<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1999
REGISTRATION STATEMENT NO. 333-79687
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TUMBLEWEED COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 7389 94-3183329
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</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)
--------------------------
JEFFREY C. SMITH
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:
<TABLE>
<S> <C>
GREGORY C. SMITH, ESQ. JEFFREY P. HIGGINS, ESQ.
MELANIE D. VINSON, ESQ. WILLIAM A. HOLMES, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP GUNDERSON DETTMER STOUGH VILLENEUVE
525 UNIVERSITY AVENUE, SUITE 220 FRANKLIN & HACHIGIAN, LLP
PALO ALTO, CALIFORNIA 94301 155 CONSTITUTION DRIVE
(650) 470-4500 MENLO PARK, CA 94025
(650) 321-2400
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, 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, please 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(c)
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. / /
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. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
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 AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 13, 1999
4,000,000 Shares
[TUMBLEWEED LOGO]
Tumbleweed Communications Corp.
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $12.00 and $14.00 per share. We have applied to list the shares on The
Nasdaq Stock Market's National Market under the symbol "TMWD."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Tumbleweed
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston Hambrecht & Quist
ING Barings
The date of this prospectus is , 1999.
<PAGE>
Cover Artwork
INSIDE FRONT COVER OF PROSPECTUS:
TUMBLEWEED-Registered Trademark-
A leading provider of Internet communication services that use e-mail networks
to bring business processes online.
[Cover design includes a graphical representation of communication moving from
paper-based processes to electronic interaction.]
Tumbleweed Integrated Messaging Exchange (IME)
IME Platform: The foundation for advanced e-mail solutions--providing the core
technology for integrating e-mail and e-commerce.
IME Applications: Additional features for specific business processes like
financial services and collaboration.
IME Services: Consulting, development and hosting services for quickly
implementing online solutions.
INSIDE BACK COVER OF PROSPECTUS:
Offering the key attributes of secure physical delivery, e-mail and the
worldwide web in a comprehensive Internet-based service.
[Cover design includes a graphical depiction of computer screen shots showing
new package, package options and delivery detail screens]
[Tumbleweed logo]
Bridging the gap between e-mail and e-commerce.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................ 4
RISK FACTORS...................... 7
USE OF PROCEEDS................... 21
DIVIDEND POLICY................... 21
CAPITALIZATION.................... 22
DILUTION.......................... 23
SELECTED CONSOLIDATED FINANCIAL
DATA............................ 24
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....... 25
BUSINESS.......................... 35
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT........................ 50
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.................... 59
PRINCIPAL STOCKHOLDERS............ 61
DESCRIPTION OF CAPITAL STOCK...... 63
SHARES ELIGIBLE FOR FUTURE SALE... 65
UNDERWRITING...................... 66
NOTICE TO CANADIAN RESIDENTS...... 68
LEGAL MATTERS..................... 69
EXPERTS........................... 69
AVAILABLE INFORMATION............. 69
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS...................... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO A DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
PROSPECTUS SUMMARY
Tumbleweed Communications Corp. 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.
Businesses increasingly seek to use e-mail as a means to communicate with
each other and with their customers. International Data Corporation estimates
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. In evaluating
Internet-based solutions to take the place of traditional paper-based
interactions, corporations demand the security, reliability and trackability
that they have come to expect from physical delivery services. The online
alternatives that provide these advanced features exist, but require dedicated
proprietary networks and desktop software. This renders the transition to online
delivery complex and expensive.
Tumbleweed IME utilizes public networks and existing e-mail platforms to
provide an efficient and cost-effective means for businesses to effect secure
communications over the Internet. Tumbleweed IME enables our customers and
service providers to offer high-value business-to-business and
business-to-consumer communications. Using our products and services, our
service provider customers are able to provide their end-user customers with
these communication services on an outsourced basis for which we have agreed to
share ongoing transaction-based revenue. Our service provider customers include
United Parcel Service, Pitney Bowes, Nippon Telegraph and Telephone Corporation
and the International Post Corporation Technology, S.C., an organization which
includes the U.S. Postal Service. These customers, in the aggregate, accounted
for 67% and 44% of our revenue during the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively. In selected strategic markets such
as the financial services, banking and pharmaceutical industries, we also offer
solutions directly to customers that use or intend to use Tumbleweed IME with
their employees, suppliers, partners and customers. Examples of customers that
have recently signed agreements to use Tumbleweed IME in this manner include the
Chase Manhattan Bank, American Express Travel Related Services, Inc. and Datek
Online Holdings Corp.
Tumbleweed IME offers customers the following benefits:
- a complete range of services;
- comprehensive technology;
- multi-level security;
- universal access;
- end-to-end trackability;
- automated delivery;
- personalized communication; and
- a design that accommodates growth.
Our objective is to be the leading provider of secure online communication
services. Key elements of our strategy include:
- establish Tumbleweed IME as the leading application platform for secure
online communication services;
- cultivate a channel of key service providers;
- establish Tumbleweed IME as the international standard for secure online
communication;
- establish Tumbleweed IME in strategic industry markets;
- expand into accounts after first securing business-critical applications;
- create recurring, transaction-based revenue streams; and
- provide comprehensive professional services.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered........................................... 4,000,000 shares
Common stock to be outstanding after the offering.............. 21,203,494 shares
Use of proceeds................................................ We expect to use the net proceeds of this
offering for working capital and other general
corporate purposes. In addition, we may use a
portion of the net proceeds to acquire
complementary products, technologies, or
businesses. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......................... "TMWD"
Dividend policy................................................ We intend to retain all future earnings to fund
the development and growth of our business.
Therefore, we do not anticipate paying cash
dividends on our common stock in the foreseeable
future. See "Dividend Policy."
</TABLE>
The common stock to be outstanding after the offering is based on shares
outstanding as of June 30, 1999. The shares outstanding exclude:
- 2,673,496 shares of common stock issuable as of July 8, 1999 upon the
exercise of outstanding stock options issued under our 1993 stock option
plan at a weighted average exercise price of $0.80 per share;
- 500,000 shares of common stock initially reserved for issuance under our
employee stock purchase plan;
- 4,576,484 shares of common stock reserved for issuance as of July 8, 1999
under our stock incentive plans; and
- 20,973 shares of common stock issuable upon the exercise of a warrant
dated November 30, 1998 that will remain outstanding after this offering
at an exercise price of $3.58 per share.
------------------------
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES THE
FOLLOWING:
- THE REINCORPORATION OF TUMBLEWEED INTO DELAWARE BEFORE THE CONSUMMATION OF
THIS OFFERING, AND A CHANGE IN THE PAR VALUE FOR THE COMMON STOCK FROM NO
PAR VALUE TO $0.001 PER SHARE;
- THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF
COMMON STOCK ON A ONE-TO-ONE BASIS UPON THE CONSUMMATION OF THIS OFFERING;
- THE EXERCISE OF WARRANTS DATED DECEMBER 19, 1997 AND MAY 13, 1999,
RESPECTIVELY, TO PURCHASE 32,307 AND 54,733 SHARES OF COMMON STOCK,
RESPECTIVELY, UPON THE CONSUMMATION OF THIS OFFERING ON A CASHLESS BASIS
AT AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $13.00 PER SHARE; AND
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenue................................................................ $ 729 $ 2,015 $ 999 $ 1,701
Total cost of revenue.................................................. 108 931 372 776
Total operating expenses............................................... 5,477 7,823 4,022 7,056
Operating loss......................................................... (4,856) (6,739) (3,395) (6,131)
Net loss............................................................... (4,691) (6,590) (3,268) (6,053)
Net loss per share
Basic and diluted.................................................. $ (1.41) $ (1.74) $ (0.89) $ (1.43)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares............................................ 3,331 3,797 3,682 4,246
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................................................................. $ 14,700 $ 61,910
Total assets.............................................................................. 19,037 66,247
Long-term obligations, excluding current installments..................................... 1,185 1,185
Total stockholders' equity................................................................ 14,832 62,042
</TABLE>
The above balance sheet data is shown on a pro forma as adjusted basis to give
effect to:
- the conversion of all outstanding shares of preferred stock into shares of
common stock upon the consummation of this offering;
- the exercise of warrants dated December 19, 1997 and May 13, 1999, to
purchase 32,307 and 54,733 shares of common stock, respectively, upon the
consummation of this offering on a cashless basis at an assumed initial
public offering price of $13.00 per share; and
- the sale of the 4,000,000 shares of common stock by Tumbleweed in this
offering at an assumed initial public offering price of $13.00 per share
and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses.
------------------------
WE RECENTLY CHANGED OUR NAME FROM TUMBLEWEED SOFTWARE CORPORATION TO
TUMBLEWEED COMMUNICATIONS CORP. OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT
700 SAGINAW DRIVE, REDWOOD CITY, CALIFORNIA 94063, AND OUR TELEPHONE NUMBER IS
(650) 216-2000. OUR WEB SITE IS WWW.TUMBLEWEED.COM. THE INFORMATION ON OUR WEB
SITE DOES NOT CONSTITUTE PART OF THIS DOCUMENT.
TUMBLEWEED-REGISTERED TRADEMARK- IS OUR REGISTERED TRADEMARK. WE HAVE
APPLIED FOR FEDERAL REGISTRATION OF OUR TRADEMARKS TUMBLEWEED COMMUNICATIONS,
POSTA AND IME. OUR TRADEMARK IME DESIGNATES OUR PRODUCTS THAT PREVIOUSLY WERE
KNOWN AS POSTA. WE INTEND TO CONTINUE USING OUR POSTA TRADEMARK IN JAPAN. THIS
PROSPECTUS ALSO CONTAINS THE TRADEMARKS AND SERVICE MARKS OF THIRD PARTIES.
6
<PAGE>
RISK FACTORS
ANY INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT
DECISION. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO SHOULD
CONSIDER CAREFULLY THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO
PURCHASE SHARES OF OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS:
BECAUSE WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND HAVE A HISTORY OF LOSSES, IT
IS DIFFICULT TO EVALUATE OUR BUSINESS AND WE MAY FACE EXPENSES, DELAYS AND
DIFFICULTIES
Tumbleweed was organized in July 1993 and has only a limited operating
history upon which an evaluation can be based. We began developing Tumbleweed
IME in December 1995, and we launched Tumbleweed IME in July 1997. Before
December 1995, we were engaged in activities related to a technology that was
sold to Novell, Inc. Accordingly, Tumbleweed's prospects must be considered in
light of the risks, expenses, delays and difficulties frequently encountered by
companies in an 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 $6.1 million in the
six months ended June 30, 1999. As of June 30, 1999, we had incurred cumulative
net losses as a C-corporation of $18.2 million. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
WE ANTICIPATE 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.
OUR 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 are 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 pilot to final
production phase and customer implementation of Tumbleweed IME in a given
quarter. Our license revenue is comprised entirely 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 revenue
historically has been comprised 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 this will also cause our quarterly
7
<PAGE>
operating results to fluctuate. Unless and until we have developed a significant
and recurring transaction-based revenue stream from communications that are sent
with our services, our revenue will 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 degree of market and customer acceptance of Tumbleweed IME as a
cost-effective solution for secure online communication services;
- our ability to upgrade, develop and maintain our systems and
infrastructure;
- the amount and timing of operating costs and capital expenditures relating
to our business, operations and infrastructure, including our
international operations;
- the announcement or introduction of new or enhanced services and products
in the secure online communications or document delivery markets;
- our ability to recruit new skilled personnel in a timely and effective
manner; and
- conditions specific to our industry and related fluctuations in stock
prices.
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE AND
THE FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS COULD HARM OUR 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. Four
customers comprised approximately 86% of our revenue in the six months ended
June 30, 1999, and five customers comprised approximately 89% of our revenue in
1998. We expect that a small number of customers will continue to account for a
majority of our revenue for the foreseeable future.
OUR SERVICE PROVIDER CUSTOMERS MAY COMPETE WITH US OR FAIL TO PROMOTE OUR
PRODUCT
To date, we have generated most of our revenue from contracts with a very
limited number of service provider customers, including the United Parcel
Service, International Post Corporation Technology, S.C., Pitney Bowes and
Nippon Telegraph and Telephone Corporation, 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
8
<PAGE>
provider customers also may compete with our secure online communication
services through their traditional physical delivery channels.
IF WE DO NOT SECURE KEY RELATIONSHIPS WITH ENTERPRISE CUSTOMERS, OUR 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 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 OUR 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 recently filed
with the Postal Rate Commission 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.
9
<PAGE>
THE TRADITIONAL AND INTERNET DELIVERY SERVICES INDUSTRIES ARE HIGHLY
COMPETITIVE, AND WE 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 area 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 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. These companies could include America Online,
Inc./Netscape Communications Corporation, Critical Path Inc., International
Business Machines Corporation/Lotus Development Corporation, Microsoft
Corporation and VeriSign, Inc.
The market for secure online communication services is new and rapidly
evolving and is 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.
WE HAVE A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM OUR 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.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY
Although we regard our patents, copyrights and similar intellectual property
as critical to our success, we may not be able to obtain the protection we seek
on commercially reasonable terms, if at all. It may also be possible for
unauthorized third parties to copy selected portions of our products or obtain
and use information that we regard as proprietary. In particular, we rely on the
utility patent we
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obtained relating to the web-based delivery method as critical to our
competitive position. Attempts by competitors to utilize this or our other
intellectual property could undermine our ability to retain or secure customers
on favorable terms, if at all. In addition, competing companies could
independently develop similar technology. 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
attempts to protect our proprietary rights in the U.S. or abroad may not be
adequate. In particular, we are currently engaged in litigation to enforce our
intellectual property rights, which may not be successful and will result in
substantial expenditures of resources to pursue. See "Business--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 pending patent applications, as well as patents we may
seek in the future, ultimately may not be issued with the scope of the claims we
are seeking 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 our products and services.
