<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TUMBLEWEED COMMUNICATIONS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4899 94-3336053
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
</TABLE>
700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------------
BERNARD J. CASSIDY, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
TUMBLEWEED COMMUNICATIONS CORP.
700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------------------
COPIES TO:
GREGORY C. SMITH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
525 UNIVERSITY AVENUE, SUITE 220
PALO ALTO, CALIFORNIA 94301
(650) 470-4500
ROBERT A. NERO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERFACE SYSTEMS, INC.
5855 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
(734) 769-5900
ALEKSANDRA A. MIZIOLEK, ESQ.
DYKEMA GOSSETT PLLC
400 RENAISSANCE CENTER
DETROIT, MICHIGAN 48243
(313) 568-6800
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger of a subsidiary of the Registrant with and into
Interface Systems, Inc. pursuant to the Agreement and Plan of Merger, dated as
of June 28, 2000, described in the enclosed joint proxy statement/prospectus,
have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share, of
Tumbleweed................................ 1,479,903(1) N/A $82,134,614(2) $21,684(2)
</TABLE>
(1) Represents 4,719,675 outstanding shares of common stock of Interface on
June 28, 2000 plus an additional 886,018 shares of Interface common stock
reserved for issuance, multiplied by the exchange ratio of 0.264.
(2) Reflects the market price of the common stock of Interface to be converted
into common stock of the Registrant in connection with the merger (set forth
in footnote (1) above) computed in accordance with Rule 457(f) and
Rule 457(c) under the Securities Act, based upon the average of the high and
low sale prices of the Interface common stock as quoted on the Nasdaq
National Market on July 12, 2000. The proposed maximum aggregate offering
price is estimated solely to determine the registration fee.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
[LOGO]
INTERFACE SYSTEMS, INC.
5855 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
TELEPHONE: (734) 769-5900
August , 2000
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Interface Systems, Inc. to be held on August , 2000 at 10:00 a.m., local time,
at the Crowne Plaza Hotel, 610 Hilton Boulevard, Ann Arbor, Michigan. THIS IS A
VERY IMPORTANT SPECIAL MEETING THAT AFFECTS YOUR INVESTMENT IN INTERFACE.
At this special meeting you will be asked to vote on an Agreement and Plan
of Merger, dated as of June 28, 2000, which we refer to as the Merger Agreement,
pursuant to which a subsidiary of Tumbleweed Communications Corp. will merge
with and into Interface and Interface will become a wholly-owned subsidiary of
Tumbleweed. In the merger, Tumbleweed will issue to Interface shareholders 0.264
of a share of Tumbleweed common stock for each share of Interface common stock
that you own. The exchange of Interface common stock for Tumbleweed common
stock, other than cash paid for fractional shares, is intended to be tax-free to
Interface shareholders for federal income tax purposes. In addition, outstanding
Interface employee and director stock options and warrants will be assumed by
Tumbleweed.
You will also be asked to consider and vote upon an amendment to the
Interface Systems, Inc. 1992 Stock Option Plan to increase the number of shares
issuable under such plan by 900,000 shares from 1,100,000 to 2,000,000 shares.
Approval of the amendment to the 1992 Stock Option Plan is not a condition to
the consummation of the merger. The increase, requested by Tumbleweed, is
intended to allow a significantly broader distribution of options among the
Interface employees and to help incentivize and retain Interface employees in
the future.
Your board of directors has unanimously approved the merger and has
determined that the Merger Agreement and the merger are in your best interests
and recommends that you vote to approve the Merger Agreement and the
transactions associated with it at the special meeting. The Merger Agreement is
attached to the accompanying proxy statement/prospectus as Annex A. In addition,
your board of directors recommends a vote for approval of the amendment to the
1992 Stock Option Plan. The amended and restated 1992 Stock Option Plan is
attached to the accompanying proxy statement/prospectus as Annex E.
In reaching this determination, your board of directors received the written
opinion of Newbury, Piret Companies, Inc. to the effect that, as of the date of
such opinion, the exchange ratio is fair, from a financial point of view, to
Interface shareholders. A copy of this opinion which sets forth the assumptions
made, matters considered, and the scope of review undertaken, is attached to the
accompanying proxy statement/ prospectus as Annex F.
We have enclosed a notice of special meeting and a proxy
statement/prospectus discussing the proposed merger and the related Merger
Agreement and the amendment to the 1992 Stock Option Plan. We encourage you to
read these documents carefully. Also enclosed is a proxy card so you can vote on
the Merger Agreement and the amendment to the 1992 Stock Option Plan without
attending the meeting. Please complete, sign and date the enclosed proxy card
and return it to us as soon as possible in the stamped envelope we have
provided. However, you are cordially invited to attend the special meeting in
person.
Thank you for your cooperation.
Very truly yours,
Robert A. Nero
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
[LOGO]
INTERFACE SYSTEMS, INC.
5855 INTERFACE DRIVE
ANN ARBOR, MICHIGAN 48103
TELEPHONE: (734) 769-5900
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST , 2000
------------------------
A special meeting of our shareholders will be held at the Crowne Plaza
Hotel, 610 Hilton Boulevard, Ann Arbor, Michigan on August , 2000 at
10:00 a.m., local time. The board of directors of Interface Systems, Inc. asks
you to attend this important special meeting to consider and vote upon the
following:
- To approve and adopt the Agreement and Plan of Merger, dated as of
June 28, 2000, by and among Tumbleweed Communications Corp., Maize
Acquisition Sub, Inc., a direct wholly-owned subsidiary of Tumbleweed, and
Interface, pursuant to which Maize Acquisition Sub will be merged with and
into Interface with Interface becoming a wholly-owned subsidiary of
Tumbleweed.
- To approve an amendment to the Interface Systems, Inc. 1992 Stock Option
Plan to increase the number of shares issuable under such plan by 900,000
shares from 1,100,000 to 2,000,000 shares.
In the merger, Tumbleweed will issue to Interface shareholders 0.264 of a
share of Tumbleweed common stock for each share of Interface common stock that
they own. In addition, outstanding Interface employee and director stock options
and warrants will be assumed by Tumbleweed. Approval of the amendment to the
1992 Stock Option Plan is not a condition to the consummation of the merger. The
increase, requested by Tumbleweed, is intended to allow a significantly broader
distribution of options among the Interface employees and to help incentivize
and retain Interface employees in the future.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT AND THE
MERGER ARE IN YOUR BEST INTERESTS AND RECOMMENDS THAT YOU VOTE TO APPROVE THE
MERGER AGREEMENT AND THE TRANSACTIONS ASSOCIATED WITH IT AT THE SPECIAL MEETING.
IN ADDITION, YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE 1992 STOCK OPTION PLAN.
In connection with the execution of the Merger Agreement, a group of
shareholders of Interface collectively holding 83,081 shares of Interface common
stock (representing approximately 1.76% of the outstanding Interface common
stock) have entered into voting agreements with Tumbleweed, pursuant to which
these shareholders have agreed, among other things, to vote such shares of
Interface common stock to approve the Merger Agreement and the transactions
associated with it at the special meeting.
Only shareholders who held their shares of Interface common stock at the
close of business on August , 2000 will be entitled to notice of, and to vote
at, the special meeting or any adjournments or postponements. The merger cannot
be completed unless holders of a majority of the outstanding shares of Interface
common stock on the record date affirmatively vote to approve the Merger
Agreement.
Accompanying this notice is a proxy statement/prospectus discussing the
proposed merger and the related Merger Agreement and the amendment to the 1992
Stock Option Plan. We encourage you to read this document carefully. Also
enclosed is a proxy card so you can vote on the Merger Agreement and the
amendment to the 1992 Stock Option Plan without attending the meeting. Please
complete, sign and date the enclosed proxy card and return it to us as soon as
possible in the stamped envelope we have provided. If your shares are not
registered in your own name and you plan to attend the special meeting and vote
your shares in person, you will need to ask the broker, trust company, bank or
other nominee that holds your shares to provide you with evidence of your share
ownership on August , 2000 and bring that evidence to the special meeting. You
may also revoke your proxy at any time before the meeting.
By order of the board of directors,
Brian D. Brooks,
CORPORATE SECRETARY
Date: August , 2000
<PAGE>
PROSPECTUS
TUMBLEWEED COMMUNICATIONS CORP.
PROXY STATEMENT
INTERFACE SYSTEMS, INC.
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The boards of directors of Tumbleweed Communications Corp. and Interface
Systems, Inc. have approved a Merger Agreement pursuant to which, if approved by
the shareholders of Interface, a subsidiary of Tumbleweed will be merged with
and into Interface and Interface will become a wholly-owned subsidiary of
Tumbleweed.
Upon completion of the merger, Interface shareholders will receive 0.264 of
a share of Tumbleweed common stock for each share of Interface common stock that
they own. The exchange of Interface common stock for Tumbleweed common stock,
other than cash paid for fractional shares, is intended to be tax-free to
Interface shareholders for federal income tax purposes. In addition, holders of
Interface employee and director stock options and warrants will have their
options and warrants converted into options and warrants to purchase 0.264 of a
share of Tumbleweed common stock for each share of Interface common stock
subject to an existing option or warrant. The converted options and warrants
will have an exercise price per share equal to the exercise price per share of
the existing options and warrants divided by 0.264. Tumbleweed stockholders will
continue to own their existing shares after the merger.
The board of directors of Interface has also approved an amendment to the
Interface Systems, Inc. 1992 Stock Option Plan to increase the number of shares
issuable under such plan by 900,000 shares from 1,100,000 to 2,000,000 shares.
The increase, requested by Tumbleweed, is intended to allow a significantly
broader distribution of options among the Interface employees and to help
incentivize and retain Interface employees in the future.
This proxy statement/prospectus is also the prospectus of Tumbleweed
regarding the Tumbleweed common stock to be issued to Interface shareholders in
exchange for their shares of Interface common stock in connection with the
merger. Based on the number of shares of Interface common stock outstanding on
June 28, 2000, Tumbleweed will issue approximately 1,245,994 shares of
Tumbleweed common stock to Interface shareholders in the merger. Tumbleweed
estimates that the shares of Tumbleweed common stock to be issued to Interface
shareholders will represent approximately 5.33% of the outstanding common stock
of Tumbleweed after the merger based on the shares outstanding on June 30, 2000.
As a result, the shares of Tumbleweed common stock held by Tumbleweed
stockholders prior to the merger will represent approximately 94.67% of the
outstanding common stock of Tumbleweed after the merger. In addition, Tumbleweed
will reserve approximately 233,909 shares of Tumbleweed common stock for
issuance upon the exercise of converted Interface options and warrants or
approximately .84% of the outstanding common stock of Tumbleweed after the
merger. Tumbleweed shares to be issued in connection with the merger or upon the
exercise of converted Interface options and warrants will be listed, subject to
official notice of issuance, on the Nasdaq National Market under the symbol
"TMWD." Interface common stock is currently listed on the Nasdaq National Market
under the symbol "INTF."
The merger cannot be completed unless the shareholders of Interface approve
the Merger Agreement and the transactions associated with it under the Merger
Agreement. Interface has scheduled a special meeting for its shareholders to
vote on the Merger Agreement and the transactions associated with it under the
Merger Agreement and to approve an amendment to the Interface Systems, Inc. 1992
Stock Option Plan to increase the number of shares issuable under such plan by
900,000 shares from 1,100,000 to 2,000,000 shares. The Interface board of
directors has determined that the Merger Agreement and the transactions
associated with it are in your best interests. THE INTERFACE BOARD OF DIRECTORS
RECOMMENDS THAT INTERFACE SHAREHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT AND
<PAGE>
RELATED TRANSACTIONS UNDER THE MERGER AGREEMENT AND TO APPROVE THE AMENDMENT TO
THE 1992 STOCK OPTION PLAN. YOUR VOTE IS VERY IMPORTANT.
Only shareholders who held their shares of Interface at the close of
business on August , 2000 will be entitled to notice of, and to vote at, the
special meeting of Interface and any adjournments or postponements.
The dates, times and place of the special meeting is as follows: August ,
2000, 10:00 a.m. Crowne Plaza Hotel, 610 Hilton Boulevard, Ann Arbor, Michigan.
This proxy statement/prospectus provides you with detailed information about
the proposed Merger Agreement and the transactions associated with it and the
amendment to the 1992 Stock Option Plan. This document incorporates important
business and financial information about each of Tumbleweed and Interface that
is not included in or delivered with this document. You may obtain documents
that are filed with the Securities and Exchange Commission and incorporated by
reference in this document without charge by requesting them in writing or by
telephone from the appropriate party at the addresses listed in "Where You Can
Find More Information" on page vi.
See "Risk Factors" beginning on page 13 for a discussion of certain factors
that you should consider in determining how to vote on the Merger Agreement and
the transactions associated with it.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE TUMBLEWEED COMMON STOCK TO BE
ISSUED UNDER THIS PROXY STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This proxy statement/prospectus, dated , will be first mailed to
shareholders on or about .
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION......................... vi
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. vii
SUMMARY..................................................... 1
The Companies............................................. 4
Our Reasons for the Merger................................ 4
Recommendations to Shareholders........................... 4
Shareholder Vote Required to Approve the Merger and the
Amendment to the 1992 Stock Option Plan................. 5
The Merger................................................ 5
Stock Option Agreement.................................... 6
Convertible Promissory Note............................... 7
Anticipated Accounting Treatment.......................... 7
Interests of Persons in the Merger........................ 7
Dissenters' Rights........................................ 7
Risks of the Merger....................................... 7
Opinions of Financial Advisors............................ 7
Comparative Per Share Market Price Information............ 7
Listing of Tumbleweed Common Stock........................ 8
Delisting of Interface Common Stock....................... 8
Forward-Looking Statements May Prove Inaccurate........... 8
Comparative Rights of Stockholders........................ 8
Tumbleweed and Interface Comparative Per Share Data....... 9
Summary Consolidated Financial Data....................... 11
RISK FACTORS................................................ 13
Risks Related to the Merger............................... 13
Risks Related to Tumbleweed............................... 14
Risks Related to Interface................................ 24
Risks Related to Sales of Tumbleweed Common Stock......... 24
THE SPECIAL MEETING OF INTERFACE SHAREHOLDERS............... 26
Date, Time and Place; Purpose of Meeting.................. 26
Record Date............................................... 26
Voting and Revocation of Proxies.......................... 26
Vote Required to Approve the Merger and the Amendment to
the 1992 Stock Option Plan.............................. 27
Principal Shareholders.................................... 27
Absence of Appraisal Rights............................... 27
Solicitation of Proxies................................... 27
Recommendation of Interface's Board of Directors.......... 28
THE MERGER.................................................. 29
General................................................... 29
Background of the Merger.................................. 29
Reasons for Tumbleweed Engaging in the Merger............. 30
Reasons for Interface Engaging in the Merger;
Recommendation of the Interface Board................... 31
Opinion of Interface's Financial Advisor.................. 33
Anticipated Accounting Treatment.......................... 38
Interests of Persons in the Merger........................ 38
Dissenters' Rights........................................ 40
Resale Restrictions....................................... 40
Stock Exchange Listing.................................... 41
Delisting and Deregistration of Interface Common Stock.... 41
Treatment of Stock Certificates........................... 41
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
THE MERGER AGREEMENT........................................ 42
The Merger................................................ 42
Exchange Procedures....................................... 42
Corporate Organization and Governance..................... 43
Representations and Warranties............................ 43
Covenants................................................. 45
No Solicitation of Transactions........................... 46
Access to Information..................................... 47
Indemnification and Insurance............................. 47
Cooperation and Reasonable Efforts........................ 48
Conditions to the Consummation of the Merger.............. 48
Termination............................................... 49
Termination Fee and Expenses.............................. 49
Amendment; Extension and Waiver........................... 50
THE STOCK OPTION AGREEMENT.................................. 51
THE VOTING AGREEMENTS....................................... 53
THE CONVERTIBLE PROMISSORY NOTE............................. 55
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....... 57
PROPOSAL TO AMEND THE 1992 STOCK OPTION PLAN................ 58
TUMBLEWEED BUSINESS......................................... 61
Overview.................................................. 61
Industry Background....................................... 61
The Tumbleweed Solution................................... 61
Strategy.................................................. 63
Tumbleweed Products....................................... 65
Tumbleweed Professional Services.......................... 66
Customers and Markets..................................... 67
Sales..................................................... 68
Marketing................................................. 69
Technology................................................ 69
Governmental Regulation................................... 73
Intellectual Property..................................... 74
Legal Proceedings......................................... 75
Competition............................................... 75
Employees................................................. 76
Properties and Facilities................................. 76
SELECTED CONSOLIDATED FINANCIAL DATA........................ 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--TUMBLEWEED..................... 78
TUMBLEWEED MANAGEMENT....................................... 91
Executive Officers and Directors.......................... 91
Classified Board of Directors............................. 94
Board Committees.......................................... 94
Director Compensation..................................... 94
Compensation Committee Interlocks and Insider
Participation........................................... 95
Executive Compensation.................................... 95
Option Grants in Last Fiscal Year......................... 95
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values.................................. 96
Employment Agreements..................................... 97
Equity Incentive Plans.................................... 97
Limitation of Liability and Indemnification............... 100
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Certain Relationships and Related Transactions............ 101
PRINCIPAL STOCKHOLDERS OF TUMBLEWEED........................ 103
DESCRIPTION OF TUMBLEWEED CAPITAL STOCK..................... 105
MAIZE....................................................... 106
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 107
Classified Board of Directors............................. 107
Number of Directors....................................... 107
Removal of Directors; Filling Vacancies................... 108
No Stockholder Action by Written Consent; Special
Meetings................................................ 108
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals................................... 109
Authorized Capital Stock.................................. 111
Voting Rights............................................. 111
Preferred Stock........................................... 112
Amendment of the Certificate and Articles of Incorporation
and Bylaws.............................................. 112
Business Combinations..................................... 113
Limitation of Liability of Directors...................... 115
Indemnification of Directors and Officers................. 115
MARKET PRICE AND DIVIDEND INFORMATION....................... 117
INTERFACE MANAGEMENT........................................ 119
PRINCIPAL SHAREHOLDERS OF INTERFACE......................... 121
EXPERTS..................................................... 123
LEGAL MATTERS............................................... 123
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ANNEXES:
A--Agreement and Plan of Merger, dated as of June 28, 2000
B--Stock Option Agreement, dated June 28, 2000
C--Form of Voting Agreement
D-- Convertible Subordinated Note Purchase Agreement and Form of Convertible
Subordinated Note
E--Form of Amended and Restated Interface Systems, Inc. 1992 Stock Option
Plan
F--Fairness Opinion of Newbury, Piret Companies, Inc.
v
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Tumbleweed and Interface file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
either company at the Securities and Exchange Commission's public reference
rooms at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following regional offices of the Securities and Exchange Commission:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and 7 World Trade Center, Suite 1300, New York, New York 10048. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. The companies' filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the Securities and Exchange Commission at http://www.sec.gov.
Tumbleweed filed a Registration Statement on Form S-4 to register with the
Securities and Exchange Commission the Tumbleweed common stock to be issued to
Interface shareholders in the merger. This proxy statement/prospectus is a part
of that Registration Statement and constitutes a prospectus of Tumbleweed in
addition to being a proxy statement for Interface for its special meeting of
shareholders. As allowed by the Securities and Exchange Commission's rules, this
proxy statement/ prospectus does not contain all of the information you can find
in the Registration Statement or the exhibits to the Registration Statement.
This proxy statement/prospectus summarizes some of the documents that are
exhibits to the Registration Statement, and you should refer to the exhibits for
a more complete description of the matters covered by those documents.
The Securities and Exchange Commission allows Interface to "incorporate by
reference" information into this proxy statement/prospectus. This means that
Interface may disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is considered to be part of this proxy
statement/prospectus, except for any information modified or superseded by
information in (or incorporated by reference in) this proxy
statement/prospectus. This proxy statement/prospectus incorporates by reference
the documents set forth below that have been previously filed with the
Securities and Exchange Commission. The documents contain important information
about Interface and its finances. The following documents of Interface are
incorporated by reference:
- Current Report on Form 8-K filed on July 7, 2000.
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
- Definitive Proxy Statement on Schedule 14A filed on January 20, 2000.
- Current Report on Form 8-K filed on January 4, 2000.
- Quarterly Report on Form 10-Q for the quarter ended December 31, 1999.
- Annual Report on Form 10-K for the year ended September 30, 1999.
- Description of Interface's common stock contained in Interface's
Registration Statement on Form 10 under the Securities and Exchange Act of
1934, as amended, Number 0-10902.
Interface is also incorporating by reference additional documents that it
may file with the Securities and Exchange Commission between the date of this
proxy statement/prospectus and the date of its special meeting of shareholders
to be held in connection with the merger. Statements contained in documents
incorporated by reference may be modified or superseded by later statements in
this proxy statement/prospectus or by statements in subsequent documents
incorporated by reference, in which case you should refer to the later
statement.
vi
<PAGE>
Interface has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Interface, and
Tumbleweed has supplied all such information relating to Tumbleweed.
Tumbleweed or Interface will provide, without charge, a copy of any or all
of their documents incorporated by reference in this proxy statement/prospectus
(other than exhibits to such documents, unless the exhibits are specifically
incorporated by reference in such documents). You may obtain documents
incorporated by reference in this proxy statement/prospectus by requesting them
in writing or by telephone from the appropriate party at the following
addresses:
FOR TUMBLEWEED DOCUMENTS:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, California 94063
Attention: Investor Relations Department
Telephone: (650) 216-2018
FOR INTERFACE DOCUMENTS:
Interface Systems, Inc.
5855 Interface Drive
Ann Arbor, Michigan 48103
Attention: Brian D. Brooks
Telephone: (734) 769-5900
If you would like to request documents from Interface, please do so by
to receive them before the special meeting of stockholders.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER AGREEMENT AND
THE TRANSACTIONS ASSOCIATED WITH IT AND THE AMENDMENT TO THE 1992 STOCK OPTION
PLAN. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED . YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF TUMBLEWEED COMMON STOCK
IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document, the documents of Tumbleweed and Interface incorporated by
reference herein and other communications to stockholders and shareholders of
Tumbleweed and Interface, respectively, may contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to expectations concerning matters that are not
historical facts. Also, when Tumbleweed or Interface uses words such as
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Although each of Tumbleweed and Interface believes
that the expectations reflected in such forward-looking statements are
reasonable, neither can give any assurance that such expectations will prove to
have been correct, particularly with respect to the ability of Tumbleweed to
complete its proposed public offering. Important factors that could cause actual
results to differ materially from such expectations are disclosed herein, in
documents incorporated by reference and in other communications to stockholders,
including, without limitation, in conjunction with the forward-looking
statements included under "Risk Factors." All forward-looking statements
attributable to Tumbleweed are expressly qualified in their entirety by those
factors, which
vii
<PAGE>
may cause actual results to differ materially from expectations described
herein. For further cautions about the risks of investing in Tumbleweed, we
refer you to the documents Tumbleweed files from time to time with the
Securities and Exchange Commission, particularly the Tumbleweed Registration
Statement on Form S-1 dated July 11, 2000, the Annual Report on Form 10-K for
the year ended December 31, 1999 and the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000. All forward-looking statements attributable to
Interface are expressly qualified in their entirety by those factors, which may
cause actual results to differ materially from expectations described herein.
For further information about the risks relating to Interface and its business,
we refer you to Interface's reports filed with the Securities and Exchange
Commission, including the Annual Report on Form 10-K for the year ended
September 30, 1999, the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 and the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.
viii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND THE AMENDMENT TO THE 1992 STOCK OPTION PLAN, AND
FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE PROPOSED MERGER AND
THE AMENDMENT TO THE 1992 STOCK OPTION PLAN, YOU SHOULD READ CAREFULLY THIS
ENTIRE DOCUMENT AS WELL AS THE ADDITIONAL DOCUMENTS TO WHICH WE REFER YOU TO.
SEE "WHERE YOU CAN FIND MORE INFORMATION" (PAGE VI).
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: The proposed merger offers a strategic growth opportunity for each company.
Currently Tumbleweed and Interface each provide solutions that address
specific aspects of a complete communication system for electronic statement
presentment. Tumbleweed technology enables businesses to move traditionally
paper-based communications online, through added security, reliability and
personalization over current messaging networks. Interface's L2i technology
enables businesses to transform legacy information sources into online
formats. Tumbleweed and Interface believe that each of these market segments
is growing and that a presence in each market segment will enhance the
ability of the combined company to command a larger share of the electronic
statement presentment market as a whole.
In addition to maintaining the independent solutions, the combined companies
would offer customers a single source for a fuller, more integrated suite of
business communication products and services. By combining the technology
and expertise of each company, the combined companies will provide customers
with a single source to satisfy requirements for electronic statement
presentment. The integrated technology would enable customers to transform
legacy content into online formats, generate personalized messages from the
content, add multiple levels of security, deliver the content to recipients,
track delivery status, archive historical transactions and enable subsequent
secure two-way communications between senders and recipients.
In addition, in order to continue to focus on its core strategies,
Tumbleweed has announced its intention to divest Interface businesses other
than L2i. These businesses comprised a substantial majority of the
historical operating results of Interface, as more fully described in the
pro forma financial statements included elsewhere in this proxy
statement/prospectus.
Q: WHAT WILL INTERFACE SHAREHOLDERS RECEIVE IN THE MERGER?
A: Interface shareholders will receive 0.264 of a share of Tumbleweed common
stock in exchange for each share of Interface common stock. Tumbleweed will
not issue fractional shares that they own. Interface shareholders who would
otherwise be entitled to receive a fractional share instead will receive a
cash payment based on the market value of the fractional share of Tumbleweed
stock on the date of the merger.
FOR EXAMPLE:
- IF YOU CURRENTLY OWN 100 SHARES OF INTERFACE COMMON STOCK, THEN AFTER THE
MERGER YOU WILL BE ENTITLED TO RECEIVE 26 SHARES OF TUMBLEWEED COMMON
STOCK AND A CHECK FOR THE MARKET VALUE OF THE 0.4 FRACTIONAL SHARE.
- IF YOU CURRENTLY OWN 100 SHARES OF TUMBLEWEED COMMON STOCK, THEN YOU WILL
CONTINUE TO OWN THOSE 100 SHARES AFTER THE MERGER.
Each outstanding stock option and warrant to acquire Interface common stock
will be converted into an option or warrant to purchase 0.264 of a share of
Tumbleweed common stock for each share of Interface common stock covered by
the option or warrant before the merger.
1
<PAGE>
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "Risk Factors" on pages 13 through 25.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: Tumbleweed and Interface are working towards completing the merger as soon as
possible. In addition to shareholder approval, we must satisfy other
conditions described in the Merger Agreement. The parties hope to complete
the merger before September 30, 2000.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO SHAREHOLDERS?
A: The exchange of shares by Interface shareholders is intended to be tax-free
to Interface shareholders for Federal income tax purposes. However, Interface
shareholders may have to pay taxes on cash received for fractional shares. To
review the tax consequences to shareholders in greater detail, see page 57.
THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR OWN SITUATION.
YOU SHOULD CONSULT YOUR TAX ADVISORS FOR A FULL UNDERSTANDING OF THESE TAX
CONSEQUENCES.
Q: WHAT WILL TUMBLEWEED'S DIVIDEND POLICY BE?
A: Tumbleweed presently anticipates that it will retain any future earnings to
finance development and expansion of its business and provide working
capital. Tumbleweed does not anticipate paying any cash dividends on
Tumbleweed common stock for the foreseeable future. Following the merger,
Tumbleweed's board of directors will use its discretion to decide whether to
declare dividends and the amount of any dividends.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve the Merger Agreement and the transactions
associated with it. If the merger is approved by you, Interface will become a
wholly-owned subsidiary of Tumbleweed.
In addition, you are being asked to approve an amendment to the Interface
Systems Inc. 1992 Stock Option Plan to increase the number of shares
issuable under such plan by 900,000 shares from 1,100,000 to 2,000,000
shares.
