its financial and other advisors, a number of
factors that it believes could contribute to the success of the combined
companies and thus inure to the benefit of Tumbleweed stockholders.
The Tumbleweed board of directors believes the proposed merger offers a
timely and strategic growth opportunity for Tumbleweed. If the merger is
consummated, Tumbleweed will immediately establish a significant presence in the
e-mail content filtering market as a result of acquiring Worldtalk's installed
base of over 400 business customers. The e-mail content filtering market segment
complements the secure messaging market segment, where Tumbleweed is already an
established leader. Tumbleweed believes that each of these market segments is
rapidly growing and that an immediate presence in each market segment will
enhance Tumbleweed's ability to command a larger share of the electronic
messaging sector as a whole.
The combined companies will offer customers a single source for a fuller,
more integrated suite of business communication products and services. Currently
Tumbleweed and Worldtalk each provide solutions that address specific aspects of
a complete Internet business communication system. Tumbleweed technology enables
businesses to move traditionally paper-based applications online, through added
security, reliability and personalization. Worldtalk technology enables
businesses to control how electronic mail is used, adding virus protection,
content filtering and routing based on policies determined by business
requirements.
In addition to maintaining these independent solutions, the combined
companies will offer new, more comprehensive solutions. By combining the
technology and expertise of each company, the combined companies will provide
customers with a single source to satisfy their business communication
requirements. The integrated technology will enable customers to filter incoming
and outgoing e-mail, add multiple levels of security, track delivery status,
archive historical transactions and customize content for specific recipients.
Worldtalk's installed customer base provides Tumbleweed with an additional
opportunity. Worldtalk's WorldSecure e-mail content filtering products are
capable of screening e-mail messages for sensitive content and automatically
routing those messages through Tumbleweed's secure document delivery
infrastructure. To the extent that the merger results in an increased number of
messages sent through the Tumbleweed infrastructure by the WorldSecure products,
Tumbleweed will receive increased transaction revenue.
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The foregoing discussion of factors considered by the Tumbleweed board of
directors is not intended to be exhaustive, but is intended to include the
material factors considered. The Tumbleweed board of directors did not find it
practical to and did not quantify or otherwise assign relative weight to the
specific factors considered and individual directors may have given different
weight to different factors.
After due consideration, the Tumbleweed board of directors approved the
merger and determined that the merger is fair to and in the best interests of
Tumbleweed and its stockholders. Accordingly, the Tumbleweed board of directors
recommends that Tumbleweed stockholders vote FOR approval of the issuance of
Tumbleweed common stock pursuant to the Merger Agreement.
In reaching its recommendation in favor of the merger, the Tumbleweed board
of directors also considered a number of uncertainties, including the challenges
of combining the businesses of the corporations and the risk of diverting
management resources from other strategic opportunities and operational matters
for an extended period of time. For further discussion of these risks, see "Risk
Factors."
REASONS FOR WORLDTALK ENGAGING IN THE MERGER; RECOMMENDATION OF THE WORLDTALK
BOARD
The Worldtalk board of directors has approved the Merger Agreement and the
transactions associated with it and has determined that the Merger Agreement and
the merger are in the best interests of Worldtalk and its stockholders. During
the course of its deliberations, the board of directors of Worldtalk considered,
with the assistance of management, legal counsel and Worldtalk's financial
advisors, a number of factors that the board of directors believes make the
merger attractive to Worldtalk's stockholders and could contribute to the
success of the combined companies.
The board of directors of Worldtalk believes that the merger will offer the
potential joint benefits described above to Worldtalk and its stockholders. In
addition, Worldtalk's stockholders would have the opportunity to participate in
the potential for growth of the combined company after the merger. The merger
will result in a combined company with greater financial, technological and
human resources to develop new generations of products and greater marketing
resources to develop and promote Worldtalk's products.
The value of the shares of Tumbleweed common stock that the Worldtalk
stockholders will receive in the merger, as calculated on the date the Merger
Agreement was signed, represents a premium of approximately 43.2% over the
average of the closing market prices of Worldtalk's common stock for the thirty
days prior to the execution of the Merger Agreement.
The shares of Tumbleweed common stock issuable to Worldtalk's stockholders
in the merger will have a significantly larger market float and average trading
volume, and may provide greater liquidity than the Worldtalk common stock
currently has.
Following the merger, Worldtalk will have the opportunity to increase
distribution of the WorldSecure products by marketing and selling them to
customers of Tumbleweed.
Worldtalk can benefit from the broad expertise of the Tumbleweed management
team and the significant marketing resources of Tumbleweed.
This discussion of factors considered by the Worldtalk board of directors is
not intended to be exhaustive, but is intended to include the material factors
considered. The Worldtalk board of directors did not find it practical to and
did not quantify or otherwise assign relative weight to the specific factors
considered and individual directors may have given different weight to different
factors.
After due consideration, the Worldtalk board of directors approved the
Merger Agreement and the transactions associated with it by a unanimous vote and
determined that the Merger Agreement and the transactions associated with it
were in the best interests of Worldtalk and its stockholders. Accordingly, the
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Worldtalk board of directors unanimously recommends that Worldtalk stockholders
vote FOR approval of the Merger Agreement and the transactions associated with
it.
OPINION OF TUMBLEWEED'S FINANCIAL ADVISOR
Tumbleweed retained Credit Suisse First Boston Corporation to act as its
exclusive financial advisor in connection with the merger. On November 18, 1999,
the Tumbleweed board of directors met to review the proposed merger with
Worldtalk and the final terms of the Merger Agreement. During this meeting
Credit Suisse First Boston rendered its oral opinion, subsequently confirmed in
writing on November 18, 1999, that, as of that date, based upon and subject to
the various considerations set forth in the Credit Suisse First Boston opinion,
the exchange ratio was fair to Tumbleweed from a financial point of view.
THE FULL TEXT OF THE CREDIT SUISSE FIRST BOSTON OPINION SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS SET ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY CREDIT SUISSE FIRST BOSTON IN RENDERING
ITS OPINION. THE FULL TEXT OF THE OPINION IS ATTACHED AS ANNEX D TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED BY REFERENCE IN ITS ENTIRETY.
TUMBLEWEED STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE CREDIT SUISSE FIRST
BOSTON OPINION CAREFULLY AND IN ITS ENTIRETY. THE CREDIT SUISSE FIRST BOSTON
OPINION ADDRESSES ONLY THE FAIRNESS TO TUMBLEWEED FROM A FINANCIAL POINT OF VIEW
OF THE EXCHANGE RATIO AS OF THE DATE OF THE CREDIT SUISSE FIRST BOSTON OPINION,
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE TUMBLEWEED SPECIAL MEETING OR THE WORLDTALK
SPECIAL MEETING. THE SUMMARY OF THE CREDIT SUISSE FIRST BOSTON OPINION IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE CREDIT SUISSE FIRST BOSTON OPINION.
In connection with its opinion, Credit Suisse First Boston, among other
things:
- reviewed certain publicly available business and financial information
relating to Tumbleweed and Worldtalk, as well as the Merger Agreement;
- reviewed certain other information, including financial forecasts provided
to Credit Suisse First Boston by Tumbleweed and Worldtalk and met with the
managements of Tumbleweed and Worldtalk to discuss the business and
prospects of Tumbleweed and Worldtalk;
- considered certain financial and stock market data of Tumbleweed and
Worldtalk and compared that data with similar data for other publicly held
companies in businesses Credit Suisse First Boston deemed similar to those
of Tumbleweed and Worldtalk;
- considered the financial terms, to the extent publicly available, of
certain other business combinations and other transactions which have
recently been effected;
- considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant; and
- had discussions with the management of Tumbleweed and Worldtalk to discuss
the business prospects of Worldtalk, its projected performance, the
strategic importance of the merger to Tumbleweed and the synergistic
values expected to be achieved through the combination of operations of
Tumbleweed and Worldtalk.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied on its being complete and accurate in all material respects. With
respect to the financial forecasts, Credit Suisse First Boston assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of Tumbleweed's and Worldtalk's managements as to the
future financial performance of Tumbleweed and Worldtalk. Specifically, for
purposes of the Credit Suisse First Boston opinion, Credit Suisse First Boston
relied upon, without independent verification, the assessment by Tumbleweed's
management of Worldtalk's financial prospects (and not upon the financial
forecasts provided by Worldtalk), synergies and other strategic benefits
expected to be derived from the merger. Tumbleweed
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also has informed Credit Suisse First Boston, and Credit Suisse First Boston has
assumed, that the merger will be treated as a tax-free reorganization for
federal income tax purposes and accounted for as a pooling-of-interests in
accordance with generally accepted accounting principles. In addition, Credit
Suisse First Boston did not make an independent evaluation or appraisal of the
assets or liabilities, contingent or otherwise, of Tumbleweed or Worldtalk, nor
was Credit Suisse First Boston furnished with any such evaluations or
appraisals. The Credit Suisse First Boston opinion is necessarily based upon
financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof. Credit Suisse First Boston did not express any
opinion as to what the value of the Tumbleweed common stock actually will be
when issued to the Worldtalk's stockholders pursuant to the merger or as to the
prices at which such Tumbleweed common stock will trade subsequent to merger.
In preparing the Credit Suisse First Boston opinion, Credit Suisse First
Boston performed a variety of financial and comparative analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Credit Suisse First
Boston believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Credit Suisse First Boston opinion. No company or
transaction used in the analyses performed by Credit Suisse First Boston as a
comparison is identical to Tumbleweed or Worldtalk or the contemplated merger.
In addition, Credit Suisse First Boston may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more or
less probable than other assumptions, so that the range of valuation resulting
from any particular analysis described below should not be taken to be Credit
Suisse First Boston's view of the actual value of Tumbleweed or Worldtalk. In
performing its analyses, Credit Suisse First Boston made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Tumbleweed or
Worldtalk. The analyses performed by Credit Suisse First Boston are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not purport
to be appraisals or to necessarily reflect the prices at which businesses or
assets may actually be sold. The analyses performed were prepared solely as part
of Credit Suisse First Boston's analysis of the fairness to Tumbleweed from a
financial point of view of the exchange ratio and were provided to the
Tumbleweed board of directors in connection with the delivery of the Credit
Suisse First Boston opinion.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion,
and reviewed with the Tumbleweed board of directors at its meeting held on
November 17, 1999. Some of the summaries of those financial analyses include
information presented in tabular format. In order to understand fully the
material financial analyses used by Credit Suisse First Boston, the tables
should be read together with the text of each summary. The tables alone do not
constitute a complete description of the material financial analyses.
HISTORICAL STOCK PRICE ANALYSIS. Credit Suisse First Boston analyzed the
closing prices of Worldtalk common stock from April 12, 1996 through
November 15, 1999. Credit Suisse First Boston noted that the high closing price
for Worldtalk common stock during such period was $14.25 on May 8, 1996, and the
low closing price for Worldtalk common stock during such period was $1.88 on
September 24, 1998.
Credit Suisse First Boston also analyzed the closing prices of Tumbleweed
common stock from August 6, 1999 through November 15, 1999. Credit Suisse First
Boston noted that the high closing price for Tumbleweed common stock during such
period was $41.00 on November 15, 1999, and the low closing price for Tumbleweed
common stock during such period was $10.25 on August 10, 1999.
EXCHANGE RATIO ANALYSIS. Credit Suisse First Boston reviewed the average of
the ratios of the closing price of Worldtalk common stock to the closing price
of Tumbleweed common stock observed on each trading day over various periods
ending on November 15, 1999 and computed the premium/(discount)
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<PAGE>
represented by these average exchange ratios when compared to the ratio of the
closing price of Worldtalk common stock to the closing price of the Tumbleweed
common stock as of November 15, 1999 (referred to as the current market exchange
ratio) and to the exchange ratio. The following table sets forth the average
exchange ratios over the various periods covered and the premium/(discount)
represented by the average exchange ratios when compared to the current market
exchange ratio and the exchange ratio of 0.26:
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT) REPRESENTED BY PREMIUM REPRESENTED BY THE
PERIOD ENDING AVERAGE EXCHANGE CURRENT MARKET EXCHANGE RATIO VERSUS EXCHANGE RATIO VERSUS
NOVEMBER 15, 1999 RATIOS AVERAGE EXCHANGE RATIOS AVERAGE EXCHANGE RATIOS
- ------------------------ ---------------- ------------------------------------ --------------------------
<S> <C> <C> <C>
1 trading day........... 0.183x 0.0% 42.1%
10 trading days......... 0.154x 18.4 68.3
30 trading days......... 0.186x (1.6) 39.9
60 trading days......... 0.185x (0.9) 40.8
Since August 6, 1999.... 0.201x (9.1) 29.2
</TABLE>
PRECEDENT TRANSACTIONS ANALYSIS. Credit Suisse First Boston reviewed 73
precedent stock-for-stock technology transactions (referred to as the precedent
transactions) and compared certain publicly available financial statistics for
the precedent transactions to the comparable financial statistics for the
merger. Credit Suisse First Boston computed the median and average
premiums/(discounts) represented by the exchange ratios of the precedent
transactions over various periods prior to the announcement of each precedent
transaction and the average premium/(discount) for the precedent transactions
and calculated the implied exchange ratio that resulted from applying the
average premium to the closing prices of the Tumbleweed common stock and
Worldtalk common stock as of November 15, 1999 and the premium represented by
the implied exchange ratio to the current market exchange ratio. The following
table sets forth the results of such analysis:
<TABLE>
<CAPTION>
IMPLIED PREMIUM REPRESENTED BY IMPLIED
MEDIAN AVERAGE EXCHANGE EXCHANGE RATIO TO CURRENT
PREMIUM PREMIUM RATIO MARKET EXCHANGE RATIO
-------- -------- -------- ------------------------------
<S> <C> <C> <C> <C>
1 trading day............................... 29.0% 33.2% 0.244x 33.2%
10 trading days............................. 33.1 42.3 0.220x 20.1
30 trading days............................. 35.9 45.9 0.271x 48.3
60 trading days............................. 35.3 42.4 0.263x 43.8
90 trading days............................. 33.4 37.4 0.276x 51.1
Average..................................... 33.3 40.3 0.255x 39.4
</TABLE>
No transaction utilized as a comparison in the precedent transactions
analysis is identical to the merger. In evaluating the merger, Credit Suisse
First Boston made judgements and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Tumbleweed and Worldtalk,
such as the impact of competition on the businesses of Tumbleweed and Worldtalk
and the industry generally, industry growth and the absence of any adverse
material change in the financial condition and prospects of Tumbleweed,
Worldtalk or the industry or in the financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using precedent transaction data.
CONTRIBUTION ANALYSIS. Credit Suisse First Boston analyzed the relative
contributions of Tumbleweed and Worldtalk to various income statement financial
metrics for the projected financial results for fiscal years 1999, 2000 and
2001. Such financial projections were based on base and upside case estimates
prepared by the management of Tumbleweed with respect to Worldtalk and estimates
published by research analysts with respect to Tumbleweed. Credit Suisse First
Boston calculated the implied exchange ratios and the premium/(discount) that
resulted from the comparison of the income statement financial
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metrics for the periods mentioned above. The following table sets forth the
results of Credit Suisse First Boston's analysis:
<TABLE>
<CAPTION>
BASE CASE UPSIDE CASE
---------------------------------- ----------------------------------
DISCOUNT REPRESENTED BY
IMPLIED DISCOUNT REPRESENTED BY IMPLIED EXCHANGE RATIO TO
EXCHANGE EXCHANGE RATIO TO EXCHANGE IMPLIED
RATIO IMPLIED EXCHANGE RATIO RATIO EXCHANGE RATIO
-------- ----------------------- -------- -----------------------
<S> <C> <C> <C> <C>
CALENDAR YEAR REVENUE
1999....................... 2.759x (90.6)% 2.759x (90.6)%
2000....................... 0.951x (72.6) 1.267x (79.5)
2001....................... 0.699x (62.8) 0.916x (71.6)
CALENDAR YEAR GROSS PROFIT
1999....................... 3.870x (93.3) 3.870x (93.3)
2000....................... 0.986x (73.6) 1.426x (81.8)
2001....................... 0.706x (63.2) 0.925x (71.9)
</TABLE>
PRO FORMA FINANCIAL IMPACT ANALYSIS. Credit Suisse First Boston analyzed
certain pro forma effects of the merger, including, among other things, the
impact of the merger on the estimated revenue per share as reported in calendar
year 2000 based on base and upside case estimates prepared by the management of
Tumbleweed with respect to Worldtalk and estimates published by research
analysts with respect to Tumbleweed. The following table sets forth, based on
such financial estimates, the resulting percentage accretion/(dilution) to
Tumbleweed's estimated revenue per share for calendar year 2001:
<TABLE>
<CAPTION>
ACCRETION/(DILUTION)
--------------------
<S> <C>
Base Case.................................................. 29.4%
Upside Case................................................ 43.1
</TABLE>
PRO FORMA TRADING ANALYSIS. Credit Suisse First Boston computed a range of
implied per share values of Tumbleweed common stock assuming the merger is
completed. This analysis was based upon an estimated trading multiple of revenue
of between 30.0x and 64.0x for fiscal year 2000 and between 15.0x and 33.2x for
fiscal year 2001 and Tumbleweed's estimated pro forma revenues in fiscal years
2000 and 2001, based on base and upside case estimates prepared by the
management of Tumbleweed with respect to Worldtalk and estimates published by
research analysts with respect to Tumbleweed. The following table sets forth the
resulting estimated ranges of the future per share value for Tumbleweed:
<TABLE>
<CAPTION>
POTENTIAL TRADING VALUES PER SHARE
----------------------------------
<S> <C>
FISCAL YEAR 2000
Base Case.................................... $27.44 - $56.09
Upside Case.................................. $30.92 - $63.50
FISCAL YEAR 2001
Base Case.................................... $23.86 - $50.19
Upside Case.................................. $26.15 - $55.27
</TABLE>
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As described above, the Credit Suisse First Boston opinion and presentation
to the Tumbleweed board of directors was one of many factors taken into
consideration by the Tumbleweed board of directors in making its determination
to recommend the Merger Agreement and the transactions contemplated thereby.
Consequently, the analyses described above should not be viewed as determinative
of the opinion of the Tumbleweed board of directors or the management of
Tumbleweed with respect to the value of Tumbleweed or Worldtalk or whether the
Tumbleweed board of directors would have been willing to agree to a different
exchange ratio.
Credit Suisse First Boston was selected by the Tumbleweed board of directors
based on Credit Suisse First Boston's qualifications, expertise and reputation,
as well as its familiarity with Tumbleweed. Credit Suisse First Boston is an
internationally recognized investment banking and advisory firm. Credit Suisse
First Boston, as part of its investment banking business, is continuously
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the past Credit Suisse First
Boston has performed certain investment banking services for Tumbleweed,
including acting as lead manager in Tumbleweed's initial public offering, and
has received customary fees for such services. In addition, Credit Suisse First
Boston owns approximately 25% of Volpe Brown Whelan & Company, LLC, Worldtalk's
financial advisor in connection with the merger. Credit Suisse First Boston has
been advised that Volpe Brown will receive a fee from Worldtalk for its
services, a significant portion of which is contingent upon the consummation of
the merger. In the ordinary course of its business, Credit Suisse First Boston
and its affiliates may actively trade the debt and equity securities of
Tumbleweed and Worldtalk for their own accounts and for the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to an engagement letter dated August 24, 1999, Tumbleweed engaged
Credit Suisse First Boston to provide financial advisory services to the
Tumbleweed board of directors in connection with the transaction, including,
among other things, rendering its opinion and making the presentation referred
to above. Pursuant to the terms of the engagement letter, Tumbleweed has agreed
to pay Credit Suisse First Boston a customary fee in connection therewith, a
substantial portion of which will be paid upon the consummation of the merger.
In addition, Tumbleweed has agreed to reimburse Credit Suisse First Boston for
its out-of-pocket expenses, including attorney's fees, incurred in connection
with its engagement and to indemnify Credit Suisse First Boston and certain
related persons against certain liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
liabilities arising under the federal securities laws.
OPINION OF WORLDTALK'S FINANCIAL ADVISOR
Worldtalk retained Volpe Brown Whelan & Company, LLC, sometimes referred to
as VBW&Co., to render an opinion as to the fairness, from a financial point of
view, to the stockholders of Worldtalk, of the exchange ratio.
THE FULL TEXT OF VBW&CO.'S WRITTEN OPINION DATED NOVEMBER 17, 1999, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX E TO THIS JOINT PROXY STATEMENT/
PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. HOLDERS OF WORLDTALK
STOCK ARE URGED TO, AND SHOULD, READ THIS OPINION CAREFULLY IN ITS ENTIRETY. THE
ENGAGEMENT OF VBW&CO. AND ITS OPINION ARE FOR THE BENEFIT OF THE WORLDTALK
BOARD. VBW&CO.'S OPINION ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO FROM
A FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF WORLDTALK AND IT DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER NOR DOES IT CONSTITUTE A RECOMMENDATION
TO ANY HOLDER OF WORLDTALK STOCK AS TO HOW TO VOTE WITH RESPECT TO THE MERGER.
For the purposes of formulating the VBW&Co. opinion, VBW&Co. among other
things:
- reviewed the November 17, 1999 draft of the Merger Agreement;
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- interviewed management of Worldtalk and Tumbleweed concerning their
respective business prospects, financial outlook and operating plans as
stand-alone concerns and as a combined enterprise;
- reviewed Worldtalk and Tumbleweed financial statements and other relevant
financial and operating data of Worldtalk and Tumbleweed prepared by
Worldtalk and Tumbleweed management teams respectively;
- reviewed the historical stock trading patterns of both Worldtalk and
Tumbleweed and analyzed implied historical exchange ratios;
- reviewed the valuation of selected publicly traded companies that VBW&Co.
deemed comparable and relevant to Worldtalk and Tumbleweed;
- reviewed, to the extent publicly available, the financial terms of
selected merger and acquisition transactions that VBW&Co. deemed
comparable and relevant to the Merger;
- performed an analysis of Worldtalk's relative contribution, adjusted to
reflect the difference in capital structures of the two companies, to
Tumbleweed in terms of revenue and gross profit;
- performed a merger analysis of the combined entity, based upon financial
projections provided by the Worldtalk and Tumbleweed management consisting
of internal Worldtalk financial projections and publicly available
assessments of Tumbleweed's financial prospects; and
- performed such other studies, analyses and inquiries and considered such
other information as VBW&Co. deemed relevant.
VBW&Co., without independent verification, relied upon the accuracy and
completeness of all accounting, legal, tax, operating, historical financial and
other information provided to VBW&Co. by Worldtalk and Tumbleweed and assumed
that all such information provided by them is complete and accurate in all
material respects and that there is no additional material information known to
them that would make any of the information made available to VBW&Co. either
incomplete or misleading. Worldtalk retained outside legal, accounting and tax
advisors to advise it on matters relating to the merger. VBW&Co. expressed no
opinion on these matters.
VBW&Co. was not asked to, and did not, conduct a market survey to determine
the interest of other potential acquirers of Worldtalk or otherwise solicit, or
assist Worldtalk in soliciting, any third party indications of interest in
acquiring all or any part of Worldtalk. Furthermore, VBW&Co. was not requested
to consider, and VBW&Co. expressed no opinion as to, the relative merits of the
Merger as compared to any alternative business strategies that might exist for
Worldtalk or the effect of any other transaction in which Worldtalk might
engage.
With respect to the projected financial data of Worldtalk and the combined
company, all of which was provided by or reviewed and approved by the management
of Worldtalk, VBW&Co. relied upon assurances of Worldtalk that these data could
be reasonably relied on. With respect to the publicly available projected
financial data of Tumbleweed, VBW&Co. relied upon assurances of Tumbleweed that
these data could be reasonably relied upon. The VBW&Co. opinion is based, in
large part, on these projected financial data and estimates.
VBW&Co. relied upon the information provided to it by Worldtalk and
Tumbleweed for the purposes of rendering the VBW&Co. opinion. VBW&Co. expressed
no opinion and made no investigation with respect to the validity, accuracy or
completeness of the information provided to it and did not and does not warrant
any projections included in such information. Actual results that Worldtalk or
Tumbleweed might achieve in the future as stand-alone entities or as a combined
company may vary materially from those used in VBW&Co.'s analysis.
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<PAGE>
VBW&Co. assumed that the merger will be consummated in accordance with the
terms of the November 17, 1999 draft of the Merger Agreement, without any
amendments thereto and without waiver of any of the conditions to the parties'
obligations thereunder.
VBW&Co. did not make an independent evaluation, appraisal or valuation of
any assets or liabilities of Worldtalk or Tumbleweed, nor was VBW&Co. furnished
with any such evaluations, appraisals or valuations. VBW&Co. performed no
investigation relating to the representations and warranties made by Worldtalk
or Tumbleweed, including the representations and warranties made with respect to
intellectual property or the status of any litigation pending or threatened
against either company. While VBW&Co. believes that its review, as described
herein, is an adequate basis for the VBW&Co. opinion it expressed, the VBW&Co.
opinion is necessarily based upon market, economic and other conditions that
exist and can be evaluated as of the date of the VBW&Co. opinion, and any change
in such conditions would require a re-evaluation of the VBW&Co. opinion.
The VBW&Co. opinion addressed only the financial fairness of the exchange
ratio of 0.26 as of the date of such opinion and did not address any other terms
or conditions of the Merger Agreement or any related documents, the relative
merits of the merger and any alternatives to the merger, Worldtalk's decision to
proceed with or the effect of the merger, or any other aspect of the merger.
Because the exchange ratio of 0.26 is fixed, with no floor or collar, and the
trading price of Tumbleweed common stock is volatile, VBW&Co. noted that the
market value of the consideration received by Worldtalk stockholders in the
merger may vary significantly from the value of such consideration as of the
date of the VBW&Co. opinion and as of the dates used by VBW&Co. in its analysis.
No opinion was expressed by VBW&Co. as to the future trading price or range of
prices of any securities of Tumbleweed issued prior to or in conjunction with
the merger.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, the factors utilized in such analyses must be
considered as a whole and considering any portion of such analyses or factors,
without considering all analyses and factors could create a misleading or
incomplete view of the process underlying the VBW&Co. Opinion. In its analyses,
VBW&Co. made numerous assumptions with respect to industry performance, general
business and other conditions and matters, many of which are beyond Worldtalk's
or Tumbleweed's control and are not susceptible to accurate prediction.
VBW&Co. is a nationally recognized investment banking firm and was selected
by Worldtalk based on VBW&Co.'s experience and expertise. As a customary part of
its investment banking business, VBW&Co. engages in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate and other purposes. Credit Suisse First Boston
Corporation, Tumbleweed's financial advisor in connection with the merger, owns
approximately 25% of VBW&Co. In the ordinary course of business, VBW&Co. and its
affiliates may actively trade in the equity securities of Worldtalk or
Tumbleweed for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
VBW&Co. received a fee for rendering the VBW&Co. opinion, no portion of
which was conditioned upon the VBW&Co. opinion being favorable. VBW&Co. has also
received fees for other services provided to the Company and will receive an
additional fee contingent upon the closing of the merger.
The VBW&Co. opinion did not constitute a recommendation as to the decision
of the Worldtalk board of directors on whether to support the merger and
recommend it to Worldtalk's stockholders and does not constitute a
recommendation to stockholders as to whether to vote in favor of the Merger. The
VBW&Co. opinion and related materials were prepared for the use and benefit of
Worldtalk's Board of
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Directors and may not be used for any other purpose without the written consent
of VBW&Co. VBW&Co. assumed no obligation to update, revise or reaffirm its
opinion.
The following is a brief summary of the material analyses performed by
VBW&Co. in rendering its opinion to Worldtalk's board of directors.
STOCK TRADING ANALYSIS. VBW&Co. analyzed historical stock prices of
Worldtalk in relation to the implied per share consideration offered by
Tumbleweed. Since Worldtalk's initial public offering of common stock in April
1996, the closing price of Worldtalk common stock ranged between $1.88 and
$14.25 with a median of $4.50. Looking at a more recent trading range, the
closing price of Worldtalk common stock ranged between $2.38 per share and $7.63
per share, with a median price of $3.75, during the six months ended
November 16, 1999. For the one-year period ended November 16, 1999, the closing
price of Worldtalk common stock ranged between $2.38 per share and $7.63 per
share, with a median price of $3.75. VBW&Co. noted that the implied
consideration of $11.12 per share of Worldtalk common stock, based on
Tumbleweed's closing price on November 16, 1999, represented a 50.9% premium to
the closing price of Worldtalk common stock on the same day. The implied
consideration of $9.12 per share of Worldtalk common stock, based on
Tumbleweed's 10-day average price through November 16, 1999 of $35.09,
represented a 64.0% premium to Worldtalk's 10-day average price for the same
period of $5.56. The implied consideration of $7.08 per share of Worldtalk
common stock, based on Tumbleweed's 30-day average price through November 16,
1999 of $27.22, represented a 43.2% premium to Worldtalk's 30-day average price
of $4.94. VBW&Co. noted that the 0.26 exchange ratio is above the 0.17 exchange
ratio of the relative stock prices on November 16, 1999 and above the median
exchange ratio of 0.19, during the period from August 6, 1999 to November 16,
1999.
PREMIUM ANALYSIS. VBW&Co. analyzed the premiums paid in selected security
industry transactions and in merger and acquisition transactions generally,
based on dates and periods prior to the date the merger was announced, and
compared them to the implied premium represented by the exchange ratio of 0.26.
For one-day premiums in security industry transactions, the premiums ranged from
- -33.8% to 59.9% (with a median of 17.7%). One week premiums ranged from -24.0%
to 84.6% (with a median of 20.7%). One month premiums ranged from -32.5% to 100%
(with a median of 38.6%). VBW&Co. also analyzed the premiums of all public to
public transactions between $75 and $250 million from January 1, 1998 through
November 5, 1999. For one day premiums, the premiums ranged from -29.1% to 300%
(with a median of 22.1%), one week premiums ranged from -26.0% to 287.5% (with a
median of 25.2%), and one month premiums ranged from -43.8% to 273.2% (with a
median of 33%).
The one day premium per share valuation for the selected security industry
transactions yielded a range of equivalent per share values from $4.88 per share
to $11.78 per share (with a median of $8.67), the one week premium per share
valuation yielded a range of equivalent values from $4.13 per share to $10.04
per share (with a median of $6.57 per share), and the one month premium per
share valuation yielded a range of equivalent values from $3.21 per share to
$9.50 per share (with a median of $6.58 per share). For all transactions, the
one day equivalent premium per share values ranged from $5.22 per share to
$29.46 per share (with a median of $8.99 per share), the one week equivalent
premium per share values ranged from $4.02 per share to $21.07 per share (with a
median of $6.81), and the one month equivalent premium per share values ranged
from $2.67 to $17.73 per share (with a median for $6.32 per share.)
COMPARABLE PUBLICLY-TRADED COMPANY ANALYSIS. VBW&Co. compared certain
financial information of Worldtalk with 13 selected publicly-traded security
industry companies it deemed comparable to Worldtalk. The security industry
companies were composed of companies providing communications security solutions
to Worldtalk. The financial information reviewed by VBW&Co. included:projected
1999, 2000 and the last 12 month earnings per share; market value (defined as
stock price multiplied by shares outstanding); enterprise value (defined as
market value plus debt less cash) in relation to the last 12 month revenues,
estimated 1999 revenues, and estimated 2000 revenues; and the price in relation
to the last 12 month earnings, estimated 1999 earnings, estimated 2000 earnings
and book value. 1999 revenues and
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earnings and 2000 revenues and earnings were based on estimates provided by
various investment banks and Worldtalk management.
VBW&Co. noted that, based on closing stock prices and earnings estimates as
of November 16, 1999, the enterprise value of the security industry companies
traded in a range of 3.8 to 25.6 times the last 12 month revenues (with a median
of 4.9 times), 2.7 to 23.3 times estimated 1999 revenues (with a median of 4.7
times), and 1.5 to 17.2 times estimated 2000 revenues (with a median of 3.6
times). The price of the security industry companies implied from the stock
prices provided a range of 29.3 to 98.1 times the last 12 month earnings (with a
median of 67.9 times), 26.4 to 82.1 times estimated 1999 earnings (with a median
of 59.2 times), 16.8 to 72.6 times estimated 2000 earnings (with a median of
44.3 times), and 2.8 to 20.2 times book value (with a median of 6.8 times).
VBW&Co. determined that for purposes of this analysis, the revenue multiple
was the only relevant valuation metric. The equity value to book value multiple
was not used given that security companies are not generally valued based on
book value but rather on the combination of profitability and growth prospects.
Other financial information was deemed "non-meaningful" based on negative
financial results. Excluding the value based on equity value to book value
multiple, the analysis of most comparable companies yielded a range of per share
values of $2.30 to $17.69 with a median of $4.52.
COMPARABLE MERGER AND ACQUISITION TRANSACTION ANALYSIS. VBW&Co. prepared a
valuation analysis of Worldtalk based upon 23 merger and acquisition
transactions of target companies in the security industry. VBW&Co. reviewed the
security industry transaction financial terms, to the extent publicly available.
The enterprise value of these transactions ranged from 2.4 to 29.3 times the
last 12 month revenues (with a median of 5.9 times), and 6.5 times next twelve
month revenues. The transaction value ranged from 45.3 to 137.7 times last
twelve month earnings (with a median of 95.5 times), 24.8 times next twelve
month earnings, and 3.6 to 71.5 times book value (with a median of 18.6 times).
VBW&Co. determined that for purposes of this analysis the transaction value
to the last twelve months revenue multiple was the only relevant valuation
metric. The transaction value to the next twelve months multiple was not used
since the multiple was representative of one data point. Furthermore, equity
value to book value multiple was not used given that security companies are not
generally valued based on book value but rather on the combination of
profitability and growth prospects. The range of per share values was $2.74 to
$20.01 with a median of $5.37.
CONTRIBUTION ANALYSIS. VBW&Co. performed a valuation analysis of Worldtalk
based on Tumbleweed's and Worldtalk's relative contributions to various measures
of operational activity. The relative contribution was adjusted for the
differences in the capital structures of the two companies. This analysis was
based on historical financial data as well as the projections for each
respective business as if each were operating independently. The per share
valuation of the analysis ranged from $7.93 to $203.85 (with a median of
$41.92). Given the significant disparity in the valuation multiples for the two
companies, VBW&Co. ascribed limited weight to this analysis.
MAXIMUM PRICE PAYABLE/NO DILUTION ANALYSIS. VBW&Co. performed an analysis
to determine the maximum price payable for Worldtalk by Tumbleweed to have no
dilutive effect on Tumbleweed's pro forma revenue per share. Based on
Worldtalk's projected revenue for 2000 and 2001, maximum prices payable per
share are $51.23 and $41.10, respectively. VBW&Co. noted that the per share
consideration is at a significant discount to the maximum price payable. VBW&Co.
ascribed less weight to this analysis, as Worldtalk is perceived by the market
to have dramatically lower growth prospects than Tumbleweed. As a result, it
would be difficult for Tumbleweed to ascribe its revenue multiple to Worldtalk.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, VBW&Co. considered the results of all of its analyses
as a whole and did not attribute any particular weight to any analysis or factor
considered by it. Selecting any portion of the analysis, without considering all
of the analyses, would create an incomplete
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view of the process underlying its opinion. In addition, VBW&Co. may have given
various analyses and factors more or less weight than other analyses and
factors, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be VBW&Co.'s view of
the actual value of Worldtalk.
The analyses performed by VBW&Co. are not necessarily indicative of actual
value, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of VBW&Co.'s analysis of
the fairness of the exchange ratio of 0.26, from a financial point of view to
the stockholders of Worldtalk. The analyses do not purport to be appraisals or
to reflect the prices at which Worldtalk might actually be purchased. Because
such estimates are inherently subject to uncertainty, none of Worldtalk,
Tumbleweed, VBW&Co. nor any other person assumes responsibility for their
accuracy. Consequently, the VBW&Co. analyses described herein should not be
viewed as determinative of the opinion of the Worldtalk board of directors with
respect to the value of Worldtalk or of whether the Worldtalk board of directors
or the Tumbleweed board of directors would have been willing to agree to a
different price.
ANTICIPATED ACCOUNTING TREATMENT
The merger is expected to be accounted for as a pooling of interests in
accordance with generally accepted according principles. Under this accounting
method, the historical financial information of Tumbleweed and Worldtalk will be
restated to reflect the combined financial position and operations of both
companies. The combined financial position and operations will be adjusted to
conform the accounting practices of the companies. Pursuant to the Merger
Agreement, each of Tumbleweed and Worldtalk will not take or allow to be taken
any action which would jeopardize the treatment of the merger as a pooling of
interests for accounting purposes. Each of Tumbleweed and Worldtalk will use all
reasonable efforts to cause to be delivered to Tumbleweed and Worldtalk a letter
from their respective independent accountants, in each case addressed to
Tumbleweed and Worldtalk, stating that they concur with the conclusion of
Tumbleweed's and Worldtalk's management that the merger will qualify for pooling
of interests accounting treatment.
INTERESTS OF PERSONS IN THE MERGER
In considering the recommendations of the Worldtalk board of directors with
respect to the Merger Agreement and the transactions associated with it,
stockholders should be aware that certain members of the management of Worldtalk
and the Worldtalk board of directors have certain interests in the merger that
are in addition to, or different from, the interests of stockholders of
Worldtalk.
Pursuant to Worldtalk's 1996 Equity Incentive Plan and 1996 Directors Stock
Option Plan, upon consummation of the merger, each outstanding award shall
immediately accelerate and awards granted before October 18, 1996 will become
immediately exercisable in full. Awards granted on or after October 18, 1996
that are not totally vested will, if the participant's employment is terminated
within one year after the consummation of the merger, become exercisable as to
the number of shares that is equal to the number of shares vested at the time of
consummation of the merger plus the number of shares that would have vested had
the award been held for the year following the consummation of the merger.
Options issued under Worldtalk's 1992 Stock Option Plan do not provide for
acceleration of vesting upon consummation of the merger.
In addition, Worldtalk currently has an employment agreement with James A.
Heisch. Pursuant to Mr. Heisch's employment agreement dated June 4, 1999, upon
consummation of the merger, the vesting of Mr. Heish's options will accelerate
and be exercisable as to the number of shares that are already vested
immediately prior to the consummation plus a number of shares equal to one-half
of all shares that remain unvested at such date. Assuming the merger is
consummated on March 1, 2000, Mr. Heisch's options
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would accelerate on to an additional 114,584 shares of Worldtalk common stock.
Acceleration of vesting of options to purchase Worldtalk common stock held by
Mr. Heisch may be characterized as an excess parachute payment under
Section 4999 of the Code.
Following the signing of the Merger Agreement, each of James A. Heisch,
Jesus Ortiz, Colin Crosby and Blake Ramsdell signed offer letters with
Tumbleweed providing these individuals with special employment rights upon
completion of the merger. The terms of the offer letters are summarized below.
JAMES A. HEISCH OFFER LETTER. Mr. Heisch's offer letter extends him
employment through January 4, 2001. Upon completion of the merger,
Mr. Heisch will be President and Chief Financial Officer of Worldtalk and
will hold these positions through June 30, 2000. The offer letter provides
for a base salary of $195,000 per year, plus a bonus of up to $50,000
payable on July 1, 2000 upon attainment of specified sales and employee
retention targets. After June 30, 2000 and through December 31, 2000,
Mr. Heisch will be employed as Financial Advisor to the Tumbleweed Chief
Financial Officer and earn a salary of $8,000 per month.
JESUS ORTIZ OFFER LETTER. Upon completion of the merger, Mr. Ortiz will
be Vice President of WorldSecure Engineering. The offer letter provides for
a base salary of $150,000 per year, plus a bonus of up to $30,000 dependent
upon his personal performance and Tumbleweed's financial performance.
COLIN CROSBY OFFER LETTER. Upon completion of the merger, Mr. Crosby
will be Vice President of WorldSecure Sales. The offer letter provides for a
base salary of $200,000 per year through July 1, 2000, sales commissions
based on the attainment of specified sales targets, and a bonus dependent
upon employment with Tumbleweed on June 30, 2000, meeting of employee
retention targets, and general performance of WorldSecure sales. In
addition, Mr. Crosby is entitled to six months of his annual salary as
severance in the event Tumbleweed terminates his employment without cause
prior to July 1, 2000 and four months of annual salary if terminated without
cause any time after July 1, 2000.
BLAKE RAMSDELL OFFER LETTER. Upon completion of the merger,
Mr. Ramsdell will be Chief Cryptographer and Manager of Worldtalk's
development center in Redmond, Washington. The offer letter provides for a
base salary of $150,000, plus a bonus of up to $30,000 dependent upon
personal performance and Tumbleweed's financial performance.
David Cowan, a general partner of the general partner of Bessemer Venture
Partners III, L.P., is a member of the Worldtalk board of directors. Bessemer
and some of its funds hold a 10.8% interest in Worldtalk and a 1.7% interest in
Tumbleweed. Prior to August 1999, the Bessemer fund was entitled to observer
rights to attend Tumbleweed board meetings. Mr. Cowan served as the observer
attending Tumbleweed board meetings.
INDEMNIFICATION AGREEMENTS
Pursuant to the Merger Agreement, Tumbleweed will maintain in effect all
rights to indemnification and exculpation from liabilities for acts or omissions
occurring at or prior to the time the merger becomes effective existing as of
the date of the Merger Agreement in favor of the current or former directors or
officers of Worldtalk and its subsidiaries, as provided in their respective
organizational documents and any indemnification agreements of Worldtalk. In
addition, from and after the time the merger becomes effective, directors and
officers of Worldtalk who become directors or officers of Tumbleweed will be
entitled to the same indemnification rights and directors' and officers'
liability insurance as are provided to other directors and officers of
Tumbleweed. The Merger Agreement also provides that for six years after the time
the merger becomes effective, Tumbleweed will use commercially reasonable
efforts to provide liability insurance covering acts or omissions occurring
prior to the time the merger becomes effective with respect to those persons who
were covered by Worldtalk's directors' and officers' liability insurance policy
on terms with respect to such coverage and amounts no less favorable than those
in effect on the date of
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the Merger Agreement. Tumbleweed, however, will not be required to pay more than
150% of the current amount paid by Worldtalk to maintain the insurance. See "The
Merger Agreement--Indemnification and Insurance."
DISSENTERS' RIGHTS
No holder of Tumbleweed common stock or Worldtalk common stock will have any
dissenters' rights in connection with, or as a result of, the matters to be
acted upon at the special meetings.
RESALE RESTRICTIONS
All shares of Tumbleweed common stock received by Worldtalk stockholders in
the merger will be freely transferable, except that shares of Tumbleweed common
stock received by persons who are deemed to be "affiliates", as that term is
defined under the Securities Act of 1933, of Worldtalk prior to the merger may
be resold by them only in transactions permitted by the resale provisions of
Rule 145, or Rule 144 in the case of those persons who become affiliates of
Tumbleweed following the merger, or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of Worldtalk or Tumbleweed
generally include individuals or entities that control, are controlled by, or
are under common control with, that party and may include certain officers and
directors of such party as well as principal stockholders of that party.
Pursuant to the Merger Agreement, Worldtalk has agreed to use reasonable
efforts to cause each of its affiliates to execute a written agreement
restricting the disposition by the affiliate of any shares of Worldtalk common
stock issued to the affiliate in the merger. Tumbleweed has also agreed to use
reasonable efforts to cause each of its affiliates to execute a written
agreement restricting the disposition by its affiliate of any shares of
Tumbleweed common stock.
STOCK EXCHANGE LISTING
It is a condition to the merger that, upon consummation of the merger, the
shares of Tumbleweed common stock to be issued by Tumbleweed in connection with
the merger be approved for quotation on the Nasdaq National Market subject to
official notice of issuance.
DELISTING AND DEREGISTRATION OF WORLDTALK COMMON STOCK
If the merger is consummated, the Worldtalk common stock will no longer meet
the requirements for continued inclusion on the Nasdaq National Market and will
be deregistered under the Securities Exchange Act of 1934. Consequently,
stockholders of Worldtalk will no longer be able to trade Worldtalk common stock
on Nasdaq.
TREATMENT OF STOCK CERTIFICATES
After the completion of the merger, each stock certificate previously
representing shares of Worldtalk common stock will automatically, with no
further action by the holder thereof, represent the right to receive 0.26 of a
share of Tumbleweed common stock for each share of Worldtalk common stock
represented by the stock certificate. Promptly after the completion of the
merger, Equiserve L.P., Tumbleweed's exchange agent, will mail a letter of
transmittal with instructions to each holder of record of Worldtalk common stock
outstanding immediately prior to the completion of the merger for use in
exchanging, by book-entry transfer or otherwise, stock certificates formerly
representing shares of Worldtalk common stock for stock certificates
representing shares of Tumbleweed common stock. No stock certificates should be
surrendered by any holder of Worldtalk common stock until he or she has received
the letter of transmittal and instructions from Equiserve L.P. Tumbleweed
stockholders will keep their current certificates as the merger does not require
surrender of Tumbleweed stock certificates.
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TAX-FREE REORGANIZATION
It is a condition to the merger that Worldtalk receive an opinion of
Fenwick & West LLP, and that Tumbleweed receive an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, in both cases substantially to the effect that the
merger will qualify as a "tax-free reorganization." Accordingly, the holders of
Worldtalk common stock will recognize no gain or loss in connection with the
merger for Federal income tax purposes, except to the extent that cash is
received in lieu of fractional shares of Tumbleweed common stock. See "Certain
Federal Income Tax Considerations."
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THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT. BECAUSE THE DESCRIPTION OF THE MERGER AGREEMENT IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THE ENTIRE COPY OF THE MERGER
AGREEMENT, WHICH IS ATTACHED AS ANNEX A TO THIS DOCUMENT AND IS INCORPORATED IN
THIS DOCUMENT BY REFERENCE, BEFORE YOU DECIDE HOW TO VOTE.
THE MERGER
The Merger Agreement requires that when all closing conditions have been
satisfied or waived, Keyhole Acquisition Corp., or Keyhole, will be merged into
Worldtalk, with Worldtalk as the surviving corporation. The merger will become
effective on the date of filing of a certificate of merger with the Secretary of
State of the State of Delaware or such later date as is specified in the
certificate of merger and agreed upon by the parties. This is referred to as the
effective time of the merger.
EXCHANGE PROCEDURES
At the effective time of the merger:
- each share of Worldtalk common stock issued and outstanding immediately
prior to the effective time, other than shares of Worldtalk common stock
owned by Tumbleweed, Keyhole, or any other wholly-owned subsidiary of
Tumbleweed will be converted into the right to receive 0.26 shares of
Tumbleweed common stock, together with rights associated with the
Tumbleweed common stock;
- all warrants to purchase Worldtalk common stock, whether or not
exercisable, shall be assumed by Tumbleweed and shall be subject to, and
exercisable upon, the same terms and conditions as under the applicable
warrant agreement, except as provided in the Merger Agreement; and
- shares of Worldtalk common stock owned by Tumbleweed, Keyhole or any other
wholly-owned subsidiary of Tumbleweed will be canceled and no Tumbleweed
common stock or other consideration will be delivered in exchange for this
cancellation.
Each outstanding employee and director stock option of Worldtalk common
stock will be converted at the effective time of the merger into, and will
become an option to purchase 0.26 shares of Tumbleweed common stock for each
share of Worldtalk common stock covered by the option before the merger. After
conversion, the exercise price per share of Tumbleweed common stock subject to
each option will equal its pre-conversion exercise price per share of Worldtalk
common stock divided by 0.26. Such option will have the same terms and
conditions as those of the Worldtalk option.
Promptly after the effective time of the merger, Equiserve L.P., as exchange
agent, will mail to each stockholder of record of Worldtalk a letter of
transmittal containing instructions for the surrender of certificates
representing Worldtalk common stock in exchange for certificates representing
Tumbleweed common stock.
No fractional shares of Tumbleweed common stock will be issued in the
merger. Instead of issuing fractional shares of Tumbleweed common stock, the
holders of shares of Worldtalk common stock, Tumbleweed will pay cash in an
amount, rounded to the nearest whole cent, equal to the fractional amount
multiplied by the closing price of a share of Tumbleweed common stock on the
Nasdaq National Market at the effective time of the merger.
Any dividends or other distributions declared or made after the effective
time of the merger on shares of Tumbleweed common stock will be paid to holders
of Worldtalk common stock only after the stock certificates representing such
stock have been surrendered to the exchange agent. No interest will be paid or
accrued on cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any.
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If, after six months from the effective time of the merger, a holder of
shares of Worldtalk common stock has not surrendered the stock certificates
representing such shares to the exchange agent, then the holder of stock
certificates representing Worldtalk common stock may only look to Tumbleweed to
receive its shares of Tumbleweed common stock, cash in lieu of fractional
shares, and any unpaid dividends and distributions on shares of Tumbleweed
common stock, if any. None of Tumbleweed, Worldtalk, Equiserve or any other
party will be liable to any holder of a certificate formerly representing shares
of Worldtalk common stock for Tumbleweed common stock, cash in lieu of
fractional shares, or any unpaid dividends and distributions properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
If, after two years from the effective time of the merger, a holder of a
certificate formerly representing shares of Worldtalk common stock has not
surrendered the holder's certificate, then unclaimed shares of Tumbleweed common
stock, cash in lieu of fractional shares and any unpaid dividends and
distributions on shares of Tumbleweed common stock will, to the extent permitted
by applicable law, become the property of Worldtalk.
At the effective time of the merger, the stock transfer books of Worldtalk
will be closed and no further transfers of shares of Worldtalk common stock will
be made.
CORPORATE ORGANIZATION AND GOVERNANCE
After the merger, the certificate of incorporation and bylaws of Keyhole, as
in effect immediately prior to the merger, will be the certificate of
incorporation and the bylaws of Worldtalk, as the surviving corporation. The
directors and officers of Keyhole at the effective time of the merger will be
the directors and officers of the surviving corporation, until their respective
successors are duly elected, appointed or qualified or until their earlier
death, removal or resignation in accordance with the certificate of
incorporation and bylaws of the surviving corporation.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Worldtalk and its subsidiaries, subject to qualifications in the Merger
Agreement, relating to the following matters:
- organization, standing and similar corporate matters;
- capital structure;
- the corporate power and authority to execute, deliver and perform the
Merger Agreement and the related agreements and to consummate the
transactions contemplated by these agreements;
- the absence of conflicts between organizational documents, bylaws and
agreements and the Merger Agreement and the related transactions;
- the absence of any required governmental and third-party consents,
approvals or authorizations other than those specified in the Merger
Agreement;
- the timely filing of documents and the accuracy of information contained
in documents filed with the Securities and Exchange Commission;
- the accuracy of information supplied by Worldtalk in connection with this
joint proxy statement/ prospectus and the registration statement of which
it is a part;
- the absence of material changes or events relating to the business of
Worldtalk and its subsidiaries since September 30, 1999;
- the absence of undisclosed liabilities;
- benefit plans and other employment related matters;
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- the absence of pending or threatened material litigation and compliance
with applicable laws;
- the absence of defaults under organizational documents, material
agreements or applicable laws;
- timely filing of tax returns and other tax related matters;
- the existence, validity and status of material agreements;
- matters relating to assets and real property;
- compliance with environmental laws and regulations;
- product liability matters;
- intellectual property matters and Year 2000 compliance;
- proprietary rights and confidentiality matters;
- insurance;
- relationships with suppliers and customers;
- compliance with employment and labor laws;
- accounts receivable shown in the balance sheet of Worldtalk;
- the absence of affiliated transactions;
- the receipt of fairness opinions from Worldtalk's financial advisor;
- the absence of undisclosed brokers and finders;
- the absence of actions that would prevent the merger from qualifying for
pooling of interests accounting treatment and as a tax-free
reorganization;
- the inapplicability of state anti-takeover laws;
- full disclosure to Worldtalk's knowledge; and
- termination of agreements relating to registration and preemptive rights
of Worldtalk common stock, subject to consummation of the merger.
The Merger Agreement also contains representations and warranties of
Tumbleweed and its subsidiaries, subject to qualifications in the Merger
Agreement, relating to the following matters:
- organization, standing and similar corporate matters;
- capital structure;
- the corporate power and authority to execute, deliver and perform the
Merger Agreement and the related agreements and to consummate the
transactions contemplated by these agreements;
- the absence of conflicts between organizational documents, bylaws and
agreements and the Merger Agreement and the related transactions;
- the absence of any required governmental and third-party consents,
approvals or authorizations other than those specified in the Merger
Agreement;
- the timely filing of documents and the accuracy of information contained
in documents filed with the Securities and Exchange Commission;
- the accuracy of information supplied by Tumbleweed in connection with this
joint proxy statement/ prospectus and the registration statement of which
it is a part;
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- the absence of material changes or events relating to the business of
Tumbleweed and its subsidiaries since September 30, 1999;
- the absence of pending or threatened material litigation and compliance
with applicable laws;
- the receipt of an opinion of Tumbleweed's financial advisor that the
exchange ratio was fair to Tumbleweed from a financial point of view;
- the absence of undisclosed brokers and finders;
- the absence of actions that would prevent the merger from qualifying for
pooling of interests accounting treatment and as a tax-free
reorganization; and
- the operations of Keyhole.
All representations and warranties of Tumbleweed, Worldtalk and Keyhole will
expire at the effective time of the merger.
COVENANTS
Worldtalk has agreed that, except as provided in the Merger Agreement or
with the consent of Tumbleweed, prior to the time the merger becomes effective,
it will conduct its business in the ordinary course and will use its best
efforts to preserve its business organization and to maintain its existing
relationships with customers, suppliers, employees, creditors and business
partners.
Accordingly, Worldtalk agreed that, subject to exceptions generally
described below, neither it nor its subsidiaries will, prior to the effective
time of the merger, without the consent of Tumbleweed:
- split, combine or reclassify its common stock or any outstanding capital
stock of its subsidiaries, or redeem or repurchase any of its capital
stock;
- amend its certificate of incorporation or bylaws or similar organizational
documents;
- declare, set aside or pay any dividend or other distribution on any of its
capital stock;
- issue additional shares of or securities convertible into, or options,
warrants or rights to acquire, any capital stock, except issuances
pursuant to the exercise of Worldtalk options outstanding on the date of
the Merger Agreement and grants of stock options to new non-executive
employees that are consistent with past practices;
- transfer, lease, license, sell, mortgage or encumber any material assets
other than in the ordinary course of business;
- increase the compensation of directors and officers, or employees other
than in the ordinary course of business, or provide any new or change any
existing benefit plan or enter into or amend any employment agreement,
except in accordance with existing policies of Worldtalk, or make any loan
to its directors, officers or employees;
- modify, amend or terminate any of its material agreements, or waive,
release or assign any material rights under these agreements;
- cause any material insurance policy naming it as a beneficiary to be
canceled or terminated without notice to Tumbleweed except in the ordinary
course of business;
- license, transfer otherwise dispose of any of its intellectual property
rights except in the ordinary course of business;
- cancel any debts or waive any contract rights or other rights of
substantial value except in the ordinary course of business;
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- incur or assume any debt or guarantee the debt of others, make any loan or
investment in any other person, or enter into or amend any material
contract, outside the ordinary course of business;
- change its accounting method unless required by generally accepted
accounting principles, or take any action that would prevent the merger
from qualifying for pooling of interests accounting treatment or as a
tax-free reorganization;
- pay or satisfy any liabilities or obligations outside the ordinary course
of business;
- adopt a plan of liquidation or dissolution, merger or other
reorganization;
- take any action that would cause any of its representations and warranties
to become inaccurate at or before the effective time;
- change its tax accounting methods, or settle or compromise any United
States federal, state, local or foreign tax liability; or
- take, or authorize or propose to take, or agree to take in writing or
otherwise, any of the above actions.
Tumbleweed has also agreed that neither it nor its subsidiaries will, prior
to the effective time of the merger, without the consent of Worldtalk:
- split, combine or reclassify its common stock or any outstanding capital
stock of its subsidiaries, or redeem or repurchase any of its capital
stock;
- amend its certificate of incorporation or bylaws or similar organizational
documents;
- declare, set aside or pay any dividend or other distribution on any of its
capital stock;
- change its accounting method unless required by generally accepted
accounting principles, or take any action that would prevent the merger
from qualifying for pooling of interests accounting treatment or as a
tax-free reorganization;
- adopt a plan of liquidation or dissolution, merger or other
reorganization;
- take any action that would cause any of its representations and warranties
to become inaccurate at or before the effective time; or
- take, or authorize or propose to take, or agree to take in writing or
otherwise, any of the above actions.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither Worldtalk nor any of its
subsidiaries, directly or indirectly, may solicit, initiate or encourage,
including by furnishing information, or take any other action designed to
facilitate any inquiries or proposals relating to an alternative transaction
described below, or participate in any negotiations regarding an alternative
transaction. The Merger Agreement defines an alternative transaction to mean:
- a tender offer or exchange offer to acquire more than 20% of the
outstanding shares of Worldtalk common stock;
- any acquisition or proposed acquisition of Worldtalk or any of its
significant subsidiaries by a merger or other business combination,
regardless of whether Worldtalk or any of its subsidiaries survives the
merger; or
- any other transaction the consummation of which a third party would
acquire control of assets of Worldtalk or any of its subsidiaries,
including the equity securities of such subsidiaries, for consideration
equal to 20% or more of the fair market value of all of the outstanding
shares of Worldtalk common stock.
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The Merger Agreement provides that these restrictions will not prohibit
Worldtalk, prior to the approval of the merger by its shareholders, from:
- complying with Rule 14e-2 and Rule 14d-9 under the Securities and Exchange
Act of 1934, as amended, with regard to a bona fide tender offer or
exchange offer, which rules require a target company to respond publicly
to a tender offer; or
- participating in negotiations or furnishing information in response to an
unsolicited proposal for an alternative transaction if all of the
following conditions are met:
-- the Worldtalk board of directors must have concluded in good faith,
after consulting its outside legal counsel, that it must participate
in such negotiations or furnish such information in order to comply
with its fiduciary duties to the stockholders; and
-- the board of directors must promptly advise Tumbleweed orally and in
writing of any request for information or of any proposal in
connection with an alternative transaction, specifying the material
terms and conditions of the request or proposal and the identity of
the person making that request or proposal.
In addition, Tumbleweed agrees not, directly or indirectly, to solicit,
initiate or encourage, including by furnishing information, or take any other
action designed to facilitate any inquiries or proposals that would delay or
interfere with the consummation of the merger, or participate in any
negotiations regarding a competing proposal.
Tumbleweed may participate in negotiations regarding an unsolicited
competing proposal, or furnish information subject to a confidentiality
agreement signed by the person making a request for information, if:
- prior to the approval of the merger by Tumbleweed stockholders, the board
of directors concludes in good faith, after consulting its outside legal
counsel, that it must participate in negotiations in order to comply with
its fiduciary duties to the stockholders; and
- the board of directors promptly advises Worldtalk orally and in writing of
any request for information or of any competing proposal, specifying the
material terms and conditions of the request or proposal and the identity
of the person making that request or proposal.
Except as described below, neither the Worldtalk board of directors or a
committee of the board shall:
- withdraw, qualify or modify in a manner adverse to Tumbleweed, its
approval or recommendation of the Merger Agreement or the merger;
- approve or recommend an alternative transaction; or
- enter into any letter of intent, acquisition agreement or other similar
agreement related to an alternative transaction.
However, if, prior to the approval of the merger by its stockholders, the
Worldtalk board of directors receives a superior proposal and, the board of
directors concludes in good faith, after consulting its outside legal counsel,
that it must take such actions in order to comply with its fiduciary duties to
the stockholders, the board may withdraw its recommendation or approval of the
merger after the fifth business day following Tumbleweed's receipt of written
notice, advising Tumbleweed of its intent to approve or recommend the superior
proposal.
For purposes of this covenant, the term superior proposal means any of the
alternative transactions described in the definition above, which the Worldtalk
board of directors concludes in its good faith judgment, after consulting with
its financial advisor, to be more favorable to the stockholders of Worldtalk
than the merger.
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ACCESS TO INFORMATION
Subject to existing confidentiality obligations, Worldtalk has agreed to
afford Tumbleweed and its representatives reasonable access during normal
business hours to its properties, books, contracts, commitments and records.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that Tumbleweed agrees to indemnify, at all
times after the effective time, directors or officers of Worldtalk or its
subsidiaries to the same extent as provided in Worldtalk's certificates of
incorporation or bylaws or in indemnity agreements in effect on November 18,
1999.
In addition, Tumbleweed also agrees to maintain for at least six years after
the effective time of the merger directors' and officers' liability insurance
policies on the same terms and conditions as Worldtalk's insurance policies in
effect on November 18, 1999, which will cover events occurring prior to the
effective time of the merger.
COOPERATION AND REASONABLE EFFORTS
Under the Merger Agreement and subject to the conditions and limitations
specified in the Merger Agreement, the parties have agreed to cooperate with
each other to take specified actions and to use their reasonable efforts to have
the registration statement declared effective as promptly as practicable after
its filing.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of Tumbleweed, Keyhole and Worldtalk to effect
the merger are subject to the following conditions:
- the waiting period under the Hart-Scott-Rodino Act, if any, must have
terminated or expired;
- the stockholders of Tumbleweed and Worldtalk must approve the merger;
- there may be no order, law, injunction or other legal restraint or
prohibition enjoining or preventing the consummation of the merger or the
effective operation of the business of Worldtalk after the effective time
of the merger;
- all required regulatory approvals are obtained;
- the shares of Tumbleweed common stock to be issued in the merger are
qualified for inclusion in the Nasdaq National Market; and
- the registration statement is declared effective and no stop order
suspends the effectiveness of the registration statement, and no
proceeding for that purpose is initiated or threatened by the Securities
and Exchange Commission.
Tumbleweed and Keyhole's obligations to effect the merger are subject to the
following additional conditions:
- the representations and warranties of Worldtalk are true and correct when
made and as of the effective time in all material respects;
- Worldtalk has performed in all material respects its obligations required
to be performed by it prior to and at the effective time of the merger;
- the agreements related to the merger shall be valid and complied with in
all material respects;
- since November 18, 1999, no event has occurred that has had, or is
reasonably likely to have, a material adverse effect on Worldtalk or its
subsidiaries;
- Tumbleweed has received an opinion of Fenwick & West LLP;
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- Tumbleweed has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP substantially to the effect that, based on specific facts,
representations and assumptions, the merger will be treated as a tax-free
reorganization;
- Worldtalk certifies that specific closing conditions have been satisfied;
and
- Worldtalk certifies that neither it nor any of its subsidiaries is a
United States real property holding company.
Worldtalk's obligations to effect the merger are subject to the following
additional conditions:
- the representations and warranties of Tumbleweed and Keyhole are true and
correct when made and as of the effective time in all material respects;
- each of Tumbleweed and Keyhole has performed in all material respects its
obligations required to be performed by it prior to and at the effective
time of the merger;
- the agreements related to the merger shall be valid and complied with in
all material respects;
- since November 18, 1999, no event has occurred that has had, or is
reasonably likely to have, a material adverse effect on Tumbleweed or its
subsidiaries;
- Worldtalk has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP;
- Worldtalk has received an opinion of Fenwick & West LLP substantially to
the effect that, based on specific facts, representations and assumptions,
the merger will be treated as a tax-free reorganization; and
- Tumbleweed certifies that specific closing conditions have been satisfied.
TERMINATION
The Merger Agreement provides that at any time prior to the effective time
of the merger, the Merger Agreement may be terminated:
- by mutual written consent of Tumbleweed and Worldtalk if the board of
directors of each determines to do so by a vote of a majority of the
entire board of directors;
- by either Tumbleweed or Worldtalk if:
-- the merger has not been completed on or prior to June 30, 2000, so
long as the party seeking to terminate did not prevent the
consummation of the merger by failing to perform any of its
obligations under the Merger Agreement;
-- the Tumbleweed stockholders or the Worldtalk stockholders fail to
approve the merger; or
-- any court or other governmental body issues a nonappealable final
order that has a material adverse effect on Worldtalk or its
subsidiaries, or a required regulatory approval is denied, provided
the party seeking to terminate the Merger Agreement used commercially
reasonable efforts to appeal the order or obtain the approval.
- by Worldtalk, as long as it is not in material breach of the Merger
Agreement, if:
-- Tumbleweed materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the
Merger Agreement, which breach or failure to perform is incapable of
being cured or is not cured within 30 days; or
-- at any time prior to Tumbleweed's special meeting, Tumbleweed's board
of directors withdraws, modifies or qualifies in a manner adverse to
Worldtalk, its recommendation that the shareholders approve the
merger.
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- by Tumbleweed, as long as it is not in material breach of the Merger
Agreement, if:
-- Worldtalk materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the
Merger Agreement, which breach or failure to perform is incapable of
being cured or is not cured within 30 days; or
-- at any time prior to Worldtalk's special meeting, Worldtalk's board
of directors withdraws, modifies or qualifies in a manner adverse to
Tumbleweed, its recommendation that the shareholders approve the
merger.
TERMINATION FEE AND EXPENSES
The Merger Agreement provides that Worldtalk will pay to Tumbleweed a
termination fee of $4.0 million if Worldtalk enters into or consummates an
alternative transaction within 12 months after termination of the Merger
Agreement upon the earliest to occur of the following events:
- at any time prior to Worldtalk's special meeting, Worldtalk's board of
directors withdraws, modifies or qualifies its recommendation that the
shareholders approve the merger, in a manner adverse to Tumbleweed;
- the Worldtalk stockholders fail to approve the merger; or
- Worldtalk materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the Merger
Agreement, which breach or failure to perform is incapable of being cured
or is not cured within 30 days.
If a termination fee is payable to Tumbleweed, that fee will include all
costs and expenses incurred by Tumbleweed in connection with the Merger
Agreement and the other agreements related to the merger. The costs and expenses
will be payable on the date of the consummation of the alternative transaction.
In addition, except as specifically provided in the Merger Agreement, each
party has agreed to bear its own expenses in connection with the Merger
Agreement and the other related agreements and transactions contemplated by the
Merger Agreement. If the merger is consummated, Tumbleweed will pay all legal,
accounting and financial advisory fees and expenses of Worldtalk.
AMENDMENT; EXTENSION AND WAIVER
The parties may amend the Merger Agreement at any time before or after the
approval of the merger by the Tumbleweed or Worldtalk stockholders. After the
approval by the stockholders, the parties may not amend the Merger Agreement
without further stockholder approval if the amendment changes the amount or the
form of consideration to be issued to Worldtalk stockholders, or which by law
requires the further approval of the stockholders.
At any time prior to the effective time of the merger, any party may,
subject to the amendment restrictions described above:
- extend the time for the performance of any of the obligations or other
acts of the other parties;
- waive any inaccuracies in the representation and warranties contained in
the Merger Agreement or in any document delivered pursuant to the Merger
Agreement; and
- waive compliance with any of the agreements or conditions in the Merger
Agreement.
Any extension or waiver described above will be valid if set forth in
writing and signed by the parties to be bound.
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THE STOCK OPTION AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE STOCK OPTION
AGREEMENT. BECAUSE THE DESCRIPTION OF THE STOCK OPTION AGREEMENT IS A SUMMARY,
YOU SHOULD READ CAREFULLY THE ENTIRE COPY OF THE STOCK OPTION AGREEMENT, WHICH
IS ATTACHED AS ANNEX B TO THIS DOCUMENT, FOR THE INFORMATION THAT IS IMPORTANT
TO YOU.
GENERAL. Concurrent with the execution of the Merger Agreement, Tumbleweed
and Worldtalk entered into a stock option agreement under which Worldtalk
granted Tumbleweed an option to purchase a number of shares of Worldtalk common
stock equal to 19.9% of the total number of shares of Worldtalk common stock
issued and outstanding as of November 18, 1999, together with the associated
rights under the Worldtalk rights agreement and subject to adjustment. Under
this option, Tumbleweed would have a right to acquire 2,889,330 shares of
Worldtalk common stock, subject to adjustment, at $10.527 per share.
EXERCISE OF THE OPTION. The option is exercisable at any time after the
occurrence of specific events, including any event entitling Tumbleweed to
receive the termination fee under the Merger Agreement. Subject to some
exceptions, the right to purchase shares under the stock option agreement will
expire upon the earliest to occur of:
- the effective time of the merger;
- termination of the Merger Agreement by mutual written consent of
Tumbleweed and Worldtalk by either Tumbleweed or Worldtalk if specific
conditions as outlined in the Merger Agreement are not met, or by
Worldtalk, if Tumbleweed is in material breach of the Merger Agreement or
the Tumbleweed board of directors fails to recommend to their stockholders
that they approve the Merger Agreement and the related transactions; and
- six months following the termination of the Merger Agreement by
Tumbleweed, which it is entitled to do under the Merger Agreement if
Worldtalk is in material breach of the Merger Agreement or if the
Worldtalk board of directors fails to recommend to their shareholders that
they approve the Merger Agreement and the related transactions.
ADJUSTMENTS TO NUMBER OF SHARES AND CLASS OF SHARES. The number and class
of securities subject to the option and the purchase price will be adjusted for
any change in Worldtalk common stock by reason of a stock dividend, split up,
merger, other than pursuant to the Merger Agreement, recapitalization,
combination, exchange of shares or similar transaction, so that Tumbleweed will
receive, upon exercise of the option, the number and class of shares that
Tumbleweed would have received if the option had been exercised immediately
prior to the occurrence of the event, or the record date of the event, if
applicable.
If Worldtalk agrees to consolidate with or merge into any person other than
Tumbleweed or one of its subsidiaries and Worldtalk will not be the surviving
corporation of that consolidation or merger, agrees to permit any person other
than Tumbleweed or one of its subsidiaries to merge into Worldtalk which results
in the outstanding shares of Worldtalk common stock immediately prior to such
merger being less than 50% of the outstanding shares of the merged company, or
agrees to sell or otherwise transfer all or substantially all of its assets to
any person other than Tumbleweed or one of its subsidiaries, then the agreement
governing any of these transactions will provide that the option will, upon the
completion of the transaction, be converted into or exchanged for a right to
receive the number and class of shares Tumbleweed would have received for
Worldtalk common stock if the option had been exercised immediately prior to the
consolidation, merger, sale or transfer.
REPURCHASE RIGHT. The stock option agreement provides that, if Worldtalk
consummates an alternative transaction, Tumbleweed is entitled to sell to
Worldtalk and Worldtalk is required to purchase from Tumbleweed, all or a
portion of the option, or all or any portion of the shares purchased by
Tumbleweed, at a price equal to the difference between:
- the market/tender offer price, as defined in the stock option agreement;
and
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- the exercise price multiplied by the number of shares purchaseable
pursuant to the option.
In addition, the stock option agreement provides that in no event will
Tumbleweed's total profit from the option, including any termination fee paid to
Tumbleweed, exceed $6.0 million and, if Tumbleweed's total profit from the
option would otherwise exceed such amount, Tumbleweed is required to:
- reduce the number of shares of Worldtalk common stock subject to the
option;
- deliver shares of Worldtalk common stock previously purchased by
Tumbleweed to Worldtalk for cancellation;
- pay cash to Worldtalk; or
- any combination of the foregoing, so that Tumbleweed's actually realized
total profit from the option including the termination fee paid to
Tumbleweed, does not exceed $6.0 million after taking into account the
foregoing actions.
REGISTRATION RIGHTS. Following the termination of the Merger Agreement and
exercise of the option, Tumbleweed may request Worldtalk to register any shares
purchased under the option under the securities laws and Worldtalk will use its
reasonable best efforts to effect this registration, subject to limitations as
provided in the stock option agreement.
EFFECT OF STOCK OPTION AGREEMENT. The stock option agreement is intended to
increase the likelihood that the merger will be consummated on the terms set
forth in the Merger Agreement. Consequently, some aspects of the stock option
agreement may discourage persons who might now or prior to the effective time of
the merger be interested in acquiring all or a significant interest in Worldtalk
from considering or proposing such an acquisition, even if such persons were
prepared to offer higher consideration per share for Worldtalk common stock than
that implicit in the 0.26 exchange ratio or a higher price per share for
Worldtalk common stock than the market price.
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THE VOTING AGREEMENTS
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE VOTING
AGREEMENTS. BECAUSE THE DESCRIPTION OF THE VOTING AGREEMENTS IS A SUMMARY, YOU
SHOULD READ CAREFULLY THE ENTIRE COPY OF THE VOTING AGREEMENTS, WHICH IS
ATTACHED AS ANNEX C TO THIS DOCUMENT, FOR THE INFORMATION THAT IS IMPORTANT TO
YOU.
Concurrent with the execution of the Merger Agreement, principal
stockholders of Tumbleweed and Worldtalk entered into voting agreements with
Tumbleweed and Worldtalk, respectively, under which they gave either Tumbleweed
or Worldtalk their irrevocable proxy to vote all the shares of Tumbleweed common
stock or Worldtalk common stock issued and outstanding and beneficially owned by
them as of the date of the voting agreements, as well as any shares acquired by
them after the date of and prior to the termination of the voting agreements:
- in favor of the adoption of the Merger Agreement and the approval of other
actions contemplated or required by the Merger Agreement or other related
agreements; and
- against any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty or any other
obligation or agreement under the Merger Agreement or other related
agreements.
Stockholders of Tumbleweed collectively holding 11,754,426 shares of
Tumbleweed common stock, representing approximately 54% of the outstanding
Tumbleweed common stock, have entered into voting agreements with Worldtalk.
Stockholders of Worldtalk collectively holding 6,630,165 shares of Worldtalk
common stock, representing approximately 46% of the outstanding Worldtalk common
stock, have entered into voting agreements with Tumbleweed.
The voting agreements will terminate on the earliest of:
- termination of the Merger Agreement:
-- by mutual written consent of Tumbleweed and Worldtalk;
-- by either Tumbleweed or Worldtalk if specific conditions as outlined
in the Merger Agreement are not met; or
-- by Worldtalk, if Tumbleweed is in material breach of the Merger
Agreement or the Tumbleweed board of directors fails to recommend to
their stockholders that they approve the Merger Agreement and the
related transactions.
- six months following the termination of the Merger Agreement by
Tumbleweed, which it is entitled to do under the Merger Agreement if
Worldtalk is in material breach of the Merger Agreement or if the
Worldtalk board of directors fails to recommend to their shareholders that
they approve the Merger Agreement and the related transactions.
- agreement by Tumbleweed, Worldtalk and the stockholders who are parties to
the voting agreement to terminate the voting agreement; or
- consummation of the merger.
In addition, each stockholder has agreed in the voting agreement that, prior
to the termination of the voting agreement, the stockholder will not, directly
or indirectly;
- sell, transfer or otherwise dispose of any shares of Worldtalk or
Tumbleweed common stock beneficially owned by them as of the date of the
voting agreements, as well as any shares acquired by them after the date
of and prior to the termination of the voting agreements;
- grant any proxy, power of attorney, or enter into a voting agreement or
arrangement; or
- take any other action that would make any representation or warranty of
the stockholder untrue or incorrect or have the effect of preventing or
disabling the stockholder from performing its obligations under the voting
agreement.
Each stockholder understands that Tumbleweed and Worldtalk entered into the
Merger Agreement in reliance upon such stockholder's execution and delivery of
the voting agreement. Each stockholder affirms that the irrevocable proxy was
given in connection with the execution of the Merger Agreement, and that such
irrevocable proxy is given to secure the performance of its duties under the
voting agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax consequences of the
merger to the holders of Worldtalk common stock that exchange such stock for
Tumbleweed common stock pursuant to the merger. This summary addresses only
stockholders who hold their Worldtalk common stock as a capital asset and will
hold Tumbleweed common stock received in exchange therefor as a capital asset.