ANY CLAIM OF INFRINGEMENT BY THIRD PARTIES COULD BE COSTLY TO DEFEND
Intellectual property claims could be time consuming to defend, result in
costly litigation, divert management's attention and resources and cause product
shipment delays. These claims could also require us to enter into royalty or
license agreements. A successful claim of product infringement against us could
harm our business and prospects. We could face a claim of infringement by third
parties with respect to our current or future products or services. In addition,
we may increasingly become subject to claims of intellectual property
infringement by third parties as the number of our competitors grows and the
functionality of their products and services increasingly overlap with ours.
Because we are in a new and evolving market, customers may demand features which
will subject us to a greater likelihood of claims of infringement.
IF WE DO NOT SUCCESSFULLY MANAGE ANY GROWTH WE EXPERIENCE, INCREASED STRAIN ON
OUR RESOURCES COULD HARM OUR BUSINESS
Although we may be unable to expand our operations in the future, our
business model contemplates a period of sustained and rapid operational growth.
If we are unable to manage growth efficiently, we will not have adequate
resources to maintain and secure key relationships contemplated by our business
plan and our business and prospects could be harmed. Our growth has subjected us
to, and will continue to subject us to, increased capital and operating
commitments. For instance, we have recently entered into a new operating lease
for significantly larger facilities. Moreover, our plan for additional customer
licenses and product and service introductions and enhancements and the timing
of implementing this plan has placed, and will continue to place, a significant
strain on our personnel, systems and resources. To manage further growth of our
operations and personnel and meet our present and future commitments, we must:
- improve existing operations and implement new operations;
- maintain and enhance our customer service; and
- expand, retain, train and manage our growing employee base.
Furthermore, our management will be required to maintain and expand its
relationships with our customers and other third parties necessary to our
business. Our current and planned systems and personnel levels may not be
adequate to support our 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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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 Japan and the United Kingdom. In the six months
ended June 30, 1999, we derived 71% of our revenue from Hikari Tsushin, the
International Post Corporation Technology, S.C. and Canon, all of which are
based abroad. 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;
- 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 particular, our
contract with Hikari Tsushin is denominated in Japanese yen, and 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.
WE ARE DEPENDENT ON TECHNOLOGIES PROVIDED BY THIRD PARTIES, AND THE TERMINATION
OF OUR RELATIONSHIPS WITH THEM COULD INCREASE OUR COSTS, DELAY PRODUCT
DEVELOPMENT AND HARM OUR REPUTATION
We have developed Tumbleweed IME partially based on selected technologies
developed by third parties that we have licensed under non-exclusive agreements.
The inability to obtain new contractual relationships or maintain existing
relationships could increase our cost of revenue, delay product development,
damage our relationships with our customers and divert our resources, which
could harm our business and prospects. In particular, our ability to provide
data security is critical to our success. For certain security algorithms, we
use proven industry standard technology licensed in perpetuity from RSA Data
Security, Inc. We in turn focus our effort on applying these fundamental
algorithms as part of an overall messaging solution, and offer today several
levels of security which can fit the needs of a broad range of customers. In
addition, we license Adobe Acrobat technology from Adobe Systems Incorporated,
which we use as the basis for creating files in Adobe's portable document
format, under a renewable agreement that expires in April 2000. Our existing
agreements may be terminated by the other parties to these contracts, or may not
be renewed on favorable terms. In addition, we may not be able to license new
technologies on favorable terms, if at all.
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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, customization 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 customization 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.
OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES
Our success depends on the confidence of our customers and their end-users
in our ability to securely transmit confidential information over the Internet.
Any failure to provide secure online communication services could harm our
business and reputation. 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. Despite our focus on Internet security, we may not be able to stop
unauthorized attempts to gain access to or disrupt the transmission of
communications by our 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
our products to protect data contained in customer databases and information
being transferred.
Although we generally limit warranties and liabilities relating to security
in our customer contracts, our customers or their end-users may seek to hold us
liable for any losses suffered as a result of unauthorized access to their
communications. We may not have adequate insurance to cover these losses. We may
be required to expend significant capital and other resources to protect against
these security breaches or to alleviate the problems they cause. 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 our products. These concerns also could cause current customers to cease
using Tumbleweed IME as a means of providing secure online communication
services. In either case, this could harm our business and prospects. Our
security measures may not be sufficient to prevent security breaches, and
failure to prevent security breaches could harm our reputation, business and
prospects.
OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO VIRUSES AND OTHER
DISRUPTIONS
Despite the implementation of data center and network security measures by
our customers and other third parties, their servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may not be able to prevent any or all of these disruptions, and our failure to
do so could limit use of our product, cause us to incur substantial expenses,
and otherwise harm our 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 our security measures could misappropriate proprietary information
or cause interruptions in Tumbleweed's, our customers' or their end-users'
operations. 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 us to
litigation or a significant loss of revenue.
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WE HAVE HAD LIMITED CUSTOMER FEEDBACK IN THE DESIGN OF OUR PRODUCTS AND OUR
PRODUCTS MAY NOT BE SATISFACTORILY DESIGNED TO MEET CUSTOMER NEEDS
Our revenue depends on the number of customers who use Tumbleweed IME to
provide secure online communication services. Accordingly, the satisfactory
design of our products and products licensed from third parties is critical to
our business, and any significant product design limitations or deficiencies
could harm our business and market acceptance. To date, the features and
functionalities reflected in our products and services have been based on our
internal design efforts and on feedback from a limited number of customers and
potential customers. This limited feedback may not have resulted in an adequate
assessment of customer requirements. Therefore, currently specified features and
functionality of our products and services may not satisfy current or future
customer demands. Furthermore, even if we identify the feature set required by
customers in our market, we 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 OUR BUSINESS
Difficulties in product design, performance and reliability could result in
lost revenue, delays in customer acceptance or lawsuits and would be detrimental
to our market reputation. Software products as complex as those offered by
Tumbleweed, 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. Our 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 which we consider minor may be considered
serious by our customers.
If our internal quality assurance testing or customer testing reveals
performance issues and/or desirable feature enhancements, we could postpone the
development and release of updates or enhancements to our current products,
future products or improvements in our services. We 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 our business
and prospects. In addition, product defects may expose us to product liability
claims, for which we may not have sufficient product liability insurance. A
successful suit against us could harm our business and financial condition.
WE MAY ENCOUNTER SYSTEM FAILURE, AND A DISASTER COULD SEVERELY DAMAGE OUR
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.
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IF WE LOSE THE SERVICES OF OUR KEY MANAGEMENT PERSONNEL, INCLUDING OUR
CO-FOUNDERS OR KEY SALES EXECUTIVES, OUR ABILITY TO DEVELOP OUR 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, 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.
WE MAY BE UNABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL, WHICH COULD HARM OUR
BUSINESS AND PRODUCT DEVELOPMENT
We also must continue to identify, recruit, hire, train, retain and motivate
other highly skilled technical, managerial, editorial, marketing and customer
service personnel. Competition for these personnel is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently qualified
personnel. In particular, we may encounter difficulties in recruiting a
sufficient number of qualified software developers, and we may not be able to
retain these developers, which could harm our relationships with existing and
future customers at a critical stage of development. The failure to recruit and
retain necessary technical, managerial, editorial, merchandising, marketing and
customer service personnel could harm our business and our ability to obtain new
customers and develop new products.
POTENTIAL YEAR 2000 PROBLEMS AND PURCHASING PATTERNS COULD HARM OUR BUSINESS AND
REDUCE SALES
Our customers, potential customers, and end-users may need to upgrade their
computer systems and software products to ensure that their installed computer
systems and software products can distinguish between 20th century dates and
21st century dates. Their 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.
Our computer systems use third-party equipment and software which may not be
Year 2000 compliant. In addition, our products and services are integrated into
the systems of our customers involving sophisticated hardware and complex
software products, which may not be Year 2000 compliant. We have no means of
ensuring that our customers and their end-users will be Year 2000 ready.
Moreover, Year 2000 readiness among international customers and in international
operations may be relatively more problematic as fewer resources may have been
devoted to addressing these issues in other countries. The failure of our
computer systems or the computer systems of our customers or Internet service
providers could cause us to incur significant expenses to remedy problems, could
reduce our revenue or could otherwise damage our business.
If we discover significant Year 2000 errors or defects, we could incur
substantial costs and our operations could be seriously disrupted. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. We could 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, we 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 we offer. To the extent that Year
2000
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issues cause significant postponements or cancellations of decisions to purchase
our products or services, our business and prospects would suffer. We cannot
reasonably estimate at this time the amount of potential liability and lost
revenue that could result from Year 2000 issues. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
OUR BUSINESS IS SUBJECT TO CONTINUOUS TECHNOLOGICAL CHANGE, AND WE MAY NOT BE
ABLE TO RESPOND SUCCESSFULLY TO THE CHANGING NEEDS OF OUR INDUSTRY
The secure online communication services industry is 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 our existing services, proprietary technology and
systems obsolete. If we are unable to adapt or respond in a timely manner to
changing market conditions or customer requirements for technical, legal,
financial or other reasons, our business and prospects could be harmed. We must
continually improve the performance, features and reliability of our services,
particularly in response to competitive offerings. Because the technologies of
our partners, such as Oracle databases, Netscape web servers and digital
certificate and encryption technology from VeriSign and RSA provide a foundation
for our products, changes in those technologies and markets could affect the
demand for Tumbleweed IME. We must also enhance our existing services, develop
new services and technologies that address the increasingly sophisticated and
varied needs of our current and prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. 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. We may
not be able to utilize new technologies effectively or adapt our products to
customer requirements or emerging industry standards.
OUR EFFORTS TO ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRAND 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.
OUR BUSINESS WILL BE HARMED IF WE CANNOT MEET OUR 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 anticipated proceeds of this 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;
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- 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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, 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 adversely affected. This
in turn could adversely affect the level of Internet usage and also the level of
utilization of our products and services. In addition, critical issues
concerning the commercial use of the Internet, such as cost, ease of use and
access, and privacy issues, remain unresolved and could have a material adverse
effect on both the growth of the Internet and our business.
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
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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 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 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. 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, 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 were 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 cost 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 telephony 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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RISKS RELATED TO THIS OFFERING:
FUTURE SALES OF COMMON STOCK COULD DEPRESS OUR STOCK PRICE
We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will depress the market price for our common stock
or our ability to raise capital by offering equity securities. Sales of
substantial amounts of common stock, or the perception that these sales could
occur, may depress prevailing market prices for the common stock.
After this offering, approximately 21,203,494 shares of common stock will be
outstanding. All of the shares sold in this offering will be freely tradeable
except for any shares purchased by affiliates of Tumbleweed. The remaining
shares of common stock outstanding after this offering will be restricted as a
result of securities laws or lock-up agreements. These remaining shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
As of the date of this prospectus.............................................................. --
February 2, 2000............................................................................... 10,866,222
At various times thereafter upon expiration of applicable holding periods...................... 6,337,272
</TABLE>
Credit Suisse First Boston may release all or a portion of the shares
subject to lock-up agreements at any time without notice. See "Underwriting" and
"Shares Eligible for Future Sale."
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against the company. The
institution of this type of litigation against us could result in substantial
costs and a diversion of our management's attention and resources, which could
harm our business and prospects.
OUR STOCK HAS NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING AND YOU MAY NOT BE
ABLE TO SELL YOUR SHARES ABOVE THE PRICE YOU PAID
We cannot predict the extent to which investor interest in Tumbleweed will
lead to the development of a trading market or how liquid that market might
become. Before this offering, there has been no public market for our common
stock, and you may not be able to resell your shares at or above the initial
public offering price. We may sell a substantial amount of our common stock in
this offering to a limited number of institutional investors, which, together
with the effect of shares subject to lock-up agreements or other restrictions,
could limit the timely development of an active trading market. As a result,
investors may experience greater price volatility and less efficient execution
of buy and sell orders. The initial public offering price for the shares of our
common stock will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. See "Underwriting."
YOU WILL NOT BE ABLE TO CONTROL CORPORATE EVENTS BECAUSE OUR MANAGEMENT AND
EXISTING STOCKHOLDERS WILL OWN A MAJORITY OF OUR STOCK AFTER THE OFFERING
Upon completion of this offering, our present directors, executive officers
and principal stockholders as a group will beneficially own approximately 72.9%
of the outstanding common stock, or 70.9% if the underwriters' over-allotment
option is exercised. Accordingly, if all or particular stockholders were to act
together, they would be able to exercise significant influence over or control
the election of our board of directors, our management and policies and the
outcome of particular
19
<PAGE>
corporate transactions or other matters submitted to our stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of our assets.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD
DISCOURAGE OR PREVENT AN ACQUISITION OF TUMBLEWEED, WHICH COULD DEPRESS OUR
STOCK PRICE
Provisions of the certificate of incorporation and bylaws that we intend to
adopt before the closing of this offering may inhibit changes of control that
are not approved by our board of directors. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. In particular, the provisions we intend to adopt will classify our
board of directors, prohibit stockholder action by written consent. These
provisions will also require advance notice for nomination of directors and
stockholders' proposals. In addition, as a Delaware corporation, we will be
subject to Section 203 of the Delaware General Corporation Law. In general, this
law prevents a person who becomes the owner of 15% or more of the corporation's
outstanding voting stock from engaging in specified business combinations for
three years unless specified conditions are satisfied. In addition, our
certificate of incorporation will allow our board of directors to issue
preferred stock without further stockholder approval. This could have the effect
of delaying, deferring or preventing a change in control. The issuance of
preferred stock also could effectively limit the voting power of the holders of
our common stock. The provisions of our certificate of incorporation and bylaws,
as well as provisions of Delaware law, may discourage or prevent an acquisition
or disposition of our business.
OUR CURRENT EXPECTATIONS AND PROJECTIONS CONTAINED IN FORWARD-LOOKING STATEMENTS
MAY NOT BE REALIZED, WHICH COULD HARM OUR BUSINESS AND REDUCE OUR STOCK PRICE
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including,
- implementing our business strategy;
- attracting and retaining customers;
- obtaining and expanding market acceptance of the products and services we
offer;
- forecasts of Internet usage and the size and growth of relevant markets;
- rapid technological changes in our industry and relevant markets; and
- competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus. We assume
no obligation to update them or to explain the reasons why actual results may
differ.