Interface's board of directors has approved the Merger Agreement and the
amendment to the 1992 Stock Option Plan and recommends voting FOR approval
of the Merger Agreement and the transactions associated with it and FOR
approval of the amendment to the 1992 Stock Option Plan.
For a discussion of the reasons for the merger and the amendment to the 1992
Stock Option Plan, see pages 29 through 41 and pages 58 through 60.
Q: WHAT DO I NEED TO DO NOW?
A: You should complete, sign and mail your signed proxy card in the enclosed
return envelope as soon as possible, so that your shares will be represented
at your special shareholders' meeting. The Interface meeting will take place
on August , 2000.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Interface shareholders will receive
written instructions for exchanging their stock certificates. Tumbleweed
stockholders will keep their certificates because the merger will not require
surrender of Tumbleweed stock certificates.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your Interface shares only if you provide instructions
on how to vote. Without instructions your shares will not be voted. Shares
that are not voted will be counted as votes against the Merger Agreement and
the transactions associated with it and will have no effect on the vote to
amend the 1992 Stock Option Plan.
2
<PAGE>
Q: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you would like additional copies of the proxy statement/prospectus, or if
you have more questions about the merger, you should contact the appropriate
party at the addresses listed in "Where You Can Find More Information" on
page vi.
3
<PAGE>
THE COMPANIES
TUMBLEWEED COMMUNICATIONS CORP.
700 Saginaw Drive
Redwood City, California 94063
Telephone: (650) 216-2000
Tumbleweed Communications Corp. is a leading provider of advanced messaging
solutions for business communications. Tumbleweed's products and services enable
businesses to extend existing networks and applications, creating secure online
channels for interactive, business-critical communication. Tumbleweed Integrated
Messaging Exchange, or Tumbleweed IME, is a platform and set of applications for
creating secure communications channels between a business and its customers,
partners and suppliers. Tumbleweed Messaging Management System, or Tumbleweed
MMS, is a comprehensive solution that extends internal e-mail systems to the
Internet through centralized management, policy enforcement, filtering and
archiving. Used together, Tumbleweed IME and Tumbleweed MMS automatically apply
security policies and redirect sensitive e-mail for secure, trackable delivery.
INTERFACE SYSTEMS, INC.
5855 Interface Drive
Ann Arbor, Michigan 48103
(734) 769-5900
Interface is a leading developer and marketer of e-commerce software
solutions for Fortune 1000 companies. Interface is currently completing a
transition plan that focused on the movement from the manufacturing of hardware
(printers, circuit boards, and peripheral equipment) to the development and
marketing of higher margin and higher growth software solutions. Interface is
now organized around two software solutions groups: L2i and Cleo.
Interface's L2i solutions include software products and implementation
services that enable large organizations to re-deploy information stored on
legacy systems as the foundation for their strategic e-commerce or
internet-based applications. Interface's products are geared primarily toward
the fast growing online billing and customer statement delivery markets.
Interface offers rapid, cost-effective implementation without having to alter
the legacy applications. Our list of growing customers includes leaders in the
financial services and public utilities industries.
The Cleo solutions assist companies with the connection of their personal
computers to legacy mainframes. This product group also is utilized to manage
communications and to transport files from the client mainframe to Electronic
Data Interchange or e-commerce networks. Interface has been divesting various
businesses and Tumbleweed has announced its intent to divest the Cleo Solutions
group as well.
OUR REASONS FOR THE MERGER
The Tumbleweed and Interface boards of directors have unanimously approved
the Merger Agreement and the transactions associated with it, and have
determined that the Merger Agreement and the transactions associated with it are
in the best interests of their respective shareholders. In reaching their
respective decisions, the boards of directors of the two companies considered
that the combination of the companies will offer customers a completed
communication system for electronic statement presentment.
To review the reasons for the merger in greater detail, as well as related
uncertainties, see pages 29 through 41.
REASONS FOR OPTION PLAN AMENDMENT
The increase in the number of shares issuable under the 1992 Stock Option
Plan, which was requested by Tumbleweed, is intended to allow for a
significantly broader distribution of options among the Interface employees and
to help incentivize and retain Interface employees in the future.
RECOMMENDATIONS TO SHAREHOLDERS
The Interface board of directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
the Merger Agreement and the transactions associated with it. The Interface
4
<PAGE>
board of directors also recommends that you vote FOR the amendment to the 1992
Stock Option Plan.
SHAREHOLDER VOTE REQUIRED TO APPROVE THE MERGER AND THE AMENDMENT TO THE 1992
STOCK OPTION PLAN
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Interface common stock is required to approve the Merger
Agreement and the transactions associated with it. Your abstention or failure to
vote, or your failure to instruct your broker or nominee as to how to vote
shares that you own but that are not held in your name, as an Interface
shareholder will have the effect of a vote against the Merger Agreement and the
transactions associated with it.
In connection with the execution of the Merger Agreement, a group of
shareholders of Interface collectively holding 83,081 shares of Interface common
stock, representing approximately 1.76% of the outstanding Interface common
stock, have entered into voting agreements with Tumbleweed, pursuant to which
these shareholders have agreed, among other things, to vote their shares of
Interface common stock to approve the Merger Agreement and the transactions
associated with it at the Interface special meeting.
The affirmative vote of the holders of a majority of the shares of Interface
common stock voted in person or by proxy at the Interface special meeting is
required to approve the amendment to the 1992 Stock Option Plan. Your abstention
or failure to vote, or your failure to instruct your broker or nominee as to how
to vote shares that you own but that are not held in your name, as an Interface
shareholder will have no effect on such proposal to amend the 1992 Stock Option
Plan.
To review information relating to shareholder votes in greater detail, see
"The Special Meetings--Voting Securities and Record Dates" on page 26.
THE MERGER (PAGE 29)
The Merger Agreement is attached as Annex A at the back of this proxy
statement/ prospectus. We encourage you to read the Merger Agreement because it
is the legal document that governs the proposed merger.
WHAT INTERFACE SHAREHOLDERS WILL RECEIVE IN THE MERGER
As a result of the merger, Interface shareholders will receive 0.264 of a
share of Tumbleweed common stock for each share of Interface common stock that
they own. Interface shareholders will not receive fractional shares. Instead,
they will receive a check in payment for any fractional share based on the
market value of Tumbleweed common stock on the date of the completion of the
merger.
In addition, at the time the merger is completed, holders of Interface
employee and director stock options and warrants will have their options and
warrants converted into options or warrants to purchase 0.264 of a share of
Tumbleweed common stock for each outstanding share of Interface common stock
subject to an existing option or warrant at that time. The exercise price of
such converted option or warrant will be adjusted to reflect the exchange ratio.
DO NOT SEND IN YOUR STOCK CERTIFICATES NOW. WHEN THE MERGER IS COMPLETED,
INTERFACE SHAREHOLDERS WILL RECEIVE WRITTEN INSTRUCTIONS FOR EXCHANGING THEIR
INTERFACE STOCK CERTIFICATES. TUMBLEWEED STOCKHOLDERS WILL CONTINUE TO HOLD
THEIR TUMBLEWEED STOCK CERTIFICATES.
STATUS OF INTERFACE FOLLOWING THE MERGER
If the merger is approved, a subsidiary of Tumbleweed will merge with and
into Interface and Interface will become a wholly-owned subsidiary of
Tumbleweed. Shareholders of Interface before the merger will own stock in
Tumbleweed after the merger.
OWNERSHIP OF TUMBLEWEED FOLLOWING THE MERGER
Tumbleweed estimates the shares of Tumbleweed common stock issued to
Interface shareholders in the merger will constitute
5
<PAGE>
approximately 5.33% of the outstanding common stock of Tumbleweed after the
merger, and the current stockholders of Tumbleweed will hold the remaining
approximately 94.67% of the outstanding common stock of Tumbleweed after the
merger based on shares of Interface outstanding on June 28, 2000 and of
Tumbleweed on June 30, 2000.
CONDITIONS (PAGE 48)
The merger will not be completed unless certain conditions are met,
including the approval of the Merger Agreement and the transactions associated
with it by Interface shareholders. Some conditions may be waived.
NO SOLICITATION OF TRANSACTIONS (PAGE 46)
Interface has agreed, subject to some exceptions, not to initiate or engage
in discussions with a third party regarding a business combination with the
third party while the merger is pending.
TERMINATION (PAGE 49)
Tumbleweed and Interface may together agree to terminate the Merger
Agreement without completing the merger, whether or not Interface shareholders
have approved the Merger Agreement.
The Merger Agreement may also be terminated by the board of directors of
either company in other circumstances, including:
- if the merger is not completed on or before December 15, 2000, except that
neither Tumbleweed nor Interface may terminate the Merger Agreement if its
breach of the Merger Agreement is the reason the merger has not been
completed by that date;
- if the approval of the shareholders of Interface is not obtained;
- if any necessary regulatory approvals are not obtained; or
- if the other party has failed to perform its obligations under the Merger
Agreement.
Tumbleweed may also terminate the Merger Agreement if Interface's board of
directors has failed to recommend the merger to its shareholders or has
withdrawn or adversely modified or qualified its recommendation of the merger.
TERMINATION FEE (PAGE 49)
The Merger Agreement generally requires Interface to pay to Tumbleweed a
termination fee of $2.5 million, plus an amount equal to all of the costs and
expenses incurred by Tumbleweed in connection with the Merger Agreement and the
transactions associated with it, if the agreement is terminated because:
- Interface's board of directors has failed to recommend the merger to its
shareholders or has withdrawn or adversely modified or qualified its
recommendation of the merger;
- the approval of the shareholders of Interface is not obtained (except as
described below); or
- Interface materially breaches other specific obligations under the Merger
Agreement.
The Merger Agreement provides that the $2.5 million fee be reduced to
$1 million in the event the Merger Agreement is terminated because the approval
of Interface's shareholders is not obtained; provided that an alternative
transaction has not been entered into or announced prior to 360 calendar days
from the date of such termination.
STOCK OPTION AGREEMENT (PAGE 51)
In connection with the merger, Interface granted Tumbleweed an option to
purchase a number of shares of Interface common stock equal to 19.9% of the
total number of shares of Interface common stock issued and outstanding as of
June 28, 2000 if an event occurs which would entitle Tumbleweed to terminate the
Merger Agreement and which would entitle Tumbleweed to receive a termination
fee. Under this option, Tumbleweed would have the right to acquire
939,215 shares of Interface common stock, subject to adjustment, at $13.33 per
share.
6
<PAGE>
This option generally terminates upon the completion of the merger or upon
termination of the Merger Agreement in specified circumstances. A copy of the
stock option agreement is attached as Annex B at the back of this proxy
statement/prospectus. We encourage you to read the stock option agreement.
CONVERTIBLE PROMISSORY NOTE (PAGE 55)
In connection with the merger, Tumbleweed also agreed to purchase an
aggregate of $3 million convertible subordinated promissory notes of Interface.
The notes are convertible at Tumbleweed's option at any time into shares of
Interface common stock. The notes convert automatically if the merger agreement
is terminated due to a material breach by Tumbleweed. The initial conversion
price is $9.50 per share subject to adjustment upon the occurrence of certain
events, including but not limited to stock splits, reverse stock splits and
dividends paid on Interface common stock. The notes mature one year from the
date of issuance and accelerate upon an event of default, including termination
of the merger agreement if Interface shareholders elect not to approve it.
Interface also has agreed to register the shares issuable upon conversion of the
votes for resale under the Securities Act. The note purchase agreement and a
form of the note are attached as Annex D at the back of this proxy statement/
prospectus. We encourage you to read them.
ANTICIPATED ACCOUNTING TREATMENT (PAGE 38)
We intend that the merger will be accounted for as a purchase.
INTERESTS OF PERSONS IN THE MERGER (PAGE 38)
In considering the board's recommendations that you vote to approve the
merger, you should note that some of the directors and officers of Interface
have continuing indemnification against specified liabilities and participate in
arrangements that provide them with interests in the merger that are different
from, or in addition to, shareholders of Interface generally. The executive
officers of Interface have received offers of employment from Tumbleweed which
include additional compensation, severance packages and accelerated vesting of
Interface stock options. As a result, these directors and officers could be more
likely to vote to approve the Merger Agreement than shareholders of Interface
generally.
DISSENTERS' RIGHTS (PAGE 40)
Under Michigan law, Interface shareholders do not have any right to an
appraisal of the value of their Interface common stock in connection with the
merger.
RISKS OF THE MERGER (PAGE 13)
In considering whether to approve the Merger Agreement, you should consider
various risks of the merger, including the risk of fluctuations in the market
price of Tumbleweed common stock, risks associated with the merger and
integrating the companies' businesses and the fact that some directors and
officers of Interface may have interests in the merger that are different from
or in addition to yours. In particular, you should consider the possibility that
the proposed concurrent public offering of Tumbleweed may not be completed as
contemplated or at all. We urge you to read carefully the factors described in
"Risk Factors" on pages 12 through 23 in making your decision.
OPINIONS OF FINANCIAL ADVISOR (PAGE 33)
In deciding to approve the merger, the board of directors of Interface
considered an opinion from its financial advisor Newbury, Piret Companies, Inc.
as to the fairness of the exchange ratio, as of the date of the opinion, to the
shareholders of Interface from a financial point of view. The opinion, which
sets forth the assumptions made, procedures followed, matters considered and
limitations set on the scope of the review undertaken, is attached as Annex F to
this proxy statement/prospectus. We encourage you to read this opinion.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 9)
Shares of Tumbleweed common stock and Interface common stock are quoted on
the Nasdaq National Market. On June 28, 2000, the last trading day before the
announcement of the
7
<PAGE>
proposed merger, the Tumbleweed common stock closed at $50.50 per share and the
Interface common stock closed at $9.50 per share. On July 17, 2000, the last
trading day prior to the date of this proxy statement/ prospectus, Tumbleweed
common stock closed at $62.13 per share and Interface common stock closed at
$15.88 per share.
LISTING OF TUMBLEWEED COMMON STOCK (PAGE 41)
The shares of Tumbleweed common stock issued in connection with the merger
will be listed on the Nasdaq National Market.
DELISTING OF INTERFACE COMMON STOCK (PAGE 41)
Following the merger, the Interface common stock will no longer be listed on
the Nasdaq National Market.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE VII)
Each of Tumbleweed and Interface has made forward-looking statements in this
document (and in documents that are incorporated by reference) that are subject
to risks and uncertainties. Forward-looking statements include expectations
concerning matters that are not historical facts. Also, when we use words such
as "believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. For more information regarding factors that could
cause actual results to differ from these expectations, you should refer to the
specific risks described under "Risk Factors" beginning on page 13 and to the
documents referred to under "Where You Can Find More Information" on page vi.
COMPARATIVE RIGHTS OF STOCKHOLDERS (PAGE 107)
The rights of stockholders of Tumbleweed and shareholders of Interface are
currently governed by Delaware and Michigan law, respectively, and the
respective certificate and articles of incorporation and bylaws of the two
companies. If the merger is completed, the rights of former Interface
shareholders who become Tumbleweed stockholders will be determined by
Tumbleweed's certificate of incorporation and bylaws, which differ in some
respects from Interface's articles of incorporation and bylaws.
8
<PAGE>
TUMBLEWEED AND INTERFACE
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Tumbleweed and Interface and combined per share data on an unaudited pro forma
basis after giving effect to the merger using the purchase method of accounting,
assuming that 0.264 of a share of Tumbleweed common stock is issued in exchange
for each share of Interface common stock in the merger and on an unaudited pro
forma as adjusted basis after giving effect to the merger and to the sale of
shares of common stock in the proposed Tumbleweed public offering at an assumed
public offering price of $52.75 per share, less estimated underwriting discounts
and commissions and estimated offering expenses. The completion of the merger is
not contingent on consummation of the proposed Tumbleweed public offering. The
offering may not close on terms proposed or at all. This data should be read in
conjunction with the selected historical financial data, the unaudited pro forma
combined condensed financial information and the separate historical financial
statements of Tumbleweed and Interface and notes thereto, included elsewhere or
incorporated by reference in this proxy statement/prospectus. The pro forma
combined and pro forma as adjusted combined financial data are not necessarily
indicative of the operating result or financial position that would have been
achieved had the merger been consummated as of the beginning of the periods
presented and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------
1997 1998 1999 2000
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
HISTORICAL--TUMBLEWEED:
Net loss per share...................................... $(1.90) $(1.79) $(1.65) $(0.43)
Book value per share.................................... $ 2.43 $ 1.78
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31, MARCH 31,
-------------------------------- ---------- ------------
1997 1998 1999 2000 2000
-------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL--INTERFACE:
Net loss per share....................... $(2.47) $(0.48) $(0.06) $(0.68) $(0.36)
Book value per share..................... $ 1.74 $ 1.12
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
PRO FORMA COMBINED NET LOSS PER SHARE:
<S> <C> <C> <C> <C> <C>
Per Tumbleweed share..................... $(3.45) $(1.07)
Equivalent per Interface share........... (0.91) (0.28)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
2000
---------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE:
Per Tumbleweed share........................................ $4.18
Equivalent per Interface share.............................. $1.10
<CAPTION>
MARCH 31,
2000
---------
<S> <C>
PRO FORMA AS ADJUSTED COMBINED BOOK VALUE PER SHARE:
Per Tumbleweed share........................................ $6.53
Equivalent per Interface share.............................. $1.72
</TABLE>
9
<PAGE>
The historical book value per share amounts are computed by dividing
stockholders' equity by the number of shares of common stock outstanding at the
end of each period. The Interface equivalent combined per share amounts are
calculated by multiplying the Tumbleweed combined per share amounts by 0.264 of
a share of Tumbleweed common stock for each share of Interface common stock. The
pro forma combined net loss per share data gives effect to the acquisition of
Interface (assuming the divestiture of the Interface businesses other than L2i)
as if it occurred at the beginning of each of the pro forma periods presented by
combining the results for the year ended December 31, 1999 of Tumbleweed with
the results for the year ended September 30, 1999 of Interface and combining the
results for the three months ended March 31, 2000 of Tumbleweed with the same
period of Interface.
The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of the period. The pro forma as adjusted combined book
value per share is computed by dividing pro forma as adjusted stockholders'
equity by the pro forma as adjusted number of shares of common stock outstanding
at the end of the period. The pro forma combined book value and pro forma as
adjusted combined book value per share data give effect to Tumbleweed's
acquisition of Interface (assuming the divestiture of the Interface businesses
other than L2i) as if it had occurred on March 31, 2000.
10
<PAGE>
TUMBLEWEED SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
AND SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The following financial data, other than the pro forma data, includes the
financial data of Tumbleweed, after giving effect to the acquisition of
Worldtalk, and excludes the financial data of Interface. Our pro forma
consolidated statement of operations data gives effect to the acquisition of
Interface (assuming the divestiture of the Interface businesses other than L2i)
as if it occurred at the beginning of the pro forma period presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- ---------------------------------------
1999 2000
---------------------- -------------------------
1997 1998 ACTUAL PRO FORMA 1999 ACTUAL PRO FORMA
-------- -------- -------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue from continuing
product lines............. $ 4,476 $ 10,575 $ 15,284 $ 18,636 $ 3,269 $ 6,610 $ 7,931
Total revenue............... 12,056 15,463 16,756 20,108 3,907 6,610 7,931
Gross profit................ 7,946 11,213 11,853 14,685 3,003 4,362 5,402
Operating expenses(1)....... 19,897 23,456 37,900 71,411 6,090 23,552 34,785
Operating loss.............. (11,951) (12,243) (26,047) (56,726) (3,087) (19,190) (29,383)
Net loss.................... (11,461) (11,720) (24,222) (54,899) (2,931) (18,622) (28,803)
Net loss per share--basic
and diluted............... (1.90) (1.79) (1.65) (3.45) (0.43) (0.73) (1.07)
Shares used in calculating
basic and diluted loss per
share..................... 6,023 6,549 14,650 15,896 6,889 25,588 26,834
</TABLE>
The pro forma balance sheet data gives effect to the acquisition of
Interface (assuming the divestiture of the Interface businesses other than L2i)
as if it had occurred on March 31, 2000. The pro forma, as adjusted balance
sheet data includes the pro forma data and gives effect to the sale of shares of
common stock in the proposed Tumbleweed public offering at an assumed public
offering price of $52.75 per share, less estimated underwriting discounts and
commissions and estimated offering expenses. The completion of the merger is not
contingent on consummation of the proposed Tumbleweed public offering. The
offering may not close on terms proposed or at all.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
------------------------------------------------------
PRO FORMA
TUMBLEWEED INTERFACE PRO FORMA AS ADJUSTED
----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $46,447 $ 931 $ 47,276 $120,456
Total assets.......................................... 62,576 7,832 131,428 204,608
Long-term debt, excluding current installments........ 858 46 904 904
Total stockholders' equity............................ 45,883 5,254 113,316 186,496
</TABLE>
------------------------
(1) Includes stock compensation expense of $288,000, $715,000, $3.5 million,
$336,000 and $1.1 million for the years ended December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000, respectively.
11
<PAGE>
INTERFACE SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary financial data includes the financial data of
Interface and excludes the financial data of Tumbleweed. Interface's 1997
financial results include a non-recurring charge of $4.4 million related to the
write-off of inventory and capitalized software development costs, and its 1998
financial results include a $2.1 million loss on the disposal of its
ISIL distribution business.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 19,085 $21,611 $20,169 $10,073 $ 6,395
Cost of revenue............................................. 14,641 9,472 7,899 4,168 1,959
Gross profit................................................ 4,444 12,139 12,270 5,905 4,435
Operating expenses.......................................... 13,187 11,739 12,537 6,270 7,733
Operating loss.............................................. (8,743) 400 (267) (365) (3,298)
Other income (expense), net................................. 37 (45) 43 53 167
Loss before provision for taxes............................. (8,706) 355 224 (312) (3,131)
Income (loss) from continuing operations.................... (6,605) 767 (265) (312) (3,138)
Loss from discontinued operations........................... (4,274) (748) -- -- --
Loss on disposal of discontinued operations................. -- (2,141) -- -- --
Net loss.................................................... $(10,879) $(2,122) $ (265) $ (312) $(3,138)
Net income (loss) per share:
Income (loss) from continuing operations.................... $ (1.50) $ 0.17 $ (0.06) $ (0.07) $ (0.68)
Loss from discontinued operations........................... $ (0.97) $ (0.65) $ -- $ -- $ --
Net loss per share.......................................... $ (2.47) $ (0.48) $ (0.06) $ (0.07) $ (0.68)
Shares used in calculating basic and diluted loss per
share..................................................... 4,411 4,434 4,481 4,464 4,608
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------ MARCH 31,
1997 1998 1999 2000
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 830 $ 301 $ 1,575 $ 931
Total assets................................................ 28,831 13,177 10,523 7,832
Long-term debt, excluding current portion................... 171 121 70 46
Total stockholders' equity.................................. 9,743 7,913 7,919 5,254
</TABLE>
12
<PAGE>
RISK FACTORS
In considering whether to vote in favor of the Merger Agreement and the
transactions associated with it, you should consider carefully the following
matters.
RISKS RELATED TO THE MERGER
FLUCTUATIONS IN STOCK PRICES COULD DECREASE THE VALUE OF THE TUMBLEWEED COMMON
STOCK TO BE ISSUED IN THE MERGER.
Shareholders of Interface will receive 0.264 of a share of Tumbleweed common
stock for each share of Interface common stock that they own regardless of any
increase or decrease in the price of the common stock of either Tumbleweed or
Interface. The price of Tumbleweed common stock at the time of the merger may be
higher or lower than its price as of today's date or at the date of the special
meeting of shareholders of Interface. The price of Tumbleweed common stock could
change due to changes in the business, operations or prospects of Tumbleweed or
Interface, market assessments of the merger, regulatory considerations, general
market and economic conditions or other factors. As a result, there can be no
assurance to Interface shareholders that the value of the 0.264 of a share of
Tumbleweed common stock issuable in respect of a share of Interface common stock
will equal or exceed the market value of a share of Interface common stock.
Shareholders of Interface should obtain current market quotations for Tumbleweed
common stock and Interface common stock.
TUMBLEWEED'S EXPECTATIONS MAY NOT BE REALIZED, WHICH COULD HARM THE COMBINED
COMPANY'S PROSPECTS.
In connection with the proposed acquisition of Interface, Tumbleweed expects
to expense up to $2.0 million of acquired in-process research and development,
and to record unearned compensation and goodwill and other intangibles of
approximately $63.3 million to be amortized over periods ranging from one to
three years. Tumbleweed's expectations with respect to these amounts,
adjustments and periods are preliminary and therefore subject to substantial
subsequent adjustment. Any such adjustment could adversely affect its historical
or future operating results.
In this proxy statement/prospectus, you are presented with pro forma
financial statements based on a number of assumptions and adjustments to
historical financial information, including adjustments for the divestiture of
Interface businesses other than L2i. The pro forma condensed combined financial
information does not purport to represent what the consolidated results of
operations or financial condition of Tumbleweed would actually have been if the
Interface acquisition had in fact occurred on such dates or the future
consolidated results of operations or financial condition of Tumbleweed. In
addition, the transaction will result in significant one-time charges, whether
completed or not, and, if completed, will substantially increase the combined
company's operating expenses in future periods.
THE INTERFACE BUSINESSES OTHER THAN L2I COMPRISED A SUBSTANTIAL MAJORITY OF THE
OPERATING RESULTS OF INTERFACE, AND TUMBLEWEED INTENDS TO DIVEST THESE
BUSINESSES.
The Interface businesses other than L2i comprised a substantial majority of
the historical operating results of Interface, as more fully described in the
pro forma financial statements included elsewhere in this proxy
statement/prospectus. Specifically, the revenue from these businesses comprised
approximately $16.8 million or 83% of the revenues of Interface for the year
ended September 30, 1999 and $1.7 million or 56% of the revenues of Interface
for the three months ended March 31, 2000. In the event that these businesses
are successfully divested, the operations of the ongoing business of Interface
will be substantially less than the historical operating results that include
these businesses. Tumbleweed expects that the amount realized from the sale of
these businesses, if successfully completed, will be limited and has assumed no
gain or loss in the pro forma presentation. By contrast, if Tumbleweed does not
successfully divest these businesses, it will be required to maintain or
wind-down these businesses. The costs of doing so could be substantial and would
adversely affect
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<PAGE>
future operating results through ongoing realization of unanticipated expenses
and one-time disposition charges.
TUMBLEWEED MAY BE UNABLE TO SUCCESSFULLY INTEGRATE INTERFACE INTO ITS BUSINESS
OR ACHIEVE THE EXPECTED BENEFITS OF THE ACQUISITION.
The acquisition of Interface will require integrating Tumbleweed's business
with Interface's, including integrating product lines, technologies and distinct
corporate cultures. Tumbleweed may not be able to successfully assimilate the
personnel, operations and customers of Interface into its business.
Additionally, Tumbleweed may fail to maintain the customers it has and those of
Interface after the acquisition. Tumbleweed may also fail to achieve the
anticipated synergies from the acquisition of Interface, including product
development and other operational synergies. The integration process may further
strain its existing financial and managerial controls and reporting systems and
procedures. This may result in the diversion of management and financial
resources from its core business objectives. Tumbleweed may not be able to
retain various individuals who provide services to Interface that it intends to
hire in connection with the acquisition. Tumbleweed's failure to successfully
manage the Interface acquisition could seriously harm its operating results.
THE INTERESTS OF INTERFACE OFFICERS AND DIRECTORS IN THE MERGER MAY DIFFER FROM
OTHER STOCKHOLDERS.
Some executive officers and directors will receive benefits in connection
with the merger that are different from those held by Interface shareholders
generally. The executive officers of Interface have received offers of
employment from Tumbleweed which include additional compensation, severance
packages and, in the event of termination without cause, immediate accelerated
vesting of Interface stock options. In addition to his severance package, Robert
Nero's offer of employment includes accelerated vesting of stock options to
purchase approximately 33,333 shares of Interface common stock at the close of
the merger. Also, the Interface officers and directors have continuing
indemnification against specified liabilities. As a result, the Interface
officers and directors could be more likely to vote to approve the Merger
Agreement and the transactions associated with it than Interface shareholders
generally.