This summary does not address all Federal income tax considerations that may be
relevant to particular stockholders in light of their individual circumstances
or to stockholders that are subject to special rules, such as financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities, foreign stockholders, to stockholders who hold Worldtalk common
stock as part of a straddle, hedge, or conversion transaction, to stockholders
who acquired their Worldtalk common stock pursuant to the exercise of employee
stock options or otherwise as compensation, and persons who hold, directly or
indirectly, 10% of more of Worldtalk common stock. The following summary is
based upon the provisions of the Internal Revenue Code of 1986, as amended,
applicable treasury regulations, judicial decisions and current administrative
rulings, as of the date hereof, all of which are subject to change, possibly on
a retroactive basis. Tax consequences under state, local, foreign, and other
laws are not addressed in this summary. Each stockholder is urged to consult his
or her tax advisor regarding the Federal, state, local, and foreign income and
other tax considerations arising out of the merger in light of the stockholder's
own personal circumstances.
No rulings have been or will be requested from the Internal Revenue Service
with respect to any of the matters discussed herein. There can be no assurance
that future legislation, regulations, administrative rulings or court decisions
would not alter the tax consequences set forth below. It is a condition to the
obligation of Tumbleweed to consummate the merger that Tumbleweed receive an
opinion from its counsel, Skadden, Arps, Slate, Meagher & Flom LLP, and it is a
condition to the obligation of Worldtalk to consummate the merger that Worldtalk
receive an opinion from its counsel, Fenwick & West LLP, in both cases
substantially to the effect that, based upon specific facts, representations,
and assumptions, the merger will be treated as a reorganization within the
meaning of section 368(a) of the Internal Revenue Code. The issuance of such
opinions is conditioned, among other things, on the receipt by Skadden, Arps,
Slate, Meagher & Flom LLP and Fenwick & West LLP of representation letters,
which will be reconfirmed prior to the closing of the merger, from each of
Tumbleweed and Worldtalk, in each case, in form and substance reasonably
satisfactory to Skadden, Arps, Slate, Meagher & Flom LLP and Fenwick and West
LLP. The following summary assumes that the merger will be consummated as
described in the Merger Agreement and this joint proxy statement/prospectus and
that the merger will be treated as a reorganization within the meaning of
section 368(a) of the Internal Revenue Code.
TREATMENT OF WORLDTALK, TUMBLEWEED AND KEYHOLE. No gain or loss will be
recognized by Worldtalk, Tumbleweed or Keyhole as a result of the merger.
EXCHANGE OF WORLDTALK COMMON STOCK FOR TUMBLEWEED COMMON STOCK. A holder of
Worldtalk common stock whose shares of Worldtalk common stock are exchanged in
the merger for Tumbleweed common stock will not recognize gain or loss, except
to the extent of cash, if any, received in lieu of fractional shares. See
"--Cash in Lieu of Fractional Shares" below. The aggregate tax basis of
Tumbleweed common stock received by such holder will be equal to the aggregate
tax basis of the Worldtalk common stock exchanged therefor, excluding any
portion of the holder's basis allocated to fractional shares, and the holding
period of Tumbleweed common stock received will include the holding period of
the Worldtalk common stock exchanged therefor.
CASH IN LIEU OF FRACTIONAL SHARES. A holder of Worldtalk common stock who
receives cash in lieu of fractional shares of Tumbleweed common stock will be
treated as having received the fractional shares pursuant to the merger and then
as having exchanged the fractional shares for cash in a redemption by
Tumbleweed. The amount of any gain or loss will be equal to the difference
between the ratable portion of the tax basis of the Worldtalk common stock
exchanged in the merger that is allocated to the fractional
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shares and the cash received instead. Any gain or loss will constitute long-term
capital gain or loss if the Worldtalk common stock has been held by the holder
for more than one year at the time of the consummation of the merger.
REPORTING REQUIREMENTS. Each holder of Worldtalk common stock that receives
Tumbleweed common stock in the merger will be required to retain records and
file with such stockholder's Federal income tax return a statement setting forth
specific facts relating to the merger.
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TUMBLEWEED BUSINESS
OVERVIEW
Tumbleweed is a leading provider of Internet-based systems that enable
businesses to conduct secure online communications using e-mail and the web.
With our solution, corporations are able to shift their historically paper-based
communications to more convenient and cost-effective online alternatives. We
combine an open, scalable messaging software platform, a set of secure messaging
applications and a broad range of professional services capabilities in order to
deliver a complete online communications solution. Using our solution, service
providers are able to provide their business customers with secure, reliable and
trackable communication services that leverage these corporations' existing
investments in e-mail and web technologies. We also sell our products and
services directly to enterprises in selected strategic markets, such as the
banking, financial services, telecommunications and healthcare industries,
enabling them to offer Tumbleweed-based services to their employees, customers,
suppliers and partners.
INDUSTRY BACKGROUND
E-mail has become one of the primary applications in use on the Internet
today, providing the foundation for global communications and enabling millions
of people to interact electronically. International Data Corporation estimates
that the number of electronic mailboxes will grow from approximately
240 million in 1998 to over 540 million by 2002. International Data Corporation
further projects that the number of e-mail messages sent per day in the U.S.
will grow from approximately 2.1 billion in 1998 to 7.9 billion in 2002.
We believe that the growth in e-mail usage generally has been associated
with increased informal communication between individuals rather than formal
communication between businesses and their customers. For business-critical
communications, corporations continue to rely upon traditional paper-based
methods of delivery such as first class mail and overnight express mail. For
example, although online brokerages execute hundreds of thousands of trades over
the Internet each day, these firms still print a physical trade confirmation and
deliver it to individuals via first class mail. The U.S. Postal Service
estimates that it delivers 107 billion pieces of first class mail annually. In
addition, the U.S. Postal Service estimates that United Parcel Service and the
U.S. Postal Service combined execute 18 million overnight deliveries per day.
To move online and away from physical delivery, businesses require
efficient, cost-effective solutions that leverage their investment in e-mail and
the Internet. Although existing online alternatives such as dedicated
proprietary networks and desktop software supply security and speed, they
introduce added cost and complexity to a corporation's business processes and
limit access to people using the same proprietary network or software. For
example, a virtual private network typically requires proprietary software,
specialized hardware and a closed list of participants.
In order to advance beyond physical mail or proprietary networks, and reach
the greatest possible number of end-users, customers need a secure, reliable
online solution built on public networks.
THE TUMBLEWEED SOLUTION
Built on widely accepted industry standards, the Tumbleweed Integrated
Messaging Exchange, or Tumbleweed IME, utilizes public networks to provide
efficient, cost-effective, secure business-to-business and business-to-consumer
communications over the Internet. By providing secure, reliable, and trackable
communication through existing networks and applications, we enable businesses
to move their historically paper-based business communications online. Our
solution blends the personalized and proactive nature of e-mail with the
ubiquity of the Internet to deliver sensitive, secure and time-critical content
to the broadest possible audience.
Tumbleweed IME enables businesses to deliver secure and personalized
outbound information in a variety of ways. This information can be distributed
within e-mail messages, on the Internet via inboxes, or through a combination of
both e-mail and the Internet. Our solution has the unique and patented
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capability of taking an e-mail message recipient to a unique web page that is
relevant to that recipient. In addition to being a vehicle for secure online
communication services, Tumbleweed IME provides features to manage personalized
content, track recipient transactions such as receipt or response, and integrate
the system into existing back-office processes.
Tumbleweed IME provides a complete framework for deploying enhanced online
communication services, eliminating the need to integrate multiple different
solutions or services that each address only part of the problem. Our customers
include enterprise customers that utilize Tumbleweed IME as a communication
platform for internal purposes or for distribution of internally generated
communication to their customers, and service providers that utilize Tumbleweed
IME as the basis for an external service for business customers. Our solution
provides the following benefits to our customers:
- COMPLETE RANGE OF SERVICES. Adding advanced technology to a customer's
already complex information technology environment presents numerous
challenges, ranging from software incompatibilities to inadequate
technical expertise. When deploying something as substantial as an
advanced online communication infrastructure, customers expect services
ranging from assistance in customizing and incorporating new technology
into their computing environment, to having the entire solution made
available to them as an outsourced, managed service. In order to meet
these unique customer requirements, together with our service providers,
we offer a complete range of services, allowing new customers to rapidly
deploy the Tumbleweed IME solution. Customers seeking to avoid complex
software procurement or installation can completely outsource the
management of Tumbleweed IME. For customers desiring to manage their
applications within their enterprise, Tumbleweed provides services ranging
from integration and customization to data center design and support.
- COMPREHENSIVE TECHNOLOGY. Tumbleweed IME is designed to provide a secure,
efficient and cost-effective method for communicating important
information online. Our solution contains all of the core technology,
integration tools and professional services necessary to incorporate
advanced messaging features into existing environments. Tumbleweed IME can
be modified to meet the unique communications needs of specific customers,
and can be easily integrated into existing environments. Customization and
integration are achieved through our extensive set of open application
programming interfaces. These application programming interfaces allow
customers to integrate Tumbleweed IME into their existing technology
infrastructure such as databases, support systems and billing systems.
- MULTI-LEVEL SECURITY. In many cases, the reason business-critical
information is not communicated online is the lack of security features
available in existing e-mail solutions. Through our innovative and unique
implementation of industry-standard security technologies, we are able to
offer secure online communication services to anyone with e-mail and
Internet access. Depending on the needs of the sender, security features
can include encryption during transmission and storage and password
protection for user authentication. For highly sensitive communication,
Tumbleweed IME includes certificate-based signing and encryption features.
Any level of security can be easily employed without requiring the sender
and recipient to have the same messaging software. Taken together, these
features provide the security necessary to communicate business-critical
information over the Internet.
- EASY, UNIVERSAL ACCESS. A successful advanced communication system must be
able to reach anyone on the Internet. Tumbleweed IME is based on open
Internet standards, and requires no proprietary desktop software,
protocols, or networks. Anyone with an e-mail account and web access can
use our solution to both send and to receive messages regardless of which
e-mail system they use or the format of the information included.
Similarly, Tumbleweed IME can be integrated with an enterprise's existing
back office systems to enable automated communication to anyone with an
e-mail account and web access. Because no new application or user
interface is needed, there is no costly training or desktop deployment
associated with our solution. In addition, senders can convert any
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information to Adobe Portable Document Format, which allows recipients to
view the information they receive regardless of the application in which
the information was created.
- END-TO-END TRACKABILITY. Many business processes require the maintenance
of a transaction log of communications and an archive of past activities.
With our solution, senders can track the status of each delivery, and
subsequent interaction through the web page by recipients. Details on a
particular delivery are also easily accessible, providing specific
delivery information such as security level, and a complete tracking log
on each recipient. The tracking log details when the recipient's e-mail
gateway received e-mail notification, and when any information was
retrieved. Additionally, unlike existing e-mail and web-based solutions,
Tumbleweed IME allows the sender to retract information if the recipient
has not yet downloaded it.
- PERSONALIZED COMMUNICATION. Communication of important business
information such as transaction confirmations or account statements
requires message customization for specific recipients. Using Tumbleweed
IME, businesses can automatically generate unique messages for each
individual, personalized with recipient-specific information and
preferences. In addition, our solution allows senders to create messages
targeting specific recipient preferences, demographics and communication
history. Tumbleweed IME also enables our customers to easily incorporate
marketing promotions into their business communications.
- SCALABLE ARCHITECTURE. Tumbleweed IME is designed to accommodate a variety
of online communication applications, ranging from small corporate
deployments to large enterprise installations supporting global service
offerings. Our scalable architecture allows customers to accommodate high
transaction volumes and implement desired levels of redundancy. Tumbleweed
IME components can be distributed across multiple servers, allowing for an
increasingly high volume of transactions while maintaining high standards
of performance, reliability and security. The ability to seamlessly handle
increasing transaction volumes is a key consideration for customers in
deploying an enterprise-class online communication system.
STRATEGY
Our objective is to be the leading provider of secure online communication
services. Key elements of our strategy are to:
ESTABLISH TUMBLEWEED IME AS THE LEADING APPLICATION PLATFORM FOR SECURE ONLINE
COMMUNICATION SERVICES
We intend to establish Tumbleweed IME as the standard platform upon which to
build business-critical communication applications. Rather than designing
Tumbleweed IME as a point-solution for a specific application, we have designed
it to be a broad-based application development platform. As such, Tumbleweed IME
can be extended to include a number of different applications and includes
support for a comprehensive, open application programming interface. This
application programming interface allows us, and our customers, to rapidly build
vertical, business-specific applications on top of our Tumbleweed IME
technology.
CULTIVATE A CHANNEL OF KEY SERVICE PROVIDERS
We intend to leverage our channel of service providers to expand our
business into new strategic industry markets as well as to pursue additional
general purpose transactions. Service providers fall into two major categories.
First, some of our service providers, license Tumbleweed IME in order to be able
to provide additional value-added services to their customers. These service
providers include Pitney Bowes, Nippon Telegraph and Telephone Corporation,
United Parcel Service, the member posts of the International Post Corporation
Technology, S.C. and Hikari Tsushin, a major e-mail outsourcing service provider
in Japan. Second, service providers such as UPAQ Ltd., an electronic transferor
of large, industrial file types, focus on distinct industries. Our service
provider customers are helping to rapidly expand the market for secure online
communications through their brand recognition, extensive sales and marketing
resources and substantial services competencies.
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ESTABLISH TUMBLEWEED IME AS THE INTERNATIONAL STANDARD FOR SECURE ONLINE
COMMUNICATION
We intend to establish Tumbleweed IME as an international standard for
secure online communication services by developing a significant base of
enterprise and service provider customers. We also intend to accomplish this by
capturing business with the national postal authorities. The national postal
authorities present a strategic business opportunity for Tumbleweed. They are
both highly trusted service providers in their respective geographies and
uniquely able to dictate national standards for certified online communication.
In order to help establish Tumbleweed IME as the international standard for
certified online communications, we have formed a strategic relationship with
the International Post Corporation Technology, S.C. The International Post
Corporation Technology, S.C. is an umbrella organization composed of twenty-one
national postal authorities including the U.S. Postal Service, Canada Post and
France's La Poste. As part of our work with the International Post Corporation
Technology, S.C., we have integrated Tumbleweed IME with the International Post
Corporation Technology, S.C.'s Electronic Post Mark technology. Tumbleweed IME
is now being used by the U.S. Postal Service, Canada Post, and France's La
Poste. We plan to introduce Tumbleweed IME to the International Post Corporation
Technology, S.C.'s other eighteen members as well.
ESTABLISH TUMBLEWEED IME IN STRATEGIC INDUSTRY MARKETS
Through our direct sales force, we are pursuing key accounts in strategic
markets. These strategic markets initially include the banking, financial
services, telecommunications and healthcare industries. Through our direct sales
force in each strategic market, we have begun to secure key accounts and we
intend to expand our business to other similar customers within those
industries. Our successes in the strategic industry markets are intended to
provide leverage to our channel of service providers as they in turn pursue
business in those industries.
EXPAND INTO ACCOUNTS AFTER FIRST SECURING BUSINESS-CRITICAL APPLICATIONS
The sophistication of the Tumbleweed IME Platform enables us to first target
those business-critical applications that require the highest degrees of
security and tracking within an enterprise. Having secured these high-value
applications, we can then expand our focus to include other messaging
applications within the same enterprise. Customers benefit through the ability
to use Tumbleweed IME as the foundation for all of their enterprise messaging
needs, from high-end to low-end applications. Our ability to address the entire
spectrum of an enterprise's communication service needs should enable us to
compete favorably against those companies whose technologies are only suited to
lower-end communications applications.
CREATE RECURRING TRANSACTION-BASED REVENUE STREAMS
To create a predictable, recurring revenue stream, we intend to generate
revenue based on the volume of communications sent through Tumbleweed IME.
Tumbleweed IME may be used by a particular customer on-site at the customer
premises or used as an outsourced service. Customers are charged a software
license fee plus any related professional service fees, supplemented by
transaction-based fees. The amount of these transaction fees varies depending on
customer usage as evidenced by the volume of communications sent through
Tumbleweed IME.
PROVIDE COMPREHENSIVE PROFESSIONAL SERVICES
Our full outsourcing services enable our customers to reduce their cost of
ownership and deployment time of our solutions, thereby helping reduce our sales
cycle to those enterprises. Enterprise customers have the option of deploying
Tumbleweed IME either on their premises or outsourcing the Tumbleweed IME
deployment to Tumbleweed. We complement our outsourcing services with a full
breadth of professional and consulting services. These services are
comprehensive, end-to-end, and designed to help customers implement Tumbleweed
IME-based applications as rapidly as possible. The services include
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business-specific applications consulting, software development, training and
education and complete technical support.
PRODUCTS AND SERVICES
Tumbleweed IME, our online communication solution, combines advanced
security, tracking and personalization features in a single, comprehensive
messaging environment. With Tumbleweed IME, businesses have a secure Internet
communication alternative that allows them to extend their existing web and
e-mail infrastructures to support critical business processes.
TUMBLEWEED IME
Tumbleweed IME includes the elements necessary to successfully deploy an
online, interactive communication solution: a comprehensive delivery platform,
customized applications that integrate with business processes, and professional
services that help customers bring legacy business communications online.
TUMBLEWEED IME PLATFORM
The Tumbleweed IME Platform is the foundation of our solution that includes
the core functionality necessary for processing, managing, presenting and
archiving electronic communications. Because advanced services require high
performance and scalability, the Tumbleweed IME Platform has been designed to
handle millions of daily secure messages efficiently. The Tumbleweed IME
Platform's flexible architecture supports distributed execution of software
components, allowing customers to expand the service as their requirements grow.
This scalability, combined with advanced security and tracking features, enables
customers to use our technology as the foundation for a variety of online
communication services.
We have optimized our technology for use with industry-leading hardware and
software solutions, ensuring that the Tumbleweed IME Platform can meet customer
requirements now and in the foreseeable future. The Tumbleweed IME Platform has
been evaluated and deployed by some of the world's largest businesses, including
Nippon Telegraph and Telephone Corporation and United Parcel Service. Our
technology has been in production use for eighteen months and has been enhanced
with two significant releases during this time frame in order to meet production
requirements and provide carrier-class quality. Through advanced security,
trackability and reliability features, the Tumbleweed IME Platform provides a
comprehensive foundation for building and deploying premium communication
applications.
IME APPLICATIONS. Using the Tumbleweed IME Platform as a foundation,
Tumbleweed IME Applications integrate with e-mail and legacy systems, interact
with existing applications, and automate transactions and exchanges to provide a
complete internal and external communications solution for the enterprise. These
applications are built to integrate with and enhance specific business
processes. Current Tumbleweed IME Applications include:
IME STATEMENTS. IME Statements offers businesses a complete solution for
the secure, Internet-based delivery of important document such as trade
confirmations, statements, invoices and other sensitive records. By automating
these communications and integrating them with Tumbleweed IME, businesses can
increase business transaction volume and improve operating efficiencies, while
at the same time offering customers lower costs and an improved level of
service. In the end, more streamlined business processes add up to more
satisfied customers.
IME PERSONALIZE. IME Personalize allows companies to interact with an
expanding online client base in a customized and personalized way, providing the
high quality of service that Internet-savvy consumers have come to expect. IME
Personalize extends secure IME-based customer communications to include targeted
messages automatically, personalized for individual customers based on their
attributes and preferences. As a result, customers can save significant
promotional dollars, improve response rates, provide a higher level of customer
service to attract and retain customers.
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IME MESSENGER. Collaborative business communications such as contract
negotiations, design and manufacturing processes, and medical referrals and lab
results require a secure delivery channel as documents go through multiple,
ad-hoc reviews and approval cycles. For example, when a company undergoes a
private or public offering, a large number of documents must be drafted and
agreed upon by several parties, including company executives, the company's law
firm, and the underwriting financial institution. Not only do the documents need
to be distributed securely to different parties, the sender must also have
assurance that all parties received the documents. IME Messenger provides the
universal, reliable delivery and tracking required for this type of
confidential, one-on-one correspondence and group collaboration, without the
expense of couriers and overnight express services.
IME DEVELOPER. IME Developer includes all of the tools necessary to integrate
secure, online communications into already established e-commerce systems. By
customizing IME to complement e-commerce and other online applications,
businesses can create automated, rich applications to deliver interactive
confirmations, notifications, receipts, and more with the security and tracking
capabilities of premium physical document delivery services and the speed,
convenience, and personalization of e-mail.
FUTURE TUMBLEWEED IME APPLICATIONS. We plan to introduce additional
applications targeted at strategic industries, such as banking and healthcare.
We also plan to introduce additional applications to address specific business
processes, such as direct marketing and security policy management. Because the
foundation for these applications will be the Tumbleweed IME platform, we can
take advantage of its numerous integration and customization features to rapidly
develop and deploy applications optimized for specific industries or business
processes.
TUMBLEWEED IME SERVICES
Our professional services organization provides all of the services and
support necessary to build a unique online communication system based on
Tumbleweed IME, including business process analysis, implementation services,
data center design, operational planning, training, quality
assurance/accreditation, installation, deployment and ongoing support.
Our consultants work closely with customers to help plan, implement, and
manage applications built on the Tumbleweed IME platform. In addition, our
consultants help ensure that Tumbleweed IME integrates seamlessly with existing
service infrastructures. The following are examples of the professional services
we offer:
CUSTOM APPLICATION DEVELOPMENT extends the functionality of the Tumbleweed
IME solution with custom engineering. The result is a unique online
communication solution that can be deployed to employees or customers around the
world.
INTEGRATION CONSULTING provides development work required to integrate
Tumbleweed IME with existing technology infrastructure, including customer
databases, support systems, and billing systems.
DATA CENTER DESIGN AND INSTALLATION assists customers in designing solutions
based on Tumbleweed IME, including determining hardware requirements, backup
processes and failure systems, and physically implementing our solution in the
customer's data center.
TECHNICAL TRAINING AND SUPPORT provides the customer with formal training in
the administration and operation of the Tumbleweed IME system, and use of the
Tumbleweed IME application programming interfaces. Our professional services
organization also provides ongoing support of the customer's data center.
CUSTOMERS AND MARKETS
Our customers are businesses for which Tumbleweed IME has created new
opportunities to bring existing communications and business processes online.
These customers fall into two broad categories. Service providers use Tumbleweed
IME to provide secure, outsourced, online communications services to
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their business customers. Examples of service providers include United Parcel
Service, Nippon Telegraph & Telephone Corporation, and Pitney Bowes. Enterprise
customers utilize Tumbleweed IME to provide secure online communications
services originating within their own enterprise to employees, suppliers, and
customers. Examples of enterprise customers include the Chase Manhattan Bank,
American Express Travel Related Services, Inc., Datek Online Holdings Corp., and
the European Union--Joint Research Council.
Service providers and enterprise customers share many common attributes with
respect to software requirements, the professional services necessary to
integrate and implement a solution, and the potential for transaction-based fees
paid based on usage of Tumbleweed IME. While both service providers and
enterprise customers are using Tumbleweed IME to provide secure online
communications services outside the boundaries of their enterprise, the
principal distinction between the two groups is market focus. Service providers
offer the service on a fee-for-use basis, while enterprise customers typically
provide the improved communications service in order to gain business advantage
through improved cost, speed, and/or interactivity.
CUSTOMER PROFILES
The following examples illustrate how customers are using Tumbleweed IME to
bring their existing communications and business processes online:
U.S. POSTAL SERVICE/INTERNATIONAL POST CORPORATION TECHNOLOGY, S.C.
The International Post Corporation Technology, S.C. is a cooperative
organization of twenty-one international postal administrations, with an
enormous customer base spanning numerous countries. Following a year-long pilot
program, the International Post Corporation Technology, S.C., the U.S. Postal
Service, Canada Post and France's La Poste signed an agreement to use Tumbleweed
IME under the label PostECS as the standard for secure online document delivery.
Tumbleweed IME's architecture and server application programming interfaces will
enable the member organizations of the International Post Corporation
Technology, S.C., including the U.S. Postal Service, Canada Post and France's La
Poste, to develop customized applications.
UNITED PARCEL SERVICE
United Parcel Service is the world's largest express carrier and largest
package delivery company, serving more than 200 countries and territories around
the world. United Parcel Service's Courier service, part of its Document
Exchange suite, is a production-level service powered by Tumbleweed IME that
allows United Parcel Service customers to deliver documents online. Current
pricing for document exchange ranges from $0.60 to $2.50 per transmission,
significantly lower than the price typically paid for overnight express document
shipments, which ranges from $6.00 to $36.75. Tumbleweed IME allows United
Parcel Service's Document Exchange Suite to provide its users with specific
features, including broad tracking capabilities and varying levels of security.
Tumbleweed IME's browser-based approach and open architecture broaden the
potential market that can be served by the United Parcel Service's online
document delivery service because end-users are not required to install any
additional software to utilize Tumbleweed IME.
EUROPEAN UNION--JOINT RESEARCH COUNCIL
The European Union's Joint Research Council is responsible for organizing
procedures for authorization, surveillance and, where appropriate, withdrawal of
human and veterinary pharmaceutical products for the entire European Union, and
coordinates the activities of more than 2,500 scientists and researchers across
Europe for the drug approval process. The Joint Research Council uses Tumbleweed
IME as a mechanism for enabling online information distribution in this
decentralized approval process. Tumbleweed IME is used by the Joint Research
Council to provide complete information security, authenticate participants, and
support a wide range of client systems. The Joint Research Council is also
investigating
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Tumbleweed IME as a platform for broad distribution of Joint Research Council
reports and rulings, as well as a possible archival platform for long-term
research projects.
PITNEY BOWES
Pitney Bowes, Inc. is a global provider of informed mail and messaging
management solutions, providing a range of systems and services to its customers
for the creation, distribution and storage of documents in both paper and
digital form. Pitney Bowes' iSend service, powered by Tumbleweed IME, provides
for the transmission of confidential, high-value documents online. Businesses
can use iSend for any of their important communications, ranging from the
electronic delivery of statements and contracts, to online bulk mail. iSend is
also a component of the mail center operation services offered by Pitney Bowes'
management services business unit to major corporations worldwide.
HIKARI TSUSHIN
Hikari Tsushin is a leading prover of value-added communication services in
Japan, including cellular telephone, virtual ISP and outsourced corporate e-mail
services under the Hitmail brand name, which has over 5,000 corporate
subscribers in the Japanese market. Hikari Tsushin has licensed Tumbleweed IME
to provide secure communication services to their customer base, as well as
integration into the Hitmail service. The integration of Tumbleweed IME with
Hitmail will allow Hikari Tsushin to differentiate and augment their outsourced
e-mail solution.
AMERICAN EXPRESS TRAVEL RELATED SERVICES
American Express is a diversified worldwide travel, financial and network
services company founded in 1850. It is a leader in charge and credit cards,
travelers checks, travel, financial planning, investment products, insurance and
international banking. American Express uses the Tumbleweed IME solution to help
meet a variety of business-to-consumer and business-to-business online
communications needs. Recently American Express introduced a new messaging
service based on Tumbleweed IME that allows American Express cardmembers to
securely ask questions and receive responses about their American Express
accounts online, rather than by telephone or by ordinary mail. The messaging
service allows customers to communicate online with American Express about items
such as their card account balances, balance transfers, card statement, specific
charges to their account, line of credit increases, and card benefits and
services. Documents sent from and delivered to the messaging service are stored
and encrypted on a secure server and transmitted using the industry standard
security protocol, Secure Sockets Layer (SSL).
DATEK ONLINE
Datek Online is the fourth largest online brokerage firm in the United
States in terms of average daily trades. Datek Online uses Tumbleweed IME to
implement electronic confirmations of its customers' stock trades. Once a Datek
Online customer executes a trade, the customer receives an e-mail with a
hyperlink that connects to a secure section of the Datek Online web site. At
this site, the customer enters his or her password to retrieve a readable and
printable trade confirmation. The customers are not required to load special
software to utilize the new service, which is configured to work with any
preinstalled web browser. Datek Online's use of the electronic trade
confirmation system reduces its costs related to printing, postage and handling.
Datek Online introduced the electronic option to its customers on October 28,
1999, and within three weeks more than 20% of its customers had elected to have
their transactions confirmed electronically.
TABLE OF CUSTOMERS
The following table describes our current customers and the markets in which
they operate. This table excludes the numerous end-user customers, such as
Hewlett-Packard, Sears, Roebuck & Co., Alston &
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Bird LLP, Morrison & Foerster LLP, the New York State Department of
Transportation, and Jackson National Insurance, that utilize Tumbleweed IME
through our service provider customers.
<TABLE>
<CAPTION>
CUSTOMER TYPE TARGET MARKET
- -------- ------------------- ----------------------
<S> <C> <C>
The Chase Manhattan Bank......................... Enterprise customer Banking
American Express Travel Related Services, Inc.... Enterprise customer Financial services
Datek Online Holdings Corp....................... Enterprise customer Brokerage
European Union-Joint Research Council............ Enterprise customer Pharmaceutical
Times Mirror Company............................. Enterprise customer Publishing
Cooley Godward LLP............................... Enterprise customer Legal
CMP Media Inc.................................... Enterprise customer Publishing
Sema Group AB.................................... Enterprise customer General purpose
Asian Securities Printing........................ Enterprise customer Financial printing
Keio University.................................. Enterprise customer Education
NASA Ames Research Center........................ Enterprise customer Aeronautics
U.S. Postal Service.............................. Service provider Certified delivery
Canada Post...................................... Service provider Certified delivery
La Poste (France)................................ Service provider Certified delivery
United Parcel Service............................ Service provider Technology/engineering
Healthcare
Telecommunications
Financial services
Nippon Telegraph and Telephone Corp.............. Service provider Printing/publishing
Technology/engineering
UPAQ Ltd......................................... Service provider Engineering
Pitney Bowes..................................... Service provider Financial services
General purpose
Hikari Tsushin, Inc.............................. Service provider General purpose
Canon Sales Co., Inc............................. Service provider Financial services
Technology/engineering
</TABLE>
Our relationship with certain customers is new and evolving. In these cases,
implementation of Tumbleweed IME is preliminary or under review, and, in any
event, the volume of transactions effected by our customers or their end-users
to date has been limited. Five customers comprised approximately 72% of our
revenue in the nine months ended September 30, 1999 and five customers comprised
approximately 91% of our revenue in 1998. In particular, sales to United Parcel
Service, the U.S. Postal Service, Canada Post and France's La Poste as member
posts of the International Post Corporation Technology, S.C., Dynalab, Inc.,
Canon Sales Co., Inc. and Nippon Telegraph and Telephone Corporation represented
30%, 28%, 15%, 9% and 9%, respectively, of our revenue in 1998. Sales to Hikari
Tsushin, the U.S. Postal Service, Canada Post and France's La Poste as member
posts of the International Post Corporation Technology, S.C., Pitney Bowes,
American Express Travel Related Services and UPAQ Ltd. accounted for 23%, 18%,
13%, 9% and 9%, respectively, of our revenue in the nine months ended
September 30, 1999. See "Risk Factors."
SALES AND MARKETING
SALES
We maintain a direct sales force that focuses on signing additional service
providers and key enterprise customers in strategic industries. Our sales force
is comprised of domestic and international sales groups. Offices in the U.S.
currently include Redwood City, California, Mount Laurel, New Jersey
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and New York, New York. We currently have international offices in Tokyo, Japan,
Reading, United Kingdom, Munich, Germany and Paris, France. Our sales force
includes field sales engineers and inside sales personnel who support the
account executives. Field sales engineers assist our account executives with
technical presentations, customer requirements analysis and initial solution
designs. Our inside sales personnel assist the account executives in managing
their customer relationships. Our sales effort is augmented by the sales forces
of our service providers.
MARKETING
Our marketing efforts are organized around three primary areas: product
marketing, product management, and marketing communications. Product marketing
identifies target markets and customer opportunities, then develops the
positioning, programs, and materials to reach customers and support sales
activities. Product marketing is also responsible for branding, corporate
identity, and the Tumbleweed website.
Product management translates customer and market requirements into product
plans and works with engineering to ensure completion. Product management also
trains salespeople on product information and competition. Marketing
communications drives overall market awareness of Tumbleweed and our products
through public relations, industry analyst relationships, product reviews,
editorial promotion, industry events and executive speaking engagements.
TECHNOLOGY
The Tumbleweed IME Platform and Tumbleweed IME Applications have been
designed using a distributed object model. This approach ensures that our
solutions are able to scale as the number of users and messages increases,
simply by adding additional servers, as well as providing enhanced reliability.
Our use of an industry standard protocol for computing using multiple central
processing units which may be distributed across discrete computing systems,
known as the common object request broker architecture, enables us to integrate
with systems from a variety of vendors. In addition, we leverage the proven
technologies of our partners, such as Oracle databases, Netscape web servers and
RSA's security toolkit, in order to provide a foundation for our products.
We have also developed a robust set of software procedures upon which
additional application-specific software functionality can be built, known as
application programming interfaces. These enable us to enhance the Tumbleweed
IME Platform and Tumbleweed IME Applications as the needs of our service
provider customers evolve. Using this set of application programming interfaces,
we can also create new Tumbleweed IME Applications, such as solutions suited to
a specific strategic industries, that run on top of the Tumbleweed IME Platform.
We have made these application programming interfaces open and available to our
customers and partners, enabling them to customize the Tumbleweed IME Platform
and Tumbleweed IME Applications to suit their individual needs.
As shown above, our Tumbleweed IME Platform is organized into three separate
tiers, each of which can run on one or more physical servers. These tiers are:
- THE GATEWAY TIER, which provides an interface between the Tumbleweed IME
Server and the Internet. The gateway tier translates outgoing messages
into the appropriate protocols for transfer over the Internet, and
translates incoming messages that use these protocols.
- THE OBJECT TIER, which contains the set of objects which implement the
core functionality of the Tumbleweed messaging platform. Each core element
of a secure communication transaction, such as a user's account or a
secure package, is represented as a unique object within the object tier.
- THE STORAGE TIER, which uses the servers' underlying data storage and file
systems, coupled with a relational database, to maintain objects when they
are not in use.
Tumbleweed IME is a data-driven application architecture. As such, the
Tumbleweed IME Server allows for the dynamic personalization of outbound
messages on a per-recipient basis. Profile attributes
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associated with individual recipients may be stored and used to populate
outbound messages with customized content. Tumbleweed IME's extensible data
model allows both profile attributes and content data to be stored in the
system.
The security options supported by Tumbleweed IME include encryption between
sender and receiver based on the secure sockets layer standard, encryption
technology developed by RSA on the server, name/ password authentication, and
encryption based on public key infrastructure. Different security options can be
applied depending on the security needs of specific applications. For
applications requiring the highest levels of security, Tumbleweed IME is fully
integrated with digital certificate and encryption technology from
industry-leading vendors such as VeriSign and RSA. These public key
infrastructure capabilities allow Tumbleweed IME to provide complete,
tamper-proof, end-to-end security for highly sensitive business-to-business and
business-to-consumer communications.
Electronic delivery applications, particularly those under regulatory
control, must provide a full range of tracking capabilities to allow for the
needs of non-repudiation and compliance reporting. Tumbleweed IME, as a
server-based application platform, provides comprehensive tracking and reporting
capabilities. These include tracking notification and receipt, recording failed
transmissions, and providing all necessary status data and statistics for the
messaging application.
We have assembled an engineering team with expertise in the following
technologies and processes:
- HYPERTEXT TRANSFER PROTOCOL--The set of standards used by computers to
transfer hypertext files, i.e. web pages, over the Internet.
- SIMPLE MAIL TRANSFER PROTOCOL--The standard protocol used for routing
e-mail messages over the Internet.
- JAVA AND C++--Computer languages that are particularly well-suited for
developing special programs, called objects, that can communicate with
each other using the Internet.
- COMMON OBJECT REQUEST BROKER ARCHITECTURE--An industry standard protocol
that allows distributed software components to interoperate with each
other. It enables objects to communicate with one another regardless of
what programming language they were written in or on what type of computer
they are running.
- DIGITAL CERTIFICATES--Digital documents, typically containing a public key
and a name, that attest to the binding of a public key to an individual or
other entity.
- PUBLIC KEY INFRASTRUCTURE--An evolving, standards-based system which
relies on digital certificates to ensure the validity of Internet
communications and transactions.
- SECURE MULTIPURPOSE INTERNET MAIL EXTENSIONS--An e-mail standard used to
format complex messages so that they can be sent securely over the
Internet.
- SECURE SOCKETS LAYER--An Internet standard which is used to encrypt data
as it is being transmitted over the Internet.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, Internet transaction taxation, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. For
example, the Federal Communications Commission could determine through one of
its ongoing proceedings that the Internet is subject to regulation in that
Internet service providers are subject
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to certain access charges or fees for carrying Internet traffic over the public
switched telephone network. The adoption of any additional laws or regulations
may decrease the growth of the Internet or other online services, which could,
in turn, decrease the demand for our products and services and increase our cost
of doing business, or otherwise have a material adverse effect on our business,
financial condition and results of operations.
Permits or licenses may be required from federal, state, local or foreign
governmental authorities to operate or to sell some products on the Internet. We
may not be able to obtain these permits or licenses. We may be required to
comply with future national and/or international legislation and statutes
regarding conducting commerce on the Internet in all or specific countries
throughout the world. It may not be possible to comply with this legislation or
these statues on a commercially reasonable basis, if at all. See "Risk
Factors--Risks Related To Our Industry--Additional Government
Regulation Relating to the Internet May Increase Our Costs of Doing Business or
Require Changes in Our Business Model; and--We May Have Liability for Internet
Content."
In addition, our products rely on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary
to achieve secure transmission of confidential information. Exports of software
products utilizing encryption technology are generally restricted by the U.S.
and various foreign governments. We have obtained approval to export Tumbleweed
IME Desktop 1.5, Tumbleweed IME Desktop 2, Tumbleweed IME Server 2 and versions
of Tumbleweed IME Desktop 3.1 and Tumbleweed IME Server 3.1. We are not
exporting other hardware, software or technology that is subject to export
control under U.S. law. However, the list of countries and products for which
exports are restricted and the related regulatory policies could be revised, and
we may not be able to obtain required government approvals. See "Risk
Factors--Risks Related To Our Industry--Our Products Are Subject to Export
Controls, and We May be Unable to Obtain Necessary Approvals."
INTELLECTUAL PROPERTY
We have filed eight utility patent applications and one design patent
application with the U.S. Patent and Trademark Office and may seek other patents
in the future. To date, a utility patent relating to our fundamental web-based
delivery method has issued, as well as a design patent relating to the user
interface of our products. We have also filed nine patent applications in
foreign jurisdictions.
We regard our patents and similar intellectual property as critical to our
success, and rely on patent law and confidentiality and/or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. We are also pursuing the registration of key trademarks and service
marks in the U.S. and internationally. Despite these precautions, it may be
possible for unauthorized third parties to copy particular portions of our
products or reverse engineer or obtain and use information that we regard as
proprietary. Some end-user license provisions protecting against unauthorized
use, copying transfer and disclosure of the licensed program may be
unenforceable under the laws of some jurisdictions and foreign countries. In
addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the U.S. Our means of protecting our
proprietary rights in the U.S. or abroad may not be adequate and competing
companies may independently develop similar technology. In particular, we are
currently engaged in litigation to enforce our intellectual property rights,
which may not be successful and in any event will result in substantial
expenditures of resources to pursue. See "Legal Proceedings."
The status of U.S. patent protection in the software industry is not well
defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents. Our patent applications may not be issued with the scope of
the claims sought by us, if at all. Our products may infringe issued patents
that relate to our products. In addition, because patent applications in the
U.S. are not publicly disclosed until the patent is issued, applications may
have been filed by third parties that relate to our software products.
Third parties could claim infringement by us with respect to current or
future products or services. We may increasingly be subject to claims of
intellectual property infringement as the number of our competitors grows and
the functionality of their products and services increasingly overlap with ours.
Any of these
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<PAGE>
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, limit use of our
services or require us to enter into royalty or license agreements. A successful
claim of product infringement against us could harm our business and prospects.
COMPETITION
Broadly speaking, Tumbleweed IME is an alternative to traditional mail and
courier delivery services, such as those offered by Federal Express Corporation,
United Parcel Service or the U.S. Postal Service, and to general purpose e-mail
applications and services. As such, we compete with these options. Ultimately,
we believe that the Internet will become the primary solution for secure online
communication services. Within this area, our direct competition comes from
other small, early stage secure online communication service providers, some of
which have products that are intended to compete directly with our products.
Examples of these companies include Differential Inc., e-Parcel, LLC,
NetDox, Inc., PostX Corporation and The docSpace Company Inc. In addition,
companies with which we do not presently directly compete may become competitors
in the future, either through the expansion of our products and services or
through their product development in the area of secure online communication
services. These companies could include America Online, Inc./Netscape
Communications Corporation, International Business Machines Corporation/Lotus
Development Corporation, Microsoft Corporation and VeriSign, Inc.
On November 4, 1999, Critical Path Inc. announced that it had entered into a
definitive agreement to acquire The docSpace Company, Inc., which may
significantly increase the competitive pressures we face.
The market for secure online communication services is new, rapidly evolving
and highly competitive. The level of competition is likely to increase as
current competitors improve their offerings and as new participants enter the
market. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and
well-financed companies. Some of our competitors may be able to enter into these
strategic or commercial relationships on more favorable terms. Additionally,
these competitors have research and development capabilities that may allow them
to develop new or improved products that may compete with product lines we
market and distribute. New technologies and the expansion of existing
technologies may increase competitive pressures on us. Furthermore, one of our
service provider customers currently offers to end-users the choice between
Tumbleweed's products and the products of one of our competitors, and other
current and future customers may also offer end-users a similar choice.
Increased competition may result in reduced operating margins as well as loss of
market share and brand recognition. We may be unable to compete successfully
against current and future competitors, and competitive pressures faced by us
could harm our business and prospects.
EMPLOYEES
As of September 30, 1999, we employed 100 people worldwide, including 31 in
engineering, 29 in sales, 18 in professional services, 9 in marketing and 13 in
corporate management and administration. Our employees are not represented by
any collective bargaining organization. We have never experienced a work
stoppage and consider our relations with our employees to be good. See "Risk
Factors Risks Related to Tumbleweed--If Tumbleweed Loses the Services of Key
Management Personnel, including Co-Founders or Key Sales Executives,
Tumbleweed's Ability to Develop Its Business and Secure Customer Relationships
Will Suffer"; and "--Risks Related to Both Tumbleweed and Worldtalk Tumbleweed
and Worldtalk May Be Unable to Recruit or Retain Qualified Personnel, Which
Could Harm Business and Product Development."
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PROPERTIES AND FACILITIES
We lease approximately 40,000 square feet for our corporate headquarters
located in Redwood City, California. Our lease is for a term of five years
commencing June 8, 1999, at an initial monthly rent of approximately $49,000
increasing to $96,000 monthly in October 1999. We also maintain domestic sales
offices in Mount Laurel, New Jersey and New York, New York and international
offices in Tokyo, Japan, Reading, United Kingdom, Munich, Germany and Paris,
France. Each of these office spaces covers approximately 3,000 square feet.
LEGAL PROCEEDINGS
On March 3, 1999, we sued The docSpace Company, Inc. alleging infringement
of our U.S. Patent No. 5,790,790. In its answer, docSpace raised counterclaims
alleging, among other things, antitrust violations and unfair competition. On
May 3, 1999, docSpace filed a summary judgement motion of noninfringement. On
May 27, 1999, the court granted Tumbleweed's request to continue docSpace's
summary judgement motion pending further discovery and indicated that docSpace's
motion would be rescheduled. On July 14, 1999, the court issued a scheduling
order stating that it would conduct a hearing on the proper interpretation of
the claims of Tumbleweed's patent on September 24, 1999, and a hearing on any
motions for summary judgement on the issue of infringement on November 1, 1999.
The court also ordered that discovery on all issues other than claim
construction and infringement would be stayed pending resolution of these
issues. The court later rescheduled the claim interpretation hearing, which
occurred on November 19, 1999. The parties are currently waiting for a ruling
from the court based on that hearing. We believe that we will prevail on the
merits of this patent infringement lawsuit and that docSpace's counterclaims are
meritless.
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SELECTED HISTORICAL FINANCIAL DATA OF TUMBLEWEED
The following selected historical financial data of Tumbleweed have been
derived from Tumbleweed's historical financial statements and should be read in
conjunction with the consolidated financial statements and the notes thereto and
Tumbleweed's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this joint proxy
statement/prospectus. The statement of operations data for the years 1994 and
1995, and the balance sheet data at December 31, 1994, 1995 and 1996, are
derived from Tumbleweed's audited financial statements that are not included in
this joint proxy statement/prospectus. Historical results are not necessarily
indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue............................................. $3,578 $818 $ 597 $ 729 $ 2,015 $ 1,580 $ 3,386
Cost of revenue..................................... 211 232 139 108 931 698 1,535
Gross profit........................................ 3,367 586 458 621 1,084 882 1,851
Operating expenses(1)............................... 560 609 1,679 5,477 7,823 5,907 13,255
Operating income (loss)............................. 2,807 (23) (1,221) (4,856) (6,739) (5,025) (11,404)
Other income (expense), net......................... (43) 7 41 165 149 155 518
Income (loss) before provision for taxes............ 2,764 (16) (1,180) (4,691) (6,590) (4,870) (10,886)
Net income (loss)................................... $2,764 $(16) $(1,180) $(4,691) $(6,590) $(4,870) $(11,022)
Net income (loss) per share- basic and diluted...... $ (0.33) $ (1.41) $ (1.74) $ (1.30) $ (1.39)
Shares used in calculating basic and diluted
earnings (loss) per share......................... 3,598 3,331 3,797 3,739 7,951
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................................. $101 $ 81 $2,670 $6,310 $ 698 $57,744
Total assets.............................................. 119 206 2,939 7,115 1,725 65,059
Long-term obligations, excluding current installments..... -- -- -- -- 369 1,404
Total stockholders' equity................................ 91 141 2,652 6,270 501 58,702
</TABLE>
- ------------------------------
(1) Includes stock compensation expense of $24,000, $246,000, $673,000, $437,000
and $2.4 million for the years ended December 31, 1996, 1997, and 1998 and
the nine months ended September 30, 1998 and 1999, respectively.
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TUMBLEWEED MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table indicates information regarding the executive officers,
directors, and key employees of Tumbleweed with their ages as of November 30,
1999:
<TABLE>
<CAPTION>
NAME TITLE AGE
- ---- ----- --------
<S> <C> <C>
Jeffrey C. Smith.................. Founder, Chairman, President and 32
Chief Executive Officer
Donald N. Taylor.................. Vice President--International 45
Sales
Donald R. Gammon.................. Vice President--North American 53
Sales
Jean-Christophe D. Bandini........ Founder and Chief Technical 35
Officer
Shomit A. Ghose................... Senior Vice President--Operations 37
Kerry S. Champion................. Senior Vice President--Product 36
Development
Joseph C. Consul.................. Vice President--Finance and Chief 39
Financial Officer
Shinji Eura....................... General Manager--Tumbleweed 63
Software, K.K.
Robert A. Krauss.................. Vice President--Business 36
Development
Mark R. Pastore................... Vice President--Corporate 32
Development
Michael J. Earhart................ Vice President--Corporate 34
Marketing
Bernard J. Cassidy................ General Counsel and Secretary 45
Pehong Chen....................... Director 41
Timothy C. Draper................. Director 40
Eric J. Hautemont................. Director 34
David F. Marquardt................ Director 50
Standish H. O'Grady............... Director 39
</TABLE>
JEFFREY C. SMITH, President and Chief Executive Officer and Chairman of the
Board of Directors, is responsible for strategic planning and business
development. Before founding Tumbleweed in June 1993, Mr. Smith held various
senior positions in research and development with the following firms: Frame
Technology from January 1991 to June 1993; Aeon Corp. from January 1990 to
January 1991; Hewlett Packard from June 1988 to June 1989; and IBM Scientific
Research Center in Palo Alto from June 1987 to June 1988. Mr. Smith served as a
lecturer in Software Engineering at Stanford University in 1988 and 1989.
Mr. Smith holds a B.S. in Computer Science from Stanford University.
DONALD N. TAYLOR, Vice President--International Sales, is responsible for
Tumbleweed's international sales organization, including our sales teams in
Europe and Japan. Before joining Tumbleweed in January 1999, Mr. Taylor gained
extensive experience in international marketing, sales, and operations, through
a number of senior executive positions at the following firms: Prism Solutions
from August 1995 to October 1998; Oracle from January 1994 to July 1995; Sun
Microsystems from November 1991 to December 1993; Netwise from October 1989 to
September 1991; and Ingres from January 1987 to August 1989. Mr. Taylor holds a
B.A. in History from Williams College.
DONALD R. GAMMON, Vice President--North American Sales, is responsible for
revenue and customer relationships in North America. Before joining Tumbleweed
in February 1999, Mr. Gammon served as Executive Vice President of PostX
Corporation from May 1997 to December 1998. He has also held senior management
positions at the following firms: Interlink Computer Sciences from July 1994 to
May 1997;
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Interactive Systems from November 1987 to April 1999; Inference Corporation from
December 1984 to October 1987; and Metier Management Systems from July 1981 to
November 1984. Mr. Gammon holds a B.S. in Management/Marketing from Oklahoma
State University.
JEAN-CHRISTOPHE D. BANDINI, Chief Technical Officer, serves as Tumbleweed's
primary technical architect and oversees product development. Before founding
Tumbleweed in 1993, Mr. Bandini was a Senior Software Engineer at Frame
Technology from March 1991 to January 1993. Mr. Bandini's industry experience
also includes engineering positions at Oracle from August 1989 to February 1991
and at IBM from March 1986 to October 1986. Mr. Bandini holds an Engineering
Degree from Ecole Centrale Paris, and an M.S. in Computer Science from Stanford
University.
SHOMIT A. GHOSE, Senior Vice President--Operations, is responsible for
applications development, consulting services, marketing and company alliances.
Before joining Tumbleweed in November 1998, Mr. Ghose served as Vice President
of Engineering and Marketing at Caresoft, Inc. from March 1998 through November
1998 and as Vice President of Marketing at Sky Stream Corp. from October 1997
through February 1998. Mr. Ghose served as Vice President of Worldwide
Consulting at BroadVision, Inc. from June 1995 through October 1997 and as
Senior Director, Business Development, at nCUBE from April 1990 through June
1995. Mr. Ghose was an engineer at Sun Microsystems, Inc., from January 1986 to
January 1989 and at Metaphor Computer Systems, a company later acquired by IBM,
from February 1983 to January 1986. Mr. Ghose holds a B.S. in Computer Science
from the University of California at Berkeley.
KERRY S. CHAMPION, Senior Vice President--Product Development, is
responsible for all aspects of engineering, including development, quality
assurance, product management, documentation and information systems. Before
joining Tumbleweed in February 1998, Mr. Champion served as Director of
Engineering at Zentek Technology from January 1997 to December 1997 and served
as a Senior Director of Engineering at BroadVision, Inc. from September 1995 to
October 1996. Mr. Champion was one of the initial members of the Gain Technology
engineering team from June 1989 to September 1995. Mr. Champion holds a B.S. in
Business Administration, with a concentration in Quantitative Methods, from San
Francisco State University.
JOSEPH C. CONSUL, Vice President--Finance and Chief Financial Officer, is
responsible for finance, administration, legal and human resources at
Tumbleweed. Before joining Tumbleweed in June 1997, Mr. Consul was Vice
President, Operations for Fractal Design Corporation from May 1996 to May 1997.
From November 1991 to May 1996, Mr. Consul served as Vice President, Finance and
Administration, CFO for Ray Dream, Inc. Mr. Consul has also held senior
financial management positions at XA Systems Corporation from December 1989 to
November 1991 and at Adobe Systems Corporation from February 1987 to November
1989. Mr. Consul received his M.B.A. from the University of Southern California,
his B.S. from San Jose State University and is a licensed C.P.A.
SHINJI EURA, General Manager--Tumbleweed Software, K.K., is responsible for
the general management of our Japanese subsidiary. Before joining Tumbleweed in
August 1998, Mr. Eura worked from July 1994 to August 1998 at DynaLab Japan Co.,
where he most recently served as a Director of Business Development. From April
1993 to June 1994, Mr. Eura served as a General Manager at I.S.T Co. From April
1991 to March 1993, Mr. Eura served as President of System Bank Corporation.
From March 1990 to March 1991, Mr. Eura served as Executive Managing Director of
NIHON UNISYS. Mr. Eura holds a B.S. in Statistics from the Tokyo College of
Science.
ROBERT A. KRAUSS, Vice President--Business Development, is responsible for
building partnerships with organizations interested in providing Tumbleweed IME
as a service offering. Before joining Tumbleweed in March 1997, Mr. Krauss
served in various positions at Novell, Inc., ultimately as Director of Marketing
from July 1994 to March 1997 and Director of North American Sales at
SoftSolutions from September 1991 to July 1994. Mr. Krauss received a B.S. in
Business Administration from LaSalle College in Philadelphia, Pennsylvania.
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MARK R. PASTORE, Vice President--Corporate Development, is responsible for
strategic technology and marketing and sales alliances. Over the course of
Mr. Pastore's tenure at Tumbleweed, he has been responsible for finance and
operations, business development, and strategic planning and alliances. Before
joining Tumbleweed in September 1993, Mr. Pastore held various strategic
marketing and finance positions at Sun Microsystems, Inc. from March 1991 to
August 1993. Mr. Pastore holds a B.S. in Values, Technology, Science, and
Society from Stanford University.
MICHAEL J. EARHART, Vice President--Corporate Marketing, is responsible for
all aspects of marketing, including strategic planning, positioning, industry
relations and demand creation. Before joining Tumbleweed in June 1998,
Mr. Earhart served as Director of Marketing at Fabrik Communications from July
1996 to June 1998. He has also served as Business Development Director for
Server Technologies at Oracle from February 1995 to July 1996, and held various
management and strategic marketing positions at Hewlett-Packard from 1987 to
1995. Mr. Earhart holds a B.A. in Economics from the University of California at
Santa Barbara.
BERNARD J. CASSIDY, General Counsel and Secretary, is responsible for the
corporate and legal affairs of Tumbleweed. Before joining Tumbleweed in May
1999, Mr. Cassidy was in private practice at Wilson Sonsini Goodrich & Rosati
from August 1992 to May 1999, and at Skadden, Arps, Slate Meagher & Flom LLP
from September 1989 to July 1992. Mr. Cassidy holds a B.A. in Philosophy from
Loyola University, an M.A. in Philosophy from the University of Toronto and a
J.D. from Harvard Law School.
PEHONG CHEN has been a Director of Tumbleweed since December 1999. Dr. Chen
has been the Chairman of the Board, Chief Executive Officer, and President of
Broadvision, Inc. since its incorporation in May 1993. From 1992 to 1993, Dr.
Chen served as the Vice President of Multimedia Technology at Sybase, a supplier
of client-server software products. Dr. Chen founded and, from 1989 to 1992,
served as President of Gain Technology, a provider of multimedia applications
development systems, which was acquired by Sybase. He received a B.S. in
Computer Science from National Taiwan University, an M.S. in Computer Science
from Indiana University and a Ph.D. in Computer Science from the University of
California at Berkeley.
TIMOTHY C. DRAPER has been a Director of Tumbleweed since August 1996.
Mr. Draper is the Founder and Managing Director of Draper Fisher Jurvetson,
formed in 1985. He currently serves on the boards of directors of PLX
Technology, GoTo.com, and various private companies. Mr. Draper holds a B.S. in
Electrical Engineering from Stanford University and an M.B.A. from Harvard
Business School.
ERIC J. HAUTEMONT has been a Director of Tumbleweed since October 1996.
Mr. Hautemont is Managing Director of Ridge Ventures, a high technology venture
fund dedicated to seed and early stage companies. Before starting Ridge Ventures
in June 1998, Mr. Hautemont served as President of Fractal Design Corporation
from June 1996 to January 1997. Before Fractal, Mr. Hautemont was co-founder,
chairman and CEO of Ray Dream, Inc. from December 1989 to June 1996. He
currently serves on the board of directors of Xenote Corporation. Mr. Hautemont
holds a M.Sc. in Computer Science and Applied Mathematics from Enseeiht,
University of Toulouse, France.
DAVID F. MARQUARDT has been a Director of Tumbleweed since August 1997.
Mr. Marquardt is a founding General Partner of August Capital, L.P., formed in
1995, and has been a General Partner of various Technology Venture Investors
entities, which are private venture capital limited partnerships, since August
1980. Mr. Marquardt is a director of Microsoft Corporation, Netopia, Inc.,
iScansoft and various privately held companies. Mr. Marquardt received a B.S. in
Mechanical Engineering from Columbia University and an M.B.A. from Stanford
Graduate School of Business.
STANDISH H. O'GRADY has been a Director of Tumbleweed since August 1997.
Mr. O'Grady has been a Managing Director of H&Q Venture Associates, LLC, a
venture capital firm, since its inception in July 1998. He previously served in
various positions with Hambrecht & Quist Group's venture capital department
since 1986, including Managing Director from 1994 to 1998. Earlier in his
career, Mr. O'Grady was a
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process engineer with Intel Corporation. Mr. O'Grady is currently a director of
various privately held companies. Mr. O'Grady holds a B.S.E. degree in Chemical
Engineering from Princeton University and an M.B.A. from the Amos Tuck School of
Business Administration at Dartmouth College.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, before the
consummation of the offering, three of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and two will be elected
to three-year terms. After that time, directors will be elected for three-year
terms. Jeffrey C. Smith has been designated a Class I director whose term
expires at the 2000 annual meeting of stockholders. Eric J. Hautemont and
Timothy C. Draper have been designated Class II directors whose term expires at
the 2001 annual meeting of stockholders. David F. Marquardt and Standish H.
O'Grady have been designated Class III directors whose term expires at the 2002
annual meeting of stockholders.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, including the selection of our independent auditors, the scope of
annual audits, fees to be paid to our independent auditors and the performance
of our independent auditors. The audit committee consists of Messrs. Draper and
O'Grady. The compensation committee reviews and recommends to the board of
directors the salaries, benefits and stock option grants for all employees,
consultants, directors and other individuals compensated by us. The compensation
committee also administers our stock option and other employee benefit plans.
The compensation committee consists of Messrs. Hautemont and Marquardt.
DIRECTOR COMPENSATION
We reimburse our non-employee directors for all out-of-pocket expenses
incurred in the performance of their duties as directors of Tumbleweed. We
currently do not pay fees to our directors for attendance at meetings or for
their services as members of the board of directors. Under our 1993 stock option
plan, directors are eligible to receive stock option grants.
On October 15, 1996 and September 15, 1998, the board of directors granted
options to purchase an aggregate of 18,000 and 42,000, respectively, shares of
common stock to Mr. Hautemont at an exercise price per share of $0.50. On
May 27, 1999, the board of directors granted an option to purchase an aggregate
of 60,000 shares of common stock to each continuing director at an exercise
price per share of $12.00.
Each non-employee director elected to the board of directors for the first
time following this offering will receive upon this election an initial grant of
options to purchase 15,000 shares of common stock at fair market value on the
date of grant as well as an annual grant of options to purchase 5,000 shares for
each year during the director's term. All of the foregoing options will have a
five-year term and will vest immediately. The foregoing award of options will be
granted automatically under the 1999 stock incentive plan.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee of Tumbleweed serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee. See "--Certain Relationships and Related Transactions"
for a description of transactions between Tumbleweed and entities affiliated
with members of the compensation committee.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table indicates information concerning compensation of our
Chief Executive Officer and our four most highly compensated executive officers
other than the Chief Executive Officer whose salary and bonus exceeded $100,000
for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
OPTIONS(#)
ANNUAL COMPENSATION LONG-TERM
------------------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS
- --------------------------- -------- --------- -------- ------------
<S> <C> <C> <C> <C>
Jeffrey C. Smith....................................... 1998 115,000 -- --
Founder, Chairman, President and Chief Executive
Officer
Joseph C. Consul....................................... 1998 130,333 12,100 147,000
Vice President--Finance & Chief Financial Officer
Kerry S. Champion...................................... 1998 104,621 11,825 230,000
Vice President--Engineering
Mark R. Pastore........................................ 1998 123,317 5,250 294,000
Vice President--Corporate Development
Randy A. Atherton(1)................................... 1998 185,728 -- 75,000(1)
Vice President--Sales
</TABLE>
- ------------------------
(1) Mr. Atherton resigned on March 31, 1999. This number excludes unvested
shares that expired upon his resignation.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1998 to
the named executive officers.
In the fiscal year ended December 31, 1998, we granted options to purchase
up to an aggregate of 1,320,250 shares to employees, directors and consultants.
All of these options were granted under our 1993 stock option plan at exercise
prices equal to the fair market value of our common stock on the date of grant,
as determined in good faith by the board of directors. All options have a term
of ten years. All option shares vest over four years, with 25% of the option
shares vesting one year after the option grant date, and the remaining option
shares vesting ratably each month for the next 36 months.
The potential realizable values are based on an assumption that the price of
our common stock will appreciate at the compounded annual rate shown from the
date of grant until the end of the option term. These values do not take into
account amounts required to be paid as income taxes under the Internal Revenue
Code and any applicable state laws or option provisions providing for
termination of an option following termination of employment,
non-transferability or vesting. These amounts are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth of the shares of our common
stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTION EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- --------------------------------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Smith................. -- -- -- -- --
Joseph C. Consul................. 25,000 1.9% $ 0.50 3/01/2008 $ 20,361 $ 34,422
12,000 0.9 0.50 9/01/2008 9,773 15,562
Kerry S. Champion................ 180,000 13.6 0.50 3/16/2008 146,601 233,437
50,000 3.8 0.50 9/01/2008 40,722 64,844
Mark R. Pastore.................. 20,000 1.5 0.50 9/01/2007 16,289 25,937
15,000 1.1 0.50 3/01/2008 12,217 19,453
10,000 0.8 0.50 9/05/2008 8,144 12,969
Randy A. Atherton................ 75,000(1) 5.7 0.50 6/29/1999 61,084 97,265
</TABLE>
- ------------------------
(1) Mr. Atherton resigned on March 31, 1999. This number excludes unvested
shares that expired upon his resignation.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table describes for the named executive officers the
exercisable and unexercisable options held by them as of December 31, 1998. No
options were exercised by the named executive officers during the fiscal year
ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
-------------------------- IN-THE-MONEY OPTIONS
--------------------------
OPTIONS HELD AT
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey C. Smith.......................................... -- -- -- --
Joseph C. Consul.......................................... 41,250 105,750 -- --
Kerry S. Champion......................................... -- 230,000 -- --
Mark R. Pastore........................................... 244,625 49,375 25,000 --
Randy A. Atherton......................................... -- 200,000 -- --
</TABLE>
The "Value of Unexercised In-the-Money Options at Fiscal Year End" is based
on a value of $0.50 per share, the fair market value of our common stock as of
December 31, 1998, as determined by the board of directors, less the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1993 stock option plan.
1993 STOCK OPTION PLAN
The 1993 stock option plan was adopted by our board of directors on
September 30, 1993, and approved by our stockholders on the same date for the
benefit of our officers, directors and consultants. This plan has been amended,
most recently on August 3, 1999 to approve an additional 150,000 shares of
common stock for issuance under this plan, and this amendment was concurrently
approved by our stockholders. This plan provides for the grant of incentive
stock options and nonstatutory stock options. An aggregate of 3,768,500 shares
of common stock is reserved for issuance under this plan. As of August 3, 1999,
we had granted options to purchase an aggregate of 3,747,016 shares of common
stock under this plan. We will not be granting options under this plan following
the offering.
In the event of certain mergers or consolidations of Tumbleweed, outstanding
options will be assumed or similar options substituted. In the event outstanding
options are not assumed or substituted for, these options will terminate if not
exercised before the event. In the event of a dissolution or liquidation of
Tumbleweed, outstanding options will terminate if not exercised before these
events.
1999 OMNIBUS STOCK INCENTIVE PLAN
The 1999 omnibus stock incentive plan was adopted by our board of directors
on May 27, 1999, and approved by our stockholders on June 25, 1999 for the
benefit of the officers, directors, key employees, advisors and consultants. An
aggregate of 4,381,500 shares of common stock is reserved for issuance under the
plan, which provides for the issuance of stock-based incentive awards, including
stock options, stock appreciation rights, limited stock appreciation rights,
restricted stock, deferred stock, and performance shares. An award may consist
of one arrangement or benefit or two or more of them in tandem or in the
alternative. Under this plan, awards covering no more than 80% of the shares
reserved for issuance under the plan may be granted to any participant in any
one year.
This plan will initially be administered by the compensation committee,
although it may be administered by either our board of directors or any
committee of our board of directors, which group is sometimes referred to as the
plan administrator. The plan administrator may interpret this plan and may
prescribe, amend and rescind rules and make all other determinations necessary
or desirable for the administration of this plan. This plan permits the plan
administrator to select the officers, directors, key
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<PAGE>
employees, advisors and consultants who will receive awards and generally to
determine the terms and conditions of those awards.
We may issue two types of stock options under this plan: incentive stock
options, which are intended to qualify under the Internal Revenue Code of 1986,
as amended, and non-qualified stock options. The option price of each incentive
stock option granted under this plan must be at least equal to the fair market
value of a share of common stock on the date the incentive stock option is
granted.
Stock appreciation rights and limited stock appreciation rights may be
granted under this plan either alone or in conjunction with all or part of any
stock option granted under this plan. A stock appreciation right granted under
this plan entitles its holder to receive, at the time of exercise, an amount per
share equal to the excess of the fair market value of a share of common stock at
the date of exercise over a specified price fixed by the plan administrator. A
limited stock appreciation right granted under this plan entitles its holder to
receive, at the time of exercise, an amount per share equal to the excess of the
change in control price of a share of common stock over a specified price fixed
by the plan administrator. A limited stock appreciation right may only be
exercised within the 30-day period following a change in control.
Restricted stock, deferred stock and performance shares may be granted under
this plan. The plan administrator will determine the purchase price, performance
period and performance goals, if any, with respect to the grant of restricted
stock, deferred stock and performance shares. Participants with restricted stock
and preferred shares generally have all of the rights of a stockholder. During
the deferral period, the deferred stock units may be credited with dividend
equivalent rights, subject to the terms and conditions imposed by the plan
administrator. If the performance goals and other restrictions are not attained,
the participant will forfeit his or her shares of restricted stock, deferred
stock and/or performance shares.
In the event of a merger, consolidation, reorganization, recapitalization,
stock dividend or other change in corporate structure affecting the number of
issued shares of common stock, the plan administrator may make adjustments to
the terms of the plan. In particular, the plan administrator may make an
equitable substitution or proportionate adjustment in the number and type of
shares authorized by this plan, the number and type of shares covered by, or
with respect to which payments are measured under, the plan outstanding awards
and the exercise prices. In addition, the plan administrator, in its discretion,
may terminate all awards with payment of cash or in-kind consideration.
The terms of this plan provide that the plan administrator may amend,
suspend or terminate this plan at any time, provided, however, that some
amendments require approval of our stockholders. Further, no action may be taken
which adversely affects any rights under outstanding awards without the holder's
consent.
Each non-employee director elected to the board of directors for the first
time following this offering will receive upon this election an initial grant of
options to purchase 15,000 shares of common stock at fair market value on the
date of grant. These non-employee directors will also receive an annual grant of
options to purchase 5,000 shares for each year during the director's term. All
of the foregoing options will have a five-year term and will vest immediately.
The foregoing award of options will be granted automatically under this plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our 1999 employee stock purchase plan, which
was approved by our board of directors on May 27, 1999 and approved by our
stockholders on June 25, 1999, which allows eligible employees to purchase our
common stock at a discount from fair market value. A total of 500,000 shares of
common stock has been reserved for issuance under this plan for each fiscal year
occurring during the term of the plan.
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<PAGE>
This plan will be administered by our board of directors, or a specifically
designated committee of the board of directors, which group is sometimes
referred to as the plan administrator. The plan administrator may interpret the
plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of the plan,
subject to the provisions of the plan.
This plan contains offering periods that commence on the first trading day
on or after May 15 and November 15 of each year and end on the last trading day
before the commencement of the next offering period. The first offering period
under the plan will commence upon the completion of this offering and end on the
trading day on or before May 14, 2000.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, an employee may not be granted the right
to purchase stock under this plan if the employee:
- immediately after the grant would own stock possessing 5% or more of the
total combined voting power or value of all classes of our capital stock;
or
- holds rights to purchase stock under any of our employee stock purchase
plans that together accrue at a rate which exceeds $25,000 worth of stock
for each calendar year.
This plan permits each employee to purchase common stock through payroll
deductions of up to 15% of the employee's "compensation." Compensation is
defined as the employee's base salary, exclusive of any bonus, fee, overtime
pay, severance pay, expenses or other special emolument or any credit or benefit
under any of our employee plans. The maximum number of shares an employee may
purchase during a single offering period is 2,500 shares.
Amounts deducted and accumulated by the employee are used to purchase shares
of common stock at the end of each offering period. The price of the common
stock offered under this plan is an amount equal to 85% of the lower of the fair
market value of the common stock at the beginning or at the end of each offering
period. Employees may end their participation in this plan at any time during an
offering period. In that event, any amounts withheld through payroll deductions
and not otherwise used to purchase shares will be returned to them.
Participation ends automatically upon termination of employment with us.
Rights granted under this plan are not transferable by an employee other
than by will or the laws of descent and distribution. This plan provides that,
in the event of a merger, consolidation, reorganization, recapitalization, stock
dividend or other change in corporate structure affecting the number of issued
shares of our common stock, the plan administrator will conclusively determine
the appropriate equitable adjustments. This plan will terminate in 2009. Our
board of directors has the authority to amend or terminate this plan, except
that no amendment or termination may adversely affect any outstanding rights
under this plan.
EMPLOYMENT AGREEMENTS
Except as described below, we have not entered into employment agreements
with our named executive officers, and their employment may be terminated at any
time at the discretion of our board of directors.
Effective January 7, 1999, we entered into an employment agreement with
Donald Taylor. The agreement provides for a base salary of $185,000 per year,
plus a bonus dependent upon the attainment of specified sales targets. The
minimum guaranteed bonus is $6,000 for each of the first six months of
employment. In addition, Mr. Taylor was granted options to purchase 140,000
shares of common stock. Mr. Taylor's employment is terminable without cause on
six months prior written notice.
The option agreements of Joseph Consul, Donald Gammon, Donald Taylor,
Bernard Cassidy, Shomit Ghose and Kerry Champion provide for the acceleration of
a portion of their stock options upon the occurrence of specified changes in
control of Tumbleweed.
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware law; or
- for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation and bylaws further provide for the
indemnification of our directors and officers to the fullest extent permitted by
Section 145 of the Delaware law, including circumstances in which
indemnification is otherwise discretionary. Indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of Tumbleweed under the foregoing provisions, or otherwise.
Tumbleweed has been advised that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our charter and
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any of these people in any action or proceeding arising out
of his or her services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified people as directors and executive officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an immediate
family member of any of the foregoing, had or will have a direct or indirect
interest other than:
- compensation arrangements, which are described where required under
"Tumbleweed Management"; and
- the transactions described below.
SERIES C PREFERRED STOCK FINANCING ROUND. In February and May 1999, we sold
shares of Series C preferred stock, at a purchase price of $3.58 per share, to
the following investors, among others:
- 3,914,989 shares of Series C preferred stock to Hikari Tsushin, Inc.;
- 1,118,569 shares of Series C preferred stock to United Parcel Service
General Services Co.;
- 165,093 shares of Series C preferred stock to August Capital, L.P.;
- 154,351 shares of Series C preferred stock to Draper Fisher Associates
Fund III, or to entities affiliated with it; and
- 112,159 shares of Series C preferred stock to Adobe Ventures II, L.P.
HIKARI LICENSE AGREEMENT. On March 31, 1999, we entered into a one-year
license and distribution agreement with Hikari Tsushin, Inc. During the year
ended December 31, 1999, Tumbleweed recognized approximately $[ ] of
revenue associated with the perpetual license fee and distribution rights from
Hikari, less a deferral for 90 days of maintenance of approximately $[ ].
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<PAGE>
SALE OF INTEREST IN SUBSIDIARY. On August 31, 1999, Tumbleweed KK, a
wholly-owned Japanese subsidiary of Tumbleweed, sold 200 shares of its common
stock, representing a 50% ownership interest in Tumbleweed KK, to Hikari for
Y350,000,000 (which approximated $3.2 million as of August 31, 1999). Following
Hikari's investment, Hikari and Tumbleweed have equal board representation in
Tumbleweed KK. As a result of the equity transaction and the change in board
constituency, Tumbleweed no longer believes that it has control of Tumbleweed
KK. Consequently, beginning September 1, 1999, Tumbleweed began accounting for
its investment in Tumbleweed KK on the equity method of accounting rather than
the consolidation method. Because Tumbleweed's reconsolidation of Tumbleweed KK
resulted in its investment basis being greater than its share of the book value
of Tumbleweed KK by approximately $1.78 million, Tumbleweed recorded
$1.55 million in additional paid-in capital in the three months ended
September 30, 1999.
INVESTORS' RIGHTS AGREEMENT. Tumbleweed has entered into an investors'
rights agreement with all of the purchasers of preferred stock and its founders.
The agreement provides for information rights, board participation, and
registration rights in favor of the purchasers and founders. See "Description of
Tumbleweed Capital Stock--Registration Rights."
INDEMNITY AGREEMENTS. Tumbleweed has entered into indemnity agreements with
each of its officers and directors. See "Tumbleweed Management--Limitation of
Liability and Indemnification."
ENGAGEMENT OF LEGAL COUNSEL. Gregory C. Smith, a brother of Jeffrey C.
Smith, the President and Chief Executive Officer of Tumbleweed and Chairman of
our board of directors, is a partner of the law firm of Skadden, Arps, Slate,
Meagher & Flom LLP, which began providing legal services to Tumbleweed in
July 1998. During the year ended December 31, 1998, the total fees paid to
Skadden, Arps was $326,442.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF TUMBLEWEED
The following table indicates information as of November 30, 1999 regarding
the beneficial ownership of Tumbleweed common stock by:
- each person known to the board of directors to own beneficially 5% or more
of our common stock;
- each of our directors;
- the named executive officers; and
- all of our directors and executive officers as a group.
Information with respect to beneficial ownership has been furnished by each
director, officer or 5% or more stockholder, as the case may be. Except as
otherwise noted below, the address for each person listed on the table is c/o
Tumbleweed Communications Corp., 700 Saginaw Drive, Redwood City, California
94063. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and include shares of common
stock issuable upon the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days. Unless otherwise
indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them,
subject to applicable community property laws.
Percentage ownership calculations are based on 21,609,233 shares of
Tumbleweed common stock outstanding as of November 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF SHARES
NAME OWNED OUTSTANDING
- ---------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Hikari Tsushin, Inc......................................................... 4,314,989 19.9%
22F Ohtemachi Nomura Bldg.
2-1-1 Ohtemachi, Chiyoda-ku, Tokyo, Japan
August Capital, L.P......................................................... 2,023,459(1) 9.4
David F. Marquardt
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
Draper Fisher Entities...................................................... 1,886,695(2) 8.7
Timothy C. Draper
400 Seaport Court, Suite 250
Redwood City, California 94063
Adobe Ventures II, L.P...................................................... 1,370,971(3) 6.3
Standish H. O'Grady
One Bush Street
San Francisco, California 94104
United Parcel Service General Services Co................................... 1,118,569 5.2
55 Glenlake Parkway NE
Atlanta, Georgia 30328
Jeffrey C. Smith............................................................ 1,767,877(4) 8.2
Jean-Christophe D. Bandini.................................................. 2,018,580 9.3
Randy A. Atherton........................................................... 75,000 *
Kerry S. Champion........................................................... 100,708(5) *
Joseph C. Consul............................................................ 92,101(5) *
Mark R. Pastore............................................................. 269,162(5) 1.2
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF SHARES
NAME OWNED OUTSTANDING
- ---------------------------------------------------------------------------- ------------- ---------
<S> <C> <C>
Eric J. Hautemont........................................................... 54,991(5) *
Standish H. O'Grady......................................................... 1,850,213(6) 8.6
Executive officers and directors as a group (16 persons).................... 10,068,286(7) 46.6%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Voting and dispositive power over the shares is held by all the general
partners of August Capital, L.P. Mr. Marquardt is a General Partner at
August Capital, L.P. and as such may be deemed to share voting and
investment power with respect to these shares. However, Mr. Marquardt
disclaims beneficial ownership of all of these shares, except to the extent
of his pecuniary interest arising from his interest in August Capital, L.P.