20
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares of our
common stock in this offering of approximately $47.2 million, based upon an
assumed offering price of $13.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that we
will receive net proceeds from this offering of $54.5 million on the same basis.
The principal purposes of this offering are to obtain additional capital and to
create a public market for our common stock. We expect to use the net proceeds
from this offering for working capital and other general corporate purposes. In
addition, we may use a portion of the net proceeds to acquire complementary
products, technologies, or businesses; however, we currently have no commitments
or agreements and are not involved in any negotiations with respect to any such
transactions.
We will have significant discretion in the use of the net proceeds of this
offering. Investors will be relying on the judgment of our management regarding
the application of the proceeds of this offering. Pending use of the net
proceeds as discussed above, we intend to invest these funds in short-term,
interest-bearing, investment-grade obligations.
DIVIDEND POLICY
We declared a substantial dividend in connection with the sale of our prior
technology in March of 1994. However, we presently anticipate that we will
retain any future earnings to finance the development and expansion of our
business and provide working capital. Therefore, we do not anticipate any cash
dividends on our common stock for the foreseeable future. The terms of our
existing credit facility prohibit the payment of dividends in specified
circumstances.
21
<PAGE>
CAPITALIZATION
The first column of the following table indicates our actual capitalization
as of June 30, 1999. The second column indicates pro forma capitalization upon
consummation of this offering assuming the conversion of outstanding shares of
our preferred stock into common stock. Pro forma capitalization also reflects
the exercise of warrants dated December 19, 1997 and May 13, 1999 to purchase
32,307 and 54,733 shares of common stock, respectively, on a cashless basis at
an assumed initial public offering price of $13.00 per share. The third column
shows our pro forma capitalization as adjusted after giving effect to the sale
of shares of common stock offered by us in this offering at the assumed initial
public offering price. Our pro forma capitalization as adjusted also reflects
the application of the estimated net proceeds from this offering. This
information should be read in conjunction with our Consolidated Financial
Statements and the related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, excluding current installments................ $ 1,185 $ 1,185 $ 1,185
Stockholders' equity:
Convertible preferred stock, 29,000,000 shares authorized,
12,331,434 shares issued and outstanding, actual; 10,000,000
shares authorized, no shares issued and outstanding, pro forma
and pro forma as adjusted........................................ 12 -- --
Common stock, 43,000,000 shares authorized, 4,785,020 shares issued
and outstanding, actual; 100,000,000 shares authorized, pro forma
and pro forma as adjusted; 17,203,494 shares issued and
outstanding, pro forma; 21,203,494 shares issued and outstanding,
pro forma as adjusted............................................ 5 17 21
Additional paid-in capital......................................... 40,077 40,077 87,283
Deferred compensation.............................................. (7,082) (7,082) (7,082)
Accumulated other comprehensive income............................. 4 4 4
Accumulated deficit................................................ (18,184) (18,184) (18,184)
------------- ------------- -------------
Total stockholders' equity....................................... 14,832 14,832 62,042
------------- ------------- -------------
Total capitalization........................................... $ 16,017 $ 16,017 $ 63,227
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The shares of common stock outstanding in the actual, pro forma and pro
forma as adjusted columns exclude:
- 2,673,496 shares of common stock issuable as of July 8, 1999 upon the
exercise of outstanding stock options at a weighted average exercise price
of $0.80 per share;
- 500,000 shares of common stock initially reserved for issuance under our
employee stock purchase plan;
- 4,576,484 shares of common stock reserved for issuance as of July 8, 1999
under our stock incentive plans; and
- 20,973 shares of common stock issuable upon the exercise of a warrant
dated November 30, 1998 that will remain outstanding after this offering
at an exercise price of $3.58 per share.
22
<PAGE>
DILUTION
The pro forma net tangible book value of Tumbleweed as of June 30, 1999 was
approximately $14,832,000, or $0.86 per share of common stock. The table below
contains additional information concerning dilution to new investors. Pro forma
net tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by 17,203,494. This number represents the number
of shares of common stock that would have been outstanding at June 30, 1999
after giving effect to the conversion of all outstanding shares of preferred
stock. This number also reflects the exercise of warrants dated December 19,
1997 and May 13, 1999 to purchase 32,307 and 54,733 shares, respectively, of
common stock on a cashless basis at an assumed public offering price of $13.00
per share. After giving effect to the sale by Tumbleweed of the shares of common
stock offered in this offering at the assumed public offering price,
Tumbleweed's pro forma net tangible book value at June 30, 1999 would have been
$62,042,000, or $2.93 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.07 per share and an immediate
dilution of $10.07 per share to new investors. The following table illustrates
the per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share:........................... $ 13.00
---------
Pro forma net tangible book value per share before this offering as of
June 30, 1999.......................................................... $ 0.86
---------
Increase per share attributable to new investors......................... 2.07
---------
Pro forma net tangible book value per share after this offering............ 2.93
---------
Dilution per share to new investors........................................ $ 10.07
---------
---------
</TABLE>
The following table summarizes on a pro forma basis the total number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid by existing stockholders and by new investors.
Each of these figures are based upon the number of shares of common stock
outstanding as of June 30, 1999. These figures give effect to the conversion of
all outstanding shares of preferred stock. These figures also give effect to the
exercise of warrants dated December 31, 1997 and May 13, 1999 to purchase 32,307
and 54,733 shares of common stock, respectively, on a cashless basis at an
assumed public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 17,203,494 81.1% $ 32,044,859 38.1% $ 1.86
New investors......................................... 4,000,000 18.9 52,000,000 61.9 13.00
------------ ----- ------------- ----- -----------
Total............................................... 21,203,494 100.0% $ 84,044,859 100.0% $ 14.86
------------ ----- ------------- ----- -----------
------------ ----- ------------- ----- -----------
</TABLE>
Except as noted above, the foregoing discussions and tables assume no
exercise of any stock options or warrants outstanding at June 30, 1999. As of
July 8, 1999, there were options outstanding to purchase 2,673,496 shares of
common stock at a weighted average exercise price of $0.80 and a warrant dated
November 30, 1998 to purchase 20,973 shares of preferred stock with an exercise
price of $3.58 per share. To the extent that any of these options or this
warrant is exercised, there will be further dilution to the new investors.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statements of operations
data for each of the years in the three-year period ended December 31, 1998 and
the balance sheet data at December 31, 1997 and 1998, are derived from our
consolidated financial statements that have been audited by KPMG LLP,
independent accountants, included elsewhere in this prospectus. The statements
of operations data for the year ended December 31, 1995 and the balance sheet
data at December 31, 1995 and 1996, are derived from our audited financial
statements that are not included in this prospectus. The statements of
operations data for the six months ended June 30, 1998 and 1999, and the balance
sheet data at June 30, 1999, are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. The statements of
operations data for the year ended December 31, 1994 and the balance sheet data
at December 31, 1994 are derived from our unaudited financial statements that
are not included in this prospectus. We launched Tumbleweed IME in July 1997;
before this time, all of our revenue was related to a technology that was sold
in March of 1994, which comprised substantially all of our license revenue in
1994, and ongoing services related to that technology.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
License......................................... $ 3,203 $ 411 $ 261 $ 359 $ 885 $ 560 $ 1,082
Services........................................ 375 407 336 250 910 329 619
Sale of technology.............................. -- -- -- 120 220 110 --
--------- --------- --------- --------- --------- --------- ---------
Total revenue................................. 3,578 818 597 729 2,015 999 1,701
Cost of revenue:
License cost.................................... -- 30 15 63 194 101 100
Services cost................................... 211 202 124 45 737 271 676
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenue......................... 211 232 139 108 931 372 776
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 3,367 586 458 621 1,084 627 925
Operating expenses:
Research and development........................ 70 169 634 1,846 2,021 869 1,880
Sales and marketing............................. 309 256 649 2,593 4,049 2,315 2,788
General and administrative...................... 181 184 372 792 1,080 579 1,105
Stock compensation.............................. -- -- 24 246 673 259 1,283
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses...................... 560 609 1,679 5,477 7,823 4,022 7,056
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................... 2,807 (23) (1,221) (4,856) (6,739) (3,395) (6,131)
Other income (expense), net....................... (43) 7 41 165 149 127 118
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before provision for taxes...... 2,764 (16) (1,180) (4,691) (6,590) (3,268) (6,013)
Provision for taxes............................... -- -- -- -- -- -- 40
Net income (loss)................................. $ 2,764 $ (16) $ (1,180) $ (4,691) $ (6,590) $ (3,268) $ (6,053)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share--basic and diluted............. $ (0.33) $ (1.41) $ (1.74) $ (0.89) $ (1.43)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average--basic and diluted............... 3,598 3,331 3,797 3,682 4,246
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 101 $ 81 $ 2,670 $ 6,310 $ 698
Total assets..................................................... 119 206 2,939 7,115 1,725
Long-term obligations, excluding current installments............ -- -- -- -- 369
Total stockholders' equity....................................... 91 141 2,652 6,270 501
<CAPTION>
JUNE 30,
1999
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 14,700
Total assets..................................................... 19,037
Long-term obligations, excluding current installments............ 1,185
Total stockholders' equity....................................... 14,832
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
REFLECT OUR PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY IN "RISK
FACTORS."
OVERVIEW
Tumbleweed is a leading provider of Internet-based systems that enable
businesses to conduct secure online communications using e-mail and the web. We
began developing our Tumbleweed technology in December of 1995 and we launched
Tumbleweed IME in July of 1997. 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 $6.1 million in the six months ended June 30, 1999. As of June 30,
1999, we had incurred cumulative net losses as a C-corporation of $18.2 million.
Our revenue is comprised of license fees and services fees. License revenue
is comprised of initial license fees and the sale of distribution rights.
License revenue typically is recognized upon customer acceptance of the
software. Revenue from the sale of distribution rights is recognized upon the
execution of a distribution agreement. Our services revenue is comprised of
transaction-based fees, implementation and consulting fees, and support and
maintenance fees. Transaction fees are based on the volume of transactions by
our customers, and the related revenue is recognized based on payment schedules
and transaction reports from our customers. A number of our contracts include
minimum transaction volume requirements. In these cases, the minimum guaranteed
revenue is recognized when fees are due and payable during those months where
transaction volume does not exceed the designated minimums. Services fees are
paid to us for implementation and consulting work. Implementation and consulting
work relates to co-branding products, integrating our products with those of our
customers, and feature enhancement. Revenue from implementation and consulting
work is recognized as the services are performed. Support and maintenance fees
are paid for ongoing customer support as well as for the right to receive future
updates and upgrades to our products during the term of the maintenance
agreement. Revenue from support and maintenance is recognized ratably over the
period the support is provided.
Our revenue is concentrated among a few customers. As license fees continue
to comprise a substantial portion of our revenue, the principal
revenue-generating customers are likely to vary on a quarterly basis. However,
we anticipate that the principal revenue-generating customers as a group will
continue to comprise a significant portion of revenue. While the number of our
customers has increased over time, we anticipate that our revenue will remain
concentrated among a few customers for the foreseeable future.
A substantial portion of our revenue relates to international customers or
operations. We are increasingly becoming dependent upon these customers. Most of
our contracts are denominated in U.S. dollars. However, our contract with Hikari
Tsushin is denominated in Japanese yen, and, in the future, an increasing number
of contracts may be denominated in foreign currencies. We currently do not have
hedging or similar arrangements to protect us against foreign currency
fluctuations. Therefore, we increasingly may be subject to currency
fluctuations, which could harm our operating results in future periods.
Development costs incurred in the research and development of new technology
and enhancements to existing technology are expensed as incurred until
technological feasibility in the form of a working
25
<PAGE>
model has been established. To date, capitalized costs for our software
development have not been material.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, we recorded aggregate deferred stock compensation expense
of $9.3 million in connection with the grant of certain stock options which were
granted at exercise prices less than the deemed fair value on the grant date.
The deferred stock compensation expense is being amortized on an accelerated
basis over the vesting period of the options, which is generally four years. Of
the total deferred stock compensation expense, $24,000, $246,000, $673,000 and
$1,283,000 was amortized in the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1999, respectively, and we expect that
approximately $2.1 million, $2.8 million and $900,000 will be amortized during
the remainder of 1999 and in 2000 and 2001, respectively. See Note 6 of the
Notes to Consolidated Financial Statements.
Our future net income and cash flow will be affected by our ability to apply
net operating losses for federal tax reporting purposes against taxable income
in future periods due to a cumulative change in ownership for income tax
purposes, as defined in Section 382 of the Internal Revenue Code, arising from
the sale of stock in this and prior offerings.
In March of 1994, we sold a technology known as Envoy to Novell, Inc.
pursuant to an asset transfer, and we thereafter effected a substantial
distribution to our stockholders. In connection with this sale, we 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 our revenue recognized before
June of 1997, which marked the initial launch of Tumbleweed IME, was derived
from these agreements. We ceased recognizing revenue under these agreements in
the first quarter of 1997, and we do not anticipate recognizing any additional
revenue under these agreements in the future since we believe 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
our operating results in subsequent periods. In addition, in 1997 and 1998, we
recognized revenue derived from a sale of ancillary technology to a third party.
We do not anticipate recognizing revenue from similar sales in the future.