RISKS RELATED TO TUMBLEWEED
BECAUSE TUMBLEWEED IS IN AN EARLY STAGE OF DEVELOPMENT AND TUMBLEWEED HAS A
HISTORY OF LOSSES, IT IS DIFFICULT TO EVALUATE TUMBLEWEED'S BUSINESS AND
TUMBLEWEED MAY FACE EXPENSES, DELAYS AND DIFFICULTIES.
Tumbleweed has only a limited operating history upon which an evaluation can
be based. Accordingly, Tumbleweed's prospects must be considered in light of the
risks, expenses, delays and difficulties frequently encountered by companies in
a similarly early stage of development, particularly companies engaged in new
and rapidly evolving markets like secure online communication services.
Tumbleweed incurred net losses of $18.6 million in the three months ended
March 31, 2000 and $24.2 million in the year ended December 31, 1999. As of
March 31, 2000, Tumbleweed had incurred cumulative net losses of $83.9 million.
TUMBLEWEED ANTICIPATES CONTINUED LOSSES.
Tumbleweed's success will depend in large part upon its ability to generate
sufficient revenue to achieve profitability and to effectively maintain existing
relationships and develop new relationships with customers and strategic
partners. If Tumbleweed does not succeed, its revenue may not increase, and it
may not achieve or maintain profitability on a timely basis or at all. In
particular, Tumbleweed intends to expend significant financial and management
resources on product development, sales and marketing, strategic relationships,
technology and operating infrastructure. As a result, Tumbleweed
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<PAGE>
expects to incur additional losses and continued negative cash flow from
operations for the foreseeable future.
TUMBLEWEED'S QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.
As a result of Tumbleweed's limited operating history and the emerging
nature of the markets in which it competes, Tumbleweed is unable to accurately
forecast its revenue or expenses. Tumbleweed's success is dependent upon its
ability to enter into and maintain strategic relationships with customers and to
develop and maintain volume usage of its products by its customers and their
end-users. Tumbleweed's revenue has fluctuated and its quarterly operating
results will continue to fluctuate based on the timing of the execution of new
customer licenses in a given quarter. Tumbleweed's license revenue is comprised
entirely of initial license and distribution fees. As a result, Tumbleweed 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.
Tumbleweed's services revenue historically has been comprised almost
entirely of implementation, customization and consulting fees and support and
maintenance fees, as actual transaction-based revenue to date has been minimal.
As a result, Tumbleweed will be required to increase its 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
its services. Unless and until Tumbleweed has developed a significant and
recurring transaction-based revenue stream from communications that are sent
with its services, its revenue will continue to fluctuate significantly.
Accordingly, Tumbleweed may be unable to achieve and recognize quarterly or
annual revenue consistent with its historical operating results or expectations.
In addition, Tumbleweed has experienced, and expects to continue to
experience, fluctuations in revenue and operating results from quarter to
quarter for other reasons, including, but not limited to:
- the amount and timing of operating costs and capital expenditures relating
to its business, operations and infrastructure, including its
international operations;
- its ability to accurately estimate and control costs;
- the announcement or introduction of new or enhanced products and services
in the secure online communications or document delivery markets; and
- acquisitions that it completes or propose, including Worldtalk and
Interface.
As a result of these factors, Tumbleweed believes that quarter-to-quarter
comparisons of its revenue and operating results are not necessarily meaningful,
and that these comparisons may not be accurate indicators of future performance.
Because Tumbleweed's staffing and operating expenses are based on anticipated
revenue levels, and because a high percentage of its 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
Tumbleweed is 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 its operating results. Moreover,
Tumbleweed's operating results in one or more future quarters may fail to meet
the expectations of securities analysts or investors. If this occurs, Tumbleweed
would expect to experience an immediate and significant decline in the trading
price of its stock.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF TUMBLEWEED'S
REVENUE AND THE FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS COULD HARM ITS
BUSINESS.
The loss of one or more of Tumbleweed's 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
15
<PAGE>
would harm its business and prospects. Five customers comprised approximately
30% of Tumbleweed's revenue in the first quarter of 2000, and 24% of its revenue
in fiscal 1999. Tumbleweed expects that a small number of customers will
continue to account for a substantial portion of its revenue for the foreseeable
future.
TUMBLEWEED'S SERVICE PROVIDER CUSTOMERS MAY COMPETE WITH IT OR FAIL TO PROMOTE
ITS PRODUCT.
To date, Tumbleweed has generated a significant amount of Tumbleweed IME
revenue from contracts with a limited number of service provider customers,
which use or intend to use its 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, the adoption of Tumbleweed's services and the
recognition of associated revenue could be limited. Because Tumbleweed's
contracts with its service provider customers are non-exclusive, these customers
could elect to offer competing secure online communication services to their
customers through its existing or future competitors. The service provider
customers also may compete with Tumbleweed's secure online communication
services through their traditional physical delivery channels.
IF TUMBLEWEED DOES NOT SECURE KEY RELATIONSHIPS WITH ENTERPRISE CUSTOMERS, ITS
ACCESS TO BROADER MARKETS WILL BE LIMITED.
Tumbleweed's enterprise customers, which use or intend to use its products
to intelligently manage the incoming and outgoing online communications of their
enterprises, are a significant source of its revenue. A key aspect of
Tumbleweed's 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 Tumbleweed's entry into
these target markets, which would harm its business and prospects.
CUSTOMERS IN A PRELIMINARY PHASE OF IMPLEMENTING TUMBLEWEED'S PRODUCTS MAY NOT
PROCEED ON A TIMELY BASIS OR AT ALL.
Some of Tumbleweed's customers are currently in a pre-production or
pre-launch stage of implementing its products and may encounter delays or other
problems in introducing them. A customer's decision not to do so or a delay in
implementation could result in a delay or loss in related revenue or otherwise
harm Tumbleweed's businesses and prospects. Tumbleweed cannot predict when any
customer that is currently in a pilot or preliminary phase will implement
broader use of its services.
THE MARKETS FOR ENHANCED ONLINE COMMUNICATION SERVICES GENERALLY, AND FOR
TUMBLEWEED'S PRODUCTS SPECIFICALLY, ARE NEW AND MAY NOT DEVELOP.
The market for Tumbleweed's products and services is new and evolving
rapidly. If the market for Tumbleweed's products and services fails to develop
and grow, or if its products and services do not gain broad market acceptance,
its business and prospects will be harmed. In particular, Tumbleweed's success
will depend upon the adoption and use by current and potential customers and
their end-users of secure online communication services. Tumbleweed's success
will also depend upon acceptance of its technology as the standard for providing
these services. The adoption and use of Tumbleweed's products and services will
involve changes in the manner in which businesses have traditionally exchanged
information. In addition, sales and marketing of Tumbleweed's products and
services is to a large extent under the control of its customers. In some cases,
Tumbleweed's customers have little experience with products, services and
technology like those offered by us. Tumbleweed's ability to influence usage of
its products and services by customers and end-users is limited. For example,
the usage of Tumbleweed IME by the end-users of Tumbleweed's service provider
customers has been limited to date. Tumbleweed has spent, and intends to
continue to spend, considerable resources educating potential customers and
their end-users about the value of its products and services. It is
16
<PAGE>
difficult to assess, or to predict with any assurance, the present and future
size of the potential market for Tumbleweed's products and services, or its
growth rate, if any. Moreover, Tumbleweed cannot predict whether its products
and services will achieve any market acceptance. Tumbleweed's ability to achieve
its goals also depends upon rapid market acceptance of future enhancements of
its products. Any enhancement that is not favorably received by customers and
end-users may not be profitable and, furthermore, could damage Tumbleweed's
reputation or brand name.
THE MARKETS TUMBLEWEED ADDRESSES ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING,
AND IT MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Tumbleweed may not be able to compete successfully against current and
future competitors, and the competitive pressures it faces could harm its
business and prospects. Tumbleweed IME is an alternative to traditional mail and
courier delivery services, such as those offered by Federal Express Corporation,
UPS or the U.S. Postal Service, and to general purpose e-mail applications and
services. As such, Tumbleweed competes with these options. Tumbleweed's direct
competition comes from other secure online communication service providers of
various sizes, some of which have products that are intended to compete directly
with our products. Examples of secure online communication service providers
include Automatic Data Processing, Inc., Critical Path, Inc., VeriCert.com,
e-Parcel, LLC, PostX Corporation and ZixIt Corporation. In addition, companies
with which Tumbleweed does not presently directly compete may become competitors
in the future, either through the expansion of its products and services or
through their product development in the area of secure online communication
services. These companies could include America Online, Inc./Netscape
Communications Corporation, International Business Machines Corporation/Lotus
Development Corporation, Microsoft Corporation and VeriSign, Inc.
TUMBLEWEED FACES TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY
PREVENT IT FROM SUCCESSFULLY INTEGRATING WORLDTALK, OR ANY OTHER COMPANY IT MAY
ACQUIRE.
The integration of the Worldtalk Communications Corporation business,
including its technology, operations and personnel, has been and will be a
complex, time consuming and expensive process that may disrupt Tumbleweed's
business if not completed in a timely and efficient manner. Additionally, the
integration of any other company or business Tumbleweed may acquire in the
future, including Interface, will be a complex, time consuming and expensive
process that may disrupt its business if not completed in a timely and efficient
manner. Whenever an acquisition is completed, Tumbleweed must operate as a
combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices. In
particular, Tumbleweed is currently evaluating and upgrading its management
information systems and establishing uniformity among its systems and those
formerly operated by Worldtalk. Tumbleweed will be required to do the same for
any subsequently acquired company, including Interface. Tumbleweed may encounter
substantial difficulties, costs and delays involved in integrating the
operations of the Worldtalk, Interface, or any other company, including:
- potential incompatibility of business cultures;
- perceived adverse changes in business focus;
- potential conflicts in customer, advertising or strategic relationships;
- potential failure to complete anticipated sales; and
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
As a result, Tumbleweed may not be successful in integrating Worldtalk,
Interface or any other business or technologies it acquires and may not achieve
anticipated revenue and cost benefits.
17
<PAGE>
Tumbleweed also cannot guarantee that these acquisitions will result in
sufficient revenues or earnings to justify its investment in, or expenses
related to, this acquisition. Nor can Tumbleweed guarantee that any anticipated
synergies will develop. If Tumbleweed fails to execute its acquisition strategy
successfully for any reason, its business will suffer significantly.
TUMBLEWEED'S PRODUCT INTEGRATION EFFORTS MAY BE HINDERED BY A VARIETY OF
TECHNICAL FACTORS.
Tumbleweed faces certain risks associated with the ongoing integration of
the Worldtalk technology and proposed integration of Interface technology. For
example, because Worldtalk has historically based its products on an NT platform
and Tumbleweed has created a platform-independent architecture for the
Tumbleweed IME products, the integration of products from Worldtalk may result
in unanticipated architectural incompatibilities that would require additional
time and engineering resources to resolve. The loss of key engineering personnel
from Worldtalk, Interface or any other entities Tumbleweed may acquire may
increase the time and resources needed to resolve these and other technical
integration issues. Tumbleweed's offices and Interface's offices are in
different locations, which may create coordination issues and could increase
employee turnover. In addition, the installation of integrated or complementary
software products at customer sites may result in difficulties associated with
customer-specific installation processes.
TUMBLEWEED HAS EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON ITS
RESOURCES AND TUMBLEWEED'S FAILURE TO MANAGE GROWTH COULD CAUSE ITS BUSINESS TO
SUFFER.
Tumbleweed has expanded its operations rapidly and intends to continue this
expansion. The number of Tumbleweed's employees increased from 75 as of
June 30, 1999 to 258 as of March 31, 2000. This expansion has placed, and is
expected to continued to place, a significant strain on managerial and
operational resources. To manage any further growth, Tumbleweed will need to
improve or replace its existing operational, customer service and financial
systems, procedures and controls. Any failure to properly manage these systems
and procedural transitions could impair Tumbleweed's ability to attract and
service customers, and could cause Tumbleweed to incur higher operating costs
and delays in the execution of Tumbleweed's business plan. Tumbleweed will also
need to continue the expansion of Tumbleweed's operations and employee base.
Tumbleweed's management may not be able to hire, train, retain, motivate and
manage required personnel. In addition, Tumbleweed's management may not be able
to successfully identify, manage and exploit existing and potential market
opportunities. If Tumbleweed cannot manage growth effectively, Tumbleweed's
business and operating results could suffer.
TUMBLEWEED HAS A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM
TUMBLEWEED'S BUSINESS.
If Tumbleweed is unable to license its services to new customers on a timely
basis or if its existing and proposed customers and their end-users suffer
delays in the implementation and adoption of Tumbleweed's services, Tumbleweed's
revenue may be limited and business and prospects may be harmed. Tumbleweed's
customers must evaluate its technology and integrate its products and services
into the products and services they provide. In addition, Tumbleweed's customers
may need to adopt a comprehensive sales, marketing and training program in order
to effectively implement Tumbleweed IME. Finally, Tumbleweed must coordinate
with its customers using its product for third-party communications in order to
assist end-users in the adoption of its 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
Tumbleweed 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 Tumbleweed has little or no control.
18
<PAGE>
A FAILURE TO PROTECT TUMBLEWEED'S INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM
ITS BUSINESS.
Tumbleweed currently relies on a combination of patents, trade secrets,
copyrights, trademarks and licenses, together with non-disclosure and
confidentiality agreements to establish and protect its proprietary rights in
its products. Tumbleweed holds certain patent rights with respect to some of its
products and currently have a lawsuit pending against The docSpace
Company, Inc. alleging infringement of one of its patents by docSpace.
Tumbleweed has filed, and expects in the future to file, additional patent
applications. Tumbleweed's existing patents or trademarks, as well as any future
patents or trademarks obtained by it, may be challenged, invalidated or
circumvented, or its competitors may independently develop or patent
technologies that are substantially equivalent or superior to its technology.
Further patent or trademark protection may not be obtained, in the United States
or elsewhere, for Tumbleweed's existing or new products, applications or
services. In addition, further protection, if obtained, may not be effective. In
some countries, meaningful patent or trademark protection is not available.
To date, Tumbleweed has not received any claims of infringement upon the
proprietary rights of third parties. However, third parties could assert
infringement claims against it in the future, and the cost of responding to such
assertions, regardless of their validity, could be significant. In addition,
such claims may be found to be valid and could result in awards against
Tumbleweed, which could harm its business.
Tumbleweed also relies, to some extent, on unpatented trade secrets and
other unpatented proprietary information. Tumbleweed's policy is to have
employees sign confidentiality agreements, to have selected parties sign
non-competition agreements and to have third parties sign non-disclosure
agreements. Although Tumbleweed takes precautionary measures to maintain its
unpatented proprietary information, others may acquire equivalent information or
otherwise gain access to or disclose its proprietary information and it may be
unable to meaningfully protect its rights to its proprietary information.
TUMBLEWEED'S EXPANSION INTO INTERNATIONAL MARKETS MAY BE DIFFICULT OR
UNPROFITABLE.
Tumbleweed has recently begun to invest significant financial and managerial
resources to expand its sales and marketing operations in international markets
and has opened sales offices in Germany, the United Kingdom, Japan, France,
Australia, The Netherlands and Sweden. In the first quarter of 2000 and in
fiscal 1999, Tumbleweed derived 34% and 41% of its revenue from international
operations. However, to date, it has limited experience in international
operations and may not be able to compete effectively in international markets.
A key component of its long-term strategy is to further expand into
international markets, and Tumbleweed must continue to devote substantial
resources to its international operations in order to succeed in these markets.
In this regard, Tumbleweed may encounter difficulties such as:
- unexpected changes in regulatory requirements and trade barriers
applicable to the Internet or its business;
- challenges in staffing and managing foreign operations, including
employment laws and practices as it expands 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 associated with the conversion of various European currencies
into a single currency, the Euro;
19
<PAGE>
- legal challenges or regulatory requirements related to the export or
import of encryption technologies;
- differing technology standards; and
- reduced protection for intellectual property rights in certain countries
in which it operates or plans to operate.
In addition, Tumbleweed's expansion into international markets will
increasingly subject it to fluctuations in currency exchange rates. In the
future, an increasing number of our contracts may be denominated in currencies
other than U.S. dollars. Tumbleweed does not presently engage in hedging or
similar transactions to protect it from currency fluctuations. Any of the
foregoing difficulties of conducting business internationally could harm
Tumbleweed's international operations and, consequently, its business and
prospects.
IF TUMBLEWEED DOES NOT PROVIDE ADEQUATE SUPPORT SERVICES TO ITS CUSTOMERS TO
IMPLEMENT ITS PRODUCTS, IT MAY LOSE CUSTOMERS OR REALIZE LOWER TRANSACTION
VOLUME.
Tumbleweed's professional services organization assists its customers in
implementing its products through software installation, integration with
existing customer systems, contract engineering, consulting and training. If the
professional services organization does not adequately assess customer
requirements or address technical problems, customers may seek to discontinue
their relationships with Tumbleweed due to dissatisfaction with the product or
its 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 Tumbleweed's
professional services organization. Tumbleweed's products must be integrated
with existing hardware and complex software products of its customers or other
third parties, and its customers may not have significant experience with the
implementation of products similar to its own. In addition, the provision of
contract engineering and integration services is an increasingly important
aspect of Tumbleweed's strategy to strengthen customer loyalty to its product
and company. Therefore, Tumbleweed's business and future prospects significantly
depend on the strength of its professional services organization.
PRODUCT PERFORMANCE PROBLEMS, SYSTEM FAILURES AND INTERNET PROBLEMS COULD
SEVERELY DAMAGE TUMBLEWEED'S BUSINESS.
The ability of Tumbleweed's customers to use Tumbleweed-based services
depends on stable product performance, and the efficient and uninterrupted
operation of the computer and communications hardware as well as the software
and Internet network systems that they maintain. Although Tumbleweed's 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 its 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 its 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 Tumbleweed, its customers or by an independent third party to which it
outsources this function, are vulnerable to damage or interruption from fire,
flood, earthquake, power loss, telecommunications failure or other similar
events.
IF TUMBLEWEED'S SOFTWARE CONTAINS ERRORS, IT MAY LOSE CUSTOMERS OR EXPERIENCE
REDUCED MARKET ACCEPTANCE OF ITS PRODUCTS.
Tumbleweed's software products are inherently complex and may contain
defects and errors that are detected only when the products are in use. In
addition, some of Tumbleweed's customers require or may require enhanced
customization of our software for their specific needs, and these modifications
20
<PAGE>
may increase the likelihood of undetected defects or errors. Further, Tumbleweed
often renders implementation, consulting and other technical services, the
performance of which typically involves working with sophisticated software,
computing and networking systems, and it could fail to meet customer
expectations as a result of any defects or errors. As a result, we may lose
customers, customers may fail to implement our products more broadly within
their organization and it may experience reduced market acceptance of its
products. Tumbleweed's products are designed to facilitate the secure
transmission of sensitive business information to specified parties outside the
business over the internet. As a result, the reputation of its software products
for providing good security is vital to their acceptance by customers.
Tumbleweed's products may be vulnerable to break-ins, theft or other improper
activity that could jeopardize the security of information for which it is
responsible. Problems caused by product defects, failure to meet project
milestones for services or security breaches could result in loss of or delay in
revenue, loss of market share, failure to achieve market acceptance, diversion
of research and development resources, harm to Tumbleweed's reputation, or
increased insurance, service and warranty costs. To address these problems,
Tumbleweed may need to expend significant capital resources that may not have
been budgeted.
IF TUMBLEWEED LOSES THE SERVICES OF KEY MANAGEMENT PERSONNEL, INCLUDING
CO-FOUNDERS OR KEY SALES EXECUTIVES, ITS ABILITY TO DEVELOP OUR BUSINESS AND
SECURE CUSTOMER RELATIONSHIPS WILL SUFFER.
Tumbleweed is substantially dependent on the continued services and
performance of its senior management and other key personnel. The loss of the
services of any of its executive officers or other key employees, particularly
our co-founders, Jeffrey C. Smith and Jean-Christophe D. Bandini, could
significantly delay or prevent the achievement of Tumbleweed's development and
strategic objectives. In addition, the loss of key members of Tumbleweed's
senior management, including Kerry S. Champion or Shomit A. Ghose, could harm
its ability to develop its business. Moreover, the loss of key members of its
sales organization, including Donald R. Gammon and Donald N. Taylor, could harm
Tumbleweed's ability to secure key relationships contemplated by its business
plan. Tumbleweed does not have long-term employment agreements with any of its
key personnel. The loss of services of any of our senior management or other key
personnel could significantly harm Tumbleweed's business and prospects.
TUMBLEWEED'S EFFORTS TO ESTABLISH, MAINTAIN AND STRENGTHEN ITS BRANDS WILL
REQUIRE SIGNIFICANT EXPENDITURES AND MAY NOT BE SUCCESSFUL.
If the marketplace does not associate Tumbleweed's brands with high quality
Internet communication services, it may be more difficult for it to attract new
customers or introduce future products and services. The market for Tumbleweed's
services is new. Therefore, Tumbleweed's failure to establish brand recognition
at this stage could harm its ability to compete in the future with other
companies that successfully establish a brand name for their services.
Tumbleweed must succeed in its marketing efforts, provide high quality services
and increase its user base in order to build its brand awareness and
differentiate its products from those of Tumbleweed's competitors. These efforts
have required significant expenditures to date. Moreover, Tumbleweed believes
that these efforts will require substantial commitments of resources in the
future as its brands become increasingly important to its overall strategy and
as the market for its services grows.
TUMBLEWEED'S BUSINESS WILL BE HARMED IF IT CANNOT MEET FUTURE CAPITAL NEEDS.
Tumbleweed will require substantial working capital to fund its business and
achieve its goals. Tumbleweed has experienced negative cash flow from operations
and it expects to continue to experience significant negative cash flow from
operations for the foreseeable future. Tumbleweed believes that its existing
capital resources, including the proceeds to it from its proposed public
offering, will enable it to maintain its current and planned operations for at
least the next 12 months. However, Tumbleweed's capital requirements depend upon
several factors, including:
- the rate of market acceptance of its products and services, including
transaction volume;
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- its ability to expand its customer base;
- its level of expenditures, including expenditures related to sales and
marketing;
- the cost of service and technology upgrades; and
- any acquisition it elects to pursue.
If Tumbleweed seeks additional funding to meet its requirements, this
funding may not be available on acceptable terms, if at all. If adequate funds
are not available, Tumbleweed may be required to curtail significantly or defer
one or more of its operating goals or programs. If it raises 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 Tumbleweed's common stock. If Tumbleweed raises additional funds
through the issuance of debt securities, these new securities would have rights,
preferences and privileges senior to those of the holders of its common stock.
The terms of these debt securities could also impose restrictions on its
operations.
BECAUSE TUMBLEWEED PRODUCTS UTILIZE THE INTERNET, IF USE OF THE INTERNET DOES
NOT INCREASE, THE LEVEL OF USE OF ITS PRODUCTS WILL SUFFER.
If the Internet and other products and services necessary for the
utilization of Tumbleweed's products are not sufficiently developed, fewer
customers and end-users will use its products and its business will be harmed.
In particular, the success of Tumbleweed's 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, Tumbleweed's success will also depend on
the timely development of complementary products or services such as high speed
modems for providing reliable Internet access and services and this may not
occur. Because the online exchange of information is new and evolving, the
Internet may not prove to be a viable platform for secure online communication
services in the long term. The Internet has experienced, and is expected to
continue to experience, significant growth in the numbers of users and amount of
traffic. As the Internet continues to experience increased numbers of users and
frequency of use, or if its users require increasingly more resources, the
Internet infrastructure may not be able to support the demands placed on it. As
a result, the performance or reliability of the Internet may be harmed. This in
turn could decrease the level of Internet usage and also the level of
utilization of Tumbleweed products and services.
ADDITIONAL GOVERNMENT REGULATION RELATING TO THE INTERNET MAY INCREASE COSTS OF
DOING BUSINESS OR REQUIRE CHANGES IN TUMBLEWEED'S BUSINESS MODEL.
Tumbleweed is 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, taxation, antitrust,
legal liability and characteristics and quality of products and services. The
adoption of any additional laws or regulations could decrease the demand for
Tumbleweed products and services and increase its cost of doing business or
otherwise harm its business or prospects.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues like property ownership, sales and other taxes,
libel and personal privacy is uncertain and may take years to resolve. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce. New state tax
regulations may subject Tumbleweed 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 Tumbleweed's business, or the
application of existing laws and regulations to the Internet and commercial
online services could harm its ability to conduct business and harm operating
results.
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TUMBLEWEED'S PRODUCTS ARE SUBJECT TO IMPORT AND EXPORT CONTROLS, AND IT 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.
Tumbleweed has obtained approval to export products using up to 128-bit
symmetric encryption and 1024-bit public key encryption, including IME Server,
IME Desktop, IME Receive Applet, IME Remote API using OmniORB with SSL, MMS
WorldWide/56 and MMS Strong WorldWide/128. Tumbleweed is 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 Tumbleweed
may not be able to obtain necessary approval for the export of future products.
The inability to obtain required approvals under these regulations could limit
Tumbleweed's ability to make international sales. Furthermore, competitors may
also seek to obtain approvals to export products that could increase the amount
of competition Tumbleweed faces. Additionally, countries outside of the U.S.
could impose regulatory restrictions impairing Tumbleweed's ability to import
its products into those countries.
COSTS OF COMMUNICATING VIA THE INTERNET COULD INCREASE IF ACCESS FEES ARE
IMPOSED.
Certain local telephone carriers have asserted that the increasing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If these access fees are imposed, the
costs of communicating on the Internet could increase substantially, potentially
slowing the increasing use of the Internet. This could in turn decrease demand
for Tumbleweed's services or increase the costs of doing business.
TUMBLEWEED MAY HAVE LIABILITY FOR INTERNET CONTENT.
As a provider of Internet communication products and services, Tumbleweed
faces 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 Tumbleweed to implement measures to
reduce exposure to this liability. This may require Tumbleweed to expend
substantial resources or to discontinue selected service or product offerings.
Tumbleweed does not and cannot screen all of the content generated by users
of its product but may be exposed to liability with respect to this content.
Furthermore, certain foreign governments, such as Germany, have enforced laws
and regulations related to content distributed over the Internet that are more
strict than those currently in place in the U.S. Other countries, such as China,
regulate or prohibit the transport of telephonic data in their territories.
Failure to comply with regulations in a particular jurisdiction could result in
fines or criminal penalties or the termination of 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. Liability insurance may not cover claims of these types, or may
not be adequate to indemnify against all liability that may be imposed.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS TUMBLEWEED'S 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 companies. The
institution of this type of litigation against Tumbleweed could result in
substantial costs and a diversion of Tumbleweed management's attention and
resources, which could harm its business and prospects.
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TUMBLEWEED'S MANAGEMENT WILL BE ABLE TO SUBSTANTIALLY INFLUENCE CORPORATE EVENTS
BECAUSE THEY OWN A SIGNIFICANT PERCENTAGE OF ITS STOCK.
Tumbleweed's present directors, executive officers and principal
stockholders as a group beneficially own approximately 36.5% of the outstanding
common stock. Accordingly, if all or particular stockholders were to act
together, they would be able to exercise significant influence over or control
the election of Tumbleweed's board of directors, its management and policies and
the outcome of particular corporate transactions or other matters submitted to
its stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of its assets.
TUMBLEWEED'S CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT
COULD DISCOURAGE OR PREVENT AN ACQUISITION OF TUMBLEWEED, WHICH COULD DEPRESS
ITS STOCK PRICE.