(2) Includes 159,858 shares held by Draper Associates, L.P.; 1,621,499 shares
held by Draper Fisher Associates Fund III, and 105,338 shares held by Draper
Fisher Partners, L.L.C. Voting and dispositive power over the shares is held
by all the general partners of Draper Fisher Jurvetson. Mr. Draper is
Managing Partner at Draper Fisher Jurvetson and as such may be deemed to
share voting and investment power with respect to these shares. However,
Mr. Draper disclaims beneficial ownership of all these shares, except to the
extent of his pecuniary interest arising from his interest in these
entities.
(3) Voting and dispositive power over the shares held by Adobe Ventures II, L.P.
is held by all members of H&Q Adobe Ventures Management II, L.L.C.
Mr. O'Grady is a member of Adobe Ventures Management II, L.L.C. and may be
deemed to share voting and investment power with respect to these shares.
However, Mr. O'Grady disclaims beneficial ownership of all of these shares,
except to the extent of his pecuniary interest arising from his interest in
H&Q Adobe Ventures Management II, L.L.C.
(4) Includes 260,000 shares held by the Jeffrey C. Smith 1999 Annuity Trust.
Mr. Smith is the sole trustee of the trust.
(5) The following table indicates those people whose total number of
beneficially owned shares include shares subject to options exercisable
within 60 days of November 30, 1999:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OPTIONS
------------------------
<S> <C>
Kerry S. Champion......................................... 78,333
Joseph C. Consul.......................................... 47,375
Mark R. Pastore........................................... 16,874
Eric J. Hautemont......................................... 34,000
</TABLE>
(6) Includes 1,370,971 shares held by Adobe Ventures II, L.P. and 273,596 shares
held by H&Q Tumbleweed Investors, L.P. Voting and dispositive power over the
shares held by H&Q Tumbleweed Investors, L.P. is held by all members of H&Q
Venture Associates, L.L.C. Voting and dispositive power over the shares held
by Adobe Ventures II, L.P. is held by all members of H&Q Adobe Ventures
Management II, L.L.C. Mr. O'Grady is a member of H&Q Venture Associates,
L.L.C. and H&Q Adobe Ventures Management II, L.L.C. and may be deemed to
share voting and investment power with respect to these shares. However,
Mr. O'Grady disclaims beneficial ownership of all of these shares, except to
the extent of his pecuniary interest arising from his interest in these
entities.
(7) Includes 418,147 shares issuable upon the exercise of stock options
exercisable within 60 days of November 30, 1999.
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<PAGE>
DESCRIPTION OF TUMBLEWEED CAPITAL STOCK
We are authorized to issue 100,000,000 shares of common stock, $0.001 par
value per share, and 10,000,000 shares of preferred stock, $0.001 par value per
share. The following description summarizes information regarding our capital
stock. This information does not purport to be complete and is subject in all
respects to the applicable provisions of the Delaware General Corporation Law,
our certificate of incorporation and our bylaws.
COMMON STOCK
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors.
Holders of common stock are entitled to receive ratably the dividends, if any,
declared from time to time by the board of directors out of legally available
funds. See "Market Price and Dividend Information." Holders of common stock have
no conversion, redemption or preemptive rights to subscribe to any of
Tumbleweed's securities. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share
ratably in our assets remaining after provision for payment of liabilities to
creditors. The rights, preferences and privileges of holders of common stock are
subject to the rights of the holders of any shares of preferred stock which we
may issue in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. We cannot predict the effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of the preferred stock. However, the effects could include one or more
of the following:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action by
the stockholders.
No shares of preferred stock are outstanding, and we have no present plans
to issue any shares of preferred stock.
REGISTRATION RIGHTS
Holders of an aggregate of approximately 16,236,640 shares of common stock
and the holders of warrants to purchase 120,973 shares of common stock are
entitled to rights with respect to the registration of these shares under the
Securities Act of 1933, as amended. Under the terms of the agreements providing
registration rights, if Tumbleweed proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of this registration and are entitled to include shares of common stock
in the registration. The rights are subject to conditions and limitations, among
them the right of the underwriters of an offering subject to the registration to
limit the number of shares included in the registration. These registration
rights are not applicable to this offering. Holders of these rights may also
require Tumbleweed to file a registration statement under the Securities Act at
its expense with respect to their shares of common stock, and Tumbleweed is
required to use its best efforts to effect this registration, subject to
conditions and limitations. Furthermore, stockholders with registration rights
may require Tumbleweed to file additional registration statements on Form S-3,
subject to conditions and limitations.
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DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Generally, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
- before the date of the business combination, the transaction is approved
by the board of directors of the corporation,
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock, or
- on or after the date the business combination is approved by the board and
by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns, or within three
years, did own 15% or more of the corporation's voting stock. The existence of
this provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
TRANSFER AGENT AND REGISTRAR
Equiserve L.P. serves as transfer agent and registrar for the Tumbleweed
common stock. Its phone number is (781) 575-2000.
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WORLDTALK BUSINESS
Worldtalk is a leading provider of Internet content security and policy
management solutions. Our WorldSecure policy management platform enables
organizations to define and manage electronic mail and Web security and usage
policies, reducing the risks, costs and liabilities associated with Internet
communications. We delivered the industry's first solution for managing and
enforcing e-mail security policies in September 1997. Since then, organizations
have deployed WorldSecure solutions to ensure confidentiality of their external
electronic mail communications, to protect their intellectual property and to
prevent unwanted electronic mail messages, sometimes called spam, and viruses
from entering their computer systems. Our products include WorldSecure Server,
also known as WorldSecure/Mail, software that provides Windows NT-based
electronic mail firewall and policy management, WorldSecure Web, a Windows
NT-based content security product, WorldSecure Client, a desktop electronic mail
encryption product, and NetTalk, a Windows NT-based electronic mail and
directory solution.
We were incorporated in California in February 1992 and reincorporated in
Delaware in March 1996. Our principal executive offices are located at 5155 Old
Ironsides Drive, Santa Clara, California, 95054. Our telephone number at this
location is (408) 567-1500. Our web site is located at HTTP://WWW.WORLDTALK.COM.
Information contained in our web site is not part of this joint proxy statement/
prospectus.
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KEYHOLE
Keyhole Acquisition Corp. is a newly formed wholly-owned subsidiary of
Tumbleweed, incorporated in Delaware on November 12, 1999 for the sole purpose
of effecting the transactions contemplated by the Merger Agreement. Prior to the
consummation of the merger, Keyhole will not engage in any activity other than
activities related to the transactions contemplated by the Merger Agreement.
Keyhole's principal executive offices are located at 700 Saginaw Drive, Redwood
City, California 94063, and its telephone number is (650) 216-2000.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
Tumbleweed and Worldtalk are each incorporated under the laws of the State
of Delaware. As a result of the Merger, holders of Worldtalk common stock will
become stockholders of Tumbleweed and the rights of all such former Worldtalk
stockholders will thereafter be governed by the Amended Restated Certificate of
Incorporation of Tumbleweed, or the Tumbleweed certificate, the Tumbleweed
bylaws and Delaware law. The rights of the holders of Worldtalk common stock are
currently governed by the Worldtalk Certificate of Incorporation, as amended, or
the Worldtalk certificate, Worldtalk bylaws and Delaware law. The following
summary, which does not purport to be a complete statement of the general
differences between the rights of the stockholders of Tumbleweed and Worldtalk,
sets forth certain differences between the Tumbleweed certificate and the
Worldtalk certificate and between the Tumbleweed bylaws and the Worldtalk
bylaws. This summary is qualified in its entirety by reference to the full text
of each of those documents and Delaware law. For information as to how such
documents may be obtained, see "Where You Can Find More Information."
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Both the Worldtalk
certificate and Tumbleweed certificate provide for classified boards. Pursuant
to the Tumbleweed certificate, the Tumbleweed board of directors is divided into
three classes of directors, with each class consisting of one-third of the total
number of directors, with any remaining directors included in such group or
groups as the board of directors designates. One class of directors is elected
each year for a three-year term.
Classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Tumbleweed board of directors. At
least two annual meetings of stockholders, instead of one, would generally be
required to effect a change in the majority of the Tumbleweed board of
directors. A delay like this may help ensure that Tumbleweed's directors, if
confronted by a third party attempting to force a proxy contest, a tender or
exchange offer or other extraordinary corporate transaction, have sufficient
time to review the proposal, as well as any available alternatives to the
proposal, and to act in what they believe to be the best interests of the
stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Tumbleweed, even though such a transaction could
be beneficial to Tumbleweed and its stockholders. The classification of the
Tumbleweed board of directors might also increase the likelihood that incumbent
directors will retain their positions.
NUMBER OF DIRECTORS
Under Delaware law, unless a corporation's certificate of incorporation
specifies the number of directors, such number shall be fixed by, or in the
manner provided in, its bylaws. If a corporation's certificate of incorporation
expressly authorizes its board of directors to amend its bylaws, its board of
directors may change the authorized number of directors by an amendment to the
corporation's bylaws, if fixed therein, or in such manner as is provided
therein. If the certificate of incorporation specifies the number of directors,
the number of directors can only be changed by amending the certificate of
incorporation.
The Tumbleweed certificate provides that the number of directors will be
fixed by the Tumbleweed board of directors, but in no event will be less than
one nor more than ten. At the effective time, the authorized number of directors
for the Tumbleweed board of directors will be six. See "The Merger
Agreement--Corporate Organization and Governance."
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The Worldtalk certificate provides that the board of directors shall consist
of six members until otherwise changed by the Worldtalk board of directors. The
number of directors on the Worldtalk board of directors is currently six.
REMOVAL OF DIRECTORS; FILLING VACANCIES
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Tumbleweed certificate provides that subject to
the rights, if any, of the holders of shares of preferred stock and provided
that Tumbleweed is not subject to Section 2115 of the California General
Corporation Law, or the CGCL, any or all of the directors may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least 66 2/3% of the voting power of Tumbleweed's outstanding
capital stock entitled to vote generally in the election of directors. During
such time or times that Tumbleweed is subject to Section 2115(b) of the CGCL,
the board of directors or any individual director may be removed from office at
any time without cause by the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote on such removal; provided,
however, that no individual director may be removed when the votes cast against
such director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively (without regard to
whether shares may otherwise be voted cumulatively) at an election which the
same total number of votes were cast and either the number of directors elected
at the most recent annual meeting of stockholders or, if greater, the number of
directors for whom removal is being sought, were then being elected. Whenever
the holders of any one or more classes or series of preferred stock issued by
Tumbleweed shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of the Tumbleweed certificate.
The Tumbleweed certificate provides that any vacancy occurring in the
Tumbleweed board of directors for any reason other than an increase in the
number of directors may be filled by a majority of the remaining members of the
Tumbleweed board of directors, even if less than a quorum, or by a sole
remaining director. Any vacancy occurring by reason of an increase in the number
of directors may only be filled by action of a majority of the Tumbleweed board
of directors provided that a quorum is present.
Under the Worldtalk certificate, any director or the entire board of
directors may be removed, but only for cause, and only by the vote of holders of
75% of the shares then entitled to vote at an election of directors. Vacancies
and newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in office,
though less than a quorum.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Under Delaware law, unless otherwise provided for in a corporation's
certificate of incorporation, any action by a corporation's stockholders must be
taken at a meeting of such stockholders, unless a consent in writing setting
forth the action so taken is signed by stockholders of the corporation having
not less than the minimum number of votes necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
The Tumbleweed certificate provides that stockholder action can be taken
only at an annual or special meeting of stockholders and not by written consent
of stockholders. The Tumbleweed bylaws provide that special meetings of
stockholders can be called only by the Chairman of the board of directors,
Tumbleweed board of directors or a committee of the Tumbleweed board of
directors. Stockholders are not permitted to call a special meeting or to
require that the Tumbleweed board of directors call a special meeting of
stockholders. As a result of the foregoing provisions, a stockholder may not
force stockholder consideration of a proposal over the opposition of the
Chairman of the board of directors and the Tumbleweed board of directors by
calling a special meeting of stockholders prior to the time the Chairman of the
board
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of directors, the Tumbleweed board of directors or a committee of the Tumbleweed
board of directors believes such consideration to be appropriate.
The Worldtalk certificate expressly prohibits written consents by
stockholders unless approved in advance or initiated by the Worldtalk board of
directors. Pursuant to the Worldtalk bylaws, special meetings of the
stockholders, for any purpose or purposes, may be called by the Chairman of the
board of directors, Chief Executive Officer, President, a majority of the
Worldtalk board of directors or by holders of 10% of the votes entitled to be
cast at such meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Tumbleweed bylaws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors, or bring other
business before a meeting of stockholders of Tumbleweed, which we refer to as
the Tumbleweed stockholder notice procedure.
The Tumbleweed stockholder notice procedure provides that only persons who
are nominated at the direction of the Tumbleweed board of directors, by any
nominating committee or person appointed by the Tumbleweed board of directors,
or by a stockholder who has given timely written notice to the Secretary of
Tumbleweed prior to the meeting at which directors are to be elected, will be
eligible for election as a director of Tumbleweed. The Tumbleweed stockholder
notice procedure provides that at an meeting only such business may be conducted
as has been brought before the meeting by or at the direction of the Tumbleweed
board of directors or by a stockholder who has given timely written notice to
the Secretary of Tumbleweed of such stockholder's intention to bring such
business before such meeting. Under the Tumbleweed stockholder notice procedure,
to be timely, notice of stockholder nominations must be received by Tumbleweed:
- in the case of an annual meeting, not less than 60 days nor more than
90 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; PROVIDED, HOWEVER, that in the event that the
annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual
meeting was made, whichever first occurs; and
- in the case of a special meeting of stockholders called for the purpose of
electing directors, not later than the close of business on the tenth day
following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.
To be timely, notice of stockholder proposals must be received by Tumbleweed
not less than 60 days or more than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in
the event that the annual meeting is called for a date that is not within
30 days before or after such anniversary date, notice by the stockholder in
order to be timely must be so received not later than the close of business on
the tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
Under the Tumbleweed stockholder notice procedure, a stockholder's notice to
Tumbleweed proposing to nominate a person for election as a director must
contain certain information, including, without limitation, the identity and
address of the proposed nominee, the class and number of shares of stock of
Tumbleweed which are beneficially owned by the proposed nominee, the principal
occupation of the proposed nominee and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee. Under the Tumbleweed
stockholder notice procedure, a stockholder's notice relating to the conduct of
business other
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than the nomination of directors must contain certain information about such
business and about the proposing stockholder, including, without limitation, a
brief description of the business the stockholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting, the name and
address of such stockholder, the class and number of shares of stock of
Tumbleweed beneficially owned by such stockholder, any material interest of such
stockholder in the business so proposed and a representation that the
stockholder intends to appear at the meeting in person or by proxy. If the
nomination or business was not brought before the meeting in accordance with the
Tumbleweed stockholder notice procedure, such person will not be eligible for
election as a director or such business will not be conducted at such meeting,
as the case may be.
By requiring advance notice of nominations by stockholders, the Tumbleweed
stockholder notice procedure affords the Tumbleweed board of directors an
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Tumbleweed board of directors, to
inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the Tumbleweed stockholder notice procedure provides a
more orderly procedure for conducting annual meetings of stockholders and, to
the extent deemed necessary or desirable by the Tumbleweed board of directors,
provides the Tumbleweed board of directors with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the Tumbleweed board
of director's position regarding action to be taken with respect to such
business, so that stockholders can better decide whether to attend the meeting
or to grant a proxy regarding the disposition of any such business.
The foregoing provisions may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Tumbleweed and its stockholders.
The Worldtalk bylaws also establish an advance notice procedure for
stockholders to make nominations of candidates for election as directors, or
bring other business before an annual meeting of stockholders of Worldtalk.
For nominations or other business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice must be
delivered to the Secretary at the principal executive offices of Worldtalk not
later than the close of business on the 60(th) day nor earlier than the close of
business on the 90(th) day prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the
annual meeting is more than 30 days before or more than 60 days afer such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90(th) day prior to such annual
meeting and not later than the close of business on the later of the 60(th) day
prior to such annual meeting or the close of business on the tenth day following
the day on which public announcement of the date of such meeting is first made
by Worldtalk.
This stockholder's notice shall set forth:
- as to each person whom the stockholder proposes to nominate for election
or reelection as a director all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act, including such person's written
consent to being named in the proxy statement as a nominee and to serving
as a director if elected;
- as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting
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such business at the meeting and any material interest in such business of
such stockholder and the beneficial owner, if any, on whose behalf the
proposal is made; and
- as to the stockholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made the name and address of
such stockholder, as they appear on Worldtalk's books, and of such
beneficial owner, and the class and number of shares of Worldtalk that are
owned beneficially and held of record by such stockholder and such
beneficial owner.
In the event that the number of directors to be elected to the board of
directors of Worldtalk is increased and there is no public announcement by
Worldtalk naming all of the nominees for director or specifying the size of the
increased board of directors at least 70 days prior to the first anniversary of
the preceding year's annual meeting, or, if the annual meeting is held more than
30 days before or 60 days after such anniversary date, at least 70 days prior to
such annual meeting, a stockholder's notice shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary not later than the close of business on
the tenth day following the day on which such public announcement is first made
by Worldtalk.
AUTHORIZED CAPITAL STOCK
Delaware law requires that a corporation's certificate of incorporation set
forth the total number of shares of all classes of stock which the corporation
has authority to issue and a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof. The authorized capital stock of Tumbleweed consists of 100,000,000
shares of Tumbleweed common stock, par value $0.001 per share and 10,000,000
shares of Tumbleweed preferred stock, par value $0.001 per share. The Worldtalk
certificate provides that Worldtalk has authority to issue 31,500,000 shares of
Worldtalk common stock, par value $0.01 per share and 6,500,000 shares of
preferred stock, par value $0.01 per share which we refer to as the Worldtalk
preferred stock.
VOTING RIGHTS
The holders of Tumbleweed common stock are entitled to one vote for each
share held on all matters and, except as otherwise provided in Tumbleweed's
certificate with respect to the Tumbleweed preferred stock, will have the
exclusive right to vote for the election of directors and for all other
purposes.
Similarly, the holders of Worldtalk common stock are entitled to one vote
for each share on all matters and, except as otherwise provided in Worldtalk's
certificate with respect to the Worldtalk preferred stock, will have the
exclusive right to vote for the election of directors and for all other
purposes.
PREFERRED STOCK
Pursuant to the Tumbleweed certificate, the Tumbleweed board of directors is
authorized to provide for the issuance of shares of Tumbleweed preferred stock,
in one or more classes or series, and to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof.
Tumbleweed believes that the ability of the Tumbleweed board of directors to
issue one or more series of Tumbleweed preferred stock provides Tumbleweed with
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs that might arise.
Although the Tumbleweed board of directors has no intention at the present
time of doing so, it could issue a series of Tumbleweed preferred stock that
could, depending on the terms of such series, impede the completion of a merger,
tender offer or other takeover attempt. The Tumbleweed board of directors will
make any determination to issue such shares based on its judgment as to the best
interests of Tumbleweed and its stockholders. The Tumbleweed board of directors,
in so acting, could issue Tumbleweed preferred stock having terms that
discourage an acquisition attempt through which an acquirer may be able to
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change the composition of the Tumbleweed board of directors, including a tender
offer or other transaction that some of Tumbleweed's stockholders might believe
to be in their best interests or in which stockholders might receive a premium
for their stock over the then current market price of such stock.
Under the Worldtalk certificate, the Worldtalk board of directors is
authorized to issue shares of Worldtalk preferred stock, in one or more classes
or series, and to fix the designations, powers, preferences, and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Delaware law allows amendment of a corporation's certificate of
incorporation if its board of directors adopts a resolution setting forth the
amendment proposed and declaring its advisability and the stockholders
thereafter approve such proposed amendment, either at a special meeting called
by the board for the purpose of approval of such amendment by the stockholders
or, if so directed by the board, at the next annual stockholders' meeting. At
any such meeting, the proposed amendment generally must be approved by a
majority of the outstanding shares entitled to vote. The holders of the
outstanding shares of a class are entitled to vote as a separate class upon a
proposed amendment, whether or not entitled to vote thereon by the certificate
of incorporation, if the amendment would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely. If any
proposed amendment would alter or change the powers, preferences or special
rights of one or more series of any class so as to affect them adversely, but
not affect the entire class, then only the shares of the series so affected by
the amendment will be considered a separate class for the purposes of a vote on
the amendment. Under Delaware law, a corporation's certificate of incorporation
also may require, for action by the board or by the holders of any class or
series of voting securities, the vote of a greater number or proportion than is
required by Delaware law and the provision of the certificate of incorporation
requiring such greater vote also provide that such provision cannot be altered,
amended or repealed except by such greater vote.
Under Delaware law, the power to adopt, amend or repeal a corporation's
by-laws resides with the stockholder entitled to vote thereon, and with the
directors of such corporation if such power is conferred upon the board of
directors by the certificate of incorporation.
The Tumbleweed certificate contains no provisions requiring a vote greater
than that specified by Delaware law to amend the Tumbleweed certificate. The
Tumbleweed certificate provides that the Tumbleweed board of directors is
expressly authorized to adopt, alter and repeal the Tumbleweed bylaws. The
affirmative vote of at least a majority of the Tumbleweed board of directors
shall be required to adopt, alter or repeal the Tumbleweed bylaws. The
Tumbleweed bylaws may also be adopted, altered and repealed by the affirmative
vote of the holders of at least 66 2/3% of the voting power of the shares
entitled to vote at an election of directors.
The Worldtalk certificate contains no provisions requiring a vote greater
than that specified by Delaware law to amend the Worldtalk certificate. The
Worldtalk bylaws provide that holders of a majority of the Worldtalk outstanding
voting stock shall have the power to make, alter or repeal the Worldtalk bylaws.
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BUSINESS COMBINATIONS
Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified therein, a corporation shall not engage in any
business combination with any interested stockholder for a three-year period
following the date that such stockholder becomes an interested stockholder
unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares held by directors who are also
officers and employee stock purchase plans in which employee participants
do not have the right to determine confidentially whether plan shares will
be tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and by the affirmative vote at an
annual or special meeting, and not by written consent, of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder.
Except as specified in Section 203 of the Delaware General Corporation Law,
an interested stockholder is defined to include any person that is the owner of
15% or more of the outstanding voting stock of the corporation or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date, and the affiliates and associates of any
such person.
Under certain circumstances, Section 203 of the Delaware General Corporation
Law may make it more difficult for a person who would be an interested
stockholder to effect various business combinations with a corporation for a
three-year period, although the corporation's certificate of incorporation or
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder.
The Tumbleweed certificate does not exclude Tumbleweed from the restrictions
imposed under Section 203 of the Delaware General Corporation Law. It is
anticipated that the provisions of Section 203 of the Delaware General
Corporation Law may encourage companies interested in acquiring Tumbleweed to
negotiate in advance with the Tumbleweed board of directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the stockholder becoming an interested stockholder.
Similarly, Worldtalk is subject to the restrictions imposed under
Section 203 of the Delaware General Corporation Law.
LIMITATION OF LIABILITY OF DIRECTORS
Delaware law permits a corporation to include a provision in its certificate
of incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for damages for a breach of the
director's fiduciary duty, subject to certain limitations. The Tumbleweed
certificate includes such a provision to the maximum extent permitted by law.
The Worldtalk certificate contains an analogous provision.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law permits a corporation to indemnify officers, directors,
employees and agents for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. Delaware law provides that a
corporation may advance expenses of defense, upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate,
and must reimburse a successful defendant for expenses, including attorneys'
fees, actually and reasonably incurred, and permits a corporation to purchase
and maintain liability insurance for its directors and officers. Delaware law
provides that no indemnification may be made for any claim, issue or matter as
to which a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses as the court deems proper.
The Tumbleweed bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of Tumbleweed, or is or was serving at the request of
Tumbleweed as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan, will be indemnified by Tumbleweed to
the full extent permitted by Delaware law if he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of Tumbleweed. The indemnification rights conferred by the Tumbleweed
bylaws are not exclusive of any other right to which persons seeking
indemnification may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Tumbleweed is authorized
to purchase and maintain (and Tumbleweed maintains) insurance on behalf of its
directors and officers.
The Worldtalk bylaws provide that each person who was or is a party or is
threatened to be a party to or is involved in any action, suit, or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or a person of whom he is the legal representative is or was a director
or officer of Worldtalk or is or was serving at the request of Worldtalk or for
its benefit as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified to the full extent permitted by Delaware law. Like the Tumbleweed
bylaws, the Worldtalk bylaws provide that the indemnification rights conferred
by the Worldtalk bylaws are not exclusive of any other right to which persons
seeking indemnification may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise. Worldtalk is authorized
to purchase and maintain, and Worldtalk maintains, insurance on behalf of its
directors and officers. See "The Merger Agreement--Indemnification and
Insurance."
Additionally, the Tumbleweed bylaws and the Worldtalk bylaws each provide
that expenses incurred by a person in defending a civil or criminal action, suit
or proceeding by reason of the fact that he or she is a director, officer
employee or agent may be paid in advance of the final disposition of such
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
such director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he or she is entitled to be indemnified by
Tumbleweed or Worldtalk, as the case may be, as authorized by Delaware law.
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MARKET PRICE AND DIVIDEND INFORMATION
Each of the Tumbleweed common stock and the Worldtalk common stock is listed
and quoted on Nasdaq. The following table sets forth the high and low trading
prices per share of each of the Tumbleweed common stock and Worldtalk common
stock as reported on Nasdaq, based on published financial sources:
<TABLE>
<CAPTION>
TUMBLEWEED WORLDTALK
COMMON STOCK COMMON STOCK
PRICES PRICES
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
First Quarter................................................... -- -- $ 10.25 $ 6.00
Second Quarter.................................................. -- -- 7.00 3.13
Third Quarter................................................... -- -- 8.13 3.38
Fourth Quarter.................................................. -- -- 8.13 3.13
1998
First Quarter................................................... -- -- 4.75 2.88
Second Quarter.................................................. -- -- 6.38 2.75
Third Quarter................................................... -- -- 5.13 1.38
Fourth Quarter.................................................. -- -- 4.00 1.63
1999
First Quarter................................................... -- -- 5.06 3.00
Second Quarter.................................................. -- -- 6.00 2.31
Third Quarter................................................... $ 30.50 $ 10.25 6.00 2.25
Fourth Quarter (through December 9, 1999)....................... 50.00 46.00 11.31 10.44
</TABLE>
On November 17, 1999, the last full trading day prior to the first public
announcement of the execution of the Merger Agreement, the reported high and low
sale prices per share and closing price per share of Tumbleweed common stock and
Worldtalk common stock on the Nasdaq were as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
--------- --------- ---------
<S> <C> <C> <C>
Tumbleweed....................................................... $ 43.13 $ 39.38 $ 39.50
Worldtalk........................................................ 8.18 7.50 8.00
</TABLE>
On [ ], the last full trading day prior to the date of this joint
proxy statement/prospectus, the reported high and low sale prices per share and
closing price per share of Tumbleweed common stock and Worldtalk common stock on
Nasdaq were as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
--------- --------- -----------
<S> <C> <C> <C>
Tumbleweed.............................................................. [] [] []
Worldtalk............................................................... [] [] []
</TABLE>
Stockholders are urged to obtain current market quotations for shares of
Tumbleweed common stock and Worldtalk common stock.
Tumbleweed declared a substantial dividend in connection with the sale of
its prior technology in March 1994. Tumbleweed presently anticipates that it
will retain any future earnings to finance the development and expansion of its
business and provide working capital. Worldtalk has never declared or paid
dividends and anticipates that it will retain any future earnings to finance the
development and expansion of its business and provide working capital. Neither
Tumbleweed nor Worldtalk anticipates paying any cash dividends on their common
stock for the foreseeable future. The terms of Tumbleweed's and Worldtalk's
existing credit facilities prohibit the payment of dividends in specified
circumstances.
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PRINCIPAL STOCKHOLDERS OF WORLDTALK
The following table sets forth information, as of November 30, 1999, known
to Worldtalk with respect to the beneficial ownership of Worldtalk common stock
by:
- each stockholder known by us to be the beneficial owner of more than 5% of
Worldtalk's common stock;
- each director;
- our former chief executive officer and our four other most highly
compensated executive officers who were serving as executive officers at
the end of the last completed fiscal year; and
- all current directors and executive officers as a group.
Applicable percentage ownership in the following table is based on
14,587,777 shares of Worldtalk common stock outstanding as of November 30, 1999.
The table treats as outstanding, for purposes of calculating each specific
stockholder's percent ownership, all shares subject to warrants held by the
stockholder as of November 30, 1999 and all shares subject to options held by
the stockholder that are exercisable within 60 days after November 30, 1999.
Unless otherwise indicated below, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK
- --------------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Paul Hilal(1) ............................................................. 4,659,999 28.9%
Hilal Capital Partners LLC
c/o Hilal Capital Management LLC
60 East 42nd Street, Suite 1946
New York, NY 10165
David J. Cowan(2) ......................................................... 1,568,977 10.8
Bessemer Venture Partners III L.P.
1025 Old Country Road, Suite 205
Westbury, NY 11590
Anthony Sun(3) ............................................................ 1,276,334 8.7
Venrock Associates
30 Rockefeller Plaza, Rm. 5508
New York, NY 10112
Wade Woodson(4) ........................................................... 757,333 5.2
Sigma Partners
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
Robert D. Dickinson III(5)................................................. 253,511 1.7
Bernard Harguindeguy(6).................................................... 251,563 1.7
Joseph Longo(7)............................................................ 86,108 *
Max D. Hopper(8)........................................................... 56,250 *
Simon Khalaf(9)............................................................ 45,752 *
John G. Weald(10).......................................................... 25,000 *
All officers and directors as a group (10 persons)(11)..................... 8,491,867 52.0
</TABLE>
- ------------------------
* Less than 1%
(1) Represents 1,194,667 shares of common stock held by Hilal Capital
Associates LLC, 662,833 shares held by Highbridge International,
619,167 shares held by Hilal Capital International, Ltd., 459,667 shares
held by Hilal Capital QP, L.P. and 180,333 shares held by Hilal
Capital, L.P. This number also includes 597,333 shares of common stock
issuable upon exercise of a warrant held by Hilal Capital Associates LLC,
323,167 shares of common stock issuable upon exercise of a warrant
111
<PAGE>
held by Highbridge International, 301,333 shares of common stock issuable
upon exercise of a warrant held by Hilal Capital International, Ltd.,
223,833 shares of common stock issuable upon exercise of a warrant held by
Hilal Capital QP, L.P., 87,667 shares of common stock issuable upon
exercise of a warrant held by Hilal Capital, L.P. and 9,999 shares of
Worldtalk common stock subject to options exercisable within 60 days of
November 30, 1999 held by Paul Hilal. Mr. Paul Hilal, a member of our board
and the Chairman of the Board of Worldtalk, is a non-managing member of
Hilal Capital Partners LLC, which is the general partner of Hilal Capital
Associates LLC, Hilal Capital QP, L.P. and Hilal Capital, L.P. Peter K.
Hilal, M.D., the brother of Paul Hilal, is the managing member of Hilal
Capital Partners LLC. Hilal Capital Management LLC is the investment
manager for Highbridge International, Ltd. and Hilal Capital
International, Ltd. Peter K. Hilal, M.D. is the managing member of Hilal
Capital Management LLC. Paul Hilal does not hold voting or dispositive
control over any shares or warrants owned of record by Hilal Capital
Associates LLC, Highbridge International, Hilal Capital
International, Ltd., Hilal Capital QP, L.P. or Hilal Capital, L.P. Paul
Hilal disclaims beneficial ownership of all of the securities listed above,
except for the options held directly by him.
(2) Mr. Cowan is a director of Worldtalk and a general partner of Deer III &
Co. L.P. ("Deer"), the general partner of Bessemer Venture Partners
III L.P. ("BVP III"). The share number includes 1,305 shares held of record
by Mr. Cowan; 12,500 shares subject to options exercisable within 60 days
after November 30, 1999; 1,528,929 shares held of record by BVP III;
22,868 shares held of record by the general partners of Deer; and
3,375 shares over which BVP III exercises voting control, held of record by
individuals, each of whom is a present or former employee or consultant to
Bessemer Securities Corporation, the sole owner of the limited partner of
BVP III. Deer is a general partnership whose voting partners are Robert H.
Buescher, David J. Cowan, G. Felda Hardymon and Christopher F.O. Gabrieli.
BVP III disclaims beneficial ownership of securities held by the general
partners of Deer and the general partners disclaim beneficial ownership of
securities held by BVP III, except to the extent of their individual
partnership interest.
(3) Represents 12,500 shares of common stock subject to options exercisable
within 60 days of November 30, 1999; 872,599 shares held of record by
Venrock Associates; and 391,235 shares held by Venrock
Associates II, L.P. Each fund disclaims beneficial ownership of the shares
held by the other. Mr. Sun is a director of Worldtalk and a general partner
of Venrock Associates and Venrock Associates II, L.P.
(4) Mr. Woodson is a director of Worldtalk and a general partner of Sigma
Partners II, L.P. and Sigma Associates II, L.P. The share number represents
24,098 shares held by Mr. Woodson; 12,500 shares of common stock subject to
options exercisable within 60 days of November 30, 1999; 670,458 shares
held by Sigma Partners II, L.P.; and 50,277 shares held by Sigma
Associates II, L.P. Each fund disclaims beneficial ownership of the shares
held by the other.
(5) Includes 30,937 shares subject to options exercisable within 60 days after
November 30, 1999. Mr. Dickinson is Worldtalk's former Chief Technical
Officer.
(6) Represents shares subject to options exercisable within 60 days after
November 30, 1999. Mr. Harguindeguy is Worldtalk's former President and
Chief Executive Officer.
(7) Represents shares subject to options exercisable within 60 days after
November 30, 1999. Mr. Longo is Worldtalk's former Vice President,
Consulting and Customer Services.
(8) Includes 1,250 shares subject to options exercisable within 60 days after
November 30, 1999. Mr. Hopper is a director of Worldtalk.
(9) Mr. Khalaf is Worldtalk's former Vice President, Marketing.
(10) Mr. Weald is Worldtalk's former Vice President, Engineering--Santa Clara.
(11) Includes warrants to purchase 1,533,333 shares listed in footnote (1) and
219,477 shares subject to options exercisable within 60 days after
November 30, 1999, including those set forth in footnotes (2)--(4) and (8)
above.
112
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA OF TUMBLEWEED AND WORLDTALK
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger, using the pooling of interests
method of accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions deemed probable by management regarding the Merger (e.g.,
that share information used in the unaudited pro forma information approximates
actual share information at the effective date). No adjustments to the unaudited
pro forma combined condensed financial information have been made to account for
different possible results in connection with the foregoing, as management
believes that the impact on such information of the varying outcomes,
individually or in the aggregate, would not be materially different.
The unaudited pro forma combined condensed balance sheet as of
September 30, 1999 gives effect to the Merger as if it had occurred on
September 30, 1999, and combined the unaudited condensed consolidated balance
sheet of Tumbleweed and the unaudited condensed consolidated balance sheet
Worldtalk as of September 30, 1999.
The unaudited pro forma combined condensed statements of operations combine
the historical consolidated statements of operations of Tumbleweed and Worldtalk
for each of the years in the three-year period ended December 31, 1998 and the
nine months ended September 30, 1998 and 1999, in each case as if the Merger had
occurred at the beginning of the earliest period presented.
Tumbleweed and Worldtalk estimate that they will incur direct transaction
costs of approximately $7.4 million associated with the Merger, which will be
charged to operations upon consummation of the Merger. In addition, it is
expected that following the Merger, the Combined Company will incur an
additional significant charge to operations, which is not currently reasonably
estimable, to reflect costs associated with integrating the two companies. There
can be no assurance that the Combined Company will not incur additional charges
to reflect costs associated with the Merger or that management will be
successful in its efforts to integrate the operations of the two companies.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merge occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. There unaudited pro forma combined condensed financial statements
are based upon the respective historical consolidated financial statements of
Tumbleweed and Worldtalk and should be read in conjunction with the respective
historical consolidated financial statements and notes thereto of Tumbleweed and
Worldtalk included elsewhere in this Prospectus/Joint Proxy Statement, and do
not incorporate, nor do they assume, any benefits from cost savings or synergies
of operations of the Combined Company.
113
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL DATA OF TUMBLEWEED AND WORLDTALK
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
TUMBLEWEED WORLDTALK ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 57,744 $ 11,027 $ $ 68,771
Accounts receivable........................................ 935 3,131 4,066
Prepaid expenses and other current assets.................. 1,751 621 2,372
--------- ---------- --------- ---------
Total current assets..................................... 60,430 14,779 -- 75,209
Property and equipment, net.................................. 2,099 873 2,972
Equity in investee........................................... 1,730 -- 1,730
Other assets................................................. 800 417 1,217
--------- ---------- --------- ---------
Total assets............................................. $ 65,059 $ 16,069 $ -- $ 81,128
========= ========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 1,524 $ 1,342 $ $ 2,866
Current installments of long-term debt..................... 615 -- 615
Accrued liabilities........................................ 2,097 3,027 7,350(2a) 12,474
Deferred revenue........................................... 717 1,204 1,921
Short-term debt............................................ -- 242 242
Capital lease obligations.................................. -- 16 16
--------- ---------- --------- ---------
Total current liabilities................................ 4,953 5,831 7,350 18,134
Long-term debt, excluding current installments............... 1,404 -- -- 1,404
Stockholders' Equity:
Common stock............................................... 22 144 (141) 25
Additional paid-in capital................................. 88,254 43,328 141 131,723
Deferred compensation expense.............................. (6,384) (15) (6,399)
Accumulated other comprehensive loss....................... (37) -- (37)
Accumulated deficit........................................ (23,153) (33,219) (7,350)(2a) (63,722)
--------- ---------- --------- ---------
Total stockholders' equity............................... 58,702 10,238 (7,350) 61,590
--------- ---------- --------- ---------
Total liabilities and stockholders' equity............... $ 65,059 $ 16,069 $ -- $ 81,128
========= ========== ========= =========
</TABLE>
114
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL DATA OF TUMBLEWEED AND WORLDTALK
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Software licenses..................................... $ 261 $ 4,097 $ 8,996 $ 6,749 $ 8,165
Services and transactions............................. 336 259 1,359 836 2,578
Sale of technology.................................... -- 120 220 220 --
Discontinued products revenues........................ 14,205 7,580 4,888 4,146 1,472
--------- ---------- ---------- --------- ----------
Total revenue....................................... 14,802 12,056 15,463 11,951 12,215
--------- ---------- ---------- --------- ----------
Cost of revenues
Software license cost................................. 1,098 1,090 931 684 515
Services and transactions cost........................ 2,479 3,009 3,306 2,503 3,016
--------- ---------- ---------- --------- ----------
Total cost of revenues.............................. 3,577 4,099 4,237 3,187 3,531
--------- ---------- ---------- --------- ----------
Gross margin.......................................... 11,225 7,957 11,226 8,764 8,684
--------- ---------- ---------- --------- ----------
Operating expenses:
Research and development.............................. 4,197 6,140 5,955 4,380 6,165
Sales and marketing................................... 7,400 9,971 11,526 8,817 12,741
General and administrative............................ 2,063 3,439 5,227 4,454 3,895
Stock compensation.................................... 66 288 715 469 2,420
Purchased research and development.................... 4,500 -- -- -- --
--------- ---------- ---------- --------- ----------
Total operating expenses............................ 18,226 19,838 23,423 18,120 25,221
--------- ---------- ---------- --------- ----------
Operating loss...................................... (7,001) (11,881) (12,197) (9,356) (16,537)
Other income (expense), net............................. 585 673 524 457 1,252
--------- ---------- ---------- --------- ----------
Loss before income taxes............................ (6,416) (11,208) (11,673) (8,899) (15,285)
Income taxes........................................ 4 183 1 170 211
--------- ---------- ---------- --------- ----------
Net loss............................................ $ (6,420) $ (11,391) $ (11,674) $ (9,069) $ (15,496)
========= ========== ========== ========= ==========
Net loss per share--basic and diluted................... $ (1.15) $ (1.89) $ (1.78) $ (1.40) $ (1.40)
========= ========== ========== ========= ==========
Shares used in per share computations................... 5,592 6,023 6,549 6,484 11,041
========= ========== ========== ========= ==========
</TABLE>
115
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF TUMBLEWEED AND WORLDTALK
(1) PRO FORMA BASIS OF PRESENTATION
For purposes of the pro forma operating data, Worldtalk's consolidated
financial statements as of September 30, 1999 and for the fiscal years ended
December 31, 1996, 1997, and 1998, and for the nine months ended September 30,
1998 and 1999 have been combined with the Tumbleweed financial statements as of
September 30, 1999 and for the fiscal years ended December 31, 1996, 1997, and
1998, and for the nine months ended September 30, 1998 and 1999.
The companies have had no significant inter-company activity which would
require elimination in preparing the combined condensed consolidated financial
statements. In addition, the companies have no significantly different
accounting polices and procedures which would have necessitated conformance.
These unaudited pro forma combined condensed consolidated financial
statements reflect the proposed issuance of 3,738,540 shares of Tumbleweed
common stock in exchange for an aggregate of 14,379,000 shares of Worldtalk
common stock (outstanding as of September 30, 1999) in connection with the
merger, based on the exchange ratio of 0.26 set forth in the following table.
<TABLE>
<S> <C>
Worldtalk common stock outstanding as of September 30,
1999(1)....................................................... 14,379,000
Exchange ratio.................................................. 0.26:1.0
---------
Number of shares of Tumbleweed common stock exchanged........... 3,738,540
Number of shares of Tumbleweed common stock outstanding as of
September 30, 1999............................................ 21,589,233
---------
Number of shares of Tumbleweed common stock outstanding after
completion of the merger...................................... 25,327,773
=========
</TABLE>
The actual number of shares of Tumbleweed common stock to be issued will be
determined at the effective time of the merger based on the number of shares of
Worldtalk common stock outstanding on that date.
(2) PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
(a) Tumbleweed and Worldtalk estimate they will incur direct transaction
costs of approximately $7.4 million associated with the merger consisting
of transaction fees for legal, accounting and financial advisory fees and
expenses. These nonrecurring costs will be charged to operations upon
consummation of the merger.
(b) It is expected that following the merger, Tumbleweed will incur an
additional charge to operations, which is not currently reasonably
estimable, to reflect costs associated with integrating the two
companies. This charge has not been reflected in the pro forma combined
condensed consolidated balance sheet. There can be no assurance that
Tumbleweed will not incur additional charges to reflect costs associated
with the merger or that management will be successful in its efforts to
integrate the operations of the two companies.
The direct transaction costs and additional charge are not reflected in the
pro forma combined condensed consolidated statements of operations.
(1) Does not include shares issuable upon exercise of outstanding warrants and
options.
116
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF TUMBLEWEED AND WORLDTALK (CONTINUED)
(3) PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following is a summary of the historical results of operations of
Tumbleweed and Worldtalk and their pro forma combined consolidated amounts to
reflect the merger as if it were effected for all periods presented below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
SOFTWARE LICENSE REVENUES:
Tumbleweed........................................... $ 261 $ 359 $ 885 $ 755 $ 1,909
Worldtalk............................................ -- 3,738 8,111 5,994 6,256
---------- ---------- ---------- --------- ----------
$ 261 $ 4,097 8,996 $ 6,749 $ 8,165
========== ========== ========== ========= ==========
SERVICES AND TRANSACTION REVENUES:
Tumbleweed........................................... $ 336 $ 250 $ 910 $ 605 $ 1,477
Worldtalk............................................ -- 9 449 231 1,101
---------- ---------- ---------- --------- ----------
$ 336 $ 259 $ 1,359 $ 836 $ 2,578
========== ========== ========== ========= ==========
REVENUES FROM THE SALE OF TECHNOLOGY:
Tumbleweed........................................... $ -- $ 120 $ 220 $ 220 $ --
Worldtalk............................................ -- -- -- -- --
---------- ---------- ---------- --------- ----------
$ -- $ 120 $ 220 $ 220 $ --
========== ========== ========== ========= ==========
DISCONTINUED PRODUCTS REVENUES:
Tumbleweed........................................... $ -- $ -- $ -- $ -- $ --
Worldtalk............................................ 14,205 7,580 4,888 4,146 1,472
---------- ---------- ---------- --------- ----------
$ 14,205 $ 7,580 $ 4,888 $ 4,146 $ 1,472
========== ========== ========== ========= ==========
SOFTWARE LICENSE COST OF REVENUES:
Tumbleweed........................................... $ 15 $ 63 $ 194 $ 162 $ 190
Worldtalk............................................ 1,083 1,027 737 522 325
---------- ---------- ---------- --------- ----------
$ 1,098 $ 1,090 $ 931 $ 684 $ 515
========== ========== ========== ========= ==========
SERVICES AND TRANSACTIONS COST OF REVENUES:
Tumbleweed........................................... $ 124 $ 45 $ 737 $ 536 $ 1,345
Worldtalk............................................ 2,355 2,964 2,569 1,967 1,671
---------- ---------- ---------- --------- ----------
$ 2,479 $ 3,009 $ 3,306 $ 2,503 $ 3,016
========== ========== ========== ========= ==========
RESEARCH AND DEVELOPMENT:
Tumbleweed........................................... $ 634 $ 1,846 $ 2,021 $ 1,369 $ 3,148
Worldtalk............................................ 3,563 4,294 3,934 3,011 3,017
---------- ---------- ---------- --------- ----------
$ 4,197 $ 6,140 $ 5,955 $ 4,380 $ 6,165
========== ========== ========== ========= ==========
SALES AND MARKETING:
Tumbleweed........................................... $ 649 $ 2,593 $ 4,049 $ 3,244 $ 5,398
Worldtalk............................................ 6,751 7,378 7,477 5,573 7,343
---------- ---------- ---------- --------- ----------
$ 7,400 $ 9,971 $ 11,526 $ 8,817 $ 12,741
========== ========== ========== ========= ==========
</TABLE>
117
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF TUMBLEWEED AND WORLDTALK (CONTINUED)
(3) PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
GENERAL AND ADMINISTRATIVE:
Tumbleweed........................................... $ 372 $ 792 $ 1,080 $ 857 $ 2,321
Worldtalk............................................ 1,691 2,647 4,147 3,597 1,574
---------- ---------- ---------- --------- ----------
$ 2,063 $ 3,439 $ 5,227 $ 4,454 $ 3,895
========== ========== ========== ========= ==========
STOCK COMPENSATION:
Tumbleweed........................................... $ 24 $ 246 $ 673 $ 437 $ 2,388
Worldtalk............................................ 42 42 42 32 32
---------- ---------- ---------- --------- ----------
$ 66 $ 288 $ 715 $ 469 $ 2,420
========== ========== ========== ========= ==========
PURCHASED RESEARCH AND DEVELOPMENT:
Tumbleweed........................................... $ -- $ -- $ -- $ -- $ --
Worldtalk............................................ 4,500 -- -- -- --
---------- ---------- ---------- --------- ----------
$ 4,500 $ -- $ -- $ -- $ --
========== ========== ========== ========= ==========
OTHER INCOME, NET:
Tumbleweed........................................... $ 41 $ 165 $ 149 $ 155 $ 518
Worldtalk............................................ 544 508 375 302 734
---------- ---------- ---------- --------- ----------
$ 585 $ 673 $ 524 $ 457 $ 1,252
========== ========== ========== ========= ==========
INCOME TAXES:
Tumbleweed........................................... $ -- $ -- $ -- $ -- $ 136
Worldtalk............................................ 4 183 1 170 75
---------- ---------- ---------- --------- ----------
$ 4 $ 183 $ 1 $ 170 $ 211
========== ========== ========== ========= ==========
NET LOSS:
Tumbleweed........................................... $ (1,180) $ (4,691) $ (6,590) $ (4,870) $ (11,022)
Worldtalk............................................ (5,240) (6,700) (5,084) (4,199) (4,474)
---------- ---------- ---------- --------- ----------
$ (6,420) $ (11,391) $ (11,674) $ (9,069) $ (15,496)
========== ========== ========== ========= ==========
</TABLE>
118
<PAGE>
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF TUMBLEWEED AND WORLDTALK (CONTINUED)
(4) PRO FORMA NET LOSS PER SHARE
The following table reconciles the number of shares used in the pro forma
per share computations to the numbers set forth in Tumbleweed's and Worldtalk's
historical statements of operations:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
SHARES USED IN PER SHARE CALCULATION (IN THOUSANDS,
EXCEPT THE APPLICABLE RATIO):
Historical--Tumbleweed................................ 3,598 3,331 3,797 3,739 7,951
--------- ---------- ---------- --------- ----------
Historical--Worldtalk................................. 7,669 10,355 10,584 10,559 11,886
Exchange ratio...................................... 0.26 0.26 0.26 0.26 0.26
--------- ---------- ---------- --------- ----------
Pro forma combined.................................. 5,592 6,023 6,549 6,484 11,041
========= ========== ========== ========= ==========
</TABLE>
119
<PAGE>
EXPERTS
The consolidated financial statements and schedule of Tumbleweed
Communications Corp. as of December 31, 1997 and 1998, and for each of the years
in the three-year period ended December 31, 1998, have been included in the
Registration Statement on Form S-4 and this joint proxy statement/prospectus in
reliance upon the reports of KPMG LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Worldtalk Communications
Corporation as of December 31, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998, have been included in the
Registration Statement on Form S-4 and this joint proxy statement/prospectus in
reliance upon the reports of KPMG LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP will issue an opinion about the
validity of the shares of Tumbleweed common stock to be issued by Tumbleweed
pursuant to the merger. Certain tax matters will be passed upon by Skadden,
Arps, Slate, Meagher & Flom LLP and Fenwick & West LLP. Gregory C. Smith, a
partner at Skadden, Arps, beneficially owns 54,246 shares of Tumbleweed common
stock.
STOCKHOLDER PROPOSALS
Proposals by stockholders of Tumbleweed that are intended to be included in
Tumbleweed's proxy statement and form of proxy card for the 2000 annual meeting
of stockholders must be received by Tumbleweed no later than December 15, 1999,
except that if the date of the meeting is changed by more than 30 days from its
presently contemplated date of May 15, 2000 a proposal must be received by
Tumbleweed a reasonable time before Tumbleweed begins to print and mail its
proxy materials. In order for a stockholder proposal to be eligible for
inclusion in the proxy statement and form of proxy card for the meeting, the
proposing stockholder must specifically request inclusion in a timely submission
of the proposal and satisfy the eligibility and procedural requirements of
Rule 14a-8 under the Exchange Act. Stockholder proposals to be presented at the
2000 annual meeting submitted to Tumbleweed outside the processes of Rule 14a-8
under the Exchange Act will be considered untimely if received by Tumbleweed
later than the close of business on the tenth day following the date on which
notice of the date of the meeting is mailed or public disclosure of the date is
made, whichever occurs first.
120
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999 (unaudited)............... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
WORLDTALK COMMUNICATIONS CORPORATION
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-26
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-27
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-28
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1999 (unaudited)...... F-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-31
Notes to Consolidated Financial Statements.................. F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
TUMBLEWEED COMMUNICATIONS CORP.:
We have audited the accompanying consolidated balance sheets of Tumbleweed
Communications Corp. (the Company) and subsidiary as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tumbleweed
Communications Corp. and subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
[LOGO]
San Francisco, California
March 18, 1999, except as to Note 10 which is as of August 3, 1999
F-2
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998 SEPTEMBER 30, 1999
-------- -------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,310 $ 698 $ 57,744
Accounts receivable....................................... 281 281 935
Prepaid expenses and other current assets................. 142 166 1,751
------- -------- --------
Total current assets.................................... 6,733 1,145 60,430
Property and equipment, net................................. 382 472 2,099
Equity in investee.......................................... -- -- 1,730
Other assets................................................ -- 108 800
------- -------- --------
Total assets............................................ $ 7,115 $ 1,725 $ 65,059
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 200 $ 136 $ 1,524
Current installments of equipment line.................... -- 141 615
Accrued liabilities....................................... 337 448 2,097
Deferred revenue.......................................... 308 130 717
------- -------- --------
Total current liabilities............................... 845 855 4,953
Long-term debt, excluding current installments.............. -- 369 1,258
Deferred rent............................................... -- -- 146
------- -------- --------
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; no shares authorized,
issued, or outstanding as of December 31, 1997 and 1998;
10,000,000 shares authorized, none issued or outstanding
as of September 30, 1999................................ -- -- --
Convertible preferred stock (29,000,000 shares
authorized):
Series A, $0.001 par value; 2,700,000 shares designated;
2,657,971 shares issued and outstanding as of December
31, 1997 and 1998 and no shares outstanding as of
September 30, 1999, (aggregate liquidation preference of
$3,668 as of December 31, 1998)......................... 3 3 --
Series B, $0.001 par value; 4,250,000 shares designated;
4,065,960 and 4,065,960 shares issued and outstanding as
of December 31, 1997 and 1998 and no shares outstanding
as of September 30, 1999 (aggregate liquidation
preference of $8,105 as of December 31, 1998)........... 4 4 --
Series C, $0.001 par value; 6,000,000 shares designated;
no shares issued and outstanding as of September 30,
1999 (aggregate liquidation preference of $20,021 as of
December 31, 1998)...................................... -- -- --
Common stock, $0.001 par value; 43,000,000 shares
authorized; 4,035,000 and 4,209,535 shares issued and
outstanding as of December 31, 1997, and 1998,
respectively; 100,000,000 shares authorized, 21,589,233
issued and outstanding as of September 30, 1999......... 4 4 22
Additional paid-in capital................................ 12,274 14,124 88,254
Deferred compensation expense............................. (474) (1,501) (6,384)
Accumulated other comprehensive income (loss)............. -- (2) (37)
Accumulated deficit....................................... (5,541) (12,131) (23,153)
------- -------- --------
Total stockholders' equity.............................. 6,270 501 58,702
------- -------- --------
Total liabilities and stockholders' equity.............. $ 7,115 $ 1,725 $ 65,059
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License...................................... $ 261 $ 359 $ 885 $ 755 $ 1,909
Services..................................... 336 250 910 605 1,477
Sale of technology........................... -- 120 220 220 --
------- ------- ------- ------- --------
Total revenue.............................. 597 729 2,015 1,580 3,386
Cost of revenue:
License cost................................. 15 63 194 162 190
Services cost................................ 124 45 737 536 1,345
------- ------- ------- ------- --------
Total cost of revenue...................... 139 108 931 698 1,535
------- ------- ------- ------- --------
Gross profit............................... 458 621 1,084 882 1,851
------- ------- ------- ------- --------
Operating expenses:
Research and development..................... 634 1,846 2,021 1,369 3,148
Sales and marketing.......................... 649 2,593 4,049 3,244 5,398
General and administrative................... 372 792 1,080 857 2,321
Stock compensation........................... 24 246 673 437 2,388
------- ------- ------- ------- --------
Total operating expenses................... 1,679 5,477 7,823 5,907 13,255
------- ------- ------- ------- --------
Operating loss............................. (1,221) (4,856) (6,739) (5,025) (11,404)
Other income (expense), net.................. 41 165 149 155 518
------- ------- ------- ------- --------
Net loss before provision for taxes........ (1,180) (4,691) (6,590) (4,870) (10,886)
Provision for taxes........................ -- -- -- -- 136
------- ------- ------- ------- --------
Net loss................................... $(1,180) $(4,691) $(6,590) $(4,870) $(11,022)
======= ======= ======= ======= ========
Other comprehensive income
(loss)--translation adjustment............. -- -- (2) -- (35)
------- ------- ------- ------- --------
Comprehensive loss......................... $(1,180) $(4,691) $(6,592) $(4,870) $(11,057)
======= ======= ======= ======= ========
Net loss per share--basic and diluted.......... $ (0.33) $ (1.41) $ (1.74) $ (1.30) $ (1.39)
======= ======= ======= ======= ========
Weighted average shares--basic and diluted..... 3,598 3,331 3,797 3,739 7,951
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------------------- ---------- --------------------
SERIES A SERIES B
--------------------------------- ---------------------------------
CONVERTIBLE PREFERRED STOCK
---------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995................................. -- $ -- -- $ --
Net loss prior to August 24, 1996........................... -- -- -- --
Transfer of accumulated deficit to additional paid in
capital in conjunction with termination of S corporation
status.................................................... -- -- -- --
Issuance of Series A preferred stock........................ 2,657,971 3 -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss subsequent to August 24, 1996...................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1996................................. 2,657,971 3 -- --
Issuance of Series B preferred stock, net of issuance costs
of $47.................................................... -- -- 4,065,960 4
Issuance of Series B preferred stock warrant................ -- -- -- --
Issuance of stock options to nonemployees................... -- -- -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss.................................................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1997................................. 2,657,971 3 4,065,960 4
Issuance of stock options to nonemployees................... -- -- -- --
Issuance of common stock upon exercise of stock options..... -- -- -- --
Issuance of Series C preferred stock warrant................ -- -- -- --
Foreign currency translation adjustment..................... -- -- -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss.................................................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1998................................. 2,657,971 3 4,065,960 4
Issuance of common stock upon exercise of stock options
(unaudited)............................................... -- -- -- --
Issuance of Series B preferred stock in exchange for
services (unaudited)...................................... -- -- 15,000 --
Issuance of Series C preferred stock and warrants, net of
issuance costs of $1,337 (unaudited)...................... -- -- -- --
Issuance of Series C preferred stock in exchange for
services (unaudited)...................................... -- -- -- --
Issuance of common stock upon exercise of warrants
(unaudited)............................................... -- -- -- --
Exercise of warrants........................................ -- -- -- --
Foreign currency translation adjustment (unaudited)......... -- -- -- --
Deferred compensation expense on stock option issuances
(unaudited)............................................... -- -- -- --
Amortization of deferred compensation expense (unaudited)... -- -- -- --
Conversion of preferred stock to common stock (unaudited)... (2,657,971) (3) (4,080,960) (4)
Gain on sale of stock by former subsidiary (unaudited)...... -- -- -- --
Repurchase of common stock (unaudited)...................... -- -- -- --
Issuance of common stock- initial public offering
(unaudited)............................................... -- -- -- --
Net loss (unaudited)........................................ -- -- -- --
---------- -------------------- ---------- --------------------
Balances, September 30, 1999 (unaudited).................... -- $ -- -- $ --
---------- -------------------- ---------- --------------------
<CAPTION>
SHARES AMOUNT SHARES AMOUNT
---------- -------------------- ---------- --------------------
SERIES C COMMON STOCK
--------------------------------- ---------------------------------
CONVERTIBLE PREFERRED STOCK
<S> <C> <C> <C> <C>
Balances, December 31, 1995................................. -- $ -- 4,035,000 $ 4
Net loss prior to August 24, 1996........................... -- -- -- --
Transfer of accumulated deficit to additional paid in
capital in conjunction with termination of S corporation
status.................................................... -- -- -- --
Issuance of Series A preferred stock........................ -- -- -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss subsequent to August 24, 1996...................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1996................................. -- -- 4,035,000 4
Issuance of Series B preferred stock, net of issuance costs
of $47.................................................... -- -- -- --
Issuance of Series B preferred stock warrant................ -- -- -- --
Issuance of stock options to nonemployees................... -- -- -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss.................................................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1997................................. -- -- 4,035,000 4
Issuance of stock options to nonemployees................... -- -- -- --
Issuance of common stock upon exercise of stock options..... -- -- 174,535 --
Issuance of Series C preferred stock warrant................ -- -- -- --
Foreign currency translation adjustment..................... -- -- -- --
Deferred compensation expense on stock option issuances..... -- -- -- --
Amortization of deferred compensation expense............... -- -- -- --
Net loss.................................................... -- -- -- --
---------- -------------------- ---------- --------------------
Balances, December 31, 1998................................. -- -- 4,209,535 4
Issuance of common stock upon exercise of stock options
(unaudited)............................................... -- -- 753,169 1
Issuance of Series B preferred stock in exchange for
services (unaudited)...................................... -- -- -- --
Issuance of Series C preferred stock and warrants, net of
issuance costs of $1,337 (unaudited)...................... 5,586,003 5 -- --
Issuance of Series C preferred stock in exchange for
services (unaudited)...................................... 6,500 -- -- --
Issuance of common stock upon exercise of warrants
(unaudited)............................................... -- -- -- --
Exercise of warrants........................................ -- -- 75,503 --
Foreign currency translation adjustment (unaudited)......... -- -- -- --
Deferred compensation expense on stock option issuances
(unaudited)............................................... -- -- -- --
Amortization of deferred compensation expense (unaudited)... -- -- -- --
Conversion of preferred stock to common stock (unaudited)... (5,592,503) (5) 12,331,434 12
Gain on sale of stock by former subsidiary (unaudited)...... -- -- -- --
Repurchase of common stock (unaudited)...................... -- -- -- --
Issuance of common stock- initial public offering
(unaudited)............................................... -- -- 4,219,592 5
Net loss (unaudited)........................................ -- -- -- --
---------- -------------------- ---------- --------------------
Balances, September 30, 1999 (unaudited).................... -- $ -- 21,589,233 $ 22
---------- -------------------- ---------- --------------------
<CAPTION>
DEFERRED ACCUMULATED OTHER
ADDITIONAL PAID COMPENSATION COMPREHENSIVE ACCUMULATED
IN CAPITAL EXPENSE INCOME (LOSS) DEFICIT
--------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995................................. $ -- $ -- $ -- $ 137
Net loss prior to August 24, 1996........................... -- -- -- (331)
Transfer of accumulated deficit to additional paid in
capital in conjunction with termination of S corporation
status.................................................... (194) -- -- 194
Issuance of Series A preferred stock........................ 3,665 -- -- --
Deferred compensation expense on stock option issuances..... 275 (275) -- --
Amortization of deferred compensation expense............... -- 24 -- --
Net loss subsequent to August 24, 1996...................... -- -- -- (850)
------- ------- ---- --------
Balances, December 31, 1996................................. 3,746 (251) -- (850)
Issuance of Series B preferred stock, net of issuance costs
of $47.................................................... 8,024 -- -- --
Issuance of Series B preferred stock warrant................ 28 -- -- --
Issuance of stock options to nonemployees................... 7 -- -- --
Deferred compensation expense on stock option issuances..... 469 (469) -- --
Amortization of deferred compensation expense............... -- 246 -- --
Net loss.................................................... -- -- -- (4,691)
------- ------- ---- --------
Balances, December 31, 1997................................. 12,274 (474) -- (5,541)
Issuance of stock options to nonemployees................... 8 -- -- --
Issuance of common stock upon exercise of stock options..... 87 -- -- --
Issuance of Series C preferred stock warrant................ 55 -- -- --
Foreign currency translation adjustment..................... -- -- (2) --
Deferred compensation expense on stock option issuances..... 1,700 (1,700) -- --
Amortization of deferred compensation expense............... -- 673 -- --
Net loss.................................................... -- -- -- (6,590)
------- ------- ---- --------
Balances, December 31, 1998................................. 14,124 (1,501) (2) (12,131)
Issuance of common stock upon exercise of stock options
(unaudited)............................................... 350 -- -- --
Issuance of Series B preferred stock in exchange for
services (unaudited)...................................... 54 -- -- --
Issuance of Series C preferred stock and warrants, net of
issuance costs of $1,337 (unaudited)...................... 18,751 -- -- --
Issuance of Series C preferred stock in exchange for
services (unaudited)...................................... 23 -- -- --
Issuance of common stock upon exercise of warrants
(unaudited)............................................... 127 -- -- --
Exercise of warrants........................................ 270 -- -- --
Foreign currency translation adjustment (unaudited)......... -- -- (35) --
Deferred compensation expense on stock option issuances
(unaudited)............................................... 7,271 (7,271) -- --
Amortization of deferred compensation expense (unaudited)... -- 2,388 -- --
Conversion of preferred stock to common stock (unaudited)... -- -- -- --
Gain on sale of stock by former subsidiary (unaudited)...... 1,547 -- -- --
Repurchase of common stock (unaudited)...................... (39) -- -- --
Issuance of common stock- initial public offering
(unaudited)............................................... 45,776 -- -- --
Net loss (unaudited)........................................ -- -- -- (11,022)
------- ------- ---- --------
Balances, September 30, 1999 (unaudited).................... $88,254 $(6,384) $(37) $(23,153)
------- ------- ---- --------
<CAPTION>
TOTAL STOCKHOLDERS'
EQUITY
-------------------
<S> <C>
Balances, December 31, 1995................................. $ 141
Net loss prior to August 24, 1996........................... (331)
Transfer of accumulated deficit to additional paid in
capital in conjunction with termination of S corporation
status.................................................... --
Issuance of Series A preferred stock........................ 3,668
Deferred compensation expense on stock option issuances..... --
Amortization of deferred compensation expense............... 24
Net loss subsequent to August 24, 1996...................... (850)
--------
Balances, December 31, 1996................................. 2,652
Issuance of Series B preferred stock, net of issuance costs
of $47.................................................... 8,028
Issuance of Series B preferred stock warrant................ 28
Issuance of stock options to nonemployees................... 7
Deferred compensation expense on stock option issuances..... --
Amortization of deferred compensation expense............... 246
Net loss.................................................... (4,691)
--------
Balances, December 31, 1997................................. 6,270
Issuance of stock options to nonemployees................... 8
Issuance of common stock upon exercise of stock options..... 87
Issuance of Series C preferred stock warrant................ 55
Foreign currency translation adjustment..................... (2)
Deferred compensation expense on stock option issuances..... --
Amortization of deferred compensation expense............... 673
Net loss.................................................... (6,590)
--------
Balances, December 31, 1998................................. 501
Issuance of common stock upon exercise of stock options
(unaudited)............................................... 351
Issuance of Series B preferred stock in exchange for
services (unaudited)...................................... 54
Issuance of Series C preferred stock and warrants, net of
issuance costs of $1,337 (unaudited)...................... 18,756
Issuance of Series C preferred stock in exchange for
services (unaudited)...................................... 23
Issuance of common stock upon exercise of warrants
(unaudited)............................................... 127
Exercise of warrants........................................ 270
Foreign currency translation adjustment (unaudited)......... (35)
Deferred compensation expense on stock option issuances
(unaudited)............................................... --
Amortization of deferred compensation expense (unaudited)... 2,388
Conversion of preferred stock to common stock (unaudited)... --
Gain on sale of stock by former subsidiary (unaudited)...... 1,547
Repurchase of common stock (unaudited)...................... (39)
Issuance of common stock- initial public offering
(unaudited)............................................... 45,781
Net loss (unaudited)........................................ (11,022)
--------
Balances, September 30, 1999 (unaudited).................... $ 58,702
--------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,180) $(4,691) $(6,590) $(4,870) $(11,022)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation for grant of non-employee stock options and
warrant issuances....................................... -- 34 8 -- 321
Amortization of deferred stock compensation expense....... 24 246 673 437 2,389
Depreciation.............................................. 29 121 201 147 341
Amortization of debt discount............................. -- -- 12 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... 7 (204) -- 131 (939)
Prepaid expenses and other current assets............... (46) (101) (24) (61) (1,315)
Accounts payable and accrued liabilities................ 132 374 47 181 3,396
Deferred revenue........................................ 74 204 (178) (167) 656
------- ------- ------- ------- --------
Net cash used in operating activities................. (960) (4,017) (5,851) (4,202) (6,173)
------- ------- ------- ------- --------
Cash flows from investing activities:
Purchase of furniture and equipment....................... (134) (352) (291) (239) (2,081)
Cash transferred to Japan joint venture................... -- -- -- -- (683)
Other long-term assets.................................... -- -- (108) -- (741)
------- ------- ------- ------- --------
Net cash used in investing activities................. (134) (352) (399) (239) (3,505)
------- ------- ------- ------- --------
Cash flows from financing activities:
Increase in borrowings.................................... -- -- 553 877 2,781
Repayments of borrowings.................................. -- -- -- (400) (1,168)
Proceeds from issuance of preferred stock and warrants,
net..................................................... 3,668 8,028 -- -- 18,639
Proceeds from issuance of common stock and warrants,
net..................................................... -- -- -- -- 45,830
Issuance of common stock upon exercise of stock options
and warrants............................................ -- -- 87 82 621
Payments on stockholder note payable...................... (50) (19) -- -- --
Borrowing on stockholder note payable..................... 65 -- -- -- --
------- ------- ------- ------- --------
Net cash provided by financing activities............. 3,683 8,009 640 559 66,703
------- ------- ------- ------- --------
Effect of exchange rate fluctuations........................ -- -- (2) -- 21
------- ------- ------- ------- --------
Net (decrease) increase in cash and cash equivalents........ 2,589 3,640 (5,612) (3,882) 57,046
Cash and cash equivalents, beginning of year/period......... 81 2,670 6,310 6,310 698
------- ------- ------- ------- --------
Cash and cash equivalents, end of year/period............... $ 2,670 $ 6,310 $ 698 $ 2,428 $ 57,744
======= ======= ======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year/period for interest............. $ -- $ -- $ 25 $ 15 $ 76
======= ======= ======= ======= ========
Noncash investing and financing activities:
Issuance of warrants and options for services, debt
issuance costs or equity offering costs................. $ -- $ 34 $ 63 $ -- $ 321
======= ======= ======= ======= ========
Deferred compensation expense associated with stock option
activity................................................ $ 275 $ 469 $ 1,700 $ 1,065 $ 7,272
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Tumbleweed Communications Corp., a California corporation incorporated in
June 1993, is a provider of secure Internet communications software and services
for businesses worldwide. Tumbleweed has developed the Tumbleweed Integrated
Messaging Exchange, or Tumbleweed IME, a scalable software solution that
combines the personal, proactive nature of e-mail with the ease of use of the
web. Tumbleweed IME offers the key attributes of physical delivery, e-mail and
web messaging in a comprehensive, Internet-based system. Tumbleweed's solutions
enable corporations to leverage their existing investments in e-mail and web
systems in order to shift their historically paper-based communications to more
convenient and cost-effective online alternatives.
In March of 1994, Tumbleweed sold a technology known as Envoy to
Novell, Inc. pursuant to an asset transfer, and Tumbleweed thereafter effected a
substantial distribution to its stockholders. In connection with this sale,
Tumbleweed retained the rights to derivative payments from various agreements
that were acquired by Novell, Inc. for specified periods of time. The proceeds
from this asset transfer were used for general corporate purposes, including the
initial development of Tumbleweed IME. Virtually all of Tumbleweed's revenue
recognized before June of 1997, which marked the initial launch of Tumbleweed
IME, was derived from these agreements. Tumbleweed ceased recognizing revenue
under these agreements in the first quarter of 1997, and does not anticipate
recognizing any additional revenue under these agreements in the future since
management believes that Novell, Inc. has discontinued distribution of products
utilizing Envoy technology. As a result, revenue recognized for periods before
June of 1997 is not indicative of Tumbleweed's operating results in subsequent
periods. In addition, in 1997 and 1998, Tumbleweed recognized revenue derived
from a sale of ancillary technology to a third party. Tumbleweed does not
anticipate recognizing revenue from similar sales in the future.
On June 28, 1999, Tumbleweed filed with the California Secretary of State to
officially change its name to Tumbleweed Communications Corp. from Tumbleweed
Software Corporation. The board of directors and shareholders approved the name
change on June 23, 1999 and June 28, 1999, respectively.
In August 1999, the Company sold 4,219,592 shares of its common stock (of
which 219,592 shares were sold pursuant to the Underwriters' over-allotment
option) through its initial public offering (IPO). Net proceeds from the
offering were approximately $45.8 million after deducting the underwriting
discount and other offering expenses. At the time of the IPO, all of the
Company's outstanding preferred stock automatically converted into 12,331,434
shares of common stock.
Tumbleweed maintains its headquarters in Redwood City, California.
Tumbleweed incorporated a subsidiary in Japan in November 1998 and incorporated
a subsidiary in the United Kingdom in February 1999.
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Tumbleweed and its wholly owned subsidiaries in Japan and the United Kingdom.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
In August 1996, Tumbleweed terminated its S-corporation election in
connection with the issuance of preferred stock. Therefore, approximately
$194,000 in accumulated deficit prior to August 24, 1996, has been transferred
to additional paid-in capital as of that date.
F-7
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(B) CASH, CASH EQUIVALENTS AND INVESTMENTS
Tumbleweed considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents. As of December 31,
1997 and 1998, Tumbleweed had $6,257,000 and $604,000 in money market accounts,
respectively. As of September 30, 1999, Tumbleweed had $6,971,000 in commercial
paper and $25,678,115 in money market accounts.
Tumbleweed has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS
No. 115 requires entities to classify investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. Tumbleweed generally has classified its investment securities as
available-for-sale and accounts for them at estimated fair value. Realized and
unrealized gains and losses were not significant for all periods presented. The
cost of securities sold is based on the specific identification method. As of
December 31, 1996, 1997, and 1998 Tumbleweed did not hold any marketable
securities.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years.
(D) CAPITALIZED SOFTWARE
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility in the form of a working model has been
established. To date, capitalized costs for Tumbleweed's software development
have not been material.
(E) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject Tumbleweed to
concentrations of credit risk, consist primarily of cash equivalents and
accounts receivable. Tumbleweed's cash equivalents generally consist of money
market funds with qualified financial institutions. To reduce credit risk with
accounts receivable, Tumbleweed performs ongoing evaluations of its customers'
financial conditions and maintains allowances for credit losses, when necessary.
(F) REVENUE RECOGNITION
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION. Effective January 1, 1998, Tumbleweed
adopted SOP 97-2. SOP 97-2 generally requires revenue recognized from software
arrangements to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, consulting,
training, installation, or post-contract customer support. Fair values are based
upon vendor specific objective evidence. If evidence of fair value for each
element of the arrangement does not exist, all revenue from the arrangement is
deferred until such time
F-8
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
that evidence of fair value does exist, or until all elements of the arrangement
are delivered. There was no material change to Tumbleweed's accounting for
revenue as a result of the adoption of SOP 97-2.
In February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 98-4, DEFERRAL OF
THE EFFECTIVE DATE OF SOP 97-2. The SOP deferred the effective date for applying
the provisions regarding vendor-specific objective evidence of fair value. There
was no material change to Tumbleweed's accounting for revenue as a result of the
adoption of SOP 98-4.
Tumbleweed's customer contracts are generally multiple-element arrangements;
that is, they involve Tumbleweed providing a combination of products and
services to a customer. Revenue is allocated to the various elements based on
the relative fair values of the elements. Revenue allocated to the various
elements is recognized when the basic revenue recognition criteria are met for
that element or group of elements.
Revenue attributable to licenses and associated initial installation and
testing services is recognized upon customer acceptance. Management currently
believes that customer acceptance is the point at which delivery has occurred,
collectibility of a fixed and determinable fee is deemed probable, and
persuasive evidence of an arrangement exists.
Paid pilot projects represent licensing transactions in which the customer
purchases the Company's products and services for internal use and
customer-testing purposes. The projects generally contain licensing elements as
well as associated initial installation and testing services. Revenues
attributable to such projects are recognized upon customer acceptance. Fees
earned from paid pilot projects historically have not been refundable against
other products and services.