RECENT DEVELOPMENTS
During the months of February and May of 1999, Tumbleweed completed private
placements that raised approximately $20.0 million of new capital. The primary
investors in these private placements were Hikari Tsushin and United Parcel
Service. All of our existing institutional investors participated as well. In
March 1999, Hikari Tsushin also executed a license agreement with us.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUE. Total revenue, which is comprised of license revenue and services
revenue, increased 70.3% to $1.7 million in the six months ended June 30, 1999
from $999,000 in the six months ended June 30, 1998. License revenue increased
93.2% to $1.1 million in the six months ended June 30, 1999 from $560,000 in the
six months ended June 30, 1998. The majority of the license revenue for the six
months ended June 30, 1999 was derived from initial license fees arising from
agreements with Hikari Tsushin and the International Post Corporation
Technology, S.C. Services revenue increased 88.1% to $619,000 in the six months
ended June 30, 1999 from $329,000 in the six months ended June 30, 1998 due to
an increase in contract engineering work by our professional services
organization, and, to a lesser extent, an increase in transaction-based fees.
COST OF REVENUE. Cost of revenue is comprised of license cost and services
cost. License cost is primarily comprised of royalties paid to third parties for
software licensed by us for inclusion in our
26
<PAGE>
products. Services cost is comprised primarily of personnel and overhead cost
related to customer support and custom development projects. Total cost of
revenue increased 108.6% to $776,000 in the six months ended June 30, 1999 from
$372,000 in the six months ended June 30, 1998 corresponding to increased
revenue. License cost decreased slightly to $100,000 in the six months ended
June 30, 1999 from $101,000 in the six months ended June 30, 1998. Services cost
increased by 149.4% to $676,000 in the six months ended June 30, 1999 from
$271,000 in the six months ended June 30, 1998, primarily due to increased
personnel costs to support new projects.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised of engineering and related costs associated with the development of
Tumbleweed IME, quality assurance and testing. Research and development expenses
increased 116.3% to $1.9 million in the six months ended June 30, 1999 from
$869,000 in the six months ended June 30, 1998. The increase was primarily due
to increased staffing. We expect that our research and development expenses will
increase in absolute dollars in future periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses are comprised of
salaries, commissions, travel expenses and costs associated with trade shows,
advertising and other marketing efforts. Sales and marketing expenses increased
20.4% to $2.8 million in the six months ended June 30, 1999 from $2.3 million in
the six months ended June 30, 1998. The increase in sales and marketing expenses
was primarily due to increased sales staffing and incentive compensation costs,
which were partially offset by decreases in our marketing program costs.
Marketing programs costs declined due to a decreased marketing emphasis on
end-users and an increased focus on marketing to customers and the realization
of co-promotion opportunities with these customers. We expect that our sales and
marketing expenses will increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and support costs for our finance, human
resources, information systems and other administration departments as well as
professional fees. General and administrative expenses increased 90.8% to $1.1
million in the six months ended June 30, 1999 from $579,000 in the six months
ended June 30, 1998 corresponding to the expansion of our business. We expect
that our general and administrative expenses will increase substantially in
absolute dollars in future periods. We expect that the increase in part will be
due to the costs associated with operating as a public company and due to the
patent infringement lawsuit we brought against The docSpace Company, Inc., which
is still pending. See "Business--Legal Proceedings."
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE. Total revenue increased 176.4% to $2.0 million in 1998 from
$729,000 in 1997. Approximately one-half of the revenue in 1997 was derived from
prior agreements relating to our technology that was sold. See "--Overview."
License revenue increased 146.5% to $885,000 in 1998 from $359,000 in 1997 due
to increases in initial license fees from customers. Services revenue increased
264.0% to $910,000 in 1998 from $250,000 in 1997 due to increases in custom
development work performed for our customers. We have recognized revenue from
Tumbleweed IME commencing with its launch in July 1997. Our first full year of
recognizing revenue from Tumbleweed IME was 1998.
COST OF REVENUE. Cost of revenue increased 762.0% to $931,000 in 1998 from
$108,000 in 1997. License cost increased 207.9% to $194,000 in 1998 from $63,000
in 1997 due to increased royalty costs associated with the addition of licensed
technology from third parties and costs which correspond to increases in license
revenue. Services cost increased 1,537.7% to $737,000 in 1998 from $45,000 in
1997 due to increased personnel costs to support new projects.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 9.5% to $2.0 million in 1998 from $1.8 million in 1997. The increase
was primarily due to increased staffing.
27
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 56.2%
to $4.0 million in 1998 from $2.6 million in 1997. The increase was primarily
due to increased staffing as well as increased spending on marketing programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 36.4% to $1.1 million in 1998 from $792,000 in 1997. The increase was
primarily due to increased personnel and professional fees.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUE. Total revenue increased 22.1% to $729,000 in 1997 from $597,000 in
1996. The increase was primarily due to the introduction of Tumbleweed IME and
the realization of related services revenue. A majority of the revenue in 1997
and all of the revenue in 1996 was derived from prior agreements relating to our
technology that was sold. See "--Overview." We have recognized revenue from
Tumbleweed IME commencing with its launch in June of 1997. During 1997, we
offered Tumbleweed IME directly to end-users, and, as a result, revenue from
customers was minimal.
COST OF REVENUE. Cost of revenue decreased 22.3% to $108,000 in 1997 from
$139,000 in 1996. Cost of revenue decreased in part due to the termination of
the revenue that was being recognized from our technology that was sold.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 191.2% to $1.8 million in 1997 from $634,000 in 1996. The increase was
primarily due to increased staffing to support the further development and
introduction of Tumbleweed IME.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 299.5%
to $2.6 million in 1997 from $649,000 in 1996. The increase was primarily due to
increased staffing and marketing program expenditures supporting the
introduction of Tumbleweed IME.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 112.9% to $792,000 in 1997 from $372,000 in 1996. The increase was
primarily due to increased staffing and outside professional fees.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected unaudited quarterly consolidated
statements of operations data for the six quarters ended June 30, 1999. In the
opinion of management, this information has been presented on the same basis as
the audited Consolidated Financial Statements appearing elsewhere in this
prospectus. Management also believes that all necessary adjustments have been
included in the amounts stated below in order to state fairly the unaudited
quarterly results when read in conjunction with Tumbleweed's audited
Consolidated Financial Statements and related Notes. Results from any quarter
are not necessarily indicative of the results to be expected for the entire
fiscal year or for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 JUNE 30, 1998 1998 1998 1999 JUNE 30, 1999
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License......................... $ 304 $ 256 $ 195 $ 130 $ 518 $ 564
Services........................ 146 183 276 305 175 444
Sale of technology.............. -- 110 110 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total revenue................. 450 549 581 435 693 1,008
Cost of revenue:
License cost.................... 41 60 61 32 46 54
Services cost................... 121 150 265 201 228 448
------------- ------------- ------------- ------------- ------------- -------------
Total cost of revenue......... 162 210 326 233 274 502
------------- ------------- ------------- ------------- ------------- -------------
Gross profit...................... 288 339 255 202 419 506
Operating expenses:
Research and development........ 457 412 500 652 819 1,061
Sales and marketing............. 1,081 1,234 929 805 1,055 1,733
General and administrative...... 275 304 278 223 274 831
Stock compensation.............. 87 172 178 236 325 958
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses...... 1,900 2,122 1,885 1,916 2,473 4,583
------------- ------------- ------------- ------------- ------------- -------------
Operating loss.................... (1,612) (1,783) (1,630) (1,714) (2,054) (4,077)
Other income (expense), net....... 81 46 28 (6) (2) 120
------------- ------------- ------------- ------------- ------------- -------------
Net loss before provision for
taxes........................... (1,531) (1,737) (1,602) (1,720) (2,056) (3,957)
Provision for taxes............... -- -- -- -- -- 40
------------- ------------- ------------- ------------- ------------- -------------
Net loss.......................... $ (1,531) $ (1,737) $ (1,602) $ (1,720) $ (2,056) $ (3,997)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
License revenue increased in the quarter ended June 30, 1999 due to new
license agreements executed during the quarter. The majority of license revenue
for the three months ended June 30, 1999 was derived from initial license fees
arising from the production agreement with the International Post Corporation
Technology, S.C. Services revenue increased significantly in the quarter ended
June 30, 1999 due to an increase in contract engineering work by our
professional services organization and an increase in transaction based fees.
License revenue increased significantly in the quarter ended March 31, 1999,
reflecting the broadening of our sales base through the efforts of our direct
sales force, which was put in place in the latter part of 1998. The majority of
the license revenue for the three months ended March 31, 1999 was derived from
initial license and distribution fees arising from the agreement with Hikari
Tsushin. License revenue decreased in the quarters ended June 30, 1998,
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September 30, 1998, and December 31, 1998, as services revenue increased,
reflecting the evolution in key customer relationships from the initial license
phase to an implementation phase. Services revenue decreased in the quarter
ended March 31, 1999 due to the substantial completion of a major project in the
preceding quarter. Revenue derived from the sale of technology in the quarters
ended June 30, 1998 and September 30, 1998, was associated with the sale of
printer driver technology to a company in Asia and is a non-recurring item.
Services cost increased in the quarter ended June 30, 1999 due to increased
personnel costs to support new projects. Services cost increased in the quarter
ended March 31, 1999 in connection with hiring additional professional services
personnel. Services cost decreased in the quarter ended December 31, 1998 due to
the reallocation of personnel from the professional services organization to
research and development. Sales and marketing expenses increased in the quarters
ended March 31, 1999 and June 30, 1999 due to the addition of personnel. Sales
and marketing expenses decreased in the quarters ended September 30, 1998 and
December 31, 1998, reflecting a decreased marketing emphasis on end-users and an
increased focus on marketing to customers. This change enabled Tumbleweed to
benefit from reduced direct marketing expenses and increased reliance on
co-promotion activities. General and administrative expenses increased
significantly in the quarter ended June 30, 1999, primarily due to legal fees
associated with the patent infringement lawsuit we brought against The docSpace
Company, Inc., as well as the addition of personnel.
FLUCTUATIONS IN QUARTERLY RESULTS
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to accurately forecast our revenue or
expenses. 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 in a given quarter. Our license
revenue is comprised entirely of initial license and distribution fees. As a
result, we will be required to regularly and increasingly sign additional
customers with substantial initial license fees on a timely basis to realize
comparable or increased license revenue.
Our services revenue historically has been comprised 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, we will be
required to increase our services revenue in the short term through custom
development work and contractual transaction minimums and in the longer term
through the increased transaction volume with the use of our services. Unless
and until we have developed a significant and recurring transaction-based
revenue stream from communications that are sent with our services, our revenue
will continue to fluctuate significantly. Accordingly, we may be unable to
recognize quarterly or annual revenue consistent with our historical operating
results or expectations.
In addition, sales to a limited number of customers have constituted a
majority of our revenue in any given quarter. In particular, four customers
comprised approximately 86% of our revenue in the six months ended June 30, 1999
and five customers comprised approximately 89% of our revenue in 1998.
Therefore, the deferral or cancellation of an agreement, or a decision not to
move from a pilot or preliminary phase into final production by any existing or
anticipated customer could harm our operating results for a quarter or annual
period. We have experienced, and expect to continue to experience, fluctuations
in revenue and operating results from quarter to quarter for other reasons which
are more fully set forth under the caption "Risk Factors -- Our Quarterly
Financial Results Are Subject to Significant Fluctuations."
As a result of these factors, we believe that quarter-to-quarter 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
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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 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Tumbleweed has financed its operations primarily through
the issuance of equity securities to investors. On June 30, 1999, Tumbleweed had
approximately $14.7 million in cash and cash equivalents.
Net cash used by operating activities for the six months ended June 30,
1999, and the years ended December 31, 1998, 1997 and 1996 was $3.7 million,
$5.9 million, $4.0 million and $1.0 million, respectively. Cash used in
operating activities in each of these periods was primarily the result of net
operating losses.
Net cash used in investing activities for the six months ended June 30,
1999, and the years ended December 31, 1998, 1997 and 1996 was $2.2 million,
$399,000, $352,000 and $134,000, respectively. In each period, net cash used in
investing activities was primarily the result of capital expenditures related to
increased personnel.
Net cash provided by financing activities for the six months ended June 30,
1999 and the years ended December 31, 1998, 1997, and 1996 was $19.9 million,
$640,000, $8.0 million and $3.7 million, respectively. Cash provided by
financing activities was primarily attributable to net proceeds from the
issuance of equity securities to investors.
As of June 30, 1999, Tumbleweed's principal commitments consisted of
obligations outstanding under equipment and operating leases. Our equipment
leases require payment of rental fees to third party leasing providers at
interest rates of between 1.4% and 12.8%. In most cases, Tumbleweed has no
obligations to purchase the equipment at the end of the term. In addition to
amounts reflected on our June 30, 1999 balance sheet, we have commitments
relating to our facility relocation of approximately $300,000. We anticipate a
substantial increase in capital expenditures consistent with potential growth in
operations, infrastructure and personnel.
We recently entered into an additional operating lease. The lease covers
approximately 40,000 square feet in Redwood City, California. The 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.
In July 1998, Tumbleweed entered into an agreement with Silicon Valley Bank,
which included a $1.5 million revolving credit facility, with availability based
on outstanding accounts receivable, and a $750,000 equipment loan facility.
Borrowings under the credit facility and equipment facility carry interest at
the prime rate plus 0.5% and 0.75%, respectively, with interest payable monthly.
Borrowings under the credit facility are due in July 1999. Borrowings under the
equipment facility are due in 36 equal monthly installments beginning January
1999, and are secured by Tumbleweed's assets. There were no borrowings under the
credit facility as of June 30, 1999. The bank has a senior security interest in
substantially all of our assets.
During November 1998, Tumbleweed amended the agreement. As part of the
amendment, Tumbleweed obtained a $1.5 million bridge facility, with availability
based on several factors, including the proposed amount of Tumbleweed's next
equity financing. Tumbleweed was prohibited from making additional borrowings
against the credit facility until the maturity date of the bridge facility and
the equipment facility was limited to making additional borrowings up to
$125,000. The bridge facility
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matured, and all outstanding borrowings under the bridge facility were repaid,
upon the closing of the Series C preferred stock financing in February 1999.
During June 1999, Tumbleweed again amended the agreement. As part of the
amendment, Tumbleweed increased the equipment loan facility by $1,000,000. As of
June 30, 1999, total borrowings under the equipment loan facility were $1.4
million. Borrowings under the equipment loan facility are due in 36 equal
monthly installments beginning January 1, 2000.