Tumbleweed's certificate of incorporation and bylaws may inhibit changes of
control that are not approved by its 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, Tumbleweed's certificate of incorporation
provides for a classified board of directors and prohibits stockholder action by
written consent. These provisions require advance notice for nomination of
directors and stockholders' proposals. In addition, as a Delaware corporation,
Tumbleweed is 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, Tumbleweed's certificate of incorporation allows its 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 Tumbleweed common stock. The provisions of Tumbleweed's
certificate of incorporation and bylaws, as well as provisions of Delaware law,
may discourage or prevent an acquisition or disposition of its business.
RISKS RELATED TO INTERFACE
INTERFACE HAS RECENTLY BEEN NAMED A DEFENDANT IN SEVERAL PURPORTED SECURITIES
CLASS ACTION LAWSUITS.
On July 7, 2000, three complaints were filed by David H. Zimmer,
Congressional Securities, Inc. and other plaintiffs against Interface and
various additional defendants, including Interface's President and Chief
Executive Officer, Robert A. Nero and Fiserv Correspondent Services, Inc., in
the United States District Court for the Southern District of New York. For a
discussion of the relationship between Congressional Securities, Mr. Zimmer, and
Fiserv Correspondent Services, see pages 121-122. The three cases contain
substantially similar allegations of false and misleading representations by
various defendants allegedly designed to inflate Interface's stock price. The
complaints seek relief under the federal securities laws on behalf of purported
classes of persons who purchased, held, or sold shares of Interface stock, and
under various other causes of action. On July 17, 2000, at least one of the
complaints was amended.
Interface and Mr. Nero have not yet been served process in these actions,
but intend vigorously to defend them and seek their dismissal. Although
Interface and Mr. Nero believe these actions to be without merit, no prediction
of the ultimate outcome can be made at this time and the outcome may harm our
business. In addition, Tumbleweed cannot fully assess the merits of the lawsuits
at this time and, in any event, the costs in defending these complaints could
harm future operating results.
RISKS RELATED TO SALES OF TUMBLEWEED COMMON STOCK
TUMBLEWEED'S PROPOSED PUBLIC OFFERING OF ITS COMMON STOCK MAY NOT CLOSE.
Tumbleweed's proposed public offering is subject to uncertainties including
overall market conditions. As a result, the public offering may not close on a
timely basis or at all, or may close on terms that differ from the terms
currently proposed. Accordingly, Interface shareholders should not rely
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on the consummation of the proposed public offering in deciding whether or not
to approve the merger. In addition, the issuance of Tumbleweed common stock in
connection with the closing of the public offering, if it occurs, will result in
dilution to shareholders of Interface who become shareholders of Tumbleweed in
connection with the merger. If Tumbleweed sells 1,500,000 shares of common stock
in its proposed public offering, the percentage of its common stock owned by
Interface shareholders will be diluted to approximately 5.06%.
FUTURE SALES OF COMMON STOCK BY TUMBLEWEED OR TUMBLEWEED STOCKHOLDERS COULD
DEPRESS TUMBLEWEED'S STOCK PRICE.
Tumbleweed cannot predict if future sales of its common stock, or the
availability of its common stock for sale, will depress the market price for its
common stock or its ability to raise capital by offering equity securities. In
particular, in the months of April and May 2000, Hikari Tsushin sold a total of
approximately 2,363,000 shares and may choose to sell additional shares of
Tumbleweed common stock. In addition, Tumbleweed has filed a registration
statement for the proposed sale by it and certain of its stockholders of up to
3,450,000 shares of its common stock. Sales of substantial amounts of common
stock, or the perception that these sales could occur, may depress prevailing
market prices for the common stock.
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THE SPECIAL MEETING OF INTERFACE SHAREHOLDERS
DATE, TIME AND PLACE; PURPOSE OF MEETING
This proxy statement/prospectus is being furnished in connection with the
solicitation of proxies from the holders of Interface common stock and by the
Interface Board of Directors for use at the special meeting of Interface
shareholders. The Interface special meeting will be held at the Crowne Plaza
Hotel located at 610 Hilton Boulevard, Ann Arbor, Michigan at 10:00 a.m., local
time, on .
At the Interface special meeting Interface shareholders will be asked to
consider and vote upon a proposal to approve and adopt the merger agreement and
the related transactions under the merger agreement and to approve an amendment
to the Interface Systems, Inc. 1992 Stock Option Plan to increase the number of
shares issuable under such plan by 900,000 shares from 1,100,000 to 2,000,000
shares. The increase, requested by Tumbleweed, is intended to allow a
significantly broader distribution of options among the Interface employees and
to help incentivize and retain Interface employees in the future. Management of
Interface knows of no other matters to be brought before the Interface special
meeting. If any other business should come before the Interface special meeting,
the persons named in the proxy, or their authorized substitutes, will vote on
this business in accordance with their best judgment.
RECORD DATE
Interface's Board of Directors has fixed the close of business on
as the record date. Only Interface shareholders of record on the
record date are entitled to notice of and to vote at the Interface special
meeting. On the record date, there were shares of Interface common stock
outstanding, held of record by approximately shareholders, and entitled to
vote at the Interface special meeting.
A majority, or of these shares, present in person or represented by
proxy, will constitute a quorum for the transaction of business. If a quorum is
not present, it is expected that Interface will adjourn or postpone its special
meeting to solicit additional proxies. Each Interface shareholder is entitled to
one vote for each share of Interface common stock held as of the record date.
VOTING AND REVOCATION OF PROXIES
Shares of Interface common stock represented by a properly executed proxy
received prior to the vote at the Interface special meeting and not revoked will
be voted at the Interface special meeting as directed in the proxy. IF YOU
SUBMIT A PROXY AND GIVE NO DIRECTION, THE PROXY WILL BE VOTED "FOR" APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE RELATED TRANSACTIONS UNDER THE MERGER
AGREEMENT AND "FOR" APPROVAL OF THE AMENDMENT TO THE 1992 STOCK OPTION PLAN. To
determine whether a quorum exists for the transaction of business, Interface
intends to count as present shares of Interface common stock present in person
at the Interface special meeting but not voting, and shares of Interface common
stock for which it has received proxies that are marked "abstain."
The affirmative vote of the holders of a majority of the outstanding shares
of Interface common stock entitled to vote on the merger is required to approve
and adopt the merger. Therefore, nonvoting shares and abstentions will have the
effect of a vote "against" the approval of the merger. In addition, brokers who
hold shares in street name for customers who are the beneficial owners of the
shares are prohibited from giving a proxy to vote shares held for these
customers without specific instructions from their customers. The failure of
these customers to provide to their brokers specific instructions with respect
to their shares of Interface common stock will have the effect of voting
"against" the approval of the merger.
The affirmative vote of the holders of a majority of the shares of Interface
common stock voted in person or by proxy at the Interface special meeting is
required to approve the amendment to the 1992 Stock Option Plan. Therefore,
nonvoting shares and abstention, and your failure to instruct brokers
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with respect to your shares of Interface common stock not held in your name will
have no effect on the proposal to amend the 1992 Stock Option Plan.
If sufficient proxies are not obtained to approve the merger, the Interface
special meeting will be postponed or adjourned to give Interface additional time
to solicit and obtain additional proxies or votes. No proxy which is voted
against the proposal to approve and adopt the merger will be voted in favor of
this adjournment or postponement.
You may revoke a proxy at any time prior to its being counted at the
Interface special meeting in the following ways:
- by filing a written notice of revocation bearing a later date than the
proxy with Brian D. Brooks, Secretary of Interface at 5855 Interface
Drive, Ann Arbor, Michigan 48103;
- by filing a duly executed proxy bearing a later date than the original
proxy; or
- by appearing at the Interface special meeting in person, notifying the
Secretary, and voting by ballot at the Interface special meeting. Your
attendance at the Interface special meeting will not in itself constitute
the revocation of a proxy.
Interface shareholders should not send their stock certificates with their
proxy cards. After the merger is effective, Interface shareholders will receive
instructions and a letter of transmittal for the submission of Interface stock
certificates.
VOTE REQUIRED TO APPROVE THE MERGER AND THE AMENDMENT TO THE 1992 STOCK OPTION
PLAN
The affirmative vote of the holders of a majority of the shares of Interface
common stock outstanding and entitled to vote at the Interface special meeting
is necessary to approve the merger. The approval of the merger by Interface's
shareholders is a condition to the consummation of the merger.
The affirmative vote of the holders of a majority of the shares of Interface
common stock voted in person or by proxy at the Interface special meeting is
necessary to approve the amendment to the 1992 Stock Option Plan. The approval
of such amendment is not a condition to the consummation of the merger.
PRINCIPAL SHAREHOLDERS
As of the record date of the Interface special meeting, shares of
Interface common stock were outstanding and entitled to vote, of which
approximately 83,081 shares, or approximately 1.76%, were held by directors and
executive officers of Interface, its subsidiaries and their respective
affiliates. All of the directors and executive officers of Interface intend to
vote their shares for approval of the merger and the amendment to the 1992 Stock
Option Plan.
As of the record date of the Interface special meeting, neither any
Tumbleweed director nor any Tumbleweed executive officer beneficially owned
shares of Interface common stock. As of the record date of the Interface special
meeting, no banking subsidiaries of Tumbleweed, as fiduciaries, custodians or
agents, held any shares of Interface common stock under trust agreements or
other instruments and agreements.
ABSENCE OF APPRAISAL RIGHTS
Under Michigan law, Interface shareholders will not be entitled to any
appraisal rights in connection with the merger agreement and the transactions
with Tumbleweed.
SOLICITATION OF PROXIES
In addition to soliciting proxies by mail, Interface's directors, officers,
and employees may solicit proxies personally without additional compensation.
These persons may be reimbursed for out-of-pocket expenses that they incur. In
addition, Interface intends to retain a firm that provides professional proxy
soliciting services, to assist in soliciting proxies from brokers, bank
nominees,
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institutional holders, and other Interface shareholders. Interface intends to
reimburse brokerage houses and other custodians, nominees, and fiduciaries for
reasonable out-of-pocket expenses incurred in forwarding copies of solicitation
materials to beneficial owners of Interface common stock held of record by those
persons.
RECOMMENDATION OF INTERFACE'S BOARD OF DIRECTORS
The Interface Board of Directors has determined that the merger is in the
best interests of Interface and its shareholders and has approved the merger
agreement. THE INTERFACE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
INTERFACE'S SHAREHOLDERS VOTE IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT AND
THE RELATED TRANSACTIONS UNDER THE MERGER AGREEMENT AT THE SPECIAL MEETING. IN
ADDITION, THE INTERFACE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
INTERFACE'S SHAREHOLDERS VOTE IN FAVOR OF APPROVAL OF THE AMENDMENT TO THE 1992
STOCK OPTION PLAN.
For a discussion of interests of certain members of Interface's management
and Board of Directors in the merger other than as Interface shareholders, see
"Interests of Certain Persons in the Merger."
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THE MERGER
GENERAL
When the merger becomes effective, Maize Acquisition Sub, Inc., a
wholly-owned subsidiary of Tumbleweed, will be merged with and into Interface,
with Interface as the surviving corporation. Upon consummation of the merger,
Interface will become a wholly-owned subsidiary of Tumbleweed. In the merger,
each share of Interface common stock issued and outstanding immediately prior to
the merger, without any action on the part of the holder thereof, will be
converted into the right to receive 0.264 of a share of Tumbleweed common stock.
Cash will be paid in lieu of fractional shares of Tumbleweed common stock. The
merger will become effective when a certificate of merger has been filed with
the Department of Consumer and Industry Services, Corporations, Securities and
Land Development Bureau, of the State of Michigan or at a later time, if agreed
upon by Tumbleweed and Interface and specified in the certificate of merger.
Tumbleweed estimates the shares of Tumbleweed common stock issued to
Interface shareholders in the merger will constitute approximately 5.33% of all
of the issued and outstanding shares of Tumbleweed common stock after the
merger, and the current Tumbleweed stockholders will hold all of the
approximately 94.67%, remaining issued and outstanding shares of Tumbleweed
common stock after the merger based on the number of shares of Tumbleweed common
stock issued and outstanding on June 30, 2000 and the number of shares of
Interface common stock issued and outstanding on June 28, 2000.
When the merger becomes effective, each outstanding and unexercised stock
option and warrant to purchase shares of Interface common stock will be
converted into an option or warrant to purchase 0.264 of a share of Tumbleweed
common stock for each share of Interface common stock subject to the option or
warrant. Approximately 4,719,675 shares of Interface common stock were
outstanding and approximately 886,018 shares of Interface common stock were
subject to outstanding options and warrants on June 28, 2000. Based upon this
number, upon consummation of the merger, approximately 1,245,994 shares of
Tumbleweed common stock would be issued to the Interface shareholders and
approximately 233,909 shares of Tumbleweed common stock would be subject to
converted options and warrants. The exercise price per share of Tumbleweed
common stock issuable pursuant to each converted option and warrant will equal
the exercise price per share of Interface common stock issuable pursuant to each
option or warrant divided by 0.264.
BACKGROUND OF THE MERGER
Between June 1999 and February 2000 Mr. Mark Pastore, VP Corporate
Development of Tumbleweed and Mr. Matt Prentice, Alliances Manager of
Tumbleweed, had several teleconferences with Mr. Robert Granger, VP Internet
Applications Group of Interface and Ms. Prudence Heikkinen, Channel Manager of
Interface. During these teleconferences, Messrs. Pastore, Prentice, Granger and
Ms. Heikkinen discussed product compatibility, potential customer opportunities,
and potential licensing agreements.
On March 2, 2000, Messrs. Granger, Pastore, and Prentice met at Tumbleweed
headquarters in Redwood City and discussed potential licensing agreements
between Tumbleweed and Interface.
On March 20, 2000, Mr. Jeffrey Smith, Chairman and CEO of Tumbleweed,
Mr. Shomit Ghose, Sr. VP of Operations of Tumbleweed, Mr. Kerry Champion, Sr. VP
of Product Development of Tumbleweed, and Mr. Robert Nero, President and CEO of
Interface, met with Messrs. Pastore and Granger at Tumbleweed headquarters in
Redwood City and discussed the potential strategic value of integrating
Tumbleweed's IME product and Interface's L2i products.
On March 30, 2000, Messrs. Pastore, Champion and Mr. Jean-Christophe
Bandini, CTO of Tumbleweed and Messrs. Nero, Granger, Mr. Brian Brooks, CFO, Mr.
Brian Niemiec, VP Product and Service Delivery, and Mr. Rich Sheridan,
VP Product Development of Interface met at Interface
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headquarters in Ann Arbor to discuss potential technology integration strategies
and business terms for technology licensing agreements.
On April 28, 2000 Tumbleweed and Interface entered into a software license
agreement through which Tumbleweed licensed Interface's MyCopy product for use
with Tumbleweed's IME product.
From May 31 to June 8, 2000 the parties had telephonic discussions about the
potential long term product development possibilities, market opportunities, and
potential operating strategies for a combined company.
On June 13, 2000, Mr. Pastore, Mr. Bernard Cassidy, VP, General Counsel, and
Secretary of Tumbleweed and Mr. James Heish, a Tumbleweed consultant, met in Ann
Arbor with Messrs. Nero and Brooks of Interface, Mr. Hugh Taylor, Managing
Director and Mr. Alan Fullerton, Jr., Associate, of Newbury, Piret Companies,
Inc., and Ms. Aleksandra A. Miziolek, Member, of Dykema Gossett PLLC. The
parties discussed issues relating to a potential business combination.
On June 14, 2000, Tumbleweed and Interface signed a mutual confidentiality
agreement and an exclusivity agreement, further defined the terms of a potential
merger, and each began its formal due diligence review of the other company.
On June 15, 2000, Tumbleweed formally retained Dain Rauscher Wessels to act
in preparing a fairness opinion with a proposed business combination with
Interface.
From June 15 through 28, 2000, each company's management team, outside
counsel, and financial advisors met in person or by telephone with their
counterparts on a daily basis to conduct due diligence, which included
management presentations, customer inquiries, technology reviews, and extensive
financial due diligence. During the same time period each company's management
team, outside counsel, and financial advisors negotiated the terms of the merger
and the transactions associated with the merger. Interface's board of directors
met during this period to discuss the status of the negotiations, and the
proposed terms of the Merger Agreement with legal counsel and Interface's
financial advisors.
On June 28, 2000, the Tumbleweed board of directors met, considered, and
unanimously approved the Merger Agreement, the merger, and the transactions
associated with the merger. On June 28, 2000 the Interface board of directors
met, considered, and unanimously approved the Merger Agreement, the merger, and
the transactions associated with the merger.
On June 28, 2000, the parties executed and delivered the Merger Agreement.
On June 29, 2000, the parties issued a joint press release announcing the
proposed merger.
REASONS FOR TUMBLEWEED ENGAGING IN THE MERGER
The Tumbleweed board of directors has approved the Merger Agreement and the
transactions associated with it and has determined that the terms of the Merger
Agreement and the merger are fair to and in the best interests of Tumbleweed and
its stockholders. During the course of its deliberations, the Tumbleweed board
of directors considered, with the assistance of management and its financial and
other advisors, a number of factors that it believes makes the merger attractive
to Tumbleweed stockholders and could contribute to the success of the combined
companies.
The Tumbleweed board of directors believes the proposed merger offers a
timely and strategic growth opportunity for Tumbleweed. If the merger is
consummated, Tumbleweed will have an expanded presence in the electronic
statement presentment market, extending Tumbleweed's ability to deliver
comprehensive solutions for businesses seeking to adapt information residing in
legacy information systems for the Internet through secure messaging systems.
Currently Tumbleweed and Interface each provide solutions that address
specific aspects of a complete communication system for electronic statement
presentment. Tumbleweed technology enables businesses to move traditionally
paper-based communications online, through added security, reliability and
personalization over current messaging networks. Interface technology enables
businesses to
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transform legacy information sources into online formats. Tumbleweed believes
that each of these market segments is growing and that a presence in each market
segment will enhance Tumbleweed's ability to command a larger share of the
electronic statement presentment market as a whole.
In addition to maintaining the independent solutions, the combined companies
would offer customers a single source for a fuller, more integrated suite of
business communication products and services. By combining the technology and
expertise of each company, the combined companies will provide customers with a
single source to satisfy requirements for electronic statement presentment. The
integrated technology would enable customers to transform legacy content into
online formats, generate personalized messages from the content, add multiple
levels of security, deliver the content to recipients, track delivery status,
archive historical transactions and enable subsequent secure two-way
communications between senders and recipients.
Interface's installed customer base provides Tumbleweed with an additional
opportunity. Interface's MyCopy product enables customers to publish electronic
statements internally for example, to brokers and customer service
representatives inside a brokerage firm. Tumbleweed's products enable customers
to distribute electronic statements externally, for example, to customers of the
brokerage with access to Internet e-mail accounts. To the extent that the merger
results in an increased number of messages sent through the Tumbleweed
infrastructure originating from the MyCopy product, Tumbleweed would receive
increased transaction revenue.
In addition, if the merger is consummated, Tumbleweed would potentially
benefit from increased sales presence for both company's products, and an
expanded technical development and consulting work force based principally in
Ann Arbor, Michigan.
The foregoing discussion of factors considered by the Tumbleweed board of
directors is not intended to be exhaustive, but is intended to include the
material factors considered. The Tumbleweed board of directors did not find it
practical to and did not quantify or otherwise assign relative weight to the
specific factors considered and individual directors may have given different
weight to different factors. After due consideration, the Tumbleweed board of
directors approved the merger and determined that the merger is fair to and in
the best interests of Tumbleweed and its stockholders.
The Tumbleweed board of directors also considered a number of uncertainties,
including the challenges of combining the businesses of the corporations and the
risk of diverting management resources from other strategic opportunities and
operational matters for an extended period of time. For further discussion of
these risks, see "Risk Factors."
REASONS FOR INTERFACE ENGAGING IN THE MERGER; RECOMMENDATION OF THE INTERFACE
BOARD
The Interface board of directors has approved the Merger Agreement and the
transactions associated with it and has determined that the Merger Agreement and
the merger are fair to and in the best interests of Interface and its
shareholders. During the course of its deliberations, the Interface board of
directors considered, with the assistance of management and its financial and
other advisors, a number of factors that it believes makes the merger attractive
to Interface's shareholders and could contribute to the success of the combined
companies.
The Interface board of directors believes that the merger will result in a
combined company that has a significantly greater opportunity than Interface
does alone to play a leadership role in the large and growing market for
electronic statement presentment. In addition, the combined companies would have
greater financial, technological, sales, marketing, and human resources with
which to pursue that opportunity. As a result of the merger, Interface
shareholders will have an opportunity to participate in the long-term growth of
the combined company.
The Interface board of directors believes the proposed merger will greatly
accelerate fulfillment of many of the key elements of Interface's strategic plan
that would otherwise have taken at least a year or longer to achieve. Some of
these elements are: achievement of a more comprehensive solution for electronic
statement presentment, expansion to new vertical markets, greater presence in
the brokerage
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market, expansion of network field sales offices in the United States and
Europe, introduction of Interface products into Asia and Australia, divestiture
of Interface's remaining non-Internet-related businesses, most notably the Cleo
product line, and transition to a recurring revenue model.
In addition, the Interface board of directors believes that the proposed
merger greatly reduces the risks and costs that Interface and Interface's
shareholders would incur by independently attempting to execute the next phases
of Interface's strategic plan. Risks and costs that would be reduced include
those stemming from the need to raise additional working capital to augment the
approximately $931,000 of cash reserves available to Interface as of March 31,
2000. Risks also include the difficulty, uncertainty, and management distraction
involved in securing capital. Costs also include the fees, interest expense, and
shareholder dilution realization by capital raising activities. In addition, the
Interface board of directors believes the proposed merger better positions
Interface to address competitive risks, because the combined company would be
larger, better funded, and more able to respond to competitive threats. Relative
to the choice of merging with one of Interface's competitors, the Interface
board of directors further believes that the choice of merging with a
complementary company provides a more likely path to incremental value for
shareholders.
The combined companies would also provide numerous benefits its customers
and prospects. Some of these benefits are: providing Interface's current
customers with a means to meet their future requirements with the complementary
capabilities of Tumbleweed's products, offering a more complete and
comprehensive solution for customers in the electronic statement presentment
market, and potentially reducing the sales cycle to new prospects by offering a
greater range of capabilities.
The Interface board of directors also believes that the proposed merger
would provide benefit to Interface shareholders in regards to the market for
trading their Interface shares. The shares of Tumbleweed common stock issuable
to Interface's shareholders in the merger will have a significantly larger
market float and average trading volume, and may provide greater liquidity than
the current Interface common stock.
The value of the shares of Tumbleweed common stock that the Interface
shareholders will receive in the merger, as calculated on the date the Merger
Agreement was signed, represents a premium of approximately 41.3% over the
average of the closing market prices of Interface's common stock for the thirty
trading days prior to the execution of the Merger Agreement.
The discussion of factors considered by the Interface board of directors is
not intended to be exhaustive, but is intended to include the material factors
considered. The Interface board of directors did not find it practical to and
did not quantify or otherwise assign relative weight to the specific factors
considered and the individual directors may have given different weight to
different factors.
After due consideration, the Interface board of directors approved the
Merger Agreement and the transactions associated with it by unanimous vote and
determined that the Merger Agreement and the transactions associated with it
were in the best interest of Interface and its shareholders. Accordingly, the
Interface board of directors unanimously recommends that the Interface
shareholders vote FOR approval of the Merger Agreement and the transactions
associated with it.
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OPINION OF INTERFACE'S FINANCIAL ADVISOR
Interface retained Newbury, Piret Companies, Inc. to act as its exclusive
financial advisor to render an opinion as to the fairness, from a financial
point of view, to the shareholders of Interface, of the exchange ratio.
THE FULL TEXT OF THE NEWBURY, PIRET OPINION DATED JUNE 28, 2000 SETS FORTH
THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS
SET ON THE SCOPE OF THE REVIEW UNDERTAKEN BY NEWBURY, PIRET IN RENDERING ITS
OPINION. THE FULL TEXT OF THE OPINION IS ATTACHED, AS ANNEX F TO THIS PROXY
STATEMENT/ PROSPECTUS AND IS INCORPORATED BY REFERENCE IN ITS ENTIRETY.
INTERFACE SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY AND
IN ITS ENTIRETY. THE OPINION ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO
TO INTERFACE SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW AS OF THE DATE OF THE
OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE CONTEMPLATED MERGER. THE
SUMMARY OF THE OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE NEWBURY, PIRET OPINION.
For the purposes of formulating the Newbury, Piret opinion, Newbury, Piret
reviewed, among other things:
- the draft merger agreement as presented to the board of directors of
Interface on June 28, 2000;
- Annual Reports to Shareholders and Annual Reports on Form 10-K of
Interface for the years ended September 30, 1999, 1998, 1997, 1996, and
1995;
- the Annual Report to Stockholders and the Annual Report on Form 10-K of
Tumbleweed for the year ended December 31, 1999;
- the Prospectus dated August 5, 1999 for Tumbleweed's Initial Public
Offering;
- interim reports to shareholders and Quarterly Reports on Form 10-Q of
Interface and Tumbleweed;
- certain financial estimates and other financial and operating data
concerning Interface prepared by the management of Interface;
- other communications from Interface and Tumbleweed to their respective
shareholders; and
- publicly available assessments of Tumbleweed's financial prospects.
Newbury, Piret also held discussions with members of the senior managements
of Interface and Tumbleweed regarding the strategic rationale for, and potential
benefits of, the transaction contemplated by the merger agreement and the past
and current business operations, financial conditions, and future prospects of
their respective companies. In addition, Newbury, Piret reviewed the reported
price and trading activity for the Interface common shares and Tumbleweed common
shares, reviewed financial and stock market information for various other
companies whose securities are publicly traded, compared the financial position
and operating results of Interface and Tumbleweed with those of other publicly
traded companies that Newbury Piret deemed relevant, reviewed the financial
terms of several recent business combinations in the software and Internet
industries specifically and in other industries generally, and performed such
other studies and considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria that we deemed
relevant for the preparation of this opinion.
Newbury, Piret relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed the accuracy and
completeness of this information for purposes of rendering its opinion.
Newbury, Piret's review of Tumbleweed's future financial performance for
purposes of rendering its opinion was limited to discussions with Tumbleweed's
management of various research analysts'
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estimates of Tumbleweed's future financial performance. Newbury, Piret has not
made any physical inspection of Tumbleweed properties or assets. In addition,
Newbury, Piret has not made an independent evaluation or appraisal of the assets
and liabilities of Interface or Tumbleweed or any of their subsidiaries and
Newbury, Piret has not been furnished with any such evaluation or appraisal.
Newbury, Piret also assumed, with the consent of Interface, that the
transaction contemplated by the merger agreement will be accounted for as a
purchase under U.S. generally accepted accounting principles. Newbury, Piret
provided the opinion described herein for the information and assistance of
Interface's board of directors in connection with its consideration of the
transaction contemplated by the merger agreement. Newbury, Piret's opinion does
not constitute a recommendation as to how any Interface shareholder should vote
with respect to the merger agreement proposal.
The following is a summary of the material financial analyses used by
Newbury, Piret in connection with providing its opinion to Interface's board of
directors on June 28, 2000. Some of the summaries of financial analyses include
information presented in tabular format. To more fully understand the financial
analyses used by Newbury, Piret, the tables must be read together with the text
of each summary. The tables alone do not constitute a complete description of
the financial analyses.
HISTORICAL STOCK TRADING ANALYSIS. The purpose of this analysis was to
provide information regarding the fairness of the exchange ratio based on
periodic historical data regarding average weighted market prices and trading
volumes of the Interface common shares. Newbury, Piret reviewed the historical
trading prices and volumes for the Interface common shares. In addition,
Newbury, Piret analyzed the exchange ratio to be received by Interface
shareholders pursuant to the merger agreement in relation to various market
prices for the Interface common shares.