Transaction-based fee revenue are derived from Tumbleweed's customers and
resellers principally based on payment schedules, for minimum volume
commitments, or information reported by the customer or reseller, for actual
volume commitments. Royalties from minimum volume commitments are recognized at
the beginning of a transaction commitment cycle when fees are fixed and
determinable. Royalties from minimum volume commitments with extended payment
terms are recognized as they become due and payable. Royalties from actual
volume commitments are recognized when amounts due are reported to Tumbleweed.
Technology revenue relates to the sale of certain intellectual property.
Tumbleweed recognized technology revenue as the payments were collected.
Tumbleweed provides post-contract support, training and other consulting
services to customers. Revenue from post-contract support, i.e. unspecified
upgrades and telephone support, is recognized ratably over the period the
support is provided. Revenue from customer training and other consulting
services is recognized as the services are performed.
Tumbleweed provides limited warranty rights to its customers, which are
accounted for in accordance with SFAS No. 5, ACCOUNTING FOR CONTINGENCIES.
Estimated warranty obligations are provided by charges to operations in the
period in which the related revenue is recognized. To date, the estimated
warranty obligations have not been considered significant.
F-9
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In December 1998, the Accounting Standards Executive Committee issued SOP
98-9, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN ARRANGEMENTS, which
requires recognition of revenue using the residual method in a multiple element
arrangement when fair value does not exist for one or more of the delivered
elements in the arrangement. Under the residual method, the total fair value of
the undelivered elements is deferred and subsequently recognized in accordance
with SOP 97-2. SOP 98-9 also extends the deferral of the application of SOP 97-2
to certain other multiple-element software arrangements through Tumbleweed's
year ending December 31, 1999. Tumbleweed does not expect a material change to
its accounting for revenue as a result of the provisions of SOP 98-9.
(G) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce deferred tax
assets to an amount whose realization is more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(H) STOCK-BASED COMPENSATION
Tumbleweed accounts for its stock-based compensation arrangements for
employees using the intrinsic-value method pursuant to Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As such,
compensation expense is recorded for fixed plan stock options on the date of
grant when the fair value of the underlying common stock exceeds the exercise
price for stock options or the purchase price for issuance or sales of common
stock. Options granted to consultants and other non-employees are considered
compensatory and are accounted for at fair value pursuant to SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Tumbleweed discloses the pro forma
effects of using the fair value method of accounting for all stock-based
compensation arrangements, in accordance with SFAS No. 123.
(I) NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE. Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net loss for the
period by the weighted average number of common and potential common shares
outstanding during the period if their effect is dilutive. Potential common
shares comprise outstanding shares of common stock issued to certain officers
(see Note 6) but subject to ratable repurchase by Tumbleweed if such officers do
not remain employees through August 1999, and incremental common and preferred
shares issuable upon the exercise of stock options and warrants and upon the
conversion of Series A, Series B, and Series C preferred stock.
F-10
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following potential common shares have been excluded from the determination
of diluted net loss per share for all periods because the effect of such shares
would have been anti-dilutive (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options.................. 1,154 1,489 2,409 1,995 3,222
Shares of restricted stock subject to repurchase..... 873 535 197 282 --
Shares issuable pursuant to warrants or rights to
purchase convertible preferred stock............... -- 40 61 40 121
Shares of convertible preferred stock on an
"as-if-converted" basis............................ 2,658 6,724 6,724 6,724 --
----- ----- ----- ----- -----
4,685 8,788 9,391 9,041 3,343
===== ===== ===== ===== =====
</TABLE>
- ------------------------
- As of September 30, 1999, the weighted average exercise prices of stock
options and warrants or rights to purchase common stock outstanding were
between $.50 and $26.00 and between $3.58 and $40.00, respectively.
(J) OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists entirely of cumulative
translation adjustments resulting from Tumbleweed's application of its foreign
currency translation policy. The tax effects of translation adjustments were not
significant.
(K) UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial information as of September 30, 1999 and for the
nine months ended September 30, 1998 and 1999 is unaudited, but includes all
adjustments (consisting of normal recurring adjustments) that Tumbleweed
considers necessary for the fair presentation of the financial position at such
dates and the operations and cash flows for the periods then ended. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of results that may be expected for the entire year.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of Tumbleweed's cash, cash equivalents, marketable
securities, accounts receivable, accounts payable and equipment line approximate
their carrying values due to the short maturity or variable-rate structure of
those instruments.
(M) USE OF ESTIMATES
The preparation of consolidated 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
disclosure of contingent assets and liabilities at the date of the consolidated
F-11
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(N) FOREIGN CURRENCY TRANSLATION
The functional currency of the Tumbleweed's Japan subsidiary is the yen. The
functional currency of the Tumbleweed's United Kingdom subsidiary is the pound.
Exchange gains and losses, which result from the translation of foreign currency
financial statements into U.S. dollars, are included in accumulated other
comprehensive income (loss) in stockholders' equity.
(O) ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Tumbleweed reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. Tumbleweed is required to adopt SFAS 133 in
fiscal 2000. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. To date, Tumbleweed has not entered into any derivative
financial instruments or hedging activities.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. SOP 98-1 establishes the accounting for costs of software products
developed or purchased for internal use, including when such costs should be
capitalized. Tumbleweed adopted SOP 98-1 effective January 1, 1999 and it did
not materially affect its financial position or results of operations.
F-12
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(2) FINANCIAL STATEMENT COMPONENTS
A summary of property and equipment as of December 31, 1997 and 1998,
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $100 $114
Computers and equipment..................................... 460 737
---- ----
560 851
Less accumulated depreciation............................... 178 379
---- ----
$382 $472
==== ====
</TABLE>
A summary of accrued liabilities as of December 31, 1997 and 1998, follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Accrued compensation........................................ $144 $235
Professional fees........................................... 78 156
Advertising................................................. 43 29
Other....................................................... 72 28
---- ----
$337 $448
==== ====
</TABLE>
Other income (expense), net consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Interest income.......................................... $41 $165 $180
Interest expense......................................... -- -- (41)
Miscellaneous income (expense)........................... -- -- 10
--- ---- ----
Other income (expense), net.............................. $41 $165 $149
=== ==== ====
</TABLE>
(3) RELATED PARTY TRANSACTIONS
In February 1999, Tumbleweed issued 3,914,989 shares of Series C preferred
stock at a price of $3.58 to Hikari Tsushin ("Hikari"), a Japanese company,
resulting in gross proceeds to Tumbleweed of approximately $14.0 million. In
August 1999, in connection with the initial public offering, Hikari purchased
400,000 shares of common stock at $12.00 per share, resulting in gross proceeds
to Tumbleweed of approximately $4.8 million. As of September 30, 1999, Hikari
owns approximately 20% of Tumbleweed's outstanding common stock.
On March 31, 1999, Tumbleweed KK (TKK), a wholly-owned Japanese subsidiary
of Tumbleweed until August 31, 1999 when it became an equity investee, entered
into a one-year License and Distribution Agreement with Hikari. A summary of the
terms of this agreement is as follows:
- TKK granted Hikari a perpetual license to use Tumbleweed's product in
consideration of a one-time, non-refundable fee of Y30,000,000 (which
approximated $251,000 as of March 31, 1999).
F-13
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
- Hikari was granted distribution rights to sell Tumbleweed's products to
third parties in consideration of a one-time, non-refundable fee of
Y20,000,000 (which approximated $167,000 as of March 31, 1999).
- Beginning on April 1, 1999, Hikari will make quarterly, non-refundable
prepaid transaction fees of Y23,625,000 (which approximated $198,000 as of
March 31, 1999). The quarterly transaction fees are based on quarterly
minimum volume commitments, and will be recognized as revenue in the
quarter that the amounts are due and payable.
On July 1, 1999, Tumbleweed entered into a Technology License Agreement with
TKK. A summary of the salient terms of this agreement is as follows:
- Tumbleweed granted TKK a five year, non-exclusive license to use
Tumbleweed IME products in connection with the marketing and sub-licensing
of Tumbleweed IME products in Japan.
- Beginning on July 1, 1999, and as consideration for the license grant, TKK
is obligated to pay Tumbleweed a royalty based on license revenue achieved
by TKK. The royalty rate begins at 60% of TKK's net license revenue in
1999, declining to 55% in 2000 and 50% in 2001 and thereafter.
Tumbleweed's management believes that these terms approximate arms-length
rates for such sublicensing activities.
- During the term of the agreement, Tumbleweed will provide maintenance and
support services to TKK. Tumbleweed receives an annual fee of $100,000 for
the services.
On August 31, 1999, TKK sold 200 shares of its common stock, representing a
50% ownership interest in TKK, to Hikari for Y350,000,000 (which approximated
$3.2 million as of August 31, 1999). Following Hikari's investment, Hikari and
Tumbleweed have equal board representation in TKK. As a result of the equity
transaction and the change in board constituency, Tumbleweed no longer believes
that it has control of TKK. Consequently, beginning September 1, 1999,
Tumbleweed began accounting for its investment in TKK on the equity method of
accounting rather than the consolidation method. Because TKK sold shares to
Hikari, Tumbleweed's share of the book value of TKK's net assets exceeded the
carrying amount of the investment by $1.55 million. As a result Tumbleweed has
recorded $1.55 million in additional paid-in capital in the three months ended
September 30, 1999.
During the two and eight months ended August 31, 1999, and the three and
nine months ended September 30, 1998, Tumbleweed recorded approximately
$250,000, $914,000, $0, and $0, respectively, in consolidated revenues from
third-party customers of TKK. Hikari has historically been a significant
customer of TKK, representing approximately 62%, 84%, 0%, and 0% of TKK's third
party revenues recorded during the aforementioned periods. During the one month
ended September 30, 1999, Tumbleweed recognized approximately $59,000 in revenue
from TKK. As of September 30, 1999, $591,000 was due from TKK, of which $532,000
was due from TKK for previous intercompany activity with no specific
F-14
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
repayment terms. TKK's summary operating results for the one month ended
September 30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
ONE-MONTH ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Revenues.................................................... $87
Cost of goods sold.......................................... (55)
---
Gross margin................................................ 32
Operating expenses.......................................... 130
---
Net loss.................................................... (98)
===
</TABLE>
Using the equity method of accounting, Tumbleweed's share of the operating
loss of TKK of approximately $(49,000) was recorded as Other Expense in the
consolidated statement of operations for the three and nine months ended
September 30, 1999.
(4) DEBT
In 1997, Tumbleweed obtained a $400,000 line of credit collateralized by all
of Tumbleweed's assets. The line bears interest at the bank's prime rate plus
1.5% and expired on August 3, 1998.
In July 1998, Tumbleweed entered into a debt agreement with a bank (the Debt
Facility) which includes a $1,500,000 revolving credit facility (the Revolver),
with availability based on outstanding accounts receivable, and a $750,000
equipment loan facility (the Equipment Line). Borrowings under the Revolver and
Equipment Line carry interest at prime rate plus 0.5% and 0.75%, respectively,
with interest payable monthly and an unamortized discount of $43,000. Borrowings
under the Revolver were due in July 1999. Borrowings under the Equipment Line
are due in 36 equal monthly installments beginning January 1999, and are secured
by certain assets of Tumbleweed. The weighted-average interest rate for the
Equipment Line was 8.5% for fiscal 1998.
During November 1998, Tumbleweed amended the Debt Facility. As part of the
amendment, Tumbleweed obtained a $1,500,000 line of credit (Bridge Loan
Facility) with availability based on several factors, including the proposed
amount of the next equity financing; Tumbleweed is prohibited from making
additional borrowings against the Revolver until the maturity date of the Bridge
Loan Facility; and the Equipment Line is limited to making additional borrowings
up to $125,000. Borrowings under the Bridge Loan Facility are due the earlier of
(i) the closing of Tumbleweed's Series C preferred stock financing;
(ii) 90 days from the initial loan; or (iii) April 30, 1999. In connection with
the Bridge Loan Facility, Tumbleweed issued a warrant to purchase preferred
stock with a fair value of $55,000, which is being amortized over the term of
the Bridge Loan Facility (see Note 6). Borrowings under the Bridge Loan Facility
carry interest at prime rate plus 1% (8.5% at December 31, 1998) and are payable
monthly. Upon the closing of the February 1999 Series C preferred stock
financing, Tumbleweed repaid all outstanding borrowings against the Bridge Loan
Facility.
In June 1999, Tumbleweed amended the $750,000 equipment loan. As part of the
amendment, Tumbleweed increased the equipment loan facility by $1.0 million. As
of September 30, 1999, total borrowings under the equipment loan facility were
$1.3 million. Borrowings under the amended equipment
F-15
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(4) DEBT (CONTINUED)
loan facility are due in 36 equal monthly installments beginning January 1,
2000. Borrowings under this facility carry interest at prime rate plus 0.75%.
In addition, Tumbleweed financed $525,000 for directors' and officers'
liability insurance, payable in nine equal monthly installments, and $231,000 in
facility-related expenditures, payable in 60 monthly installments. As of
September 30, 1999, total debt outstanding under these financing arrangements
was $639,000.
As of September 30, 1999, minimum debt payments under all agreements were as
follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------
<S> <C>
1999........................................................ $ 242
2000........................................................ 870
2001........................................................ 584
2002........................................................ 363
2003........................................................ 9
------
2,068
Less interest............................................... 195
Less current installments of equipment line................. 615
------
$1,258
------
</TABLE>
F-16
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES
The differences between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% for the years ended December 31, 1997 and 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Statutory federal income tax benefit...................... $(1,511) $(2,047)
Net operating loss not benefited.......................... 1,503 2,035
Other..................................................... 8 12
------- -------
$ -- $ --
======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $1,921 $4,052
Tax credit carryforwards.................................. 56 249
Reserves and accruals not currently deductible............ 227 196
Other..................................................... 2 9
------ ------
2,206 4,506
Less valuation allowance.................................... 2,206 4,506
------ ------
Net deferred tax assets................................... $ -- $ --
====== ======
</TABLE>
Tumbleweed believes that sufficient uncertainty exists with respect to
future realization of these deferred tax assets; therefore, it has established a
valuation allowance against all net deferred tax assets.
The net change in the valuation allowance for the year ended December 31,
1998, was an increase of approximately $2,300,000.
As of December 31, 1998, Tumbleweed has federal and California net operating
loss carryforwards of approximately $11,000,000 and $5,700,000, respectively.
The net operating loss carryforwards expire in the years 2011 through 2018 for
federal income tax purposes and the years 2001 through 2003 for California
income tax purposes.
As of December 31, 1998, Tumbleweed has federal and California research and
development tax credit carryforwards of approximately $144,000 and $105,000,
respectively. The research and development tax credit carryforwards for federal
income tax purposes expire in the years 2012 through 2018. The research and
development tax credit carryforwards for California income tax purposes can be
carried forward indefinitely.
The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change." Several of
Tumbleweed's issuances of preferred stock have resulted in multiple ownership
changes since inception of Tumbleweed. Of the approximately $11.0 million of
federal net operating loss carryforward as of December 31, 1998, approximately
$3.5 million will be subject to an annual limitation in
F-17
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES (CONTINUED)
the aggregate of $400,000. Any unused annual limitation can be carried over and
added to the succeeding year's annual limitation within the allowable
carryforward period. Future changes in ownership may result in additional
limitations.
(6) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The rights, preferences, and privileges of the Series A, B, and C preferred
stock are as follows:
- The conversion rate in effect at any time for each series of convertible
preferred stock shall be the quotient obtained by dividing the original
issuance price for such series of series preferred stock by the series
preferred stock conversion price. The series preferred stock conversion
price shall initially be the original issue price for such series adjusted
for stock splits and combinations, common stock dividends and
distributions, and similar transactions. As of September 30, 1999, the
conversion rates allow each share of Series A, B and C preferred stock to
be converted into one share of common stock.
- Each share of series preferred stock shall automatically be converted into
shares of common stock, based on the then-effective series preferred stock
conversion price (a) at any time upon the affirmative vote of the holders
of more than 50% of the outstanding shares of preferred stock, or
(b) immediately upon the closing of a public offering in which the per
share price is two times the original issuance price of the Series C
preferred stock and the gross cash proceeds to Tumbleweed are at least
$10,000,000.
- Each shareholder of Series A, B, and C preferred stock is entitled to
receive, when and as declared by Tumbleweed's board of directors,
noncumulative dividends of approximately $0.11, $0.16, and $0.29 per
share, respectively, payable in preference and priority to any payment of
dividends on common stock. No dividends have been declared or paid on the
preferred stock.
- In the event of liquidation, the stockholders of Series A, B, and C
preferred stock are entitled to a liquidation preference equal to $1.38,
$1.99, and $3.58 per share, respectively, plus all declared but unpaid
dividends. All remaining assets shall be distributed on a pro rata basis
among the holders of the preferred and common stock on an
"as-if-converted" basis.
STOCK REPURCHASE AGREEMENTS
On August 16, 1996, stock repurchase agreements were signed with
Tumbleweed's Chief Technical Officer and Chief Executive Officer (the Officers).
Under these agreements, Tumbleweed may repurchase a ratable portion of the
shares of common stock held by the Officers if the Officers terminate their
employment with Tumbleweed at any time prior to August 16, 1999. The common
stock was issued for the value of services rendered, at a value of $0.001 per
share. The purchase price would be $0.005 per share, and the total number of
shares available for repurchase by Tumbleweed is reduced ratably over the
three-year term of the agreements. The amount of shares subject to repurchase by
Tumbleweed as of December 31, 1998 and September 30, 1999, were approximately
197,000 and 0, respectively.
F-18
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
1993 STOCK OPTION PLAN
On September 30, 1993, the Company adopted the 1993 stock option plan.
During 1998 and 1999, the board of directors approved an amendment to the plan
to increase the number of shares authorized for issuance by 1,000,000 shares and
500,000 shares, respectively, to a total of 3,618,500 authorized shares.
Under the plan, the exercise price for incentive options is at least 100% of
the fair market value on the date of grant. The exercise price for nonqualified
stock options is at least 85% of the fair market value on the date of grant.
Options generally expire in 10 years. Vesting periods are determined by the
board of directors and generally provide for 25% of the options to vest on the
first anniversary date of the grant with the remaining options vesting monthly
over the following 36 months.
1999 OMNIBUS STOCK INCENTIVE PLAN
The 1999 Omnibus Stock Incentive Plan (the Incentive Plan) was adopted by
Tumbleweed's board of directors on May 27, 1999 (and to be approved by
stockholders thereafter), for the benefit of the officers, directors, key
employees, advisors and consultants. An aggregate of 4,381,500 shares of common
stock is reserved for issuance under the Incentive Plan, which provides for the
issuance of stock-based incentive awards, including stock options, stock
appreciation rights, limited stock appreciation rights, restricted stock,
deferred stock, and performance shares.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan (the Purchase Plan) was adopted by
Tumbleweed's board of directors on May 27, 1999 (and to be approved by
stockholders thereafter) which allows eligible employees to purchase common
stock at a discount from fair market value. A total of 500,000 shares of common
stock has been reserved for issuance under the Purchase Plan for each fiscal
year occurring during the term of the Purchase Plan (the Purchase Plan will
terminate in 2009).
F-19
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
----------------- ----------- --------------
<S> <C> <C> <C>
Balances, December 31, 1996............................ 964,500 1,154,000 $0.48
Granted................................................ (531,500) 531,500 0.50
Canceled............................................... 196,375 (196,375) 0.50
---------- ---------
Balances, December 31, 1997............................ 629,375 1,489,125 0.48
Authorized............................................. 1,000,000 -- --
Granted................................................ (1,320,250) 1,320,250 0.50
Exercised.............................................. -- (174,535) 0.50
Canceled............................................... 225,629 (225,629) 0.50
---------- ---------
Balances, December 31, 1998............................ 534,754 2,409,211 0.49
Authorized (unaudited)................................. 5,031,500 -- --
Granted (unaudited).................................... (1,737,750) 1,737,750 5.98
Exercised (unaudited).................................. -- (753,169) 0.47
Canceled (unaudited)................................... 171,480 (171,480) 0.50
---------- ---------
Balances, September 30, 1999 (unaudited)............... 3,999,984 3,222,312 3.46
========== =========
Options vested as of September 30, 1999 (unaudited).... 531,631
=========
Weighted-average fair value of options granted during the year:
1996................................................. $0.13
1997................................................. $0.13
1998................................................. $0.11
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
AVERAGE REMAINING
CONTRACTUAL LIFE
EXERCISE PRICES NUMBER OUTSTANDING (YEARS) NUMBER EXERCISABLE
- --------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
$0.50...................... 1,687,062 8.8 504,966
0.80....................... 770,750 9.5 26,665
9.60....................... 63,000 10.0 --
12.00...................... 623,500 10.0 --
17.13-25.75................ 78,000 10.0 --
--------- -------
3,222,312 531,631
========= =======
</TABLE>
STOCK-BASED COMPENSATION
Tumbleweed uses the intrinsic value method prescribed by APB No. 25 in
accounting for its stock-based compensation arrangements for employees.
Compensation cost has been recognized for fixed stock
F-20
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
option issuances in the accompanying consolidated financial statements because
the fair value of the underlying common stock equals or exceeds the exercise
price of the stock options at the date of grant. Tumbleweed has recorded
deferred stock compensation expense of $275,000, $469,000, $1.7 million and
$7.3 million for the difference at the grant date between the exercise price and
the fair value of the common stock underlying the options granted in the years
ended December 31, 1996, 1997 and 1998, and in the nine months ended
September 30, 1999, respectively. These amounts are being amortized on an
accelerated basis over the vesting period, generally four years, consistent with
the method described in FASB Interpretation No. 28. Amortization of deferred
compensation of approximately $24,000, $246,000, $673,000 and $2.4 million were
recognized in the years ended December 31, 1996, 1997 and 1998, and in the nine
months ended September 30, 1999, respectively. Had compensation cost for
Tumbleweed's stock-based compensation plan been determined consistent with the
fair value approach set forth in SFAS No. 123, Tumbleweed's net losses for the
years ended December 31, 1996, 1997, and 1998, would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported........................................ $(1,180) $(4,691) $(6,590)
APB No. 25 compensation expense recorded.................... 24 246 673
Additional stock-based compensation under SFAS No. 123...... (27) (281) (731)
------- ------- -------
Net loss pro forma.......................................... $(1,183) $(4,726) $(6,648)
------- ------- -------
Basic and diluted net loss per share as reported............ $ (0.33) $ (1.41) $ (1.74)
------- ------- -------
Basic and diluted net loss per share pro forma.............. $ (0.33) $ (1.42) $ (1.75)
------- ------- -------
</TABLE>
The fair value of options granted during the years ended December 31, 1996,
1997 and 1998, are estimated on the date of grant using the minimum value method
with the following weighted-average assumptions: no dividend yield; risk-free
interest rates ranging from 4.75% to 7.5%; and an expected life of four years.
WARRANTS
In connection with Tumbleweed's sale of certain technology rights to a third
party in December 1997, Tumbleweed licensed the rights back from the third party
in exchange for a warrant to purchase 40,000 shares of Tumbleweed's Series B
convertible preferred stock at an exercise price of $2.50 per share. The warrant
is exercisable upon issuance and expires upon on the earlier of the closing of
an initial public offering of Tumbleweed's common stock or five years from the
issue date. Using the Black-Scholes option pricing model Tumbleweed has
calculated the value of the warrant based on the following assumptions: no
dividends; contractual term of 5 years; risk-free interest rate of 5.75%;
expected volatility of 55%. The resultant expense of $28,000 is included in
research and development expenses in 1997.
In connection with the November 1998 Bridge Loan Facility (see Note 4),
Tumbleweed issued a warrant to acquire 20,973 shares of Series C preferred stock
at an exercise price of $3.58. Using the Black-Scholes model, the warrant is
valued at $2.65 per share, for a total of $55,000, based on the following
assumptions: no dividends; contractual term of 10 years; risk-free interest rate
of 4.86%; expected volatility of 60%. The value of the warrant is being
amortized over the term of the Bridge Loan Facility. The warrant expires upon
the earlier of (i) November 2008; (ii) five years from the closing of an initial
public offering;
F-21
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
or (iii) the closing of an acquisition of Tumbleweed in which Tumbleweed's stock
is sold for at least three times the initial exercise price.
In connection with the February 1999 Series C financing, Tumbleweed's
financial advisor earned the right to receive a warrant to acquire 58,725 shares
of Series C convertible preferred stock at an exercise price of $3.58. Using the
Black-Scholes model, the warrant is valued at $1.99 per share, for a total of
$117,000, based on the following assumptions: no dividends; contractual term of
5 years; risk-free interest rate of 4.75%; expected volatility of 60%. The value
of the warrant is included as an issuance cost of the Series C financing. The
warrant will be exercisable for a period of 5 years from the date of issuance.
The warrant will terminate upon an initial public offering by Tumbleweed or sale
or acquisition of Tumbleweed.
In connection with the May 1999 Series C financing, Tumbleweed issued a
warrant to acquire 16,778 shares of Series C convertible preferred stock at an
exercise price of $3.58. The warrant will be exercisable for a period of
5 years from the date of issuance and will terminate upon an initial public
offering or sale or acquisition of Tumbleweed. Using the Black-Scholes model,
the warrant is valued at $8.51 per share, for a total of $143,000, based on the
following assumptions: no dividends; contractual term of 5 years; risk-free
interest rate of 4.79%; expected volatility of 60%. The value of the warrant is
included as an issuance cost of the Series C financing.
In July 1999, in exchange for marketing and publicity assistance from a
customer, Tumbleweed issued a warrant to acquire 100,000 share of its common
stock. The warrant is exercisable immediately in three tranches: 50,000 shares
at an exercise price of $20 per share; 25,000 shares at an exercise price of $30
per share; and 25,000 shares at an exercise price of $40 per share. Using the
Black-Scholes option pricing model, the total fair value of the warrant was
estimated to be $127,000, based on the following assumptions: no dividends;
contractual term of three years; risk-free interest rate of 4.8%; and expected
volatility of 60%. The fair value of the warrant was charged to sales and
marketing expense in the third quarter of 1999. In June 1999, Tumbleweed entered
into a license agreement and a consulting agreement with the customer for a
total of $355,000.
(7) EMPLOYEE BENEFIT PLAN
Tumbleweed has a 401(k) plan that allows eligible employees to contribute a
percentage of their compensation, limited to $10,000 in 1998. Tumbleweed may
make discretionary matching contributions of up to 6% of employee contributions.
Tumbleweed matching contributions and earnings thereon vest immediately.
Tumbleweed has made no contributions to date.
F-22
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(8) COMMITMENTS
LEASE COMMITMENTS
Future minimum lease payments under all noncancelable operating leases as of
December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ------------------------ ---------
<S> <C>
1999........................................................ $178
2000........................................................ 53
2001........................................................ 9
2002........................................................ 3
2003........................................................ --
----
Total minimum lease payments................................ $243
====
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1996, 1997 and 1998, was $56,000, $139,000 and $278,000, respectively.
ROYALTY AGREEMENTS
During 1996, Tumbleweed entered into royalty agreements with various
companies whereby Tumbleweed was granted a right to sublicense certain software
technology. Under the terms of the agreements, Tumbleweed pays royalties based
on the number of software licenses sold or a percentage of revenue. Royalty
expense under these agreements in 1996, 1997 and 1998 was approximately $9,000,
$39,000 and $128,000, respectively, and was recorded as cost of revenue. Royalty
expense under these agreements in the nine month periods ended September 30,
1998 and 1999 was approximately $118,000 and $121,000, respectively, and was
recorded as cost of revenue.
(9) SEGMENT INFORMATION
Tumbleweed has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within Tumbleweed for
making operating decisions and assessing financial performance.
Tumbleweed's chief operating decision-maker is considered to be Tumbleweed's
Chief Executive Officer. The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenue by
geographic region for purposes of making operating decisions and assessing
financial performance. The consolidated financial information reviewed by the
CEO is identical to the information presented in the accompanying consolidated
statement of operations. Therefore, Tumbleweed operates in a single operating
segment.
F-23
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
Revenue information regarding operations in the different geographic regions
is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
STATES BELGIUM TAIWAN COUNTRIES TOTAL
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
1996................................................ $592 $ -- $ -- $ 5 $ 597
1997................................................ 534 -- 178 17 729
1998................................................ 756 560 667 32 2,015
</TABLE>
Revenue attributable to significant customers, representing approximately
10% or more of total revenue for at least one of the respective periods, are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SALES:
Customer A........................................... --% 38% 33% 41% 4%
Customer B........................................... 22% 26% --% --% --%
Customer C........................................... --% 12% --% --% --%
Customer D........................................... --% --% 28% 17% 18%
Customer E........................................... --% --% 30% 33% 5%
Customer F........................................... 26% --% --% --% --%
Customer G........................................... 20% --% --% --% --%
Customer H........................................... 12% 2% 2% 2% 1%
Customer I........................................... --% --% --% --% 23%
Customer J........................................... --% --% --% --% 13%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Customer A........................................... --% 43% --% --% --%
Customer B........................................... 85% --% --% --% --%
Customer C........................................... --% 19% --% 13% --%
Customer D........................................... --% --% 82% --% --%
Customer E........................................... --% 36% 16% 74% --%
Customer F........................................... --% --% --% --% --%
Customer G........................................... --% --% --% --% --%
Customer H........................................... --% --% --% --% --%
Customer I........................................... --% --% --% --% --%
Customer J........................................... --% --% --% --% 14%
</TABLE>
Revenue aggregating 0%, 0%, 30%, 33% and 28% of total revenue for the years
ended December 31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999, respectively, was
F-24
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998
(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
generated from two customers who are also stockholders of Tumbleweed, and whose
ownership percentages were 6.5% and 22.8%, respectively.
(10) SUBSEQUENT EVENTS
REINCORPORATION
On May 27, 1999, the board of directors approved Tumbleweed's
reincorporation in the state of Delaware. On August 2, 1999, the reincorporation
was completed. The Certificate of Incorporation of the Delaware successor
corporation authorizes 100 million shares of common stock, $0.001 par value per
share, and 10 million shares of preferred stock, $0.001 par value per share. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.
1993 STOCK OPTION PLAN
On August 3, 1999, the board of directors approved an amendment to the plan
to increase the number of shares authorized for issuance by 150,000 shares to a
total of 3,768,500 authorized shares.
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Worldtalk Communications Corporation:
We have audited the accompanying consolidated balance sheets of Worldtalk
Communications Corporation and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the consolidated financials
statements, we also have audited the financial statement schedule listed in the
Index at Item 14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Worldtalk
Communications Corporation and subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
[LOGO]
Mountain View, California
January 28, 1999
F-26
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,662 $ 3,858 $ 11,027
Short-term investments.................................... 6,415 2,166 --
Accounts receivable, net of allowance for doubtful
accounts of $121, $1,840 and $1,052, respectively....... 3,039 2,960 3,131
Prepaid expenses.......................................... 935 613 621
-------- -------- --------
Total current assets.................................... 15,051 9,597 14,779
Property and equipment, net................................. 1,658 1,108 873
Other assets................................................ 556 441 417
-------- -------- --------
$ 17,265 $ 11,146 $ 16,069
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 760 $ 787 $ 1,342
Short-term debt........................................... 243 250 242
Current portion of capital lease obligations.............. 339 115 16
Accrued expenses.......................................... 3,041 3,419 3,027
Deferred revenue.......................................... 4,094 2,474 1,204
-------- -------- --------
Total current liabilities............................... 8,477 7,045 5,831
Capital lease obligations, less current portion............. 132 13 --
-------- -------- --------
Total liabilities....................................... 8,609 7,058 5,831
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 6,500 authorized, none
designated or outstanding............................... -- -- --
Common stock, $.01 par value; 25,000 and 50,000 shares
authorized as of December 31, 1997 and 1998 and
September 30, 1999, respectively, 10,487, 10,686 and
14,379 shares issued and outstanding as of December 31,
1997 and 1998, and September 30, 1999, respectively..... 105 107 144
Additional paid-in capital................................ 32,301 32,773 43,328
Deferred compensation..................................... (89) (47) (15)
Accumulated deficit....................................... (23,661) (28,745) (33,219)
-------- -------- --------
Total stockholders' equity.............................. 8,656 4,088 10,238
-------- -------- --------
$ 17,265 $ 11,146 $ 16,069
======== ======== ========
</TABLE>
F-27
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Continuing products:
Software licenses............................ $ -- $ 3,738 $ 8,111 $ 5,994 $ 6,256
Maintenance, installation and training....... -- 9 449 231 1,101
------- ------- ------- ------- -------
Total revenues from continuing products.... -- 3,747 8,560 6,225 7,357
Discontinued products revenue.................. 14,205 7,580 4,888 4,146 1,472
------- ------- ------- ------- -------
Total revenues............................. 14,205 11,327 13,448 10,371 8,829
------- ------- ------- ------- -------
Cost of revenues:
Software licenses............................ 1,083 1,027 737 522 325
Maintenance, installation and training....... 2,355 2,964 2,569 1,967 1,671
------- ------- ------- ------- -------
Total cost of revenues..................... 3,438 3,991 3,306 2,489 1,996
------- ------- ------- ------- -------
Gross profit............................... 10,767 7,336 10,142 7,882 6,833
------- ------- ------- ------- -------
Operating expenses:
Product development.......................... 3,563 4,294 3,934 3,011 3,017
Sales and marketing.......................... 6,751 7,378 7,477 5,573 7,343
General and administrative................... 1,733 2,689 4,189 3,629 1,606
Purchased research and development........... 4,500 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses................... 16,547 14,361 15,600 12,213 11,966
------- ------- ------- ------- -------
Operating loss................................. (5,780) (7,025) (5,458) (4,331) (5,133)
Operating income:
Interest income, net......................... 544 508 375 302 291
Gain on sale of discontinued products........ -- -- -- -- 443
------- ------- ------- ------- -------
Loss before income taxes................... (5,236) (6,517) (5,083) (4,029) (4,399)
Income taxes................................... 4 183 1 170 75
------- ------- ------- ------- -------
Net loss................................... $(5,240) $(6,700) $(5,084) $(4,199) $(4,474)
======= ======= ======= ======= =======
Basic and diluted net loss per share........... $ (0.68) $ (0.65) $ (0.48) $ (0.40) $ (0.38)
======= ======= ======= ======= =======
Shares used in computing basic and diluted net
loss per share............................... 7,669 10,355 10,584 10,559 11,886
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL
-------- -------- ---------------
<S> <C> <C> <C>
Balances as of December 31, 1995............................ 1,505 $ 15 $ 670
Issuance of common stock in initial public offering,
net..................................................... 2,000 20 13,812
Conversion of redeemable preferred stock to common
stock................................................... 6,025 60 12,756
Exercise of common stock options and warrants............. 178 2 49
Purchases under the Employee Stock Purchase Plan.......... 35 -- 238
Issuance of shareholders' notes receivable................ -- -- --
Issuance of common stock in acquisition................... 547 6 4,125
Amortization of deferred compensation..................... -- -- --
Net loss.................................................. -- -- --
------ ---- -------
Balances as of December 31, 1996............................ 10,290 $103 $31,650
Exercise of common stock options.......................... 148 2 202
Purchases under the Employee Stock Purchase Plan.......... 124 1 461
Repurchased common stock.................................. (75) (1) (12)
Repayment of shareholders' notes receivable............... -- -- --
Amortization of deferred compensation..................... -- -- --
Net loss.................................................. -- -- --
------ ---- -------
Balances as of December 31, 1997............................ 10,487 $105 $32,301
Exercise of common stock options.......................... 90 1 129
Purchases under the Employee Stock Purchase Plan.......... 155 1 357
Repurchased common stock.................................. (46) -- (14)
Amortization of deferred compensation..................... -- -- --
Net loss.................................................. -- -- --
------ ---- -------
Balances as of December 31, 1998............................ 10,686 $107 $32,773
Exercise of common stock options and warrants
(unaudited)............................................. 277 3 484
Purchases under the Employee Stock Purchase Plan
(unaudited)............................................. 83 1 166
Amortization of deferred compensation (unaudited)......... -- -- --
Issuance of common stock for equity financing
(unaudited)............................................. 3,333 33 9,905
Net loss (unaudited)...................................... -- -- --
------ ---- -------
Balances as of September 30, 1999 (unaudited)............... 14,379 $144 $43,328
====== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDER STOCKHOLDERS'
NOTE DEFERRED ACCUMULATED EQUITY
RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1995............. $(194) $(175) $(11,721) $(11,405)
Issuance of common stock in initial public
offering, net............................ -- -- -- 13,832
Conversion of redeemable preferred stock to
common stock............................. -- -- -- 12,816
Exercise of common stock options and
warrants................................. -- -- -- 51
Purchases under the Employee Stock Purchase
Plan..................................... -- -- -- 238
Issuance of shareholders' notes
receivable............................... (68) -- -- (68)
Issuance of common stock in acquisition.... (3) -- -- 4,128
Amortization of deferred compensation...... -- 44 -- 44
Net loss................................... -- -- (5,240) (5,240)
----- ----- -------- --------
Balances as of December 31, 1996............. $(265) $(131) $(16,961) $ 14,396
Exercise of common stock options........... -- -- -- 204
Purchases under the Employee Stock Purchase
Plan..................................... -- -- -- 462
Repurchased common stock................... -- -- -- (13)
Repayment of shareholders' notes
receivable............................... 265 -- -- 265
Amortization of deferred compensation...... -- 42 -- 42
Net loss................................... -- -- (6,700) (6,700)
----- ----- -------- --------
Balances as of December 31, 1997............. $ -- $ (89) $(23,661) $ 8,656
Exercise of common stock options........... -- -- -- 130
Purchases under the Employee Stock Purchase
Plan..................................... -- -- -- 358
Repurchased common stock................... -- -- -- (14)
Amortization of deferred compensation...... -- 42 -- 42
Net loss................................... -- -- (5,084) (5,084)
----- ----- -------- --------
Balances as of December 31, 1998............. $ -- $ (47) $(28,745) $ 4,088
Exercise of common stock options
(unaudited).............................. -- -- -- 487
Purchases under the Employee Stock Purchase
Plan (unaudited)......................... -- -- -- 167
Amortization of deferred compensation
(unaudited).............................. -- 32 -- 32
Issuance of common stock (unaudited)....... -- -- -- 9,938
Net loss (unaudited)....................... -- -- (4,474) (4,474)
----- ----- -------- --------
Balances as of September 30, 1999
(unaudited)................................ $ -- $ (15) $(33,219) $ 10,238
===== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,240) $(6,700) $(5,084) $(4,199) $(4,474)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 452 703 783 590 484
Change in allowance for doubtful accounts............... (1) (28) 1,719 1,670 (788)
Amortization of deferred compensation................... 44 42 42 32 32
Purchased research and development...................... 4,500 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (3,956) 2,513 (1,640) (1,417) 617
Prepaid expenses...................................... (507) (313) 322 312 (8)
Accounts payable...................................... 647 (841) 27 279 555
Accrued expenses...................................... 714 (53) 378 521 (392)
Deferred revenue...................................... 561 2,528 (1,620) (1,828) (1,270)
Other liabilities..................................... (280) (350) -- -- --
------- ------- ------- ------- -------
Net cash used in operating activities............... (3,066) (2,499) (5,073) (4,040) (5,244)
------- ------- ------- ------- -------
Cash flows from investing activities:
Restricted cash........................................... 2,000 -- -- -- --
Purchase of property and equipment........................ (1,413) (520) (233) (159) (249)
Purchase of short-term investments........................ (9,469) (7,418) (56,383) -- --
Sales and maturities of short-term investments............ 3,442 7,030 60,632 4,337 2,166
Other assets.............................................. 39 247 115 91 24
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities........................................ (5,401) (661) 4,131 4,269 1,941
------- ------- ------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 14,053 653 474 316 10,592
Repayment of shareholder receivable....................... -- 265 -- -- --
Principal payments under capital lease obligations........ (256) (351) (343) (265) (112)
Proceeds (repayments) on bank borrowings.................. 698 243 7 -- (8)
------- ------- ------- ------- -------
Net cash provided by financing activities........... 14,495 810 138 51 10,472
------- ------- ------- ------- -------
Change in cash and cash equivalents......................... 6,028 (2,350) (804) 280 7,169
Cash and cash equivalents at beginning of year.............. 984 7,012 4,662 4,662 3,858
------- ------- ------- ------- -------
Cash and cash equivalents at end of year.................... $ 7,012 $ 4,662 $ 3,858 $ 4,942 $11,027
======= ======= ======= ======= =======
Supplemental disclosures:
Cash paid for interest:................................... $ 106 $ 92 $ 54 $ 47 $ 16
======= ======= ======= ======= =======
Noncash investing and financing activities:
Common stock issued in acquisition of Deming Software,
Inc................................................... $ 4,131 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Conversion of convertible preferred stock to common
stock................................................. $12,816 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Notes receivable from stockholders...................... $ 68 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Equipment acquired under capital lease agreements....... $ 506 $ 110 $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Worldtalk Communications Corporation (the "Company") is a leading provider
of Internet content security and policy management solutions. The Company's
WorldSecure policy management platform enables organizations to define and
manage electronic mail and web security and usage policies, reducing the risks
and liabilities associated with Internet communications. The Company's products
include WorldSecure/Mail, a Windows NT-based content firewall and policy
management solution, WorldSecure Web, a Windows NT-based content security
product, WorldSecure/ESP, a surveillance program for Internet e-mail,
WorldSecure Client, a desktop e-mail encryption product and NetTalk-TM-, a
Windows NT-based e-mail and directory solution.
DISCONTINUED PRODUCTS
In July 1999, the Company completed the sale of its NetJunction e-mail
connectivity and directory integration business to Wingra Technologies, LLC.
Under the terms of the agreement, Wingra has acquired the assets related to the
NetJunction product and has assumed support and development responsibilities for
NetJunction customers and resellers with current agreements. In addition, the
Company has appointed Wingra as a reseller of the Company's NetTalk product
line. Due to the sale of the Company's NetJunction product line, the revenue in
the accompanying consolidated statements of operations has been divided into
continuing product revenue and discontinued product revenue. The continuing
product revenue represents the WorldSecure and NetTalk product lines and the
discontinued product revenue accounts for all NetJunction related revenue.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
transactions and accounts have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial information as of September 30, 1999 and for the
nine months ended September 30, 1998 and 1999 is unaudited, but includes all
adjustments (consisting of normal recurring adjustments) that the Company
considers necessary for the fair presentation of the financial position at such
dates and the operations and cash flows for the periods then ended. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of results that may be expected for the entire year.
USE OF ESTIMATES
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-32
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Cash equivalents consist of highly liquid investments, principally money
market accounts and marketable debt securities, with maturities of three months
or less at the time of purchase.
The Company has classified its short-term marketable investments as
"available-for-sale." Available-for-sale securities are carried at fair market
value, with material unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. Gains and losses on securities sold
are based on the specific identification method.
Fair values of short-term marketable investments are based on quoted market
values as of December 31, 1998 and 1997. As of December 31, 1998 and 1997, the
difference between the fair value and amortized cost of short-term marketable
investments was not material. As of December 31, 1998, short-term marketable
investments consisted of commercial paper due within one year or less.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash equivalents, short-term
marketable investments and accounts receivable. The Company's cash equivalents
and short-term marketable investments consist primarily of commercial paper with
various maturities during 1999. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base and their dispersion across different industries and
geographic areas. Generally, the Company requires no collateral on trade
receivables. The Company believes that its credit evaluation process
substantially mitigates any credit risks.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the respective useful lives of the assets or the lease term.
OTHER ASSETS
Other assets consist of long-term deposits and certain intangible assets and
goodwill acquired in the purchase of Deming Software, Inc. in November 1996. The
intangible assets and goodwill are being amortized using the straight-line
method over the expected four year life of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount, including the
unamortized portion of goodwill allocated to the property and equipment, of an
asset may not be recoverable. Recoverability of property and
F-33
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment is measured by comparison of its carrying amount to future net cash
flow the property and equipment are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the property and equipment, including the
allocated goodwill, if any, exceeds its fair market value. To date, the Company
has made no adjustments to the carrying amount of its property and equipment.
REVENUE RECOGNITION
For software transactions entered into after January 1, 1998, the Company
adopted the American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." SOP
No. 97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on its relative fair
value. The fair value of the element must be based on objective evidence that is
specific to the vendor. If the vendor does not have objective evidence of the
fair value of all elements in a multiple-element arrangement, all revenue from
the arrangement must be deferred until such evidence exists or until all
elements have been delivered. The revenue allocated to software products is
generally recognized upon shipment of the products provided there is persuasive
evidence that an agreement exists, the fee is fixed, determinable and
collectible and the arrangement does not involve significant customization,
modification or production. The revenue allocated to post contract customer
support is recognized ratably over the term of the support and revenue allocated
to service elements is recognized as the services are performed. The adoption of
SOP No. 97-2 did not have a material effect on the Company's operating results.
RESEARCH AND DEVELOPMENT
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility in the form of a working model has been
established. To date, the Company's software development has been completed
concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans using the intrinsic value
method. As such, compensation expense is recorded if on the date of grant the
current market price of the underlying stock exceeds the exercise price.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those
F-34
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by an allowance to an amount whose realization is more likely
than not.
EARNINGS PER SHARE
Basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of potentially dilutive common equivalent shares
outstanding for the period, if any. For the years ending December 31, 1996, 1997
and 1998 and the nine months ended September 30, 1998 and 1999, common stock
options totaling 1,251, 1,853, and 2,143, 1,120 and 2,265, respectively, were
omitted from the computation, as their impact would be anti-dilutive. In
addition, warrants to purchase common stock for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 of 28,
28 and 53, 53 and 1,694, respectively, were omitted from the computation, as the
impact would be anti-dilutive.
OTHER COMPREHENSIVE INCOME (LOSS)
The Company has no material components of other comprehensive income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SFAS No. 133 for the year ended
December 31, 2000.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP
No. 98-9 establishes the method of recognizing revenue for certain
multiple-element software arrangements. The Company will be required to
implement SOP No. 98-9 for the year ending December 31, 2000. SOP No. 98-9 also
extends the deferral of the application of SOP No. 97-2 to certain other
multiple-element software arrangements through the Company's year ending
December 31, 1999. The Company is evaluating the provisions of SOP No. 98-9 and
has not yet determined what impact, if any SOP No. 98-9 will have on its
financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
F-35
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(2) BUSINESS COMBINATION
In November 1996, the Company acquired all of the outstanding stock of
Deming Software, Inc. ("Deming"), a privately held company specializing in the
development of electronic mail security software for the Internet, for a total
purchase price of $4,773, including 569 shares of the Company's common stock,
$225 in cash, and $418 of direct acquisition costs. The acquisition was
accounted for using the purchase method, and, accordingly, the operating results
of Deming have been included in the consolidated financial statements of the
Company from the date of the acquisition. The purchase price has been allocated
as follows:
<TABLE>
<S> <C>
Net liabilities assumed..................................... $ (226)
Goodwill, covenant not to compete and workforce in place.... 499
Purchased research and development.......................... 4,500
------
$4,773
======
</TABLE>
The $4,500 allocated to purchased research and development was charged to
operations in the quarter ended December 31, 1996. The amount allocated to
goodwill, covenant not to compete and workforce in place will be amortized using
the straight-line method over 48 months.
The following pro forma combined results of operations for the year ended
December 31, 1996 is presented as if the acquisition had occurred at the
beginning of the period. The charge for in process research and development has
not been reflected in the following pro forma summary. The pro forma summary
does not necessarily reflect the results of operations as if the Company and
Deming had been consolidated during such periods:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net revenues................................................ $14,734
Net loss.................................................... $(1,507)
Basic and diluted net loss per share........................ $ (0.18)
</TABLE>
F-36
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS
UNAUDITED)
(ALL AMOUNTS IN THOUSANDS)
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Equipment................................................ $2,515 $2,672
Furniture and fixtures................................... 655 657
Purchased software....................................... 224 268
Leasehold improvements................................... 111 111
------ ------
3,505 3,708
Less accumulated depreciation and amortization........... (1,847) (2,600)
------ ------
$1,658 $1,108
====== ======
</TABLE>
Equipment recorded under capital leases aggregated $1,533 and $1,533 with
related accumulated amortization of $997 and $1,461 for the years ended
December 31, 1997 and 1998, respectively.
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued employee compensation.............................. $1,021 $ 935
Accrued commissions........................................ 177 236
Other accrued liabilities.................................. 1,843 2,248
------ ------
$3,041 $3,419
====== ======
</TABLE>
F-37
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(5) INCOME TAXES
The Company's effective tax rate differs from the federal income tax rate of
34%, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at statutory rate......... $ 1,780 $ 2,216 $ 1,728
Nondeductible purchased research and
development................................ (1,652) -- --
Losses for which no benefit is currently
realized................................... (101) (2,157) (1,728)
State income tax............................. (4) (37) (1)
Foreign withholding tax...................... -- (115) --
Other........................................ (27) (90) --
------- ------- -------
Actual tax expense........................... $ (4) $ (183) $ (1)
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Accruals and reserves.................................... $ 923 $ 1,013
Deferred research and development costs.................. 3,828 3,889
Net operating loss carryforward--federal................. 2,313 3,736
Net operating loss carryforward--state................... 131 226
Research and development credit carryforward............. 1,090 1,481
Other.................................................... 34 (78)
------- --------
8,319 10,267
Less valuation allowance................................. (8,319) (10,267)
------- --------
Net deferred tax assets................................ $ -- $ --
======= ========
</TABLE>
The net change in the valuation allowance for the year ended December 31,
1998 was an increase of $1,948.
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $10,989 expiring in the tax years 2008 through
2018. For California income tax purposes, the Company has net operating loss
carryforwards of approximately $3,870, expiring in the tax years 1998 through
2003. The Company has a taxable year ending March 31 but reports on the calendar
year for financial statement purposes. The difference between the net operating
loss carryforward for federal income tax purposes and for state income tax
purposes results primarily from a 50% limitation on the California loss
carryforwards.
The Company has research and development tax credit carryforwards for
federal and California tax purposes of approximately $835 and $646. The federal
credits expire in various years through 2018, and the California credits may be
carried forward indefinitely.
F-38
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(5) INCOME TAXES (CONTINUED)
Internal Revenue Code Section 382 limits the utilization of net operating
losses incurred prior to an "ownership change," as defined. The Company believes
an ownership change resulted from the issuance of the Series B preferred stock
on December 31, 1993.
The Company has not yet determined whether an ownership change occurred due
to an initial public offering in April 1996. If an ownership change has
occurred, utilization of the net operating loss carryforwards could be
significantly reduced.
(6) BANK BORROWINGS AND CONVERTIBLE SECURED PROMISSORY NOTES
On December 30, 1998, the Company entered into a loan and security agreement
comprised of a $1,500 line of credit, which expires on December 29, 1999 and a
$250 term facility, which expires on December 29, 2000, bearing interest at the
prime rate (7.75% as of December 1998) plus 0.25% and prime rate plus 0.50%,
respectively. The agreement is collateralized by the assets of the Company,
contains certain financial covenants and restricts the Company's ability to
incur other indebtedness and pay dividends. As of December 31, 1998 and
September 30, 1999, there were no outstanding balances under the line of credit
agreement. The outstanding balance under the term facility was $250 and $167 as
of December 31, 1998 and September 30, 1999.
(7) PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
As of December 31, 1998, there were 25,000 authorized shares of common
stock, with a $0.01 per share par value. In October 1999, the authorized shares
of common stock was increased to 50,000.
PREFERRED STOCK
As of December 31, 1998, there were 6,500 authorized shares of preferred
stock, none of which are designated or outstanding, with a $0.01 per share par
value.
STOCK OPTION AND PURCHASE PLANS
In February 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"), under which 1,000 shares of common stock were reserved for
issuance. The 1996 Plan became effective in April 1996 on the effective date of
the Company's initial public offering. The 1996 Plan provides for the grant of
options, stock bonuses and restricted stock purchase rights. The compensation
committee of the Board of Directors has the authority to set exercise dates (no
longer than 10 years from date of grant), payment terms and other provisions for
each grant. Options are subject to vesting as determined by the compensation
committee, generally over 48 months. Vesting and exercisability of certain
outstanding options and other stock awards under the 1996 Plan will accelerate
upon certain change of control transactions. In August 1997 and April 1998, an
additional 750 and 1,000 shares of common stock, respectively, were reserved for
issuance under the Company's 1996 Plan. In October 1999, an additional
2,500 shares were reserved for issuance under the Company's 1996 Plan and a
resolution was passed to
F-39
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(7) PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
increase the shares reserved for issuance under the Company's 1996 Plan by 3% a
year every year thereafter.
The Company's 1992 Stock Option Plan (the "1992 Plan") terminated at the
effective date of the Company's initial public offering, at which time the 1996
Plan became effective. As a result, no further options may be granted under the
1992 Plan. However, termination of the 1992 Plan does not affect outstanding
options, all of which remain outstanding until exercised or until they terminate
or expire. The terms of options granted under the 1992 Plan and the
administration of the 1992 Plan are substantially the same as the 1996 Plan,
except that vesting of options under the 1992 Plan does not accelerate upon an
acquisition.
Activity under the option plans follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE AVERAGE
FOR OPTIONS EXERCISE
GRANT OUTSTANDING PRICE
--------- ----------- ---------
<S> <C> <C> <C>
Balances as of December 31, 1995............... 133 827 $0.83
Additional shares reserved..................... 1,200 -- --
Options granted................................ (722) 722 9.23
Options exercised.............................. -- (171) 0.33
Options canceled............................... 127 (127) 3.62
------ ------
Balances as of December 31, 1996............... 738 1,251 5.46
Additional shares reserved..................... 750 -- --
Options granted................................ (1,990) 1,990 4.74
Options exercised.............................. -- (148) 1.38
Options canceled............................... 1,240 (1,240) 7.42
------ ------
Balances as of December 31, 1997............... 738 1,853 3.70
Additional shares reserved..................... 1,000 -- --
Options granted................................ (1,138) 1,138 2.82
Options exercised.............................. -- (91) 1.05
Options canceled............................... 658 (658) 4.98
------ ------
Balances as of December 31, 1998............... 1,258 2,242 2.99
------ ------
Options granted (unaudited).................... (1,370) 1,370 3.23
Options exercised (unaudited).................. -- (264) 1.84
Options cancelled (unaudited).................. 803 (803) 3.06
------ ------
Balances as of September 30, 1999
(unaudited).................................. 691 2,545 $3.22
====== ======
</TABLE>
F-40
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(7) PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information about options outstanding under
the plans as of December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------- EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF SHARES CONTRACTUAL EXERCISE OF SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.20......................................... 150 6.2 years $0.20 139 $0.20
From $0.50 to $3.50........................... 1,316 9.0 2.84 263 2.99
From $3.75 to $5.00........................... 776 7.6 3.79 388 3.75
------ ---
2,242 790 2.88
====== ===
</TABLE>
Certain options under the stock option plan granted to officers were
immediately exercisable but subject to repurchase by the Company at a rate
equivalent to the current vesting schedule of each option. During 1998, the
Company repurchased 46 shares. As of December 31, 1997 and 1998, 82 and 36
shares were subject to repurchase, respectively. As of September 30, 1999, there
were no shares subject to repurchase.
The Company initially recorded deferred compensation of $175 for the
difference between the grant price and the deemed fair value of the common stock
underlying the options granted in November and December 1995. This amount is
being amortized over the vesting period of the individual options, generally
four years.
In February 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 1,000 shares of common stock for
issuance thereunder. The Purchase Plan became effective in April 1996, on the
effective date of the Company's initial public offering and permitted eligible
employees to acquire shares of the Company's common stock through payroll
deductions at a price equal to 85% of the lower of the fair market value at the
beginning or end of each six-month offering period. As of December 31, 1998, a
cumulative total of 314 shares had been issued under the Purchase Plan.
In April 1997, the Company offered option holders under its stock option
plans the opportunity to have outstanding unvested options repriced to the then
current fair market value of the Company's common stock of $3.75 per share.
Employees electing to have options repriced were required to accept an extension
of their vesting schedule. The other terms of the options remained unchanged. On
April 28, 1997, the Company amended 852 options pursuant to this offer.
In December 1998, the Company granted option holders under its stock option
plans with options at a price over $5.00 per share to have those options
repriced to the then current fair market value of the Company's common stock of
$3.50 per share. The other terms of the options remained unchanged. In
December 1998, the Company amended 162 options pursuant to this offer.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $4.26, $2.12, and $1.54, respectively, on the date of
grant using the Black-Scholes option-pricing model
F-41
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(7) PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
with the following assumptions: 1996 expected dividend yield 0%, risk-free
interest rate of 6.25%, expected volatility of 57% and expected life of
4 years; 1997 expected dividend yield 0%, risk-free interest rate of 6.32%,
expected volatility of 57%, and expected life of 3.2 years; 1998 expected
dividend yield 0%, risk-free interest rate of 4.98%, expected volatility of 80%
and expected life of 3.2 years.
The per share weighted-average fair value of employees' stock purchase
rights under the Purchase Plan included in the pro forma amounts was estimated
using the Black-Scholes model with the following assumptions: 1996 expected
dividend yield of 0%, expected life of 6 months, expected volatility of 57% and
risk free rate of 6.25%; 1997 expected dividend yield of 0%, expected life of
6 months, expected volatility of 57% and risk-free interest rate of 5.31%; 1998
dividend yield of 0%, expected life of 15 months, expected volatility of 80% and
risk-free interest rate of 4.97%. The weighted-average fair value of purchase
rights granted in 1996, 1997 and 1998 was $4.39, $1.89 and $1.28, respectively.
The Company uses the intrinsic value method in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for these plans in the financial statements. Had the Company
determined compensation cost for its stock-based compensation plans under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported....................................... $5,240 $6,700 $5,084
Pro forma......................................... 5,870 8,146 6,262
Basic and diluted net loss per share:
As reported....................................... $ 0.68 $ 0.65 $ 0.48
Pro forma......................................... 0.77 0.79 0.59
</TABLE>
Pro forma net income reflects only options granted in 1995, 1996, 1997 and
1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options' vesting
period of three to four years and compensation cost for options granted prior to
January 1, 1995, is not considered.
WARRANTS
In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999 the Company issued warrants to purchase 1,719 shares of common stock at
prices ranging from $1.50 per share to $18.16 per share and 7 shares of Series B
redeemable preferred stock now exercisable for common stock in lieu of the
preferred stock at $2.24 per share. Of these warrants to purchase common stock,
1,667 relate to an equity financing with affiliates of Hilal Capital Management
and others completed in July 1999. A total of 1,694 warrants to purchase common
stock remain available through September 30, 1999. These warrants expire at
various dates through July 7, 2006.
F-42
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under operating
lease agreements. The equipment operating leases expire in 1999 and the
facilities lease expires in 2005. Additionally, the Company leases certain
equipment under capital lease agreements. These leases expire at various dates
through 2000. Future minimum lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999....................................................... 121 511
2000....................................................... 15 480
2001....................................................... -- 499
2002....................................................... -- 517
2003....................................................... -- 535
Thereafter................................................. -- 930
---- ------
Future minimum lease payments.............................. 136 $3,472
======
Less amount representing interest.......................... 8
----
Present value of future minimum lease payments............. 128
Less current portion....................................... 115
----
Long-term portion.......................................... $ 13
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
nine month period ended September 30, 1999 was approximately $367, $660, $664
and $690, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation to a statutory maximum amount. Employee
contributions and earnings thereon vest immediately. The Company may make
discretionary contributions to the 401(k) plan; none have been made to date.
LEGAL ACTIONS
The Company has engaged in certain legal actions arising in the ordinary
course of business.
On December 11, 1998, the Company filed a lawsuit against i4 Corporation,
formerly known as ASCII Something Good Corporation in the United States District
Court for the Northern District of California (Case No. C-98-21231) regarding
alleged breach by i4 of a Distribution Agreement for the Company's products in
Japan, seeking damages in excess of $2.7 million plus attorneys' fees and costs.
On April 13, 1999, the Company announced that it had entered into a settlement
agreement with i4. Under the terms of the settlement, i4 has agreed to pay the
Company $1.5 million in scheduled payments over the succeeding four quarters.
The Company has received through September 30, 1999, payments totaling
approximately
F-43
<PAGE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$900,000. The final payment under the terms of the settlement is due by
February 15, 2000 and may be reduced by $100,000 if i4 exercises certain
prepayment options.
(9) INTERNATIONAL SALES AND MAJOR CUSTOMERS
International license sales accounted for 37%, 28% and 18% of the Company's
total software license revenues in 1997, 1998 and the nine months ended
September 30, 1999, respectively. In 1997 and 1998, sales to one customer, ASG,
accounted for 14% and 18%, respectively, of the Company's total software license
revenue. In 1998, sales to one customer, Securities Dynamics Technologies, Inc.
("SDTI"), accounted for 17% of the Company's total software license revenue. For
the nine months ended September 30, 1999, sales to one customer, Merrill Lynch
Inc., accounted for 10% of the Company's total software license revenue. No
other single customer accounted for greater than 10% of the Company's total
software license revenue in 1996, 1997, 1998 or the nine months ended
September 30, 1999.
(10) SEGMENT INFORMATION
The Company operates in the United States and internationally and derives
its revenue from software license sales and associated services of Internet
content security and policy management solutions and e-mail productivity
products. In 1998 and continuing into 1999, the Company's sales, marketing, and
development efforts have been entirely focused on the server-based WorldSecure
product line.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Software license revenue:
United States................................. $4,326 $6,937 $6,753 $5,204
All other countries........................... 2,534 2,694 671 1,148
------ ------ ------ ------
Total......................................... $6,860 $9,631 $7,424 $6,352
====== ====== ====== ======
</TABLE>
PRODUCT LINE INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Software license revenue:
WorldSecure Server............................ $1,119 $6,980 $5,020 $5,819
All other products............................ 5,741 2,651 2,404 533
------ ------ ------ ------
Total......................................... $6,860 $9,631 $7,424 $6,352
====== ====== ====== ======
</TABLE>
F-44
<PAGE>
ANNEX A
AGREEMENT
AND
PLAN OF MERGER
BY AND AMONG
TUMBLEWEED COMMUNICATIONS CORP.,
KEYHOLE ACQUISITION CORP.
AND
WORLDTALK COMMUNICATIONS CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE I
MERGER..................................................................................... A-2
Section 1.1 THE MERGER.............................................. A-2
Section 1.2 EFFECTIVE TIME.......................................... A-2
Section 1.3 CLOSING................................................. A-2
Section 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION..... A-2
ARTICLE II
CONVERSION OF SHARES....................................................................... A-2
Section 2.1 CONVERSION OF SHARES.................................... A-2
Section 2.2 SURRENDER OF CERTIFICATES............................... A-3
Section 2.3 NO FRACTIONAL SHARES.................................... A-3
Section 2.4 NO DIVIDENDS............................................ A-4
Section 2.5 RETURN TO PARENT........................................ A-4
Section 2.6 COMPANY OPTION PLANS.................................... A-4
Section 2.7 COMPANY WARRANTS........................................ A-5
Section 2.8 STOCK TRANSFER BOOKS.................................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY.................................................. A-6
Section 3.1 ORGANIZATION............................................ A-6
Section 3.2 CAPITALIZATION.......................................... A-6
Section 3.3 CORPORATE AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY A-7
ACTION................................................
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS................... A-8
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS.................... A-8
Section 3.6 ABSENCE OF CERTAIN CHANGES.............................. A-9
Section 3.7 NO UNDISCLOSED LIABILITIES.............................. A-9
Section 3.8 INFORMATION IN PROXY STATEMENT/PROSPECTUS............... A-9
Section 3.9 EMPLOYEE BENEFIT MATTERS................................ A-10
Section 3.10 LITIGATION; COMPLIANCE WITH LAW......................... A-11
Section 3.11 NO DEFAULT.............................................. A-11
Section 3.12 TAXES................................................... A-12
Section 3.13 CONTRACTS............................................... A-13
Section 3.14 ASSETS; REAL PROPERTY................................... A-13
Section 3.15 ENVIRONMENTAL MATTERS................................... A-13
Section 3.16 PRODUCT LIABILITY....................................... A-14
Section 3.17 INTELLECTUAL PROPERTY................................... A-14
Section 3.18 PROPRIETARY RIGHTS AND CONFIDENTIALITY AGREEMENTS....... A-16
Section 3.19 INSURANCE............................................... A-16
Section 3.20 SUPPLIERS AND CUSTOMERS................................. A-16
Section 3.21 LABOR MATTERS........................................... A-17
Section 3.22 ACCOUNTS RECEIVABLE..................................... A-17
Section 3.23 TRANSACTIONS WITH AFFILIATES............................ A-18
Section 3.24 OPINION OF FINANCIAL ADVISOR............................ A-18
Section 3.25 BROKERS OR FINDERS...................................... A-18
Section 3.26 ACCOUNTING MATTERS; REORGANIZATION...................... A-18
Section 3.27 STATE TAKEOVER STATUTES................................. A-18
Section 3.28 FULL DISCLOSURE......................................... A-18
Section 3.29 REGISTRATION AND PREEMPTIVE RIGHTS...................... A-18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........................................... A-19
Section 4.1 ORGANIZATION............................................ A-19
Section 4.2 CAPITALIZATION.......................................... A-19
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY A-19
ACTION................................................
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS................... A-20
Section 4.5 INFORMATION IN PROXY STATEMENT/PROSPECTUS............... A-20
Section 4.6 SEC REPORTS AND FINANCIAL STATEMENTS.................... A-21
Section 4.7 ABSENCE OF CERTAIN CHANGES.............................. A-21
Section 4.8 LITIGATION; COMPLIANCE WITH LAW......................... A-21
Section 4.10 BROKERS OR FINDERS...................................... A-22
Section 4.11 ACCOUNTING MATTERS; REORGANIZATION...................... A-22
Section 4.12 OPERATIONS OF SUB....................................... A-22
ARTICLE V
COVENANTS.................................................................................. A-22
Section 5.1 INTERIM OPERATIONS OF THE COMPANY....................... A-22
Section 5.2 INTERIM OPERATIONS OF PARENT............................ A-24
Section 5.3 ACCESS TO INFORMATION................................... A-25
Section 5.4 HSR ACT FILINGS......................................... A-25
Section 5.5 OTHER CONSENTS AND APPROVALS............................ A-26
Section 5.6 EMPLOYMENT AGREEMENTS................................... A-26
Section 5.7 NO SOLICITATION BY THE COMPANY.......................... A-26
Section 5.8 NO SOLICITATION BY PARENT............................... A-28
Section 5.9 STOCKHOLDERS' MEETINGS.................................. A-28
Section 5.10 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT...... A-29
Section 5.11 ADDITIONAL AGREEMENTS................................... A-30
Section 5.12 PUBLICITY............................................... A-30
Section 5.13 NOTIFICATION OF CERTAIN MATTERS......................... A-30
Section 5.14 DIRECTORS' AND OFFICERS' INSURANCE AND A-30
INDEMNIFICATION.......................................
Section 5.15 AFFILIATE AGREEMENTS.................................... A-31
Section 5.16 COOPERATION............................................. A-31
Section 5.17 LETTERS OF ACCOUNTANTS.................................. A-32
Section 5.18 CONSENTS OF ACCOUNTANTS................................. A-32
Section 5.19 SUBSEQUENT FINANCIAL STATEMENTS......................... A-33
Section 5.20 ACCOUNTING AND TAX TREATMENT............................ A-33
Section 5.21 NASDAQ QUALIFICATION.................................... A-33
Section 5.22 EMPLOYEE PLANS AND ARRANGEMENTS......................... A-33
Section 5.23 REGISTRATION RIGHTS..................................... A-33
ARTICLE VI
CONDITIONS................................................................................. 34
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY............. A-34
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB......... A-34
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY............ A-35
ARTICLE VII
TERMINATION................................................................................ A-36
Section 7.1 TERMINATION............................................. A-36
Section 7.2 EFFECT OF TERMINATION................................... A-37
Section 7.3 AMENDMENT............................................... A-37
Section 7.4 EXTENSION; WAIVER....................................... A-37
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C> <C>
ARTICLE VIII
MISCELLANEOUS.............................................................................. A-38
Section 8.1 FEES AND EXPENSES....................................... A-38
Section 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES........... A-38
Section 8.3 NOTICES................................................. A-38
Section 8.4 INTERPRETATION.......................................... A-39
Section 8.5 COUNTERPARTS............................................ A-39
Section 8.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS A-39
OF OWNERSHIP..........................................
Section 8.7 SEVERABILITY............................................ A-39
Section 8.8 GOVERNING LAW........................................... A-39
Section 8.9 ASSIGNMENT.............................................. A-39
Exhibits
</TABLE>
iv
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Agreement....................................... 5.7(b)
Agreement................................................... Preamble
Alternative Transaction..................................... 5.7(a)
Ancillary Agreements........................................ Recitals
Antitrust Laws.............................................. 5.4(b)
Assertion................................................... 5.14
Audit....................................................... 3.12(j)
Certificate of Merger....................................... 1.2
Certificates................................................ 2.1(d)
Closing..................................................... 1.3
Closing Date................................................ 1.3
Code........................................................ Recitals
Company..................................................... Preamble
Company Agreement........................................... 3.4
Company Balance Sheet....................................... 3.22
Company Benefit Plans....................................... 3.9(a)
Company Board............................................... 3.3(b)
Company Common Stock........................................ 2.1(a)
Company Financial Statements................................ 3.5
Company Option Plans........................................ 2.6
Company Options............................................. 2.6
Company Preferred Stock..................................... 3.2(a)
Company SEC Documents....................................... 3.5
Company Special Meeting..................................... 5.9(a)
Company Stockholder Approval................................ 3.3(a)
Company Stockholders Agreements............................. Recitals
Company Warrants............................................ 2.7
Competing Proposal.......................................... 5.8
Confidentiality Agreement................................... 5.3
DGCL........................................................ 1.1
Disclosure Schedule......................................... Article III
Effective Time.............................................. 1.2
Employment Agreements....................................... Recitals
Environmental Claims........................................ 3.15
Environmental Laws.......................................... 3.15
ERISA....................................................... 3.9(a)
Excess Shares............................................... 2.3(b)
Exchange Act................................................ 3.4
Exchange Agent.............................................. 2.2
Exchange Ratio.............................................. 2.1(a)
GAAP........................................................ 3.5
Governmental Entity......................................... 3.4
HMO......................................................... 3.9(d)
HSR Act..................................................... 3.4
HSR Authority............................................... 5.4(a)
Indemnified Liability....................................... 5.14
Indemnified Parties......................................... 5.14
Indemnified Party........................................... 5.14
Indemnitors................................................. 5.14
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Intellectual Property....................................... 3.17(a)
IRS......................................................... 3.9(a)
License Agreements.......................................... 3.17(b)
Licensed Software........................................... 3.17(k)
Liens....................................................... 3.2(c)
material adverse effect..................................... 3.1
Materials of Environmental Concern.......................... 3.15
Merger...................................................... 1.1
Merger Consideration........................................ 2.1(a)
Merger Filing............................................... 1.2
Millennial Date Data........................................ 3.17(k)
Non-Competition Agreements.................................. Recitals
Option Agreement............................................ Recitals
Parent...................................................... Preamble
Parent Board................................................ 5.9(b)
Parent Common Stock......................................... 2.1(a)
Parent Preferred Stock...................................... 4.2(a)
Parent Registration Statement............................... 5.10(a)
Parent SEC Documents........................................ 4.6
Parent Special Meeting...................................... 5.9(b)
Parent Stockholder Approval................................. 4.3(a)
Parent Stockholders Agreement............................... Recitals
Proxy statement/prospectus.................................. 5.10(a)
Real Property............................................... 3.14
Requisite Regulatory Approvals.............................. 5.5
Restraints.................................................. 6.1(d)
Rights...................................................... 3.2(b)
SEC......................................................... 3.5
Secretary of State.......................................... 1.2
Securities Act.............................................. 3.5
Shares Trust................................................ 2.3(c)
Software.................................................... 3.17(j)
Special Meetings............................................ 5.9(b)
Sub......................................................... Preamble
Subsequent Determination.................................... 5.7(b)
Subsidiary.................................................. 3.1
Superior Proposal........................................... 5.7(b)
Surviving Corporation....................................... 1.1
System...................................................... 3.17(l)
Tax......................................................... 3.12(j)
Tax Authority............................................... 3.12(j)
Tax Returns................................................. 3.12(j)
Taxes....................................................... 3.12(j)
Third Party................................................. 5.7(a)
Third Party Expenses........................................ 8.1(a)
Trade Secrets............................................... 3.17(a)
Trademarks.................................................. 3.17(a)
WARN Act.................................................... 3.21(b)
</TABLE>
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of November 18,
1999, by and among Tumbleweed Communications Corp., a Delaware corporation
("PARENT"), Keyhole Acquisition Corp., a Delaware corporation and a direct
wholly owned subsidiary of Parent ("SUB"), and Worldtalk Communications
Corporation, a Delaware corporation (the "COMPANY").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent and Sub have approved, and deem
it advisable and in the best interests of their respective stockholders to
consummate, a strategic business combination between the Company and Parent upon
the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company, having determined that such
combination is desirable, has approved the transactions contemplated by this
Agreement and the Ancillary Agreements (as defined below);
WHEREAS, as a condition and inducement to Parent's and Sub's willingness to
enter into this Agreement and incur the obligations set forth herein,
concurrently with the execution and delivery of this Agreement, (i) Parent and
certain stockholders of the Company identified in SCHEDULE A hereto have entered
into a Voting Agreement in the form of EXHIBIT A hereto (the "COMPANY
STOCKHOLDERS AGREEMENTS"), pursuant to which, among other things, such
stockholders agree to vote in favor of approval and adoption of this Agreement;
(ii) the Company and certain key employees of the Company identified in
SCHEDULE B hereto have entered into non-competition agreements (the
"NON-COMPETITION AGREEMENTS") in the form of EXHIBIT B-1 hereto, and employment
agreements (the "EMPLOYMENT AGREEMENTS") in the form of EXHIBIT B-2 hereto, the
effectiveness of which are conditioned upon the consummation of the transactions
contemplated hereby; and (iii) Parent and the Company have entered into an
Option Agreement in the form of EXHIBIT C hereto (the "OPTION AGREEMENT"),
pursuant to which, among other things, the Company grants to Parent an option to
purchase newly issued shares of Company Common Stock representing 19.9% of the
total outstanding shares of Company Common Stock;
WHEREAS, as a condition and inducement to the Company's willingness to enter
into this Agreement and incur the obligations set forth herein, concurrently
with the execution and delivery of this Agreement, (i) the Company and certain
stockholders of Parent identified in SCHEDULE D hereto have entered into a
Voting Agreement in the form of EXHIBIT D hereto (the "PARENT STOCKHOLDERS
AGREEMENTS"), pursuant to which, among other things, such stockholders agree to
vote in favor of approval and adoption of this Agreement (the Company
Stockholders Agreements, the Parent Stockholders Agreements, the Non-Competition
Agreements, the Employment Agreements and the Option Agreement are collectively
referred to herein as the "ANCILLARY AGREEMENTS");
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger (as defined in Section 1.1 hereof) shall qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "CODE"), and
this Agreement is intended to be and is adopted as a plan of reorganization
within the meaning of Section 368 of the Code; and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests" in conformity with generally accepted
accounting principles, as described in Accounting Principles Board Opinion
No. 16 and the applicable rules and regulations of the SEC.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements, and other good and
valuable consideration, set forth herein and in the
<PAGE>
Ancillary Agreements, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
MERGER
Section 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), the Company
and Sub shall consummate a merger (the "MERGER") pursuant to which (a) Sub shall
be merged with and into the Company and the separate corporate existence of Sub
shall thereupon cease, (b) the Company shall be the successor or surviving
corporation (the "SURVIVING CORPORATION") in the Merger and shall continue to be
governed by the laws of the State of Delaware and (c) the separate corporate
existence of the Company, with all its rights, privileges, immunities, powers
and franchises, shall continue unaffected by the Merger.