We license technology from RSA Data Security, Inc. and from Adobe Systems
Incorporated pursuant to agreements that require payment of royalties to these
parties based on our revenue. The annual minimum payments currently effective
under these agreements are not significant.
Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we devote to development
of our products and services and the resources we devote to sales and marketing.
We have experienced a substantial increase in our capital expenditures and
operating expenses since our inception consistent with our relocation and the
growth in our operations and staffing. We anticipate that this growth will
continue for the foreseeable future. Additionally, we expect to make additional
investments in technologies, and plan to expand our sales and marketing
programs. We currently anticipate that the net proceeds of the offering,
together with our existing cash and sources of liquidity, will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next 12 months. To the extent we experience growth beyond the next 12
months, we will need to raise funds for our growth from financing activities.
We intend to continue to consider our future financing alternatives, which
may include the incurrence of indebtedness, additional public or private equity
offerings or an equity investment by a strategic partner. However, other than
our agreement with Silicon Valley Bank, we have no present commitments or
arrangements assuring us of any future equity or debt financing, and additional
equity or debt financing may not be available to us on favorable terms, if at
all.
We are not aware of seasonal aspects of our business that will affect our
business on a short or long-term basis other than as described under the caption
"Year 2000 Compliance" below. See "Risk Factors--Our Business Will Be Harmed If
We Cannot Meet Our Future Capital Needs."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to identify a year in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Accordingly, our customers, potential
customers, and end-users may need to upgrade their computer systems and software
products to comply with applicable Year 2000 requirements.
To date, we have completed our preliminary assessment of all internal
systems and equipment that could be significantly affected by the Year 2000.
Based on our Year 2000 assessment program, we believe that the portions of our
computer systems that we developed are Year 2000 compliant. Our computer system
also uses third-party equipment and software which may not be Year 2000
compliant. We are currently assessing the third-party equipment and software for
Year 2000 compliance. Based on our assessment to date, we also believe that the
current versions of our software products and services are Year 2000 compliant.
However, our products and services are integrated into the systems of our
customers involving sophisticated hardware and complex software products, which
may not be Year 2000 compliant. We are not aware of customers with a Year 2000
issue that would materially impact our results of operations, liquidity, or
capital resources.
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We have not incurred significant costs to date complying with Year 2000
requirements. We expect that our future costs to ensure compliance with Year
2000 concerns will not be significant. If we discover significant Year 2000
errors or defects, we could incur substantial costs and our operations could be
seriously disrupted. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect us. We could 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, we 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 we offer. To the extent that Year
2000 issues cause significant delay in, or cancellation of, decisions to
purchase our products or services, our business and prospects would suffer. See
"Risk Factors--Potential Year 2000 Problems and Purchasing Patterns Could Harm
Our Business and Reduce Sales."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tumbleweed transacts business in various foreign currencies. Accordingly,
Tumbleweed is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to revenue and operating
expenses in the United Kingdom and Japan denominated in the respective local
currency. However, as of December 31, 1998, Tumbleweed had no hedging contracts
outstanding.
Tumbleweed currently does not use financial instruments to hedge operating
expenses in the United Kingdom or Japan denominated in the respective local
currency. Tumbleweed assesses the need to utilize financial instruments to hedge
currency exposures on an ongoing basis.
Tumbleweed does not use derivative financial instruments for speculative
trading purposes, nor does Tumbleweed hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
Tumbleweed regularly reviews its hedging program and may as part of this review
determine at any time to change its hedging program.
FIXED INCOME INVESTMENTS
Tumbleweed's exposure to market risks for changes in interest rates relates
primarily to investments in money market funds and securities. Tumbleweed places
its investments with high credit quality issuers and, by policy, limits the
amount of the credit exposure to any one issuer.
Tumbleweed's general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents, investments with maturities
between three and twelve months are considered to be short-term investments and
investments with maturities in excess of twelve months are considered to be
long-term investments. For the fiscal year ended December 31, 1998 the weighted
average interest rate on the investment portfolio was approximately 5.0%.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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, we have not entered into any derivative financial
instruments or hedging activities.
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In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. The SOP requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. The SOP also
requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
Tumbleweed adopted SOP 98-1 effective January 1, 1999 and it did not materially
affect its financial position or results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-9, MODIFICATIONS OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9 requires recognition of revenue
using the residual method in a multiple-element software 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 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. We do not expect a material change to our accounting for revenue as a
result of the provisions of SOP 98-9.
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BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN
THESE FORWARD-LOOKING STATEMENTS. SEE "RISK FACTORS--OUR CURRENT EXPECTATIONS
AND PROJECTIONS CONTAINED IN FORWARD-LOOKING STATEMENTS MAY NOT BE REALIZED,
WHICH COULD HARM OUR BUSINESS AND REDUCE OUR STOCK PRICE."
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
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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
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
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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
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
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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.
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. 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.
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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.
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 the volume of communications sent through
Tumbleweed IME and whether Tumbleweed IME is being used on-site at the customer
premises or used as an outsourced service.
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
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.
[Graphic depicts the three layers of Tumbleweed IME, with the Tumbleweed IME
Platform at the bottom, Tumbleweed IME Applications stacked on top of the
platform, and Tumbleweed IME Services stacked on top of the applications.]
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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.
TUMBLEWEED 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:
TUMBLEWEED IME FOR FINANCIAL SERVICES. As a growing number of organizations
make product and customer account information available online, billing and
customer management remain paper-intensive processes requiring physical delivery
of millions of documents. By automating these processes and integrating them
with Tumbleweed IME, both businesses and their customers can save time and money
with secure electronic communication of payment remittances, credit reports,
bills, statements, loan origination documents, and other types of
correspondence. Tumbleweed IME for Financial Services is also an ideal, low-cost
solution for distributing high-volume documentation, including prospectuses,
stockholder information, and research materials.
TUMBLEWEED IME INTERPERSONAL. Contracts, design and manufacturing
specifications and confidential records communicated between individuals often
require the secure delivery of information. 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. During the
drafting exercise, the document must be distributed securely to the different
parties many times. Each time, the sender must have assurance that all parties
received the documents. Tumbleweed IME Interpersonal provides all of the
security, tracking, and reliability required for ad-hoc correspondence and group
collaboration on any important business matters.
TUMBLEWEED IME CUSTOM APPLICATION BUILDER. Tumbleweed IME Custom
Application Builder incorporates the application programming interface
technology necessary to build a unique, secure online application. For example,
travel reservations, product and service sales and stock trading are becoming
increasingly popular on the Internet, but the security and reliability
limitations of e-mail have prevented some of these types of transactions from
becoming completely electronic. By customizing
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Tumbleweed IME to complement electronic commerce and other online processes,
businesses can create automated, sophisticated applications to deliver
confirmations, notifications and alerts 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 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., Thomson
Financial, 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.
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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.
Following a year-long pilot program, the International Post Corporation
Technology, S.C., a cooperative organization of twenty-one international postal
administrations, signed an agreement to use Tumbleweed IME under the label
PostECS as its standard for secure online document delivery. The U.S. Postal
Service, France's La Poste and Canada Post are the first three member
organizations to join International Post Corporation Technology, S.C.'s online
initiative. The International Post Corporation Technology, S.C. members'
customer base is enormous and spans numerous countries. Tumbleweed IME's
architecture and server application programming interfaces will enable the
member organizations 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.
THOMSON FINANCIAL SERVICES
Thomson Financial, a subsidiary of The Thomson Corporation, is a leading
provider of financial information, research, and analysis to global investment
and corporate communities. Thomson Financial has deployed Tumbleweed IME as part
of Thomson Prospectus, a service for electronic distribution of new issue
prospectuses for equity offerings, corporate bonds, and municipal bonds. Thomson
Prospectus compiles e-mail distribution lists, obtains electronic delivery
consent from investors, and converts prospectuses to searchable electronic
format. Tumbleweed IME allows Thomson to distribute prospectuses electronically
and satisfy Securities and Exchange Commission delivery requirements. The use of
Tumbleweed IME by Thomson Financial improves the timeliness of prospectus
deliveries and cuts printing and mailing costs for issuers. In addition,
prospectuses delivered using Tumbleweed IME are searchable and hyperlinked.
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 across Europe. The Joint Research
Council provides a centralized authorization process for approving or rejecting
new drugs for the entire European Union. The Joint Research Council employs a
distributed authorization procedure, in which the agency coordinates the
activities of more than 2,500 scientists and researchers across Europe for the
drug approval process, before ultimate approval is granted or rejected by the
European Commission. The Joint Research Council uses Tumbleweed IME as a
mechanism for enabling online information distribution in this decentralized
approval process.
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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 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. Pitney Bowes provides 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. Hitmail 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.
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 & 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>
<S> <C> <C>
CUSTOMER TYPE TARGET MARKET
The Chase Manhattan Bank Enterprise customer Banking
American Express Travel Related Services, Enterprise customer Financial services
Inc.
Datek Online Holdings Corp. Enterprise customer Brokerage
Thomson Financial Enterprise customer Financial services
European Union-Joint Research Council Enterprise customer Pharmaceutical
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 Service provider General purpose
Canon Service provider Financial services
Technology/engineering
</TABLE>
*Currently participating in a paid pilot project.
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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. Four customers comprised approximately 86% of our
revenue in the six months ended June 30, 1999 and five customers comprised
approximately 89% of our revenue in 1998. In particular, sales to United Parcel
Service, the International Post Corporation Technology, S.C. members, Dynalab,
Inc., Canon and Nippon Telegraph and Telephone Corporation represented 29%,
27%,16%, 9% and 8%, respectively, of our revenue in 1998. Sales to Hikari
Tsushin, the International Post Corporation Technology, S.C. members, UPAQ Ltd.
and Pitney Bowes accounted for 36%, 32%, 10% and 8%, respectively, of our
revenue in the six months ended June 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 and New
York, New York. We currently have international offices in Tokyo, Japan and
Reading, United Kingdom. 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,
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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.
[Graphic depicts the Tumbleweed IME architecture, demonstrating how the
Tumbleweed IME application programming interfaces interact with the Tumbleweed
IME Platform and Tumbleweed IME Applications.]
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 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.
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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 to certain access charges or fees for
carrying Internet traffic over
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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--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--Our Products Are Subject to Export Controls, and We May be Unable to
Obtain Necessary Approvals."
INTELLECTUAL PROPERTY
We have filed eight utility patents and one design patent 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 patents 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 "Business--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.
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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 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. However, unlike Tumbleweed
IME's open, scalable architecture, these competing solutions are based on
proprietary protocols, require proprietary client software, and/or are not very
scalable. 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, Critical Path Inc., International
Business Machines Corporation/Lotus Development Corporation, Microsoft
Corporation and VeriSign, Inc.
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 June 30, 1999, we employed 75 people worldwide, including 24 in
engineering, 22 in sales, 15 in professional services, five in marketing and 9
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--If We Lose the Services of Our Key Management Personnel, Including Our
Co-Founders or Key Sales Executives, Our Ability to Develop Our Business and
Secure Customer Relationships Will Suffer"; and "--We May Be Unable to Recruit
or Retain Qualified Personnel, Which Could Harm Our 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 and Reading, United Kingdom. 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 judgment motion of noninfringement. On May
27, 1999, the court granted Tumbleweed's request to continue docSpace's summary
judgment motion pending further discovery, and indicated that docSpace's motion
would be rescheduled at the initial case management conference with the court on
July 8, 1999. At the July 8, 1999 case management conference, the court
indicated 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 judgment on the issue of infringement on November 1, 1999.
The court also stated that discovery on all issues other than claim construction
and infringement would be stayed pending resolution of these issues. We believe
that we will prevail on the merits of this patent infringement lawsuit and that
docSpace's counterclaims are meritless.
49
<PAGE>
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 April 30, 1999:
<TABLE>
<CAPTION>
NAME TITLE AGE
- ------------------------------- --------------------------------------------------------------------------- ---
<S> <C> <C>
Jeffrey C. Smith Founder, Chairman, President and Chief Executive Officer 32
Donald N. Taylor Vice President--International Sales 45
Donald R. Gammon Vice President--North American Sales 53
Jean-Christophe D. Bandini Founder and Chief Technical Officer 35
Shomit A. Ghose Vice President--Applications 37
Kerry S. Champion Vice President--Engineering 36
Joseph C. Consul Vice President--Finance and Chief Financial Officer 39
Shinji Eura General Manager--Tumbleweed Software, K.K. 63
Robert A. Krauss Vice President--Business Development 36
Mark R. Pastore Vice President--Corporate Development 32
Michael J. Earhart Vice President--Corporate Marketing 34
Bernard J. Cassidy General Counsel and Secretary 44
Timothy C. Draper Director 40
Eric J. Hautemont Director 33
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; Aion 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; 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.
50
<PAGE>
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, Vice President--Applications, 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, Vice President--Engineering, is responsible for all
aspects of engineering, including development, quality assurance, product
management and documentation. 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, operations, 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, PA.
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.
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<PAGE>
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 J.D. from Harvard Law
School, an M.A. in Philosophy from the University of Toronto and a B.A. in
Philosophy from Loyola University.
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 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
52
<PAGE>
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 equal to the price per share to the public in this offering, which
shall be effective upon the consummation of this offering.
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.
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.
53
<PAGE>
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 $100,000
for the year ended December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- --------------------------------------------------------------------- --------- --------- ----------- -------------
<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.
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.