This review included, among other things, Newbury, Piret's analysis of the
weighted average market prices of the Interface common shares and the total
volume of the Interface common shares traded as a percentage of Interface common
shares outstanding during the period from June 29, 1995 to June 28, 2000. These
analyses indicated a weighted average market price of $13.12 per share with
1060% of the total outstanding stock of Interface common shares traded in such
period. This review also included Newbury, Piret's assessment of the latest
twelve months from June 29, 1999, to June 28, 2000. Such analysis indicated a
weighted average market price of $20.34 per share, based on the daily closing
prices for that period, with 429% of the total outstanding Interface common
shares traded in that period. Newbury, Piret also reviewed daily closing prices
for the period between May 1, 2000 and June 28, 2000. Such analysis indicated a
weighted average market price of $11.83 per share, based on the daily closing
prices for that period, with 64% of the total outstanding Interface common
shares traded in that period. In addition, Newbury, Piret reviewed daily closing
prices for the period between June 1, 2000 and June 28, 2000. Such analysis
indicated a weighted average market price of $10.16 per share, based on the
daily closing prices for that period, with 31% of the total outstanding
Interface common shares traded in that period.
Newbury, Piret reviewed the closing prices of Interface common stock from
June 29, 1995 through June 28, 2000. Newbury, Piret noted that the high closing
price for Interface common stock during that period was $73.44 on March 27,
2000, and the low closing price for Interface common stock during that period
was $1.50, most recently on October 16, 1998.
Newbury, Piret also reviewed the closing prices of Tumbleweed common stock
from August 6, 1999 through June 28, 2000. Newbury, Piret noted that the high
closing price for Tumbleweed common stock during that period was $129.25 on
March 14, 2000, and the low closing price for Tumbleweed common stock during
that period was $10.25 on August 10, 1999.
SELECTED COMPANIES ANALYSIS. The purpose of this analysis was to provide
information regarding the fairness of the exchange ratio based upon a comparison
of specific financial information of Interface with several comparable public
companies. Newbury, Piret reviewed and compared specific
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financial information relating to Interface to corresponding financial
information, ratios and public market multiples for the following four
publicly-traded corporations: Alysis, Insci-Statements.com, Mobius, and Xenos
Group. These companies were chosen for comparison because they are publicly-
traded companies with operations that, for purposes of analysis, may be
considered similar to Interface. Newbury, Piret calculated and compared various
financial multiples and ratios. Newbury, Piret calculated the multiples of
Interface using a price of $9.50 per share, the closing price for the Interface
common shares on June 28, 2000. The multiples and ratios for Interface and the
comparative companies were based on the most recent publicly available
information and recently published research estimates.
The financial information on the comparable companies reviewed by Newbury,
Piret included reported revenues, gross profits, earnings before income, taxes
depreciation and amortization, assets, and shareholders' equity for the most
recent four quarters and publicly available research analyst reports and
estimates, in addition to enterprise value, and ratios between enterprise value
and reported and research analyst projected comparable company financial
performance. Newbury, Piret determined that, for the purposes of this opinion,
the ratios of enterprise value to revenue and gross margin, as an indicator of
future profitability potential, were the only relevant ratios using historic
financial results.
The following table presents the ranges for the calculated multiples and
ratios for the comparable companies, compared to the values indicated for
Interface.
<TABLE>
<CAPTION>
RANGES FOR MEDIANS FOR
SELECTED SELECTED
COMPANIES COMPANIES INTERFACE
------------ ------------ ----------
<S> <C> <C> <C>
Enterprise Value/Sales (Most recent four quarters).... 0.8x - 3.3x 2.7x 2.7x
Enterprise Value/Gross Margin (Most recent four
quarters)........................................... 0.9x - 5.2x 3.7x 4.0x
Enterprise Value/Sales (Most recent quarter).......... 3.7x - 14.5x 13.0x 14.7x
Enterprise Value/Gross Margin (Most recent quarter)... 4.1x - 25.4x 18.8x 18.3x
</TABLE>
Because of inherent differences between the businesses, operations and
prospects of Interface and the companies listed above, Newbury, Piret believes
that a purely quantitative analysis of the selected companies, without
considering qualitative judgments concerning differences between the financial
and operating characteristics of Interface and the selected companies that could
affect the public trading values of Interface and the selected companies, would
not be particularly meaningful in the context of the merger.
SELECTED TRANSACTIONS ANALYSIS. The purpose of this analysis was to provide
information regarding the fairness of the exchange ratio based upon a comparison
of the financial terms of the contemplated merger with the financial terms of
several other proposed, pending or completed business combinations. Newbury,
Piret analyzed various information relating to 19 selected technology
transactions with enterprise values between $20 million and $200 million
announced since June 26, 1999, including the merger of Worldtalk Communications
with Tumbleweed announced November 18, 1999.
This analysis focused on the multiples of revenues for each of the selected
transactions, as well as measuring premium to stock market prices. The following
table presents the range of multiples of the relevant revenues for the selected
transactions, and the stock price premiums based on market prices one day, one
week, and four weeks prior to announcement of each of the selected transactions,
each as compared to the corresponding values indicated for the merger. Revenues
were calculated using the
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<PAGE>
reported results for the most recent four quarters leading up the transaction
for each of the selected transactions, as well as for the merger.
<TABLE>
<CAPTION>
MEDIANS FOR RANGES FOR
SELECTED SELECTED
TRANSACTIONS TRANSACTIONS THE MERGER
------------- --------------- -----------
<S> <C> <C> <C>
Multiple of Revenues........................... 3.8x 1.1x to 53.6x 3.8x
Premium to One Day Prior Price................. 28.4% -2.3% to 108.7% 40.3%
Premium to One Week Prior Price................ 38.2% 6.3% to 217.0% 49.7%
Premium to Four Week Prior Price............... 58.3% 8.2% to 205.5% 74.8%
</TABLE>
CONTRIBUTION ANALYSIS. The purpose of this analysis was to provide
information regarding the fairness of the exchange ratio based on specific
historical operating and financial information comparing Interface's
contribution to the combined company resulting from the merger with what
Interface's shareholders would receive. Newbury, Piret reviewed specific
historical operating and financial information, including, among other things,
revenues, gross profits, operating losses, net income, equity value and
enterprise value for Interface, Tumbleweed, and the pro forma combined entity
resulting from the merger.
This analysis indicated, and the following table presents, the percentages
of sales, gross profits, and operating losses that Interface would have
contributed for the year ended December 31, 1999 and the quarter ended
March 31, 2000.
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, 1999 MARCH 31, 2000
------------------ ---------------
<S> <C> <C>
Sales..................................... 58.5% 31.3%
Gross Profit.............................. 59.9% 35.3%
Operating Losses.......................... 11.5% 17.0%
</TABLE>
This analysis also indicated that (a) Interface shareholders would have
contributed 3.3% of the equity value and 3.4% of the enterprise value to the
combined entity as of June 28, 2000; and (b) Interface shareholders would
receive 4.6% of the outstanding common equity of the combined entity and 4.7% of
the implied enterprise value of the combined entity after the merger, assuming
an exchange ratio for the merger of 0.264.
HISTORICAL EXCHANGE RATIO ANALYSIS. The purpose of this analysis was to
provide information regarding the fairness of the exchange ratio range in the
merger through comparison to the exchange ratios of the historical daily trading
prices for Interface and Tumbleweed common shares. Newbury, Piret reviewed
historical daily trading prices for Interface common shares and Tumbleweed
common shares for the period beginning with Tumbleweed's Initial Public Offering
on August 6, 1999 through June 28, 2000. Newbury, Piret conducted this analysis
by dividing the closing price per Interface common share by the closing price
per Tumbleweed common share. This analysis indicated, and the
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<PAGE>
following table presents, exchange ratio ranges for the period from August 6,
1999 to June 28, 2000, for the indicated quarterly periods and the most recent
10, 20, and 30 trading days.
<TABLE>
<CAPTION>
PERIOD OF EXCHANGE MEDIAN EXCHANGE RANGE OF EXCHANGE
RATIO CALCULATION RATIO RATIOS
------------------ ----------------- ------------------
<S> <C> <C>
August 6, 1999 through June 28, 2000................. 0.387 0.158 to 0.665
October 1, 1999 through December 31, 1999............ 0.378 0.247 to 0.602
January 3, 2000 through March 31, 2000............... 0.437 0.290 to 0.611
April 3, 2000 through June 28, 2000.................. 0.254 0.158 to 0.665
10 Trading Days...................................... 0.183 0.158 to 0.189
20 Trading Days...................................... 0.188 0.158 to 0.247
30 Trading Days...................................... 0.200 0.158 to 0.256
</TABLE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
all of the analyses as a whole, could create an incomplete view of the processes
underlying Newbury, Piret's opinion. In arriving at its fairness determination,
Newbury, Piret considered the results of all these analyses. No company or
transaction used as a comparable in the above analyses is directly comparable to
Interface or Tumbleweed or the contemplated transaction. Newbury, Piret prepared
the analyses solely for purposes of allowing it to provide its opinion to
Interface's board of directors as to the fairness from a financial point of view
of the exchange ratio for the merger to Interface shareholders and these
analyses do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold.
Analyses based upon estimates of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, as they are based upon numerous factors or events beyond
the control of the parties or their respective advisors, neither Interface nor
Newbury, Piret, nor any other person assumes responsibility if future results
are materially different from those estimated.
As part of its investment banking business, Newbury, Piret is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, private placements, and valuations for strategic
advisory and other purposes. Interface selected Newbury, Piret as its financial
advisor because it is a nationally recognized investment banking firm that has
substantial experience in transactions in technology industries. In addition,
Newbury, Piret is familiar with Interface, having provided strategic advisory
services to Interface from time to time, including having participated in the
negotiations leading to the merger agreement.
Pursuant to its engagement letter dated December 20, 1999, and modified as
of June 28, 2000, Interface engaged Newbury, Piret to act as its exclusive
financial advisor in connection with the contemplated transaction. Pursuant to
the terms of the engagement letter, Interface paid Newbury, Piret a fairness
opinion fee of $50,000. In addition, Newbury, Piret will receive an $880,000
fixed fee, which includes $60,000 already paid to Newbury, Piret by Interface,
contingent upon the consummation of the proposed merger. This fixed fee
represents approximately 1.4% of the aggregate value of the consideration
received by Interface shareholders in the merger, assuming the merger is
consummated at an exchange ratio of 0.264, and based on $50.50 per share as the
closing price of Tumbleweed's stock on June 28, 2000. Interface has further
agreed to indemnify Newbury, Piret against specified liabilities, including
liabilities under the federal securities laws. In the opinion of the Securities
and Exchange Commission, indemnification for liabilities arising under the
federal securities laws may not be enforceable.
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ANTICIPATED ACCOUNTING TREATMENT
Tumbleweed will account for the merger as a purchase in accordance with
generally accepted accounting principles.
INTERESTS OF PERSONS IN THE MERGER
In considering the recommendations of the Interface board of directors with
respect to the Merger Agreement and the transactions associated with it,
shareholders should be aware that certain members of the management of Interface
and the Interface board of directors have certain interests in the merger that
are in addition to, or different from, the interests of shareholders of
Interface.
EMPLOYMENT RELATED INTERESTS
Following the signing of the Merger Agreement, each of Robert Nero, Brian
Brooks, Donald Redding, Robert Granger, Brian Niemiec, Keith Bauserman and
Richard Sheridan signed offer letters with Tumbleweed providing these
individuals with special employment rights upon completion of the merger. The
terms of the offer letters are summarized below.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Robert Nero. The letter provides for a base salary of $208,000
per year plus an annual bonus of $104,000, dependent, for calendar year 2000
upon achievement of a sale of the Cleo business prior to December 31, 2000, and
thereafter dependent on achievement of mutually agreed objectives. Additionally,
until December 31, 2001 Mr. Nero will provide consulting services to Tumbleweed
from time to time at a fee to be negotiated by Tumbleweed and Mr. Nero.
Tumbleweed will provide Mr. Nero, accelerated vesting of 100% of the Interface
options cumulatively granted to Mr. Nero. If Mr. Nero resigns his employment
within three months of the effective date of the merger or before January 1,
2001, or Mr. Nero's employment is terminated without cause at any time following
the closing of the merger, then Tumbleweed will (i) pay Mr. Nero a lump sum
severance payment equivalent to eighteen months' salary from the date of such
termination, subject to all applicable withholdings; (ii) provide continued
coverage for Mr. Nero and his eligible dependents under the Tumbleweed health
care plans then in existence; and (iii) provide for continued use of Mr. Nero's
company car. During such severance period, Mr. Nero will be eligible to exercise
his vested stock options. The offer letter provides that Mr. Nero's employment
is at-will.
Effective on the consummation of the merger through January 31, 2001,
Tumbleweed entered into an offer letter with Brian Brooks. The letter provides
for a base salary of $140,400 plus a year 2000 management incentive bonus of
$17,500 payable in November, 2000. If Mr. Brooks satisfies the objectives in the
agreement, he will receive a completion bonus of $25,000. If Mr. Brooks'
employment is terminated without cause, then Tumbleweed will (i) provide a
severance package consisting of immediate accelerated vesting of 100% of
Interface options cumulatively granted to Mr. Brooks as of June 28, 2000;
(ii) a severance sum equivalent to six months of his annual salary, subject to
all applicable withholdings; and (iii) a twelve month outplacement program,
subject to mutual approval. The offer letter provides that Mr. Brook's
employment is at-will.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Donald Redding. The letter provides for a base salary of
$120,000 per year plus a possible quarterly bonus of up to $6,000. If
Mr. Redding assists Tumbleweed in the consummation of the sale of the Cleo
business prior to December 31, 2000, Mr. Redding will receive a completion bonus
of $25,000 plus 1% of any amount over a purchase price of $3,000,000. Upon the
sale of the Cleo business prior to December 31, 2000, Tumbleweed will provide
Mr. Redding immediate accelerated vesting of 100% of Interface Options
cumulatively granted to Mr. Redding as of June 28, 2000 and Mr. Redding and
Tumbleweed will enter into a consulting agreement through December 31, 2001. If
Tumbleweed is unable to divest the Cleo business or if Mr. Redding's employment
is terminated without cause, then
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Tumbleweed will provide a severance package consisting of immediate accelerated
vesting of 100% of Interface options cumulatively granted to Mr. Redding as of
June 28, 2000 and a severance sum equivalent to six months of his annual salary,
subject to all applicable withholdings. The offer letter provides that
Mr. Redding's employment is at-will.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Robert Granger. The letter provides for a base salary of
$130,000 per year plus a possible quarterly bonus of up to $11,250, based on a
standard sales management plan. In addition to his existing Interface options,
which will become options to purchase Tumbleweed common stock, Mr. Granger was
granted 20,000 options to purchase shares of Tumbleweed common stock. If
Mr. Granger's employment is terminated without cause at any time following the
closing of the merger, then Tumbleweed will provide a severance package
consisting of immediate accelerated vesting of 100% of Interface options
cumulatively granted to Mr. Granger as of June 28, 2000. If such termination
occurs prior to March 31, 2001, Tumbleweed will also provide six months' base
salary, subject to all applicable withholdings. With the exception of the
options vesting acceleration, termination of Mr. Granger's employment without
cause subsequent to March 31, 2001, would be treated as Tumbleweed would treat
the termination of an existing Tumbleweed employee in a similar position. The
offer letter provides that Mr. Granger's employment is at-will.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Brian Niemiec. The letter provides for a base salary of
$141,018 per year plus a possible quarterly bonus of up to $8,815. In addition
to his existing Interface options, which will become options to purchase
Tumbleweed common stock, Mr. Niemiec was granted 25,000 options to purchase
shares of Tumbleweed common stock. If Mr. Niemiec's employment is terminated
without cause at any time following the closing of the merger, then Tumbleweed
will provide a severance package consisting of immediate accelerated vesting of
100% of Interface options cumulatively granted to Mr. Niemiec as of June 28,
2000. If such termination occurs prior to March 31, 2001, Tumbleweed will also
provide six months' base salary, subject to all applicable withholdings. With
the exception of the options vesting acceleration, termination of Mr. Niemiec's
employment without cause subsequent to March 31, 2001, would be treated as
Tumbleweed would treat the termination of an existing Tumbleweed employee in a
similar position. The offer letter provides that Mr. Niemiec's employment is
at-will.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Keith Bauserman. The letter provides for a base salary of
$139,925 per year plus a possible quarterly bonus of up to 25% of the base
salary. In addition to his existing Interface options, which will become options
to purchase Tumbleweed common stock, Mr. Bauserman was granted 20,000 options to
purchase shares of Tumbleweed common stock. If Mr. Bauserman's employment is
terminated without cause at any time following the closing of the merger, then
Tumbleweed will provide a severance package consisting of immediate accelerated
vesting of 100% of Interface options cumulatively granted to Mr. Bauserman as of
June 28, 2000. If such termination occurs prior to March 31, 2001, Tumbleweed
will also provide six months' base salary, subject to all applicable
withholdings. With the exception of the options vesting acceleration,
termination of Mr. Bauserman's employment without cause subsequent to March 31,
2001, would be treated as Tumbleweed would treat the termination of an existing
Tumbleweed employee in a similar position. The offer letter provides that
Mr. Bauserman's employment is at-will.
Effective on the consummation of the merger, Tumbleweed entered into an
offer letter with Richard Sheridan. The letter provides for a base salary of
$136,517 per year plus a possible quarterly bonus of up to $6,750. In addition
to his existing Interface options, which will become options to purchase
Tumbleweed common stock, Mr. Sheridan was granted 25,000 options to purchase
shares of Tumbleweed common stock. If Mr. Sheridan's employment is terminated
without cause at any time following the closing of the merger, then Tumbleweed
will provide a severance package consisting of immediate accelerated vesting of
100% of Interface options cumulatively granted to Mr. Sheridan as of June 28,
2000. If such termination occurs prior to March 31, 2001, Tumbleweed will also
provide six
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months' base salary, subject to all applicable withholdings. With the exception
of the options vesting acceleration, termination of Mr. Sheridan's employment
without cause subsequent to March 31, 2001, would be treated as Tumbleweed would
treat the termination of an existing Tumbleweed employee in a similar position.
The offer letter provides that Mr. Sheridan's employment is at-will.
Each offer letter above contains restrictive covenants that have a term
through December 31, 2001. Pursuant to the restrictive covenants, the employee
will agree not to solicit or attempt to solicit any of Tumbleweed's or
Tumbleweed's subsidiaries' suppliers, clients, vendors, suppliers or consultants
to terminate their relationship with Tumbleweed. The employee shall not induce
or attempt to induce any employee, agent or contractor of Tumbleweed or
Tumbleweed's subsidiaries to terminate their position for the purpose of
consummating a business relationship with the employee or a competitor of
Tumbleweed. Finally, the employee shall not engage in the business of
Tumbleweed's anywhere in the United States except that the employee may own
securities in a similar corporation as long as they are not the controlling or
beneficial owner of 2% or more of any class of securities of such corporation.
INDEMNIFICATION AGREEMENTS
Pursuant to the Merger Agreement, Tumbleweed will maintain in effect all
rights to indemnification and exculpation from liabilities for acts or omissions
occurring at or prior to the time the merger becomes effective existing as of
the date of the Merger Agreement in favor of the current or former directors or
officers of Interface and its subsidiaries, as provided in their respective
organizational documents and any indemnification agreements of Interface. In
addition, from and after the time the merger becomes effective, directors and
officers of Interface who become directors or officers of Tumbleweed will be
entitled to the same indemnification rights and directors' and officers'
liability insurance as are provided to other directors and officers of
Tumbleweed. The Merger Agreement also provides that for six years after the time
the merger becomes effective, Tumbleweed will use commercially reasonable
efforts to provide liability insurance covering acts or omissions occurring
prior to the time the merger becomes effective with respect to those persons who
were covered by Interface's directors' and officers' liability insurance policy
on terms with respect to such coverage and amounts no less favorable than those
in effect on the date of the Merger Agreement. Tumbleweed, however, will not be
required to pay more than 150% of the current amount paid by Interface to
maintain the insurance.
DISSENTERS' RIGHTS
No holder of Interface common stock will have any dissenters' rights in
connection with, or as a result of, the matters to be acted upon at the special
meeting.
RESALE RESTRICTIONS
All shares of Tumbleweed common stock received by Interface shareholders in
the merger will be freely transferable, except that shares of Tumbleweed common
stock received by persons who are deemed to be "affiliates" of Interface, as
that term is defined under the Securities Act of 1933, prior to the merger may
be resold by them only in transactions permitted by the resale provisions of
Rule 145, or Rule 144 in the case of those persons who become affiliates of
Tumbleweed following the merger, or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of Interface or Tumbleweed
generally include individuals or entities that control, are controlled by, or
are under common control with, that party and may include certain officers and
directors of such party as well as principal stockholders of that party.
Pursuant to the Merger Agreement, Interface has agreed to use reasonable
efforts to cause each of its affiliates to execute a written agreement
restricting the disposition by the affiliate of any shares of Interface common
stock issued to the affiliate in the merger. Tumbleweed has also agreed to use
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reasonable efforts to cause each of its affiliates to execute a written
agreement restricting the disposition by its affiliate of any shares of
Tumbleweed common stock.
STOCK EXCHANGE LISTING
It is a condition to the merger that, upon consummation of the merger, the
shares of Tumbleweed common stock to be issued by Tumbleweed in connection with
the merger be approved for quotation on the Nasdaq National Market subject to
official notice of issuance.
DELISTING AND DEREGISTRATION OF INTERFACE COMMON STOCK
If the merger is consummated, the Interface common stock will no longer meet
the requirements for continued inclusion on the Nasdaq National Market and will
be deregistered under the Securities Exchange Act of 1934. Consequently,
shareholders of Interface will no longer be able to trade Interface common stock
on the Nasdaq Stock Market.
TREATMENT OF STOCK CERTIFICATES
After the completion of the merger, each stock certificate previously
representing shares of Interface common stock will automatically, with no
further action by the holder thereof, represent the right to receive 0.264 of a
share of Tumbleweed common stock for each share of Interface common stock
represented by the stock certificate. Promptly after the completion of the
merger, Equiserve L.P., Tumbleweed's exchange agent, will mail a letter of
transmittal with instructions to each holder of record of Interface common stock
outstanding immediately prior to the completion of the merger for use in
exchanging, by book-entry transfer or otherwise, stock certificates formerly
representing shares of Interface common stock for stock certificates
representing shares of Tumbleweed common stock. No stock certificates should be
surrendered by any holder of Interface common stock until the holder has
received the letter of transmittal and instructions from Equiserve L.P.
Tumbleweed stockholders will keep their current certificates as the merger does
not require surrender of Tumbleweed stock certificates.
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THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT. BECAUSE THE DESCRIPTION OF THE MERGER AGREEMENT IN THIS PROXY
STATEMENT/PROSPECTUS IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THE ENTIRE COPY OF THE MERGER
AGREEMENT, WHICH IS ATTACHED AS ANNEX A TO THIS DOCUMENT AND IS INCORPORATED IN
THIS DOCUMENT BY REFERENCE, BEFORE YOU DECIDE HOW TO VOTE.
THE MERGER
The Merger Agreement requires that when all closing conditions have been
satisfied or waived, Maize Acquisition Sub, Inc., or Maize, will be merged into
Interface, with Interface as the surviving corporation. The merger will become
effective on the date of filing of a certificate of merger with the Department
of Consumer and Industry Services, Corporation, Securities and Land Development
Bureau, of the State of Michigan or such later date as is specified in the
certificate of merger and agreed upon by the parties. This is referred to as the
effective time of the merger.
EXCHANGE PROCEDURES
At the effective time of the merger:
- each share of Interface common stock issued and outstanding immediately
prior to the effective time, other than shares of Interface common stock
owned by Tumbleweed, Maize, or any other wholly-owned subsidiary of
Tumbleweed will be converted into the right to receive 0.264 shares of
Tumbleweed common stock, together with rights associated with the
Tumbleweed common stock;
- all warrants to purchase Interface common stock, whether or not
exercisable, shall be assumed by Tumbleweed and shall be subject to, and
exercisable upon, the same terms and conditions as under the applicable
warrant agreement, except as provided in the Merger Agreement; and
- shares of Interface common stock owned by Tumbleweed, Maize or any other
wholly-owned subsidiary of Tumbleweed will be canceled and no Tumbleweed
common stock or other consideration will be delivered in exchange for this
cancellation.
Each outstanding employee and director stock option of Interface common
stock will be converted at the effective time of the merger into, and will
become an option to purchase 0.264 of a share of Tumbleweed common stock for
each share of Interface common stock covered by the option before the merger.
After conversion, the exercise price per share of Tumbleweed common stock
subject to each option will equal its pre-conversion exercise price per share of
Interface common stock divided by 0.264. Such option will have the same terms
and conditions as those of the Interface option.
Promptly after the effective time of the merger, Equiserve L.P., as exchange
agent, will mail to each shareholder of record of Interface a letter of
transmittal containing instructions for the surrender of certificates
representing Interface common stock in exchange for certificates representing
Tumbleweed common stock.
No fractional shares of Tumbleweed common stock will be issued in the
merger. Instead of issuing fractional shares of Tumbleweed common stock, the
holders of shares of Interface common stock, Tumbleweed will pay cash in an
amount, rounded to the nearest whole cent, equal to the fractional amount
multiplied by the closing price of a share of Tumbleweed common stock on the
Nasdaq National Market at the effective time of the merger.
Any dividends or other distributions declared or made after the effective
time of the merger on shares of Tumbleweed common stock will be paid to holders
of Interface common stock only after the stock certificates representing the
stock have been surrendered to the exchange agent. No interest will
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be paid or accrued on cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any.
If, after six months from the effective time of the merger, a holder of
shares of Interface common stock has not surrendered the stock certificates
representing such shares to the exchange agent, then the holder of stock
certificates representing Interface common stock may only look to Tumbleweed to
receive its shares of Tumbleweed common stock, cash in lieu of fractional shares
and any unpaid dividends and distributions on shares of Tumbleweed common stock,
if any. None of Tumbleweed, Interface, Equiserve or any other party will be
liable to any holder of a certificate formerly representing shares of Interface
common stock for Tumbleweed common stock, cash in lieu of fractional shares, or
any unpaid dividends and distributions properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
If, after two years from the effective time of the merger, a holder of a
certificate formerly representing shares of Interface common stock has not
surrendered the holder's certificate, then unclaimed shares of Tumbleweed common
stock, cash in lieu of fractional shares and any unpaid dividends and
distributions on shares of Tumbleweed common stock will, to the extent permitted
by applicable law, become the property of Interface.
At the effective time of the merger, the stock transfer books of Interface
will be closed and no further transfers of shares of Interface common stock will
be made.
CORPORATE ORGANIZATION AND GOVERNANCE
Upon consummation of the Merger, Interface will become the surviving
corporation (the "Surviving Corporation"), and shall continue to be governed by
the laws of the State of Michigan and the separate corporate existence of
Interface, with all its rights, privileges, immunities, powers and franchises,
shall continue unaffected by the Merger. The directors and officers of Maize at
the effective time of the merger will be the directors and officers of the
surviving corporation, until their respective successors are duly elected,
appointed or qualified or until their earlier death, removal or resignation in
accordance with the articles of incorporation and bylaws of the surviving
corporation.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Interface and its subsidiaries, subject to qualifications in the Merger
Agreement, relating to the following matters:
- organization, standing and similar corporate matters;
- capital structure;
- the corporate power and authority to execute, deliver and perform the
Merger Agreement and the related agreements and to consummate the
transactions contemplated by these agreements;
- the absence of conflicts between organizational documents, bylaws and
agreements and the Merger Agreement and the related transactions;
- the absence of any required governmental and third-party consents,
approvals or authorizations other than those specified in the Merger
Agreement;
- the timely filing of documents and the accuracy of information contained
in documents filed with the Securities and Exchange Commission;
- the accuracy of information supplied by Interface in connection with this
proxy statement/ prospectus and the registration statement of which it is
a part;
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- the absence of material changes or events relating to the business of
Interface and its subsidiaries since March 31, 2000;
- the absence of undisclosed liabilities;
- benefit plans and other employment related matters;
- the absence of pending or threatened material litigation and compliance
with applicable laws;
- the absence of defaults under organizational documents, material
agreements or applicable laws;
- timely filing of tax returns and other tax related matters;
- the existence, validity and status of material agreements;
- matters relating to assets and real property;
- compliance with environmental laws and regulations;
- product liability matters;
- intellectual property matters and Year 2000 compliance;
- proprietary rights and confidentiality matters;
- insurance;
- relationships with suppliers and customers;
- compliance with employment and labor laws;
- accounts receivable and inventories shown in the balance sheet of
Interface;
- the absence of affiliated transactions;
- the receipt of fairness opinions from Interface's financial advisor;
- the absence of undisclosed brokers and finders;
- the absence of actions that would prevent the merger from qualifying as a
tax-free reorganization;
- the inapplicability of state anti-takeover laws; and
- full disclosure to Interface's knowledge.