Pursuant to the Merger, (a) the Certificate of Incorporation of Sub, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Certificate of Incorporation, and (b) the By-laws of Sub, as in
effect immediately prior to the Effective Time, shall be the By-laws of the
Surviving Corporation until thereafter amended as provided by law, such
Certificate of Incorporation and such By-laws. The Merger shall have the effects
set forth in the Delaware General Corporation Law (the "DGCL").
Section 1.2 EFFECTIVE TIME. Parent, Sub and the Company will cause a
certificate of merger (the "CERTIFICATE OF MERGER") in the form of EXHIBIT E
hereto, to be filed on the Closing Date (as defined in Section 1.3 hereof) (or
on such other date as Parent and the Company may agree) with the Secretary of
State of the State of Delaware (the "SECRETARY OF STATE") as provided in the
DGCL. The Merger shall become effective on the date on which the Certificate of
Merger pursuant to Section 251 of the DGCL and any other documents necessary to
effect the Merger in accordance with the DGCL are duly filed with the Secretary
of State (the "MERGER FILING") or such time as is agreed upon by the parties and
specified in the Certificate of Merger, and such time is hereinafter referred to
as the "EFFECTIVE TIME."
Section 1.3 CLOSING. The closing of the Merger (the "CLOSING") will take
place at 8:00 a.m., Pacific Standard Time, on a date to be specified by the
parties, which shall be no later than the second business day after satisfaction
or waiver of all of the conditions set forth in Article VI hereof (the "CLOSING
DATE"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 525
University Avenue, Palo Alto, California 94301, or such other date or place as
agreed to in writing by the parties hereto.
Section 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors and officers of the Sub at the Effective Time shall, from and after
the Effective Time, be the directors and officers, respectively, of the
Surviving Corporation until their successors shall have been duly elected or
appointed or qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
By-laws.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 CONVERSION OF SHARES.
(a) Each share of common stock, par value $.01 per share ("COMPANY
COMMON STOCK"), of the Company issued and outstanding immediately prior to
the Effective Time (other than any Shares to be canceled pursuant to
Section 2.1(c) hereof) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive
0.26 (the "EXCHANGE RATIO") of a
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fully paid and nonassessable share (the "MERGER CONSIDERATION") of common
stock, par value $.001 per share, of Parent (the "PARENT COMMON STOCK").
(b) Each share of common stock, par value $.001 per share, of Sub issued
and outstanding immediately prior to the Effective Time shall, by virtue of
the Merger and without any action on the part of Parent, be converted into
one fully paid and nonassessable share of common stock, par value $.001 per
share, of the Surviving Corporation.
(c) Any shares of Company Common Stock that are owned by Parent, Sub or
any other wholly owned Subsidiary (as defined in Section 3.1) of Parent
shall be canceled and retired and shall cease to exist and no Parent Common
Stock or other consideration shall be delivered in exchange therefor.
(d) On and after the Effective Time, holders of certificates (the
"CERTIFICATES"), which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock, shall cease to have any rights
as stockholders of the Company, except the right to receive, subject to
Section 2.5 hereof, the Merger Consideration (and cash in lieu of any
fractional share as contemplated by Section 2.3) for each share of Company
Common Stock held by them.
Section 2.2 SURRENDER OF CERTIFICATES. At or promptly after the Effective
Time, Parent shall make available to Equiserve L.P., or a bank reasonably
acceptable to the Company (the "EXCHANGE AGENT"), in trust for the benefit of
the holders of shares of Company Common Stock for exchange in accordance with
this Article II, (i) cash in an amount sufficient to pay cash in lieu of
fractional shares pursuant to Section 2.3, and (ii) certificates representing
the aggregate number of shares of Parent Common Stock issuable pursuant to
Section 2.1 hereof. Promptly after the Effective Time, the Exchange Agent shall
mail to each holder of record of a Certificate or Certificates a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing Parent
Common Stock and cash in lieu of fractional shares, if applicable. Upon
surrender of a Certificate or Certificates to the Exchange Agent, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor the Merger Consideration for each
share of Company Common Stock formerly represented by such Certificate or
Certificates, and the Certificate(s) so surrendered shall forthwith be canceled.
Until surrendered as contemplated by this Article II, from and after the
Effective Time each Certificate shall be deemed to represent only the right to
receive the Merger Consideration (and cash in lieu of any fractional share as
contemplated by Section 2.3) for each share of Company Common Stock formerly
represented by such Certificate, and shall not evidence any interest in, or any
right to exercise the rights of a stockholder of, Parent. If a certificate
representing Parent Common Stock is to be issued or a cash payment in lieu of
fractional share interests is to be made to a person other than the one in whose
name the Certificate surrendered in exchange therefor is registered, it shall be
a condition to such issuance or payment that such Certificate be properly
endorsed (or accompanied by an appropriate instrument of transfer) and
accompanied by evidence that any applicable stock transfer taxes have been paid
or provided for.
Section 2.3 NO FRACTIONAL SHARES. (a) No certificates representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests shall not entitle
the owner thereof to vote or to any other rights of a stockholder of Parent. In
lieu of such fractional shares, any holder of Company Common Stock who would
otherwise be entitled to receive a fraction of a share of Parent Common Stock
(after aggregating all shares of Parent Common Stock issuable to such holder)
shall, upon surrender of such holder's Certificate or Certificates, be paid in
cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price of a share of
Parent Common Stock on Nasdaq Stock Market on the date the Merger became
effective.
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(b) As promptly as practicable following the Effective Time, the
Exchange Agent shall deliver the Merger Consideration, whether in the form
of Parent Common Stock or cash in lieu of fractional shares, or both to each
holder of a Certificate or Certificates which have been surrendered.
Section 2.4 NO DIVIDENDS. No dividends or other distributions declared or
made after the Effective Time with respect to shares of Parent Common Stock with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the Parent Common Stock represented
thereby until the holder of such Certificate shall surrender such Certificate.
Dividends or other distributions with a record date after the Effective Time
payable in respect of shares of Parent Common Stock held by the Exchange Agent
shall be held in trust for the benefit of such holders of unsurrendered
Certificates. Following surrender of any previously unsurrendered Certificate,
there shall be paid to the holder of the certificates representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of Parent Common Stock and (ii) at the date of payment of any
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender, the amount of
such dividends or other distributions payable with respect to such whole shares
of Parent Common Stock.
Section 2.5 RETURN TO PARENT. Any shares of Parent Common Stock made
available to the Exchange Agent and any portion of the Shares Trust not
exchanged for Certificates within six months after the Effective Time and any
dividends and distributions held by the Exchange Agent for payment or delivery
to the holders of unsurrendered Certificates formerly representing shares of
Company Common Stock and unclaimed at the end of such six month period shall be
redelivered or repaid by the Exchange Agent to Parent, after which time any
holder of Certificates who has not theretofore delivered or surrendered such
Certificates to the Exchange Agent, subject to applicable law, shall look as a
general creditor only to Parent for payment of the Merger Consideration, cash in
lieu of fractional share interests, and any such dividends or distributions with
respect to its shares of Parent Common Stock. Notwithstanding the foregoing,
none of Parent, the Exchange Agent, the Surviving Corporation or any other party
shall be liable to any holder of a Certificate formerly representing shares of
Company Common Stock for any Merger Consideration, cash in lieu of fractional
share interests or dividends or distributions properly delivered to a public
official pursuant to applicable property, escheat or similar laws. If
Certificates are not surrendered prior to two years after the Effective Time,
unclaimed Merger Consideration (or funds with respect to fractional shares)
payable with respect to such shares of Company Common Stock shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
Section 2.6 COMPANY OPTION PLANS. At the Effective Time, all options (the
"COMPANY OPTIONS") then outstanding, whether or not vested and exercisable,
under the Company's 1992 Stock Option Plan, 1996 Equity Incentive Plan, 1996
Directors Stock Option Plan and 1996 Employee Stock Purchase Plan, in each case
as amended (collectively, the "COMPANY OPTION PLANS"), shall be assumed by
Parent. Each Company Option assumed by Parent other than Company Options issued
pursuant to the Company 1996 Employee Stock Purchase Plan shall be subject to,
and exercisable upon, the same terms and conditions as under the applicable
Company Option Plan and the applicable option agreement issued thereunder,
except that (a) each assumed Company Option shall be exercisable for, and
represent the right to acquire, that number of shares of Parent Common Stock
(rounded down to the nearest whole share) equal to (i) the number of shares of
Company Common Stock subject to such Company Option immediately prior to the
Effective Time multiplied by (ii) the Exchange Ratio; and (b) the option price
per share of Parent Common Stock subject to each assumed Company Option shall be
an amount equal to (i) the option price per share of Company Common Stock
subject to such Company Option in effect immediately prior to the Effective Time
divided by (ii) the Exchange Ratio (rounded up to the nearest whole cent). The
Company represents and warrants that each of the foregoing actions may be taken
and effected by the Company without the consent of any holder of Company
Options. Each assumed purchase right under the Company
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1996 Employee Stock Purchase Plan shall continue to have, and be subject to, the
terms and conditions set forth in the Company 1996 Employee Stock Purchase Plan
and the documents governing the assumed purchase right, except that the purchase
price of such shares of Parent Common Stock for each respective purchase date
under each assumed purchase right shall be the lower of (i) the quotient
determined by dividing eighty-five percent (85%) of the fair market value of
Company Common Stock on the offering date of each assumed offering period by the
Exchange Ratio or (ii) eighty-five percent (85%) of the fair market value of the
Parent Common Stock on each purchase date of each assumed offering period
occurring after the Effective Time (with the number of shares rounded to the
nearest whole share and the purchase price rounded to the nearest whole cent).
The assumed purchase rights shall be exercised at such times following the
Effective Time as set forth in the Company 1996 Employee Stock Purchase Plan and
each participant shall, accordingly, be issued shares of Parent Common Stock at
such times pursuant to the Company 1996 Employee Stock Purchase Plan. The
Company 1996 Employee Stock Purchase Plan shall terminate with the exercise of
the last assumed purchase right, and no additional purchase rights shall be
granted under the Company Employee Stock Purchase Plan following the Effective
Time. Parent agrees that from and after the Effective Time, employees of the
Surviving Corporation may participate in Parent's employee stock purchase plan,
subject to the terms and conditions of such plan.
The adjustment provided herein with respect to stock options shall be and is
intended to be effected in a manner which is consistent with Section 424(a) of
the Internal Revenue Code of 1986, as amended (the "CODE"). The duration,
vesting schedule, exercisability and other terms of each option immediately
after the Effective Time shall be the same as the corresponding terms in effect
immediately before the Effective Time, except that all references to Company in
the Company Option Plans (and the corresponding references in the option
agreement documenting such option) shall be deemed to be references to Parent.
Except as set forth in Section 3.2(d) of the Disclosure Schedule (as defined in
Article III hereof), vesting of Company Options shall not be accelerated as a
result of the Merger. Continuous employment with the Company or its Subsidiaries
shall be credited to the optionee for purposes of determining the vesting of all
assumed Company Options after the Effective Time. As soon as reasonably
practicable, but in no event later than 30 days after the Effective Time, Parent
will issue to each holder of an assumed Company Option notice of the foregoing
assumption by Parent.
Parent shall file with the SEC, no later than ten business days after the
Effective Time, a Registration Statement on Form S-8 relating to the shares of
Parent Common Stock issuable with respect to the Company Options assumed by
Parent in accordance with this Section 2.6.
Section 2.7 COMPANY WARRANTS. At the Effective Time, all warrants to
purchase Company Common Stock (the "COMPANY WARRANTS") then outstanding, whether
or not exercisable, shall be assumed by Parent. Each Company Warrant assumed by
Parent shall be subject to, and exercisable upon, the same terms and conditions
as under the applicable warrant agreement issued thereunder, except that
(a) each assumed Company Warrant shall be exercisable for, and represent the
right to acquire, that number of shares of Parent Common Stock (rounded down to
the nearest whole share) equal to (i) the number of shares of Company Common
Stock subject to such Company Warrant immediately prior to the Effective Time
multiplied by (ii) the Exchange Ratio; and (b) the exercise price per share of
Parent Common Stock subject to each assumed Company Warrant shall be an amount
equal to (i) the price per share of Company Common Stock subject to such Company
Warrant in effect immediately prior to the Effective Time divided by (ii) the
Exchange Ratio (rounded up to the nearest whole cent). The Company represents
and warrants that each of the foregoing actions may be taken and effected by the
Company without the consent of any holder of Company Warrants, except for the
warrant held by Comdisco, Inc. to purchase 2,250 shares of the Company Common
Stock at an exercise price of $18.10 per share pursuant to a Warrant Agreement
dated as of July 30, 1993.
Section 2.8 STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock shall thereafter be made. If, after the Effective Time,
certificates formerly representing shares of Company Common Stock are presented
to the
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Surviving Corporation, they shall be canceled and exchanged for cash and/or
certificates representing Parent Common Stock pursuant to this Article II.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the disclosure schedule prepared and signed by the
Company and delivered to Parent simultaneously with the execution hereof (the
"DISCLOSURE SCHEDULE"), the Company represents and warrants to Parent and Sub
all of the statements contained in this Article III. Each exception set forth in
the Disclosure Schedule and each other response to this Agreement set forth in
the Disclosure Schedule is identified by reference to, or has been grouped under
a heading referring to, a specific individual section of this Agreement and
relates only to such section, except to the extent that one portion of the
Disclosure Schedule specifically refers to another portion thereof, identifying
such other portion by section reference or similar specific cross reference.
Section 3.1 ORGANIZATION. Each of the Company and its Subsidiaries is a
corporation or other entity duly organized, validly existing, duly qualified or
licensed to do business and in good standing under the laws of the jurisdiction
of its incorporation or organization and in each jurisdiction in which the
nature of the business conducted by it makes such qualification or licensing
necessary, and has all requisite corporate or other power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority, and
governmental approvals would not have a material adverse effect on the Company
and its Subsidiaries. As used in this Agreement, the word "SUBSIDIARY" means,
with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding such partnerships where such party
or any Subsidiary of such party do not have a majority of the voting interest in
such partnership) or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party or by any one or more of its Subsidiaries, or by such party and
one or more of its Subsidiaries. As used in this Agreement, any reference to any
event, change or effect having a "MATERIAL ADVERSE EFFECT" on or with respect to
any entity (or group of entities taken as a whole) means such event, change or
effect, individually or in the aggregate with such other events, changes, or
effects, which is materially adverse to the financial condition, businesses,
results of operations, assets, liabilities, properties or prospects of such
entity (or, if used with respect thereto, of such group of entities taken as a
whole), it being understood that none of the following shall be deemed by itself
or by themselves, either alone or in combination, to constitute a material
adverse effect: (i) a change in the market price or trading volume of Company
Common Stock or Parent Common Stock, as the case may be, (ii) changes
attributable to financial results for the quarter ended December 31, 1999,
(iii) conditions affecting the economy of the United States of America as a
whole, (iv) conditions affecting generally the industry in which Parent or the
Company, as applicable, operates, or (v) changes after the date hereof in laws
or regulations applicable to Parent or the Company, as the case may be.
Section 3.1 of the Disclosure Schedule, sets forth a complete list of the names,
jurisdiction of incorporation or other formation and capitalization of each of
the Company's Subsidiaries and the jurisdictions in which the Company and each
of its Subsidiaries are qualified to do business.
Section 3.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 25,000,000
shares of Company Common Stock and 6,500,000 shares of preferred stock, par
value $.01 per share (the "COMPANY PREFERRED STOCK"). As of the date hereof,
(i) 14,519,246 shares of Company Common Stock were issued and outstanding,
(ii) no shares of Company Preferred Stock were issued and outstanding,
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(iii) 2,627,068 shares of Company Common Stock were reserved for issuance
upon the exercise of outstanding Company Options pursuant to the Company
Option Plans and (iv) 1,693,916 shares of Company Common Stock were reserved
for issuance upon the exercise of outstanding Company Warrants. All of the
issued and outstanding shares of Company Common Stock are validly issued,
fully paid and nonassessable, were issued in compliance with applicable law,
and are not subject to any preemptive or similar rights.
(b) Except as set forth in Section 3.2(b) of the Disclosure Schedule and
other than pursuant to the Option Agreement, there are not now, and at the
Effective Time there will not be, any (i) outstanding right, subscription,
warrant, call, option or other agreement or arrangement of any kind
(collectively, "RIGHTS") to purchase or otherwise to receive from the
Company or any of its Subsidiaries any of the outstanding authorized but
unissued or treasury shares of the capital stock or any other security of
the Company or any of its Subsidiaries, (ii) outstanding security of any
kind convertible into or exchangeable for such capital stock or
(iii) voting trust or other agreement or understanding to which the Company
or any of its Subsidiaries is a party or is bound with respect to the voting
of the capital stock of the Company or any of its Subsidiaries.
(c) Each outstanding share of capital stock of each Subsidiary of the
Company is duly authorized, validly issued, fully paid and nonassessable and
each such share owned by the Company or any Subsidiary of the Company is
owned free and clear of any mortgage, pledge, assessment, security interest,
lease, sublease, lien, adverse claim, levy, charge, option, right of others
or restriction (whether on voting, sale, transfer, disposition or otherwise)
or other encumbrance of any kind, whether imposed by agreement,
understanding, law or equity, or any conditional sale contract, title
retention contract or other contract to give or to refrain from giving any
of the foregoing (collectively, "LIENS").
(d) Section 3.2(d) of the Disclosure Schedule sets forth a listing of
(i) all outstanding Company Options as of the date hereof, which schedule
shows the portion of each Company Option which is then vested, the vesting
and acceleration provisions thereof, if any, the date upon which each
Company Option expires and whether or not such Company Option is intended to
qualify as an "incentive stock option" within the meaning of Section 422 of
the Code; (ii) all outstanding Company Warrants as of the date hereof, which
schedule shows the portion of each Company Warrant which is exercisable and
the date upon which each Company Warrant expires; and (iii) each outstanding
Company Option and Company Warrant that will accelerate, in whole or in
part, pursuant to its terms as a result of the transactions contemplated
hereby, which schedule summarizes the terms of acceleration pursuant to such
Company Option, Company Warrant or Company Option Plan.
Section 3.3 CORPORATE AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY ACTION.
(a) The Company has full corporate power and authority to execute and
deliver this Agreement and the Ancillary Agreements to which it is a party
and, subject to obtaining approval and adoption of this Agreement by the
affirmative vote of the holders of a majority of the outstanding shares of
Company Common Stock (the "COMPANY STOCKHOLDER APPROVAL"), to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance by the Company of this Agreement and the Ancillary Agreements to
which the Company is a party, and the consummation by it of the transactions
contemplated hereby and thereby, have been duly and validly authorized by
all necessary corporate action on the part of the Company and, except for
obtaining the Company Stockholder Approval, no other corporate action on the
part of the Company is necessary to authorize the execution and delivery by
the Company of this Agreement and the Ancillary Agreements to which it is a
party and the consummation of the transactions contemplated hereby and
thereby. Each of this Agreement and the Ancillary Agreements to which it is
a party have been duly executed and delivered by the Company and, if
applicable, the Company's stockholders and affiliates and, assuming each of
this Agreement and such Ancillary Agreements constitutes a valid and binding
obligation of the other parties hereto and thereto, constitutes a valid and
binding obligation of the Company and such
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stockholders and affiliates enforceable against the Company and such
stockholders and affiliates in accordance with their respective terms,
except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
(b) The Board of Directors of the Company (the "COMPANY BOARD") has duly
and validly approved and taken all corporate action required to be taken by
such Company Board for the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements, and resolved to recommend that
the stockholders of the Company approve and adopt this Agreement. The
Company Stockholder Approval is the only vote of the holders of any class or
series of Company capital stock necessary to approve this Agreement and to
consummate the Merger. The Company has taken all actions necessary with
respect to the entering into of this Agreement and the Ancillary Agreements
to which it is a party, the consummation of the Merger and the other
transactions contemplated by this Agreement and the Ancillary Agreements so
as to render inapplicable to such transactions the restrictions on business
combinations contained in Section 203 of the DGCL.
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as disclosed in
Section 3.4 of the Disclosure Schedule and except for the Company Stockholder
Approval, the Merger Filing, and filings, permits, authorizations, consents and
approvals as may be required under, and other applicable requirements of, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), and the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
the Securities Act and state blue sky laws, neither the execution, delivery or
performance of this Agreement or any Ancillary Agreements by the Company nor the
consummation by the Company of the transactions contemplated hereby or thereby
nor compliance by the Company with any of the provisions hereof or thereof will
(i) conflict with or result in any breach of any provision of the certificate of
incorporation or by-laws or similar organizational documents of the Company or
of any of its Subsidiaries, (ii) require any filing with, or permit,
authorization, consent or approval of, any court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency (a "GOVERNMENTAL ENTITY"), (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or result in the creation of any lien) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, lease, license, contract, agreement
or other instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound (a "COMPANY AGREEMENT") or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company, any
of its Subsidiaries or any of their properties or assets, except in the case of
clause (ii), (iii) or (iv) where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults would not, individually or in the aggregate,
have a material adverse effect on the Company and its Subsidiaries, taken as a
whole, and will not materially impair the ability of the Company to consummate
the transactions contemplated hereby or by the Ancillary Agreements.
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed
with the Securities and Exchange Commission (the "SEC"), and has heretofore made
available to Parent true and complete copies of, all forms, reports, schedules,
statements and other documents required to be filed by it and its Subsidiaries
since April 11, 1996 under the Exchange Act and the Securities Act of 1933, as
amended (the "SECURITIES ACT") (as such documents have been amended since the
time of their filing, collectively, the "COMPANY SEC DOCUMENTS"). As of their
respective dates or, if amended, as of the date of the last such amendment, the
Company SEC Documents, including, without limitation, any financial statements
or schedules included therein (the "COMPANY FINANCIAL STATEMENTS") (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading
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and (b) complied in all material respects with the applicable requirements of
the Exchange Act or the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder. The Company SEC Documents include
all the documents that the Company was required to file with the SEC since
April 11, 1996. The Company Financial Statements have been prepared from, and
are in accordance with, the books and records of the Company and its
consolidated Subsidiaries, comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto or,
in the case of the unaudited statements, as permitted by Form 10-Q of the SEC)
and present fairly the consolidated financial position and the consolidated
results of operations and cash flows of the Company and its consolidated
Subsidiaries as at the dates thereof or for the periods presented therein. The
Company has not received notice (written or oral) from and, to its knowledge, is
not under any review by any Governmental Entity in connection with its revenue
recognition policies and procedures. Without limiting the foregoing, for any
period after December 31, 1998, the Company has complied in all material
respects with Statement of Position 97-2 (Software Revenue Recognition), as
amended by Statement of Position 9804.
Section 3.6 ABSENCE OF CERTAIN CHANGES. Except as and to the extent
disclosed in the Company SEC Documents filed prior to the date of this
Agreement, since September 30, 1999, the Company and its Subsidiaries have
conducted their respective businesses and operations consistent with past
practice only in the ordinary and usual course. From September 30, 1999 through
the date of this Agreement, there has not occurred (i) any events, changes or
effects (including the incurrence of any liabilities of any nature, whether or
not accrued, contingent or otherwise) having or, which would be reasonably
likely to have, individually or in the aggregate, a material adverse effect on
the Company and its Subsidiaries; (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property) with
respect to the equity interests of the Company or of any of its Subsidiaries; or
(iii) any change by the Company or any of its Subsidiaries in accounting
principles or methods, except insofar as may be required by a change in GAAP.
Since September 30, 1999 neither the Company nor any of its Subsidiaries has
taken any of the actions prohibited by Section 5.1 hereof.
Section 3.7 NO UNDISCLOSED LIABILITIES. Except as set forth in
Section 3.7 of the Disclosure Schedule, since September 30, 1999, neither the
Company nor any of its Subsidiaries has incurred any liabilities or obligations
of any nature, whether or not accrued, contingent or otherwise, that (a) have,
or would be reasonably likely to have, a material adverse effect on the Company
and its Subsidiaries or (b) (i) would be required to be reflected or reserved
against on a consolidated balance sheet of the Company and its Subsidiaries
(including the notes thereto) prepared in accordance with GAAP as applied in
preparing the consolidated balance sheet of the Company and its Subsidiaries as
of September 30, 1999 and (ii) were outside the ordinary course of business and
not immaterial in amount. Section 3.7 of the Disclosure Schedule sets forth the
amount of principal and unpaid interest outstanding under each instrument
evidencing indebtedness of the Company and its Subsidiaries which will
accelerate or become due or result in a right of redemption or repurchase on the
part of the holder of such indebtedness (with or without due notice or lapse of
time) as a result of this Agreement, any of the Ancillary Agreements, the Merger
or the other transactions contemplated hereby or thereby.
Section 3.8 INFORMATION IN PROXY STATEMENT/PROSPECTUS. The Proxy
Statement/Prospectus (as defined in Section 5.10 hereof) (or any amendment
thereof or supplement thereto) will not, at the date mailed to Company
stockholders or at the times of the Special Meetings (as defined in
Section 5.9(b) hereof), contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading, except that no representation is made by the Company
with respect to statements made therein based on information supplied by Parent
or Sub specifically for inclusion in the Proxy Statement/Prospectus. None of the
information supplied by the Company specifically for inclusion in the Parent
Registration Statement (as defined in Section 5.10 hereof) will, at the date it
becomes effective
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and at the time of the Special Meetings, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus specifically, as to information supplied by the Company for
inclusion therein, will comply in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder.
Section 3.9 EMPLOYEE BENEFIT MATTERS.
(a) All employee benefit plans and other incentive, compensation or
benefit agreements or arrangements covering any current or former employee
or director of, or consultant to, the Company or any Subsidiary are listed
in Section 3.9 of the Disclosure Schedule (the "COMPANY BENEFIT PLANS").
True and complete copies of the Company Benefit Plans, trusts and reports
and summaries required under the Code or the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), have been provided to the
Purchaser. Except as set forth in Section 4.11(a) of the Disclosure
Schedule, each Company Benefit Plan has been administered and maintained in
all material respects in compliance with its terms and with all applicable
laws, including, but not limited to, ERISA and the Code. Each Company
Benefit Plan intended to be qualified under Section 401(a) of the Code has
been determined by the Internal Revenue Service (the "IRS") to be so
qualified and to the knowledge of the Company no event has occurred that
could reasonably be expected to adversely affect the qualified status of
such Company Benefit Plan. Neither the Company nor any of its Subsidiaries
has incurred (and to the knowledge of the Company no transaction has
occurred which could reasonably be expected to give rise to) any liability
or penalty under Section 4975 of the Code or Section 502(i) of ERISA with
respect to any Company Benefit Plan. To the knowledge of the Company, there
are no pending, nor has the Company or any of its Subsidiaries received
notice of any threatened, claims against or otherwise involving any of the
Company Benefit Plans. No Company Benefit Plan is under audit or
investigation by the IRS, the Department of Labor or the Pension Benefit
Guaranty Corporation, and to the knowledge of the Company, no such audit or
investigation is pending or threatened. All material contributions and other
payments required to be made as of the date of this Agreement to, or
pursuant to, the Company Benefit Plans have been made or accrued for in the
Company Financial Statements. Neither the Company nor any entity under
"common control" with the Company within the meaning of Section 4001 of
ERISA has at any time contributed to, or been required to contribute to, any
"pension plan" (as defined in Section 3(2) of ERISA) that is subject to
Title IV of ERISA or Section 412 of the Code, including, without limitation,
any "multi-employer plan" (as defined in Sections 3(37) and 4001(a)(3) of
ERISA), and neither the Company nor any such entity has at any time incurred
or could reasonably expect to incur any liability under Title IV of ERISA.
(b) The consummation of the Transactions will not (either alone or upon
the occurrence of any additional or subsequent events) (i) constitute an
event under any Company Benefit Plan, employment or severance agreement,
trust, loan or other compensation or benefits agreement or arrangement that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any current or
former employee, officer, director, agent or consultant of the Company or
any Subsidiary, or (ii) result in the triggering or imposition of any
restrictions or limitations on the right of the Company or the Purchaser to
amend or terminate any Company Benefit Plan and receive the full amount of
any excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will or may be made
by the Company, any of its Subsidiaries, the Purchaser or any of their
respective affiliates with respect to any employee, officer or director of
the Company or its Subsidiaries will be characterized as an "excess
parachute payment," within the meaning of Section 280G(b)(1) of the Code and
no amount of any such payment or benefit will fail to be deductible by the
Company by reason of Section 162(m) of the Code.
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(c) Neither the Company nor any of its Subsidiaries (i) maintains or
contributes to any Company Benefit Plan which provides, or has any liability
to provide, life insurance, medical, severance or other employee welfare
benefits to any employee upon or with respect to periods following his
retirement or termination of employment, except as may be required by
Section 4980B of the Code; or (ii) has ever represented, promised or
contracted (whether in oral or written form) to any employee (either
individually or to employees as a group) that such employee(s) would be
provided with life insurance, medical, severance or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by Section 4980B of the Code. All amounts of deferred
compensation benefits under any Company Benefit Plan have been properly
accrued for in the Financial Statements.
(d) With respect to each Company Benefit Plan which is an "employee
welfare benefit plan" within the meaning of Section 3(1) of ERISA, all
material claims incurred (including claims incurred but not reported) by
employees thereunder for which the Company is, or will become, liable are
(i) insured pursuant to a contract of insurance whereby the insurance
company bears any risk of loss with respect to such claims; (ii) covered
under a contract with a health maintenance organization (an "HMO") pursuant
to which the HMO bears the liability for such claims, or (iii) reflected as
a liability in Section 3.9(d) of the Disclosure Schedule.
Section 3.10 LITIGATION; COMPLIANCE WITH LAW.
(a) Except for the suits disclosed in the Company SEC Documents filed
prior to the date of this Agreement, there is no suit, claim, action,
proceeding, arbitration or investigation pending or, to the knowledge of the
Company, threatened against or affecting, the Company or any of its
Subsidiaries which, individually or in the aggregate, is reasonably likely,
individually or in the aggregate, to have a material adverse effect on the
Company and its Subsidiaries, or materially impair the ability of the
Company to consummate the Merger or the other transactions contemplated
hereby or by the Ancillary Agreements. The foregoing includes, without
limitation, actions pending or, to the knowledge of the Company, threatened
(or any basis therefor known to the Company) involving the prior employment
of any of the Company's or any of its Subsidiaries' employees, their use in
connection with the Company's or any of its Subsidiaries' business of any
information, techniques, patents, patent applications, copyrights, trade
secrets, inventions, technology, know-how, Software (as defined in
Section 3.17(j)) or other intellectual property rights allegedly proprietary
to any of their former employers, or their obligations under any agreements
with prior employers.
(b) The Company and its Subsidiaries have complied in a timely manner
and in all material respects, with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any
court or Governmental Entity relating to any of the property owned, leased
or used by them, or applicable to their business, including, but not limited
to, (1) the Foreign Corrupt Practices Act of 1977 and any other laws
regarding use of funds for political activity or commercial bribery and
(2) laws relating to equal employment opportunity, discrimination,
occupational safety and health, environmental, interstate commerce and
antitrust.
Section 3.11 NO DEFAULT. The business of the Company and each of its
Subsidiaries has not been and is not being conducted in default or violation of
any term, condition or provision of (i) its respective certificate of
incorporation or bylaws or similar organizational documents, (ii) any Company
Agreement or (iii) any federal, state, local or foreign law, statute,
regulation, rule, ordinance, judgment, decree, order, writ, injunction,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to the Company or any of its Subsidiaries
or relating to any of the property owned, leased or used by them, or applicable
to their business, excluding from the foregoing clauses (ii) and (iii), defaults
or violations that would not, individually or in the aggregate, have a material
adverse effect on the Company and its Subsidiaries or materially impair the
ability of the Company to consummate the Merger or the other transactions
contemplated hereby or by the Ancillary Agreements. As of the date of this
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Agreement, no investigation or review by any Governmental Entity or other entity
with respect to the Company or any of its Subsidiaries is pending or, to the
knowledge of the Company, threatened, nor has any Governmental Entity or other
entity indicated an intention to conduct the same, other than, in each case,
those the outcome of which, as far as reasonably can be foreseen, in the future
will not, individually or in the aggregate, have a material adverse effect on
the Company and its Subsidiaries.
Section 3.12 TAXES.
(a) Except as set forth in Section 3.12 of the Disclosure Schedule, the
Company and each of its Subsidiaries has timely filed (or has had timely
filed on its behalf) with the appropriate Tax Authorities all Tax Returns
required to be filed by the Company and each of its Subsidiaries, and such
Tax Returns are true, correct, and complete in all material respects.
(b) The Company and each of its Subsidiaries has paid, or where payment
is not yet due, has established an adequate accrual in accordance with GAAP
for the payment of, all Taxes for all periods ending through the date
hereof.
(c) There are no liens for Taxes upon any property or assets of the
Company or any of its Subsidiaries, except for liens for Taxes not yet due
and for which adequate reserves have been established in accordance with
GAAP.
(d) No federal, state, local or foreign Audits are presently pending
with regard to any Taxes or Tax Returns of the Company and its Subsidiaries
and to the knowledge of the Company, no such Audit is threatened.
(e) Except as set forth in Section 3.12(e) of the Disclosure Schedule,
the Tax Returns of the Company and each of its Subsidiaries have not been
examined by the applicable Tax Authority (or the applicable statutes of
limitation for the assessment of Taxes for such periods have expired), and
for any year that a Tax Return was examined, no material adjustments were
asserted as a result of such examination which have not been resolved and
fully paid, and no issue has been raised by any Tax Authority in any Audit
of the Company or any of its Subsidiaries that, if raised with respect to
any other period not so audited, could be expected to result in a proposed
deficiency for any such period not so audited.
(f) There are no outstanding requests, agreements, consents or waivers
to extend the statutory period of limitations applicable to the assessment
of any Taxes or deficiencies against the Company or any of its Subsidiaries,
and no power of attorney granted by the Company or any of its Subsidiaries
with respect to any Taxes is currently in force.
(g) Neither the Company nor any of its Subsidiaries is a party to any
agreement providing for the allocation, indemnification, or sharing of
Taxes.
(h) Neither the Company nor any of its Subsidiaries has been a member of
any "affiliated group" (as defined in section 1504(a) of the Code) and is
not subject to Treas. Reg. 1.1502-6 for any period.
(i) Neither the Company nor any of its Subsidiaries is or has been a
U.S. real property holding company (as defined in Section 897(c)(2) of the
Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Code.
(j) "AUDIT" means any audit, assessment, or other examination relating
to Taxes by any Tax Authority or any judicial or administrative proceedings
relating to Taxes. "TAX" or "TAXES" means all federal, state, local, and
foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including any interest, additions to tax,
or penalties applicable thereto, imposed by any Tax Authority. "TAX
AUTHORITY" means the IRS and any other domestic or foreign governmental
authority responsible for the administration of any Taxes. "TAX RETURNS"
mean
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all federal, state, local, and foreign tax returns, declarations,
statements, reports, schedules, forms, and information returns and any
amendments thereto.
Section 3.13 CONTRACTS. Each Company Agreement is valid, binding and
enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a material
adverse effect on the Company and its Subsidiaries, and there are no defaults
thereunder, except those defaults that would not have a material adverse effect
on the Company and its Subsidiaries. Section 3.13 of the Disclosure Schedule
sets forth a true and complete list of (i) all Company Agreements entered into
by the Company, or any of its Subsidiaries and all amendments to any Company
Agreement, included as exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and (ii) all non-competition agreements
imposing restrictions on the ability of the Company or any of its Subsidiaries
to conduct business in any jurisdiction or territory.
Section 3.14 ASSETS; REAL PROPERTY. The Company and its Subsidiaries have
all assets, properties, rights and contracts necessary to permit the Company and
its Subsidiaries to conduct their business as it is currently being conducted,
except where the failure to have such assets, properties, rights and contracts
would not have a material adverse effect on the Company and its Subsidiaries.
The Company SEC Documents accurately identify all material real property or
material interests in material real property owned by the Company and its
Subsidiaries (the "REAL PROPERTY"). The Company or its Subsidiaries has good and
marketable title to the real property owned by them, free and clear of all
liens, charges, security interests, options, claims, mortgages, pledges,
easements, rights-of-way or other encumbrances and restrictions of any nature
whatsoever, except as described in Section 3.14 of the Disclosure Schedule and
those that do not adversely affect the value of such real property.
Section 3.15 ENVIRONMENTAL MATTERS. Except as disclosed in the Company SEC
Documents filed prior to the date of this Agreement, (a) the Company and its
Subsidiaries are in compliance in all material respects with federal, state,
local and foreign laws and regulations relating to pollution, protection or
preservation of human health or the environment, including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of toxic or hazardous substances, materials or wastes, petroleum and
petroleum products, asbestos or asbestos-containing materials, polychlorinated
biphenyls, radon, or lead or lead-based paints or materials ("MATERIALS OF
ENVIRONMENTAL CONCERN"), or otherwise relating to the generation, storage,
containment (whether above ground or underground), disposal, transport or
handling of Materials of Environmental Concern, or the preservation of the
environment or mitigation of adverse effects thereon (collectively,
"ENVIRONMENTAL LAWS"), and including, but not limited to, compliance with any
permits or other governmental authorizations or the terms and conditions
thereof; (b) neither the Company nor any of its Subsidiaries has received any
communication or notice, whether from a governmental authority or otherwise,
alleging any violation of or noncompliance with any Environmental Laws by any of
the Company or its Subsidiaries or for which the any of them is responsible, and
there is no pending or threatened claim, action, investigation or notice by any
person or entity alleging potential liability for investigatory, cleanup or
governmental response costs, or natural resources or property damages, or
personal injuries, attorney's fees or penalties relating to (i) the presence, or
release into the environment, of any Materials of Environmental Concern at any
location owned or operated by the Company or its Subsidiaries, now or in the
past, or (ii) any violation, or alleged violation, of any Environmental Law
(collectively, "ENVIRONMENTAL CLAIMS"), except where such Environmental Claims
would not have a material adverse effect or otherwise require disclosure in the
Company SEC Documents; and (c) to the knowledge of the Company, there are no
past or present facts or circumstances that could form the basis of any
Environmental Claim against the Company or its Subsidiaries or against any
person or entity whose liability for any Environmental Claim the Company or its
Subsidiaries have retained or assumed either contractually or by operation of
law, except where such Environmental Claim, if made, would not have a material
adverse effect or otherwise require disclosure in the Company SEC Documents. All
permits and other governmental authorizations currently held or required to be
held by the Company and its Subsidiaries pursuant to any Environmental Laws are
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identified in Section 3.15 of the Disclosure Schedule. The Company has provided
to Parent all assessments, reports, data, results of investigations or audits,
and other information that is in the possession of or reasonably available to
the Company regarding environmental matters pertaining to the environmental
condition of the business of the Company and its Subsidiaries, or the compliance
(or noncompliance) by the Company or its Subsidiaries with any Environmental
Laws.
Section 3.16 PRODUCT LIABILITY. Except as described in Section 3.16 of the
Disclosure Schedule, there are not presently pending or, to the knowledge of the
Company, threatened any civil, criminal or administrative actions, suits,
demands, claims, hearings, notices of violation, investigations, proceedings or
demand letters relating to any alleged hazard or alleged defect in design,
manufacture, materials or workmanship, including any failure to warn or alleged
breach of express or implied warranty or representation, relating to any product
manufactured, distributed or sold by or on behalf of the Company and its
Subsidiaries, which if adversely determined, would reasonably be expected to
have a material adverse effect on the Company and its Subsidiaries. Neither the
Company nor any of its Subsidiaries has extended to its customers any written
non-uniform product warranties, indemnifications or guarantees.
Section 3.17 INTELLECTUAL PROPERTY.
(a) The Company or its Subsidiaries own or have a valid right to use all
trademarks, service marks, trade names, Internet domain names, designs,
slogans, and general intangibles of like nature, together with all goodwill
related to the foregoing (collectively, "TRADEMARKS"); patents; copyrights
(including any registrations, renewals and applications for any of the
foregoing); Software; technology, trade secrets and other confidential
information, know-how, proprietary processes, formulae, algorithms, models,
and methodologies (collectively, "TRADE SECRETS," and together with the
foregoing, the "INTELLECTUAL PROPERTY") used in or necessary for the conduct
of the Company and each Subsidiaries' business as currently conducted or
contemplated to be conducted and described in the Company SEC Documents.
(b) Section 3.17(b)(1) of the Disclosure Schedule sets forth, for the
Intellectual Property owned by the Company or its Subsidiaries, a complete
and accurate list of all U.S. and foreign (1) patents and patent
applications; (2) Trademark registrations (including Internet domain
registrations) and applications and material unregistered Trademarks;
(3) copyright registrations and applications, including those in Software,
indicating for each, the applicable jurisdiction, registration number (or
application number), and date issued (or date filed). Section 3.17(b)(2)
sets forth a complete and accurate list of all license agreements granting
any right to use or practice any rights under any Intellectual Property,
whether the Company or any of its Subsidiaries is the licensee or licensor
thereunder, and any written settlements relating to any Intellectual
Property to which the Company or any of its Subsidiaries is a party or
otherwise bound (collectively, the "LICENSE AGREEMENTS"), indicating for
each the title, the parties and the date executed.
(c) The Intellectual Property owned by the Company or any of its
Subsidiaries is free and clear of all Liens, and the Company or a Subsidiary
of the Company, as noted in Section 3.17(c) of the Disclosure Schedule is
listed in the records of the appropriate United States, state or foreign
agency as the sole owner of record for each application and registration
listed in Section 3.17(c) of the Disclosure Schedule.
(d) Except as set forth in Section 3.17(d) of the Disclosure Schedule,
the Intellectual Property owned by the Company or any Subsidiary and, to the
best of the Company's knowledge, any Intellectual Property used by the
Company, is valid and subsisting, in full force and effect, and has not been
canceled, expired, or abandoned. There is no pending or, to the knowledge of
the Company, threatened opposition, interference or cancellation proceeding
before any court or registration authority in any jurisdiction against the
registrations listed in Section 3.19(d) of the Disclosure Schedule, or, to
the best of the Company's knowledge, against any Intellectual Property
licensed to the Company or its Subsidiaries.
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(e) The conduct of the Company's and its Subsidiaries' business as
currently conducted or planned to be conducted and described in the Company
SEC Documents does not infringe upon any Intellectual Property rights owned
or controlled by any third party (either directly or indirectly such as
through contributory infringement or inducement to infringe). Except as set
forth in Section 3.17(e) of the Disclosure Schedule, there are no claims or
suits pending or, to the knowledge of the Company, threatened, and neither
the Company nor any of its Subsidiaries has received any notice of a third
party claim or suit (1) alleging that its activities or the conduct of its
businesses infringes upon, violates, or constitutes the unauthorized use of
the Intellectual Property rights of any third party or (2) challenging the
ownership, use, validity or enforceability of any Intellectual Property.
(f) Except as set forth in Section 3.17(f) of the Disclosure Schedule,
there are no settlements, forebearances to sue, consents, judgments, or
orders or similar obligations which (1) restrict the Company's or its
Subsidiaries' rights to use any Intellectual Property, (2) restrict the
Company's or its Subsidiaries' business in order to accommodate a third
party's Intellectual Property or (3) permit third parties to use any
Intellectual Property owned or controlled by the Company or any of its
Subsidiaries. The Company or its Subsidiaries has not licensed or
sublicensed its rights in any material Intellectual Property other than
pursuant to the License Agreements, and no royalties, honoraria or other
fees are payable by the Company or its Subsidiaries for the use of or right
to use any Intellectual Property, except pursuant to the License Agreements.
The License Agreements are valid and binding obligations of all parties
thereto, enforceable in accordance with their terms, and there exists no
event or condition which will result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
by the Company or, to the knowledge of the Company, any other party under
any such License Agreement.
(g) The Company and each of its Subsidiaries take reasonable measures to
protect the confidentiality of Trade Secrets, including requiring its
employees and independent contractors having access thereto to execute
written non-disclosure agreements. To the knowledge of the Company, no Trade
Secret has been disclosed or authorized to be disclosed to any third party
other than pursuant to a non-disclosure agreement that adequately protects
the Company and the applicable Subsidiary's proprietary interests in and to
such Trade Secrets. Neither the Company nor, to the knowledge of the
Company, any other party to any non-disclosure agreement relating to the
Company's Trade Secrets is in breach or default thereof.
(h) To the knowledge of the Company, no third party is misappropriating,
infringing, diluting, or violating any Intellectual Property owned by the
Company or any of its Subsidiaries and, except as set forth in
Section 3.17(h) of the Disclosure Schedule, no such claims have been brought
against any third party by the Company or any of its Subsidiaries.
(i) Except as set forth in Section 3.17(i) of the Disclosure Schedule,
the consummation of the transactions contemplated hereby will not result in
the loss or impairment of the Company or any of its Subsidiaries' right to
own or use any of the Intellectual Property, nor will require the consent of
any governmental authority or third party in respect of any such
Intellectual Property.
(j) Section 3.17(j) of the Disclosure Schedule lists all Software (other
than off-the-shelf software applications programs having an acquisition
price of less than $25,000) which are owned, licensed, leased, or otherwise
used by the Company or any of its Subsidiaries, and identifies which of such
Software is owned, licensed, leased, or otherwise used, as the case may be.
Section 3.17(j) of the Disclosure Schedule lists all Software sold,
licensed, leased or otherwise distributed by the Company or any of its
Subsidiaries to any third party, and identifies which Software is sold,
licensed, leased, or otherwise distributed as the case may be. With respect
to the Software set forth in Section 3.17(j) of the Disclosure Schedule
which the Company or any of its Subsidiaries purports to own, such Software
was either developed (1) by employees of the Company or any of its
Subsidiaries within the scope of their employment; or (2) by independent
contractors who have assigned their rights to the Company
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or any of its Subsidiaries pursuant to written agreements. For purposes of
this Section 3.17, "SOFTWARE" means any and all (v) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, (w) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (x) descriptions, flow-charts and other work
product used to design, plan, organize and develop any of the foregoing,
(y) the technology supporting any Internet site(s) operated by or on behalf
of the Company or any of its Subsidiaries, and (z) all documentation,
including user manuals and training materials, relating to any of the
foregoing.
(k) Any Software that the Company or any of its Subsidiaries licenses
and maintains pursuant to contracts with third parties ("LICENSED SOFTWARE")
in order to enable such Software to process accurately (including
calculating, comparing and sequencing) in all material respects date data
from, into and between the twentieth and twenty-first centuries, including
leap year calculations ("MILLENNIAL DATE DATA"). All such Licensed Software
processes Millennial Date Data without material errors or omissions and
without materially affecting functionality when used in accordance with the
product documentation provided by the Company therefor and provided that all
other software and all hardware and firmware used in combination with such
Licensed Software properly exchanges date data with it. To the knowledge of
the Company, neither the Company nor any of its Subsidiaries has made any
representation or warranty to any third party that imposes any liability
(whether or not accrued, contingent or otherwise) on the Company or any of
its Subsidiaries greater than the preceding representation.
(l) The Company and its Subsidiaries are in the process of, and have
substantially completed obtaining, written representations or assurances
from each third party that (A) provides or will provide Millennial Date Data
to the Company or its Subsidiaries, (B) processes or will process Millennial
Date Data for the Company or its Subsidiaries or (C) otherwise provides or
will provide any material product or service to the Company or its
Subsidiaries that is dependent upon any Software, microcode, chip or
hardware system or component, including any electronic or electronically
controlled system or component (a "SYSTEM") that processes any Millennial
Date Data, stating that all of such Systems that are used for, or on behalf
of, the Company or its Subsidiaries will process Millennial Date Data
without materially affecting the supply of such product or service to the
Company or its Subsidiaries after December 31, 1999.
Section 3.18 PROPRIETARY RIGHTS AND CONFIDENTIALITY AGREEMENTS. Each
current and former employee and officer of the Company and its Subsidiaries has
executed a Proprietary Rights and Confidentiality Agreement or similar such
agreement, in substantially the form previously provided to Parent. The Company
is not aware that any of the current or former employees of the Company or any
of its Subsidiaries is in violation thereof.
Section 3.19 INSURANCE. The Company and each of its Subsidiaries has
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting businesses or owning assets similar to those of the
Company and its Subsidiaries. There is no material claim pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and the Company and its
Subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds. The Company has not been notified of any threatened
termination of, or material premium increase with respect to, any of such
policies.
Section 3.20 SUPPLIERS AND CUSTOMERS. Since September 30, 1999, no
material licensor, vendor, supplier, licensee or customer of the Company or any
of its Subsidiaries has canceled or otherwise modified its relationship with the
Company or its Subsidiaries and, to the Company's knowledge, (a) no such person
has any intention to do so, and (b) the consummation of the transactions
contemplated hereby will not adversely affect any of such relationships.
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Section 3.21 LABOR MATTERS.
(a) Except as set forth in Section 3.21(a) of the Disclosure Schedule,
(i) the Company and its Subsidiaries are in compliance with all applicable
laws respecting employment and employment practices, terms and conditions of
employment, health and safety, and wages and hours; (ii) neither the Company
nor any of its Subsidiaries has received written notice of any charge or
complaint against the Company or any of its Subsidiaries pending before the
Equal Employment Opportunity Commission, the National Labor Relations Board,
or any other government agency or court or other tribunal regarding an
unlawful employment practice; (iii) neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement and there is
no labor strike, slowdown or stoppage actually pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
Subsidiaries; (iv) neither the Company nor any of its Subsidiaries has
received notice that any representation petition respecting the employees of
the Company or any of its Subsidiaries has been filed with the National
Labor Relations Board, and, to the knowledge of the Company, there has been
no labor union prior to the date hereof organizing any employees of the
Company or any of its Subsidiaries into one or more collective bargaining
units; (v) there are no complaints, lawsuits, arbitrations or other
proceedings pending, or to the knowledge of the Company, threatened by or on
behalf of any present or former employee of the Company or any of its
Subsidiaries alleging breach of any express or implied contract of
employment; (vi) to the knowledge of the Company, no federal, state, or
local agency responsible for the enforcement of labor or employment laws
intends to conduct an investigation with respect to or relating to the
Company or any of its Subsidiaries and no such investigation is in progress;
(vii) there are no personnel arrangements, understandings, policies, rules
or procedures (whether written or oral) applicable to employees of the
Company or any of its Subsidiaries other than those set forth in
Section 3.21(a) of the Disclosure Schedule, true, correct and complete
copies of which have heretofore been delivered to Parent; and (viii) there
are no employment contracts, severance agreements, confidentiality
agreements (other than standard employee non-disclosure agreements as
contemplated by Section 3.21(vii)) or any other agreements (whether written
or oral) with any employees of the Company or any Subsidiary thereto.
(b) The Company and its Subsidiaries are and have been in substantial
compliance with all notice and other requirements under the Worker
Adjustment and Retaining Notification Act ("WARN") or similar state statute.
Except as set forth in Section 3.21(b) of the Disclosure Schedule, none of
the employees of the Company or any of its Subsidiaries have suffered an
"employment loss" (as defined in WARN) during the ninety-day period prior to
the execution of this Agreement.
(c) Neither the Company nor any of its Subsidiaries is bound by any
contract, arrangement, understanding, policy, rule or procedure (whether
written or oral) that restricts its ability to terminate the employment of
any of its employees at any time without payment or other liability.
Section 3.22 ACCOUNTS RECEIVABLE. Subject to any reserves set forth in the
balance sheet of the Company included in the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, as filed with the SEC prior
to the date of this Agreement (the "COMPANY BALANCE SHEET"), the accounts
receivable shown in the Company Balance Sheet arose in the ordinary course of
business; were not, as of the date of the Company Balance Sheet, subject to any
material discount, contingency, claim of offset or recoupment or counterclaim;
and represented, as of the date of the Company Balance Sheet, bona fide claims
against debtors for sales, leases, licenses and other charges. All accounts
receivable of the Company and its Subsidiaries arising after the date of the
Company Balance Sheet through the date of this Agreement arose in the ordinary
course of business and, as of the date of this Agreement, are not subject to any
material discount, contingency, claim of offset or recoupment or counterclaim,
except for normal reserves consistent with past practice. The amount carried for
doubtful accounts and allowances disclosed in the Company Balance Sheet is
believed by the Company as of the date of this Agreement to be sufficient to
provide for any losses which may be sustained or realization of the accounts
receivable shown in the Company Balance Sheet.
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Section 3.23 TRANSACTIONS WITH AFFILIATES. Except to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement or as
disclosed in Section 3.23 of the Disclosure Schedule, since September 30, 1999,
there have been no transactions, agreements, arrangements or understandings
between the Company and its affiliates that would be required to be disclosed
under Item 404 of Regulation S-K under the Securities Act.
Section 3.24 OPINION OF FINANCIAL ADVISOR. The Company has received the
written opinion of Volpe Brown Whelan & Company, LLC, dated the date hereof, to
the effect that, as of such date, the consideration to be received by the
stockholders of the Company in the Merger is fair to such stockholders from a
financial point of view, a signed copy of which opinion has been delivered to
Parent.
Section 3.25 BROKERS OR FINDERS. The Company represents, as to itself, its
Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person, other than Volpe Brown Whelan &
Company, LLC is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and the Company agrees to indemnify and hold
Parent and Sub harmless from and against any and all claims, liabilities or
obligations with respect to any other commissions or similar fees in connection
with any of the transactions contemplated by this Agreement which are asserted
by any person on the basis of any act or statement alleged to have been made by
or on behalf of the Company. The Company has heretofore furnished to Parent a
complete and correct copy of all agreements between the Company and Volpe Brown
Whelan & Company, LLC pursuant to which such firm would be entitled to any
payment relating to the transactions contemplated hereby.
Section 3.26 ACCOUNTING MATTERS; REORGANIZATION. None of the Company, any
of its Subsidiaries or, to the knowledge of the Company, any of their respective
directors, officers or stockholders, has taken any action which would prevent
the Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code. Each of the representations made by the Company to
its accountants relating to treatment of the Merger as a "pooling of interests"
for accounting purposes are true and correct in all respects. Each of the
representations made and to be made by the Company to KPMG LLP in connection
with KPMG LLP's issuance of the letter referred to in Section 5.17(c) hereof are
or will be, as the case may be, true and correct in all respects.
Section 3.27 STATE TAKEOVER STATUTES. To the knowledge of the Company, no
state takeover statute (other than Section 203 of the DGCL, which is
inapplicable) is applicable to the Merger or the transactions contemplated by
this agreement and the Ancillary Agreements.
Section 3.28 FULL DISCLOSURE. The Company has not knowingly failed to
disclose to Parent any facts material to the Company's business, results of
operations, assets, liabilities, financial condition or prospects. No
representation or warranty by the Company in this Agreement and no statement by
the Company contained in any document (including the Company Financial
Statements), schedule or certificate furnished or to be furnished by the Company
to Parent pursuant to the terms hereof, the Option Agreement or in connection
with the transactions contemplated hereby or thereby, contains as of the date
hereof or will contain as of the Effective Time, any untrue statements of a
material fact or omit or will omit to state any material fact necessary, in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 3.29 REGISTRATION AND PREEMPTIVE RIGHTS. Prior to the date hereof,
each of (i) that certain Securities Purchase Agreement (the "Securities Purchase
Agreement"), dated as of July 7, 1999, by and among the Company and certain
persons listed on a schedule thereto, (ii) that certain Registration Rights
Agreement, dated as of July 7, 1999, by and among the Company and the other
signatories thereto, and (iii) that certain Third Amended and Restated
Registration Rights Agreement, as amended, dated as of March 3, 1995, by and
among the Company and the other signatories thereto, has been terminated in
accordance with its terms, such termination to be effective as of the Effective
Time and to be subject to consummation of the Merger. In addition, each party
(other than the Company) to the Securities Purchase
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Agreement has retroactively waived all rights such party has, may have had or
may in the future have had pursuant to the Securities Purchase Agreement, such
waiver to be effective as of the Effective Time and to be subject to
consummation of the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 ORGANIZATION. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite corporate or other
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing and in good standing or to
have such power, authority, and governmental approvals would not have a material
adverse effect on Parent and its Subsidiaries. Parent and each of its
Subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, in the aggregate, have a material adverse effect on
Parent and its Subsidiaries.
Section 4.2 CAPITALIZATION.
(a) The authorized capital stock of Parent consists of 100,000,000
shares of Parent Common Stock and 10,000,000 shares of preferred stock, par
value $.001 per share (the "PARENT PREFERRED STOCK"). As of the date hereof,
(i) 21,589,233 shares of Parent Common Stock were issued and outstanding,
(ii) no shares of Parent Preferred Stock were issued and outstanding, and
(iii) 3,590,812 shares of Parent Common Stock were reserved for issuance
upon the exercise of outstanding options to purchase shares of Parent Common
Stock pursuant to employee stock option plans of Parent and all other
employee benefit plans of Parent. All of the issued and outstanding shares
of Parent Common Stock are validly issued, fully paid and nonassessable and
are not subject to any preemptive or similar rights.
(b) Except as disclosed in this Section 4.2, as of the date of this
Agreement, there is no outstanding (i) Right to purchase or otherwise to
receive from Parent or any of its Subsidiaries any of the outstanding
authorized but unissued or treasury shares of the capital stock of Parent or
any of its Subsidiaries, (ii) security of any kind convertible into or
exchangeable for such capital stock and (iii) voting trust or other
agreement or understanding to which Parent or any of its Subsidiaries is a
party or is bound with respect to the voting of the capital stock of Parent
or any of its Subsidiaries.
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION.
(a) Each of Parent and Sub has full corporate power and authority to
execute and deliver this Agreement and the Ancillary Agreements to which it
is a party and, subject to obtaining approval by the affirmative vote of the
holders of a majority of the outstanding shares of Parent Common Stock of
the issuance of Parent Common Stock in connection with the Merger (the
"PARENT STOCKHOLDER APPROVAL"), to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance of this
Agreement and the Ancillary Agreements to which each of Parent and Sub,
respectively, is a party and the consummation by Parent and Sub of the
Merger and of the other transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate action on the
part of Parent and Sub, respectively, and, subject to obtaining the Parent
Stockholder Approval, no other corporate actions on the part of Parent and
Sub are necessary to authorize the execution and delivery of this Agreement
or such Ancillary Agreements and the consummation by each of them of the
transactions contemplated hereby and thereby. Each of this Agreement and the
Ancillary Agreements to which each of Parent and Sub, respectively, is a
party has
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been duly executed and delivered by Parent or Sub, as the case may be, and
if applicable, the Parent's stockholders and affiliates, assuming each of
this Agreement and such Ancillary Agreements constitutes a valid and binding
obligation of the other parties hereto and thereto, constitutes a valid and
binding obligation of Parent or Sub, as the case may be, and Parents
stockholders and affiliates enforceable against Parent, Sub or Parent's
stockholders and affiliates, as the case may be, in accordance with their
respective terms, in accordance with its respective terms, except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought. The shares of Parent Common Stock to be issued pursuant to the
Merger, upon receipt of the Parent Stockholder Approval, when issued in
accordance with the terms hereof, will be duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights.
(b) The Boards of Directors of Parent and Sub each have duly and validly
approved and taken all corporate action required to be taken by such Board
of Directors for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements to which Parent or Sub, as the case
may be, is a party. The Parent Stockholder Approval is the only vote of the
holders of any class or series of Parent capital stock necessary to approve
the Agreement. As of the date hereof, the stockholders of Parent who have
executed the Parent Stockholder Agreements collectively own shares of Parent
Common Stock representing, in the aggregate, voting power sufficient to
effect the Parent Stockholder Approval.
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the Parent
Stockholder Approval, the Merger Filing and filings, permits, authorizations,
consents and approvals as may be required under, and other applicable
requirements of, the HSR Act, the Exchange Act, the Securities Act, and state
blue sky laws, neither the execution, delivery or performance of this Agreement
or any Ancillary Agreements by Parent and Sub nor the consummation by Parent and
Sub of the transactions contemplated hereby or thereby nor compliance by Parent
and Sub with any of the provisions hereof or thereof will (i) conflict with or
result in any breach of any provision of the respective certificates of
incorporation or by-laws of Parent, (ii) require any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (iii) result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, guarantee, other evidence of
indebtedness, license, lease, contract, agreement or other instrument or
obligation to which Parent or any of its Subsidiaries is a party or by which any
of them or any of their properties or assets may be bound or (iv) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Parent, any of its Subsidiaries or any of their properties or assets, except in
the case of clauses (ii), (iii) and (iv) where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings, or where
such violations, breaches or defaults would not, individually or in the
aggregate, have a material adverse effect on Parent and will not materially
impair the ability of Parent or Sub to consummate the transactions contemplated
hereby or by the Ancillary Agreements.
Section 4.5 INFORMATION IN PROXY STATEMENT/PROSPECTUS. The Registration
Statement (or any amendment thereof or supplement thereto) will not, at the date
it becomes effective and at the times of the Special Meetings, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, except
that no representation is made by Parent or Sub with respect to statements made
therein based on information supplied by the Company for inclusion in the
Registration Statement. None of the information supplied by Parent or Sub for
inclusion or incorporation by reference in the Proxy Statement/Prospectus, at
the date mailed to stockholders and at the time of the Special Meetings, will
contain any untrue statement of a material fact or omit to state any
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material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement, as to information supplied by Parent or
Sub, will comply in all material respects with the provisions of the Securities
Act and the rules and regulations thereunder.
Section 4.6 SEC REPORTS AND FINANCIAL STATEMENTS. Parent has filed with
the SEC, and has heretofore made available to the Company true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it and its Subsidiaries since August 5, 1999 under the
Exchange Act or the Securities Act (as such documents have been amended since
the time of their filing, collectively, the "PARENT SEC DOCUMENTS"). As of their
respective dates or, if amended, as of the date of the last such amendment, the
Parent SEC Documents, including, without limitation, any financial statements or
schedules included therein (a) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading and (b) complied in all material
respects with the applicable requirements of the Exchange Act or the Securities
Act, as the case may be, and the applicable rules and regulations of the SEC
thereunder. The Parent SEC Documents include all the documents that Parent was
required to file with the SEC since August 5, 1999. Each of the consolidated
financial statements included in the Parent SEC Documents have been prepared
from, and are in accordance with, the books and records of Parent and its
consolidated Subsidiaries, comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of the unaudited statements, as permitted by
Form 10-Q of the SEC) and present fairly the consolidated financial position and
the consolidated results of operations and cash flows of Certificate of
Incorporation and its consolidated Subsidiaries as at the dates thereof or for
the periods presented therein. Parent has not received notice (written or oral)
from and, to its knowledge, is not under any review by any Governmental Entity
in connection with its revenue recognition policies and procedures. Without
limiting the foregoing, for any period after December 31, 1998, Parent has
complied in all material respects with State of Position 97-2 (Software Revenue
Recognition), as amended by Statement of Position 98-4.
Section 4.7 ABSENCE OF CERTAIN CHANGES. Except as and to the extent
disclosed in the Parent SEC Documents filed prior to the date of this Agreement,
since September 30, 1999, Parent and its Subsidiaries have conducted their
respective businesses and operations in all material respects consistent with
past practice only in the ordinary and usual course. From September 30, 1999
through the date of this Agreement, there has not occurred (i) any events,
changes or effects (including the incurrence of any liabilities of any nature,
whether or not accrued, contingent or otherwise) having or, which would be
reasonably likely to have, individually or in the aggregate, a material adverse
effect on Parent and its Subsidiaries; (ii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the equity interests of Parent or of any of its
Subsidiaries other than regular quarterly cash dividends or dividends paid by
wholly owned Subsidiaries; or (iii) any change by Parent or any of its
Subsidiaries in accounting principles or methods, except insofar as may be
required by a change in GAAP. Since September 30, 1999 neither Parent nor any of
its Subsidiaries has taken any of the actions prohibited by Section 5.2 hereof.
Section 4.8 LITIGATION; COMPLIANCE WITH LAW.
(a) Except for the suits disclosed in the Parent SEC Documents filed
prior to the date of this Agreement, there is no suit, claim, action,
proceeding, arbitration or investigation pending or, to the knowledge of
Parent, threatened against or affecting, Parent or any of its Subsidiaries
which, individually or in the aggregate, is reasonably likely, individually
or in the aggregate, to have a material adverse effect on Parent and its
Subsidiaries, or materially impair the ability of Parent to consummate the
Merger or the other transactions contemplated hereby or by the Ancillary
Agreements. The foregoing includes, without limitation, actions pending or,
to the knowledge of Parent,
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threatened (or any basis therefor known to Parent) involving the prior
employment of any of Parent's or any of its Subsidiaries' employees, their
use in connection with Parent's or any of its Subsidiaries' business of any
information, techniques, patents, patent applications, copyrights, trade
secrets, inventions, technology, know-how, software or other intellectual
property rights allegedly proprietary to any of their former employers, or
their obligations under any agreements with prior employers.
(b) Parent and its Subsidiaries have complied in a timely manner and in
all material respects, with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any
court or Governmental Entity relating to any of the property owned, leased
or used by them, or applicable to their business, including, but not limited
to, (1) the Foreign Corrupt Practices Act of 1977 and any other laws
regarding use of funds for political activity or commercial bribery and
(2) laws relating to equal employment opportunity, discrimination,
occupational safety and health, environmental, interstate commerce and
antitrust.
Section 4.9 OPINION OF FINANCIAL ADVISOR. Parent has received the written
opinion of Credit Suisse First Boston, dated the date hereof, to the effect
that, as of such date, the Merger Consideration to be paid by Parent in the
Merger is fair from a financial point of view to Parent, a signed copy of which
opinion has been delivered to the Company.
Section 4.10 BROKERS OR FINDERS. No agent, broker, investment banker,
financial advisor or other firm or person, other than Credit Suisse First
Boston, is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and Parent agrees to indemnify and hold the
Company harmless from and against any and all claims, liabilities or obligations
with respect to any other fees, commissions or expenses asserted by any person
on the basis of any act or statement alleged to have been made by or on behalf
of such party.
Section 4.11 ACCOUNTING MATTERS; REORGANIZATION. None of Parent, any of
its Subsidiaries or, to the knowledge of Parent, any of their respective
directors, officers or stockholders, has taken any action which would prevent
the Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code. Each of the representations made by Parent to KPMG
LLP relating to treatment of the Merger as a "pooling of interests" for
accounting purposes are true and correct in all respects. Each of the
representations made and to be made by Parent to KPMG LLP in connection with
KPMG LLP's issuance of the letter referred to in Section 5.17(c) hereof are or
will be, as the case may be, true and correct in all respects.
Section 4.12 OPERATIONS OF SUB. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement, has engaged in no
other business activities and has conducted its operations only as contemplated
by this Agreement.
ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and
agrees that, except (i) as expressly provided in this Agreement or (ii) with the
prior written consent of Parent, after the date hereof and prior to the
Effective Time:
(a) the business of the Company and its Subsidiaries will be conducted
in the ordinary and customary course consistent with past practice and each
of the Company and its Subsidiaries shall use its best efforts to preserve
its business organization intact and maintain its existing relations with
customers, suppliers, employees, creditors and business partners;
(b) the Company will not, directly or indirectly, split, combine or
reclassify the outstanding Company Common Stock, or any outstanding capital
stock of any of the Subsidiaries of the Company;
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(c) neither the Company nor any of its Subsidiaries shall (i) amend its
certificate of incorporation or by-laws or similar organizational documents;
(ii) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock; (iii) issue,
sell, transfer, pledge, dispose of or encumber any additional shares of, or
securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class of the Company or its Subsidiaries, other than issuances
pursuant to the exercise of Company Options outstanding on the date hereof,
in accordance with their present terms and the grant of options to purchase
Company Common Stock to new non-executive level employees consistent with
past practices; (iv) transfer, lease, license, sell, mortgage, pledge,
dispose of, or encumber any material assets other than in the ordinary and
usual course of business and consistent with past practice; or (v) redeem,
purchase or otherwise acquire directly or indirectly any of its capital
stock;
(d) neither the Company nor any of its Subsidiaries shall (i) grant any
increase in the compensation payable or to become payable by the Company or
any of its Subsidiaries to any of its officers, directors, employees, agents
or consultants (other than increases for non-executive level employees in
the ordinary course of not more than 10%); (ii) adopt or enter into any new
plan, policy, agreement or arrangement that would constitute a Company
Benefit Plan, or amend or otherwise increase, or accelerate the payment or
vesting of the amounts payable or to become payable under any existing
Company Benefit Plan; (iii) enter into any, or amend any existing,
employment or severance agreement with or, except in accordance with the
existing written policies of the Company previously delivered to Parent,
grant any severance or termination pay to any officer, director or employee
of the Company or any of its Subsidiaries; or (iv) make any loans to any of
its officers, directors, employees, agents or consultants or make any
changes in its existing borrowing or lending arrangements for or on behalf
of any of such persons, whether contingent on the Merger or otherwise;
(e) neither the Company nor any of its Subsidiaries shall modify, amend
or terminate any of the Company Agreements or waive, release or assign any
material rights or claims, except in the ordinary course of business and
consistent with past practice;
(f) the Company and its Subsidiaries shall use commercially reasonable
efforts to prevent any material insurance policy naming it as a beneficiary
or a loss payable payee to be canceled or terminated without notice to
Parent, except in the ordinary course of business and consistent with past
practice;
(g) neither the Company nor any of its Subsidiaries shall license or
otherwise transfer, dispose of, permit to lapse or otherwise fail to
preserve any of the Company's or any of its Subsidiaries' Intellectual
Property Rights, or dispose of or disclose to any person who has not entered
into a confidentiality agreement any trade secret, formula, process or
know-how not theretofore a matter of public knowledge, except in the
ordinary course of business and consistent with past practice;
(h) neither the Company nor any of its Subsidiaries shall cancel any
debts or waive, release or relinquish any contract rights or other rights of
substantial value, except settlements of accounts receivable in the ordinary
course of business and consistent with past practice;
(i) neither the Company nor any of its Subsidiaries shall: (i) incur or
assume any long-term debt except for amounts set forth in the Company's
budget previously delivered to Parent and, except in the ordinary course of
business consistent with past practice, incur or assume any short-term
indebtedness in amounts not consistent with past practice; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person, except in the ordinary course of business and consistent with past
practice; (iii) make any loans, advances or capital contributions to, or
investments in, any other person (other than to wholly owned Subsidiaries of
the Company or customary advances to employees for travel and business
expenses in the ordinary course of business and consistent with past
practice); or (iv) enter
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into any material commitment or transaction (including, but not limited to,
any borrowing, capital expenditure or purchase, sale or lease of assets)
other than capital expenditures pursuant to the Company's capital
expenditures budget previously delivered to Parent and other capital
expenditures that do not exceed $50,000 in the aggregate since
September 30, 1999;
(j) neither the Company nor any of its Subsidiaries shall (i) change any
of the accounting principles used by it unless required by GAAP; (ii) take
or allow to be taken any action which would jeopardize the treatment of
Parent's business combination with the Company as a pooling of interests for
accounting purposes; or (iii) take or allow to be taken any action which
would jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code;
(k) neither the Company nor any of its Subsidiaries shall pay, discharge
or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction of any such claims, liabilities or obligations
(i) in the ordinary course of business and consistent with past practice, or
claims, liabilities or obligations reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes
thereto) of the Company and its consolidated Subsidiaries, (ii) incurred in
the ordinary course of business and consistent with past practice or
(iii) which are legally required to be paid, discharged or satisfied
(provided that if such claims, liabilities or obligations referred to in
this clause (iii) are legally required to be paid and are also not otherwise
payable in accordance with clauses (i) or (ii) above, the Company will
notify Parent in writing if such claims, liabilities or obligations exceed,
individually or in the aggregate, $50,000 in value, reasonably in advance of
their payment);
(l) neither the Company nor any of its Subsidiaries will adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or
any of its Subsidiaries or any agreement relating to an Alternative
Transaction (as defined in Section 5.7(a) hereof);
(m) neither the Company nor any of its Subsidiaries will take, or agree
to commit to take, any action that would make any representation or warranty
of the Company contained herein inaccurate in any respect at, or as of any
time prior to, the Effective Time;
(n) neither the Company nor any of its Subsidiaries will voluntarily
make or agree to make any changes in Tax accounting methods, waive or
consent to the extension of any statute of limitations with respect to
Taxes, or consent to any assessment of Taxes, or settle any judicial or
administrative proceeding affecting Taxes; and
(o) neither the Company nor any of its Subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing,
or to authorize, recommend, propose or announce an intention to do any of
the foregoing.
Section 5.2 INTERIM OPERATIONS OF PARENT. Parent covenants and agrees
that, except (i) as expressly provided in this Agreement, or (ii) with the prior
written consent of the Company, after the date hereof and prior to the Effective
Time:
(a) Parent will not, directly or indirectly, split, combine or
reclassify the outstanding Parent Common Stock;
(b) Parent shall not: (i) amend its certificate of incorporation or
by-laws; or (ii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to its capital
stock other than regular quarterly cash dividends consistent with past
practice;
(c) neither Parent nor any of its Subsidiaries shall (i) change any of
the accounting principles used by it unless required by GAAP; (ii) take or
allow to be taken any action which would jeopardize the treatment of
Parent's business combination with the Company as a pooling of interests for
accounting purposes; or (iii) take or allow to be taken any action which
would jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code;
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(d) neither Parent nor any of its Subsidiaries will adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of Parent or any of
its Subsidiaries or any agreement relating to a Competing Proposal (as
defined in Section 5.8 hereof);
(e) neither Parent nor any of its Subsidiaries will take, or agree to
commit to take, any action that would make any representation or warranty of
Parent and Sub contained herein inaccurate in any respect at, or as of any
time prior to, the Effective Time; and
(f) neither Parent nor any of its Subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing,
or to authorize, recommend, propose or announce an intention to do any of
the foregoing.
Section 5.3 ACCESS TO INFORMATION. The Company shall (and shall cause each
of its Subsidiaries to) afford to the officers, employees, accountants, counsel,
financing sources and other representatives of Parent, access, during normal
business hours, during the period prior to the Effective Time, to all of its and
its Subsidiaries' properties, books, contracts, commitments and records and,
during such period, the Company shall (and shall cause each of its Subsidiaries
to) furnish promptly to Parent (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as Parent may reasonably
request. Unless otherwise required by law, until the Effective Time, Parent will
hold, and cause its officers, employees, accountants, counsel, financing sources
and other representatives to hold, any such information which is nonpublic in
confidence in accordance with the provisions of the Mutual Non-Disclosure
Agreement between the Company and Parent, dated as of August 18, 1999 (the
"CONFIDENTIALITY AGREEMENT").
Section 5.4 HSR ACT FILINGS.
(a) Each of Parent and the Company shall, to the extent applicable,
(i) make or cause to be made any filings required of such party or any of
its Subsidiaries or affiliates under the HSR Act with respect to the
transactions contemplated hereby as promptly as practicable and in any event
within ten business days after the date of this Agreement, (ii) comply at
the earliest practicable date with any request under the HSR Act for
additional information, documents, or other materials received by such party
or any of its Subsidiaries from the Federal Trade Commission or the
Department of Justice (either, an "HSR AUTHORITY") or any other Governmental
Entity in respect of such filings or such transactions, and (iii) cooperate
with the other party in connection with any such filing (including, with
respect to the party making a filing, providing copies of all such documents
to the nonfiling party and its advisors prior to filing and, if requested,
to accept all reasonable changes suggested in connection therewith) and in
connection with resolving any investigation or other inquiry of any such
agency or other Governmental Entity under any Antitrust Laws (as defined in
Section 5.4(b) hereof) with respect to any such filing or any such
transaction. Each party shall use its reasonable best efforts to furnish to
each other all information required for any application or another filing to
be made pursuant to any applicable law in connection with the Merger and the
other transactions contemplated by this Agreement. Each party shall promptly
inform the other party of any communication with, and any proposed
understanding, undertaking, or agreement with, any Governmental Entity
regarding any such filings or any such transaction.