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<PAGE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF POTENTIAL
NUMBER OF STOCK PRICE REALIZABLE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR VALUE AT AN ASSUMED
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM INITIAL PUBLIC
OPTION TO EMPLOYEES IN PRICE EXPIRATION -------------------- OFFERING
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10% PRICE PER SHARE
- ------------------- ----------- ----------------- ----------- ----------- --------- --------- -------------------
<S> <C> <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 $ 312,500
12,000 0.9 0.50 9/01/2008 9,773 15,562 150,000
Kerry S. Champion.. 180,000 13.6 0.50 3/16/2008 146,601 233,437 2,250,000
50,000 3.8 0.50 9/01/2008 40,722 64,844 625,000
Mark R. Pastore.... 20,000 1.5 0.50 9/01/2007 16,289 25,937 250,000
15,000 1.1 0.50 3/01/2008 12,217 19,453 187,500
10,000 0.8 0.50 9/05/2008 8,144 12,969 125,000
Randy A. Atherton.. 75,000(1) 5.7 0.50 6/29/1999 61,084 97,265 937,500
</TABLE>
- ------------------------------
(1) Mr. Atherton resigned on March 31, 1999. This number excludes unvested
shares that expired upon his resignation.
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
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) 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 May 24, 1999 to approve an additional 500,000 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 3,618,500 shares of common stock
is reserved for issuance under this plan. As of July 8, 1999, we had granted
options to purchase an aggregate of 3,423,516 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.
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<PAGE>
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 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.
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<PAGE>
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.
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
57
<PAGE>
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
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.
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 General Corporation 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 General Corporation 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 intend to enter 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, will 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.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1996, 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
"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.
- 112,159 shares of Series C preferred stock to Adobe Ventures II, L.P.
SERIES B PREFERRED STOCK FINANCING ROUND. In August and September 1997, we
sold shares of Series B preferred stock, at a purchase price of $1.99 per share,
to the following investors, among others:
- 1,762,336 shares of Series B preferred stock to August Capital, L.P.
- 427,996 shares of Series B preferred stock to Draper Fisher Associates
Fund III.
- 1,258,812 shares of Series B preferred stock to Adobe Ventures II, L.P.
- 12,588 shares of Series B preferred stock to Jeffrey C. Smith, our
President and Chief Executive Officer, and Chairman of our board of
directors.
SERIES A PREFERRED STOCK FINANCING ROUND. In August and September 1996, we
sold shares of Series A preferred stock, at a purchase price of $1.38 per share,
to the following investors, among others:
- 103,623 shares of Series A preferred stock to Jeffrey C. Smith, our
President and Chief Executive Officer, and Chairman of our board of
directors.
- 90,580 shares of Series A preferred stock to Jean-Christophe D. Bandini,
our Chief Technical Officer, and a member of our board of directors.
- 1,304,348 shares of Series A preferred stock to Draper Fisher Associates
Fund III, or to entities affiliated with it.
- 90,580 shares of Series A preferred stock to August Capital, L.P.
Each of August Capital, L.P., Draper Fisher Associates Fund III, Adobe
Ventures II, L.P., Hikari Tsushin, Inc. and United Parcel Service General
Services Co., or their affiliated entities, is a 5% or greater shareholder of
us. In addition, August Capital, L.P., Draper Fisher Associates Fund III and
Adobe Ventures II, L.P. designate a representative to our board of directors.
HIKARI LICENSE AGREEMENT. On March 31, 1999, we entered into a one-year
license and distribution agreement with Hikari Tsushin, Inc. During the three
months ended March 31, 1999, Tumbleweed recognized approximately $388,000 of
revenue associated with the perpetual license fee and distribution rights from
Hikari, less a deferral for 90 days of maintenance of approximately $30,000.
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,
59
<PAGE>
board participation, and registration rights in favor of the purchasers and
founders. These registration rights survive the closing of this offering. See
"Description of Capital Stock--Registration Rights."
INDEMNITY AGREEMENTS. Tumbleweed intends to enter into indemnity agreements
with each of its officers and directors. See "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. Before that time, Gregory Smith was a partner of the law firm of Cooley
Godward LLP, which provides legal services to Tumbleweed as well. The total fees
paid to Skadden, Arps in 1998 was $11,281. The total fees paid to Cooley Godward
in 1998, 1997 and 1996 were $326,442, $174,515 and $57,616, respectively. The
rates charged for services provided generally were equal to or more favorable
than the rates generally charged by these firms. Gregory Smith acted as
Secretary of Tumbleweed during these periods.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table indicates information as of July 8, 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 17,203,494 shares of common
stock outstanding as of July 8, 1999. To the extent that any shares are issued
upon exercise of options, warrants or other rights to acquire our capital stock
that are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, there will be further dilution to new public
investors.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
NUMBER OF SHARES --------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED OFFERING OFFERING
- ------------------------------------------------------------------------ ----------------- ----------- -------------
<S> <C> <C> <C>
Hikari Tsushin, Inc..................................................... 3,914,989 22.8% 18.5%
22F Ohtemachi Nomura Bldg.
2-1-1 Ohtemachi, Chiyoda-ku, Tokyo
August Capital, L.P..................................................... 2,018,009(1) 11.7 9.5
David F. Marquardt
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Draper Fisher Entities.................................................. 1,886,695(2) 11.0 8.9
Timothy C. Draper
400 Seaport Court, Suite 250
Redwood City, CA 94063
Adobe Ventures II, L.P.................................................. 1,370,971(3) 8.0 6.5
Standish H. O'Grady
One Bush Street
San Francisco, CA 94104
United Parcel Service General Services Co............................... 1,118,569 6.5 5.3
55 Glenlake Parkway NE
Atlanta, Georgia 30328
Jeffrey C. Smith........................................................ 2,027,877 11.8 9.6
Jean-Christophe D. Bandini.............................................. 2,018,580 11.7 9.5
Randy A. Atherton....................................................... 75,000 * *
Kerry S. Champion....................................................... 76,250(4) * *
Joseph C. Consul........................................................ 76,789(4) * *
Mark R. Pastore......................................................... 264,476(4) 1.5 1.2
Eric J. Hautemont....................................................... 49,616(4) * *
Standish H. O'Grady..................................................... 1,644,567(5) 9.6 7.8
Executive officers and directors as a group (16 persons)................ 10,420,254(6) 60.6 49.1
</TABLE>
- ------------------------------
* Less than 1% of the outstanding shares of common stock.
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<PAGE>
(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) The following table indicates those people whose total number of
beneficially owned shares include shares subject to options exercisable
within 60 days of July 8, 1999:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OPTIONS
------------------------
<S> <C>
Kerry S. Champion.............................................................. 20,000
Joseph C. Consul............................................................... 11,438
Mark R. Pastore................................................................ 4,688
Eric J. Hautemont.............................................................. 12,500
</TABLE>
(5) 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.
(6) Includes 406,021 shares issuable upon the exercise of stock options
exercisable within 60 days of July 8, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, we will be 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 "Dividend Policy." 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.
Upon the consummation of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
REGISTRATION RIGHTS
Upon completion of the offering, the holders of an aggregate of
approximately 16,236,640 shares of common stock and the holder of a warrant
dated November 30, 1998 to purchase preferred stock convertible into 20,973
shares of common stock will be 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 have been waived
with respect 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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<PAGE>
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. will serve as Transfer Agent and Registrar for our common
stock. Its phone number is (781) 575-2469.
LISTING
We have applied to list the common stock on the Nasdaq Stock Market's
National Market under the trading symbol "TMWD."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will depress the market price for our common stock
or our ability to raise capital by offering equity securities. Sales of
substantial amounts of common stock, or the perception that these sales could
occur, may depress prevailing market prices for the common stock.
After this offering, approximately 21,203,494 shares of common stock will be
outstanding. All of the shares sold in this offering will be freely tradeable
except for any shares purchased by affiliates of Tumbleweed. The remaining
shares of common stock outstanding after this offering will be restricted as a
result of securities laws or lock-up agreements. These remaining shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
As of the date of the prospectus............................................................... --
February 2, 2000............................................................................... 10,866,222
At various times afterwards upon expiration of applicable holding periods...................... 6,337,272
</TABLE>
Credit Suisse First Boston may release all or a portion of the shares
subject to this lockup agreement at any time without notice. See "Underwriting"
and "Shares Eligible for Future Sale."
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any of our employees, officers, directors or
consultants who purchased shares under a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell their shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling their shares.
However, substantially all Rule 701 shares are subject to lock-up agreements and
will only become eligible for sale at the earlier of the expiration of the
180-day lock-up agreements or no sooner than 90 days after the offering upon
obtaining the prior written consent of Credit Suisse First Boston Corporation.
We intend to file a Registration Statement on Form S-8 registering shares of
common stock subject to outstanding options or reserved for future issuance
under our stock plans. As of July 8, 1999, options to purchase a total 2,673,496
shares were outstanding under our stock option plans. Common stock issued upon
exercise of outstanding vested options, other than common stock issued to our
affiliates is available for immediate resale in the open market.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC and ING Barings LLC are acting as representatives, the following respective
numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
- --------------------------------------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Hambrecht & Quist LLC............................................................
ING Barings LLC..................................................................
----------
Total.......................................................................... 4,000,000
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option from the date of this
prospectus to purchase up to 600,000 additional shares at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover over-allotments of common stock.
The underwriters propose to offer the shares to the public initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters and
selling group members may allow a discount of $ per share on sales to other
broker/dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per share Total
---------------------------- ----------------------------
Without With Without With
Overallotment Overallotment Overallotment Overallotment
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by us......................... $ $ $ $
Expenses payable by us............................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and substantially all of our other
securityholders have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible into or exchangeable or exercisable for any
shares of common stock, or publicly disclose the intention to make any such
offer, sale, pledge or disposal, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days from the date of this
prospectus, subject to limited exceptions.
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<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
other persons associated with us that have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not purchased will be offered
by the underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list our shares on The Nasdaq Stock Market's National
Market under the symbol "TMWD."
Before this offering, there has been no public market for our common stock.
The initial public offering price has been determined by negotiation between the
representatives and us. The principal factors considered in determining the
public offering price included: the information in this prospectus and available
to the representatives; the history and the prospects for the industry in which
we will compete; our management's ability; the prospects for our future
earnings; the present state of our development and our current financial
condition; the general condition of the securities markets at the time of this
offering; and the recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Entities affiliated with Hambrecht & Quist LLC purchased an aggregate of
22,432 shares of Series C preferred stock of Tumbleweed, on the same terms as
other investors in a private placement by Tumbleweed in February 1999, for a
total purchase price of $80,216. In addition, Hambrecht & Quist LLC received
from us a fee of approximately $1,080,000 and a warrant to purchase 75,503
shares of Series C preferred stock at a price of $3.58 per share for acting as
placement agent in connection with the private placement of our Series C
preferred stock.
Curtis Smith, an associate of ING Barings LLC, is a brother of Jeffrey C.
Smith, the Chairman, President and Chief Executive Officer of Tumbleweed.
67
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws. These will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice before any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under such securities laws,
- where required by law, the purchaser is purchasing as principal and not as
agent, and
- the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or these persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed upon
for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
Gregory C. Smith, a partner at Skadden, Arps, beneficially owns 54,246 shares of
common stock. Selected legal matters in connection with this offering will be
passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP.
EXPERTS
The consolidated financial statements of Tumbleweed 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 herein and in the Registration Statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock being offered. This prospectus does not contain all of the
information described in the registration statement and the related exhibits and
schedules. For further information with respect to Tumbleweed and the common
stock being offered, reference is made to the registration statement and the
related exhibits and schedule. A copy of the registration statement and the
related exhibits and schedule may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities
and Exchange Commission's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from these offices upon
the payment of the fees prescribed by the Securities and Exchange Commission.
Information on the operation of the Public Reference Room may be obtained by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.
Tumbleweed intends to provide its stockholders with annual reports
containing combined financial statements audited by an independent accounting
firm and quarterly reports containing unaudited combined financial data for the
first three quarters of each year.
69
<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 June 30, 1999 (unaudited)................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1998 and 1999 (unaudited).......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 and
the six months ended June 30, 1999 (unaudited)........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1998 and 1999 (unaudited).......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT
When the reincorporation of the Company in Delaware described in Note 10 of
the Notes to the Consolidated Financial Statements has been consummated, we will
be in a position to render the following report.
[KPMG LLP]
San Francisco, California
May 28, 1999
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.