The Merger Agreement also contains representations and warranties of
Tumbleweed and its subsidiaries, subject to qualifications in the Merger
Agreement, relating to the following matters:
- organization, standing and similar corporate matters;
- capital structure;
- the corporate power and authority to execute, deliver and perform the
Merger Agreement and the related agreements and to consummate the
transactions contemplated by these agreements;
- the absence of conflicts between organizational documents, bylaws and
agreements and the Merger Agreement and the related transactions;
- the absence of any required governmental and third-party consents,
approvals or authorizations other than those specified in the Merger
Agreement;
- the timely filing of documents and the accuracy of information contained
in documents filed with the Securities and Exchange Commission;
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- the accuracy of information supplied by Tumbleweed in connection with this
proxy statement/ prospectus and the registration statement of which it is
a part;
- the absence of material changes or events relating to the business of
Tumbleweed and its subsidiaries since March 31, 2000;
- the absence of pending or threatened material litigation and compliance
with applicable laws;
- the absence of undisclosed brokers and finders;
- the absence of actions that would prevent the merger from qualifying as a
tax-free reorganization; and
- the operations of Maize.
All representations and warranties of Tumbleweed, Interface and Maize will
expire at the effective time of the merger.
COVENANTS
Interface has agreed that, except as provided in the Merger Agreement or
with the consent of Tumbleweed, prior to the time the merger becomes effective,
it will conduct its business in the ordinary course and will use its best
efforts to preserve its business organization and to maintain its existing
relationships with customers, suppliers, employees, creditors and business
partners.
Accordingly, Interface agreed that, subject to exceptions generally
described below, neither it nor its subsidiaries will, prior to the effective
time of the merger, without the consent of Tumbleweed:
- split, combine or reclassify its common stock or any outstanding capital
stock of its subsidiaries, or redeem or repurchase any of its capital
stock;
- amend its articles of incorporation or bylaws or similar organizational
documents;
- declare, set aside or pay any dividend or other distribution on any of its
capital stock;
- issue additional shares of or securities convertible into, or options,
warrants or rights to acquire, any capital stock, except issuances
pursuant to the exercise of Interface options outstanding on the date of
the Merger Agreement in accordance with their present terms;
- transfer, lease, license, sell, mortgage or encumber any material assets
other than in the ordinary course of business;
- redeem, purchase or otherwise acquire directly or indirectly any of its
capital stock;
- increase the compensation of directors and officers, or employees other
than in the ordinary course of business, or provide any new or change any
existing benefit plan or enter into or amend any employment agreement,
except in accordance with existing policies of Interface, or make any loan
to its directors, officers or employees;
- modify, amend or terminate any of its material agreements, or waive,
release or assign any material rights under these agreements;
- cause any material insurance policy naming it as a beneficiary to be
canceled or terminated without notice to Tumbleweed except in the ordinary
course of business;
- license, transfer or otherwise dispose of any of its intellectual property
rights except in the ordinary course of business;
- cancel any debts or waive any contract rights or other rights of
substantial value except in the ordinary course of business;
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- incur or assume any debt or guarantee the debt of others, make any loan or
investment in any other person, or enter into or amend any material
contract, outside the ordinary course of business;
- change its accounting method unless required by generally accepted
accounting principles, or take any action that would prevent the merger
from qualifying as a tax-free reorganization;
- pay or satisfy any liabilities or obligations outside the ordinary course
of business;
- adopt a plan of liquidation or dissolution, merger or other
reorganization;
- take any action that would cause any of its representations and warranties
to become inaccurate at or before the effective time;
- change its tax accounting methods, or settle or compromise any United
States federal, state, local or foreign tax liability; or
- take, or authorize or propose to take, or agree to take in writing or
otherwise, any of the above actions.
Tumbleweed has also agreed that neither it nor its subsidiaries will, prior
to the effective time of the merger, without the consent of Interface:
- split, combine or reclassify its common stock;
- amend its certificate of incorporation or bylaws;
- declare, set aside or pay any dividend or other distribution on any of its
capital stock;
- change its accounting method unless required by generally accepted
accounting principles, or take any action that would prevent the merger
from qualifying as a tax-free reorganization;
- take any action that would cause any of its representations and warranties
to become inaccurate at or before the effective time; or
- take, or authorize or propose to take, or agree to take in writing or
otherwise, any of the above actions.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither Interface nor any of its
subsidiaries, directly or indirectly, may solicit, initiate or encourage,
including by furnishing information, or take any other action designed to
facilitate any inquiries or proposals relating to an alternative transaction
described below, or participate in any discussions or negotiations regarding an
alternative transaction. The Merger Agreement defines an alternative transaction
to mean:
- a tender offer or exchange offer to acquire more than 20% of the
outstanding shares of Interface common stock;
- any acquisition or proposed acquisition of Interface or any of its
significant subsidiaries by a merger or other business combination,
regardless of whether Interface or any of its subsidiaries survives the
merger; or
- any other transaction the consummation of which a third party would
acquire control of assets of Interface or any of its subsidiaries,
including the equity securities of such subsidiaries, for consideration
equal to 20% or more of the fair market value of all of the outstanding
shares of Interface common stock.
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The Merger Agreement provides that these restrictions will not prohibit
Interface, prior to the approval of the merger by its shareholders, from:
- complying with Rule 14e-2 and Rule 14d-9 under the Securities and Exchange
Act of 1934, as amended, with regard to a bona fide tender offer or
exchange offer, which rules require a target company to respond publicly
to a tender offer; or
- participating in negotiations or furnishing information in response to an
unsolicited proposal for an alternative transaction if all of the
following conditions are met:
-- the Interface board of directors must have concluded in good faith,
after receipt of advice from outside legal counsel, that it must
participate in such negotiations or furnish such information in order
to comply with its fiduciary duties to the shareholders; and
-- the board of directors must promptly advise Tumbleweed orally and in
writing of any request for information or of any proposal in
connection with an alternative transaction, specifying the material
terms and conditions of the request or proposal and the identity of
the person making that request or proposal.
Except as described below, neither the Interface board of directors or a
committee of the board shall:
- withdraw, qualify or modify in a manner adverse to Tumbleweed, its
approval or recommendation of the Merger Agreement or the merger;
- approve or recommend an alternative transaction; or
- enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement related to an alternative
transaction.
However, if, prior to the approval of the merger by its shareholders, the
Interface board of directors receives a superior proposal and, the board of
directors concludes in good faith, after consulting its outside legal counsel,
that it must take such actions in order to comply with its fiduciary duties to
the shareholders, the board may withdraw its recommendation or approval of the
merger after the fifth business day following Tumbleweed's receipt of written
notice, advising Tumbleweed of its intent to approve or recommend the superior
proposal.
For purposes of this covenant, the term superior proposal means any of the
alternative transactions described in the definition above, which the Interface
board of directors concludes in its good faith judgment, after consulting with
its financial advisor, to be more favorable to the shareholders of Interface
than the merger.
ACCESS TO INFORMATION
Subject to existing confidentiality obligations, Interface has agreed to
afford Tumbleweed and its representatives reasonable access during normal
business hours to its properties, books, contracts, commitments and records.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that Tumbleweed agrees to indemnify, at all
times after the effective time, directors or officers of Interface or its
subsidiaries to the same extent as provided in Interface's certificates of
incorporation or bylaws or in indemnity agreements in effect on June 28, 2000.
In addition, Tumbleweed also agrees to maintain for at least six years after
the effective time of the merger directors' and officers' liability insurance
policies on the same terms and conditions as
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Interface's insurance policies in effect on June 28, 2000, which will cover
events occurring prior to the effective time of the merger.
COOPERATION AND REASONABLE EFFORTS
Under the Merger Agreement and subject to the conditions and limitations
specified in the Merger Agreement, the parties have agreed to cooperate with
each other to take specified actions and to use their reasonable efforts to have
the registration statement declared effective as promptly as practicable after
its filing.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of Tumbleweed, Maize and Interface to effect the
merger are subject to the following conditions:
- the shareholders of Interface must approve the merger;
- there may be no order, law, injunction or other legal restraint or
prohibition enjoining or preventing the consummation of the merger or the
effective operation of the business of Interface after the effective time
of the merger;
- all required regulatory approvals are obtained;
- the shares of Tumbleweed common stock to be issued in the merger are
qualified for inclusion in the Nasdaq National Market; and
- the registration statement is declared effective and no stop order
suspends the effectiveness of the registration statement, and no
proceeding for that purpose is initiated or threatened by the Securities
and Exchange Commission.
Tumbleweed and Maize's obligations to effect the merger are subject to the
following additional conditions:
- the representations and warranties of Interface are true and correct when
made and as of the effective time in all material respects;
- Interface has performed in all material respects its obligations required
to be performed by it prior to and at the effective time of the merger;
- Interface has received all necessary consents;
- the agreements related to the merger shall be valid and complied with in
all material respects;
- since June 28, 2000, no event has occurred that has had, or is reasonably
likely to have, a material adverse effect on Interface or its
subsidiaries;
- Tumbleweed has received an opinion of Dykema Gossett PLLC;
- Interface certifies that specific closing conditions have been satisfied;
- Interface certifies that neither it nor any of its subsidiaries is a
United States real property holding company; and
- each employee of Interface shall have entered into a proprietary rights
and confidentiality agreement and confirmed their status as "at will"
employees.
Interface's obligations to effect the merger are subject to the following
additional conditions:
- the representations and warranties of Tumbleweed and Maize are true and
correct when made and as of the effective time in all material respects;
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- each of Tumbleweed and Maize has performed in all material respects its
obligations required to be performed by it prior to and at the effective
time of the merger;
- since June 28, 2000, no event has occurred that has had, or is reasonably
likely to have, a material adverse effect on Tumbleweed or its
subsidiaries;
- Interface has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP; and
- Tumbleweed certifies that specific closing conditions have been satisfied.
TERMINATION
The Merger Agreement provides that at any time prior to the effective time
of the merger, the Merger Agreement may be terminated:
- by mutual written consent of Tumbleweed and Interface if the board of
directors of each determines to do so by a vote of a majority of the
entire board of directors;
- by either Tumbleweed or Interface if:
-- the merger has not been completed on or prior to December 15, 2000,
so long as the party seeking to terminate did not prevent the
consummation of the merger by failing to perform any of its
obligations under the Merger Agreement;
-- the Interface shareholders fail to approve the merger; or
-- any court or other governmental body issues a nonappealable final
order that has a material adverse effect on Interface or its
subsidiaries, or a required regulatory approval is denied, provided
the party seeking to terminate the Merger Agreement used commercially
reasonable efforts to appeal the order or obtain the approval.
- by Interface, as long as it is not in material breach of the Merger
Agreement, if:
-- Tumbleweed materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the
Merger Agreement, which breach or failure to perform is incapable of
being cured or is not cured within 30 days; or
- by Tumbleweed, as long as it is not in material breach of the Merger
Agreement, if:
-- Interface materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the
Merger Agreement, which breach or failure to perform is incapable of
being cured or is not cured within 30 days; or
-- at any time prior to Interface's special meeting, Interface's board
of directors withdraws, modifies or qualifies in a manner adverse to
Tumbleweed, its recommendation that the shareholders approve the
merger.
TERMINATION FEE AND EXPENSES
The Merger Agreement provides that Interface will pay to Tumbleweed a
termination fee of $2.5 million plus all costs and expenses incurred by
Tumbleweed in connection with the Merger Agreement and the other agreements
related to the merger.
- at any time prior to Interface's special meeting, Interface's board of
directors withdraws, modifies or qualifies its recommendation that the
shareholders approve the merger, in a manner adverse to Tumbleweed;
- the Interface shareholders fail to approve the merger (except as described
below); or
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- Interface materially breaches or fails to perform any of its
representations, warranties, covenants or other agreements in the Merger
Agreement, which breach or failure to perform is incapable of being cured
or is not cured within 30 days.
Notwithstanding the above, in the event the Merger Agreement is terminated
because the approval of Interface's shareholders is not obtained and if an
alternative transaction has not been entered into or announced prior to 360
calendar days from the date of such termination, the Merger Agreement provides
that the $2.5 million termination fee will be reduced to $1.0 million.
In addition, except as specifically provided in the Merger Agreement, each
party has agreed to bear its own expenses in connection with the Merger
Agreement and the other related agreements and transactions contemplated by the
Merger Agreement. Interface has agreed not to incur legal, accounting and
financial advisory fees and expenses in excess of $1.2 million.
AMENDMENT; EXTENSION AND WAIVER
The parties may amend the Merger Agreement at any time before or after the
approval of the merger by the Interface shareholders. After the approval by the
shareholders, the parties may not amend the Merger Agreement without further
shareholder approval if the amendment changes the amount or the form of
consideration to be issued to Interface shareholders, or which by law requires
the further approval of the shareholders.
At any time prior to the effective time of the merger, any party may,
subject to the amendment restrictions described above:
- extend the time for the performance of any of the obligations or other
acts of the other parties;
- waive any inaccuracies in the representation and warranties contained in
the Merger Agreement or in any document delivered pursuant to the Merger
Agreement; and
- waive compliance with any of the agreements or conditions in the Merger
Agreement.
Any extension or waiver described above will be valid if set forth in
writing and signed by the parties to be bound.
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THE STOCK OPTION AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE STOCK OPTION
AGREEMENT. BECAUSE THE DESCRIPTION OF THE STOCK OPTION AGREEMENT IS A SUMMARY,
YOU SHOULD READ CAREFULLY THE ENTIRE COPY OF THE STOCK OPTION AGREEMENT, WHICH
IS ATTACHED AS ANNEX B TO THIS DOCUMENT, FOR THE INFORMATION THAT IS IMPORTANT
TO YOU.
GENERAL. Concurrent with the execution of the Merger Agreement, Tumbleweed
and Interface entered into a stock option agreement under which Interface
granted Tumbleweed an option to purchase a number of shares of Interface common
stock equal to 19.9% of the total number of shares of Interface common stock
issued and outstanding as of June 28, 2000, together with the associated rights
under the Interface rights agreement and subject to adjustment. Under this
option, Tumbleweed would have a right to acquire 939,215 shares of Interface
common stock, subject to adjustment, at $13.33 per share.
EXERCISE OF THE OPTION. The option is exercisable at any time after the
occurrence of specific events, including any event entitling Tumbleweed to
receive the termination fee under the Merger Agreement. Subject to some
exceptions, the right to purchase shares under the stock option agreement will
expire upon the earliest to occur of:
- the effective time of the merger;
- termination of the Merger Agreement by mutual written consent of
Tumbleweed and Interface, by either Tumbleweed or Interface if specific
conditions as outlined in the Merger Agreement are not met, or by
Interface, if Tumbleweed is in material breach of the Merger Agreement;
and
- twelve months following the termination of the Merger Agreement by
Tumbleweed, which it is entitled to do under the Merger Agreement if
Interface is in material breach of the Merger Agreement or if the
Interface board of directors fails to recommend to their shareholders that
they approve the Merger Agreement and the related transactions.
ADJUSTMENTS TO NUMBER OF SHARES AND CLASS OF SHARES. The number and class
of securities subject to the option and the purchase price will be adjusted for
any change in Interface common stock by reason of a stock dividend, split up,
merger, other than pursuant to the Merger Agreement, recapitalization,
combination, exchange of shares or similar transaction, so that Tumbleweed will
receive, upon exercise of the option, the number and class of shares that
Tumbleweed would have received if the option had been exercised immediately
prior to the occurrence of the event, or the record date of the event, if
applicable.
If Interface agrees to consolidate with or merge into any person other than
Tumbleweed or one of its subsidiaries and Interface will not be the surviving
corporation of that consolidation or merger, agrees to permit any person other
than Tumbleweed or one of its subsidiaries to merge into Interface which results
in the outstanding shares of Interface common stock immediately prior to such
merger being less than 50% of the outstanding shares of the merged company, or
agrees to sell or otherwise transfer all or substantially all of its assets to
any person other than Tumbleweed or one of its subsidiaries, then the agreement
governing any of these transactions will provide that the option will, upon the
completion of the transaction, be converted into or exchanged for a right to
receive the number and class of shares Tumbleweed would have received for
Interface common stock if the option had been exercised immediately prior to the
consolidation, merger, sale or transfer.
REPURCHASE RIGHT. The stock option agreement provides that, if Interface
consummates an alternative transaction, Tumbleweed is entitled to sell to
Interface and Interface is required to purchase
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from Tumbleweed, all or a portion of the option, or all or any portion of the
shares purchased by Tumbleweed, at a price equal to the difference between:
- the market/tender offer price, as defined in the stock option agreement;
and
- the exercise price multiplied by the number of shares purchaseable
pursuant to the option.
In addition, the stock option agreement provides that in no event will
Tumbleweed's total profit from the option, including any termination fee paid to
Tumbleweed, exceed $2.5 million plus an amount equal to all the costs and
expenses incurred by Tumbleweed in connection with the Merger Agreement and, if
Tumbleweed's total profit from the option would otherwise exceed such amount,
Tumbleweed is required to:
- reduce the number of shares of Interface common stock subject to the
option;
- deliver shares of Interface common stock previously purchased by
Tumbleweed to Interface for cancellation;
- pay cash to Interface; or
- any combination of the foregoing, so that Tumbleweed's actually realized
total profit from the option including the termination fee paid to
Tumbleweed, does not exceed $2.5 million plus an amount equal to all the
costs and expenses incurred by Tumbleweed in connection with the Merger
Agreement after taking into account the foregoing actions.
REGISTRATION RIGHTS. Following the termination of the Merger Agreement and
exercise of the option, Tumbleweed may request Interface to register any shares
purchased under the option under the securities laws and Interface will use its
reasonable best efforts to effect this registration in a firm commitment
offering, subject to limitations as provided in the stock option agreement.
EFFECT OF STOCK OPTION AGREEMENT. The stock option agreement is intended to
increase the likelihood that the merger will be consummated on the terms set
forth in the Merger Agreement. Consequently, some aspects of the stock option
agreement may discourage persons who might now or prior to the effective time of
the merger be interested in acquiring all or a significant interest in Interface
from considering or proposing such an acquisition, even if such persons were
prepared to offer higher consideration per share for Interface common stock than
that implicit in the 0.264 exchange ratio or a higher price per share for
Interface common stock than the market price.
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THE VOTING AGREEMENTS
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE VOTING
AGREEMENTS. BECAUSE THE DESCRIPTION OF THE VOTING AGREEMENTS IS A SUMMARY, YOU
SHOULD READ CAREFULLY THE ENTIRE COPY OF THE VOTING AGREEMENTS, WHICH IS
ATTACHED AS ANNEX C TO THIS DOCUMENT, FOR THE INFORMATION THAT IS IMPORTANT TO
YOU.
Concurrent with the execution of the Merger Agreement, officers and
directors of Interface entered into voting agreements with Tumbleweed under
which they gave Tumbleweed their irrevocable proxy to vote all the shares of
Interface common stock issued and outstanding and beneficially owned by them as
of the date of the voting agreements, as well as any shares acquired by them
after the date of and prior to the termination of the voting agreements:
- in favor of the adoption of the Merger Agreement and the approval of other
actions contemplated or required by the Merger Agreement or other related
agreements; and
- against any action or agreement that would result in a breach in any
respect of any covenant, representation or warranty or any other
obligation or agreement under the Merger Agreement or other related
agreements.
Shareholders of Interface collectively holding 83,081 shares of Interface
common stock, representing approximately 1.76% of the outstanding Interface
common stock, have entered into voting agreements with Tumbleweed.
The voting agreements will terminate on the earliest of:
- termination of the Merger Agreement:
-- by mutual written consent of Tumbleweed and Interface;
-- by either Tumbleweed or Interface if specific conditions as outlined
in the Merger Agreement are not met; or
-- by Interface, if Tumbleweed is in material breach of the Merger
Agreement.
- six months following the termination of the Merger Agreement by
Tumbleweed, which it is entitled to do under the Merger Agreement if
Interface is in material breach of the Merger Agreement or if the
Interface board of directors fails to recommend to their shareholders that
they approve the Merger Agreement and the related transactions;
- agreement by Tumbleweed, Interface and the shareholders who are parties to
the voting agreement to terminate the voting agreement; or
- consummation of the merger.
Each shareholder has agreed in the voting agreement that, prior to the
termination of the voting agreement, the shareholder will not, directly or
indirectly;
- sell, transfer, tender, pledge, encumber, assign, or otherwise dispose of
any shares of Interface or Tumbleweed common stock beneficially owned by
them as of the date of the voting agreements, as well as any shares
acquired by them after the date of and prior to the termination of the
voting agreements (except as described below);
- grant any proxy, power of attorney, or enter into a voting agreement or
arrangement; or
- take any other action that would make any representation or warranty of
the shareholder untrue or incorrect or have the effect of preventing or
disabling the shareholder from performing its obligations under the voting
agreement.
Each shareholder has agreed in the voting agreement that until 90 days after
the closing of the merger, the shareholder will not offer for sale, sell,
transfer, tender, pledge, encumber, assign or
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otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of any or all of
the Tumbleweed common stock, or securities convertible into or exchangeable or
exercisable for any shares of Tumbleweed common stock, beneficially owned or
controlled by such shareholder as of June 28, 2000 or at any time thereafter
without, in each case, the prior written consent of Tumbleweed; provided, that
for members of the Interface board of directors, the foregoing prohibitions will
not apply to shares sold for the express purpose of covering the exercise price
of shareholder options.
Each shareholder understands that Tumbleweed and Interface entered into the
Merger Agreement in reliance upon such shareholder's execution and delivery of
the voting agreement. Each shareholder affirms that the irrevocable proxy was
given in connection with the execution of the Merger Agreement, and that such
irrevocable proxy is given to secure the performance of its duties under the
voting agreement.
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CONVERTIBLE PROMISSORY NOTE
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE CONVERTIBLE
PROMISSORY NOTE AND THE NOTE PURCHASE AGREEMENT. BECAUSE THE DESCRIPTION OF THE
CONVERTIBLE PROMISSORY NOTE AND NOTE PURCHASE AGREEMENT IS A SUMMARY, YOU SHOULD
READ CAREFULLY THE ENTIRE COPY OF THE CONVERTIBLE PROMISSORY NOTE AND THE NOTE
PURCHASE AGREEMENT, WHICH ARE ATTACHED AS ANNEX D TO THIS DOCUMENT, FOR THE
INFORMATION THAT IS IMPORTANT TO YOU.
GENERAL. Concurrent with the execution of the Merger Agreement, Tumbleweed
and Interface entered into a note purchase agreement under which Tumbleweed
agreed to purchase an aggregate of $3 million of convertible subordinated
promissory notes, or notes, of Interface, pursuant to a note purchase agreement.
CONVERSION INTO INTERFACE COMMON STOCK. The notes are convertible at
Tumbleweed's option at any time prior to payment in full of the principal
balance of the note into shares of Interface common stock. The notes convert
automatically if the Merger Agreement is terminated due to a material breach by
Tumbleweed. The notes mature one year from the date of issuance and accelerate
upon an event of default, including termination of the Merger Agreement if
Interface shareholders elect not to approve it. Interface also has agreed to
register the shares issuable upon conversion of the notes for resale under the
Securities Act. The initial conversion price is $9.50 per share but is subject
to adjustment upon the occurrence of certain events, including but not limited
to stock splits, reverse stock splits and dividends paid on Interface common
stock. If at any time the Merger Agreement is terminated by Interface pursuant
to a material breach of the Merger Agreement by Tumbleweed, the entire principal
amount of the notes shall be automatically converted into shares of Interface
common stock at the conversion price in effect at that time.
INTEREST AND PAYMENTS. Commencing on December 31, 2000, and on each
June 30 and December 31 thereafter until all outstanding principal and interest
on the notes has been paid in full, Interface agreed to pay interest at the rate
of ten percent (10%) per annum on the principal of the notes then outstanding.
In the event that the principal amount of the notes is not paid in full when
such amount becomes due and payable, interest at the rate of thirteen percent
(13%) shall continue to accrue on the balance of any unpaid principal until such
balance is paid.
EVENTS OF DEFAULT. If any of the following events should occur, then so
long as such condition exists, Tumbleweed may declare the entire principal and
unpaid accrued interest hereon immediately due and payable, by notice in writing
to Interface:
- Default in the payment of the principal and unpaid accrued interest of the
notes when due and payable if such default is not cured by Interface
within ten (10) days after Tumbleweed has given Interface written notice
of such default; or
- The institution by Interface of proceedings to be adjudicated as bankrupt
or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or
answer or consent seeking reorganization or release under the federal
Bankruptcy Act, or any other applicable federal or state law, or the
consent by it to the filing of any such petition or the appointment of a
receiver, liquidator, assignee, trustee or other similar official of
Interface, or of any substantial part of its property, or the making by it
of an assignment for the benefit of creditors, or the taking of corporate
action by Interface in furtherance of any such action; or
- If, within sixty (60) days after the commencement of an action against
Interface seeking any bankruptcy, insolvency, reorganization, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such action shall not have been resolved in favor of Interface
or all orders or proceedings thereunder affecting the operations or the
business of
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Interface stayed, or if the stay of any such order or proceeding shall
thereafter be set aside, or if, within sixty (60) days after the
appointment without the consent or acquiescence of Interface of any
trustee, receiver or liquidator of Interface or of all or any substantial
part of the properties of Interface, such appointment shall not have been
vacated; or
- Any declared default of Interface under any indebtedness senior to the
note; or
- Sixty days after either Interface or the Tumbleweed terminates the Merger
Agreement under any reason other than a material breach by Tumbleweed of
the Merger Agreement.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes the anticipated material United
States federal income tax consequences of the merger to holders of Interface
common stock who exchange their Interface stock for Tumbleweed common stock in
the merger. This discussion addresses only such shareholders who hold their
Interface stock as a capital asset and does not address all of the United States
federal income tax consequences that may be relevant to particular shareholders
in light of their individual circumstances or to shareholders who are subject to
special rules, such as financial institutions, mutual funds, tax-exempt
organizations, insurance companies, dealers in securities or foreign currencies,
traders in securities who elect to apply a mark-to-market method of accounting,
foreign holders, persons who hold such shares as a hedge against currency risk
or as part of a straddle, constructive sale or conversion transaction, or
holders who acquired their shares upon the exercise of employee stock options or
similar derivative securities or otherwise as compensation.
The following discussion is not binding on the Internal Revenue Service or
any court and no ruling has been, or will be, sought from the Internal Revenue
Service as to the United States federal income tax consequences of the merger.
The discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), laws, regulations, rulings and decisions in effect as of the date of
this proxy statement/prospectus, all of which are subject to change, possibly
with retroactive effect. Tax consequences under state, local and foreign laws,
and federal laws other than federal income tax laws, are not addressed.
INTERFACE SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER
TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
Interface and Tumbleweed intend to take the position that the merger will
qualify as a reorganization within the meaning of Section 368(a) of the Code.