(b) Each of Parent and the Company shall use its reasonable best efforts
to resolve such objections, if any, as may be asserted by any Governmental
Entity with respect to the transactions contemplated by this Agreement under
HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the
Federal Trade Commission Act, as amended, and any other federal, state or
foreign statutes, rules, regulations, orders, decrees, administrative or
judicial doctrines or other laws that are designed to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restraint
of trade (collectively, "ANTITRUST LAWS"). In connection therewith, if any
administrative or
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judicial action or proceeding is instituted (or threatened to be instituted)
challenging any transaction contemplated by this Agreement as violative of
any Antitrust Law, each of Parent and the Company shall cooperate and use
its reasonable best efforts vigorously to contest and resist any such action
or proceeding, including any legislative, administrative or judicial action,
and to have vacated, lifted, reversed or overturned any decree, judgment,
injunction or other order, whether temporary, preliminary or permanent, that
is in effect and that prohibits, prevents, or restricts consummation of the
Merger or any other transactions contemplated by this Agreement, and
vigorously to pursue all available avenues of administrative and judicial
appeal and all available legislative action, unless by mutual agreement
Parent and the Company decide that litigation is not in their respective
best interest. Parent shall be entitled to direct any proceedings or
negotiations with any Governmental Entity relating to any of the foregoing
described in this Section 5.4, provided that it shall afford the Company a
reasonable opportunity to participate therein. Notwithstanding the foregoing
or any other provision of this Agreement, nothing in this Section 5.4 shall
limit a party's right to terminate this Agreement pursuant to Section 7.1,
so long as such party has up to then complied in all material respects with
its obligations under this Section 5.4. Each of Parent and the Company shall
use its reasonable best efforts to take such action as may be required to
cause the expiration of any notice period under the HSR Act or other
Antitrust Laws with respect to such transactions as promptly as possible
after the execution of this Agreement.
(c) Notwithstanding this Section 5.4 or any other provision of this
Agreement or any of the Ancillary Agreements, neither Parent nor Sub shall
be required, whether before or after the Effective Time, to hold separate
(including by trust or otherwise) or divest any of its business or assets or
any of the businesses or assets of the Company, or enter into any consent
decree or other agreement that would restrict Parent or the Company in the
conduct of its respective businesses as heretofore conducted.
Section 5.5 OTHER CONSENTS AND APPROVALS. Each of the Company, Parent and
Sub will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to this Agreement and the
transactions contemplated hereby (which actions shall include, without
limitation, furnishing all information in connection with approvals of or
filings with any Governmental Entity) and will promptly cooperate with and
furnish information to each other in connection with any such requirements
imposed upon any of them or any of their Subsidiaries in connection with this
Agreement, the Ancillary Agreements and the transactions contemplated hereby and
thereby. Each of the Company, Parent and Sub will, and will cause its respective
Subsidiaries to, take all reasonable actions necessary to obtain any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity or other public or private third party required to be obtained or made by
Parent, Sub, the Company or any of their Subsidiaries in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement or
the Ancillary Agreements (collectively, the "REQUISITE REGULATORY APPROVALS").
Section 5.6 EMPLOYMENT AGREEMENTS. Prior to the Closing, the Company
shall, upon Parent's request, extend offers of employment, to be effective as of
the Effective Time and to be subject to consummation of the Merger, to certain
key employees of the Company identified by Parent, in each case on terms to be
proposed by Parent, subject to execution of Parent's standard form of offer
letter, in the form of Exhibit B-2 hereto, and non-disclosure agreement, in the
form of EXHIBIT F hereto, the effectiveness of which offer letters and
non-disclosure agreements shall be conditioned upon the consummation of the
transactions consummated hereby.
Section 5.7 NO SOLICITATION BY THE COMPANY.
(a) The Company shall not, nor shall it permit any of its Subsidiaries
to, nor shall it authorize or permit any of its officers, directors or
employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of its Subsidiaries to,
directly or indirectly
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through another person, (i) solicit, initiate or encourage (including by way
of furnishing information), or take any other action designed to facilitate,
any inquiries or the making of any proposal the consummation of which would
constitute an Alternative Transaction or (ii) participate in any
negotiations regarding any Alternative Transaction; provided, however, that
if, at any time prior to the adoption of this Agreement by the holders of
the Company Common Stock, the Company Board determines in good faith, after
receipt of advice from outside counsel, that such action is required for the
Company Board to comply with its fiduciary obligations to the Company's
stockholders under applicable law, the Company may, in response to any such
proposal that was not solicited by it or which did not otherwise result from
a breach of this Section 5.7(a), and subject to compliance with
Section 5.7(c) hereof, (A) furnish information with respect to the Company
and its Subsidiaries to any person pursuant to a customary confidentiality
agreement containing terms as to confidentiality no less restrictive than
the Confidentiality Agreement and (B) participate in negotiations regarding
such proposal. For purposes of this Agreement "ALTERNATIVE TRANSACTION"
means any of (i) a transaction or series of transactions pursuant to which
any person (or group of persons) other than the Company and its Subsidiaries
and other than Parent and its Subsidiaries (a "THIRD PARTY") acquires or
would acquire, directly or indirectly, beneficial ownership (as defined in
Rule 13d-3 under the Exchange Act) of more than 20% of the outstanding
shares of the Company, whether from the Company or pursuant to a tender
offer or exchange offer or otherwise, (ii) any acquisition or proposed
acquisition of the Company or any of its significant Subsidiaries by a
merger or other business combination whether or not the Company or any of
its significant Subsidiaries is the entity surviving any such merger or
business combination) or (iii) any other transaction pursuant to which any
Third Party acquires or would acquire, directly or indirectly, control of
assets (including for this purpose the outstanding equity securities of
Subsidiaries of the Company and any entity surviving any merger or
combination including any of them) of the Company or any of its Subsidiaries
for consideration equal to 20% or more of the fair market value of all of
the outstanding shares of the Company Common Stock on the date prior to the
date hereof.
(b) Neither the Company Board nor any committee thereof shall
(i) except as expressly permitted by this Section 5.7, withdraw, qualify or
modify, or propose publicly to withdraw, qualify or modify, in a manner
adverse to Parent, the approval or recommendation by such Board of Directors
or such committee of the Merger or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Alternative
Transaction, or (iii) cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement
(each, a "ACQUISITION AGREEMENT") related to any Alternative Transaction.
Notwithstanding the foregoing, in the event that prior to the adoption of
this Agreement by the holders of the Company Common Stock the Company Board
determines in good faith, after it has received a Superior Proposal (as
defined below) and after receipt of advice from outside counsel, that such
actions is required for the Company Board to comply with its fiduciary
obligations to the Company's stockholders under applicable law, the Company
Board may (subject to this and the following sentences) inform the Company
stockholders that it no longer believes that the Merger or this Agreement is
advisable and no longer recommends approval of the Merger or this Agreement
and/or approves or recommends a Superior Proposal (a "SUBSEQUENT
DETERMINATION"), but only at a time that is after the fifth business day
following Parent's receipt of written notice advising Parent that the
Company Board has received a Superior Proposal, specifying the material
terms and conditions of such Superior Proposal, identifying the person
making such Superior Proposal and stating that it intends to make a
Subsequent Determination. After providing such notice, the Company shall
provide a reasonable opportunity to Parent to make such adjustments in the
terms and conditions of this Agreement as would enable the Company to
proceed with its original recommendation to stockholders without making a
Subsequent Determination; provided, however, that any such adjustments shall
be at the discretion of the parties at such time. For purposes of this
Agreement, a "SUPERIOR PROPOSAL" means any proposal (on its most recently
amended or modified terms, if amended or modified) made by a Third Party to
enter into an Alternative
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Transaction on terms which the Company Board determines in its good faith
judgment (after receiving the advice of a financial advisor of nationally
recognized reputation) to be more favorable to the Company's stockholders
than the Merger taking into account all relevant factors (including whether,
in the good faith judgment of the Company Board, after obtaining advice from
a financial advisor of nationally recognized reputation, the Third Party is
reasonably able to finance the transaction, and any proposed changes to this
Agreement that may have been proposed by Parent in response to such
Alternative Transaction). Notwithstanding any other provision of this
Agreement, the Company shall submit this Agreement to its stockholders
whether or not the Company Board makes a Subsequent Determination.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 5.7, the Company shall promptly
advise Parent orally and in writing of any request for information or of any
proposal in connection with an Alternative Transaction, the material terms
and conditions of such request or proposal and the identity of the person
making such request or proposal. The Company will keep Parent reasonably
informed of the status and details (including amendments or proposed
amendments) of any such request or proposal on a current basis.
(d) Nothing contained in this Section 5.7 shall prohibit the Company
from (i) taking and disclosing to its stockholders a position contemplated
by Rule 14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or
(ii) from making any disclosure to its stockholders if, in the good faith
judgment of the Company Board, after receipt of advice from outside counsel,
failure so to disclose would violate its fiduciary duties to the Company's
stockholders under applicable law.
Section 5.8 NO SOLICITATION BY PARENT. Parent shall not, nor shall it
permit any of its Subsidiaries to, nor shall it authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of its
Subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage
(including by way of furnishing information), or take any other action designed
to facilitate, any inquiries or the making of any competing or alternative
proposal for Parent to acquire a third party, the consummation of which would
delay, interfere with or adversely affect the consummation of the Merger (a
"COMPETING PROPOSAL"), or (ii) participate in any negotiations regarding any
Competing Proposal; provided, however, that if, at any time prior to the
adoption of this Agreement by the holders of the Parent Common Stock, the Parent
Board determines in good faith, after receipt of advice from outside counsel,
that such action is required for the Parent Board to comply with its fiduciary
obligations to Parent's stockholders under applicable law, Parent may, in
response to any such proposal that was not solicited by it or which did not
otherwise result from a breach of this Section 5.8, (A) furnish information with
respect to Parent and its Subsidiaries to any person pursuant to a customary
confidentiality agreement containing terms as to confidentiality no less
restrictive than the Confidentiality Agreement and (B) participate in
negotiations regarding such proposal.
In addition, Parent shall promptly advise the Company orally and in writing
of any request for information or of any proposal in connection with a Competing
Proposal, the material terms and conditions of such request or proposal and the
identity of the person making such request or proposal. Parent will keep the
Company reasonably informed of the status and details (including amendments or
proposed amendments) of any such request or proposal on a current basis.
Section 5.9 STOCKHOLDERS' MEETINGS. (a) In order to consummate the Merger,
the Company, acting through its Board of Directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting of
its stockholders (the "COMPANY SPECIAL MEETING"), as soon as practicable after
the Registration Statement is declared effective, for the purpose of considering
and voting upon this Agreement. The Company shall include in the proxy
statement/prospectus the unanimous recommendation of the Company Board that
stockholders of the Company vote in favor of the adoption of this Agreement.
Nothing contained in the preceding sentence shall prohibit the Company from
(i) taking and disclosing to its stockholders a position contemplated by
Rule 14d-9 or 14e-2 promulgated under the
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Exchange Act or (ii) from making any disclosure to its stockholders if, in the
good faith judgment of the Company Board, after receipt of advice from outside
counsel, failure so to disclose would violate its fiduciary duties to the
Company's stockholders under applicable law.
(b) If required in order to consummate the Merger, Parent, acting
through its Board of Directors (the "PARENT BOARD"), shall, in accordance
with applicable law, duly call, give notice of, convene and hold a special
meeting of its stockholders (the "PARENT SPECIAL MEETING" and, together with
the Company Special Meeting, the "SPECIAL MEETINGS"), as soon as practicable
after the Registration Statement is declared effective, for the purpose of
considering and voting upon the issuance of shares of Parent Common Stock in
the Merger in accordance with the rules of the Nasdaq Stock Market. Parent
shall include in the proxy statement/prospectus the recommendation of the
Parent Board that stockholders of Parent vote in favor of such issuance of
shares of Parent Common Stock in the Merger. Nothing contained in the
preceding sentence shall prohibit Parent from (i) taking and disclosing to
its stockholders a position contemplated by Rule 14d-9 or 14e-2 promulgated
under the Exchange Act or (ii) from making any disclosure to its
stockholders if, in the good faith judgment of the Parent Board, after
receipt of advice from outside counsel, failure so to disclose would violate
its fiduciary duties to Parent's stockholders under applicable law.
(c) Parent and the Company shall use all reasonable efforts to hold the
Parent Special Meeting and the Company Special Meeting on the same date and
as soon as reasonably practicable after the date hereof.
Section 5.10 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT.
(a) Parent and the Company shall use commercially reasonable efforts to
prepare and file with the SEC, as promptly as practicable after the
execution of this Agreement, a joint proxy statement relating to the Company
Special Meeting and the Parent Special Meeting to be held in connection with
the Transactions (together with any amendments thereof or supplements
thereto, the "PROXY STATEMENT/PROSPECTUS"). Parent shall use commercially
reasonable efforts to prepare and file with the SEC, as promptly as
practicable after the execution of this Agreement, a registration statement
on Form S-4 (together with all amendments thereto, the "PARENT REGISTRATION
STATEMENT"), in which the proxy statement/prospectus shall be included as a
prospectus, in connection with the registration under the Securities Act of
the shares of Parent Common Stock and warrants to purchase shares of Parent
Common Stock to be issued pursuant to the Merger. Each of Parent and the
Company (i) shall cause the proxy statement/prospectus and the Parent
Registration Statement to comply as to form in all material respects with
the applicable provision of the Securities Act, the Exchange Act and the
rules and regulations thereunder, (ii) shall use all reasonable efforts to
have or cause the Parent Registration Statement to become effective as
promptly as practicable, and (iii) shall take any and all action required
under any applicable Federal or state securities laws in connection with the
issuance of shares of Parent Common Stock pursuant to the Merger. Parent and
the Company shall furnish to the other all information concerning Parent and
the Company as the other may reasonably request in connection with the
preparation of the documents referred to herein. As promptly as practicable
after the Parent Registration Statement shall have become effective, each of
Parent and the Company shall deliver the proxy statement/prospectus to its
respective stockholders.
(b) The information supplied by each of Parent and the Company for
inclusion in the Parent Registration Statement and the proxy
statement/prospectus shall not (i) at the time the Parent Registration
Statement is declared effective, (ii) at the time the proxy
statement/prospectus (or any amendment thereof or supplement thereto) is
first mailed to the stockholders of Parent or the Company, (iii) at the time
of the Company Special Meeting, (iv) at the time of the Parent Special
Meeting, or (v) at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
If, at any time prior to the Effective Time, any event or circumstance
relating to the
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Company, any Subsidiary of the Company, Parent, any Subsidiary of Parent, or
their respective officers or directors, should be discovered by such party
which should be set forth in an amendment or a supplement to the Parent
Registration Statement or the proxy statement/prospectus, such party shall
promptly inform the other thereof and take appropriate action in respect
thereof.
Section 5.11 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable, whether under applicable laws and
regulations or otherwise, or to remove any injunctions or other impediments or
delays, legal or otherwise, to consummate and make effective the Merger and the
other transactions contemplated by this Agreement and the Ancillary Agreements.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or the Ancillary
Agreements, the proper officers and directors of the Company and Parent shall
use all reasonable efforts to take, or cause to be taken, all such necessary
actions.
Section 5.12 PUBLICITY. So long as this Agreement is in effect, neither
the Company, Parent nor any of their respective affiliates shall issue or cause
the publication of any press release or other announcement with respect to the
Merger, this Agreement, the Ancillary Agreements, or the other transactions
contemplated hereby or thereby without the prior consultation of the other
party, except as may be required by law or by any listing agreement with a
national securities exchange. Without limiting the foregoing, so long as this
Agreement is in effect, the Company shall not issue or cause the publication of
any press release or other announcement without the prior consent of Parent,
which consent shall not be unreasonably withheld.
Section 5.13 NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Parent and Parent shall give prompt notice to the Company, of
(i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Effective Time and (ii) any material failure of the Company or Parent, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder or under any Ancillary
Agreement; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 5.13 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 5.14 DIRECTORS' AND OFFICERS' INSURANCE AND
INDEMNIFICATION. Parent agrees that at all times after the Effective Time, it
shall indemnify, or shall cause the Company (or the Surviving Corporation if
after the Effective Time) and its Subsidiaries to indemnify, each person who is
now, or has been at any time prior to the date hereof, a director or officer of
the Company or of any of the Company's Subsidiaries, successors and assigns
(individually an "INDEMNIFIED PARTY" and collectively the "INDEMNIFIED
PARTIES"), to the same extent and in the same manner as is now provided in the
respective certificates of incorporation or by-laws or in the indemnity
agreements, copies of which agreements have been previously provided to Parent,
of the Company and such Subsidiaries or otherwise in effect on the date hereof,
with respect to any claim, liability, loss, damage, cost or expense (whenever
asserted or claimed) ("INDEMNIFIED LIABILITY") based in whole or in part on, or
arising in whole or in part out of, any matter existing or occurring at or prior
to the Effective Time. Parent shall, and shall cause the Company (or the
Surviving Corporation if after the Effective Time) to, maintain in effect for
not less than six years after the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries on the date hereof (provided that Parent may substitute therefor
policies having at least the same coverage and containing terms and conditions
which are no less advantageous to the persons currently covered by such policies
as insured) with respect to matters existing or occurring at or prior to the
Effective Time; PROVIDED, HOWEVER, that if the aggregate annual premiums for
such insurance at any time during such period shall exceed 150% of the per annum
rate of premium currently paid by the Company and its Subsidiaries for such
insurance on the date of this Agreement, which amount is set forth in
Section 5.14 of the Disclosure Schedule, then Parent shall cause the Company (or
the Surviving Corporation if after the
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Effective Time) to, and the Company (or the Surviving Corporation if after the
Effective Time) shall, provide the maximum coverage that shall then be available
at an annual premium equal to 150% of such rate. Without limiting the foregoing,
in the event any Indemnified Party becomes involved in any capacity in any
action, proceeding or investigation based in whole or in part on, or arising in
whole or in part out of, any matter, including the transactions contemplated
hereby, existing or occurring at or prior to the Effective Time, then to the
extent permitted by law Parent shall, or shall cause the Company (or the
Surviving Corporation if after the Effective Time) to, periodically advance to
such Indemnified Party its legal and other expenses (including the cost of any
investigation and preparation incurred in connection therewith), subject to the
provision by such Indemnified Party of an undertaking to reimburse the amounts
so advanced in the event of a final determination by a court of competent
jurisdiction that such Indemnified Party is not entitled thereto. Promptly after
receipt by an Indemnified Party of notice of the assertion (an "ASSERTION") of
any claim or the commencement of any action against him in respect to which
indemnity or reimbursement may be sought against Parent, the Company, the
Surviving Corporation or a Subsidiary of the Company or the Surviving
Corporation ("INDEMNITORS") hereunder, such Indemnified Party shall notify any
Indemnitor in writing of the Assertion, but the failure to so notify any
Indemnitor shall not relieve any Indemnitor of any liability it may have to such
Indemnified Party hereunder except where such failure shall have materially
prejudiced Indemnitor in defending against such Assertion. Indemnitors shall be
entitled to participate in and, to the extent Indemnitors elect by written
notice to such Indemnified Party within 30 days after receipt by any Indemnitor
of notice of such Assertion, to assume, the defense of such Assertion, at their
own expense, with counsel chosen by Indemnitors and reasonably satisfactory to
such Indemnified Party. Notwithstanding that Indemnitors shall have elected by
such written notice to assume the defense of any Assertion, such Indemnified
Party shall have the right to participate in the investigation and defense
thereof, with separate counsel chosen by such Indemnified Party, but, until
there is a conflict between the positions of the Indemnified Party and the
Indemnitors, the fees and expenses of such counsel shall be paid by such
Indemnified Party. No Indemnified Party shall settle any Assertion without the
prior written consent of Parent, which consent may not be unreasonably withheld,
nor shall Parent settle any Assertion without either (i) the written consent of
all Indemnified Parties against whom such Assertion was made, or (ii) obtaining
a general release from the party making the Assertion for all Indemnified
Parties as a condition of such settlement. The provisions of this Section 5.14
are intended for the benefit of, and shall be enforceable by, the respective
Indemnified Parties.
Section 5.15 AFFILIATE AGREEMENTS. The Company has previously delivered to
Parent a list setting forth the names of all persons who are expected to be, at
the time of the Special Meetings, in the Company's reasonable judgment,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act or
under applicable SEC accounting releases with respect to pooling of interests
accounting treatment. The Company shall furnish such information and documents
as Parent may reasonably request for the purpose of reviewing such list. The
Company shall use its reasonable best efforts to cause each person who is
identified as an "affiliate" in the list furnished pursuant to this
Section 5.15 to execute a written agreement as soon as practicable after the
date hereof, but in no event later than the day preceding the filing of the
Registration Statement, in substantially the form of EXHIBIT G hereto. Parent
has previously delivered to the Company a list setting forth the names of all
persons who are expected to be, at the time of the Special Meetings, in Parent's
reasonable judgment, "affiliates" of Parent under applicable SEC accounting
releases with respect to pooling of interests accounting treatment. Parent shall
furnish such information and documents as the Company may reasonably request for
the purpose of reviewing such list. Parent shall use its reasonable best efforts
to cause each person who is identified as its "affiliate" hereunder to execute a
written agreement as soon as practicable after the date hereof, but in no event
later than the day preceding the filing of the Registration Statement, in
substantially the form of EXHIBIT G hereto.
Section 5.16 COOPERATION. Parent and the Company shall together, or
pursuant to an allocation of responsibility to be agreed upon between them,
coordinate and cooperate (i) with respect to the timing of the Parent Special
Meeting and the Company Special Meeting and shall use their reasonable best
efforts to
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hold such meetings on the same day, (ii) in determining whether any action by or
in respect of, or filing with, any Governmental Entity is required, or any
actions, consents approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements, and
(iii) in seeking any such actions, consents, approvals or waivers or making any
such filings, furnishing information required in connection therewith and timely
seeking to obtain any such actions, consents approvals or waivers. Subject to
the terms and conditions of this Agreement, Parent and the Company will each use
its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after the
Registration Statement is filed, and Parent and the Company shall, subject to
applicable law, confer on a regular and frequent basis with one or more
representatives of one another to report operational matters of significance to
the Merger and the general status of ongoing operations insofar as relevant to
the Merger, provided that the parties will not confer on any matter to the
extent inconsistent with law.
Section 5.17 LETTERS OF ACCOUNTANTS.
(a) Parent shall use all reasonable efforts to cause to be delivered to the
Company a comfort letter of KPMG LLP, Parent's independent auditors, dated
within two business days before the date on which the Registration Statement
shall become effective and addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, which letter
shall be brought down to the Effective Time.
(b) The Company shall use all reasonable best efforts to cause to be
delivered to Parent a comfort letter of KPMG LLP, the Company's independent
auditors, dated within two business days before the date on which the
Registration Statement shall become effective and addressed to Parent, in form
and substance reasonably satisfactory to Parent and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement, which letter
shall be brought down to the Effective Time.
(c) The Company shall use all reasonable best efforts to cause to be
delivered to Parent a letter from its independent accountants, dated the Closing
Date, in form and substance reasonably satisfactory to the Company and Parent,
stating that such independent accountants concur with the conclusion of Parent's
management that the Merger will qualify as a pooling of interest transaction
under Accounting Principles Board Opinion No. 16 and applicable SEC regulations,
if the Merger is consummated in accordance with this Agreement. Parent shall use
all reasonable best efforts to cause to be delivered to the Company a letter
from its independent accountants, dated the Closing Date, in form and substance
reasonably satisfactory to the Company and Parent, stating that such independent
accountants concur with the conclusion of the Company's management that the
Merger will qualify as a pooling of interests transaction under Accounting
Principles Board Opinion No. 16 and applicable SEC regulations, if the Merger is
consummated in accordance with this Agreement.
Section 5.18 CONSENTS OF ACCOUNTANTS. Parent and the Company will each use
reasonable best efforts to cause to be delivered to each other consents from
their respective independent auditors, dated the date on which the Registration
Statement shall become effective, in form reasonably satisfactory to the
recipient and customary in scope and substance for consents delivered by
independent public accountants in connection with registration statements on
Form S-4 under the Securities Act.
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Section 5.19 SUBSEQUENT FINANCIAL STATEMENTS. The Company shall consult
with Parent prior to making publicly available its financial results for any
period after the date of this Agreement and prior to filing any Company SEC
Documents after the date of this Agreement, it being understood that Parent
shall have no liability by reason of such consultation.
Section 5.20 ACCOUNTING AND TAX TREATMENT. Each of Parent, Sub, the
Company and their respective Subsidiaries shall take all actions reasonably
necessary (a) to ensure that each of Parent and the Company is a "poolable
entity" eligible to participate in a transaction to be accounted for as a
pooling of interests for accounting purposes and (b) to cause the Merger to
qualify as a reorganization within the meaning of Section 368(a) of the Code
(including, without limitation, by providing to a requesting party, customary
representations contained in the certificates referred to in Section 6.2(g) and
6.3(e)).
Section 5.21 NASDAQ QUALIFICATION. Parent shall use all reasonable efforts
to cause the shares of Parent Common Stock to be issued in the Merger to be
qualified for inclusion in the Nasdaq Stock Market, subject to official notice
of issuance, as of or prior to the Effective Time.
Section 5.22 EMPLOYEE PLANS AND ARRANGEMENTS. As soon as practicable after
the execution of this Agreement, the Company and Parent shall confer and work
together in good faith to agree upon mutually acceptable employee benefit and
compensation arrangements (and amend or terminate Company employee plans
immediately prior to the Effective Time, if appropriate). Parent shall use
commercially reasonable efforts to ensure that continuous employment with the
Company or its Subsidiaries shall be credited to Company employees who become
Parent employees or become Continuing Employees for all purposes of eligibility
and vesting of benefits but not for purposes of accrual of benefits. Parent
shall take commercially reasonable steps to (a) cause to be waived all
limitations as to preexisting condition limitations, exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the employees of the Company and its Subsidiaries under any welfare benefit
plans that such employees are eligible to participate in after the Effective
Time, other than limitations, exclusions or waiting periods that are already in
effect with respect to such employees and that have not been satisfied as of the
Effective Time under any welfare benefit plan maintained for such employees
immediately prior to the Effective Time and (b) provide each employee of the
Company and its Subsidiaries with credit for any co-payments and deductibles
paid during the plan year commencing immediately prior to the Effective Time in
satisfying any applicable deductible or out-of-pocket requirements under any
welfare plans that such employees are eligible to participate in after the
Effective Time for such plan year. For purposes of this Section 5.22,
"Continuing Employee" means any employee of the Company who continues as an
employee of the Surviving Corporation or Parent after the Effective Time.
Section 5.23 REGISTRATION RIGHTS. Parent shall use all reasonable efforts
to provide to the stockholders of the Company listed in SCHEDULE 5.23 hereto,
effective upon the Effective Time, substantially the same registration rights
with respect to the Parent Common Stock they receive as Merger Consideration to
which "Holders" are entitled under Section 3 of the Amended and Restated
Investors' Rights Agreement of Parent dated as of February 26, 1999 with respect
to "Registrable Securities" (as those terms are defined in such agreement);
PROVIDED, HOWEVER, that no such stockholder shall be entitled, directly or
indirectly, to initiate or create any obligation on the part of Parent to
file a Registration Statement (as defined in such agreement).
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ARTICLE VI
CONDITIONS
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations
of the Company, on the one hand, and Parent and Sub, on the other hand, to
consummate the Merger are subject to the satisfaction (or, if permissible,
waiver by the party for whose benefit such conditions exist) of the following
conditions:
(a) any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated, and no action shall
have been instituted by any HSR Authority challenging or seeking to enjoin
the consummation of this transaction, which action shall have not been
withdrawn or terminated;
(b) the Company shall have received the Company Stockholder Approval;
(c) Parent shall have received the Parent Stockholder Approval;
(d) no court, arbitrator or governmental body, agency or official shall
have issued any order, and there shall not be any statute, rule or
regulation, restraining or prohibiting (collectively, "RESTRAINTS") the
consummation of the Merger or the effective operation of the business of the
Company and its respective Subsidiaries after the Effective Time;
(e) all Requisite Regulatory Approvals shall have been obtained but
excluding any Requisite Regulatory Approval the failure to obtain which
would not have a material adverse effect on Parent, Sub, the Company or,
after the Effective Time, the Surviving Corporation;
(f) the shares of Parent Common Stock to be issued in the Merger shall
have been qualified for inclusion in Nasdaq Stock Market; and
(g) the Registration Statement shall have become effective under the
Securities Act and no stop order suspending effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the SEC.
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB. The
obligations of Parent and Sub to consummate the Merger are subject to the
satisfaction (or waiver by Parent) of the following further conditions:
(a) the representations and warranties of the Company shall have been
true and accurate both when made and (except for those representations and
warranties that address matters only as of a particular date which need only
be true and accurate as of such date) as of the Effective Time as if made at
and as of such time, except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality" or "material adverse effect" set forth
therein), does not have, and is not likely to have, individually or in the
aggregate, a material adverse effect on the Company and its Subsidiaries
taken as a whole; PROVIDED, that the representations and warranties set
forth in Sections 3.2 and 3.3 shall be true and correct in all respects;
(b) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time;
(c) each of the Ancillary Agreements shall be valid, in full force and
effect and complied with in all material respects;
(d) since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which could be reasonably likely to have,
individually or in the aggregate, a material adverse effect on the Company
and its Subsidiaries;
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(e) Parent shall have received an opinion of Fenwick & West LLP,
substantially in the form attached as EXHIBIT H-1 hereto and otherwise
reasonably satisfactory in form and substance to Parent, addressed to Parent
and dated the Closing Date;
(f) Parent shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, in form and substance reasonably satisfactory to Parent,
dated the Effective Time, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing as of the Effective Time, for
federal income tax purposes, the Merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code. In rendering such opinion,
Skadden, Arps, Slate, Meagher & Flom LLP may receive and rely upon
representations contained in certificates of Parent, the Company and others;
(g) The Company shall have furnished Parent with a certificate dated the
Closing Date signed on behalf of it by the Chairman of the Board of
Directors of the Company and the President and Chief Financial Officer of
the Company to the effect that the conditions set forth in Sections 6.2(a)
through (d) have been satisfied; and
(h) The Company shall deliver to Parent a certification, in form and
substance reasonably satisfactory to Parent, that neither the Company nor
any of its Subsidiaries is or has been a U.S. real property holding company
(as defined in Section 897(c)(2) of the Code) during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code.
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the Merger are subject to the satisfaction (or
waiver by the Company) of the following further conditions:
(a) the representations and warranties of Parent and Sub shall have been
true and accurate both when made and (except for those representations and
warranties that address matters only as of a particular date which need only
be true and accurate as of such date) as of the Effective Time as if made at
and as of such time, except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality" or "material adverse effect" set forth
therein), does not have, and is not likely to have, individually or in the
aggregate, a material adverse effect on Parent and its Subsidiaries taken as
a whole; PROVIDED, that the representations and warranties set forth in
Sections 4.2 and 4.3 shall be true and correct in all respects;
(b) Each of Parent and Sub shall have performed in all material respects
all of the respective obligations hereunder required to be performed by
Parent or Sub, as the case may be, at or prior to the Effective Time;
(c) Since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which could be reasonably likely to have,
individually or in the aggregate, a material adverse effect on Parent and
its Subsidiaries, taken as a whole;
(d) The Company shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, substantially in the form attached as EXHIBIT H-2 hereto
and otherwise reasonably satisfactory in form and substance to the Company,
addressed to the Company and dated the Closing Date;
(e) The Company shall have received an opinion of Fenwick & West LLP, in
form and substance reasonably satisfactory to the Company, dated the
Effective Time, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing as of the Effective Time, for
federal income tax purposes the Merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code. In rendering such opinion,
Fenwick & West LLP may receive and rely upon representations contained in
certificates of the Company, Parent and others; and
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(f) Parent shall have furnished the Company with a certificate dated the
Closing Date signed on behalf of it by the President of Parent to the effect
that the conditions set forth in Sections 6.3(a) through (c) have been
satisfied.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated at any time prior to the
Effective Time, and (except in the case of 7.1(e) or 7.1(f)) whether before or
after the Parent Stockholder Approval or the Company Stockholder Approval:
(a) by mutual written consent of the Company and Parent, if the Board of
Directors of each so determines by a vote of a majority of its entire Board;
(b) by either the Company Board or the Parent Board:
(i) if the Merger shall not have been consummated by June 30, 2000,
unless the Company Board or Parent Board, as the case may be, has
expressly restricted in writing its right to terminate this Agreement
pursuant to this Section 7.1(b)(i); PROVIDED, HOWEVER, that the right to
terminate this Agreement pursuant to this Section 7.1(b)(i) shall not be
available to any party whose failure to perform any of its obligations
under this Agreement results in the failure of the Merger to be
consummated by such time;
(ii) if the Parent Stockholder Approval shall not have been obtained
at the Parent Special Meeting duly convened therefor or at any
adjournment or postponement thereof;
(iii) if the Company Stockholder Approval shall not have been obtained
at the Company Special Meeting duly convened therefor or at any
adjournment or postponement thereof; or
(iv) if any Restraint having any of the effects set forth in
Section 6.1(d) shall be in effect and shall have become final and
nonappealable, or if any Governmental Entity that must grant a Requisite
Regulatory Approval has denied approval of the Merger and such denial has
become final and nonappealable; PROVIDED, HOWEVER, that the party seeking
to terminate this Agreement pursuant to this Section 7.1(b)(iv) shall
have used commercially reasonable efforts to prevent the entry of and to
remove such Restraint or to obtain such Requisite Regulatory Approval, as
the case may be;
(c) by the Company Board (PROVIDED that the Company is not then in
material breach of any representation, warranty, covenant or other agreement
contained herein), if Parent shall have materially breached or failed to
perform any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
(A) would give rise to the failure of a condition set forth in
Section 6.3(a) or (b), and (B) is incapable of being cured by Parent or is
not cured within 30 days of written notice thereof;
(d) by the Parent Board (PROVIDED that Parent is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein), if the Company shall have materially breached or failed
to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement, which breach or
failure to perform (A) would give rise to the failure of a condition set
forth in Section 6.2(a) or (b), and (B) is incapable of being cured by the
Company or is not cured within 30 days of written notice thereof;
(e) by the Company Board, at any time prior to the Parent Special
Meeting, if the Parent Board shall have (A) failed to include in the proxy
statement/prospectus to the stockholders of Parent its recommendation
without modification or qualification that such stockholders approve this
Agreement and the transactions contemplated hereby, (B) failed to reaffirm
such recommendation upon the
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Company's request, (C) subsequently withdrawn such recommendation or
(D) modified or qualified such recommendation in a manner adverse to the
interests of the Company; and
(f) by the Parent Board, at any time prior to the Company Special
Meeting, if the Company Board shall have (A) failed to include in the proxy
statement/prospectus to the stockholders of the Company its recommendation
without modification or qualification that such stockholders approve this
Agreement and the transaction contemplated hereby, (B) failed to reaffirm
such recommendation upon Parent's request, (C) subsequently withdrawn such
recommendation or (D) modified or qualified such recommendation in a manner
adverse to the interests of Parent.
Section 7.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in
Section 7.1 hereof, and subject to the provisions of Section 8.1 hereof,
this Agreement shall forthwith become void and there shall be no liability
on the part of any of the parties, except (i) as set forth in this
Section 7.2, Section 8.1 and in the last sentence of Section 5.3, and
(ii) nothing herein shall relieve any party from liability for any breach
hereof.
(b) The Company shall pay to Parent a fee of $4.0 million, plus an
amount equal to all of the costs and expenses incurred by Parent in
connection with this Agreement, the Ancillary Agreements and the
consummation of the transactions contemplated hereby and thereby, upon the
earliest to occur of the following events:
(i) the termination of this Agreement by Parent pursuant to
Section 7.1(f);
(ii) the termination of this Agreement by the Company or Parent
pursuant to Section 7.1(b)(iii); or
(iii) the termination of this Agreement by Parent pursuant to
Section 7.1(d)
and, in the case of each of clauses (i), (ii) and (iii) above, if the
Company subsequently enters into or consummates an Alternative Transaction
within twelve (12) months of such termination.
(c) The fee, costs and expenses payable pursuant to Section 7.2(b)
hereof shall be paid on the date of the consummation of the Alternative
Transaction giving rise to such fee. Parent will provide to the Company
reasonable documentation in respect of the costs and expenses payable
pursuant to Section 7.2(b) hereof.
(d) Notwithstanding anything to the contrary in this Section 7.2, the
payments provided for in this Section 7.2 shall not be deemed to be Parent's
or Sub's exclusive remedy, and Parent and Sub shall have the right to pursue
any remedies available to them at law or in equity.
Section 7.3 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties at any time before or after the Parent
Stockholder Approval or the Company Stockholder Approval; PROVIDED, HOWEVER,
that after any such approval, there may not be, without further approval of such
the stockholders of Parent (in the case of the Parent Stockholder Approval) and
the stockholders of the Company (in the case of the Company Stockholder
Approval), any amendment of this Agreement that changes the amount or the form
of the consideration to be delivered to the holders of Company Common Stock
hereunder, or which by law otherwise expressly requires the further approval of
such stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto and duly approved by the
parties' respective Boards of Directors or a duly designated committee thereof.
Section 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, a
party may, subject to the proviso of Section 7.3 (and for this purpose treating
any waiver referred to below as an amendment), (a) extend the time for the
performance of any of the obligations or other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties of the other
parties contained in this
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Agreement or in any document delivered pursuant to this Agreement or (c) waive
compliance by the other party with any of the agreements or conditions contained
in this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. Any extension or waiver given in compliance with this
Section 7.4 or failure to insist on strict compliance with an obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. (a) Except as otherwise contemplated by
this Agreement, including Section 7.2 hereof, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
the Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby, including all legal, accounting and financial advisory fees
and expenses ("THIRD PARTY EXPENSES"), shall be paid by the party incurring such
expenses, except that (i) those costs and expenses incurred in connection with
filing, printing and mailing the Registration Statement and the Proxy
Statement/Prospectus (including filing fees related thereto) shall be shared
equally by Parent and the Company and (ii) the Company shall cause that portion
of its Third Party Expenses which constitute legal, accounting and financial
advisory fees and expenses to be invoiced or estimated and capped at or before
the Closing and not to exceed, in the aggregate, $850,000, plus the fees and
expenses required to be paid to Volpe Brown Whelan & Company, LLC in connection
with the Merger pursuant to that certain engagement letter, dated November 4,
1999, between the Company and Volpe Brown Whelan & Company, LLC. If the Merger
is consummated, Parent shall be responsible for such Third Party Expenses of the
Company.
Section 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.3 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by an overnight courier service, such as FedEx, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Sub, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwod City, California 94063
Attention: Jeffrey C. Smith
Telephone No.: 650-216-2010
Telecopy No.: 650-216-2001
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue--Suite 220
Palo Alto, California 94301
Attention: Gregory C. Smith
Telephone No.: 650-470-4500
Facsimile No.: 650-470-4590
and
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(b) if to the Company, to:
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, California 95054
Attention: James Heisch
Telephone No.: 408-567-5012
Facsimile No.: 408-567-5122
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Gordon K. Davidson
Telephone No.: 650-494-0600
Facsimile No.: 650-494-1417
Section 8.4 INTERPRETATION. When a reference is made in this Agreement to
an Article or Section, such reference shall be to an Article or Section of this
Agreement, as the case may be, unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation." The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available. The phrases "the date of this Agreement", "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to November 18, 1999. As used in this Agreement, the term
"affiliate(s)" shall have the meaning set forth in Rule 12b-2 of the Exchange
Act. The headings and table of contents contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation hereof.
Section 8.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement, the Ancillary Agreements and the Confidentiality
Agreement (including the documents and the instruments referred to herein and
therein): (a) constitute the entire agreement and supersede all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 5.14 hereof, are
not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
Section 8.7 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.8 GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
Section 8.9 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned Subsidiary of Parent. Subject
to the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
Tumbleweed Communications Corp.
By /s/ JEFFREY C. SMITH
--------------------------------------
Name: Jeffrey C. Smith
Title: President and Chief
Executive Officer
Worldtalk Communications Corporation
By /s/ JAMES HEISCH
--------------------------------------
Name: James Heisch
Title: President and Chief
Financial Officer
Keyhole Acquisition Corp.
By /s/ JEFFREY C. SMITH
--------------------------------------
Name: Jeffrey C. Smith
Title: President and Chief
Executive Officer
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ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement"), dated as of November 18, 1999, by
and between Tumbleweed Communications Corp., a Delaware corporation ("Parent"),
and Worldtalk Communications Corporation, a Delaware corporation (the
"Company").
WITNESSETH:
WHEREAS, concurrently with the execution and delivery of this Agreement, the
Company, Parent and Keyhole Acquisition Corp., a Delaware corporation ("Sub"),
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), which provides that, among other things, upon the
terms and subject to the conditions thereof, Sub will be merged with and into
the Company (the "Merger"), with the Company continuing as the surviving
corporation; and
WHEREAS, as a condition and inducement to Parent's willingness to enter into
the Merger Agreement, Parent has required that the Company agree, and the
Company has so agreed, to grant to Parent an option with respect to certain
shares of the Company's authorized but unissued common stock on the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, to induce Parent and Sub to enter into the Merger Agreement
and in consideration of the representations, warranties, covenants and
agreements set forth herein and in the Merger Agreement, the parties hereto
intending to be legally bound, hereby agree as follows. Capitalized terms used
herein but not defined herein shall have the meanings set forth in the Merger
Agreement.
1. GRANT OF OPTION. The Company hereby grants Parent an irrevocable option
(the "Option") to purchase a number of shares (the "Shares") of common stock,
par value $0.01 per share, of the Company (the "Company Common Stock") equal to
the Option Number (as defined hereinafter), on the terms and subject to the
conditions set forth below.
2. EXERCISE OF OPTION.
(a) EXERCISE. At any time or from time to time prior to the termination of
the Option granted hereunder in accordance with the terms of this Agreement,
Parent (or a wholly-owned subsidiary of Parent designated by Parent) may
exercise the Option, in whole or in part, if on or after the date hereof:
(i) any corporation, partnership, individual, trust, unincorporated
association, or other entity or "person" (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other
than Parent or any of its "affiliates" (as defined in the Exchange Act) (a
"Third Party"), shall have:
(A) commenced or announced an intention to commence a BONA FIDE
tender offer or exchange offer for any shares of Company Common Stock,
the consummation of which would result in "beneficial ownership" (as
defined under Rule 13d-3 of the Exchange Act) by such Third Party
(together with all such Third Party's affiliates and "associates" (as
such term is defined in the Exchange Act)) of 20% or more of the then
voting equity of the Company (either on a primary or a fully diluted
basis);
(B) filed a Notification and Report Form under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
reflecting an intent to acquire the Company or any assets or securities
of the Company;
(C) solicited "proxies" in a "solicitation" subject to the proxy
rules under the Exchange Act, executed any written consent or become a
"participant" in any "solicitation" (as such terms are
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defined in Regulation 14A under the Exchange Act), in each case with
respect to the Company Common Stock; or
(ii) the events described in Section 7.2(b) of the Merger Agreement
that would require the Company to pay Parent the fee set forth therein (but
without the necessity of Parent having terminated the Merger Agreement).
(iii) Each of the events described in clauses (i) and (ii) hereof shall
be referred to herein as a "Trigger Event." The Company shall notify Parent
promptly in writing of the occurrence of any Trigger Event; however, such
notice shall not be a condition to the right of Parent to exercise the
Option.
(b) EXERCISE PROCEDURE. In the event Parent wishes to exercise the Option,
Parent shall deliver to the Company a written notice (an "Exercise Notice")
specifying the total number of the Shares it wishes to purchase. To the extent
permitted by law and the Certificate of Incorporation of the Company and
provided that the conditions set forth in Section 3 hereof to Company's
obligation to issue the Shares to Parent hereunder have been satisfied or
waived, Parent shall, upon delivery of the Exercise Notice and tender of the
applicable aggregate Exercise Price, immediately be deemed to be the holder of
record of the shares of the Company Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of the Company Common Stock
shall not heretofore have been delivered to Parent. Each closing of a purchase
of the Shares (a "Closing") shall occur at a place, on a date and at a time
designated by Parent in an Exercise Notice delivered at least two business days
prior to the date of the Closing.
(c) TERMINATION OF THE OPTION. The Option shall terminate upon the earlier
of: (i) the Effective Time of the Merger; and (ii) the termination of the Merger
Agreement pursuant to Section 7.1(a), (b), (c) or (e) thereof; and (iii) six (6)
months following the termination of the Merger Agreement pursuant to Section
7.1(d) or (f) thereof. Notwithstanding the foregoing, if the Option cannot be
exercised by reason of any applicable judgment, decree, order, law or
regulation, the Option shall remain exercisable and shall not terminate until
the earlier of (x) the date on which such impediment shall become final and not
subject to appeal, and (y) 5:00 p.m. Pacific Standard Time, on the tenth (10th)
business day after such impediment shall have been removed. The rights of Parent
set forth in Sections 7 and 8 shall not terminate upon termination of Parent's
right to exercise the Option, but shall extend to the time provided in such
sections. Notwithstanding the termination of the Option, Parent shall be
entitled to purchase the shares of the Company Common Stock with respect to
which Parent had exercised the Option prior to such termination.
(d) OPTION NUMBER. The "Option Number" shall initially be the number of
shares equal to nineteen and nine-tenths percent (19.9%) of the total number of
shares of the Company Common Stock issued and outstanding as of the date of this
Agreement, and shall be adjusted hereafter to reflect changes in the Company's
capitalization occurring after the date hereof in accordance with Section 9
hereof. Notwithstanding any other provision of this Agreement, in no event shall
the Option Number exceed nineteen and nine-tenths percent (19.9%) of the total
number of shares of the Company Common Stock issued and outstanding as of the
date of this Agreement, adjusted in accordance with Section 9 hereof.
(e) EXERCISE PRICE. The purchase price per share of the Company Common
Stock pursuant to the Option (the "Exercise Price") shall be $10.527
3. CONDITIONS TO CLOSING. The obligation of the Company to issue the
Shares to Parent hereunder is subject to the conditions that (i) all waiting
periods, if any, under the HSR Act, applicable to the issuance of the Shares and
the acquisition of such shares by Parent hereunder shall have expired or have
been terminated; (ii) all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any federal, state or local
administrative agency or commission or other federal state or local governmental
authority or instrumentality, if any, required in connection with the issuance
of the Shares and the acquisition of such shares by Parent hereunder shall have
been obtained or made, as the
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case may be; and (iii) no preliminary or permanent injunction or other order by
any court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect.
4. CLOSING. At any Closing,
(a) the Company shall deliver to Parent a single certificate in
definitive form representing the number of the Shares designated by Parent
in its Exercise Notice, such certificate to be registered in the name of
Parent and to bear the legend set forth in Section 12 hereof;
(b) Parent shall deliver to the Company the aggregate price for the
Shares so designated and being purchased by wire transfer of immediately
available funds to the account or accounts specified in writing by the
Company;
(c) the Company shall pay all expenses, and any and all federal, state
and local taxes and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section 4;
and
(d) the Company shall cause the shares of the Company Common Stock being
delivered at the Closing to be approved for quotation on the Nasdaq National
Market and shall pay all expenses in connection with the application for
approval of such quotation. At any Closing at which Parent is exercising the
Option in part, Parent shall present and surrender this Agreement to the
Company, and the Company shall deliver to Parent an executed new agreement
with the same terms as this Agreement evincing the right to purchase the
balance of the shares of the Company Common Stock purchasable hereunder.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Parent that:
(a) the Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder;
(b) the execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or any of the transactions
contemplated hereby;
(c) this Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, and, assuming
this Agreement constitutes a valid and binding obligation of Parent, is
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy and other laws affecting the
rights and remedies of creditors generally and general principles of equity;
(d) the Company has taken all necessary corporate action to authorize
and reserve for issuance and to permit it to issue, upon exercise of the
Option, and at all times from the date hereof through the expiration of the
Option will have reserved a number of authorized and unissued shares of the
Company Common Stock not less than the Option Number, such amount being
subject to adjustment as provided in Section 11 hereof, all of which, upon
their issuance and delivery in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable;
(e) upon delivery of the Shares to Parent upon the exercise of the
Option, Parent will acquire the Shares free and clear of all claims, liens,
charges, encumbrances and security interests of any nature whatsoever;
(f) the execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
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cancellation or acceleration of any obligation or the loss of a benefit
under, or the creation of a lien, pledge, security interest or other
encumbrance on assets pursuant to (any such conflict, violation, default,
right of termination, cancellation or acceleration, loss or creation, a
"Violation"), (A) any provision of the Certificate of Incorporation, or
Bylaws, of the Company or (B) any provisions of any mortgage, indenture,
lease, contract or other agreement, instrument, permit, concession,
franchise, or license or (C) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets, which Violation, in the case of each of clauses (B) and (C), would
have a material adverse effect on the Company;
(g) except for the expiration or early termination of the waiting period
under the HSR Act and except as contemplated by Section 8(b) hereof and may
be required under the Securities Act of 1933, as amended (the "Securities
Act"), the execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority; and
(h) none of the Company or any of its affiliates or anyone acting on its
or their behalf has issued, sold or offered any security of the Company to
any person or entity under circumstances that would cause the issuance and
sale of shares of the Company Common Stock hereunder to be subject to the
registration requirements of the Securities Act as in effect on the date
hereof, and, assuming the representations and warranties of Parent contained
in Section 6(f) are true and correct, the issuance, sale and delivery of the
shares of the Company Common Stock hereunder would be exempt from the
registration and prospectus delivery requirements of the Securities Act, as
in effect on the date hereof, and the Company shall not take any action
which would cause the issuance, sale, and delivery of shares of the Company
Common Stock hereunder not to be exempt from such requirements.
6. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent represents and
warrants to the Company that:
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power
and authority to enter into this Agreement and to carry out its obligations
hereunder;
(b) the execution and delivery of this Agreement by Parent and the
consummation by Parent of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Parent and
no other corporate proceedings on the part of Parent are necessary to
authorize this Agreement or any of the transactions contemplated hereby;
(c) this Agreement has been duly executed and delivered by Parent and
constitutes a valid and binding obligation of Parent, and, assuming this
Agreement constitutes a valid and binding obligation of the Company, is
enforceable against Parent in accordance with its terms, except as
enforceability may be limited by bankruptcy and other laws affecting the
rights and remedies of creditors generally and general principles of equity;
(d) the execution and delivery of this Agreement by Parent does not, and
the performance of this Agreement by Parent will not, result in any
Violation pursuant to, (A) any provision of the Certificate of Incorporation
or By-laws of Parent, (B) any provisions of any mortgage, indenture, lease,
contract or other agreement, instrument, permit, concession, franchise, or
license or (C) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent or its properties or assets, which
Violation, in the case of each of clauses (B) and (C), would have a material
adverse effect on Parent;
(e) except for the expiration or early termination of the waiting period
under the HSR Act and except as contemplated by Section 8(b) hereof and as
may be required under the Securities Act, the execution and delivery of this
Agreement by Parent does not, and the performance of this Agreement
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by Parent will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any governmental or regulatory
authority;
(f) any shares of the Company Common Stock acquired by Parent upon
exercise of the Option will be acquired for Parent's own account, for
investment purposes only and will not be, and the Option is not being,
acquired by Parent with a view to the public distribution thereof, in
violation of any applicable provision of the Securities Act.
7. CERTAIN REPURCHASES.
(a) PARENT PUT. At any time during which the Option is exercisable
pursuant to Section 2 hereof (the "Repurchase Period") provided that the Company
shall have consummated an Alternative Transaction, upon demand by Parent, Parent
shall have the right to sell to the Company (or any successor entity thereof)
and the Company (or such successor entity) shall be obligated to repurchase from
Parent (the "Put"), all or any portion of the Option, at the price set forth in
subparagraph (i) below, or all or any portion of the Shares purchased by Parent
pursuant to the exercise of the Option, at a price set forth in subparagraph
(ii) below:
(i) The difference between the "Market/Tender Offer Price" for shares of
the Company Common Stock as of the date (the "Notice Date") notice of
exercise of the Put, is given to the Company (defined as the higher of (A)
the price per share offered as of the Notice Date pursuant to any tender or
exchange offer or other Alternative Transaction (as defined in the Merger
Agreement) which was made prior to the Notice Date and not terminated or
withdrawn as of the Notice Date (the "Tender Price") and (B) the average of
the closing prices of shares of the Company Common Stock on the Nasdaq
National Market for the ten trading days immediately preceding the Notice
Date, (the "Market Price")), and the Exercise Price, multiplied by the
number of the Shares purchasable pursuant to the Option (or portion thereof
with respect to which Parent is exercising its rights under this Section 7),
but only if the Market/Tender Offer Price is greater than the Exercise
Price. For purposes of determining the highest price offered pursuant to any
Alternative Transaction which involves consideration other than cash, the
value of such consideration shall be equal to the higher of (x) if
securities of the same class of the proponent as such consideration are
traded on any national securities exchange or by any registered securities
association, a value based on the closing sale price or asked price for such
securities on their principal trading market on such date and (y) the value
ascribed to such consideration by the proponent of such Alternative
Transaction, or if no such value is ascribed, a value determined in
reasonable good faith by the Board of Directors of the Company.
(ii) The Exercise Price paid by Parent for the Shares acquired pursuant
to the exercise of the Option plus the difference between the Market/Tender
Offer Price and the Exercise Price, but only if the Market/Tender Offer
Price is greater than the Exercise Price, multiplied by the number of the
Shares so purchased.
(iii) For purposes of clauses (i) and (ii) of this Section 7(a), the
Tender Price shall be the highest price per share offered pursuant to a
tender or exchange offer or other Alternative Transaction during the
Repurchase Period.
(b) PAYMENT AND REDELIVERY OF THE OPTION OR SHARES. In the event Parent
exercises its rights under this Section 7, the Company shall, within ten
business days of the Notice Date, pay the required amount to Parent in
immediately available funds and Parent shall surrender to the Company the Option
or the certificates evidencing the Shares purchased by Parent pursuant thereto,
and Parent shall warrant that it owns such shares and that such shares are then
free and clear of all liens, claims, charges and encumbrances of any kind or
nature whatsoever.
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8. REGISTRATION RIGHTS.
(a) Following the termination of the Merger Agreement and exercise of the
Option, Parent may by written notice request the Company to register for resale
under the Securities Act all or any part of the Shares beneficially owned by
Parent (the "Registrable Securities"). The Company shall use its reasonable best
efforts to effect, as promptly as practicable, the registration under the
Securities Act of the Registrable Securities; PROVIDED, HOWEVER, that (i) Parent
shall not be entitled to demand more than an aggregate of two (2) effective
registration statements hereunder, and (ii) the Company will not be required to
file any such registration statement during any period of time (not to exceed
sixty (60) days after such request in the case of clause (A) below or ninety
(90) days after such request in the case of clauses (B) and (C) below) when (A)
the Registrant is in possession of material non-public information which it
reasonably believes would be detrimental to be disclosed at such time and, in
the opinion of counsel to the Company, such information would be required to be
disclosed if a registration statement were filed at that time; (B) the Company
is required under the Securities Act to include audited financial statements for
any period in such registration statement and such financial statements are not
yet available for inclusion in such registration statement; or (C) the Company
determines, in its reasonable judgment, that such registration would interfere
with any financing, acquisition or other transaction involving the Company or
any of its material subsidiaries and that such transaction is material to the
Registrant and its subsidiaries taken as a whole.
(b) The Company shall use its reasonable best efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified for
sale under the securities or Blue Sky laws of such jurisdictions as Parent may
reasonably request and shall continue such registration or qualification in
effect in such jurisdiction; PROVIDED, HOWEVER, that the Company shall not be
required to qualify to do business in, or consent to general service of process
in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that Parent shall provide the Company with such information with
respect to its Registrable Securities, the plans for the distribution thereof,
and such other information with respect to the Parent as, in the reasonable
judgment of counsel for the Company, is necessary to enable the Registrant to
include in such registration statement all material facts required to be
disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Company's expense, except for underwriting discounts and commissions and the
fees and the expenses of counsel to the Parent, and the Registrant shall provide
to the underwriters such documentation (including certificates, opinions of
counsel and "comfort" letters from auditors) as is customary in connection with
underwritten public offerings as such underwriters may reasonably require.
(e) In connection with any registration effected under this Section 8, the
parties agree (i) to indemnify each other and the underwriters, if any, in the
customary manner, (ii) to enter into an underwriting agreement in form and
substance customary for transactions of such type with the underwriters
participating in such offering, if any, and (iii) to take all further actions
which shall be reasonably necessary to effect such registration and sale
(including if the managing underwriter deems it necessary, participating in
road-show presentations).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) In the event of any change in the Company Common Stock by reason of
stock dividends, splitups, mergers (other than the Merger), recapitalizations,
combinations, exchange of shares or the like, the type and number of shares or
securities subject to the Option, and the purchase price per share provided in
Section 2(e) hereof, shall be adjusted appropriately, and proper provision shall
be made in the agreements governing such transaction so that Parent shall
receive, upon exercise of the Option, the number and class of shares or other
securities or property that Parent would have received in respect of the Company
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Common Stock if the Option had been exercised immediately prior to such event or
the record date therefor, as applicable.
(b) In the event that the Company shall enter in an agreement: (i) to
consolidate with or merge into any person, other than Parent or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Parent or one of
its Subsidiaries, to merge into the Company and the Company shall be the
continuing or surviving corporation, but, in connection with such merger, the
then-outstanding shares of the Company Common Stock shall be changed into or
exchanged for stock or other securities of the Company or any other person or
cash or any other property or the outstanding shares of the Company Common Stock
immediately prior to such merger shall after such merger represent less than 50%
of the outstanding shares and share equivalents of the merged company; or (iii)
to sell or otherwise transfer all or substantially all of its assets to any
person, other than Parent or one of its Subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provisions so
that upon the consummation of any such transaction and upon the terms and
conditions set forth herein, Parent shall receive for each the Share with
respect to which the Option has not been exercised an amount of consideration in
the form of and equal to the per share amount of consideration that would be
received by the holder of one share of the Company Common Stock less the
Exercise Price (and, in the event of an election or similar arrangement with
respect to the type of consideration to be received by the holders of the
Company Common Stock, subject to the foregoing, proper provision shall be made
so that the holder of the Option would have the same election or similar rights
as would the holder of the number of shares of the Company Common Stock for
which the Option is then exercisable).
10. LIMITATION OF PARENT PROFIT.
(a) Notwithstanding any other provision of this Agreement, in no event shall
Parent's Total Profit (as defined below) exceed $6,000,000, including in such
amount the fees payable under the provisions of Section 7.2(b) of the Merger
Agreement, and, if Parent's Total Profit shall otherwise exceed such amount,
Parent, at its sole election, shall either (i) reduce the number of shares of
Company Common Stock subject to this Option, (ii) deliver to the Company for
cancellation Shares previously purchased by Parent (valued, for purposes of this
Section 10(a) at the average closing sales price per share of Company Common
Stock (or if there is no sale on such date then the average between the closing
bid and ask prices on any such day) as quoted on the Nasdaq National Market
based on published financial sources for the twenty consecutive trading days
preceding the day on which Parent's Total Profit exceeds $6,000,000, (iii) pay
cash to the Company, or (iv) any combination thereof, such that Parent's
actually realized Total Profit shall not exceed $6,000,000 after taking into
account the foregoing actions.
(b) As used herein, the term "Total Profit" shall mean the amount (before
taxes) of the following: (a) the aggregate amount of (i)(x) the net cash amounts
received by Parent or its permitted designees or any affiliated party pursuant
to the sale of Shares (or any other securities into which the Option is
converted or exchanged) to any unaffiliated party or to the Company pursuant to
this Agreement, less (y) Parent's or its permitted designees purchase price of
such Shares, (ii) any amounts received by Parent or its permitted designees or
any affiliated party on the transfer of the Option (or any portion thereof) to
any unaffiliated party or to the Company pursuant to this Agreement, and (iii)
any amounts received by Parent pursuant to Section 7.2(b) of the Merger
Agreement; minus (b) the amount of cash theretofore paid to the Company pursuant
to this Section 10 plus the value of the Shares theretofore delivered to the
Company for cancellation pursuant to this Section 10.
11. RESTRICTIVE LEGENDS. Each certificate representing shares of the
Company Common Stock issued to Parent hereunder shall include a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED
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OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.
It is understood and agreed that (i) the reference to the resale
restrictions of the Securities Act and state securities or Blue Sky laws in the
foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if Parent shall have delivered to the Company a copy of a
letter from the staff of the Securities and Exchange Commission, or an opinion
of counsel, in form and substance reasonably satisfactory to the Company, to the
effect that such legend is not required for purposes of the Securities Act or
such laws; (ii) the reference to the provisions of this Agreement in the
foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may be
required by law. Certificates representing shares sold in a registered public
offering pursuant to Section 8 shall not be required to bear the legend set
forth in this Section 11.
12. BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Except as expressly provided for in this Agreement,
neither this Agreement nor the rights or the obligations of either party hereto
are assignable, except by operation of law, or with the written consent of the
other party. Nothing contained in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto and their
respective permitted assigns any rights or remedies of any nature whatsoever by
reason of this Agreement.
13. SPECIFIC PERFORMANCE. The parties recognize and agree that if for any
reason any of the provisions of this Agreement are not performed in accordance
with their specific terms or are otherwise breached, immediate and irreparable
harm or injury would be caused for which money damages would not be an adequate
remedy. Accordingly, each party agrees that, in addition to other remedies, the
other party shall be entitled to an injunction restraining any violation or
threatened violation of the provisions of this Agreement. In the event that any
action should be brought in equity to enforce the provisions of this Agreement,
neither party will allege, and each party hereby waives the defense, that there
is adequate remedy at law.
14. ENTIRE AGREEMENT. This Agreement, the Merger Agreement, and the other
Ancillary Agreements constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all other prior agreements
and understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof.
15. FURTHER ASSURANCE. Each party will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
16. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect. In
the event any court or other competent authority holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith the execution and delivery of an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision. Each party agrees
that, should any court or other competent authority hold any provision of this
Agreement or part hereof to be null, void or unenforceable, or order any party
to take any action inconsistent herewith, or not take any action required
herein, the other party shall not be entitled to specific performance of such
provision or part hereof or to any other remedy, including but not limited to
money damages, for breach hereof or of any other provision of this Agreement or
part hereof as the result of such holding or order.
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17. NOTICES. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed to
be given, dated and received when so delivered personally, telegraphed or
telecopied or, if mailed, five business days after the date of mailing to the
following address or facsimile number, or to such other address or addresses as
such person may subsequently designate by notice given hereunder.
(a) if to Parent, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, CA 94063
Attention: Jeffrey C. Smith
Telephone No.: 650-216-2010
Facsimile No.: 650-216-2001
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue--Suite 220
Palo Alto, California 94301
Attention: Gregory C. Smith
Telephone No.: 650-470-4500
Facsimile No.: 650-470-4590
(b) if to the Company, to:
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, CA 95054
Attention: James Heisch
Telephone No.: 408-567-5012
Facsimile No.: 408-567-5122
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Gordon K. Davidson
Telephone No.: 650-494-0600
Facsimile No.: 650-494-1417
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
19. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same instrument.
21. EXPENSES. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
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22. AMENDMENTS; WAIVER. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
<TABLE>
<S> <C> <C>
Worldtalk Communications Corporation
By: /s/ JAMES HEISCH
-----------------------------------------
Name: James Heisch
Title: Vice President, CFO
Tumbleweed Communications Corp.
By: /s/ JEFFREY C. SMITH
-----------------------------------------
Name: Jeffrey C. Smith
Title: Chief Executive Officer
</TABLE>
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ANNEX C
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of November 18, 1999, by and
among Tumbleweed Communications Corp., a Delaware corporation ("Parent"),
Keyhole Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
Parent (the "Sub"), and [Stockholder] ("Stockholder").
WITNESSETH:
WHEREAS, immediately prior to the execution of this Agreement, Parent, Sub
and Worldtalk Communications Corporation, a Delaware corporation (the "Company")
have entered into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement", pursuant to which the parties thereto have agreed, upon the
terms and subject to the conditions set forth therein, to merge Sub with and
into the Company (the "Merger"); and
WHEREAS, as of the date hereof, Stockholder is the record and Beneficial
Owner (as defined hereinafter) of Existing Shares (as defined hereinafter)
of the common stock, $0.01 par value, of the Company (the "Company Common
Stock"); and
WHEREAS, as inducement and a condition to entering into the Merger
Agreement, Parent has required Stockholder to agree, and Stockholder has agreed,
to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
Section 1. CERTAIN DEFINITIONS. In addition to the terms defined elsewhere
herein, capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Without duplicative counting of the same
securities by the same holder, securities Beneficially Owned by a person
include securities Beneficially Owned by all other persons with whom such
person would constitute a "group" within the meaning of Section 13(d) of the
Exchange Act with respect to the securities of the same issuer.
(b) "Existing Shares" means shares of the Company Common Stock
Beneficially Owned by Stockholder as of the date hereof.
(c) "Securities" means the Existing Shares together with any shares of
the Company Common Stock or other securities of the Company acquired by
Stockholder in any capacity after the date hereof and prior to the
termination of this Agreement whether upon the exercise of options, warrants
or rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares or the like, gift,
bequest, inheritance or as a successor in interest in any capacity or
otherwise.
Section 2. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder
represents and warrants to Parent and Sub as follows:
(a) OWNERSHIP OF SHARES. Stockholder is the sole record and Beneficial
Owner of (i) the Existing Shares, (ii) Company Options to purchase
[ ] shares of Company Common Stock ("Stockholder Options") and
(iii) Company Warrants to purchase [ ] shares of Company Common Stock
("Stockholder Warrants") . On the date hereof, the Existing Shares
constitute all of
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the shares of the Company Common Stock owned of record or Beneficially Owned
by Stockholder. There are no outstanding options or other rights to acquire
from Stockholder or obligations of Stockholder to sell or to acquire, any
shares of the Company Common Stock. Stockholder has sole voting power and
sole power to issue instructions with respect to the matters set forth in
Sections 5, 7 and 8 hereof, sole power of disposition, sole power of
conversion, sole power to demand appraisal rights and sole power to agree to
all of the matters set forth in this Agreement, in each case with respect to
all of the Existing Shares with no limitations, qualifications or
restrictions on such rights, subject to applicable securities laws and the
terms of this Agreement.
(b) POWER; BINDING AGREEMENT. Stockholder has the legal capacity,
power and authority to enter into and perform all of Stockholder's
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by Stockholder and constitutes a valid and binding
agreement of Stockholder, enforceable against Stockholder in accordance with
its terms except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(c) NO CONFLICTS. Except as contemplated by the Merger Agreement, no
filing with, and no permit, authorization, consent or approval of, any state
or federal public body or authority ("Governmental Entity") is necessary for
the execution of this Agreement by Stockholder and the consummation by
Stockholder of the transactions contemplated hereby, none of the execution
and delivery of this Agreement by Stockholder, the consummation by
Stockholder of the transactions contemplated hereby or compliance by
Stockholder with any of the provisions hereof shall (i) conflict with or
result in any breach of any organizational documents applicable to
Stockholder, (ii) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which Stockholder is a party or by which Stockholder or any of
its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to Stockholder or any of Stockholder's properties or assets, except in the
case of clauses (ii) and (iii) where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults would not, individually or in the
aggregate, materially impair the ability of Stockholder or the Company to
consummate the transactions contemplated by the Merger Agreement, this
Agreement or by the other Ancillary Agreements.
(d) NO ENCUMBRANCE. Except as permitted by this Agreement, the
Existing Shares are now and, at all times during the term hereof, and the
Securities will be, held by Stockholder, or by a nominee or custodian for
the benefit of Stockholder, free and clear of all mortgages, claims,
charges, liens, security interests, pledges or options, proxies, voting
trusts or agreements, understandings or arrangements or any other rights
whatsoever ("Encumbrances"), except for any such Encumbrances arising
hereunder.
(e) NO FINDER'S FEES. No broker, investment banker, financial advisor
or other person is entitled to any broker's, finder's, financial adviser's
or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of
Stockholder.
(f) RELIANCE BY PARENT. Stockholder understands and acknowledges that
Parent is entering into, and causing Sub to enter into, the Merger Agreement
in reliance upon Stockholder's execution and delivery of this Agreement.
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Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Each of
Parent and Sub hereby, jointly and severally, represents and warrants to
Stockholder as follows:
(a) POWER; BINDING AGREEMENT. Parent and Sub each has the corporate
power and authority to enter into and perform all of its obligations under
this Agreement. This Agreement has been duly and validly executed and
delivered by each of Parent and Sub and constitutes a valid and binding
agreement of Parent and Sub, enforceable against each of Parent and Sub in
accordance with its terms, except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency or other similar laws, now or hereafter
in effect, affecting creditors' rights generally, and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(b) NO CONFLICTS. Except as contemplated by the Merger Agreement, no
filing with, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution of this Agreement by
Parent and Sub and the consummation by Parent and Sub of the transactions
contemplated hereby, and none of the execution and delivery of this
Agreement by each of Parent and Sub, the consummation by each of Parent and
Sub of the transactions contemplated hereby or compliance by each of Parent
and Sub with any of the provisions hereof shall (i) conflict with or result
in any breach of any provi-sion of the respective certificates of
incorporation or by-laws of Parent and Sub, (ii) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity,
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
license, lease, contract, agreement or other instrument or obligation to
which Parent or any of its Subsidiaries is a party or by which any of them
or any of their properties or assets may be bound or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to Parent,
any of its Subsidiaries or any of their properties or assets, except in the
case of clauses (ii), (iii) and (iv) where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings, or
where such violations, breaches or defaults would not, individually or in
the aggregate, materially impair the ability of Parent or Sub to consummate
the transactions contemplated by the Merger Agreement, this Agreement or by
the other Ancillary Agreements.
Section 4. DISCLOSURE. Stockholder hereby agrees to permit Parent to
publish and disclose in the Registration Statement and the proxy
statement/prospectus (including all documents and schedules filed with the
Securities and Exchange Commission), and any press release or other disclosure
document which Parent, in its sole discretion determines to be necessary or
desirable in connection with the Merger and any transactions related thereto,
Stockholder's identity and ownership of the Company Common Stock and the nature
of Stockholder's commitments, arrangements and understandings under this
Agreement.
Section 5. TRANSFER AND OTHER RESTRICTIONS. Prior to the termination of
this Agreement, Stockholder agrees not to, directly or indirectly:
(i) except pursuant to the terms of the Merger Agreement, offer for
sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose
of, or enter into any contract, option or other arrangement or understanding
with respect to or consent to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of any or all of the
Securities or any interest therein except as provided in Section 6 hereof;
(ii) grant any proxy, power of attorney, deposit any of the Securities
into a voting trust or enter into a voting agreement or arrangement with
respect to the Securities except as provided in this Agreement; or
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(iii) take any other action that would make any representation or
warranty of Stockholder contained herein untrue or incorrect or have the
effect of preventing or disabling Stockholder from performing its
obligations under this Agreement.
Section 6. VOTING OF THE COMPANY COMMON STOCK. Stockholder hereby agrees
that, during the period commencing on the date hereof and continuing until the
first to occur of (a) the Effective Time or (b) termination of this Agreement in
accordance with its terms, at any meeting (whether annual or special and whether
or not an adjourned or postponed meeting) of the holders of the Company Common
Stock, however called, or in connection with any written consent of the holders
of the Company Common Stock, Stockholder will appear at the meeting or otherwise
cause the Securities to be counted as present thereat for purposes of
establishing a quorum and vote or consent (or cause to be voted or consented)
the Securities:
(A) in favor of the adoption of the Merger Agreement and the approval of
other actions contemplated by the Merger Agreement and this Agreement and
any actions required in furtherance thereof and hereof;
(B) against any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty or any other obligation
or agreement of the Company under the Merger Agreement or this Agreement;
and
Stockholder may not enter into any agreement or understanding with any
person the effect of which would be inconsistent with or violative of any
provision contained in this Section 6.
Section 7. PROXY.
(a) Stockholder hereby irrevocably grants to, and appoints, Parent and
Bernard J. Cassidy, Joseph C. Consul, or any of them in their respective
capacities as officers of Parent and any individual who shall hereafter succeed
to any such office of Parent and each of them individually, such Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Stockholder, to vote the Securities, or grant a consent
or approval in respect of the Securities, in connection with any meeting of the
stockholders of the Company, as specified in Section 6 hereof.
(b) Stockholder represents that any other proxies heretofore given in
respect of the Existing Shares are not irrevocable, and that such proxies are
hereby revoked.
(c) Stockholder understands and acknowledges that Parent is entering into
the Merger Agreement in reliance upon such Stockholder's execution and delivery
of this Agreement. Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 7 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of Stockholder under this Agreement. Stockholder hereby further
affirms that the irrevocable proxy is coupled with an interest and may not be
revoked under any circumstances. Stockholder hereby ratifies and confirms all
that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of section 212(e) of Delaware General Corporation
Law.
Section 8. STOP TRANSFER; LEGEND.
(a) Stockholder agrees with, and covenants to, Parent that Stockholder will
not request that the Company register the transfer (book-entry or otherwise) of
any certificate or uncertificated interest representing any of the Securities,
unless such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of share or the like other than pursuant
to the Merger, the term "Existing Shares" will be deemed to refer to and include
the shares of the Company Common Stock as well as all such stock dividends and
distributions and any shares into
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which or for which any or all of the Securities may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Agreement.
(c) Stockholder will promptly after the date hereof surrender to the Company
all certificates representing the Securities, the Company will place the
following legend on such certificates in addition to any other legend required
thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER PURSUANT TO AND OTHER PROVISIONS OF A VOTING AGREEMENT, DATED AS
OF NOVEMBER 18, 1999, BY AND AMONG TUMBLEWEED COMMUNICATIONS CORP., KEYHOLE
ACQUISITION CORP. AND [STOCKHOLDER]."
Section 9. REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the Merger Agreement. Each party shall promptly consult with
the other and provide any necessary information and material with respect to all
filings made by such party with any Governmental Entity in connection with this
Agreement and the Merger Agreement and the transactions contemplated hereby and
thereby.
Section 10. TERMINATION. This Agreement shall terminate on the earliest of
(a) termination of the Merger Agreement pursuant to Section 7.1(a), (b), (c) or
(e) thereof, (b) six months following the termination of the Merger Agreement
pursuant to Section 7.1(d) or (f) thereof, (c) the agreement of the parties
hereto to terminate this Agreement, or (d) the consummation of the Merger.
Section 11. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties hereto. This Agreement shall be binding upon, inure to the benefit of
and be enforceable by each party and such party's respective heirs,
beneficiaries, executors, representatives and permitted assigns.
(c) AMENDMENT AND MODIFICATION. This Agreement may not be amended,
altered, supplemented or otherwise modified or terminated except upon the
execution and delivery of a written agreement executed by the parties hereto.
(d) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as FedEx, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Parent or Sub, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, CA 94063
Attention: Jeffrey C. Smith
Telephone No.: 650-216-2010
Facsimile No.: 650-216-2001
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with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue, Suite 220
Palo Alto, California 94301
Telephone: (650) 470-4500
Telecopy No.: (650) 470-4570
Attention: Gregory C. Smith
If to Stockholder, to:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
with a copy to:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
(e) SEVERABILITY. Any term or provision of this Agreement which is held to
be invalid, illegal or unenforceable in any respect in any jurisdiction shall,
as to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
(f) SPECIFIC PERFORMANCE. Each of the parties hereto recognizes and
acknowledges a breach by it of any covenants or agreements contained in this
Agreement will cause the other party to sustain damages for which it would not
have an adequate remedy at law for money, damages, and therefore in the event of
any such breach the aggrieved party shall be entitled to the remedy of specified
performance of such covenants and agreements and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled, at law or in
equity.