San Francisco, California
March 18, 1999, except as to Note 10 which is as of , 1999
F-2
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
-------------------- ----------------------
1997 1998 ACTUAL PRO FORMA
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 6,310 $ 698 $ 14,700 $ 14,700
Accounts receivable............................................................ 281 281 1,151 1,151
Prepaid expenses and other current assets...................................... 142 166 554 554
--------- --------- --------- -----------
Total current assets....................................................... 6,733 1,145 16,405 16,405
Property and equipment, net...................................................... 382 472 1,587 1,587
Other assets..................................................................... -- 108 1,045 1,045
--------- --------- --------- -----------
Total assets............................................................... $ 7,115 $ 1,725 $ 19,037 $ 19,037
--------- --------- --------- -----------
--------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 200 $ 136 $ 909 $ 909
Current installments of equipment line......................................... -- 141 227 227
Accrued liabilities............................................................ 337 448 1,166 1,166
Deferred revenue............................................................. ` 308 130 718 718
--------- --------- --------- -----------
Total current liabilities.................................................. 845 855 3,020 3,020
Equipment line, excluding current installments................................... -- 369 1,185 1,185
--------- --------- --------- -----------
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; no shares authorized, issued, or outstanding
as of December 31, 1997 and 1998 and June 30, 1999; 10,000,000 shares
authorized, none issued or outstanding on a pro forma basis as of June 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 June 30, 1999,
and none outstanding on a pro forma basis as of June 30, 1999 (aggregate
liquidation preference of $3,668 as of December 31, 1998).................. 3 3 3 --
Series B, $0.001 par value; 4,250,000 shares designated; 4,065,960, 4,065,960
and 4,080,960 shares issued and outstanding as of December 31, 1997 and
1998 and June 30, 1999, and none outstanding on a pro forma basis as of
June 30, 1999 (aggregate liquidation preference of $8,105 as of December
31, 1998).................................................................. 4 4 4 --
Series C, $0.001 par value; 6,000,000 shares designated; 5,592,503 shares
issued and outstanding as of June 30, 1999, and none outstanding on a pro
forma basis as of June 30, 1999 (aggregate liquidation preference of
$20,021 as of December 31, 1998)........................................... -- -- 5 --
Common stock, $0.001 par value; 43,000,000 shares authorized; 4,035,000,
4,209,535 and 4,785,020 shares issued and outstanding as of December 31,
1997, 1998 and June 30, 1999, respectively; 100,000,000 shares authorized,
17,203,494 issued and outstanding on a pro forma basis as of June 30, 1999... 4 4 5 17
Additional paid-in capital..................................................... 12,274 14,124 40,077 40,077
Deferred compensation expense.................................................. (474) (1,501) (7,082) (7,082)
Accumulated other comprehensive income (loss).................................. -- (2) 4 4
Accumulated deficit............................................................ (5,541) (12,131) (18,184) (18,184)
--------- --------- --------- -----------
Total stockholders' equity................................................. 6,270 501 14,832 14,832
--------- --------- --------- -----------
Total liabilities and stockholders' equity................................. $ 7,115 $ 1,725 $ 19,037 $ 19,037
--------- --------- --------- -----------
--------- --------- --------- -----------
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License................................................... $ 261 $ 359 $ 885 $ 560 $ 1,082
Services.................................................. 336 250 910 329 619
Sale of technology........................................ -- 120 220 110 --
--------- --------- --------- --------- ---------
Total revenue........................................... 597 729 2,015 999 1,701
Cost of revenue:
License cost.............................................. 15 63 194 101 100
Services cost............................................. 124 45 737 271 676
--------- --------- --------- --------- ---------
Total cost of revenue................................... 139 108 931 372 776
--------- --------- --------- --------- ---------
Gross profit.............................................. 458 621 1,084 627 925
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................................. 634 1,846 2,021 869 1,880
Sales and marketing....................................... 649 2,593 4,049 2,315 2,788
General and administrative................................ 372 792 1,080 579 1,105
Stock compensation........................................ 24 246 673 259 1,283
--------- --------- --------- --------- ---------
Total operating expenses................................ 1,679 5,477 7,823 4,022 7,056
--------- --------- --------- --------- ---------
Operating loss.......................................... (1,221) (4,856) (6,739) (3,395) (6,131)
Other income (expense), net............................... 41 165 149 127 118
--------- --------- --------- --------- ---------
Net loss before provision for taxes..................... (1,180) (4,691) (6,590) (3,268) (6,013)
Provision for taxes..................................... -- -- -- -- 40
--------- --------- --------- --------- ---------
Net loss................................................ $ (1,180) $ (4,691) $ (6,590) $ (3,268) $ (6,053)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Other comprehensive income (loss)--translation
adjustment.............................................. -- -- (2) -- 6
--------- --------- --------- --------- ---------
Comprehensive loss...................................... $ (1,180) $ (4,691) $ (6,592) $ (3,268) $ (6,047)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share--basic and diluted....................... $ (0.33) $ (1.41) $ (1.74) $ (0.89) $ (1.43)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares--basic and diluted.................. 3,598 3,331 3,797 3,682 4,246
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 SIX MONTHS ENDED JUNE 30,
1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------
SERIES A SERIES B SERIES C
--------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <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).................... -- -- -- -- 5,586,003 5
Issuance of Series C preferred stock in exchange for
services (unaudited).................................... -- -- -- -- 6,500 --
Foreign currency translation adjustment (unaudited)....... -- -- -- -- -- --
Deferred compensation expense on stock option issuances
(unaudited)............................................. -- -- -- -- -- --
Amortization of deferred compensation expense
(unaudited)............................................. -- -- -- -- -- --
Net loss (unaudited)...................................... -- -- -- -- -- --
--------- ---------- --------- ---------- --------- ----------
Balances, June 30, 1999 (unaudited)....................... 2,657,971 $ 3 4,080,960 $ 4 5,592,503 $ 5
--------- ---------- --------- ---------- --------- ----------
--------- ---------- --------- ---------- --------- ----------
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER
--------------------- PAID IN COMPENSATION COMPREHENSIVE
SHARES AMOUNT CAPITAL EXPENSE INCOME (LOSS)
--------- ---------- ----------- --------------- ---------------
<S> <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.................................................. -- -- (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.................... -- -- -- -- --
--------- ---------- ----------- ------- ------
Balances, December 31, 1996............................... 4,035,000 4 3,746 (251) --
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.................................................. -- -- -- -- --
--------- ---------- ----------- ------- ------
Balances, December 31, 1997............................... 4,035,000 4 12,274 (474) --
Issuance of stock options to nonemployees................. -- -- 8 -- --
Issuance of common stock upon exercise of stock options... 174,535 -- 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.................................................. -- -- -- -- --
--------- ---------- ----------- ------- ------
Balances, December 31, 1998............................... 4,209,535 4 14,124 (1,501) (2)
Issuance of common stock upon exercise of stock options
(unaudited)............................................. 575,485 1 261 -- --
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 -- --
Foreign currency translation adjustment (unaudited)....... -- -- -- -- 6
Deferred compensation expense on stock option issuances
(unaudited)............................................. -- -- 6,864 (6,864) --
Amortization of deferred compensation expense
(unaudited)............................................. -- -- -- 1,283 --
Net loss (unaudited)...................................... -- -- -- -- --
--------- ---------- ----------- ------- ------
Balances, June 30, 1999 (unaudited)....................... 4,785,020 $ 5 $ 40,077 $ (7,082) $ 4
--------- ---------- ----------- ------- ------
--------- ---------- ----------- ------- ------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
Balances, December 31, 1995............................... $ 137 $ 141
Net loss prior to August 24, 1996......................... (331) (331)
Transfer of accumulated deficit to additional paid in
capital in conjunction with termination of S corporation
status.................................................. 194 --
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) (850)
------------- -------------
Balances, December 31, 1996............................... (850) 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) (4,691)
------------- -------------
Balances, December 31, 1997............................... (5,541) 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) (6,590)
------------- -------------
Balances, December 31, 1998............................... (12,131) 501
Issuance of common stock upon exercise of stock options
(unaudited)............................................. -- 262
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
Foreign currency translation adjustment (unaudited)....... -- 6
Deferred compensation expense on stock option issuances
(unaudited)............................................. -- --
Amortization of deferred compensation expense
(unaudited)............................................. -- 1,283
Net loss (unaudited)...................................... (6,053) (6,053)
------------- -------------
Balances, June 30, 1999 (unaudited)....................... $ (18,184) $ 14,832
------------- -------------
------------- -------------
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 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) $ (3,268) $ (6,053)
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 -- 77
Amortization of deferred stock compensation expense............. 24 246 673 259 1,283
Depreciation.................................................... 29 121 201 94 171
Amortization of debt discount................................... -- -- 12 -- 43
Changes in operating assets and liabilities:
Accounts receivable........................................... 7 (204) -- 227 (870)
Prepaid expenses and other current assets..................... (46) (101) (24) (217) (388)
Accounts payable and accrued liabilities...................... 132 374 47 119 1,491
Deferred revenue.............................................. 74 204 (178) (114) 588
--------- --------- --------- --------- ---------
Net cash used in operating activities....................... (960) (4,017) (5,851) (2,900) (3,658)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of furniture and equipment............................. (134) (352) (291) (167) (1,286)
Other long-term assets.......................................... -- -- (108) (50) (937)
--------- --------- --------- --------- ---------
Net cash used in investing activities....................... (134) (352) (399) (217) (2,223)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings on equipment line.................................... -- -- 553 400 1,966
Payments on equipment line...................................... -- -- -- -- (1,107)
Proceeds from issuance of preferred stock and warrants, net..... 3,668 8,028 -- -- 18,756
Issuance of common stock upon exercise of stock options......... -- -- 87 58 262
Payments on stockholder note payable............................ (50) (19) -- -- --
Borrowing on stockholder note payable........................... 65 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by financing activities................... 3,683 8,009 640 458 19,877
--------- --------- --------- --------- ---------
Effect of exchange rate fluctuations................................ -- -- (2) -- 6
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents................ 2,589 3,640 (5,612) (2,659) 14,002
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 $ 3,651 $ 14,700
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year/period for interest..................... $ -- $ -- $ 25 $ 5 $ 81
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Noncash investing and financing activities--
Issuance of warrants and options for services, debt issuance
costs or equity offering costs................................ $ -- $ 34 $ 63 $ -- $ 194
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deferred compensation expense associated with stock option
activity...................................................... $ 275 $ 469 $ 1,700 $ 854 $ 6,864
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 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 May 27, 1999, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
Tumbleweed to sell shares of its common stock in connection with a proposed
initial public offering. If the offering is consummated under the terms
presently anticipated, all currently outstanding shares of preferred stock will
automatically convert into shares of common stock upon the closing of the
proposed initial public offering. The conversion of the convertible preferred
stock has been reflected in the unaudited pro forma consolidated balance sheet
as of June 30, 1999.
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.
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.
F-7
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(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.
(b) UNAUDITED PRO FORMA FINANCIAL BALANCE SHEET
The pro forma consolidated balance sheet as of June 30, 1999 includes (i)
the assumed automatic conversion of all outstanding shares of Series A, B and C
convertible preferred stock upon the closing of Tumbleweed's planned initial
public offering into 12,331,434 shares of common stock, and (ii) the assumed
cashless conversion of the December 1997 and May 1999 warrant issuances, using
the assumed initial public offering price, into approximately 87,040 shares of
common stock.
(c) 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 June 30, 1999, Tumbleweed had $6,972,000 in commercial paper
and $6,512,000 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.
(d) 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.
(e) 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
F-8
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the form of a working model has been established. To date, capitalized costs for
Tumbleweed's software development have not been material.
(f) 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.
(g) 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 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
F-9
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
(h) 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.
F-10
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(i) 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.
(j) 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. 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options............................. 1,154 1,489 2,409 1,950 2,673
Shares of restricted stock subject to repurchase................ 873 535 197 368 30
Shares issuable pursuant to warrants or rights to purchase
convertible preferred stock................................... -- 40 61 40 120
Shares of convertible preferred stock on an "as-if-converted"
basis......................................................... 2,658 6,724 6,724 6,724 12,331
--------- --------- --------- --------- ---------
4,685 8,788 9,391 9,082 15,154
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
As of June 30, 1999, the weighted average exercise prices of stock options
and warrants or rights to purchase preferred stock outstanding were $0.80 and
$3.22, respectively.
F-11
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(k) 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.
(l) UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated financial information as of June 30, 1999 and for the six
months ended June 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
six months ended June 30, 1999 are not necessarily indicative of results that
may be expected for the entire year.
(m) 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.
(n) 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 financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(o) 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.
(p) 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.
F-12
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(q) 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.
(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>
F-13
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(2) FINANCIAL STATEMENT COMPONENTS (CONTINUED)
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 per share to Hikari Tsushin ("Hikari"), a Japanese
company, resulting in gross proceeds to Tumbleweed of approximately $14.0
million.
On March 31, 1999, Tumbleweed entered into a License and Distribution
Agreement with Hikari. The distribution agreement grants Hikari the right to
resell Tumbleweed's products to its customers. During the six months ended June
30, 1999, the Company recognized approximately $614,000 for perpetual license
fee, distribution rights and maintenance revenue from Hikari.
(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). The Debt Facility expires on July
22, 1999. 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 are 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
F-14
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(4) DEBT (CONTINUED)
$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 Debt Facility. As part of the
amendment, Tumbleweed increased its Equipment Line by $1,000,000. Borrowings are
due in 36 equal monthly installments beginning January 1, 2000.
As of June 30, 1999, minimum debt payments under all agreements were as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
- -----------------------------------------------------------------
<S> <C>
1999............................................................. $ 168
2000............................................................. 571
2001............................................................. 535
2002............................................................. 322
2003............................................................. 11
---------
1,607
Less interest.................................................... (195)
Less current installments of equipment line...................... (227)
---------
$ 1,185
---------
---------
</TABLE>
(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>
F-15
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES (CONTINUED)
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, 1997 and 1998, Tumbleweed has federal and California net
operating loss carryforwards of approximately $5,700,000 and $11,000,000,
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.
F-16
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES (CONTINUED)
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 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
(a) 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 June 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.
(b) 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
F-17
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
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 June 30, 1999, were
approximately 197,000 and 30,000, respectively.
(c) 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.
(d) 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.
(e) 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-18
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING 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.............................................. 500,000 -- --
Granted (unaudited)..................................... (1,011,250) 1,011,250 1.29
Exercised (unaudited)................................... -- (575,485) 0.46
Canceled (unaudited).................................... 171,480 (171,480) 0.50
----------- -----------
Balances, June 30, 1999 (unaudited)..................... 194,984 2,673,496 0.80
----------- -----------
----------- -----------
Options vested as of June 30, 1999 (unaudited).......... 537,736
-----------
-----------
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 June 30, 1999:
<TABLE>
<CAPTION>
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
- -------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
$0.50................................................... 1,864,746 8.4 537,736
0.80................................................... 745,750 9.7 --
9.60................................................... 63,000 10.0 --
----------- -----------
2,673,496 537,736
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
(f) 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 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 $6.8 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 six months ended June 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 $1,283,000 were recognized in the
years ended December 31, 1996, 1997 and 1998, and in the six months ended June
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.
(g) 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%;
F-20
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
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; 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.
(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-21
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(8) COMMITMENTS
(a) 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.