Assuming the merger qualifies as a reorganization within the meaning of
Section 368(a) of the Code, a holder of Interface stock who exchanges his or her
Interface stock solely for Tumbleweed common stock in the merger will not
recognize gain or loss for United States federal income tax purposes, except
with respect to cash received in lieu of a fractional share of Tumbleweed common
stock. Each holder's aggregate tax basis in the Tumbleweed common stock received
in the merger will be the same as his or her aggregate tax basis in the
Interface stock surrendered in the merger, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is received. The
holding period of the Tumbleweed common stock received in the merger by a holder
of Interface stock will include the holding period of the Interface stock
exchanged therefor.
A holder of Interface stock who receives cash in lieu of a fractional share
of Tumbleweed common stock will recognize gain or loss equal to the difference
between the amount of cash received and his or her tax basis allocable to such
fractional share. That gain or loss generally will constitute capital gain or
loss. In the case of an individual stockholder, any such capital gain generally
will be subject to a maximum United States federal income tax rate of 20% if the
individual has held his or her Interface stock for more than 12 months on the
date of the merger. The deductibility of capital losses is subject to
limitations for both individuals and corporations.
Each holder of Interface common stock that receives Tumbleweed common stock
in the merger will be required to retain records and file with such holder's
United States Federal income tax return a statement setting forth specific facts
relating to the merger.
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PROPOSAL TO AMEND THE 1992 STOCK OPTION PLAN
On July 14, 2000, the Board of Directors of Interface unanimously approved
an amendment to the Interface Systems, Inc. 1992 Stock Option Plan (the "Plan")
to increase the number of shares issuable under the Plan from 1,100,000 to
2,000,00 shares. The Board of Directors of Interface has determined that
additional shares should be made available under the Plan if the merger is
consummated to attract, retain and motivate highly qualified individuals to
serve as employees of Interface. Awards under the Plan are intended to align the
interests of employees with those of Interface's shareholders and encourage
employees to acquire an ownership interest in Interface. Since stock options
granted under the Plan only gain value if the price of the Interface common
stock increases above the option exercise price, grants of options to employees
under the Plan reflect Interface's philosophy and objective of linking employee
compensation to Interface performance. The Plan also may provide compensation
incentives that Interface cannot presently provide through salary or bonus. The
increase, requested by Tumbleweed, is intended to allow a significantly broader
distribution of options among the Interface employees and to help incentivize
and retain Interface employees in the future. Except as otherwise described in
this proxy statement/prospectus, neither Interface nor Tumbleweed has made any
commitments to grant any stock options following consummation of the merger.
Approval of the amendment to the Plan is not a condition to the consummation
of the merger. However, the amendment will only become effective if approved by
a majority of the shares of Interface common stock voting on the proposal at the
Interface special meeting and if the merger is consummated.
THE BOARD OF DIRECTORS OF INTERFACE UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE AMENDMENT TO THE PLAN.
GENERAL
On May 6, 1992, the shareholders of Interface approved the Plan and on
August 8, 1997, the shareholders approved an amended and restated Plan. At the
annual shareholder meeting held on February 18, 2000, the plan was further
amended to increase the number of shares issuable under the Plan from 800,000 to
1,100,000. The Plan is intended to attract and motivate highly qualified
individuals to serve as employees of Interface and to encourage employees of
Interface and its subsidiaries to acquire an ownership interest in Interface.
The Plan is administered by the Compensation Committee of the Interface
Board of Directors (the "Committee"), which is comprised of no fewer than two
non-employee members of the Interface Board of Directors. The Committee is
authorized to administer and interpret the Plan and to adopt such rules and
regulations as it determines are appropriate. Shares subject to the canceled,
forfeited, terminated or expired portion of grants and awards made under the
Plan may again be used for grants and awards under the Plan.
Awards may be made by the Committee to employees as the Committee may select
and may be in the form of stock options, restricted stock or performance shares.
Options under the Plan to purchase 381,633 shares of Interface common stock are
currently outstanding under the Plan.
EXERCISE OF OPTIONS
The current Plan provides for the issuance of up to 1,100,000 shares of
Interface common stock. Persons eligible for awards under the Plan are officers
and key employees. Options granted under the Plan may be either incentive stock
options under Section 422 of the Code or nonqualified stock options. The
exercise price of any option granted under the Plan may be no less than the fair
market value per share of Interface common stock on the date of grant. Options
granted under the Plan
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generally are exercisable at a rate of 33% per year after one year from the date
of grant and have a term of ten years.
The purchase price for shares of common stock to be acquired upon exercise
of an option granted under the Plan is required to be paid in full, at the time
of exercise, in cash, by certified check, bank draft or money order or by
tendering to Interface shares of common stock then owned by the option holder.
In general, if prior to the date that an option first becomes exercisable,
the option holder's employment is terminated, with or without cause, or by the
act, death, disability, or retirement of the option holder, the option holder's
right to exercise the option will terminate. If, on or after the date that an
option first becomes exercisable, an option holder's employment is terminated
for any reason other than death or disability, the option holder will have the
right, prior to the earlier of the expiration of the option or three months
after such termination of employment, to exercise the option in effect at the
date of exercise. Additionally, if on or after the date that an option becomes
exercisable, the option holder dies or becomes disabled while an employee or
while the option remains exercisable, the option holder or the executor or
administrator of the estate of the option holder, or the persons to whom the
option shall have been transferred by will or by the laws of descent and
distribution, shall have the right, prior to the earlier of the expiration of
the option or one year from the date of the option holder's death or termination
due to a disability to exercise the option to the extent that it was exercisable
and unexercised on the date of death, subject to any other limitation on
exercise in effect at the date of exercise.
The 1992 Plan provides in the event that any dividend or other distribution
(whether in the form of cash, common stock, other securities, or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of common stock or other securities of Interface, issuance of warrants or other
rights to purchase common stock or other securities of Interface, or other
similar corporate transaction or event affects the common stock, the Committee
may make such adjustments, including in the number or type of shares authorized
by the 1992 Plan, as it deems appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the 1992 Plan. In addition, in the event of a change of control and under
such other circumstances as the Committee may designate, options under the Plan
may be treated as the Committee may determine (including acceleration of
vesting) at the time or at a subsequent date as provided in the stock option
agreement reflecting the grant of such options. In connection with the merger,
the Committee will adjust the number of shares available for grant under the
1992 Plan in accordance with the exchange ratio in the merger. Accordingly, if
this amendment is approved following the merger, the 1992 Plan will have
528,000 shares of Tumbleweed available for grant.
AMENDMENT; TERMINATION
The Board may generally amend or terminate the 1992 Plan from time to time
without shareholder approval; provided, however, that the Board may not amend
the 1992 Plan to increase the number of shares available for grant without
shareholder approval. No amendment, modification, or termination of the 1992
Plan shall in any manner affect any option granted under the 1992 Plan without
the consent of the participant holding the option.
FEDERAL INCOME TAX CONSEQUENCES
1992 Plan participants will not recognize taxable income at the time an
option is granted under the Plan unless the option has a readily ascertainable
market value at the time of the grant. Management understands that options to be
granted under the 1992 Plan will not have a readily ascertainable market value;
therefore, income will not be recognized by participants before the time of
exercise of an
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option. For nonqualified stock options, the difference between the fair market
value of the shares at the time an option is exercised and the option price
generally will be treated as ordinary income to the optionee, in which case
Interface will be entitled to a deduction equal to the amount of the optionee's
ordinary income. With respect to incentive stock options, participants will not
realize income for federal income tax purposes as a result of the exercise of
such options. In addition, if common stock acquired as a result of the exercise
of an incentive stock option is disposed of more than two years after the date
the option is granted and more than one year after the date the option was
exercised, the entire gain, if any, realized upon disposition of such common
stock will be treated as capital gain for federal income tax purposes. Under
these circumstances, no deduction will be allowable to the Company in connection
with either the grant or exercise of an incentive stock option. Exceptions to
the general rules apply in the case of a "disqualifying disposition."
If a participant disposes of shares of common stock acquired pursuant to the
exercise of an incentive stock option before the expiration of one year after
the date of exercise or two years after the date of grant, the sale of such
stock will be treated as a "disqualifying disposition." As a result, such a
participant would recognize ordinary income and Interface would be entitled to a
deduction in the year in which such disposition occurred. The amount of the
deduction and the ordinary income recognized upon a disqualifying disposition
would generally be equal to the lesser of: (a) the sale price of the shares sold
minus the option price, or (b) the fair market value of the shares at the time
of exercise minus the option price. If the disposition is to a related party
(such as a spouse, brother, sister, lineal descendant, or certain trusts or
business entities in which the seller holds a direct or indirect interest), the
ordinary income recognized generally is equal to the excess of the fair market
value of the shares at the time of exercise over the exercise price. Any
additional gain recognized upon disposition, in excess of the ordinary income,
will be taxable as capital gain. In addition, the exercise of incentive stock
options may result in an alternative minimum tax liability.
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TUMBLEWEED BUSINESS
OVERVIEW
Tumbleweed is a leading provider of advanced messaging solutions for
business communications. Tumbleweed's products and services enable businesses to
extend existing networks and applications, creating secure online channels for
interactive, business-critical communication. Tumbleweed Integrated Messaging
Exchange, or Tumbleweed IME, is a platform and set of applications for creating
secure communications channels between a business and its customers, partners,
and suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a
comprehensive solution that extends internal e-mail systems to the Internet
through centralized management, policy enforcement, filtering and archiving.
Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security
policies and redirect sensitive e-mail for secure, trackable delivery.
INDUSTRY BACKGROUND
E-mail has quickly claimed its place as one of the most ubiquitous and
utilized forms of business communications. International Data Corporation
estimates that the number of electronic mailboxes will grow from approximately
315 million as of July 1999 to over 757 million by 2005. International Data
Corporation further estimates that the number of e-mail messages sent worldwide
will grow from 5.3 billion per day in 1999 to more than 26 billion per day by
2005.
Although e-mail, with its wide availability and acceptance, is an ideal
mechanism for conducting business exchanges and automating time-intensive
business processes, many companies have not yet expanded their use of e-mail
beyond internal communication or casual Internet correspondence. Groupware
e-mail solutions, like Microsoft Exchange and Lotus Notes, are widely used
within an enterprise, but their security and management features do not extend
beyond the corporate network. Standard Internet e-mail systems have much broader
reach, but lack the security, tracking and archiving functionality required to
conduct transactions and deliver sensitive information online. Thus, business
processes that may in part be automated and online still rely on physical
delivery by first class mail or overnight delivery services, for example, when
sensitive communication is involved.
To take advantage of the e-mail infrastructure already deployed by most
companies, businesses need advanced messaging solutions that create managed,
secure communication channels on top of Internet e-mail, and extend the features
of corporate e-mail networks to enable business-critical Internet communication.
THE TUMBLEWEED SOLUTION
Tumbleweed offers a variety of comprehensive messaging solutions that
seamlessly integrate with existing business systems and networks, enabling our
customers to conduct more business over the Internet.
Tumbleweed's solution consists of two complementary product lines.
Tumbleweed IME, Tumbleweed's infrastructure solution for creating secure
communication channels, combines advanced security, tracking and personalization
features in a single, comprehensive messaging environment. Tumbleweed IME uses
public networks to provide efficient business communications over the Internet.
Tumbleweed IME enables businesses to build secure, feature-rich interactive
communication channels, resulting in the secure delivery of sensitive
information to anyone, anywhere, anytime. Tumbleweed MMS enables businesses to
safely extend internal e-mail networks to the Internet. Tumbleweed MMS enables
businesses to centrally define and enforce Internet communication policies and
manage their corporate intellectual assets by filtering content, archiving
messages and applying security to e-mail traffic.
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Tumbleweed sells Tumbleweed IME and related services to service providers
that provide their customers with secure, reliable and trackable communication
services for a fee. Tumbleweed also sells Tumbleweed IME products and services
directly to enterprises in selected strategic markets, such as the banking,
financial services, healthcare and manufacturing industries, enabling them to
offer Tumbleweed-based services to their employees, customers, suppliers and
partners. The Tumbleweed IME solution provides the following benefits to our
customers:
- COMPREHENSIVE TECHNOLOGY. Tumbleweed IME is designed to provide a secure,
efficient and cost-effective method for communicating important
information online. Tumbleweed's 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 communication needs of
specific customers, and can easily be integrated into existing
environments. Because Tumbleweed has multiple IME applications available
for use with the IME Platform, additional services can be added to an IME
environment, enabling businesses to deliver several types of information
over a single channel.
- 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 its innovative and unique
implementation of industry-standard security technologies, Tumbleweed is
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, password
protection for user authentication, or for highly sensitive communication,
certificate-based signing and additional encryption features. Any level of
security can easily be employed without requiring the sender and recipient
to have the same messaging software.
- 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 Tumbleweed's solution to both send and 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. Because no new
application or user interface is needed, there is no costly training or
desktop deployment associated with Tumbleweed's solution.
- 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, Tumbleweed's solution allows senders to create
messages targeting specific recipient preferences, demographics and
communication history. Tumbleweed IME also enables Tumbleweed's customers
to easily incorporate marketing promotions into their business
communication.
- 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. Tumbleweed's 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.
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Tumbleweed sells Tumbleweed MMS directly to enterprises in selected
strategic markets, such as financial services, healthcare, manufacturing,
telecommunications and government. The Tumbleweed MMS solution provides the
following benefits to Tumbleweed's customers:
- IDENTIFICATION AND HANDLING OF SENSITIVE DIGITAL INFORMATION. Using
lexicons of keywords, Tumbleweed MMS scans messages and attachments
looking for specific information. For example, Tumbleweed MMS can screen
for confidential information, such as credit card numbers, medical
information or legal advice; proprietary material, like business plans,
contracts and sales figures; attachment types that are likely to carry
corporate assets or confidential information; or industry-specific
terminology, like "guaranteed return" in financial services or diagnostic
codes in healthcare. When a policy violation is detected, Tumbleweed MMS
can apply a combination of countermeasures to protect the information, the
business relationship and the company.
- MULTI-LEVEL SECURITY. With Tumbleweed MMS Security Manager, organizations
can create policies that automatically encrypt potentially sensitive
information traveling to and from certain servers using the secure
multipurpose Internet mail extension, or S/MIME, public key of each
organization. This allows companies to create S/MIME Virtual Private
Networks (VPNs) with longer-term business partners, such as law firms,
insurance companies, or suppliers. Tumbleweed MMS handles all digital
certificates at the server level, eliminating the need to deploy desktop
encryption or manage individual public keys. It is also transparent to end
users, allowing organizations to enforce encryption policies centrally,
while users continue to send messages as they normally would.
- DYNAMIC ROUTING BASED ON POLICY. Because business relationships are
dynamic, it doesn't always make sense to establish an S/MIME VPN, or
assume that all parties have S/MIME public keys and S/MIME-compatible
e-mail clients. But security solutions are only effective if they apply to
everyone within an organization, and everyone sending e-mail into that
organization. For ad-hoc communication with individuals, or short-term
communication with business partners or customers, Tumbleweed MMS policies
can transparently redirect messages to a secure delivery system, such as
Tumbleweed IME. Messages that are routed via Tumbleweed IME can be read by
any addressee with e-mail and Internet access. No special keys are
required. Recipients can also reply to messages using the same secure
channel, making Tumbleweed MMS an effective solution that ensures secure
two-way communication between a company and the outside world.
STRATEGY
Tumbleweed's objective is to be the leading provider of online business
communication services. Key elements of Tumbleweed's strategy are to:
ESTABLISH TUMBLEWEED'S PRODUCTS AS THE LEADING INFRASTRUCTURE AND MANAGEMENT
SOLUTIONS FOR ONLINE BUSINESS COMMUNICATION.
Tumbleweed intends to continue to establish Tumbleweed IME as the leading
application platform upon which to build business-critical messaging
applications. Rather than designing Tumbleweed IME as a point solution for a
specific application, Tumbleweed has 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. Tumbleweed intends to establish Tumbleweed
MMS as the leading communication stream management solution. Tumbleweed MMS
enables a wide variety of businesses to define and enforce security policies,
ensuring the safe and efficient use of corporate e-mail systems. Tumbleweed MMS
is scalable and modular, with components optimized for specific business
processes and vertical industries. Through Tumbleweed's direct sales force,
Tumbleweed is pursuing key accounts in strategic markets.
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These strategic markets initially include the financial services, healthcare,
manufacturing, legal and telecommunications industries.
INCREASE RECURRING TRANSACTION-BASED REVENUE.
To increase Tumbleweed's predictable, recurring revenue, Tumbleweed intends
to continue to generate additional messaging traffic in Tumbleweed's
communication channel. In addition to a software license fee and related
professional services fee, Tumbleweed charges its customers a transaction fee
based on customer usage as evidenced by the volume of messages sent through
Tumbleweed IME and Tumbleweed MMS. Tumbleweed intends to increase message volume
by selling additional applications and value-added services to Tumbleweed's
installed customer base, selling IME customers MMS products and applications and
selling MMS customers IME products and services. Tumbleweed intends to promote
the use of policies defined and enforced in Tumbleweed MMS products to drive
messaging traffic over Tumbleweed IME platform. In addition, Tumbleweed may
acquire complementary businesses to increase Tumbleweed's traffic flow.
CULTIVATE A CHANNEL OF KEY SERVICE PROVIDERS.
Tumbleweed intends to leverage its channel of service providers to expand
its business into new strategic industry markets as well as to pursue additional
general purpose transactions. Tumbleweed's 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.
Tumbleweed intends to continue to establish Tumbleweed IME as an
international standard for secure online communication services by developing a
significant base of enterprise and service provider customers. Tumbleweed also
intends to accomplish this by capturing business with the national postal
authorities. The national postal authorities present a strategic business
opportunity for Tumbleweed. Postal authorities are highly trusted service
providers in their respective geographies and are uniquely able to dictate
national standards for certified online communication.
EXPAND INTO ACCOUNTS AFTER FIRST SECURING BUSINESS-CRITICAL APPLICATIONS.
The sophistication of the Tumbleweed IME and Tumbleweed MMS systems enable
Tumbleweed 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, Tumbleweed can then expand its focus to include
other messaging applications within the same enterprise. Customers benefit
through the ability to use Tumbleweed's solutions as the foundation for all of
their enterprise messaging needs, from high-end to low-end applications.
Tumbleweed's ability to address the entire spectrum of an enterprise's
communication service needs should enable it to compete favorably against those
companies whose technologies are primarily only suited to lower-end
communications applications.
PROVIDE COMPREHENSIVE PROFESSIONAL SERVICES.
Tumbleweed's full outsourcing services enable its customers to reduce their
cost of ownership and deployment time of the Tumbleweed solutions, thereby
helping reduce Tumbleweed's sales cycle to those enterprises. Enterprise
customers have the option of deploying Tumbleweed's products either on their
premises or outsourcing the deployment to Tumbleweed. Tumbleweed complements its
outsourcing services with a full suite of professional and consulting services.
These services are comprehensive, end-to-end and designed to help customers
implement Tumbleweed IME-based applications and Tumbleweed MMS as rapidly as
possible. The services include business-specific applications consulting,
software development, training and education and complete technical support.
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TUMBLEWEED PRODUCTS
Tumbleweed offers two complementary product lines.
TUMBLEWEED IME
Tumbleweed IME combines an advanced software platform and customized
applications to establish a vital Internet communication channel between a
business and its customers, suppliers and partners. This channel enables
businesses both to greatly expand and exploit the communication power of e-mail
and to fully integrate existing business processes with the Internet. Once
established, the IME channel can be used to securely send sensitive information
to anyone with Internet access. When sensitive information is flowing over the
Tumbleweed IME channel, deliveries can be personalized, tracked and archived,
making business communication more secure.
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 the Tumbleweed Secure Inbox, a
protected repository for receiving and managing secure online communications, or
through a combination of both e-mail and the Internet. IME 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.
The Tumbleweed IME Platform includes the core functionality necessary for
preparing, securing, delivering and tracking electronic communications, and
provides the foundation on which businesses can build one or a series of online
communication applications. Because advanced services require high performance
and scalability, the Tumbleweed IME Platform has been designed to efficiently
handle millions of secure messages daily. 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
Tumbleweed's technology as the foundation for a variety of online communication
services. Once installed, the IME Platform can be used for an array of
applications--allowing businesses to quickly develop and deploy multiple
services without having to re-invent or re-architect their environments.
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. IME STATEMENTS enables financial institutions to automatically send
documents such as monthly statements and trade confirmations electronically,
directly from back-office databases rather than through a process that involves
printing, paper, and storage. IME ALERT and IME PERSONALIZE enable online
businesses to customize their communications with customers, increasing the
quality and value of the relationship. IME MESSENGER enables individuals to
create ad-hoc electronic deliveries of any kind and send them through the secure
IME channel. IME ASSIST enables businesses to automate responses to customer
inquiries based on the context in which the inquiry is sent. And, IME DEVELOPER
allows third parties to create new IME applications of their own.
TUMBLEWEED MMS
Tumbleweed MMS is a comprehensive solution for managing intellectual
property as it travels over the Internet via e-mail. Tumbleweed MMS allows
businesses to control both the processes and pathways involved, through options
for routing, filtering, monitoring and archiving digital messages and documents.
By defining what is allowed in, what is allowed out, and how deliveries are
secured and sent, enterprises can enforce Internet communication policies,
enabling them to safely extend e-mail
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networks to the Internet. Tumbleweed MMS provides a complete solution for
managing business communications streams.
Tumbleweed MMS allows administrators and policy-makers to define and enforce
security policies to ensure the safe and efficient use of corporate e-mail
systems. Policies can be created to apply virus scanning, content control,
access control, encryption, and digital signature policies universally across
the enterprise. Tumbleweed MMS can also enact policies for secure communications
by automatically re-routing sensitive e-mail traffic to Tumbleweed IME.
Tumbleweed MMS includes a suite of process managers and optional
applications that can be quickly configured to define and enforce the policies
appropriate to a particular business. MMS CONTENT MANAGER scans messages and
attachments for specific words or strings of words. When a policy violation is
detected, MMS can take a number of actions, such as block, quarantine, archive,
or defer delivery. With MMS ACCESS MANAGER, companies can set policies that
restrict e-mail from certain senders or to certain recipients. For example,
policies can block inbound messages from known problem or "SPAM" domains, or
prevent confidential information from being sent to a competitor's e-mail
domain. MMS VIRUS MANAGER uses integrated server-based anti-virus software from
Network Associates to detect and optionally clean or strip infected attachments
in both incoming and outgoing messages. MMS Enterprise ARCHIVING automatically
creates archives for future review. MMS SECURE MESSAGING REDIRECT automatically
routes sensitive messages over more secure Tumbleweed IME channels. And MMS
MESSAGE MONITOR allows organizations to continuously monitor e-mail activity
using graphical reports of measurable statistics, including frequency of policy
violations.
TUMBLEWEED PROFESSIONAL SERVICES
Tumbleweed's professional services organization provides all of the
consulting, integration engineering, custom application development, training
and educational services and support necessary to build a unique online
communication system based on the Tumbleweed products.
The following are examples of the professional services Tumbleweed offers:
CUSTOM APPLICATION DEVELOPMENT, which extends the functionality of
Tumbleweed's solutions with custom engineering. The result is a unique online
communication solution that can be deployed to precisely meet a company's
business needs.
INTEGRATION CONSULTING, which provides the development work required to
integrate Tumbleweed's solutions with existing technology infrastructure,
including legacy systems, customer databases, support systems, and billing
systems.
DATA CENTER DESIGN AND INSTALLATION, which assists customers in designing
communication services based on Tumbleweed's products, including determining
hardware requirements, backup processes and failure systems, and physically
implementing Tumbleweed's solution in the customer's data center. Tumbleweed's
professional services organization also provides ongoing support of the
customer's data center.
TECHNICAL TRAINING AND SUPPORT, which provides the customer with formal
training in the administration and operation of Tumbleweed's products and use of
the Tumbleweed IME application programming interfaces.
Professional services are performed for an additional fee and are offered in
conjunction with the licensing or deployment of Tumbleweed's products.
Tumbleweed's products are generally deployed in business-critical
environments, where highly responsive customer support is critical to the
continuing success of the deployed solution. Tumbleweed maintains a centralized
technical support group that is responsible for first-line and second-line
customer support as well as distribution of products and documentation updates.
This group works
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closely with Tumbleweed's professional services and product development
organizations in order to ensure continuity in the areas of problem resolution
and priority response.
Customers may elect to purchase software upgrades for a fee. Transaction
prices include basic support provided by Tumbleweed. Tumbleweed also offers
extended customer assistance 24 hours a day, 7 days a week, for those customers
requiring around the clock support. Pricing for such support is negotiated
separately and is in addition to the standard fees.
CUSTOMERS AND MARKETS
Tumbleweed's 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 Nippon
Telegraph & Telephone Corporation, Pitney Bowes, Inc and UPS. 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 Company, Inc., Datek Online Holdings
Corp., TD Waterhouse, Travelers Property Casualty, Northern Trust and the
European Union--Joint Research Centre.
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. Although 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 communication services in order to gain business advantage
through improved cost, speed, and/or interactivity.
Tumbleweed has developed multiple channels of distribution worldwide for
Tumbleweed MMS products. Tumbleweed's distribution strategy addresses the
requirements of small companies and large enterprises alike and matches the
appropriate sales and distribution channels to its product offerings. In North
America, Tumbleweed has relied primarily on direct field sales, telesales, its
professional services organization and value added resellers, such as Ikon
Office Solutions, and their service organizations for the license, support and
installation of Tumbleweed's products. Internationally, sales are directed by
non-exclusive distributors and value added resellers acting in concert with
Tumbleweed MMS sales personnel. Tumbleweed MMS customers include Bell Atlantic,
Merrill Lynch, E-Trade, Chevron, Nike, the Gap, Time Warner, Blue Cross/Blue
Shield, Mass Mutual, Best Foods, Gymboree, Safeway, Kimberly-Clark, John Deere,
and Robert Half.
The following table lists customers who have provided Tumbleweed with over
$100,000 of recognized revenue from their use of Tumbleweed IME or over $50,000
of recognized revenue from their use of Tumbleweed MMS. This list 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 Tumbleweed's service provider customers.
<TABLE>
<CAPTION>
TUMBLEWEED SERVICE PROVIDERS
<S> <C>
Cable & Wireless HKT Prodamus Ltd.
Canada Post Salmat Pty. Ltd.
La Poste Swiss Post
MessageMedia Inc. UPS
Pitney Bowes, Inc. United States Postal
Posten SDS (Norway) Service
UPAQ, Ltd.
</TABLE>
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<TABLE>
<CAPTION>
TUMBLEWEED IME ENTERPRISE CUSTOMERS
<S> <C>
American Century Services Corporation Ogilvy & Mather
American Express Orrick, Herrington & Sutcliffe
Applicast Paccar Incorporated
Canon Information Systems, Inc. Pacificare
The Chase Manhattan Bank Peoplesoft
CommFin, Inc. Phelps Dodge
Commonwealth of Pennsylvania Presbyterian Healthcare Services
Datek Online Holdings Corp. Prudential Securities, Inc.
Diners Club Inc. Rabbobank Nederland
European Commission (JRC) Reckitt Benckiser
Goldman, Sachs & Co. Robert Half
Hewlett Packard Japan Co., Ltd. Salomon Smith Barney Holdings Inc.
Hikari Tsushin SEB (Enskilda)
IHM Siemens Switzerland Ltd.
Mitsui & Co. Synergy TD Waterhouse Group, Inc.
National Association of Security Dealers The Travelers Indemnity Company
Natl Semiconductor Tokyo Matsushita Computer Corp.
Nike Inc. Toyo Information Systems Co., Ltd.
Northern Trust Company Toppan Forms
NTL Group Ltd Wachovia Securities, Inc.
</TABLE>
<TABLE>
<CAPTION>
TUMBLEWEED MMS CUSTOMERS
<S> <C> <C>
Advanced Micro Devices, Inc. Deere & Co. Lehman Brothers
Allegro Net Dell Products, L.P. Mass Mutual Life Insurance Co.
American Express Dunn and Bradstreet MBNA
Amgen, Inc. Entrust MediaOne Group, Inc.