(g) NO WAIVER. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, will not constitute a waiver by such party of
its right to exercise any such or other right, power or remedy or to demand such
compliance.
(h) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
(i) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflict of law thereof.
(j) DESCRIPTIVE HEADING. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(k) EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
(l) FURTHER ASSURANCES. From time to time, at any other party's request
and without further consideration, each party hereto shall execute and deliver
such additional documents and take all such
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further lawful action as may be necessary or desirable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
(m) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Parent, Sub, and Stockholder have caused this Agreement
to be duly executed as of the day and year first written above.
<TABLE>
<S> <C> <C>
Tumbleweed Communications Corp.
By:
-----------------------------------------
Name: Jeffrey C. Smith
Title: Chief Executive Officer
Keyhole Acquisition Corp.
By:
-----------------------------------------
Name: Jeffrey C. Smith
Title: Chief Executive Officer
By:
-----------------------------------------
[Stockholder]*
</TABLE>
- ------------------------
* In the event this agreement covers shares held jointly or held individually by
related parties who will sign this together, each joint or related party shall
sign.
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VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of November 18, 1999, by and
between Worldtalk Communications Corporation, a Delaware corporation
("Company"), and [Stockholder] ("Stockholder").
WITNESSETH:
WHEREAS, immediately prior to the execution of this Agreement, Tumbleweed
Communications Corp., a Delaware corporation ("Parent"), Keyhole Acquisition
Corp., a Delaware corporation and a direct wholly owned subsidiary of Parent
("Sub") and the Company have entered into an Agreement and Plan of Merger of
even date herewith (the "Merger Agreement"), pursuant to which the parties
thereto have agreed, upon the terms and subject to the conditions set forth
therein, to merge Sub with and into the Company (the "Merger"); and
WHEREAS, as of the date hereof, Stockholder is the record and Beneficial
Owner (as defined hereinafter) of Existing Shares (as defined
hereinafter) of the common stock, $0.001 par value, of Parent (the "Parent
Common Stock"); and
WHEREAS, as inducement and a condition to entering into the Merger
Agreement, the Company has required Stockholder to agree, and Stockholder has
agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
Section 1. CERTAIN DEFINITIONS. In addition to the terms defined elsewhere
herein, capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Without duplicative counting of the same
securities by the same holder, securities Beneficially Owned by a person
include securities Beneficially Owned by all other persons with whom such
person would constitute a "group" within the meaning of Section 13(d) of the
Exchange Act with respect to the securities of the same issuer.
(b) "Existing Shares" means shares of the Parent Common Stock
Beneficially Owned by Stockholder as of the date hereof.
(c) "Securities" means the Existing Shares together with any shares of
the Parent Common Stock or other securities of the Company acquired by
Stockholder in any capacity after the date hereof and prior to the
termination of this Agreement whether upon the exercise of options, warrants
or rights, the conversion or exchange of convertible or exchangeable
securities, or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares or the like, gift,
bequest, inheritance or as a successor in interest in any capacity or
otherwise.
Section 2. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder
represents and warrants to Parent and Sub as follows:
(a) OWNERSHIP OF SHARES. Stockholder is the sole record and Beneficial
Owner of (i) the Existing Shares, (ii) options to purchase [ ] shares
of Parent Common Stock and (iii) warrants to purchase [ ] shares of
Parent Common Stock. On the date hereof, the Existing Shares constitute all
of the shares of the Parent Common Stock owned of record or Beneficially
Owned by Stockholder. There are no outstanding options or other rights to
acquire from Stockholder or obligations of Stockholder to sell or to
acquire, any shares of the Parent Common Stock. Stockholder
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has sole voting power and sole power to issue instructions with respect to
the matters set forth in Sections 5, 7 and 8 hereof, sole power of
disposition, sole power of conversion, sole power to demand appraisal rights
and sole power to agree to all of the matters set forth in this Agreement,
in each case with respect to all of the Existing Shares with no limitations,
qualifications or restrictions on such rights, subject to applicable
securities laws and the terms of this Agreement.
(b) POWER; BINDING AGREEMENT. Stockholder has the legal capacity,
power and authority to enter into and perform all of Stockholder's
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by Stockholder and constitutes a valid and binding
agreement of Stockholder, enforceable against Stockholder in accordance with
its terms except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(c) NO CONFLICTS. Except as contemplated by the Merger Agreement, no
filing with, and no permit, authorization, consent or approval of, any state
or federal public body or authority ("Governmental Entity") is necessary for
the execution of this Agreement by Stockholder and the consummation by
Stockholder of the transactions contemplated hereby, none of the execution
and delivery of this Agreement by Stockholder, the consummation by
Stockholder of the transactions contemplated hereby or compliance by
Stockholder with any of the provisions hereof shall (i) conflict with or
result in any breach of any organizational documents applicable to
Stockholder, (ii) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which Stockholder is a party or by which Stockholder or any of
its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to Stockholder or any of Stockholder's properties or assets except, in the
case of clauses (ii) and (iii) where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults would not, individually or in the
aggregate, materially impair the ability of Stockholder or Parent to
consummate the transactions contemplated by the Merger Agreement, this
Agreement or by the other Ancillary Agreements.
(d) NO ENCUMBRANCE. Except as permitted by this Agreement, the
Existing Shares are now and, at all times during the term hereof, and the
Securities will be, held by Stockholder, or by a nominee or custodian for
the benefit of Stockholder, free and clear of all mortgages, claims,
charges, liens, security interests, pledges or options, proxies, voting
trusts or agreements, understandings or arrangements or any other rights
whatsoever ("Encumbrances"), except for any such Encumbrances arising
hereunder.
(e) NO FINDER'S FEES. No broker, investment banker, financial advisor
or other person is entitled to any broker's, finder's, financial adviser's
or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of
Stockholder.
(f) RELIANCE BY THE COMPANY. Stockholder understands and acknowledges
that the Company is entering into the Merger Agreement in reliance upon
Stockholder's execution and delivery of this Agreement.
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Section 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Stockholder as follows:
(a) POWER; BINDING AGREEMENT. The Company has the corporate power and
authority to enter into and perform all of its obligations under this
Agreement. This Agreement has been duly and validly executed and delivered
by the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought.
(b) NO CONFLICTS. Except as contemplated by the Merger Agreement, no
filing with, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby, and none of the execution and delivery of this Agreement by the
Company, the consummation by the Company of the transactions contemplated
hereby or compliance by the Company with any of the provisions hereof shall
(i) conflict with or result in any breach of any provision of the
certificate of incorporation or by-laws or similar organizational documents
of the Company or of any of its Subsidiaries, (ii) require any filing with,
or permit, authorization, consent or approval of, any Governmental Entity,
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration or result in the
creation of any lien) under, any of the terms, conditions or provisions of
any Company Agreement or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company, any of its
Subsidiaries or any of their properties or assets, except in the case of
clause (ii), (iii) or (iv) where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults would not, individually or in the
aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole, and will not materially impair the ability
of the Company to consummate the transactions contemplated the Merger
Agreement, this Agreement or by the other Ancillary Agreements.
Section 4. DISCLOSURE. Stockholder hereby agrees to permit the Company to
publish and disclose in the Registration Statement and the proxy
statement/prospectus (including all documents and schedules filed with the
Securities and Exchange Commission), and any press release or other disclosure
document which the Company, in its sole discretion, determines to be necessary
or desirable in connection with the Merger and any transactions related thereto,
Stockholder's identity and ownership of the Parent Common Stock and the nature
of Stockholder's commitments, arrangements and understandings under this
Agreement.
Section 5. TRANSFER AND OTHER RESTRICTIONS. Prior to the termination of
this Agreement, Stockholder agrees not to, directly or indirectly:
(i) except pursuant to the terms of the Merger Agreement, offer for
sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose
of, or enter into any contract, option or other arrangement or understanding
with respect to or consent to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of any or all of the
Securities or any interest therein except as provided in Section 6 hereof;
(ii) grant any proxy, power of attorney, deposit any of the Securities
into a voting trust or enter into a voting agreement or arrangement with
respect to the Securities except as provided in this Agreement; or
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(iii) take any other action that would make any representation or
warranty of Stockholder contained herein untrue or incorrect or have the
effect of preventing or disabling Stockholder from performing its
obligations under this Agreement.
Section 6. VOTING OF THE PARENT COMMON STOCK. Stockholder hereby agrees
that, during the period commencing on the date hereof and continuing until the
first to occur of (a) the Effective Time or (b) termination of this Agreement in
accordance with its terms, (i) Stockholder will not sell or transfer any
Securities or any interest therein to any person, and (ii) at any meeting
(whether annual or special and whether or not an adjourned or postponed meeting)
of the holders of the Parent Common Stock, however called, or in connection with
any written consent of the holders of the Parent Common Stock, Stockholder will
appear at the meeting or otherwise cause the Securities to be counted as present
thereat for purposes of establishing a quorum and vote or consent (or cause to
be voted or consented) the Securities:
(A) in favor of the adoption of the Merger Agreement and the approval of
other actions contemplated by the Merger Agreement and this Agreement and
any actions required in furtherance thereof and hereof;
(B) against any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty or any other obligation
or agreement of Parent, or Sub under the Merger Agreement or this Agreement;
and
Stockholder may not enter into any agreement or understanding with any
person the effect of which would be inconsistent with or violative of any
provision contained in this Section 6.
Section 7. PROXY.
(a) Stockholder hereby irrevocably grants to, and appoints, the Company and
Paul Hilal, James A. Heisch, or any of them in their respective capacities as
officers of the Company and any individual who shall hereafter succeed to any
such office of the Company and each of them individually, such Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Stockholder, to vote the Securities, or grant a consent
or approval in respect of the Securities, in connection with any meeting of the
stockholders of Parent, as specified in Section 6 hereof.
(b) Stockholder represents that any proxies heretofore given in respect of
the Existing Shares are not irrevocable, and that such proxies are hereby
revoked.
(c) Stockholder understands and acknowledges that the Company is entering
into the Merger Agreement in reliance upon such Stockholder's execution and
delivery of this Agreement. Stockholder hereby affirms that the irrevocable
proxy set forth in this Section 7 is given in connection with the execution of
the Merger Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of Stockholder under this Agreement. Stockholder
hereby further affirms that the irrevocable proxy is coupled with an interest
and may not be revoked under any circumstances. Stockholder hereby ratifies and
confirms all that such irrevocable proxy may lawfully do or cause to be done by
virtue hereof. Such irrevocable proxy is executed and intended to be irrevocable
in accordance with the provisions of section 212(e) of Delaware General
Corporation Law.
Section 8. STOP TRANSFER; LEGEND.
(a) Stockholder agrees with, and covenants to, the Company that Stockholder
will not request that Parent register the transfer (book-entry or otherwise) of
any certificate or uncertificated interest representing any of the Securities,
unless such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in the
Parent Common Stock by reason of any stock dividend, split-up, recapitalization,
combination, exchange of share or the like other than pursuant to the Merger,
the term "Existing Shares" will be deemed to refer to and include the shares of
the Parent Common Stock as well as all such stock dividends and distributions
and any shares into which
C-11
<PAGE>
or for which any or all of the Securities may be changed or exchanged and
appropriate adjustments shall be made to the terms and provisions of this
Agreement.
(c) Stockholder will promptly after the date hereof surrender to Parent all
certificates representing the Securities, Parent will place the following legend
on such certificates in addition to any other legend required thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER PURSUANT TO AND OTHER PROVISIONS OF A VOTING AGREEMENT, DATED AS
OF NOVEMBER 18, 1999, BY AND BETWEEN [ ] AND [Stockholder]."
Section 9. REASONABLE BEST EFFORTS. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the Merger Agreement. Each party shall promptly consult with
the other and provide any necessary information and material with respect to all
filings made by such party with any Governmental Entity in connection with this
Agreement and the Merger Agreement and the transactions contemplated hereby and
thereby.
Section 10. TERMINATION. This Agreement shall terminate on the earliest of
(a) termination of the Merger Agreement pursuant to Section 7.1(a), (b), (d) or
(f) thereof, (b) six months following the termination of the Merger Agreement
pursuant to Section 7.1(c) or (e) thereof, (c) the agreement of the parties
hereto to terminate this Agreement, or (d) the consummation of the Merger.
Section 11. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties hereto. This Agreement shall be binding upon, inure to the benefit of
and be enforceable by each party and such party's respective heirs,
beneficiaries, executors, representatives and permitted assigns.
(c) AMENDMENT AND MODIFICATION. This Agreement may not be amended,
altered, supplemented or otherwise modified or terminated except upon the
execution and delivery of a written agreement executed by the parties hereto.
(d) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as FedEx, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to the Company, to:
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, CA 95054
Attention: James Heisch
Telephone No.: 408-567-1500
Facsimile No.: 408-567-5122
C-12
<PAGE>
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Gordon K. Davidson
Telephone No.: 650-494-0600
Facsimile No.: 650-494-1417
If to Stockholder, to:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue--Suite 220
Palo Alto, California 94301
Attention: Gregory C. Smith
Telephone No.: 650-470-4500
Facsimile No.: 650-470-4590
(e) SEVERABILITY. Any term or provision of this Agreement which is held to
be invalid, illegal or unenforceable in any respect in any jurisdiction shall,
as to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
(f) SPECIFIC PERFORMANCE. Each of the parties hereto recognizes and
acknowledges a breach by it of any covenants or agreements contained in this
Agreement will cause the other party to sustain damages for which it would not
have an adequate remedy at law for money, damages, and therefore in the event of
any such breach the aggrieved party shall be entitled to the remedy of specified
performance of such covenants and agreements and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled, at law or in
equity.
(g) NO WAIVER. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, will not constitute a waiver by such party of
its right to exercise any such or other right, power or remedy or to demand such
compliance.
(h) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
(i) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflict of law thereof.
(j) DESCRIPTIVE HEADING. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(k) EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
C-13
<PAGE>
(l) FURTHER ASSURANCES. From time to time, at any other party's request
and without further consideration, each party hereto shall execute and deliver
such additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most expeditious
manner practicable, the transactions contemplated by this Agreement.
(m) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Stockholder have caused this Agreement
to be duly executed as of the day and year first written above.
<TABLE>
<S> <C> <C>
Worldtalk Communications Corporation
By: /s/
-----------------------------------------
Name: James Heisch
Title: Vice President, CFO
By:
-----------------------------------------
[Stockholder]*
</TABLE>
- ------------------------
* In the event this agreement covers shares held jointly or held individually by
related parties who will sign this together, each joint or related party shall
sign.
C-14
<PAGE>
ANNEX D
<TABLE>
<S> <C>
[LOGO] [LOGO]
</TABLE>
November 18, 1999
Board of Directors
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, CA 94063
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness to Tumbleweed
Communications Corp. ("Parent") from a financial point of view of the Exchange
Ratio (as defined below) as provided by the Agreement and Plan of Merger, dated
as of November 18, 1999 (the "Merger Agreement"), among Parent, Merger Sub, a
wholly owned subsidiary of Parent ("Merger Sub"), and Worldtalk Corporation (the
"Company"). The Merger Agreement provides for the merger (the "Merger") of the
Company with Merger Sub pursuant to which the Company will become a wholly owned
subsidiary of Parent and each outstanding share of common stock, par value $0.01
per share (the "Company Common Stock"), of the Company will be converted into
0.260 (the "Exchange Ratio") of a share of common stock, par value $0.001 per
share (the "Parent Common Stock"), of Parent.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and Parent, as well
as the Merger Agreement. We have also reviewed certain other information,
including financial forecasts, provided to us by the Company and Parent, and
have met with the Company's and Parent's managements to discuss the business and
prospects of the Company and Parent. We have also considered certain financial
and stock market data of the Company and Parent, and we have compared that data
with similar data for other publicly held companies in businesses we deemed
similar to those of the Company and Parent and we have considered the financial
terms, to the extent publicly available, of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant. We have had
discussions with the management of the Company and Parent to discuss the
business prospects of the Company, its projected performance, the strategic
importance of the Merger to Parent, and the synergistic values expected to be
achieved through the combination of the operations of the Company and Parent.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's and Parent's managements as to the future financial performance of the
Company and Parent. Specifically, for purposes of this opinion we have relied
upon, without independent verification, the assessment by Parent's management of
synergies and other strategic benefits expected to be derived from the Merger.
You also have informed us, and we have assumed, that the Merger will be treated
as a tax-free reorganization for federal income tax purposes and accounted for
as a pooling-of-interests in accordance with generally accepted accounting
principles. In addition, we have not been requested to make, and have not made,
an independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of the Company or Parent, nor have we been furnished with any such
evaluations or appraisals. Our opinion is necessarily based upon financial,
economic, market and other conditions as they exist and can be evaluated on the
date hereof. We are not expressing any opinion as to the actual value of the
Parent Common Stock when issued to the Company's stockholders pursuant to the
Merger or the prices at which such Parent Common Stock will trade subsequent to
Merger.
<PAGE>
We have acted as financial advisor to Parent in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We will also receive a fee for
rendering this opinion. In addition, as we have previously discussed, we own a
minority interest in Volpe Brown Whelan & Company, the Company's financial
advisor in connection with the Merger, who we have been advised will receive a
fee from the Company for their services, a significant portion of which is
contingent upon the consummation of the Merger.
In the past, we have performed certain investment banking services for
Parent, including acting as lead manager in Parent's initial public offering,
and have received customary fees for such services.
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of both the Company and Parent for our and
such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Parent in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to Parent from a financial point of
view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ ETHAN TOPPER
--------------------------------------
Ethan Topper
Managing Director
<PAGE>
ANNEX E
VOLPE BROWN WHELAN & COMPANY, LLC
INVESTMENT BANKERS
ONE MARITIME PLAZA, SAN FRANCISCO, CA 94111
(415) 274-4400 FAX (415) 274-4468
PRIVATE AND CONFIDENTIAL
November 18, 1999
The Board of Directors
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, CA 95054
Members of the Board of Directors:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to the stockholders of Worldtalk Communications
Corporation ("Worldtalk" or the "Company"), of the Exchange Ratio (as defined
below) set forth in the Agreement and Plan of Merger (the "Merger Agreement") by
and among Worldtalk, Tumbleweed Communications Corp. ("Tumbleweed") and a
wholly-owned subsidiary of Tumbleweed established for purposes of the
transaction ("Sub").
Under the terms of the Merger Agreement, Sub will be merged with and into
Worldtalk (the "Merger") and each issued and outstanding share of common stock,
par value $.01 per share (the "Common Stock"), of the Company will be converted
into the right to receive 0.26 (the "Exchange Ratio") of a share of common
stock, par value $0.001 per share, of Tumbleweed. It is our understanding that
the transaction will be accounted for as a pooling of interests for financial
reporting purposes and as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.
For the purposes of formulating the Opinion, we have, among other things:
(i) reviewed the November 17, 1999 draft of the Merger Agreement;
(ii) interviewed management of Worldtalk and Tumbleweed concerning their
respective business prospects, financial outlook and operating plans
as stand-alone concerns and as a combined enterprise;
(iii) reviewed certain Worldtalk and Tumbleweed financial statements and
other relevant financial and operating data of Worldtalk and
Tumbleweed prepared by Worldtalk and Tumbleweed management teams
respectively;
(iv) reviewed the historical stock trading patterns of both Worldtalk and
Tumbleweed and analyzed implied historical exchange ratios;
(v) reviewed the valuation of selected publicly traded companies we deemed
comparable and relevant to Worldtalk and Tumbleweed;
(vi) reviewed, to the extent publicly available, the financial terms of
selected merger and acquisition transactions that we deemed comparable
and relevant to the Merger;
(vii) performed an analysis of Worldtalk's relative contribution, adjusted
to reflect the difference in capital structures of the two companies,
to Tumbleweed in terms of revenue and gross profit;
(viii) performed a merger analysis of the combined entity, based upon
financial projections provided by the Worldtalk and Tumbleweed
management teams; and
(ix) performed such other studies, analyses and inquiries and considered
such other information as we deemed relevant.
<PAGE>
The Board of Directors
Worldtalk Communications Corporation
November 18, 1999
Page 2
VBW&Co. relied without independent verification upon the accuracy and
completeness of all of the financial, accounting, legal, tax, operating and
other information provided to VBW&Co. by Worldtalk and Tumbleweed and has relied
upon the assurances of Worldtalk and Tumbleweed that all such information
provided by them is complete and accurate in all material respects and that
there is no additional material information known to them that would make any of
the information made available to VBW&Co. either incomplete or misleading.
Worldtalk has retained outside legal, accounting and tax advisors to advise it
on matters relating to the Merger. VBW&Co. expresses no opinion on such matters.
VBW&Co. was not asked to, and did not, conduct a market survey to determine
the interest of other potential acquirers of the Company or otherwise solicit,
or assist the Company in soliciting, any third party indications of interest in
acquiring all or any part of the Company. Furthermore, VBW&Co. was not requested
to consider, and VBW&Co. is expressing no opinion as to, the relative merits of
the Merger as compared to any alternative business strategies that might exist
for Worldtalk or the effect of any other transaction in which Worldtalk might
engage.
With respect to the projected financial data of Worldtalk and the combined
company, all of which has been provided by or reviewed and approved by the
management of Worldtalk, VBW&Co. has relied upon assurances of Worldtalk that
such data has been prepared in good faith on a reasonable basis reflecting the
best currently available estimates and judgments of management as to the future
financial performance of Worldtalk separately and as combined with Tumbleweed.
With respect to the projected financial data of Tumbleweed, all of which has
been provided by the management of Tumbleweed, VBW&Co. has similarly relied upon
assurances of Tumbleweed that all such data provided by management has been
prepared in good faith on a reasonable basis and reflects the best currently
available estimates and judgments of management as to the future financial
performance of Tumbleweed. The Opinion is based, in large part, on these
projected financial data and estimates.
VBW&Co. is relying upon the information provided to it by Worldtalk and
Tumbleweed for the purposes of rendering the Opinion. VBW&Co. expresses no
opinion and has made no investigation with respect to the validity, accuracy or
completeness of the information provided to it and does not warrant any
projections included in such information. Actual results that Worldtalk or
Tumbleweed might achieve in the future as stand-alone entities or as a combined
company may vary materially from those used in VBW&Co.'s analysis.
VBW&Co. has assumed that the Merger will be consummated in accordance with
the terms of the November 17, 1999 draft of the Merger Agreement, without any
amendments thereto and without waiver of any of the conditions to the parties'
obligations thereunder.
VBW&Co. has not made an independent evaluation, appraisal or valuation of
any assets or liabilities of Worldtalk or Tumbleweed, nor has VBW&Co. been
furnished with any such evaluations, appraisals or valuations. VBW&Co. has
performed no investigation relating to the representations and warranties made
by Worldtalk or Tumbleweed, including the representations and warranties made
with respect to intellectual property or the status of any litigation pending or
threatened against either company. While VBW&Co. believes that its review, as
described herein, is an adequate basis for the Opinion it has expressed, the
Opinion is necessarily based upon market, economic and other conditions that
exist and can be evaluated as of the date of the Opinion, and any change in such
conditions would require a re-evaluation of the Opinion.
The Opinion addresses only the financial fairness of the Exchange Ratio as
of the date hereof and does not address any other terms or conditions of the
Merger Agreement or any related documents, the relative merits of the Merger and
any alternatives to the Merger, Worldtalk's decision to proceed with or the
effect of the Merger, or any other aspect of the Merger. VBW&Co. notes that the
Exchange Ratio is fixed, with no floor or collar, and the trading price of
Tumbleweed common stock is volatile. Accordingly
<PAGE>
The Board of Directors
Worldtalk Communications Corporation
November 18, 1999
Page 3
the market value of the consideration received by Worldtalk stockholders in the
Merger may vary significantly from the value of such consideration as of the
date hereof and as of the dates used by VBW&Co. in its analysis. No opinion is
expressed herein as to the future trading price or range of prices of any
securities of Tumbleweed issued prior to or in conjunction with the Merger.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, we believe our analyses and the factors utilized in
such analyses must be considered as a whole and that considering any portion of
such analyses or factors, without considering all analyses and factors could
create a misleading or incomplete view of the process underlying the Opinion. In
our analyses, we made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond
Worldtalk's or Tumbleweed's control and are not susceptible to accurate
prediction.
As a customary part of its investment banking business, VBW&Co. engages in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of their business, VBW&Co. and its affiliates may actively trade
in the equity securities of Worldtalk or Tumbleweed for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
VBW&Co. will receive a fee of $400,000 for rendering its Opinion, no portion
of which is conditioned upon the Opinion being favorable. VBW&Co. has received
fees for other services provided to the Company and will receive an additional
fee of 1.5% of the aggregate value of the merger consideration, less the
fairness opinion fee, contingent upon the closing of the Merger.
The Opinion does not constitute a recommendation as to the Board of
Director's decision on whether to support the Merger and recommend it to
Worldtalk's stockholders and does not constitute a recommendation to
stockholders as to whether to vote in favor of the Merger. The Opinion and
related materials have been prepared for the use and benefit of the Board of
Directors of Worldtalk and may not be used for any other purpose without the
written consent of VBW&Co. VBW&Co. assumes no obligation to update, revise or
reaffirm the Opinion.
Based upon and subject to the foregoing limitations and restrictions and
after considering such other matters as we deem relevant, it is our opinion
that, as of the date hereof, the Exchange Ratio is fair, from a financial point
of view, to the stockholders of Worldtalk.
Very truly yours,
VOLPE BROWN WHELAN & COMPANY, LLC
By: /s/ STEVEN D. PIPER
- ---------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the knowingly violated a
law, authorized the payment of a dividend or approved a stock repurchase in
violation of Delaware corporate law or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Tumbleweed) by reason of the fact that the person
is or was a director, officer, agent or employee of Tumbleweed or is or was
serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with the
action, suit or proceeding. The power to indemnify applies (a) if the person is
successful on the merits or otherwise in defense of any action, suit or
proceeding, or (b) if the person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of Tumbleweed, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of Tumbleweed as well,
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in these actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to Tumbleweed, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, any avoid liability by causing his or her dissent to
these actions to be entered in the books containing the minutes of the meetings
of the board of directors at the time be entered in the books containing the
minutes of the meetings of the board of directors at the time the action
occurred or immediately after the absent director receives notice of the
unlawful acts.
Tumbleweed's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Tumbleweed or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL regarding unlawful dividends and stock
purchases; and
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Tumbleweed's Amended and Restated Bylaws provide that:
- it must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- it must indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our board of directors; and
II-1
<PAGE>
- it must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain
insurance on behalf of our directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of this status.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of the
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- ------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of November 18, 1999,
among Tumbleweed Communications Corp., Keyhole Acquisition
Corp. and Worldtalk Communications Corporation (included as
Annex A to the joint proxy statement/prospectus which forms
a part of this Registration Statement)
3.1 Amended and Restated Certificate of Incorporation of
Registrant
3.2 Amended and Restated Bylaws of Registrant
4.1 Specimen common stock certificate
4.2 Amended and Restated Investors' Rights Agreement, dated as
of February 26, 1999, among the Registrant, Jeffrey C.
Smith, Jean-Christophe D. Bandini, and the holders of the
Registrant's preferred stock
4.3 Warrant to Purchase Stock, dated November 30, 1998, issued
to Silicon Valley Bank
5.1 * Opinion of Skadden, Arps, Slate, Meagher and Flom LLP
regarding the validity of the securities being registered
8.1 * Opinion of Skadden, Arps, State, Meagher & Flom LLP
regarding certain tax matters
9.1 Form of Tumbleweed Voting Agreement (included as Annex C to
the joint proxy statement/prospectus which forms a part of
this Registration Statement)
10.1 Stock Option Agreement dated November 18, 1999, between
Tumbleweed Communications Corp. and Worldtalk Communications
Corporation (included as Annex B to the joint proxy
statement/prospectus which forms a part of this Registration
Statement)
10.2 Form of Worldtalk Voting Agreement (included as Annex C to
the joint proxy statement/ prospectus which forms a part of
this Registration Statement)
10.3 1993 Stock Option Plan
10.4 1999 Omnibus Stock Incentive Plan
10.5 1999 Employee Stock Purchase Plan
10.6 * Software License, Development and Services Agreement, dated
December 19, 1997, between the Registrant and United Parcel
Service General Services, Co.
10.7 * Posta License and Distribution Agreement, dated as of
March 31, 1999, between Tumbleweed Software, K.K. and K.K.
Hikari Tsushin
10.8 * OEM Object Code License Agreement, dated as of March 30,
1998, between the registrant and RSA Data Security, Inc.
10.9 Employment Agreement, dated May 24, 1999, between Tumbleweed
Software Inc. and Tumbleweed Limited and Donald N. Taylor
10.10 Indemnity Agreement
21.1 Subsidiaries of Registrant
23.1 * Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(contained in Exhibit 5.1 hereto)
23.2 * Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(contained in Exhibit 8.1 hereto)
23.3 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 * Form of Proxy
99.2 Consent of Credit Suisse First Boston Corporation
99.3 Consent of Volpe Brown Whelan & Company, LLC
</TABLE>
- ------------------------
* To be filed in an amendment.
II-3
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Consolidated Financial
Statements or related Notes.
(c) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES
The opinions of Credit Suisse First Boston Corporation and Volpe Brown
Whelan & Company, LLC are included as Annexes D and E to the Proxy
Statement-Prospectus.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) (a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the application registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(b) that every prospectus: (A) that is filed pursuant to paragraph
(1)(a) immediately preceding, or (B) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any actions,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Redwood City, state of
California, on December 10, 1999.
<TABLE>
<S> <C> <C>
Tumbleweed Communications Corp.
By: /s/ JEFFREY C. SMITH
-----------------------------------------
Jeffrey C. Smith
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Bernard J. Cassidy and Joseph C. Consul, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all (i) amendments (including post-effective amendments) and additions
to this Registration Statement and (ii) Registration Statements, and any and all
amendments thereto (including post-effective amendments), relating to the
offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on December 10, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JEFFREY C. SMITH
------------------------------------------- Chairman of the Board, President and Chief Executive
Jeffrey C. Smith Officer (Principal Executive Officer)
/s/ JOSEPH C. CONSUL Vice President--Finance and Chief Financial Officer
------------------------------------------- (Principal Financial Officer and Principal Accounting
Joseph C. Consul Officer)
/s/ DAVID F. MARQUARDT
------------------------------------------- Director
David F. Marquardt
/s/ TIMOTHY C. DRAPER
------------------------------------------- Director
Timothy C. Draper
------------------------------------------- Director
Standish H. O'Grady
/s/ ERIC J. HAUTEMONT
------------------------------------------- Director
Eric J. Hautemont
------------------------------------------- Director
Pehong Chen
</TABLE>
II-5
<PAGE>
EXHIBIT 23.3
The Board of Directors
Tumbleweed Communications Corp.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
San Francisco, California
December 10, 1999
<PAGE>
[LOGO]
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TUMBLEWEED COMMUNICATIONS CORP.
FIRST: The name of the Corporation is Tumbleweed Communications Corp.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is Corporation Service
Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"DGCL").
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 100,000,000 shares of Common Stock, each having a par
value of one one-thousandth ($0.001), and 10,000,000 shares of Preferred Stock,
each having a par value of one one-thousandth ($0.001).
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the DGCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or
<PAGE>
upon any distribution of the assets of, the Corporation; or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors.
(b) The Board of Directors shall consist of not less than one nor
more than ten members, the exact number of which shall be fixed by the Board of
Directors. Election of directors need not be by written ballot unless the Bylaws
so provide.
(c) The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. The initial division of the Board of Directors into classes
shall be made by the decision of the affirmative vote of a majority of the
entire Board of Directors. The term of the initial Class I directors shall
terminate on the date of the 2000 annual meeting; the term of the initial Class
II directors shall terminate on the date of the 2001 annual meeting; and the
term of the initial Class III directors shall terminate on the date of the 2002
annual meeting. At each succeeding annual meeting of stockholders beginning in
2003, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director.
(d) A director shall hold office until the annual meeting for the
year in which his or her term expires and until his or her successor shall be
elected
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<PAGE>
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
(e) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director of any class elected to fill a vacancy
resulting from an increase in the number of directors of such class shall hold
office for a term that shall coincide with the remaining term of that class. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his predecessor.
Subject to the rights, if any, of the holders of shares of Preferred Stock then
outstanding (and provided that the Corporation is not subject to Section 2115 of
the California General Corporation Law (the "CGCL")), any or all of the
directors of the Corporation may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the voting power of the Corporation's then
outstanding capital stock entitled to vote generally in the election of
directors. During such time or times that the Corporation is subject to Section
2115(b) of the CGCL, the Board of Directors or any individual director may be
removed from office at any time without cause by the affirmative vote of the
holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
(without regard to whether shares may otherwise be voted cumulatively) at an
election which the same total number of votes were cast and either the number of
directors elected at the most recent annual meeting of shareholders or, if
greater, the number of directors for whom removal is being sought, were then
being elected. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article
FIFTH unless expressly provided by such terms.
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<PAGE>
(f) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the DGCL,
this Amended and Restated Certificate of Incorporation, and any Bylaws adopted
by the stockholders; PROVIDED, HOWEVER, that no Bylaws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such Bylaws had not been adopted.
(g) Provided that the Corporation is not subject to Section 2115
of the CGCL, no director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from
which the director derived an improper personal benefit. During such time or
times that the Corporation is subject to Section 2115(b) of the CGCL, no
director shall be personally liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent prohibited by Section 204(a)(10) of the CGCL. Any repeal or
modification of this Article FIFTH, Section (g) by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.
SIXTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of his or her heirs, executors and personal and legal representatives;
PROVIDED, HOWEVER, that, except for proceedings to enforce rights to
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors. The right to indemnification conferred by this
Article SIXTH shall include the right to be paid by the Corporation the expenses
incurred in defending or otherwise participating in any proceeding in advance of
its final disposition.
4
<PAGE>
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SIXTH to directors and officers of the Corporation.
The rights to indemnification and to the advancement of expenses
conferred in this Article SIXTH shall not be exclusive of any other right which
any person may have or hereafter acquire under this Certificate of
Incorporation, the Bylaws of the Corporation, any statute, agreement, vote of
stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article SIXTH by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation existing
at the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the DGCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
EIGHTH: In furtherance and not in limitation of the powers conferred
upon it by the laws of the State of Delaware, the Board of Directors shall have
the power to make, alter, amend, change, add to or repeal the Corporation's
Bylaws. The affirmative vote of at least a majority of the entire Board of
Directors shall be required to adopt, amend, alter or repeal the Corporation's
Bylaws. The Corporation's Bylaws also may be altered, amended, changed, added to
or repealed by the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of the shares entitled to vote
at an election of directors.
NINTH: Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation, and the ability of the stockholders to
consent in writing to the taking of any action is hereby specifically denied.
TENTH: Unless otherwise required by law, special meetings of
stockholders, for any purpose or purposes, may be called by either (i) the
Chairman, if there be
5
<PAGE>
one, (ii) the Board of Directors or (iii) a committee of the Board of Directors
that has been duly designated by the Board of Directors and whose powers and
authority include the power to call such meetings. The ability of the
stockholders to call a special meeting of stockholders is hereby specifically
denied.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TWELFTH: The foregoing amendment and restatement of the Certificate of
Incorporation has been duly approved by the Corporation's Board of Directors and
its stockholders in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and
Restated Certificate of Incorporation on __________, 1999.
--------------------------------
Jeffrey C. Smith
--------------------------------
Joseph C. Consul
7
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
TUMBLEWEED COMMUNICATIONS CORP.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors.
SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders for
the election of directors shall be held on such date and at such time as shall
be designated from time to time by the Board of Directors. Any other proper
business may be transacted at the Annual Meeting of Stockholders.
<PAGE>
SECTION 3. NATURE OF BUSINESS AT MEETINGS OF STOCKHOLDERS. No
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 3
and on the record date for the determination of stockholders entitled to vote at
such annual meeting (ii) who complies with the notice procedures set forth in
this Section 3 and (iii) who otherwise meets the applicable requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations promulgated thereunder.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary or
Assistant Secretary of the Company.
To be timely, a stockholder's notice to the Secretary or Assistant
Secretary must be delivered to or mailed and received at the principal executive
offices of the Company not less than sixty (60) days nor more than ninety (90)
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the
2
<PAGE>
date of the annual meeting was mailed or such public disclosure of the date of
the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
or Assistant Secretary must set forth as to each matter such stockholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of such stockholder, (iii) the class or series and number of shares of capital
stock of the Company which are owned beneficially or of record by such
stockholder, (iv) a description of all arrangements or understandings between
such stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 3; PROVIDED, HOWEVER, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 3 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
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<PAGE>
SECTION 4. NOMINATION OF DIRECTORS. Only persons who are nominated
in accordance with the following procedures shall be eligible for election as
directors of the Company, except as may be otherwise provided in the Certificate
of Incorporation with respect to the right of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors
may be made at any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, (a) by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (b) by any stockholder of the Company (i) who is a stockholder of record on
the date of the giving of the notice provided for in this Section 4 and on the
record date for the determination of stockholders entitled to vote at such
meeting, (ii) who complies with the notice procedures set forth in this Section
4 and (iii) who otherwise meets the applicable requirements of the Exchange Act
and the rules and regulations promulgated thereunder.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary or Assistant Secretary of the Company.
To be timely, a stockholder's notice to the Secretary or Assistant
Secretary must be delivered to or mailed and received at the principal executive
offices of the Company (a) in the case of an annual meeting, not less than sixty
(60) days nor more than ninety (90) days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in
the event that the annual meeting is called for a date that is not within thirty
(30) days before or after such anniversary date, notice by the stockholder in
order to be timely must
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<PAGE>
be so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of stockholders
called for the purpose of electing directors, not later than the close of
business on the tenth (10th) day following the day on which notice of the date
of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
or Assistant Secretary must set forth (a) as to each person whom the stockholder
proposes to nominate for election as a director (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class or series and number of shares of
capital stock of the Company which are owned beneficially or of record by the
person and (iv) any other information relating to the person that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act, and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice (i) the
name and record address of such stockholder, (ii) the class or series and number
of shares of capital stock of the Company which are owned beneficially or of
record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its
5
<PAGE>
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with the procedures set forth in this Section 4.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
SECTION 5. SPECIAL MEETINGS. Unless otherwise required by law or by
the Certificate of Incorporation of the Corporation, as amended and restated
from time to time (the "Certificate of Incorporation"), Special Meetings of
Stockholders, for any purpose or purposes, may be called by either (i) the
Chairman, if there be one, (ii) the Board of Directors or (iii) a committee of
the Board of Directors that has been duly designated by the Board of Directors
and whose powers and authority include the power to call such meetings. Any
request for a Special Meeting of Stockholders by any of the foregoing shall be
directed in writing to the (i) the Chairman, if there be one, (ii) the President
or (iii) the Secretary and shall state the purpose or purposes of the proposed
meeting. At a Special Meeting of Stockholders, only such business shall be
conducted as shall be specified in the notice of meeting (or any supplement
thereto).
6
<PAGE>
The ability of the stockholders to call a special meeting of stockholders is
hereby specifically denied.
SECTION 6. NOTICE. Whenever stockholders are required or permitted
to take any action at a meeting, a written notice of the meeting shall be given
which shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise required by law, the written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
SECTION 7. ADJOURNMENTS. Any meeting of the stockholders may be
adjourned from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 8. QUORUM. Unless otherwise required by law or the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders
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<PAGE>
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, in the manner provided in
Section 6, until a quorum shall be present or represented.
SECTION 9. VOTING. Unless otherwise required by law, the Certificate
of Incorporation or these Bylaws, any question brought before any meeting of
stockholders, other than the election of directors, shall be decided by the vote
of the holders of a majority of the total number of votes of the capital stock
represented and entitled to vote thereat, voting as a single class. Unless
otherwise provided in the Certificate of Incorporation, and subject to Section
1(b) of Article III and Section 5 of Article V hereof, each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder. Such votes may be cast in person or by proxy but no proxy shall be
voted on or after three years from its date, unless such proxy provides for a
longer period. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in such officer's
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
SECTION 10. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders of the
Corporation, and the ability of the stockholders to consent in writing to the
taking of any action is hereby specifically denied.
SECTION 11. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the
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meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected
by any stockholder of the Corporation who is present.
SECTION 12. STOCK LEDGER. The stock ledger of the Corporation shall
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 11 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 13. CONDUCT OF MEETINGS. The Board of Directors of the
Corporation may adopt by resolution such rules and regulations for the conduct
of the meeting of the stockholders as it shall deem appropriate. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an agenda
or order of business for the meeting; (ii) the determination of when the polls
shall open and close for any given matter to be voted on at the
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meeting; (iii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iv) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (v) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (vi) limitations on the time allotted to
questions or comments by participants.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS.
(a) The Board of Directors shall consist of not less than one nor
more than ten members, the exact number of which shall initially be fixed by the
Incorporator and thereafter from time to time by the Board of Directors. Except
as provided in Section 2 of this Article III, directors shall be elected by a
plurality of the votes cast at the Annual Meeting of Stockholders and each
director so elected shall hold office until the next Annual Meeting of
Stockholders and until such director's successor is duly elected and qualified,
or until such director's earlier death, resignation or removal. Any director
may resign at any time upon written notice to the Corporation. Directors need
not be stockholders.
(b) No person entitled to vote at an election for directors
may cumulate votes to which such person is entitled, unless, at the time of such
election, the Corporation is subject to Section 2115(b) of the California
General Corporation Law (the "CGCL"). During such time or times that the
Corporation is subject to Section 2115(b) of the CGCL, every stockholder
entitled to vote at any election for directors may cumulate such stockholder's
votes and give one
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candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder desires. No stockholder, however,
shall be entitled to so cumulate such stockholder's votes unless (i) the names
of such candidate or candidates have been placed in nomination prior to the
voting and (b) the stockholder has given notice at the meeting prior to the
voting of such stockholder's intention to cumulate such stockholder's votes. If
any stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have been properly placed in
nomination. Under cumulative voting, the candidates receiving the highest number
of votes, up to the number of directors to be elected, are elected.
SECTION 2. VACANCIES.
(a) Unless otherwise required by law or the Certificate of
Incorporation, vacancies arising through death, resignation, removal, an
increase in the number of directors or otherwise may be filled only by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and qualified,
or until their earlier death, resignation or removal.
(b) At any time or times that the Corporation is subject to Section
2115(b) of the CGCL, if, after the filling of any vacancy, the directors then in
office who have been elected by stockholders constitute less than a majority of
the directors then in office, then (i) any holder or holders of an aggregate of
five percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for those directors may call a special meeting of
stockholders
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or (ii) the Superior Court of the proper county shall, upon application of such
stockholder or stockholders, summarily order a special meeting of the
stockholders, to be held to elect the entire board, all in accordance with
Section 305(c) of the CGCL. The term of office of any director shall terminate
upon that election of a successor.
SECTION 3. DUTIES AND POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws required to be exercised or done by the stockholders.
SECTION 4. MEETINGS. The Board of Directors may hold meetings, both
regular and special, either within or without the State of Delaware. Regular
meetings of the Board of Directors may be held without notice at such time and
at such place as may from time to time be determined by the Board of Directors.
Special meetings of the Board of Directors may be called by the Chairman, if
there be one, or the President. Notice thereof stating the place, date and hour
of the meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone or telegram
on twenty-four (24) hours' notice, or on such shorter notice as the person or
persons calling such meeting may deem necessary or appropriate in the
circumstances.
SECTION 5. QUORUM. Except as otherwise required by law or the
Certificate of Incorporation, at all meetings of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
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Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting of the time and
place of the adjourned meeting, until a quorum shall be present.
SECTION 6. ACTIONS BY WRITTEN CONSENT. Unless otherwise provided in
the Certificate of Incorporation, or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
SECTION 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless
otherwise provided in the Certificate of Incorporation, members of the Board of
Directors of the Corporation, or any committee thereof, may participate in a
meeting of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this Section 7 shall constitute presence in person at such meeting.
SECTION 8. COMMITTEES. The Board of Directors may designate one or
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
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the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to
the extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each committee shall keep regular minutes and report to the
Board of Directors when required.
SECTION 9. COMPENSATION. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director, payable in cash or securities. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
SECTION 10. INTERESTED DIRECTORS. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof which authorizes
the contract or transaction, or solely because the director or officer's vote is
counted for such purpose if (i) the material facts as to the director or
officer's relationship or interest and as to the contract or
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transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to the director or officer's relationship
or interest and as to the contract or transaction are disclosed or are known to
the stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the Board of Directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a President, a Secretary or Assistant
Secretary and a Treasurer. The Board of Directors, in its discretion, also may
choose a Chairman of the Board of Directors (who must be a director) and one or
more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law or the Certificate of Incorporation. The officers
of the Corporation need not be stockholders of the Corporation nor, except in
the case of the Chairman of the Board of Directors, need such officers be
directors of the Corporation.
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SECTION 2. ELECTION. The Board of Directors, at its first meeting
held after each Annual Meeting of Stockholders, shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier death,
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the affirmative vote of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
SECTION 3. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President or any
other officer authorized to do so by the Board of Directors and any such officer
may, in the name of and on behalf of the Corporation, take all such action as
any such officer may deem advisable to vote in person or by proxy at any meeting
of security holders of any corporation in which the Corporation may own
securities and at any such meeting shall possess and may exercise any and all
rights and power incident to the ownership of such securities and which, as the
owner thereof, the Corporation might have exercised and possessed if present.
The Board of Directors may, by resolution, from time to time confer like powers
upon any other person or persons.
SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of
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Directors. The Chairman of the Board of Directors shall be the Chief Executive
Officer of the Corporation, unless the Board of Directors designates the
President as the Chief Executive Officer, and, except where by law the signature
of the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates and
other instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as may from time to
time be assigned by these Bylaws or by the Board of Directors.
SECTION 5. PRESIDENT. The President shall, subject to the control of
the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. The President shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. If there be no Chairman of the
Board of Directors, or if the Board of Directors shall otherwise designate, the
President shall be the Chief Executive Officer of the Corporation. The
President shall also perform such other duties and may exercise
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such other powers as may from time to time be assigned to such officer by these
Bylaws or by the Board of Directors.
SECTION 6. VICE PRESIDENTS. At the request of the President or in
the President's absence or in the event of the President's inability or refusal
to act (and if there be no Chairman of the Board of Directors), the Vice
President, or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors), shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform such
other duties and have such other powers as the Board of Directors from time to
time may prescribe. If there be no Chairman of the Board of Directors and no
Vice President, the Board of Directors shall designate the officer of the
Corporation who, in the absence of the President or in the event of the
inability or refusal of the President to act, shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
SECTION 7. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for committees of the Board of
Directors when required. The Secretary shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors, the Chairman of the Board of Directors or the President, under
whose supervision the Secretary shall be. If the Secretary shall be unable or
shall refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
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Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest to the affixing by such officer's signature.
The Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
SECTION 8. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all transactions as Treasurer and of the financial condition of
the Corporation. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance
of the duties of the office of the Treasurer and for the restoration to the
Corporation, in case of the Treasurer's death, resignation, retirement or
removal
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from office, of all books, papers, vouchers, money and other property of
whatever kind in the Treasurer's possession or under the Treasurer's control
belonging to the Corporation.
SECTION 9. ASSISTANT SECRETARIES. Assistant Secretaries, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Secretary, and in the absence of the Secretary or in the
event of the Secretary's disability or refusal to act, shall perform the duties
of the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
SECTION 10. ASSISTANT TREASURERS. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of the Treasurer's disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of Assistant
Treasurer and for the restoration to the Corporation, in case of the Assistant
Treasurer's death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in the Assistant
Treasurer's possession or under the Assistant Treasurer's control belonging to
the Corporation.
SECTION 11. OTHER OFFICERS. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to
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them by the Board of Directors. The Board of Directors may delegate to any
officer of the Corporation the power to choose such other officers and to
prescribe their respective duties and powers.
ARTICLE V
STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such stockholder in the Corporation.
SECTION 2. SIGNATURES. Any or all of the signatures on a certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or the owner's legal representative, to advertise the same in such
manner as the Board of Directors shall require
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and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed or the issuance of
such new certificate.
SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these Bylaws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, which shall be cancelled before
a new certificate shall be issued. No transfer of stock shall be valid as
against the Corporation for any purpose until it shall have been entered in the
stock records of the Corporation by an entry showing from and to whom
transferred.
SECTION 5. RECORD DATE.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment
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of the meeting; providing, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 6. RECORD OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise required by
law.
ARTICLE VI
NOTICES
SECTION 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or
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stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at such person's address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given by facsimile, telex,
telegram or Tumbleweed IME to the extent permitted by law.
SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by
law, the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto. Attendance
of a person at a meeting, present in person or represented by proxy, shall
constitute a waiver of notice of such meeting, except where the person attends
the meeting for the express purpose of objecting at the beginning of the meeting
to the transaction of any business because the meeting is not lawfully called or
convened.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, the requirements of the General Corporation Law of the State of Delaware
(the "DGCL") and, if the Corporation is subject to Section 2115(b) of the CGCL,
to the requirements of the CGCL, may be declared by the Board of Directors at
any regular or special meeting of the Board of Directors (or any action by
written consent in lieu thereof in accordance with Section 6 of Article III
hereof), and may be
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paid in cash, in property, or in shares of the Corporation's capital stock.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for any proper purpose, and the
Board of Directors may modify or abolish any such reserve.
SECTION 2. DISBURSEMENTS. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 5. ANNUAL REPORT. The Board of Directors shall cause an
annual report to be sent to each stockholder of the Corporation not later than
one hundred twenty (120) days after the close of the Corporation's fiscal year.
Such report shall include a balance sheet as of the end of such fiscal year and
an income statement and statement of changes in financial position for such
fiscal year, accompanied by any report thereon of independent accounts or, if
there is no such report, the certificate of an authorized officer of the
Corporation that such statements were prepared without audit from the books and
records of the Corporation.
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ARTICLE VIII
INDEMNIFICATION
SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER
THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in (or, at such time
or times as the Corporation is not subject to Section 2115(b) of the CGCL, not
opposed to) the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
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SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR
IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in (or, at such time or times as the Corporation is not subject
to Section 2115(b) of the CGCL, not opposed to) the best interests of the
Corporation (and, at such time or times as the Corporation is subject to Section
2115(b) of the CGCL, its shareholders); PROVIDED, that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper; PROVIDED, FURTHER, that, during such time
or times that the Corporation is subject to Section 2115(b) of the CGCL, no
indemnification shall be made in respect of any claim, issue or matter as to (i)
amounts paid in settling or otherwise disposing of a
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pending action without court approval or (ii) expenses incurred in defending a
pending action which is settled or otherwise disposed of without court approval.
SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. If the
Corporation is not subject to Section 2115(b) of the CGCL, such determination
shall be made, with respect to a person who is a director or officer at the time
of such determination, (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) by a committee of such directors designated by a majority vote of such
directors, even though less than a quorum, or (iii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion or (iv) by the stockholders. If the Corporation is subject to
Section 2115(b) of the CGCL, such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (i) by a
majority vote of a quorum consisting of directors who are not parties to such
action, suit or proceeding, (ii) if such a quorum of directors is not
obtainable, by independent legal counsel in a written opinion, (iii) by the
stockholders with the shares owned by the person to be indemnified not being
entitled to vote thereon or (iv) by the court in which the proceeding is or was
pending upon application made by the Corporation or the agent or attorney or
other person rendering services in connection with the defense, whether or not
the application by the agent, attorney or other person is opposed by the
Corporation. Such determination shall be made, with respect to former directors
and officers, by
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any person or persons having the authority to act on the matter on behalf of the
Corporation. To the extent, however, that a present or former director or
officer of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of any
claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith, without the necessity of authorization in the
specific case.
SECTION 4. GOOD FAITH DEFINED. For purposes of any determination
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe such
person's conduct was unlawful, if (i) during such time or times that the
Corporation is not subject to Section 2115(b) of the CGCL, such person's action
is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to such person by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise or (ii) during such time or times that the Corporation is subject to
Section 2115(b) of the CGCL, such person's action is based on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared by (x) one or more officers or employees
of the Corporation whom the director believes to be reliable and competent in
the matters presented, (y) counsel, independent accountants or other persons as
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to matters which the director believes to be within such person's professional
or expert competence or (z) a committee of the Board of Directors upon which the
director does not serve, as to matters within its designated authority, which
committee the director believes to merit confidence, so long as, in any such
case, the director acts after reasonable inquiry when the need therefor is
indicated by the circumstances and without knowledge that would cause such
reliance to be unwarranted. The term "another enterprise" as used in this
Section 4 shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the Corporation as a director, officer, employee or
agent. The provisions of this Section 4 shall not be deemed to be exclusive or
to limit in any way the circumstances in which a person may be deemed to have
met the applicable standard of conduct set forth in Section 1 or 2 of this
Article VIII, as the case may be.
SECTION 5. INDEMNIFICATION BY A COURT. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery in the State of Delaware or, at such
time or times that the Corporation is subject to Section 2115(b) of the CGCL, to
the Superior Court in the State of California, for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standards of conduct set forth in
Section 1 or 2 of this Article VIII, as the case may be. Neither a contrary
determination in the specific case under Section 3 of this Article VIII nor the
absence of any determination thereunder shall be a defense to such application
or create a
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presumption that the director or officer seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification
pursuant to this Section 5 shall be given to the Corporation promptly upon the
filing of such application. If successful, in whole or in part, the director or
officer seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses incurred by a
director or officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the Corporation as authorized in this Article VIII.
SECTION 7. NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under the Certificate of Incorporation, any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Section 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the
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DGCL, or, if the Corporation is subject to Section 2115(b) of the CGCL, under
the provisions of the CGCL, or otherwise.
SECTION 8. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power or the obligation to indemnify such person against such
liability under the provisions of this Article VIII.
SECTION 9. CERTAIN DEFINITIONS. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
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references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VIII.
SECTION 10. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
SECTION 11. LIMITATION ON INDEMNIFICATION. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
SECTION 12. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
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ARTICLE IX
AMENDMENTS
SECTION 1. AMENDMENTS. These Bylaws may be altered, amended or
repealed, in whole or in part, or new Bylaws may be adopted by the stockholders
or by the Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of the
meeting of stockholders or Board of Directors, as the case may be. All
amendments must be approved by either sixty-six and two-thirds percent (66 2/3%)
of the outstanding capital stock entitled to vote thereon or by a majority of
the entire Board of Directors then in office.
SECTION 2. ENTIRE BOARD OF DIRECTORS. As used in this Article IX and
in these Bylaws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
* * *
Adopted as of: _____________________
Last Amended as of: ________________
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Exhibit 10.3
TUMBLEWEED SOFTWARE CORPORATION
1993 STOCK OPTION PLAN
ADOPTED SEPTEMBER 30, 1993
APPROVED BY THE SHAREHOLDERS SEPTEMBER 30, 1993
AMENDED FEBRUARY 26, 1996
APPROVED BY THE SHAREHOLDERS FEBRUARY 26, 1996
AMENDED OCTOBER 15, 1996
APPROVED BY THE SHAREHOLDERS AUGUST 5, 1997
AMENDED SEPTEMBER 15, 1998
APPROVED BY THE SHAREHOLDERS OCTOBER 21, 1998
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock
<PAGE>
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Tumbleweed Software Corporation, a California
corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(h) "DIRECTOR" means a member of the Board.
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(i) "DISINTERESTED PERSON" means a Director: (i) who was not during the
one year prior to service as an administrator of the Plan granted or awarded
equity securities pursuant to the Plan or any other plan of the Company or any
of its affiliates entitling the participants therein to acquire
equity securities of the Company or any of its affiliates except as permitted by
Rule 16b-3(c)(2)(i); or (ii) who is otherwise considered to be a "disinterested
person" in accordance with Rule 16b- 3(c)(2)(i), or any other applicable rules,
regulations or interpretations of the Securities and Exchange Commission.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
(1) If the common stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reporting in the Wall Street Journal or such
other source as the Board deems reliable;
(2) If the common stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling
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<PAGE>
prices are not reported, the Fair Market Value of a share of common stock shall
be the mean between the bid and asked prices for the common stock on the last
market trading day prior to the day of determination, as reported in the Wall
Street Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(o) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "OPTION" means a stock option granted pursuant to the Plan.
(q) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(r) "OPTIONED STOCK" means the common stock of the Company subject to
an Option.
(s) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(t) "PLAN" means this 1993 Stock Option Plan.
(u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
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3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons
eligible under the Plan shall be granted Options; when and how each Option shall
be granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option; the provisions of each Option granted (which need not
be identical), including the time or times such Option may be exercised in whole
or in part; and the number of shares for which an Option shall be granted to
each such person.
(2) To construe and interpret the Plan and Options granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(3) To amend the Plan as provided in Section 11.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee shall be Disinterested Persons if required by the provisions
of subsection 3(d). If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board (and references in this Plan to the Board
shall thereafter be to the Committee), subject, however, to such resolutions,
not inconsistent with the provisions of
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<PAGE>
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan. Additionally, prior to the date of the first registration of an equity
security of the Company under Section 12 of the Exchange Act, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to any person or persons and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply (i) prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Disinterested Person shall otherwise comply
with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate three million one hundred eighteen thousand five hundred
(3,118,500) shares of the Company's common stock. If any Option shall for any
reason expire or otherwise terminate, in whole or in part, without having been
exercised in full, the stock not purchased under such Option shall revert to and
again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
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<PAGE>
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
(b) A Director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of the Director
as a person to whom Options may be granted, or in the determination of the
number of shares which may be covered by Options granted to the Director: (i)
the Board has delegated its discretionary authority over the Plan to a Committee
which consists solely of Disinterested Persons; or (ii) the Plan otherwise
complies with the requirements of Rule 16b-3. The Board shall otherwise comply
with the requirements of Rule 16b-3. This subsection 5(b) shall not apply (i)
prior to the date of the first registration of an equity security of the Company
under Section 12 of the Exchange Act, or (ii) if the Board or Committee
expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Option if, at the
time of grant, such person owns (or is deemed to own pursuant to Section 424(d)
of the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such stock at the date of grant and the
Option is not exercisable after the expiration of five (5) years from the date
of grant.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option
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<PAGE>
shall include (through incorporation of provisions hereof by reference in the
Option or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, (A) by delivery to the Company of other common stock of
the Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
common stock of the Company) with the person to whom the Option is granted or to
whom the Option is transferred pursuant to subsection 6(d), or (C) in any other
form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement in connection with the
exercise of an Incentive Stock Option, interest shall be payable at least
annually and shall be charged at the minimum rate of interest necessary to avoid
the treatment as interest, under any applicable provisions of the Code, of any
amounts other than amounts stated to be interest under the deferred payment
arrangement.
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(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option shall
not be transferable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act, or the rules thereunder (a
"QDRO"), and shall be exercisable during the lifetime of the person to whom the
Option is granted only by such person or any transferee pursuant to a QDRO. The
person to whom the Option is granted may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionee, shall thereafter be entitled to exercise
the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary but in each case will provide for vesting of at
least twenty percent (20%) per year of the total number of shares subject to the
Option. The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
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(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the issuance of
the shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option but only within such
period of time as is determined by the Board, and only to the extent that the
Optionee
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<PAGE>
was entitled to exercise it at the date of termination (but in no event later
than the expiration of the term of such Option as set forth in the Option
Agreement). In the case of an Incentive Stock Option, the Board shall determine
such period of time (in no event to exceed three (3) months from the date of
termination, which in no event shall be less than thirty (30) days) when the
Option is granted. If, after termination, the Optionee does not exercise his or
her Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period, which in no event shall be less than six (6) months), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement.
If, at the date of termination, the Optionee is not entitled to exercise his or
her entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (or such shorter period specified in the Option Agreement) (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement), by the Optionee's estate or by a person who acquired
11
<PAGE>
the right to exercise the Option by bequest or inheritance, but only to the
extent the optionee was entitled to exercise the Option at the date of death.
If, at the time of death, the Optionee was not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after death, the Optionee's estate or a person who
acquired the right to exercise the Option by bequest or inheritance does not
exercise the Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the common stock otherwise
issuable to the participant as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of the common stock of
the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available
at all times the number of shares of stock required to satisfy such Options.
12
<PAGE>
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; PROVIDED, HOWEVER,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement.
(c) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the
13
<PAGE>
employ of the Company or any Affiliate (or to continue acting as a Director or
Consultant) or shall affect the right of the Company or any Affiliate to
terminate the employment or relationship as a Director or Consultant of any
Employee, Director, Consultant or Optionee with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by any Optionee during any
calendar year under all plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Plan and outstanding Options will be appropriately
adjusted in the class(es) and maximum number of shares subject to the Plan and
the class(es) and number of shares and price per share of stock subject to
outstanding Options.
(b) In the event of: (1) a merger or consolidation in which the Company
is not the surviving corporation or (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or otherwise
then to the extent permitted by applicable law: (i) any surviving corporation
shall assume any Options outstanding under the Plan or shall substitute similar
Options for those outstanding
14
<PAGE>
under the Plan, or (ii) such Options shall continue in full force and effect. In
the event any surviving corporation refuses to assume or continue such Options,
or to substitute similar options for those outstanding under the Plan, then such
Options shall be terminated if not exercised prior to such event. In the event
of a dissolution or liquidation of the Company, any Options outstanding under
the Plan shall terminate if not exercised prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under
the Plan;
(2) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code); or
(3) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code, comply with the stockholder approval requirements of
Section 162(m) of the Code or to comply with the requirements of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating
15
<PAGE>
to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
Options granted under it into compliance therewith.
(c) Rights and obligations under any Option granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on September 30, 2003. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Option granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board,
and, if required, an appropriate permit has been issued by the Commissioner of
Corporations of the State of California.
16
<PAGE>
INCENTIVE STOCK OPTION
____________________, OPTIONEE:
TUMBLEWEED SOFTWARE CORPORATION (the "Company"), pursuant to its 1993
Stock Option Plan (the "Plan") has this day granted to you, the optionee named
above, an option to purchase shares of the common stock of the Company ("Common
Stock"). This option is intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants and is intended to comply with
the provisions of Rule 701 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
__________ (______). Subject to the limitations contained herein, this option
shall be exercisable with respect to each installment shown below on or after
the date of vesting applicable to such installment, as follows:
NUMBER OF SHARES (INSTALLMENT) DATE OF EARLIEST EXERCISE (VESTING)
2. (a) The exercise price of this option is fifty cents ($0.50) per
share, being not less than the fair market value of the Common Stock on the date
of grant of this option.
(b) Payment of the exercise price per share is due in full
upon exercise of all or any part of each installment which has accrued to you.
You may elect, to the extent permitted by applicable statutes and regulations,
to make payment of the exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash (including
check) at the time of exercise; or
<PAGE>
(ii) Payment pursuant to a program developed under Regulation
T as promulgated by the Federal Reserve Board which results in the receipt of
cash (or check) by the Company prior to the issuance of Common Stock.
3. This option may not be exercised for any number of shares which
would require the issuance of anything other than whole shares.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
5. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on __________
(which date shall be no more than ten (10) years from the date this option is
granted). In no event may this option be exercised on or after the date on which
it terminates. This option shall terminate prior to the expiration of its term
as follows: three (3) months after the termination of your employment with the
Company or an affiliate of the Company (as defined in the Plan) for any reason
or for no reason unless:
(a) such termination of employment is due to your disability,
in which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months following such termination of employment
(or such longer or shorter period, which in no event shall be less than six (6)
months); or
(b) such termination of employment is due to your death, in
which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months after your death; or
(c) during any part of such three (3) month period the option
is not exercisable solely because of the condition set forth in paragraph 4
above, in which event the option shall not terminate until the earlier of the
termination date set forth above or until it shall have been exercisable for an
aggregate period of three (3) months after the termination of employment; or
(d) exercise of the option within three (3) months after
termination of your employment with the Company or with an affiliate would
result in liability under section 16(b) of the Securities Exchange Act of 1934,
in which case the option will terminate on the earlier of (i) the termination
date set forth above, (ii) the tenth (10th) day after the last date upon which
exercise would result in such liability or (iii) six (6) months and ten (10)
days after the termination of your employment with the Company or an affiliate.
However, this option may be exercised following termination of
employment only as to that number of shares as to which it was exercisable on
the date of termination of employment under the provisions of paragraph 1 of
this option.
2
<PAGE>
6. (a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to subparagraph
6(f) of the Plan.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (A) the exercise of this option;
(B) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (C) the disposition of shares acquired upon
such exercise;
(ii) you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of this option that occurs within two (2) years after
the date of this option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of this option; and
(iii) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters. For purposes of this restriction you
will be deemed to own securities which (1) are owned directly or indirectly by
you, including securities held for your benefit by nominees, custodians, brokers
or pledgees; (2) may be acquired by you within sixty (60) days of the Effective
Date; (3) are owned directly or indirectly, by or for your brothers or sisters
(whether by whole or half blood) spouse, ancestors and lineal descendants; or
(4) are owned, directly or indirectly, by or for a corporation, partnership,
estate or trust of which you are a shareholder, partner or beneficiary, but only
to the extent of your proportionate interest therein as a shareholder, partner
or beneficiary thereof. You further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company.
9. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you,
3
<PAGE>
five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the address specified below or at such other address as you
hereafter designate by written notice to the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the .
-------------
Very truly yours,
TUMBLEWEED SOFTWARE CORPORATION
By
---------------------------------------
Duly authorized on behalf of the Board
of Directors
ATTACHMENTS:
1993 Stock Option Plan
Notice of Exercise
4
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
NONE
---------------------
(Initial)
OTHER
------------------------------
------------------------------
------------------------------
, OPTIONEE
-------------------
Address:
-------------------
-------------------
5
<PAGE>
NOTICE OF EXERCISE
Tumbleweed Software Corporation
2010 Broadway, Suite 200
Redwood City, CA 94063
Date of Exercise:
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option (check one): Incentive / / Nonstatutory / /
Stock option dated: ________________________
Number of shares as
to which option is
exercised: ________________________
Certificates to be
issued in name of: ________________________
Total exercise price: $_______________________
Cash payment delivered
herewith: $_______________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1993 Stock Option Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any shares
of Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of grant of this option or within one (1) year after such
shares of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with
respect to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
6
<PAGE>
I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Act. I warrant and represent to the Company that I have no
present intention of distributing or selling said Shares, except as permitted
under the Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for
at least ninety days after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the
Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any legends
reflecting restrictions pursuant to the Company's Articles of Incorporation,
Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative
of the underwriters) in connection with the first underwritten registration of
the offering of any securities of the Company under the Act, I will not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Act (the "Effective Date") as may be requested by the Company or the
representative of the underwriters. For purposes of this restriction I will be
deemed to own securities that (i) are owned directly or indirectly by me,
including securities held for my benefit by nominees, custodians, brokers or
pledgees; (ii) may be acquired by me within sixty (60) days of the Effective
Date; (iii) are owned directly or indirectly, by or for my brothers or sisters
(whether by whole or half blood), spouse, ancestors and lineal descendants; or
(iv) are owned, directly or indirectly, by or for a corporation, partnership,
estate or trust of which I am a shareholder, partner or beneficiary, but only to
the extent of my proportionate interest therein as a shareholder, partner or
beneficiary thereof. I further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
Very truly yours,
------------------
7
<PAGE>
NONSTATUTORY STOCK OPTION
__________________, Optionee:
TUMBLEWEED SOFTWARE CORPORATION (the "Company"), pursuant to its 1993
Stock Option Plan (the "Plan") has this day granted to you, the optionee named
above, an option to purchase shares of the common stock of the Company ("Common
Stock"). This option is not intended to qualify and will not be treated as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants and is intended to comply with
the provisions of Rule 701 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
_______________ (_________). Subject to the limitations contained herein, this
option shall be exercisable with respect to each installment shown below on or
after the date of vesting applicable to such installment, as follows:
NUMBER OF SHARES (INSTALLMENT) DATE OF EARLIEST EXERCISE (VESTING)
2. (a) The exercise price of this option is ___________ ($_____) per
share, being not less than 85% of the fair market value of the Common Stock on
the date of grant of this option.
(b) Payment of the exercise price per share is due in full
upon exercise of all or any part of each installment which has accrued to you.
You may elect, to the extent permitted by applicable statutes and regulations,
to make payment of the exercise price under one of the following alternatives:
<PAGE>
(i) Payment of the exercise price per share in cash
(including check) at the time of exercise; or
(ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which results in the
receipt of cash (or check) by the Company prior to the issuance of Common Stock.
3. This option may not be exercised for any number of shares which
would require the issuance of anything other than whole shares.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
5. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on
_______________, 20____ (which date shall be no more than ten (10) years from
the date this option is granted). In no event may this option be exercised on or
after the date on which it terminates. This option shall terminate prior to the
expiration of its term as follows: three (3) months after the termination of
your employment with the Company or an affiliate of the Company (as defined in
the Plan) for any reason or for no reason unless:
(a) such termination of employment is due to your disability,
in which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months following such termination of employment
(or such longer or shorter period, which in no event shall be less than six (6)
months); or
(b) such termination of employment is due to your death, in
which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months after your death; or
(c) during any part of such three (3) month period the option
is not exercisable solely because of the condition set forth in paragraph 4
above, in which event the option shall not terminate until the earlier of the
termination date set forth above or until it shall have been exercisable for an
aggregate period of three (3) months after the termination of employment; or
(d) exercise of the option within three (3) months after
termination of your employment with the Company or with an affiliate would
result in liability under section 16(b) of the Securities Exchange Act of 1934,
in which case the option will terminate on the earlier of (i) the termination
date set forth above, (ii) the tenth (10th) day after the last date upon which
exercise would result in such liability or (iii) six (6) months and ten (10)
days after the termination of your employment with the Company or an affiliate.
2
<PAGE>
However, this option may be exercised following termination of
employment only as to that number of shares as to which it was exercisable on
the date of termination of employment under the provisions of paragraph 1 of
this option.
6. (a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then require pursuant to paragraph 6 of
the Plan.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the cash payment by you to the Company of any tax withholding
obligation of the Company arising by reason of: (1) the exercise of this option;
(2) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (3) the disposition of shares acquired upon
such exercise; and
(ii) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters. For purposes of this restriction you
will be deemed to own securities which (i) are owned directly or indirectly by
you, including securities held for your benefit by nominees, custodians, brokers
or pledgees; (ii) may be acquired by you within sixty (60) days of the Effective
Date; (iii) are owned directly or indirectly, by or for your brothers or sisters
(whether by whole or half blood) spouse, ancestors and lineal descendants; or
(iv) are owned, directly or indirectly, by or for a corporation, partnership,
estate or trust of which you are a shareholder, partner or beneficiary, but only
to the extent of your proportionate interest therein as a shareholder, partner
or beneficiary thereof. You further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you. By
delivering written notice to the Company, in a form satisfactory to the Company,
you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise this option.
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company. In the event that this option is granted to you in
connection with the performance of services as a consultant or director,
references to employment, employee and similar terms shall be deemed to include
the
3
<PAGE>
performance of services as a consultant or a director, as the case may be,
PROVIDED, HOWEVER, that no rights as an employee shall arise by reason of the
use of such terms.
4
<PAGE>
9. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the address specified
below or at such other address as you hereafter designate by written notice to
the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the _______ day of _______________, 1998.
Very truly yours,
TUMBLEWEED SOFTWARE CORPORATION
By
---------------------------------
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
1993 Stock Option Plan
Notice of Exercise
5
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
NONE
--------------------
(Initial)
OTHER
--------------------------------
--------------------------------
--------------------------------
----------------------------------------
, OPTIONEE
---------------------
Address:
------------------------------
------------------------------
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NOTICE OF EXERCISE
Tumbleweed Software Corporation
2010 Broadway, Suite 200
Redwood City, CA 94063
Date of Exercise:
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option (check one): Incentive / / Nonstatutory / /
Stock option dated: ______________________
Number of shares as
to which option is
exercised: ______________________
Certificates to be
issued in name of: ______________________
Total exercise price: $______________________
Cash payment delivered
herewith: $______________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1993 Stock Option Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any shares
of Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of grant of this option or within one (1) year after such
shares of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with
respect to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
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I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Act. I warrant and represent to the Company that I have no
present intention of distributing or selling said Shares, except as permitted
under the Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for
at least ninety days after the stock of the Company becomes publicly traded
(I.E., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the
Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any legends
reflecting restrictions pursuant to the Company's Articles of Incorporation,
Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative
of the underwriters) in connection with the first underwritten registration of
the offering of any securities of the Company under the Act, I will not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Act (the "Effective Date") as may be requested by the Company or the
representative of the underwriters. For purposes of this restriction I will be
deemed to own securities that (i) are owned directly or indirectly by me,
including securities held for my benefit by nominees, custodians, brokers or
pledgees; (ii) may be acquired by me within sixty (60) days of the Effective
Date; (iii) are owned directly or indirectly, by or for my brothers or sisters
(whether by whole or half blood), spouse, ancestors and lineal descendants; or
(iv) are owned, directly or indirectly, by or for a corporation, partnership,
estate or trust of which I am a shareholder, partner or beneficiary, but only to
the extent of my proportionate interest therein as a shareholder, partner or
beneficiary thereof. I further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
Very truly yours,
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Exhibit 10.4
TUMBLEWEED SOFTWARE CORPORATION
1999 OMNIBUS STOCK INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Tumbleweed Software Corporation
1999 Omnibus Stock Incentive Plan (the "Plan"). The Plan was adopted by the
Board (defined below) on [ ] subject to the approval of the stockholders of the
Company (defined below). The purpose of the Plan is to enable the Company to
attract and retain highly qualified personnel who will contribute to the
Company's success and to provide incentives to Participants (defined below) that
are linked directly to increases in stockholder value and will therefore inure
to the benefit of all stockholders of the Company.
For purposes of the Plan, the following terms shall be defined
as set forth below:
(1) "ADMINISTRATOR" means the Board, or if and to the extent
the Board does not administer the Plan, the Committee in accordance with Section
2 below.
(2) "BOARD" means the Board of Directors of the Company.
(3) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.
(4) "COMMITTEE" means any committee the Board may appoint to
administer the Plan. To the extent necessary and desirable, the Committee shall
be composed entirely of individuals who meet the qualifications referred to in
Section 162(m) of the Code and Rule 16b-3 under the Exchange Act. If at any time
or to any extent the Board shall not administer the Plan, then the functions of
the Board specified in the Plan shall be exercised by the Committee.
(5) "COMPANY" means Tumbleweed Software Corporation, a
Delaware corporation (or any successor corporation).
(6) "DEFERRED STOCK" means the right to receive Stock at the
end of a specified deferral period granted pursuant to Section 7 below.
<PAGE>
(7) "DISABILITY" means the inability of a Participant to
perform substantially his or her duties and responsibilities to the Company or
to any Parent or Subsidiary by reason of a physical or mental disability or
infirmity (i) for a continuous period of six months, or (ii) at such earlier
time as the Participant submits medical evidence satisfactory to the
Administrator that the Participant has a physical or mental disability or
infirmity that will likely prevent the Participant from returning to the
performance of the Participant's work duties for six months or longer. The date
of such Disability shall be the last day of such six-month period or the day on
which the Participant submits such satisfactory medical evidence, as the case
may be.
(8) "ELIGIBLE RECIPIENT" means an officer, director, employee,
consultant or advisor of the Company or of any Parent or Subsidiary.
(9) "EMPLOYEE DIRECTOR" means any director of the Company who
is also an employee of the Company or of any Parent or Subsidiary.
(10) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended from time to time.