(b) 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 six month periods ended June 30, 1998 and
1999 was approximately $38,000 and $55,000, 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-22
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 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
STATES BELGIUM TAIWAN OTHER 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>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
SALES:
Customer A............................................... --% 38% 33% 37% 6%
Customer B............................................... 22 26 -- -- --
Customer C............................................... -- 12 -- -- --
Customer D............................................... -- -- 28 12 32
Customer E............................................... -- -- 30 45 4
Customer F............................................... 26 -- -- -- --
Customer G............................................... 20 -- -- -- --
Customer H............................................... 12 2 2 2 1
Customer I............................................... -- -- -- -- 36
Customer J............................................... -- -- -- -- 10
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Customer A............................................... --% 43% --% 83% 5%
Customer B............................................... 85 -- -- -- --
Customer C............................................... -- 19 -- -- --
Customer D............................................... -- -- 82 -- 45
Customer E............................................... -- 36 16 7 9
Customer F............................................... -- -- -- -- --
Customer G............................................... -- -- -- -- --
Customer H............................................... -- -- -- -- --
Customer I............................................... -- -- -- -- 18
Customer J............................................... -- -- -- -- 12
</TABLE>
F-23
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
Revenue aggregating 0%, 0%, 30%, 45% and 40% of total revenue for the years
ended December 31, 1996, 1997 and 1998 and for the six months ended June 30,
1998 and 1999, respectively, was 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. Following stockholder approval, the
Certificate of Incorporation of the Delaware successor corporation will
authorize 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.
F-24
<PAGE>
[TUMBLEWEED LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the expenses to be incurred in connection with
the offering described in this Registration Statement, all of which will be paid
by Tumbleweed. All amounts are estimates, other than the registration fee, the
NASD fee, and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 18,070
NASD Filing fee................................................. 7,000
Nasdaq National Market listing fee.............................. 95,000
Accounting fees and expenses.................................... 300,000
Legal fees and expenses......................................... 450,000
Printing and engraving expenses................................. 220,000
Transfer agent fees and expenses................................ 6,750
Blue sky fees and expenses...................................... 10,000
Miscellaneous fees and expenses................................. 43,180
---------
Total......................................................... $1,150,000
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. 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 director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or 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
II-1
<PAGE>
approved or dissented at the time, may 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 the action occurred or
immediately after the absent director receives notice of the unlawful acts.
Our 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 the section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated Bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
- we 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
- we 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 intend to enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) On August 28, 1996, September 30, 1996 and October 29, 1997, Registrant
issued and sold an aggregate of 2,657,971 shares of Series A preferred
stock to 18 investors for $1.38 per share, or an aggregate of
$3,667,999.98. Upon the closing of this offering, each share of Series A
preferred stock will automatically convert into one share of common
stock. The foregoing purchases and sales were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof on the basis
that the transactions did not involve a public offering.
(b) On August 21, 1997 and September 4, 1997, Registrant issued and sold an
aggregate of 4,065,960 shares of Series B preferred stock to 13 investors
for $1.98 per share, or an aggregate of $8,074,996.56. Upon the closing
of this offering, each share of Series B preferred stock will
automatically convert into one share of common stock. The foregoing
purchases and
II-2
<PAGE>
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder on the basis
that the transactions did not involve a public offering.
(c) On December 19, 1997, Registrant issued a warrant to Dynalab Technology
to purchase 40,000 shares of Series B preferred stock for $2.50 per
share. Upon the closing of this offering this warrant will be
automatically terminated unless otherwise exercised. The issuance of this
warrant was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(d) On November 30, 1998, Registrant issued a warrant to Silicon Valley Bank
to purchase 20,973 shares of Series C preferred stock for $3.576 per
share. The issuance of this warrant was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(e) On February 11, 1999, Registrant issued 15,000 shares of Series B
preferred stock to a consultant of Registrant for services rendered
valued at $29,790. Upon the closing of this offering, these shares of
Series B preferred stock will automatically convert into 15,000 shares of
common stock. The foregoing purchase and sale was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transaction did not involve a public offering.
(f) On February 26, 1999 and May 13, 1999, Registrant issued and sold an
aggregate of 5,592,503 shares of Series C preferred stock to a total of
14 investors for $3.576 per share, or an aggregate of $19,975,546.73.
Upon the closing of this offering, each share of Series C preferred stock
will automatically convert into one share of common stock. The foregoing
purchases and sales were exempt from registration under the Securities
Act pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder on the basis that the transactions did not involve a public
offering.
(g) On March 24, 1999, Registrant issued 6,500 shares of Series C preferred
stock to a consultant of Registrant for services rendered valued at
$23,244. Upon the closing of this offering, these shares of Series C
preferred stock will automatically convert into 6,500 shares of common
stock. The foregoing purchase and sale was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(h) On May 13, 1999, Registrant issued a warrant to Hambrecht & Quist LLC to
purchase 75,503 shares of Series C preferred stock for $3.576 per share.
Upon the closing of this offering this warrant will be automatically
terminated unless otherwise exercised. The issuance of this warrant was
exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.
(i) As of July 8, 1999, an aggregate of 750,020 shares of common stock had
been issued upon exercise of options under the Registrant's 1993 stock
option plan at a weighted average exercise price of $0.47 per share, or
an aggregate of $350,010. The foregoing purchases and sales were exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof or Rule 710 promulgated thereunder.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, except that Hambrecht & Quist
LLC acted as placement agent in connection with the transaction described in
paragraph (f) above. See "Underwriting." The recipients in such transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution, and
appropriate legends were affixed to the share certificates and instruments
issued in those transactions.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- --------------------------------------------------------------------------
<C> <S>
1.1(1) Form of Underwriting Agreement
3.1(3) Amended and Restated Articles of Incorporation of the Registrant, as
amended
3.2(3) Amended and Restated Certificate of Incorporation of the Registrant
3.3(3) Bylaws of the Registrant
3.4(3) Amended and Restated Bylaws of the Registrant
4.1(1) Specimen common stock certificate
4.2(3) Investors' Rights Agreement, dated as of February 26, 1999, among the
Registrant, the Founders, and the holders of the Registrant's preferred
stock
4.3(3) Warrant to Purchase Stock, dated November 30, 1998, issued to Silicon
Valley Bank
5.1(2) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1(3) Form of Indemnity Agreement between the Registrant and each of its
directors and officers
10.2(3) 1993 Stock Option Plan, as amended, and form of agreements thereunder
10.3(3) Form of 1999 Omnibus Stock Incentive Plan and form of stock option
thereunder
10.4(2) Form of 1999 Employee Stock Purchase Plan
10.5(3)+ Software License, Development and Services Agreement, dated December 19,
1997, between the Registrant and United Parcel Service General Services,
Co.
10.6(3)+ Posta License and Distribution Agreement, dated as of March 31, 1999,
between Tumbleweed Software, K.K. and K.K. Hikari Tsushin.
10.7(3)+ OEM Object Code License Agreement, dated as of March 30, 1998, between the
Registrant and RSA Data Security, Inc.
10.8(3) Employment Agreement, dated May 24, 1999, between Tumbleweed Software Inc.
and Tumbleweed Limited and Donald N. Taylor
21(3) Subsidiaries of the Registrant
23.1(2) Consent of KPMG LLP
23.2(2) Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit
5.1)
24.1(3) Power of Attorney
27.1(2) Financial Data Schedule
</TABLE>
- ------------------------
(1) To be filed by amendment
(2) Filed with this amendment
(3) Previously filed
+ We sought confidential treatment from the Securities and Exchange Commission
for selected portions of this exhibit. The omitted portions were separately
filed with the Securities and Exchange Commission.
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.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing certificates in the denominations and registered in the names as
required by the Underwriters to permit prompt delivery to each purchaser.
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 provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant 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 action,
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 maser has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against pubic policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant under Rule 424(b) (1) or (4) or
497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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 bonafide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF REDWOOD
CITY, STATE OF CALIFORNIA, ON JULY 13, 1999.
<TABLE>
<S> <C> <C>
TUMBLEWEED COMMUNICATIONS CORP.
By: /s/ JOSEPH C. CONSUL
------------------------------------------
Joseph C. Consul
VICE PRESIDENT--FINANCE AND CHIEF
FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board,
/s/ JEFFREY C. SMITH* President and Chief
- ------------------------------ Executive Officer July 13, 1999
Jeffrey C. Smith (Principal Executive
Officer)
Vice President--Finance
and Chief Financial
/s/ JOSEPH C. CONSUL Officer (Principal
- ------------------------------ Financial Officer and July 13, 1999
Joseph C. Consul Principal Accounting
Officer)
/s/ DAVID F. MARQUARDT*
- ------------------------------ Director July 13, 1999
David F. Marquardt
/s/ TIMOTHY C. DRAPER*
- ------------------------------ Director July 13, 1999
Timothy C. Draper
- ------------------------------ Director July 13, 1999
Standish H. O'Grady
/s/ ERIC J. HAUTEMONT*
- ------------------------------ Director July 13, 1999
Eric J. Hautemont
</TABLE>
<TABLE>
<S> <C> <C>
/s/ JOSEPH C. CONSUL
------------------------------------------
Joseph C. Consul
*By: ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- --------------------------------------------------------------------------
<C> <S>
1.1(1) Form of Underwriting Agreement
3.1(3) Amended and Restated Articles of Incorporation of the Registrant, as
amended
3.2(3) Amended and Restated Certificate of Incorporation of the Registrant
3.3(3) Bylaws of the Registrant
3.4(3) Amended and Restated Bylaws of the Registrant
4.1(1) Specimen common stock certificate
4.2(3) Investors' Rights Agreement, dated as of February 26, 1999, among the
Registrant, the Founders, and the holders of the Registrant's preferred
stock
4.3(3) Warrant to Purchase Stock, dated November 30, 1998, issued to Silicon
Valley Bank
5.1(2) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1(3) Form of Indemnity Agreement between the Registrant and each of its
directors and officers
10.2(3) 1993 Stock Option Plan, as amended, and form of stock option thereunder
10.3(3) Form of 1999 Omnibus Stock Incentive Plan and form of stock option
thereunder
10.4(2) Form of 1999 Employee Stock Purchase Plan
10.5(3)+ Software License, Development and Services Agreement, dated December 19,
1997, between the Registrant and United Parcel Service General Services,
Co.
10.6(3)+ Posta License and Distribution Agreement, dated as of March 31, 1999,
between Tumbleweed Software, K.K. and K.K. Hikari Tsushin.
10.7(3)+ OEM Object Code License Agreement, dated as of March 30, 1998, between the
Registrant and RSA Data Security, Inc.
10.8(3) Employment Agreement, dated May 24, 1999, between Tumbleweed Software Inc.
and Tumbleweed Limited and Donald N. Taylor
21(3) Subsidiaries of the Registrant
23.1(2) Consent of KPMG LLP
23.2(2) Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit
5.1)
24.1(3) Power of Attorney
27.1(2) Financial Data Schedule
</TABLE>
- ------------------------
(1) To be filed by amendment
(2) Filed with this amendment
(3) Previously filed
+ We sought confidential treatment from the Securities and Exchange Commission
for selected portions of this exhibit. The omitted portions were separately
filed with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 5.1
[Skadden, Arps, Slate, Meagher & Flom LLP Letterhead]
July 13, 1999
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, CA 94063
Re: Tumbleweed Communications
Corp. Registration on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to Tumbleweed Communications Corp., a
California corporation (the "Company"), in connection with the initial public
offering by the Company of up to 4,600,000 shares (including 600,000 shares
subject to an over-allotment option) (the "Shares") of the Company's Common
Stock, par value $0.001 per share (the "Common Stock").
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-79687) as filed with the Securities and
Exchange Commission (the "Commission") on May 28, 1999 under the Act, Amendment
No. 1 thereto filed with the Commission on June 29, 1999 and Amendment No. 2
thereto filed with the Commission on July 13, 1999 (such Registration Statement,
as so amended, being hereinafter referred to as the "Registration Statement");
(ii) the form of Underwriting Agreement (the "Underwriting Agreement") proposed
to be entered into among the Company, as issuer, and Credit Suisse First Boston
Corporation, Hambrecht & Quist LLC and ING Barings LLC, as representatives of
the several underwriters (the "Underwriters"); (iii) a specimen certificate
representing the Common Stock; (iv) the Amended and Restated Certificate of
Incorporation of the Company, as presently in effect, and the form of Amended
and Restated Certificate of Incorporation of the Company, filed as an exhibit to
the Registration Statement; (v) the Bylaws of the Company, as presently in
effect, and the form of Amended and Restated Bylaws of the Company, filed as an
exhibit to the Registration Statement; and (vi) certain resolutions of the Board
of Directors of the Company relating to the issuance and sale of the Shares and
related matters. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of the
Company and others.
<PAGE>
Securities and Exchange Commission
July 13, 1999
Page 2
Members of our firm are admitted to the bar in the State of California, and
we do not express any opinion as to the laws of any other jurisdiction other
than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the opinion that when (i)
the Registration Statement becomes effective; (ii) the price at which the Shares
are to be sold to the Underwriters pursuant to the Underwriting Agreement and
other matters relating to the issuance and sale of the Shares have been approved
by the Board of Directors; (iii) the Underwriting Agreement has been duly
executed and delivered; and (iv) certificates representing the Shares in the
form of the specimen certificates examined by us have been manually signed by an
authorized officer of the transfer agent and registrar for the Common Stock and
registered by such transfer agent and registrar, and delivered to and paid for
by the Underwriters at a price per share not less than the per share par value
of the Common Stock as contemplated by the Underwriting Agreement, the issuance
and sale of the Shares will have been duly authorized, and the Shares will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
[Skadden, Arps, Slate, Meagher & Flom
LLP]
<PAGE>
Exhibit 10.4
TUMBLEWEED COMMUNICATIONS CORP.
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Tumbleweed Communications
Corp. 1999 Employee Stock Purchase Plan (the "Plan"). The Plan was adopted by
the Board (defined below) on May 27, 1999, 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 Communications Corp., a
Delaware corporation.
<PAGE>
(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
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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%)
6
<PAGE>
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
<PAGE>
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
<PAGE>
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 500,000 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
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
12
<PAGE>
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.
13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed Communications Corp.
We consent to the form of our report included herein and to the references
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG LLP
San Francisco, California
July 13, 1999
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<PAGE>
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<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
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<TOTAL-LIABILITY-AND-EQUITY> 1,725 19,037
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