(11) "FAIR MARKET VALUE" means, as of any given date, with
respect to any awards granted hereunder, (A) if the Stock is publicly traded,
the closing sale price of a share of Stock on such date as reported in the
Western Edition of the Wall Street Journal, or (B) the fair market value of a
share of Stock as determined in accordance with a method prescribed in the
agreement evidencing any award hereunder, (C) in the case of a Limited Stock
Appreciation Right, the per share "Change in Control Price" (as defined in the
agreement evidencing such Limited Stock Appreciation Right) of the Stock as of
the date of exercise or (D) the fair market value of a share of Stock as
otherwise determined by the Administrator in the good faith exercise of its
discretion.
(12) "INCENTIVE STOCK OPTION" means any Stock Option intended
to be designated as an "incentive stock option" within the meaning of Section
422 of the Code.
(13) "LIMITED STOCK APPRECIATION RIGHT" means a Stock
Appreciation Right that can be exercised only in the event of a "Change in
Control" (as defined in the award evidencing such Limited Stock Appreciation
Right).
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(14) "NON-EMPLOYEE DIRECTOR" means a director of the Company
who is not an employee of the Company or of any Parent or Subsidiary. [EXCLUDE
ANY VC'S]
(15) "NON-QUALIFIED STOCK OPTION" means any Stock Option that
is not an Incentive Stock Option, including any Stock Option that provides (as
of the time such option is granted) that it will not be treated as an Incentive
Stock Option.
(16) "PARENT" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if
each of the corporations in the chain (other than the Company) owns stock
possessing 50% or more of the combined voting power of all classes of stock
in one of the other corporations in the chain.
(17) "PARTICIPANT" means (i) any Eligible Recipient
selected by the Administrator, pursuant to the Administrator's authority in
Section 2 below, to receive grants of Stock Options, Stock Appreciation
Rights, Limited Stock Appreciation Rights, awards of Restricted Stock,
Deferred Stock, or Performance Shares or any combination of the foregoing, or
(ii) any Non-Employee Director who is eligible to receive grants of Stock
Options pursuant to Section 5(9) below.
(18) "PERFORMANCE SHARES" means shares of Stock that are
subject to restrictions based upon the attainment of specified performance
objectives granted pursuant to Section 7 below.
(19) "REGISTRATION STATEMENT" means the registration statement
on Form S-1 filed with the Securities and Exchange Commission for the initial
underwritten public offering of the Company's Stock.
(20) "RESTRICTED STOCK" means shares of Stock subject to
certain restrictions granted pursuant to Section 7 below.
(21) "STOCK" means the common stock, par value $0.001 per
share, of the Company.
(22) "STOCK APPRECIATION RIGHT" means the right pursuant to an
award granted under Section 6 below to receive an amount equal to the excess, if
any, of (A) the Fair Market Value, as of the date such Stock Appreciation Right
or portion thereof is surrendered, of the shares of Stock covered by such right
or such
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<PAGE>
portion thereof, over (B) the aggregate exercise price of such right or such
portion thereof.
(23) "STOCK OPTION" means an option to purchase shares of
Stock granted pursuant to Section 5 below.
(24) "SUBSIDIARY" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company, if
each of the corporations (other than the last corporation) in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered in accordance with the
requirements of Section 162(m) of the Code (but only to the extent necessary and
desirable to maintain qualification of awards under the Plan under Section
162(m) of the Code) and, to the extent applicable, Rule 16b-3 under the Exchange
Act ("Rule 16b-3"), by the Board or, at the Board's sole discretion, by the
Committee, which shall be appointed by the Board, and which shall serve at the
pleasure of the Board.
Pursuant to the terms of the Plan, the Administrator shall
have the power and authority to grant to Eligible Recipients pursuant to the
terms of the Plan: (a) Stock Options, (b) Stock Appreciation Rights or Limited
Stock Appreciation Rights, (c) awards of Restricted Stock, Deferred Stock or
Performance Shares or (d) any combination of the foregoing; PROVIDED, HOWEVER,
that automatic, nondiscretionary grants of Stock Options shall be made to
Non-Employee Directors pursuant to and in accordance with the terms of Section
5(9) below. Except as otherwise provided in Section 5(9) below, the
Administrator shall have the authority:
(a) to select those Eligible Recipients who shall be
Participants;
(b) to determine whether and to what extent Stock
Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, awards of
Restricted Stock, Deferred Stock or Performance Shares or a combination of any
of the foregoing, are to be granted hereunder to Participants;
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<PAGE>
(c) to determine the number of shares of Stock to be
covered by each such award granted hereunder;
(d) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, (x) the restrictions applicable to awards of
Restricted Stock or Deferred Stock and the conditions under which restrictions
applicable to such awards of Restricted Stock or Deferred Stock shall lapse, and
(y) the performance goals and periods applicable to awards of Performance
Shares);
(e) to determine the terms and conditions, not
inconsistent with the terms of the Plan, which shall govern all written
instruments evidencing the Stock Options, Stock Appreciation Rights, Limited
Stock Appreciation Rights, awards of Restricted Stock, Deferred Stock or
Performance Shares or any combination of the foregoing granted hereunder to
Participants; and
(f) to reduce the option price of any Stock Option to
the then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Stock Option has declined since the date such Stock Option was
granted.
The Administrator shall have the authority, in its sole
discretion, to adopt, alter and repeal such administrative rules, guidelines and
practices governing the Plan as it shall from time to time deem advisable; to
interpret the terms and provisions of the Plan and any award issued under the
Plan (and any agreements relating thereto); and to otherwise supervise the
administration of the Plan.
All decisions made by the Administrator pursuant to the
provisions of the Plan shall be final, conclusive and binding on all persons,
including the Company and the Participants.
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<PAGE>
Section 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for
issuance under the Plan shall be [ ] shares. Such shares may consist, in whole
or in part, of authorized and unissued shares or treasury shares. The aggregate
number of shares of Stock as to which Stock Options, Stock Appreciation Rights,
and awards of Restricted Stock, Deferred Stock and Performance Shares may be
granted to any individual during any calendar year may not, subject to
adjustment as provided in this Section 3, exceed [80]% of the shares of Stock
reserved for the purposes of the Plan in accordance with the provisions of this
Section 3.
Consistent with the provisions of Section 162(m) of the Code,
as from time to time applicable, to the extent that (i) a Stock Option expires
or is otherwise terminated without being exercised, or (ii) any shares of Stock
subject to any award of Restricted Stock, Deferred Stock or Performance Shares
granted hereunder are forfeited, such shares of Stock shall again be available
for issuance in connection with future awards under the Plan. If any shares of
Stock have been pledged as collateral for indebtedness incurred by a Participant
in connection with the exercise of a Stock Option and such shares are returned
to the Company in satisfaction of such indebtedness, such shares shall again be
available for issuance in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
affecting the Stock, an equitable substitution or proportionate adjustment shall
be made in (i) the aggregate number of shares of Stock reserved for issuance
under the Plan, (ii) the kind, number and option price of shares of Stock
subject to outstanding Stock Options granted under the Plan, and (iii) the kind,
number and purchase price of shares of Stock subject to outstanding awards of
Restricted Stock, Deferred Stock and Performance Shares granted under the Plan,
in each case as may be determined by the Administrator, in its sole discretion.
Such other substitutions or adjustments shall be made as may be determined by
the Administrator, in its sole discretion. An adjusted option price shall also
be used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right or Limited Stock Appreciation Right related to any
Stock Option. In connection with any event described in this paragraph, the
Administrator may provide, in its sole discretion, for the cancellation of any
outstanding awards and payment in cash or other property therefor.
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<PAGE>
SECTION 4. ELIGIBILITY.
Eligible Recipients who are responsible for, or are in a
position to contribute to the management, growth and/or profitability of the
business of the Company, shall be eligible to be granted Stock Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights, awards of Restricted
Stock, Deferred Stock or Performance Shares or any combination of the foregoing
hereunder. The Participants under the Plan shall be selected from time to time
by the Administrator, in its sole discretion, from among the Eligible Recipients
recommended by the senior management of the Company, and the Administrator shall
determine, in its sole discretion, the number of shares of Stock covered by each
such award.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other
awards granted under the Plan. Any Stock Option granted under the Plan shall be
in such form as the Administrator may from time to time approve, and the
provisions of Stock Option awards need not be the same with respect to each
Participant. Participants who are granted Stock Options shall enter into a
subscription and/or award agreement with the Company, in such form as the
Administrator shall determine, which agreement shall set forth, among other
things, the option price of the Stock Option, the term of the Stock Option and
provisions regarding exercisability of the Stock Option granted thereunder.
The Stock Options granted under the Plan may be of two types:
(i) Incentive Stock Options and (ii) Non-Qualified Stock Options.
The Administrator shall have the authority to grant to any
officer or employee of the Company or of any Parent or Subsidiary (including
directors who are also officers of the Company) Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options (in each case with
or without Stock Appreciation Rights or Limited Stock Appreciation Rights).
Directors who are not also officers of the Company or of any Parent or
Subsidiary, consultants or advisors to the Company or to any Parent or
Subsidiary may only be granted Non-Qualified Stock Options (with or without
Stock Appreciation Rights or Limited Stock Appreciation Rights). To the extent
that any Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option. More than one option may be
granted to the same Participant and be outstanding concurrently hereunder.
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Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Administrator
shall deem desirable:
(1) OPTION PRICE. The option price per share of Stock
purchasable under a Stock Option shall be determined by the Administrator in its
sole discretion at the time of grant but shall not, (i) in the case of Incentive
Stock Options, be less than 100% of the Fair Market Value of the Stock on such
date, (ii) in the case of Non-Qualified Stock Options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, be less than 100% of the Fair Market Value of the Stock on such date and
(iii) in any event, be less than the par value (if any) of the Stock. If a
Participant owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or of any Parent or
Subsidiary and an Incentive Stock Option is granted to such Participant, the
option price of such Incentive Stock Option (to the extent required at the time
of grant by the Code shall be no less than 110% of the Fair Market Value of the
Stock on the date such Stock Option is granted.
(2) OPTION TERM. The term of each Stock Option shall be fixed
by the Administrator, but no Stock Option shall be exercisable more than ten
years after the date such Stock Option is granted; PROVIDED, HOWEVER, that if an
employee owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary and an Incentive Stock
Option is granted to such employee, the term of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be no more than five
years from the date of grant.
(3) EXERCISABILITY. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after the time of grant. The Administrator may provide
at the time of grant, in its sole discretion, that any Stock Option shall be
exercisable only in installments, and the Administrator may waive such
installment exercise provisions at any time, in whole or in part, based on such
factors as the Administrator may determine, in its sole discretion, including
but not limited to in connection with any "change in control" of the Company as
defined in any Stock Option agreement.
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(4) METHOD OF EXERCISE. Subject to paragraph (3) of this
Section 5, Stock Options may be exercised in whole or in part at any time during
the option period, by giving written notice of exercise to the Company
specifying the number of shares of Stock to be purchased, accompanied by payment
in full of the purchase price in cash or its equivalent, as determined by the
Administrator. As determined by the Administrator, in its sole discretion,
payment in whole or in part may also be made (i) by means of any cashless
exercise procedure approved by the Administrator, (ii) in the form of
unrestricted Stock already owned by the Participant which, (x) in the case of
unrestricted Stock acquired upon exercise of an option, have been owned by the
Participant for more than six months on the date of surrender, and (y) has a
Fair Market Value on the date of surrender equal to the aggregate option price
of the Stock as to which such Stock Option shall be exercised, or (iii) in the
case of the exercise of a Non-Qualified Stock Option, in the form of Restricted
Stock or Performance Shares subject to an award hereunder (based, in each case,
on the Fair Market Value of the Stock on the date the option is exercised);
PROVIDED, however, that in the case of an Incentive Stock Option, the right to
make payment in the form of already owned shares of Stock may be authorized only
at the time of grant. If payment of the option price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock or
Performance Shares, the shares received upon the exercise of such Stock Option
shall be restricted in accordance with the original terms of the Restricted
Stock award or Performance Shares award in question, except that the
Administrator may direct that such restrictions shall apply only to that number
of shares of Stock equal to the number of shares surrendered upon the exercise
of such Stock Option. A Participant shall generally have the rights to dividends
and any other rights of a stockholder with respect to the Stock subject to the
Stock Option only after the Participant has given written notice of exercise,
has paid in full for such shares, and, if requested, has given the
representation described in paragraph (1) of Section 10 below.
The Administrator may require the surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent to
the grant of a new Stock Option. Subject to the provisions of the Plan, such new
Stock Option shall be exercisable at the price, during such period and on such
other terms and conditions as are specified by the Administrator at the time the
new Stock Option is granted. Consistent with the provisions of Section 162(m),
to the extent applicable, upon their surrender, Stock Options shall be canceled
and the shares of Stock previously subject to such canceled Stock Options shall
again be available for grants of Stock Options and other awards hereunder.
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(5) LOANS. The Company or any Parent or Subsidiary may make
loans available to Stock Option holders in connection with the exercise of
outstanding Stock Options, as the Administrator, in its sole discretion, may
determine. Such loans shall (i) be evidenced by promissory notes entered into by
the Stock Option holders in favor of the Company or any Parent or Subsidiary,
(ii) be subject to the terms and conditions set forth in this Section 5(5) and
such other terms and conditions, not inconsistent with the Plan, as the
Administrator shall determine, (iii) bear interest at the applicable Federal
interest rate or such other rate as the Administrator shall determine, and (iv)
be subject to Board approval (or to approval by the Administrator to the extent
the Board may delegate such authority). In no event may the principal amount of
any such loan exceed the sum of (x) the option price less the par value (if any)
of the shares of Stock covered by the Stock Option, or portion thereof,
exercised by the holder, and (y) any Federal, state, and local income tax
attributable to such exercise. The initial term of the loan, the schedule of
payments of principal and interest under the loan, the extent to which the loan
is to be with or without recourse against the holder with respect to principal
and/or interest and the conditions upon which the loan will become payable in
the event of the holder's termination of service to the Company or to any Parent
or Subsidiary shall be determined by the Administrator. Unless the Administrator
determines otherwise, when a loan is made, shares of Stock having a Fair Market
Value at least equal to the principal amount of the loan shall be pledged by the
holder to the Company as security for payment of the unpaid balance of the loan,
and such pledge shall be evidenced by a pledge agreement, the terms of which
shall be determined by the Administrator, in its sole discretion; PROVIDED,
HOWEVER, that each loan shall comply with all applicable laws, regulations and
rules of the Board of Governors of the Federal Reserve System and any other
governmental agency having jurisdiction.
(6) NON-TRANSFERABILITY OF OPTIONS. Except under the laws of
descent and distribution, unless otherwise determined by the Administrator, the
Participant shall not be permitted to sell, transfer, pledge or assign any Stock
Option, and all Stock Options shall be exercisable, during the Participant's
lifetime, only by the Participant; PROVIDED, HOWEVER, that the Participant shall
be permitted to transfer one or more Non-Qualified Stock Options to a trust
controlled by the Participant during the Participant's lifetime for estate
planning purposes.
(7) TERMINATION OF EMPLOYMENT OR SERVICE. If a Participant's
employment with or service as a director, consultant or advisor to the Company
or to any Parent or Subsidiary terminates by reason of death, Disability or for
any
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other reason, the Stock Option may thereafter be exercised to the extent
provided in the applicable subscription or award agreement, or as otherwise
determined by the Administrator.
(8) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
that the aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of shares of Stock with respect to which Incentive
Stock Options granted to a Participant under this Plan and all other option
plans of the Company or of any Parent or Subsidiary become exercisable for
the first time by the Participant during any calendar year exceeds $100,000,
such Stock Options shall be treated as Non-Qualified Stock Options.
(9) AUTOMATIC GRANTS OF STOCK OPTIONS TO NON-EMPLOYEE
DIRECTORS. The Company shall grant Non-Qualified Stock Options to Non-Employee
Directors pursuant to this subsection (9), which grants shall be automatic and
nondiscretionary and otherwise subject to the terms and conditions set forth in
this subsection (9) and the terms of the Plan ("Automatic Non-Employee Director
Options"). Each Non-Employee Director who first becomes a director of the
Company following the Effective Date , whether through election by the
stockholders of the Company or appointment by the Board to fill a vacancy shall
be automatically granted a Non-Qualified Stock Option to purchase [ ] shares of
Stock (an "Initial Option"). Thereafter, each Non-Employee Director shall be
automatically granted a Non-Qualified Stock Option to purchase [ ] shares of
Stock (the "Annual Options") on the date immediately following the Company's
annual meeting of stockholders; PROVIDED, HOWEVER, that he or she is then a
director of the Company and, PROVIDED, FURTHER, that as of such date, such
director shall have served on the Board for at least the preceding six (6)
months.
The term of each Automatic Non-Employee Director
Option shall be [TEN (10) YEARS], and the option price per share of Stock
purchasable under an Automatic Non-Employee Director Option shall be no less
than 100% of the Fair Market Value of the Stock on the date of grant, PROVIDED,
HOWEVER, in no event shall the option price per share of Stock purchasable under
an Automatic Non-Employee Director Option be less than the par value (if any) of
the Stock. [Each Initial Option shall vest as to [insert vesting schedule]. Each
Initial Option shall also be immediately exercisable for all of the shares
subject such option; PROVIDED, HOWEVER, that, in the event the Non-Employee
Director's service with the Company terminates for any reason prior to full
vesting of the shares of Stock subject to the Initial Option, any unvested
shares purchased pursuant to such option
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shall be subject to repurchase by the Company at the option price paid per share
of Stock. The Annual Options shall be [fully vested and immediately exercisable
as of the date of grant].
In the event that the number of shares of Stock
available for grant under the Plan is not sufficient to accommodate the
Automatic Non-Employee Director Options, then the remaining shares of Stock
available for Automatic Non-Employee Director Options shall be granted to
Non-Employee Directors on a pro-rata basis. No further grants shall be made
until such time, if any, as additional shares of Stock become available for
grant under the Plan through action of the Board and/or the stockholders of the
Company to increase the number of shares of Stock that may be issued under the
Plan or through cancellation or expiration of awards previously granted
hereunder.
SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights and Limited Stock Appreciation
Rights may be granted either alone ("Free Standing Rights") or in conjunction
with all or part of any Stock Option granted under the Plan ("Related Rights").
In the case of a Non-Qualified Stock Option, Related Rights may be granted
either at or after the time of the grant of such Stock Option. In the case of an
Incentive Stock Option, Related Rights may be granted only at the time of the
grant of the Incentive Stock Option. The Administrator shall determine the
Eligible Recipients to whom, and the time or times at which, grants of Stock
Appreciation Rights or Limited Stock Appreciation Rights shall be made; the
number of shares of Stock to be awarded, the exercise price (or, in the case of
a Limited Stock Appreciation Right, the "Change in Control" price), and all
other conditions of Stock Appreciation Rights and Limited Stock Appreciation
Rights. The provisions of Stock Appreciation Rights and Limited Stock
Appreciation Rights need not be the same with respect to each Participant.
Stock Appreciation Rights and Limited Stock Appreciation
Rights granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator shall deem
desirable:
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(1) AWARDS. The prospective recipient of a Stock Appreciation
Right or Limited Stock Appreciation Right shall not have any rights with respect
to such award, unless and until such recipient has executed an agreement
evidencing the award (a "Stock Appreciation Right Agreement" or "Limited Stock
Appreciation Right Agreement," as appropriate) and delivered a fully executed
copy thereof to the Company, within a period of sixty days (or such other period
as the Administrator may specify) after the award date. Participants who are
granted Stock Appreciation Rights or Limited Stock Appreciation Rights shall
have no rights as stockholders of the Company with respect to the grant or
exercise of such rights.
(2) EXERCISABILITY.
(a) Stock Appreciation Rights that are Free Standing
Rights ("Free Standing Stock Appreciation Rights") shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Administrator at or after grant; PROVIDED, HOWEVER, that no Free Standing
Stock Appreciation Right shall be exercisable during the first six months of its
term, except that this additional limitation shall not apply in the event of a
Participant's death or Disability prior to the expiration of such six-month
period.
(b) Stock Appreciation Rights that are Related Rights
("Related Stock Appreciation Rights") shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 above and this
Section 6 of the Plan; PROVIDED, HOWEVER, that a Related Stock Appreciation
Right granted in connection with an Incentive Stock Option shall be exercisable
only if and when the Fair Market Value of the Stock subject to the Incentive
Stock Option exceeds the option price of such Stock Option; PROVIDED, FURTHER,
that no Related Stock Appreciation Right shall be exercisable during the first
six months of its term, except that this additional limitation shall not apply
in the event of a Participant's death or Disability prior to the expiration of
such six-month period.
(c) Limited Stock Appreciation Rights shall only be
exercised within the 30-day period following a "Change in Control" (as defined
by the Administrator in the Limited Stock Appreciation Right Agreement
evidencing such right) and, with respect to Limited Stock Appreciation Rights
that are Related Rights ("Related Limited Stock Appreciation Rights"), only to
the extent that the Stock Options to which they relate shall be exercisable in
accordance with the provisions of Section 5 above and this Section 6 of the
Plan.
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(3) PAYMENT UPON EXERCISE.
(a) Upon the exercise of a Free Standing Stock
Appreciation Right, the Participant shall be entitled to receive up to, but not
more than, an amount in cash or that number of shares of Stock (or any
combination of cash and shares of Stock) equal in value to the excess of the
Fair Market Value of one share of Stock as of the date of exercise over the
price per share specified in the Free Standing Stock Appreciation Right (which
price shall be no less than 100% of the Fair Market Value of the Stock on the
date of grant) multiplied by the number of shares of Stock in respect of which
the Free Standing Stock Appreciation Right is being exercised, with the
Administrator having the right to determine the form of payment.
(b) A Related Right may be exercised by a Participant
by surrendering the applicable portion of the related Stock Option. Upon such
exercise and surrender, the Participant shall be entitled to receive up to, but
not more than, an amount in cash or that number of shares of Stock (or any
combination of cash and shares of Stock) equal in value to the excess of the
Fair Market Value of one share of Stock as of the date of exercise over the
option price per share specified in the related Stock Option multiplied by the
number of shares of Stock in respect of which the Related Stock Appreciation
Right is being exercised, with the Administrator having the right to determine
the form of payment. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.
(c) Upon the exercise of a Limited Stock Appreciation
Right, the Participant shall be entitled to receive an amount in cash equal in
value to the excess of the "Change in Control Price" (as defined in the
agreement evidencing such Limited Stock Appreciation Right) of one share of
Stock as of the date of exercise over (A) the option price per share specified
in the related Stock Option, or (B) in the case of a Limited Stock Appreciation
Right which is a Free Standing Stock Appreciation Right, the price per share
specified in the Free Standing Stock Appreciation Right, such excess to be
multiplied by the number of shares in respect of which the Limited Stock
Appreciation Right shall have been exercised.
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(4) NON-TRANSFERABILITY.
(a) Free Standing Stock Appreciation Rights shall be
transferable only when and to the extent that a Stock Option would be
transferable under paragraph (6) of Section 5 of the Plan.
(b) Related Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying Stock Option would
be transferable under paragraph (6) of Section 5 of the Plan.
(c) Limited Stock Appreciation Rights shall be
transferable only when and to the extent that a Stock Option would be
transferable under paragraph (6) of Section 5 of the Plan.
(5) TERMINATION OR EMPLOYMENT OR SERVICE
(a) In the event of the termination of employment or
service of a Participant who has been granted one or more Free Standing Stock
Appreciation Rights, such rights shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Administrator
at or after grant.
(b) In the event of the termination of employment or
service of a Participant who has been granted one or more Related Stock
Appreciation Rights, such rights shall be exercisable at such time or times and
subject to such terms and conditions as set forth in the related Stock Options.
(c) In the event of the termination of employment or
service of a Participant who has been granted one or more Limited Stock
Appreciation Rights, such rights shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Administrator
at or after grant.
(6) TERM.
(a) The term of each Free Standing Stock Appreciation
Right shall be fixed by the Administrator, but no Free Standing Stock
Appreciation Right shall be exercisable more than ten years after the date such
right is granted.
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(b) The term of each Related Stock Appreciation Right
shall be the term of the Stock Option to which it relates, but no Related Stock
Appreciation Right shall be exercisable more than ten years after the date such
right is granted.
(c) The term of each Limited Stock Appreciation Right
shall be fixed by the Administrator, but no Limited Stock Appreciation Right
shall be exercisable more than ten years after the date such right is granted.
SECTION 7. RESTRICTED STOCK, DEFERRED STOCK AND PERFORMANCE SHARES.
Awards of Restricted Stock, Deferred Stock or Performance
Shares may be issued either alone or in addition to other awards granted under
the Plan. The Administrator shall determine the Eligible Recipients to whom, and
the time or times at which, awards of Restricted Stock, Deferred Stock or
Performance Shares shall be made; the number of shares to be awarded; the price,
if any, to be paid by the Participant for the acquisition of Restricted Stock,
Deferred Stock or Performance Shares; the Restricted Period (as defined in
paragraph (2) of this Section 7) applicable to awards of Restricted Stock or
Deferred Stock; the performance objectives applicable to awards of Deferred
Stock or Performance Shares; and all other conditions of the awards of
Restricted Stock, Deferred Stock and Performance Shares. Subject to the
requirements of Section 162(m) of the Code, as applicable, the Administrator may
also condition the grant of the award of Restricted Stock, Deferred Stock or
Performance Shares upon the exercise of Stock Options, or upon such other
criteria as the Administrator may determine, in its sole discretion. The
provisions of the awards of Restricted Stock, Deferred Stock or Performance
Shares need not be the same with respect to each Participant. In the sole
discretion of the Administrator, loans may be made to Participants in connection
with the purchase of Restricted Stock under substantially the same terms and
conditions as provided in paragraph (5) of Section 5 of the Plan with respect to
the exercise of Stock Options.
(1) AWARDS AND CERTIFICATES. The prospective recipient of
awards of Restricted Stock, Deferred Stock or Performance Shares shall not have
any rights with respect to any such award, unless and until such recipient has
executed an agreement evidencing the award (a "Restricted Stock Award
Agreement," "Deferred Stock Award Agreement" or "Performance Shares Award
Agreement," as appropriate) and delivered a fully executed copy thereof to the
Company, within a period of sixty days (or such other period as the
Administrator may specify) after
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the award date. Except as otherwise provided below in this Section 7(2), (i)
each Participant who is granted an award of Restricted Stock or Performance
Shares shall be issued a stock certificate in respect of such shares of
Restricted Stock or Performance Shares; and (ii) such certificate shall be
registered in the name of the Participant, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to any such
award.
The Company may require that the stock certificates evidencing
Restricted Stock or Performance Shares granted hereunder be held in the custody
of the Company until the restrictions thereon shall have lapsed, and that, as a
condition of any award of Restricted Stock or Performance Shares, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the Stock covered by such award.
With respect to awards of Deferred Stock, at the expiration of
the Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the Participant, or his legal representative, in a
number equal to the number of shares of Stock covered by the Deferred Stock
award.
(2) RESTRICTIONS AND CONDITIONS. The awards of Restricted
Stock, Deferred Stock and Performance Shares granted pursuant to this Section 7
shall be subject to the following restrictions and conditions:
(a) Subject to the provisions of the Plan and the
Restricted Stock Award Agreement, Deferred Stock Award Agreement or Performance
Shares Award Agreement, as appropriate, governing any such award, during such
period as may be set by the Administrator commencing on the date of grant (the
"Restricted Period"), the Participant shall not be permitted to sell, transfer,
pledge or assign shares of Restricted Stock, Deferred Stock or Performance
Shares awarded under the Plan; PROVIDED, HOWEVER, that the Administrator may, in
its sole discretion, provide for the lapse of such restrictions in installments
and may accelerate or waive such restrictions in whole or in part based on such
factors and such circumstances as the Administrator may determine, in its sole
discretion, including, but not limited to, the attainment of certain performance
related goals, the Participant's termination of employment or service as a
director, consultant or advisor to the Company or any Parent or Subsidiary, the
Participant's death or Disability or the occurrence of a "Change in Control" as
defined in the Restricted Stock Award Agreement, Deferred Stock Award Agreement
or Performance Shares Award Agreement, as appropriate, evidencing such award.
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(b) Except as provided in paragraph (3)(a) of this
Section 7, the Participant shall generally have the rights of a stockholder of
the Company with respect to Restricted Stock or Performance Shares during the
Restricted Period. The Participant shall generally not have the rights of a
stockholder with respect to Stock subject to awards of Deferred Stock during the
Restricted Period; PROVIDED, HOWEVER, that dividends declared during the
Restricted Period with respect to the number of shares of Stock covered by
Deferred Stock shall be paid to the Participant. Certificates for shares of
unrestricted Stock shall be delivered to the Participant promptly after, and
only after, the Restricted Period shall expire without forfeiture in respect of
such awards of Restricted Stock, Deferred Stock or Performance Shares except as
the Administrator, in its sole discretion, shall otherwise determine.
(c) The rights of Participants granted awards of
Restricted Stock, Deferred Stock or Performance Shares upon termination of
employment or service as a director, consultant or advisor to the Company or to
any Parent or Subsidiary terminates for any reason during the Restricted Period
shall be set forth in the Restricted Stock Award Agreement, Deferred Stock Award
Agreement or Performance Shares Award Agreement, as appropriate, governing such
awards.
SECTION 8. AMENDMENT AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under any award theretofore granted without such
Participant's consent, or that, without the approval of the stockholders (as
described below), would:
(1) except as provided in Section 3 of the Plan, increase the
total number of shares of Stock reserved for issuance under the Plan;
(2) change the class of officers, directors, employees,
consultants and advisors eligible to participate in the Plan; or
(3) extend the maximum option period under paragraph (2) of
Section 5 of the Plan.
Notwithstanding the foregoing, stockholder approval under this
Section 8 shall only be required at such time and under such circumstances as
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stockholder approval would be required under Section 162(m) of the Code or other
applicable law, rule or regulation with respect to any material amendment to any
employee benefit plan of the Company.
The Administrator may amend the terms of any award theretofore
granted, prospectively or retroactively, but, subject to Section 3 of Plan, no
such amendment shall impair the rights of any holder without his or her consent.
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for
incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
SECTION 10. GENERAL PROVISIONS.
(1) Shares of Stock shall not be issued pursuant to the
exercise of any award granted hereunder unless the exercise of such award and
the issuance and delivery of such shares of Stock pursuant thereto shall comply
with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act and the requirements of any
stock exchange upon which the Stock may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(2) The Administrator may require each person acquiring shares
of Stock hereunder to represent to and agree with the Company in writing that
such person is acquiring the shares of Stock without a view to distribution
thereof. The certificates for such shares of Stock may include any legend which
the Administrator deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable federal or state securities
law, and the Administrator may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
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(3) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval, if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of the
Plan shall not confer upon any Eligible Recipient any right to continued
employment or service with the Company, as the case may be, nor shall it
interfere in any way with the right of the Company or any Parent or Subsidiary
to terminate the employment or service of any of its Eligible Recipients at any
time.
(4) Each Participant shall, no later than the date as of which
the value of an award first becomes includible in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any
federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.
(5) No member of the Board or the Administrator, nor any
officer or employee of the Company acting on behalf of the Board or the
Administrator, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Administrator and each and any officer or employee
of the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
SECTION 11. STOCKHOLDER APPROVAL; EFFECTIVE DATE OF PLAN.
(1) The grant of any award hereunder shall be contingent upon
stockholder approval of the Plan being obtained within 12 months before or after
the date the Board adopts the Plan.
(2) Subject to the approval of the Plan by the stockholders of
the Company within twelve (12) months before or after the date the Plan is
adopted by the Board, the Plan shall be effective as of the first trading day on
or after the date on which the Securities and Exchange Commission declares the
Company's Registration Statement effective (the "Effective Date").
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SECTION 12. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Limited Stock
Appreciation Right, or awards of Restricted Stock, Deferred Stock or Performance
Shares shall be granted pursuant to the Plan on or after the tenth anniversary
of the Effective Date, but awards theretofore granted may extend beyond that
date.
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Exhibit 10.5
TUMBLEWEED SOFTWARE CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Tumbleweed Software Corporation
1999 Employee Stock Purchase Plan (the "Plan"). The Plan was adopted by the
Board (defined below) on [_____], subject to the approval of the stockholders of
the Company (defined below), which approval was obtained on [_____]. The purpose
of the Plan is to provide Employees (defined below) of the Company (defined
below), its Parent (defined below) and any Designated Subsidiary (defined below)
with the opportunity to purchase Common Stock (defined below) through
accumulated payroll deductions. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Code (defined below), and that the provisions of the Plan be construed in
a manner consistent with the requirements of such Section of the Code.
For purposes of the Plan, the following terms shall be defined
as set forth below:
(a) "ADMINISTRATOR" means the Board, or if and to the extent
the Board does not administer the Plan, the Committee in accordance with Section
11 below.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CHANGE IN CAPITALIZATION" shall mean any increase,
reduction, change or exchange of Shares for a different number of shares and/or
kind of shares or other securities of the Company by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
issuance of warrants or rights, stock dividend, stock split or reverse stock
split, combination or exchange of Shares, repurchase of Shares, change in
corporate structure or otherwise.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time, or any successor thereto.
(e) "COMMITTEE" shall mean a committee appointed by the Board
to administer the Plan and to perform the functions set forth herein.
(f) "COMMON STOCK" shall mean the common stock, $0.001 par
value, of the Company.
(g) "COMPANY" shall mean Tumbleweed Software Corporation, a
Delaware corporation.
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(h) "COMPENSATION" shall mean the fixed salary or wage paid by
the Company to an Employee as reported by the Company to the United States
government for Federal income tax purposes, including an Employee's portion of
salary deferral contributions pursuant to Section 401(k) of the Code and any
amount excludable pursuant to Section 125 of the Code, but excluding any
payments for overtime, shift premium, incentive compensation, bonuses,
commissions, severance pay, expense reimbursements or any credit or benefit
under any employee plan maintained by the Company.
(i) "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence
of any interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of a leave of
absence agreed to in writing by the Company, its Parent or a Designated
Subsidiary, as appropriate, provided that (x) such leave is for a period of not
more than 90 days or (y) reemployment with the Company, its Parent or a
Designated Subsidiary, as appropriate, is guaranteed by contract or statute upon
expiration of such leave.
(j) "DESIGNATED SUBSIDIARY" shall mean a Subsidiary that has
been designated by the Administrator from time to time in its sole discretion as
eligible to participate in the Plan.
(k) "EMPLOYEE" shall mean any person who is customarily
employed for at least twenty (20) hours per week and more than five (5) months
in a calendar year by the Company, its Parent or a Designated Subsidiary.
(l) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
(m) "FAIR MARKET VALUE" as of a particular date shall mean the
fair market value of the Shares as determined by the Administrator in its sole
discretion; PROVIDED, HOWEVER, that (i) if the Shares are admitted to trading on
a national securities exchange, fair market value of the Shares on any date
shall be the closing sale price reported for the Shares on such exchange on such
date or, if no sale was reported on such date, on the last date preceding such
date on which a sale was reported, (ii) if the Shares are admitted to quotation
on the National Association of Securities Dealers Automated Quotation ("Nasdaq")
System or other comparable quotation system and have been designated as a
National Market System ("NMS") security, fair market value of the Shares on any
date shall be the [CLOSING SALE PRICE] reported for the Shares on such system on
such date or, if no sale was reported on such date, on the last date preceding
such date on which a
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sale was reported, or (iii) if the Shares are admitted to quotation on the
Nasdaq System but have not been designated as an NMS security, fair market value
of the Shares on any date shall be the average of the highest bid and lowest
asked prices of the Shares on such system on such date or, if no bid and ask
prices were reported on such date, on the last date preceding such date on which
both bid and ask prices were reported. Notwithstanding anything to the contrary
contained herein, for purposes of the Enrollment Date of the first Offering
Period under the Plan, fair market value of the Shares shall be the initial
price to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial underwritten public offering of the Stock (the
"Registration Statement").
(n) "OFFERING PERIOD" shall mean a period as described in
Section 3 hereof.
(o) "PARENT" shall mean any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of the granting of an option, each of the corporations other than the
Company owns Shares possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain, whether or not such corporation now exists or hereafter acquires the
Company.
(p) "PARTICIPANT" shall mean an Employee who elects to
participate in the Plan pursuant to Section 4 hereof.
(q) "PURCHASE DATE" shall mean the last Trading Day of each
Offering Period.
(r) "PURCHASE PRICE" shall mean an amount equal to the lesser
of (i) 85% of the Fair Market Value of a Share on the Enrollment Date or (ii)
85% of the Fair Market Value of Share on the Purchase Date.
(s) "SHARE" shall mean a share of Common Stock.
(t) "SUBSIDIARY" shall mean any corporation (other than the
Company) in an unbroken chain of corporations, beginning with the Company, if,
at the time of the granting of an option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in
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such chain, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(u) "TRADING DAY" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
SECTION 2. ELIGIBILITY.
(a) Subject to the limitations set forth in Section 2(b)
hereof, any person who is an Employee as of an Enrollment Date shall be eligible
to participate in the Plan in accordance with Section 4 hereof and shall be
granted an option for the Offering Period commencing on such Enrollment Date.
(b) Notwithstanding any provision of the Plan to the contrary,
no Employee shall be granted an option under the Plan (i) if such Employee (or
any other person whose stock would be attributed to such Employee pursuant to
Section 424(d) of the Code) would own stock and/or hold outstanding options to
purchase stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company, its Parent or of any
Subsidiary, or (ii) if such grant would permit such Employee's right to purchase
stock under all employee stock purchase plans (described in Section 423 of the
Code) of the Company, its Parent and of any Subsidiary to accrue at a rate that
exceeds twenty-five thousand dollars ($25,000) of Fair Market Value of such
stock (determined at the time such option is granted) for any calendar year in
which such option would be outstanding. Any amounts received from an Employee
that cannot be used to purchase Shares as a result of this limitation shall be
returned as soon as reasonably practicable to the Employee without interest.
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SECTION 3. OFFERING PERIODS.
The Plan shall be implemented by a series of consecutive
six-month Offering Periods, with a new Offering Period commencing on the first
Trading Day on or after May 15 (beginning in the year 2000) and November 15
(beginning in the year 2000) of each year, or at such other time or times as may
be determined by the Administrator, and ending on the last Trading Day on or
before the following November 14 and May 14, respectively, or at such other time
or times as may be determined by the Administrator; PROVIDED, HOWEVER, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before May 14, 2000. The Plan shall continue until terminated in
accordance with Section 17 hereof. Subject to Section 17 hereof, the
Administrator shall have the power to change the duration and/or the frequency
of Offering Periods with respect to future offerings and shall use its best
efforts to notify Employees of any such change at least fifteen (15) days prior
to the scheduled beginning of the first Offering Period to be affected. In no
event shall any option granted hereunder be exercisable more than twenty-seven
(27) months from its date of grant.
SECTION 4. ENROLLMENT; PARTICIPATION.
(a) On each Enrollment Date, the Company shall commence an
offering by granting each eligible Employee who has elected to participate in
such Offering Period pursuant to Section 4(b) hereof an option to purchase on
the Purchase Date of such Offering Period up to a number of Shares determined by
dividing each Employee's payroll deductions accumulated prior to such Purchase
Date and retained in the Participant's account as of such Purchase Date by the
applicable Purchase Price; provided that in no event shall a Participant be
permitted to purchase during each Offering Period more than [2,500] Shares
(subject to any adjustment pursuant to Section 16 hereof), PROVIDED, FURTHER,
that such purchase shall be subject to the limitations set forth in Sections
2(b) and 10 hereof. Exercise of the option shall occur as provided in Section 6
hereof, unless the Participant has withdrawn pursuant to Section 8 hereof. The
option with respect to an Offering Period shall expire on the Purchase Date with
respect to such Offering Period or the withdrawal date if earlier.
(b) Subject to the limitations set forth in Section 2(b)
hereof, an Employee may elect to become a Participant in the Plan by completing
and filing a
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subscription agreement authorizing the Company to make payroll deductions (as
set forth in Section 5 hereof) at least five (5) business days prior to the
applicable Enrollment Date unless a later time for filing the subscription
agreement is set by the Administrator for all Employees. Unless a Participant,
by giving written notice (or such other notice as may from time to time be
prescribed by the Administrator), elects not to participate with respect to any
subsequent Offering Period, the Participant shall be deemed to have accepted
each new offer and to have authorized payroll deductions in respect thereof
during each subsequent Offering Period.
SECTION 5. PAYROLL DEDUCTIONS.
(a) An Employee may, in accordance with rules and procedures
adopted by the Administrator and subject to the limitation set forth in Section
2(b) hereof, authorize payroll deductions in amounts which are not less than one
percent (1%) and not more than fifteen percent (15%) of such Employee's
Compensation on each payday during the Offering Period. Payroll deductions shall
commence on the first payroll paid following the Enrollment Date, and shall end
on the last payroll paid prior to the Purchase Date of the Offering Period to
which the subscription agreement is applicable, unless sooner terminated by the
Participant's withdrawal from the Plan or termination of the Participant's
Continuous Status as an Employee as provided in Section 8 hereof. A Participant
may increase or decrease his or her rate of payroll deductions at any time
during an Offering Period, but not more frequently than [ONCE] during each
Offering Period, or as may be determined by the Administrator prior to the
commencement of an Offering Period, by giving written notice (or such other
notice as may from time to time be prescribed by the Administrator). The change
in rate shall be effective the first full payroll period following five (5)
business days after the Company's receipt of the new subscription agreement
unless the Company elects to process a given change in rate of payroll
deductions more quickly.
(b) All payroll deductions made by a Participant shall be
credited to such Participant's account under the Plan and shall be withheld in
whole percentages only. A Participant may not make any additional payments into
such account.
(c) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 2(b) hereof, a
Participant's rate of payroll deductions may be decreased by the Company to zero
percent (0%)
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at any time during an Offering Period. Payroll deductions shall recommence at
the rate provided for in such Participant's subscription agreement at the
beginning of the first Offering Period which is scheduled to end the following
calendar year, unless a Participant increases or decreases the rate of his or
her payroll deductions as provided in Section 5(a) hereof, or terminates his or
her participation in the Plan as provided in Section 8 hereof.
SECTION 6. PURCHASE OF SHARES.
Unless a Participant withdraws from the Plan as provided in
Section 8 hereof, such Participant's election to purchase Shares shall be
exercised automatically on each Purchase Date, and the maximum number of whole
Shares subject to option shall be purchased for each Participant at the
applicable Purchase Price with the accumulated payroll deductions in each
Participant's account as of the Purchase Date. No fractional Shares may be
purchased hereunder. Any payroll deductions accumulated in a Participant's
account following the purchase of Shares on any Purchase Date that are not
sufficient to purchase a full Share shall be retained in the Participant's
account for the subsequent Offering Period, subject to earlier withdrawal by the
Participant as provided in Section 8 hereof. Any additional amounts remaining in
a Participant's account following the purchase of Shares on any Purchase Date
that are equal to, or in excess of, the amount required under this Section 6 to
purchase at least one full Share shall be returned to the Participant as soon as
reasonably practicable following the Purchase Date. During a Participant's
lifetime, a Participant's option to purchase Shares hereunder is exercisable
only by the Participant.
SECTION 7. DELIVERY OF SHARES; WITHDRAWAL OR SALE OF SHARES.
As promptly as reasonably practicable after each Purchase
Date, the Company shall either arrange the delivery of the whole Shares
purchased on such date by each Participant to the Participant's brokerage
account or arrange the delivery to the Participant of a share certificate
representing such Shares.
7
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SECTION 8. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw all, but not less than all, of
the payroll deductions credited to such Participant's account (that have not
been used to purchase Shares) under the Plan by giving written notice to the
Company at least five (5) business days prior to the Purchase Date of the
Offering Period in which the withdrawal occurs. Withdrawal of payroll deductions
shall be deemed to be a withdrawal from the Plan. All of the payroll deductions
credited to such Participant's account (that have not been used to purchase
Shares) shall be paid to such Participant promptly after receipt of such
Participant's notice of withdrawal, and such Participant's eligibility to
participate in the Plan for the Offering Period in which the withdrawal occurs
shall be automatically terminated. No further payroll deductions for the
purchase of Shares shall be made for such Participant during such Offering
Period. If a Participant withdraws from an Offering Period, payroll deductions
for such Participant shall not resume at the beginning of the succeeding
Offering Period unless the Participant timely delivers to the Company a new
subscription agreement in accordance with the provisions of Section 4 hereof. A
Participant's withdrawal from an Offering Period shall not have any effect upon
a Participant's eligibility to participate in any similar plan which may
hereafter be adopted by the Company or in succeeding Offering Periods which
commence after termination of the Offering Period from which the Participant
withdraws.
(b) Upon termination of a Participant's Continuous Status as
an Employee during the Offering Period for any reason, including Participant's
voluntary termination, retirement or death, all the payroll deductions credited
to such Participant's account (that have not been used to purchase Shares) shall
be returned to such Participant or, in the case of such Participant's death, to
the person or persons entitled thereto under Section 12 hereof, and such
Participant's option shall be automatically terminated. Such termination shall
be deemed a withdrawal from the Plan.
SECTION 9. INTEREST.
No interest shall accrue on or be payable by the Company with
respect to the payroll deductions of a Participant in the Plan.
8
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SECTION 10. STOCK SUBJECT TO PLAN.
(a) Subject to adjustment upon Changes in Capitalization of
the Company as provided in Section 16 hereof, the maximum aggregate number of
Shares which shall be reserved for sale under the Plan for all Offering Periods
that commence during each fiscal year of the Company occurring during the term
of the Plan shall be 250,0001 Shares. Such Shares shall be available as of the
first day of the first Offering Period that commences in each such fiscal year.
The Shares may consist, in whole or in part, of authorized and unissued Shares
or treasury Shares. If the total number of Shares which would otherwise be
subject to options granted pursuant to Section 2(a) hereof on an Enrollment Date
exceeds the number of Shares then available under the Plan (after deduction of
all Shares for which options have been exercised or are then outstanding), the
Administrator shall make a pro rata allocation of the Shares remaining available
for option grant in as uniform a manner as shall be practicable and as it shall
determine to be equitable. In such event, the Administrator shall give written
notice to each Participant of such reduction of the number of option Shares
affected thereby and shall similarly reduce the rate of payroll deductions, if
necessary.
(b) No Participant shall have rights as a stockholder with
respect to any option granted hereunder until the date on which such Shares
shall be deemed to have been purchased by the Participant in accordance with
Section 6 hereof.
(c) Shares purchased on behalf of a Participant under the Plan
shall be registered in the name of the Participant or, if requested in writing
by the Participant, in the names of the Participant and the Participant's
spouse.
SECTION 11. ADMINISTRATION.
The Plan shall be administered by the Board or a Committee.
The Board or the Committee shall have full power and authority, subject to the
provisions of the Plan, to promulgate such rules and regulations as it deems
necessary for the proper administration of the Plan, to interpret the provisions
and supervise the administration of the Plan, and to take all action in
connection therewith or in relation thereto as it deems necessary or advisable.
Any decision reduced to
- ----------------------
1Reflects post-exchange shares
9
<PAGE>
writing and signed by a majority of the members of the Committee shall be fully
effective as if it had been made at a meeting duly held. The Company shall pay
all expenses incurred in the administration of the Plan. No member of the Board
or Committee shall be personally liable for any action, determination, or
interpretation made in good faith with respect to the Plan, and all members of
the Board or Committee shall be fully indemnified by the Company with respect to
any such action, determination or interpretation.
All decisions, determinations and interpretations of the Board
or Committee shall be final and binding on all persons, including the Company,
its Parent, any Subsidiary, the Employee (or any person claiming any rights
under the Plan through any Employee) and any stockholder of the Company, its
Parent or any Subsidiary.
SECTION 12. DESIGNATION OF BENEFICIARY.
(a) A Participant may file, on forms supplied by and delivered
to the Company, a written designation of a beneficiary who is to receive Shares
and/or cash, if any, remaining in such Participant's account under the Plan in
the event of the Participant's death.
(b) Such designation of beneficiary may be changed by the
Participant at any time by written notice. In the event of the death of a
Participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such Participant's death, the Company shall
deliver the balance of the Shares and/or cash credited to Participant's account
to the executor or administrator of the estate of the Participant or, if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
10
<PAGE>
SECTION 13. TRANSFERABILITY.
Neither payroll deductions credited to a Participant's account
nor any rights with regard to the exercise of an option or any rights to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by the laws of descent and distribution or as
provided in Section 12 hereof) by the Participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 8 hereof.
SECTION 14. USE OF FUNDS.
All payroll deductions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such payroll deductions.
SECTION 15. REPORTS.
Individual accounts shall be maintained by the Company for
each Participant in the Plan. Statements of account shall be given to each
Participant at least annually which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of Shares purchased and the
remaining cash balance, if any.
SECTION 16. EFFECT OF CERTAIN CHANGES.
In the event of a Change in Capitalization or the distribution
of an extraordinary dividend, the Administrator shall conclusively determine the
appropriate equitable adjustments, if any, to be made under the Plan, including
without limitation adjustments to the number of Shares which have been
authorized for issuance under the Plan, but have not yet been placed under
option, as well as the Purchase Price of each option under the Plan which has
not yet been exercised. In the event of a Change in Control of the Company, the
Offering Period shall terminate unless otherwise provided by the Administrator.
11
<PAGE>
SECTION 17. AMENDMENT OR TERMINATION.
The Board may at any time terminate or amend the Plan. Except
as provided in Section 16 hereof, no such termination may adversely affect
options previously granted and no amendment may make any change in any option
theretofore granted which adversely affects the rights of any Participant. To
the extent necessary to comply with Section 423 of the Code (or any successor
rule or provision or any other applicable law, regulation or stock exchange
rule), the Company shall obtain stockholder approval in such a manner and to
such a degree as required.
SECTION 18. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when they are received in a timely manner in the form specified by the
Company at the location, or by the person, designated by the Company for the
receipt thereof.
SECTION 19. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW.
(a) This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the State of
California without giving effect to the choice of law principles thereof, except
to the extent that such law is preempted by Federal law.
(b) The obligation of the Company to sell or deliver Shares
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Administrator.
SECTION 20. WITHHOLDING OF TAXES.
If the Participant makes a disposition, within the meaning of
Section 424(c) of the Code of any Share or Shares issued to Participant pursuant
to Participant's exercise of an option, and such disposition occurs within the
two-year period commencing on the day after the Enrollment Date or within the
one-year period commencing on the day after the Purchase Date, Participant
shall, within
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ten (10) days of such disposition, notify the Company thereof and thereafter
immediately deliver to the Company any amount of Federal, state or local income
taxes and other amounts which the Company informs the Participant the Company
may be required to withhold.
SECTION 21. EFFECTIVE DATE.
Subject to the approval of the Plan by the stockholders of the
Company within twelve (12) months before or after the date the Plan is adopted
by the Board, the Plan shall be effective as of the first Trading Day on or
after the date on which the Securities and Exchange Commission declares the
Company's Registration Statement effective (the "Effective Date").
SECTION 22. TERM OF PLAN.
No option shall be granted pursuant to the Plan and no
Offering Period shall commence on or after the tenth anniversary of the
Effective Date, but options theretofore granted may extend beyond that date.
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Exhibit 10.8
Mr Donald N Taylor
Basset Shaw
Uxmore Road
Checkendon RG8 0TD
England
May 24, 1999
Dear Don
This letter sets out the terms and conditions of your employment with
Tumbleweed Software Inc and Tumbleweed Limited (together called "Tumbleweed").
1 JOB TITLE, DUTIES AND RESPONSIBILITIES
1.1 You are employed by Tumbleweed as:-
1.1.1 Vice President, International
1.1.2 Managing Director, Tumbleweed Software Limited
and will serve in such other senior capacities as may be agreed from
time to time. Your responsibilities will include operations in
Europe, Asia and the global development of our Posta Service Provider
business. Our Country Manager in Japan and our Director of Business
Development in the US will report to you.
1.2 You shall carry out such duties, and exercise such powers and
responsibilities, as are appropriate to your position and as may be
agreed by you from time to time.
1.3 During the period of your employment with Tumbleweed, you shall:
1.3.1 report to Jeff Smith (or such other superior officer of
Tumbleweed Software Inc as the then Chief Executive Officer
shall reasonably specify in writing);
1.3.2 comply with all lawful and reasonable directions as Tumbleweed
shall reasonably give;
2 COMMENCEMENT DATE
2.1 Your employment with Tumbleweed under this Agreement commenced on 7
January 1999.
<PAGE>
2.2 Your continuous employment for statutory purposes also commenced on 7
January 1999.
3 REMUNERATION
3.1 During your employment with Tumbleweed:
3.1.1 Tumbleweed Software Limited will pay you a basic salary at
the rate of $185,000 (currently converted at $1.65 to the L)
per annum which shall be payable to you in the UK in pounds
sterling by equal monthly instalments (and pro rata where you
are only employed during part of a month);
3.1.2 Tumbleweed will pay you bonus and commissions in accordance
with plans agreed with you for each calendar year, such
payments unless otherwise agreed to be made to you gross in
US dollars and to such account in the United States as you
may nominate. The present plan provides for on-target bonus
and commission of US$150,000. You are guaranteed $6,000 in
monthly commissions for your first six months of employment
4 HOURS OF WORK
The Company's standard working hours are 39 hours per week, with one hour for
lunch. The Company does not normally make special payments for additional
hours worked outside the normal hours. You are expected to devote your
full-time attention and abilities to the Company during normal working hours.
5 PLACE OF WORK
Your job is formally based at your home but you will also be expected to work
from Tumbleweed's offices in Reading and elsewhere by agreement, as
reasonable and appropriate to fulfil the needs of the business.
6 EXPENSES
You will be reimbursed all expenses properly incurred in the performance of
your duties. Expense claims should be supported by appropriate receipts and
will be repaid as soon as possible.
7 BENEFITS
7.1 COMPANY CAR
<PAGE>
7.1.1 Tumbleweed will provide a car for your business and private
use up to a monthly lease value of L850;
7.1.2 Tumbleweed will be responsible for insuring, maintaining and
taxing the car and will also reimburse to you all petrol
expenses and business related car expenses such as parking
charges.
7.2 PENSION
7.2.1 Tumbleweed will contribute to such defined pension plan as
you nominate (which may, if you elect, be the group scheme) a
sum equivalent to 8% of your earnings annually (and pro rata
for part thereof).
7.2.2 There is a contracting out certificate in force in relation
to Tumbleweed's company pension scheme.
7.3 INSURANCE PROVISION
LIFE COVER
7.3.1 You will be provided with life assurance cover by Tumbleweed
which provides four times salary in the event of your death.
PERMANENT HEALTH INSURANCE
7.3.2 You will be covered by a permanent health insurance policy
provided by Tumbleweed. It comes into effect after 13 weeks'
continuous absence from work and then provides monthly
payments which, including State Invalidity Benefit, are
equivalent to 70% of your earnings.
PRIVATE MEDICAL COVER
7.3.3 You and your family are fully covered in the UK by
Tumbleweed's private medical and dental insurance plan.
7.3.4 You and your family will also be entitled to participate at
the Company's expense in a comprehensive US private medical
and dental cover scheme.
7.4 STOCK AND STOCK OPTIONS
On joining you have been granted options to purchase 140,000 shares of
Tumbleweed common stock in accordance with the terms of those options.
In addition, you have received an additional grant of 30,000 shares.
<PAGE>
In the event that Tumbleweed Software Inc ("the Company") is Acquired
(as hereinafter defined), 42,500 shares (35,000 from the initial
grant, and 7,500 from the second grant) covered by these options that
have not vested as of the date of such Acquisition shall immediately
become vested without further action of the Company or Optionee;
provided, however, that such accelerated vesting shall not occur if it
could prevent the Acquisition from qualifying for "pooling of
interests" accounting treatment as conclusively determined by the
Company.
An "Acquisition" shall mean any acquisition or merger of the Company
with or into, or any sale of all or substantially all of the Company's
assets to, another corporation in which (i) the shareholders of the
Company immediately prior to such acquisition, merger or sale (the
"transaction") own less than 50% of the voting power of the surviving
corporation after giving effect to such transaction, and (ii) the
board of directors of the surviving corporation immediately after such
transaction is not comprised of at least 50% of the board of directors
of the Company immediately prior to such transaction.
Details of any further stock and stock options to which you are
entitled from time to time will be dealt with separately.
8 HOLIDAYS
8.1 Tumbleweed's holiday year runs from 1 January to 31 December.
8.2 In addition to Bank and other English public holidays you shall be
entitled to 20 working days' holiday in each calendar year which shall
accrue from day to day. After three years' continuous employment your
annual holiday entitlement will increase to 25 working days. You are
entitled to carry over 5 working days holiday from one calendar year
to the next provided it is taken by 1 April in the following year.
8.3 On the termination of your employment you shall be entitled to be paid
in lieu of accrued untaken holiday on a pro rata basis.
9 INCAPACITY
9.1 If you are at any time absent from work due to illness or injury you
shall as soon as reasonably practicable inform the Company of the
reason for your absence and its anticipated duration and shall keep
Tumbleweed informed of such matters at reasonable intervals.
<PAGE>
9.2 If you are absent from work due to illness or injury for more than
seven days (including non-working days), you shall as soon as is
reasonably practicable thereafter send to the Company a statement of
your incapacity signed by a registered medical practitioner and shall
send such further statements, if required, to cover the full period of
absence.
9.3 You are required to complete an absence notification form for all
absences regardless of their duration or reason.
9.4 For Statutory Sick Pay purposes, your qualifying days shall be your
normal working days, which shall be Monday to Friday.
9.5 If you are absent due to illness or injury, provided that you shall
have complied with Tumbleweed's then current regulations relating to
incapacity you shall be paid Company Sick Pay equivalent to your
normal remuneration for up to 13 weeks continuous absence or up to 26
weeks absence in aggregate in any period of twelve months, and
thereafter only for such periods as Tumbleweed in its absolute
discretion (without obligation) considers reasonable in the
circumstances.
9.6 Company Sick Pay payable to you shall be reduced by any Statutory Sick
Pay received by you and any State or other benefits recoverable by you.
10 TERMINATION
10.1 Subject to provisions for earlier termination contained in this
clause, your employment shall continue until terminated by six months
notice in writing by either party.
10.2 Tumbleweed shall be entitled to terminate your employment summarily
without notice if you:
10.2.1 are guilty of gross misconduct;
10.2.2 have committed a serious or repeated breach of this Agreement
other than a breach of a term which (being capable of being
remedied) is remedied by you within a reasonable period of your
being called upon to do so).
10.3 On the termination of your employment for whatever reason, you shall
immediately return to Tumbleweed's office or such other location as
Tumbleweed shall direct all original documents, keys or other property
belonging to or relating to the business of Tumbleweed which are in
your possession or under your control.
<PAGE>
11 DISCIPLINARY AND GRIEVANCE PROCEDURES
11.1 There is no specific disciplinary procedure applicable to your
employment.
11.2 The President and CEO of Tumbleweed Software Inc alone has the right
to dismiss you. You will have the right to appeal (with
representation) to him and from him to the Board of Tumbleweed
Software Inc about any decision to dismiss or take other less serious
disciplinary action. In cases other than following valid dismissal
under clause 10.2 above the Company may decide to suspend you on full
pay and require you not to attend work until an appeal decision has
been made.
11.3 Any grievance which you have in respect of your employment should be
reported to and will normally be dealt with by the President and CEO.
12 RESTRICTIONS
12.1 You shall not during your employment with Tumbleweed without its prior
written consent either directly or indirectly be interested or
concerned whether as principal, partner, employee, shareholder,
director, agent, consultant or otherwise in any other business where
this may materially interfere, conflict or compete with the interests
of Tumbleweed or the efficient performance of your duties.
13 CONFIDENTIALITY
13.1 You will, during your employment with the Company, have access to
confidential information such as technical and business affairs,
future plans, inventions and product knowledge, trade secrets,
marketing information and relationships with customers. You are
expected to protect the confidentiality of this information during and
after your employment with the Company and you must not without
authority or in the normal course of your employment disclose such
information to any third party nor make nor process without authority
copies of documents or other media on which such information is
recorded.
13.2 This clause shall not apply to information which might come into the
public domain other than in consequence of your or any other person's
default.
14 GENERAL
14.1 This Agreement replaces any previous agreement governing your
employment
<PAGE>
with Tumbleweed.
14.2 You warrant that you are not subject to any agreement, arrangement or
understanding or subject to any other restriction which in any way
directly or indirectly restricts or prohibits you from entering into
this Agreement or from fully performing your duties and
responsibilities set out in this Agreement.
14.3 No variation or amendment to this Agreement shall be legally binding
unless and until such variation or amendment is confirmed in writing
and signed by you and a duly authorised representative of Tumbleweed.
14.4 There are no collective agreements which affect your employment.
Please sign and date one copy of this letter by way of acceptance of its
terms and then return it to me.
Yours sincerely
/s/ Jeff Smith
Jeff Smith
President
I agree and accept the terms and conditions of employment set out in this
letter.
SIGNED /s/ Donald N. Taylor
---------------------------------------------------
Donald N Taylor
DATED 3/6/99
---------------------------------------------------
<PAGE>
Exhibit 10.10
INDEMNITY AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of
__________, 1999 by and between Tumbleweed Software Corporation, a California
corporation and, following its reincorporation into Delaware, a Delaware
corporation (the "Corporation"), and _________________ ("Agent"). This Agreement
super sedes any and all indemnity agreement(s) previously entered into between
the Corporation and the Agent.
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation
in his capacity as ______________ of the Corporation;
WHEREAS, the current By-laws and Amended and Restated Articles
of Incorporation of the Corporation, and the Amended and Restated By-laws and
Amended and Restated Certificate of Incorporation to be adopted upon the consum
mation of the Company's currently contemplated initial public offering
(collectively, the "Charter Documents") require the Corporation to indemnify and
advance expenses to its directors and officers to the full extent permitted by
the California Corporations Code, as amended, and, following the Corporation's
reincorporation in Delaware, by the Delaware General Corporation Law, as amended
(as applicable, the "Code") and the Agent intends to continue serving as a
director or officer of the Corporation in part in reliance on such Charter
Documents and Code;
WHEREAS, the Charter Documents and the Code, by their
non-exclusive nature, permit contracts between the Corporation and its agents,
officers, employees and other agents with respect to indemnification of such
persons; and
WHEREAS, in order to induce Agent to continue to serve as
___________ of the Corporation, the Corporation has determined and agreed to
enter into this Agreement with Agent;
NOW, THEREFORE, in consideration of Agent's continued service
as __________ after the date hereof, the parties hereto agree as follows:
<PAGE>
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will
of the Corporation or under separate contract, if any such contract exists, as
__________ of the Corporation or as a director, officer or other fiduciary of an
affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of his or her ability so long as he or
she is duly elected and qualified in accordance with the provisions of the
Charter Documents or the charter documents of such affiliate; provided, however,
that Agent may at any time and for any reason resign from such position (subject
to any contractual obligation that Agent may have assumed apart from this
Agreement) and that the Corporation or any affiliate shall have no obligation
under this Agreement to continue Agent in any such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold
harmless and indemnify Agent to the fullest extent authorized or permitted by
the provisions of the Charter Documents and the Code, as the same may be amended
from time to time (but, only to the extent that such amendment permits the
Corpora tion to provide broader indemnification rights than the Charter
Documents or the Code permitted prior to adoption of such amendment).
3. ADDITIONAL INDEMNITY. In addition to and not in limitation
of the indemnification otherwise provided for herein, and subject only to the
exclu sions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(a) against any and all expenses (including attorneys' fees),
witness fees, damages, judgments, fines and amounts paid in settlement
and any other amounts that Agent becomes legally obligated to pay
(including interest, assessments and other charges paid or payable,
because of, or in preparation for the defense of, any claim or claims
made against or by him or her in connection with any threatened,
pending or completed action, suit or proceed ing, whether civil,
criminal, arbitrational, administrative or investigative (including an
action by or in the right of the Corporation) to which Agent is, was or
at any time becomes a party to or witness or other participant in, or
is threatened to be made a party to or witness or other participant in,
by reason of the fact that Agent is, was or at any time becomes a
director, officer, employee or other agent of Corporation, or is or was
serving or at any time serves at the request of the Corporation as a
director, officer, employee or
2
<PAGE>
other agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to
Agent by the Corporation under the non-exclusivity provisions of the
Code and the Charter Documents.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant
to Section 3 hereof shall be paid by the Corporation:
(a) on account of any claim against Agent for an accounting of
profits made from the purchase or sale by Agent of securities of the
Corporation pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(b) on account of Agent's conduct that was knowingly
fraudulent or deliberately dishonest or that constituted willful
misconduct;
(c) on account of Agent's conduct that constituted a breach of
Agent's duty of loyalty to the Corporation or resulted in any personal
profit or advan tage to which Agent was not legally entitled;
(d) for which payment is actually made to Agent under a valid
and collectible insurance policy or under a valid and enforceable
indemnity clause, bylaw or agreement, except in respect of any excess
beyond payment under such insurance, clause, bylaw or agreement;
(e) if indemnification is not lawful (and, in this respect,
both the Corporation and Agent have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities
arising under the federal securities laws is against public policy and
is, therefore, unenforceable and that claims for indemnification should
be submitted to appropriate courts for adjudication);
(f) if indemnification is not authorized in the specific case
upon a determination that indemnification is proper in the
circumstances because the Agent has met the standard of conduct
required by the Code, as applicable, which determination shall be made
by a majority of directors who are not
3
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party to the action or a committee designated by such directors,
independent legal counsel or the stockholders; or
(g) in connection with any proceeding (or part thereof)
initiated by Agent, or any proceeding by Agent against the Corporation
or its directors, officers, employees or other agents, unless (i) such
indemnification is ex pressly required to be made by law, (ii) the
proceeding was authorized by the Board of Directors of the Corporation,
(iii) such indemnification is provided by the Corporation, in its sole
discretion, pursuant to the powers vested in the Corporation under the
Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations
of the Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this
Agreement to indemnification by the Corporation for a portion of the expenses
(including attorneys' fees), witness fees, damages, judgments, fines and amounts
paid in settlement and any other amounts that Agent becomes legally obligated to
pay in connection with any action, suit or proceeding referred to in Section 3
hereof even if not entitled hereunder to indemnification for the total amount
thereof, and the Corporation shall indemnify Agent for the portion thereof to
which Agent is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty
(30) days after receipt by Agent of notice of the commencement of any action,
suit or proceeding, Agent will, if a claim in respect thereof is to be made
against the Corporation under this Agreement, notify the Corporation of the
commencement thereof; but the omission so to notify the Corporation will not
relieve it from any liability which it may have to Agent otherwise than under
this Agreement. With respect to any such action, suit or proceeding as to which
Agent notifies the Corpora tion of the commencement thereof:
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(a) the Corporation will be entitled to participate therein at
its own expense;
(b) except as otherwise provided below, the Corporation may,
at its option and jointly with any other indemnifying party similarly
notified and electing to assume such defense, assume the defense
thereof, with counsel reasonably satisfactory to Agent. After notice
from the Corporation to Agent of its election to assume the defense
thereof, the Corporation will not be liable to Agent under this
Agreement for any legal or other expenses subse quently incurred by
Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have
the right to employ separate counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from
the Corporation of its assumption of the defense thereof shall be at
the expense of Agent unless (i) the employment of counsel by Agent has
been authorized by the Corporation, (ii) Agent shall have reasonably
concluded that there may be a conflict of interest between the
Corporation and Agent in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and
expenses of Agent's separate counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the
defense of any action, suit or proceeding brought by or on behalf of
the Corporation or as to which Agent shall have made the conclusion
provided for in clause (ii) above; and
(c) the Corporation shall not be liable to indemnify Agent
under this Agreement for any amounts paid in settlement of any action
or claim effected without its written consent, which shall not be
unreasonably withheld. The Corporation shall be permitted to settle any
action except that it shall not settle any action or claim in any
manner which would impose any penalty or limitation on Agent without
Agent's written consent, which may be given or withheld in Agent's sole
discretion.
8. EXPENSES. The Corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by Agent in connection with such proceeding upon receipt of an undertak
ing by or on behalf of Agent to repay said amounts if it shall be determined
ulti mately that Agent is not entitled to be indemnified under the provisions of
this Agreement, the Charter Documents, the Code or otherwise.
5
<PAGE>
9. ENFORCEMENT. Any right to indemnification, advances or
insurance recovery granted by this Agreement or any other agreement or provision
contained in a Charter Document now or hereafter in effect to Agent shall be
enforceable by or on behalf of Agent in any court of competent jurisdiction if
(i) the claim for indemnification, advances or insurance recovery is denied, in
whole or in part, or (ii) no disposition of such claim is made within ninety
(90) days of request therefor. Agent, in such enforcement action, if successful
in whole or in part, shall be entitled to be paid also the expense of
prosecuting his claim. It shall be a defense to any action for which a claim for
indemnification is made under Section 3 hereof (other than an action brought to
enforce a claim for expenses pursuant to Section 8 hereof, provided that the
required undertaking has been tendered to the Corporation) that Agent is not
entitled to indemnification because of the limitations set forth in Section 4
hereof. Neither the failure of the Corporation (including its Board of Directors
or its shareholders) to have made a determination prior to the commence ment of
such enforcement action that indemnification of Agent is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors or its shareholders) that such indemnification is improper
shall be a defense to the action or create a presumption that Agent is not
entitled to indemnifi cation under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agree
ment, the Corporation shall be surrogated to the extent of such payment to all
of the rights of recovery of Agent, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent
by this Agreement shall not be exclusive of any other right which Agent may have
or hereafter acquire under any statute, provision of the Charter Documents,
agreement, vote of shareholders or directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding office.
12. BURDEN OF PROOF. In connection with any determination as
to whether the Agent is entitled to be indemnified hereunder the burden of proof
shall be on the Company to establish that Agent is not so entitled.
13. LIABILITY INSURANCE. To the extent the Company main tains
an insurance policy or policies providing directors' and officers' liability
insurance, Agent shall be covered by such policy or policies, in accordance with
its
6
<PAGE>
or their terms, to the maximum extent of coverage available to any Company
director of officer.
13. SURVIVAL OF RIGHTS.
(a) The rights conferred on Agent by this Agreement shall
continue after Agent has ceased to be a director, officer, employee or
other agent of the Corporation or to serve at the request of the
Corporation as a director, officer, employee or other agent of another
corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise and shall inure to the benefit of Agent's heirs,
executors and administrators.
(b) The Corporation shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substan tially all of the business or assets of the Corporation,
expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to
perform if no such succession had taken place.
14. SEPARABILITY. Each of the provisions of this Agreement is
a separate and distinct agreement and independent of the others, so that if any
provi sion hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Charter Documents, the Code or any other
applicable law.
15. GOVERNING LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California prior to the Com
pany's reincorporation into Delaware, and following such reincorporation, in
accordance with the laws of the State of Delaware.
16. AMENDMENT AND TERMINATION. No amendment,
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by both parties hereto.
17. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed
7
<PAGE>
to be an original but all of which together shall constitute but one and the
same Agreement.
18. HEADINGS. The headings of the sections of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction hereof.
19. NOTICES. All notices, requests, demands and other
communica tions hereunder shall be in writing and shall be deemed to have been
duly given (i) upon delivery if delivered by hand to the party to whom such
communication was directed, (ii) upon the third business day after the date on
which such communication was mailed if mailed by certified or registered mail
with postage prepaid, (iii) upon the first business day after the date on which
such communication was sent by a nationally recognized overnight delivery
service, with delivery confirmed, or (iv) upon delivery by facsimile, with
receipt confirmed, addressed as follows:
(a) If to Agent, at the address indicated on the signature
page hereof.
(b) If to the Corporation, to
Tumbleweed Software Corporation
2010 Broadway
Redwood City, California 94063
Attention: President and CEO
Fax: (650) 369-7197
or to such other address as may have been furnished to Agent by the Corporation.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
TUMBLEWEED SOFTWARE CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
AGENT
By:
---------------------------------------
Print Name:
----------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
Fax:
--------------------------------
9
<PAGE>
Exhibit 21.1
- ----------
Subsidiaries of the Registrant
Tumbleweed Software, K.K. (Japan)
Tumbleweed Software Ltd. (United Kingdom)
<PAGE>
EXHIBIT 23.3
The Board of Directors
Tumbleweed Communications Corp.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
San Francisco, California
December 10, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 698 14,700
<SECURITIES> 0 0
<RECEIVABLES> 281 1,151
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,145 16,405
<PP&E> 851 2,108
<DEPRECIATION> 379 521
<TOTAL-ASSETS> 1,725 19,037
<CURRENT-LIABILITIES> 855 3,020
<BONDS> 369 1,185
0 0
7 12
<COMMON> 4 5
<OTHER-SE> 14,124 40,077
<TOTAL-LIABILITY-AND-EQUITY> 1,725 19,037
<SALES> 2,015 1,701
<TOTAL-REVENUES> 2,015 1,701
<CGS> 931 776
<TOTAL-COSTS> 931 776
<OTHER-EXPENSES> 7,823 7,056
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 41 78
<INCOME-PRETAX> (6,590) (6,013)
<INCOME-TAX> 0 40
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,590) (6,053)
<EPS-BASIC> (1.74) (1.43)
<EPS-DILUTED> (1.74) (1.43)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 57,744
<SECURITIES> 0
<RECEIVABLES> 935
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,430
<PP&E> 2,772
<DEPRECIATION> 673
<TOTAL-ASSETS> 65,059
<CURRENT-LIABILITIES> 4,869
<BONDS> 1,488
0
0
<COMMON> 22
<OTHER-SE> 88,254
<TOTAL-LIABILITY-AND-EQUITY> 65,059
<SALES> 0
<TOTAL-REVENUES> 3,386
<CGS> 0
<TOTAL-COSTS> 1,535
<OTHER-EXPENSES> 13,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,886)
<INCOME-TAX> 136
<INCOME-CONTINUING> (11,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,022)
<EPS-BASIC> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
<PAGE>
EXHIBIT 99.2
[Letterhead of Credit Suisse First Boston Corporation]
December 10, 1999
VIA FEDEX
Board of Directors
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, CA 94063
Consent to Include Fairness Opinion
IN THE JOINT PROXY/REGISTRATION STATEMENT
Dear Sirs:
We hereby consent to the inclusion of and reference to our opinion, dated
November 18, 1999, in the prospectus included in this Registration Statement
on Form S-4 (the ""Registration Statement"") of Tumbleweed Communications
Corp. , a Delaware corporation (the ""Company"") covering common stock to be
issued in connection with the merger of Keyhole Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of the Company, with and into
Worldtalk Corporation, a Delaware corporation. In giving the foregoing
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended
(the ""Securities Act""), or the rules and regulations promulgated
thereunder, nor do we admit that we are experts with respect to any part of
such Registration Statement within the meaning of the term ""experts"" as
used in the Securities Act or the rules and regulations promulgated
thereunder.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Ethan Topper
-----------------------
Name: Ethan Topper
Title: Managing Director
<PAGE>
Exhibit 99.3
December 9, 1999
Board of Directors
Worldtalk Communications Corporation
5155 Old Ironsides Drive
Santa Clara, CA 95054
Gentlemen:
The undersigned hereby consents to the inclusion of its letter, dated
November 18, 1999, addressed to you in the registration statement on Form S-4
(the "Registration Statement") filed by Tumbleweed Communications Corp., a
Delaware corporation ("Tumbleweed"), related to the offer and sale of shares
of Tumbleweed common stock contemplated by the Agreement and Plan of Merger,
dated as of November 18, 1999, by and among Tumbleweed, Worldtalk
Communications Corporation, a Delaware corporation, and a wholly owned
subsidiary of Tumbleweed, and to the references to our firm in the proxy
statement/prospectus forming a part of the Registration Statement. In giving
such consent, the undersigned does not thereby admit that it is within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
VOLPE BROWN WHELAN & COMPANY, LLC
By: /s/ Steven D. Piper
------------------------------