APL Oakland E-Trade Merrill Lynch
Avery Dennison FDA Metropolitan Life Insurance Company
AZ Public Service Co. Fedsure Holdings Royal Bank of Canada
BC Tel First American Corp. SAFECO
Beckman Coulter, Inc. First Citizens Bank & Trust Company Safeway
Bell Atlantic First Security Service Co. Sandia National Laboratories
Brobeck Phleger & Harrison LLP Florida Power and Light Sutter Health
California Federal Bank Freightliner Telecom NZ
Canaccord Gap Inc. The Associates
Catholic Healthcare West Glaxo Welcome, Inc. Thompson Financial Services
Chevron Corp. GSA Turner Broadcasting/CNN
CIGNA Halifax Building Society US Bancorp
Clarica Life Jacobs Engineering US Clearing/Fleet
Cosmair, Inc. JC Bradford US Department of Energy
Credit Suisse First Boston Kimberly Clark
Kmart Corporation
Koch Industries Inc.
</TABLE>
SALES
Tumbleweed maintains a direct sales force that focuses on signing additional
service providers and key enterprise customers in strategic industries, as well
as further penetrating existing accounts by selling them new applications.
Tumbleweed's sales force is comprised of domestic and international sales groups
consisting of a total of 97 employees. Offices in the U.S. currently include
Redwood City, California; Santa Clara, California; New York, New York; Mount
Laurel, New Jersey; Los Angeles, California; San Ramon, California; Chicago,
Illinois; Redmond, Washington; Reston, Virginia; Charlotte, North Carolina and
Dallas, Texas. Tumbleweed currently has international offices in Munich,
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Germany; Hurst, United Kingdom; Tokyo, Japan; Paris, France; Chatswood,
Australia; Amersfoot, The Netherlands and Stockholm, Sweden. Tumbleweed's sales
force includes field sales engineers and inside sales personnel who support the
account executives. Field sales engineers assist Tumbleweed's account executives
with technical presentations, customer requirements analysis and initial
solution designs. Tumbleweed's inside sales personnel assist the account
executives in managing their customer relationships. Tumbleweed's sales effort
is augmented by the sales forces of its service providers.
The sales force also works with value added resellers, or VARs, to sell
Tumbleweed MMS products. The typical sales cycle can range from several weeks to
six months, but may be significantly longer for large sales.
MARKETING
Tumbleweed's 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 its products
through public relations, industry analyst relationships, product reviews,
editorial promotion, industry events and executive speaking engagements.
TECHNOLOGY
TUMBLEWEED IME
The Tumbleweed IME Platform and Tumbleweed IME Applications have been
designed using a distributed object model. This approach ensures that its
solutions are able to grow as the number of users and messages increases, simply
by adding additional servers, as well as providing enhanced reliability.
Tumbleweed's 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 it to
integrate with systems from a variety of vendors. In addition, Tumbleweed
leverages the proven technologies of its partners, such as Oracle databases,
Netscape web servers and RSA's security toolkit, in order to provide a
foundation for its products.
Tumbleweed has also developed a robust set of software procedures upon which
additional application-specific software functionality can be built, known as
application programming interfaces. These procedures enable Tumbleweed 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, Tumbleweed can also create new Tumbleweed IME
Applications, such as solutions suited to specific strategic industries, that
run on top of the Tumbleweed IME Platform. Tumbleweed has made these application
programming interfaces open and available to Tumbleweed's customers and
partners, enabling them to customize the Tumbleweed IME Platform and Tumbleweed
IME Applications to suit their individual needs.
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[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, the 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 Personalization Application 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.
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 and digital signature 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
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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.
Tumbleweed has 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.
TUMBLEWEED MMS
MMS is implemented in C++ as a multi-threaded Windows NT/2000 application.
In a typical deployment, MMS is installed on a dedicated Windows machine between
the firewall and the internal e-mail server. It consists of the following key
components:
- Simple Mail Transfer Protocol Relay, or SMTP Relay;
- Policy Engine;
- Policy Managers; and
- Directory.
The MMS SMTP Relay is responsible for routing messages. Like other SMTP
relays, the MMS SMTP Relay accepts SMTP connections on TCP port 25 and initiates
connections to other SMTP relays to transmit SMTP messages to their destinations
or next hops. Between accepting e-mail messages and routing them, the MMS SMTP
Relay passes e-mail messages to the MMS policy engine for evaluation. Depending
on the result of the evaluation, the MMS policy engine might modify messages
(disinfect, annotate, etc.), before returning them to the SMTP Relay. In other
cases, it might drop or return messages, or place them in alternate queues
(deferred delivery, quarantine, redirect) for special handling.
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The MMS policy engine ensures that specific policies selected by the
enterprise are applied to all messages passing through MMS. It prepares messages
for evaluation, sends them to the policy managers for evaluation, and determines
final message handling based on the results of the individual policy manager
analyses. For messages with multiple recipients, the policy engine keeps track
of the different recipients and their corresponding policies, and if necessary,
creates separate messages for recipients with different policy results. For
example, if MMS receives a message with a .gif attachment, and if one of the
message recipients has an attachment stripping policy that removes .gif
attachments, then MMS will create two copies of the message, one without the
attachment for the recipient with the attachment stripping policy and one with
the attachment for the other recipient.
The MMS policy managers evaluate SMTP messages for security threats and
other types of content that require special treatment. Each policy manager
specializes in a specific countermeasure and is responsible for the policies
that carry out that countermeasure. For example, the Virus Manager is
responsible for the "Infected Message" policies offered by default in the MMS
setup program. The policy managers are:
- Access Manager;
- Content Manager;
- Format Manager;
- Security Manager; and
- Virus Manager.
The policy engine passes each SMTP message to the policy managers. Each
policy manager invokes the policies it is responsible for, and recommends a
message disposition. In addition, the policy managers might log events or send
notifications. Some policy managers handle the same message multiple times for
different purposes. After the message has been processed by all the policy
managers, the policy engine uses the most restrictive disposition to determine
whether or not the message should be delivered normally, dropped, returned to
the sender, quarantined, deferred or redirected to another service.
The MMS Directory contains security policies and other information about
users protected by MMS. It includes three types of objects: user records, domain
records and folders. User records contain policies that apply to specific users,
identified by their e-mail addresses. Domain records contain policies that apply
to groups of users that belong to the same domain. Folders contain policies that
apply to arbitrary groups of users, domains or other folders.
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The following is a graphical illustration of the Tumbleweed MMS information
flow.
[FLOWCHART]
<TABLE>
<CAPTION>
CONNECTION & ROUTING MESSAGE MANAGEMENT EVALUATION
------------------------ ------------------------ ------------------------
<S> <C> <C>
- Inbound: accept or - Determine applicable - Decompose and evaluate
reject SMTP connection policies - Decrypt, verify
- Outbound: Partition - Pass message to policy - Decompress
message managers for - Scan, disinfect
- Outbound: Route decomposition and - Extract text
message to next hop evaluation - Recommend disposition
- Determine final - Compose
message disposition - Encrypt, sign
- Pass message to policy
managers for
composition
</TABLE>
GOVERNMENTAL REGULATION
Tumbleweed is 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. Among other
possible courses of action, the FCC may determine that Internet service
providers are subject to certain access charges or fees for carrying Internet
traffic over the public switched telephone network. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for Tumbleweed's
products and services and increase Tumbleweed's cost of doing business, or
otherwise have a material adverse effect on Tumbleweed's 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.
Tumbleweed may not be able to obtain these permits or licenses. Tumbleweed 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 statutes on a commercially reasonable basis, if at all.
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In addition, Tumbleweed's products rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to achieve secure transmission of confidential
information. Exports of software products utilizing encryption technology are
generally restricted by the U.S. and various foreign governments. Tumbleweed has
obtained approval to export products using up to 128-bit symmetric encryption
and 1024-bit public key encryption, including IME Server, IME Desktop, IME
Receive Applet, IME Remote API using OmniORD with SSL, MMS WorldWide/56 and MMS
Strong WorldWide/128. Tumbleweed is 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 in the future, and Tumbleweed may not be
able to obtain required government approvals
INTELLECTUAL PROPERTY
Tumbleweed has filed sixteen utility patent applications with the U.S.
Patent and Trademark Office and may seek other patents in the future. To date,
Tumbleweed has three issued U.S. patents--a utility patent relating to
Tumbleweed's fundamental web-based delivery method, a utility patent relating to
secure messaging technology and a design patent relating to the user interface
of Tumbleweed's products. Tumbleweed has also filed twelve patent applications
in foreign jurisdictions.
Tumbleweed regards its patents and similar intellectual property as critical
to its success, and relies on patent law and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. Tumbleweed currently has nine registered trademarks
worldwide, including the mark Tumbleweed, and is pursuing other 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
Tumbleweed's products or reverse engineer or obtain and use information that
Tumbleweed regards 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, particularly software based patents, to the same extent as
do the laws of the U.S. Tumbleweed's means of protecting its proprietary rights
in the U.S. or abroad may not be adequate and competing companies may
independently develop similar technology. In particular, Tumbleweed is currently
engaged in litigation to enforce its intellectual property rights, which may not
be successful and in any event will result in substantial expenditures of
resources to pursue.
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 and as the Federal Courts further interpret software-based
inventions. The status of foreign protection in the software industry is also
not well-defined and evolving. Tumbleweed's patent applications may not be
issued with the scope of the claims sought by Tumbleweed, if at all.
Tumbleweed's products may infringe patents issued to third parties. In addition,
because foreign patent applications are not published until 18 months after
filing and patent applications in the U.S. are not publicly disclosed until the
patent is issued, U.S. and/or foreign applications may have been filed by third
parties that relate to Tumbleweed's software products.
Third parties could claim infringement by Tumbleweed with respect to current
or future products or services. We may increasingly be subject to claims of
intellectual property infringement as the number of its competitors grows and
the functionality of their products and services increasingly overlap with
Tumbleweed's. 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 Tumbleweed's services or require Tumbleweed to enter
into royalty or license agreements. A successful claim of product infringement
against Tumbleweed could harm its business and prospects.
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LEGAL PROCEEDINGS
On March 3, 1999, Tumbleweed sued The docSpace Company, Inc. alleging
infringement of Tumbleweed's 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
non-infringement. 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. On July 14, 1999, the
court issued a scheduling order stating that it would conduct a hearing on the
proper interpretation of the claims of Tumbleweed's patent, and would afterwards
hold a hearing on any motions for summary judgment on the issue of infringement.
The court also ordered that discovery on all issues other than claim
construction and infringement would be stayed pending resolution of these
issues.
The court held the claim interpretation hearing on November 19, 1999. On
December 9, 1999, the court issued an order based on the claims construction
hearing essentially adopting Tumbleweed's interpretation of the patent claims.
Critical Path, Inc. acquired docSpace on March 9, 2000. On April 24, 2000,
Tumbleweed filed a motion for summary judgment that all versions of the docSpace
"Express" system infringe Tumbleweed's patent. On the same day, docSpace filed a
motion for summary judgment that its current version of "Express" does not
infringe Tumbleweed's patent. On July 10, 2000, the court held a hearing on the
parties' summary judgment motions.
COMPETITION
Tumbleweed IME is an alternative to traditional mail and courier delivery
services, such as those offered by Federal Express Corporation, UPS or the U.S.
Postal Service, and to general purpose e-mail applications and services. As
such, Tumbleweed compete with these options. Tumbleweed's direct competition
comes from other secure online communication service providers of various sizes,
some of which have products that are intended to compete directly with
Tumbleweed's products. Examples of secure online communication service providers
include Automatic Data Processing, Inc., Critical Path, Inc., VeriCert.com,
e-Parcel, LLC, PostX Corporation and ZixIt Corporation. In addition, companies
with which Tumbleweed does not presently directly compete may become competitors
in the future, either through the expansion of Tumbleweed's products and
services or through the other companies' product development in the area of
secure online communication services. These companies could include America
Online, Inc./Netscape Communications Corporation, International Business
Machines Corporation/Lotus Development Corporation, Microsoft Corporation and
VeriSign, Inc.
The market for the Tumbleweed MMS products is intensely competitive and
subject to rapid changes. The enterprise security market is characterized by
various products and solutions that compete with Tumbleweed's Internet content
security and policy management solutions. These include products offered by
Content Technologies, Ltd. (which is partially owned by Integralis
Technology, Ltd.) Trend Micro Incorporated, SRA International and TenFour AB.
Tumbleweed anticipate competition in the future from other companies in the
enterprise security market as the industry continues to grow.
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 Tumbleweed's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than Tumbleweed
and may enter into strategic or commercial relationships with larger, more
established and well-financed companies. Some of Tumbleweed's 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 Tumbleweed market and distributes. New technologies
and the expansion of existing technologies may increase competitive pressures on
Tumbleweed. Furthermore, one of Tumbleweed's service provider
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customers currently offers to end-users the choice between Tumbleweed's products
and the products of one of Tumbleweed's 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. Tumbleweed may be unable to compete successfully
against current and future competitors, and competitive pressures faced by
Tumbleweed could harm its business and prospects.
EMPLOYEES
As of March 31, 2000, Tumbleweed employed 258 people worldwide, including 69
in engineering, 97 in sales, 48 in professional services, 19 in marketing and 25
in corporate management and administration. Tumbleweed's employees are not
represented by any collective bargaining organization. Tumbleweed has never
experienced a work stoppage and considers its relations with its employees to be
good.
PROPERTIES AND FACILITIES
Tumbleweed leases approximately 40,000 square feet for its corporate
headquarters located in Redwood City, California under a lease with a term of
five years commencing June 8, 1999. Tumbleweed also leases approximately 30,000
square feet of office space in Santa Clara, California, the former headquarters
of Worldtalk, under a lease scheduled to terminate in September 2005 and
additional office space in New York, NY under a lease that expires in April
2005. Tumbleweed also maintains domestic sales offices in Redwood City,
California; Santa Clara, California; New York, New York; Mount Laurel, New
Jersey; Los Angeles, California; San Ramon, California; Chicago, Illinois;
Redmond, Washington; Reston, Virginia; Charlotte, North Carolina and Dallas,
Texas and international offices in Munich, Germany; Hurst, United Kingdom;
Tokyo, Japan; Paris, France; Chatswood, Australia; Amersfoot, The Netherlands
and Stockholm, Sweden.
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TUMBLEWEED SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Tumbleweed" included elsewhere in this proxy
statement/prospectus. The following financial data, other than the pro forma
data, include the financial data of Tumbleweed, after giving effect to the
acquisition of Worldtalk, and exclude the financial data of Interface.
Tumbleweed's consolidated pro forma statements of operations data give effect to
the acquisition of Interface (assuming the divestiture of the Interface
businesses other than L2i) as if it occurred at the beginning of each of the pro
forma periods presented by combining the results for the year ended
December 31, 1999 of Tumbleweed with the results for the year ended
September 30, 1999 of Interface and combining the results for the three months
ended March 31, 2000 of Tumbleweed with the same period of Interface. The pro
forma balance sheet data give effect to Tumbleweed's acquisition of Interface
(assuming the divestiture of the Interface businesses other than L2i) as if it
had occurred on March 31, 2000. The statements of operations data for each of
the years in the three-year period ended December 31, 1999 and the balance sheet
data at December 31, 1998 and 1999, are derived from Tumbleweed's consolidated
financial statements that have been audited by KPMG LLP, independent certified
public accountants, included elsewhere in this proxy statement/prospectus. The
statements of operations data for the two years ended December 31, 1996 and the
balance sheet data at December 31, 1995, 1996 and 1997 are derived from
Tumbleweed's audited financial statements that are not included in this proxy
statement/prospectus. The statements of operations data for the three months
ended March 31, 1999 and 2000 and the balance sheet data at March 31, 2000, are
derived from Tumbleweed's unaudited consolidated financial statements included
elsewhere in this proxy statement/prospectus. The pro forma statement of
operations data for the year ended December 31, 1999 and the three months ended
March 31, 2000 and as of March 31, 2000 are derived from the selected unaudited
pro forma condensed combined financial information included elsewhere in this
proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999
----------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue from continuing product
lines.......................... $ 818 $ 597 $ 4,476 $ 10,575 $ 15,284 $ 18,636
Gross profit(1).................. 5,463 11,225 7,946 11,213 11,853 14,685
Operating expenses(2)............ 9,157 18,226 19,897 23,456 37,900 71,411
Operating loss................... (3,694) (7,001) (11,951) (12,243) (26,047) (56,726)
Net loss......................... (3,656) (6,420) (11,461) (11,720) (24,222) (54,899)
Net loss per share-basic and
diluted........................ -- (1.15) (1.90) (1.79) (1.65) $ (3.45)
Shares used in calculating basic
and diluted loss per share..... -- 5,592 6,023 6,549 14,650 15,896
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2000
-------------------------
1999 ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue from continuing product
lines.......................... $ 3,269 $ 6,610 $ 7,931
Gross profit(1).................. 3,003 4,362 5,402
Operating expenses(2)............ 6,090 23,552 34,785
Operating loss................... (3,087) (19,190) (29,383)
Net loss......................... (2,931) (18,622) (28,803)
Net loss per share-basic and
diluted........................ $ (0.43) $ (0.73) $ (1.07)
Shares used in calculating basic
and diluted loss per share..... 6,889 25,588 26,834
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31, 2000
---------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 3,065 $ 9,682 $10,972 $ 4,556 $60,544 $46,447 $ 47,276
Total assets................................... 5,933 24,658 24,272 12,719 75,683 62,576 131,428
Long-term debt, excluding current
installments................................. 451 719 132 382 1,017 858 904
Total stockholders' equity (deficit)........... (11,264) 17,048 14,818 4,437 61,713 45,883 113,317
</TABLE>
------------------------------
(1) Includes gross profit from our discontinued product lines.
(2) Includes stock compensation expense of $288,000, $715,000, $3.5 million,
$336,000 and $1.1 million for the years ended December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--TUMBLEWEED
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND THE RELATED NOTES APPEARING
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT REFLECT TUMBLEWEED'S PLANS, ESTIMATES AND
BELIEFS. TUMBLEWEED'S 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 THOSE LISTED UNDER "RISK FACTORS."
OVERVIEW
Tumbleweed is a leading provider of advanced messaging solutions for
business communications. Tumbleweed's products and services enable businesses to
extend existing networks and applications, creating secure online channels for
interactive, business-critical communication. Tumbleweed Integrated Messaging
Exchange, or Tumbleweed IME, is a platform and set of applications for creating
secure communications channels between a business and its customers, partners
and suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a
comprehensive solution that extends internal e-mail systems to the Internet
through centralized management, policy enforcement, filtering and archiving.
Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security
policies and redirect sensitive e-mail for secure, trackable delivery.
On January 31, 2000, Tumbleweed completed the acquisition of Worldtalk
Communications Corporation, a leading provider of Internet security and policy
management solutions that enable organizations to define and manage electronic
mail and web security usage policies to manage the risks and liabilities
associated with Internet communications. The business combination has been
accounted for as a pooling of interests and, accordingly, Tumbleweed's
historical financial statements have been restated to include the accounts and
results of operations of Worldtalk.
Tumbleweed's revenue consists of (i) license revenue (ii) services revenue
and (iii) transaction revenue. License revenue consists of initial license fees
and the sale of distribution rights. License revenue typically is recognized
upon the later of customer acceptance or software shipment. Revenue from the
sale of distribution rights is recognized upon the execution of a distribution
agreement. Services revenue consists of consulting fees and support and
maintenance fees. Consulting fees related to installation are recognized upon
acceptance of the installation while all other consulting fees are recognized
based on percentage of completion. Support and maintenance fees are paid for
ongoing customer support as well as for the right to receive future upgrades of
Tumbleweed's products during the term of the maintenance agreement. Revenue from
support and maintenance is recognized ratably over the period the support is
provided. Transaction revenue is based on the volume of transactions by
Tumbleweed's customers, and the related revenue is recognized based on payment
schedules and transaction reports from Tumbleweed's customers. A number of
Tumbleweed's 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.
In July 1999, Worldtalk completed the sale of its NetJunction e-mail
connectivity and directory integration product line to Wingra Technologies, LLC.
Under the terms of the agreement, Wingra has acquired the assets related to the
NetJunction product line and has assumed support and development
responsibilities for NetJunction customers and resellers with current
agreements. As a result of the sale of the NetJunction product line, revenue
related to the NetJunction product line is reported as discontinued product line
in Tumbleweed's consolidated statement of operations.
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Historically, Tumbleweed's revenue has been concentrated among a few
customers, but the customer base contributing to revenue has been diversifying.
For the three months ended March 31, 2000 and the year ended December 31, 1999,
Tumbleweed's top five customers contributed 30% and 24% of total revenue,
respectively. In addition, the constituency of that list is evolving.
A substantial portion of Tumbleweed's revenue relates to international
customers or operations. Most of Tumbleweed's contracts are denominated in U.S.
dollars. However, a contract between Tumbleweed's Japanese subsidiary,
Tumbleweed Communications K.K., and Hikari Tsushin is denominated in Japanese
yen, and, in the future, an increasing number of contracts may be denominated in
foreign currencies. Tumbleweed currently does not have hedging or similar
arrangements to protect it against foreign currency fluctuations. Therefore,
Tumbleweed increasingly may be subject to currency fluctuations, which could
harm its operating results in future periods. On May 15, 2000, Tumbleweed
repurchased from Hikari 5% of the outstanding stock of Tumbleweed KK, for a
price of approximately $700,000.
During the years ended December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000, Tumbleweed recorded aggregate deferred stock compensation
expense of $10.5 million primarily 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, $3.5 million,
$715,000, $288,000, $1.1 million and $336,000 was amortized in the years ended
December 31, 1999, 1998 and 1997, and the three months ended March 31, 2000 and
1999, respectively, and Tumbleweed expects that approximately $2.3 million,
$1.8 million, and $1.1 million will be amortized during the remainder of 2000,
2001, and 2002 and thereafter, respectively. The aforementioned amounts do not
include any compensation expense that might result from the proposed Interface
transaction.
Tumbleweed's future net income and cash flow may be adversely affected by
limitations on its ability to apply net operating losses for federal income tax
purposes against taxable income in future periods, including limitations due to
ownership changes, as defined in Section 382 of the Internal Revenue Code,
arising from the issuances of its stock.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
REVENUE. Total revenue from continuing product lines for the three months
ended March 31, 2000 increased 102% to $6.6 million from $3.3 million (excluding
revenue of $638,000 from discontinued products) for the same three months in
1999. Total revenue increased in both periods due to increases in license,
services and transaction revenue.
License revenue for the three months ended March 31, 2000 increased 61% to
$4.4 million from $2.7 million for the same three months in 1999. License
revenue increased due to a higher number of new customers brought into
production and to additional license fees paid by existing customers.
Services revenue for the three months ended March 31, 2000 increased 170% to
$1.5 million from $564,000 for the same three months in 1999. The increase in
services revenue was due to an increase in contract development work performed
by Tumbleweed's professional services organization, and, to a lesser extent,
increases in maintenance fees. The increase in contract development work was a
direct result of the increase in customers licensing Tumbleweed's products.
Transaction revenue for the three months ended March 31, 2000 increased to
$730,000 from $3,000 for the same three months in 1999. The increase in
transaction revenue resulted from minimum transaction fee payments made by new
customers who launched IME-based services, and to a lesser extent, transaction
fee payments made by existing customers.
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Total revenue from the Tumbleweed IME product line for the three months
ended March 31, 2000 increased 474% to $4.0 million from $693,000 for the same
three months in 1999 due to increases in license, services, and transaction fees
revenue. License revenue from the IME product line for the three months ended
March 31, 2000 increased 349% to $2.3 million from $518,000 for the same three
months in 1999 due to bringing new customers into production and to additional
license fees paid by existing customers. Services revenue from the IME product
line for the three months ended March 31, 2000 increased 434% to $923,000 from
$172,000 for the same three months in 1999. The increase in services revenue was
due to an increase in contract development work by Tumbleweed's professional
services organization, and, to a lesser extent, increases in maintenance fees.
Transaction fees revenue from the IME product line for the three months ended
March 31, 2000 increased to $730,000 from $3,000 for the same three months in
1999. The increase in transaction fees revenue resulted from minimum transaction
fee payments made by new customers who launched IME-based services and, to a
lesser extent, transaction fee payments from existing customers.
Total revenue from the Tumbleweed MMS product line remained flat at
$2.6 million for both the three months ended March 31, 2000 and the same three
months in 1999 (excluding revenue of $638,000 from discontinued products).
License revenue from the MMS product line for the three months ended March 31,
2000 decreased 7% to $2.0 million from $2.2 million for the same three months in
1999. MMS revenue for the three months ended March 31, 1999 included a
non-recurring commitment with two resellers. Services revenue from the MMS
product line for the three months ended March 31, 2000 increased 53% to $600,000
from $392,000 for the same three months in 1999. The increase in services
revenue was due to an increase in contract development work by Tumbleweed's
professional services organization, and, to a lesser extent, increases in
maintenance fees.
COST OF REVENUE. Cost of revenue is comprised of license cost, services
cost and transaction cost. License cost is primarily comprised of royalties paid
to third parties for software licensed by Tumbleweed for inclusion in its
products. Services cost is comprised primarily of personnel and overhead costs
related to customer support and contract development projects. Transaction fees
cost is primarily comprised of royalties due on transaction fees revenue and, to
a lesser extent, depreciation expense and connectivity costs incurred in
generating transaction revenue. Total cost of revenue for the three months ended
March 31, 2000 increased 149% to $2.2 million from $904,000 for the same three
months in 1999 corresponding to increased revenue during the same period.
License cost for the three months ended March 31, 2000 increased 128% to
$267,000 from $117,000 for the same three months in 1999. License costs
increased due to an increase in sales of products containing software licensed
from third parties. The increase was not in direct proportion to the increase in
license revenue as some of the agreements with third parties contain fixed
minimum payments.
Services cost for the three months ended March 31, 2000 increased 148% to
$1.9 million from $782,000 for the same three months in 1999. The increase was
primarily due to higher personnel costs supporting an increase in new contract
development projects and an increase in facilities-related expenses.
Transaction fees cost for the three months ended March 31, 2000 was $40,000
compared to $5,000 for the same three months in 1999. The increase in
transaction fees cost resulted primarily from royalties paid on transaction fees
revenue and, to a lesser extent, depreciation expense and connectivity costs
incurred in generating transaction revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised of engineering and related costs associated with the development of
Tumbleweed IME and MMS applications, quality assurance and testing. Research and
development costs for the three months ended March 31, 2000 increased 58% to
$2.8 million from $1.8 million for the same three months in 1999. The increase
was primarily because of an increase in personnel needed to support ongoing
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development of Tumbleweed's products and new applications for its target
markets, increases in average salaries for development personnel in order to
provide a competitive salary in today's marketplace and increased
facilities-related expenses. Tumbleweed expects that research and development
expenses will increase in absolute dollars in future periods mainly because of
an increase in personnel costs. Tumbleweed anticipates that additional research
and development personnel will be required for it to develop and support new
projects as it expands the functionality of its platforms, increases the number
of vertical applications built for its target markets and integrates its
platforms with new messaging applications.
SALES AND MARKETING EXPENSES. Sales and marketing expenses are primarily
comprised of salaries, commissions, travel expenses and costs associated with
trade shows, advertising and other marketing efforts. Sales and marketing
expenses for the three months ended March 31, 2000 increased 129% to
$7.2 million from $3.1 million for the same three months in 1999. The increase
in sales and marketing expenses was primarily from increased sales staffing and
incentive compensation costs. Tumbleweed expects that sales and marketing
expenses will increase in absolute dollars in future periods as it expands into
new target markets and geographic areas. Current plans are to significantly
increase the number of Tumbleweed's sales and marketing personnel worldwide, as
it focuses on extending our position in its target markets throughout 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and support costs for Tumbleweed's finance,
legal, information systems and human resources departments as well as
professional fees. General and administrative expenses for the three months
ended March 31, 2000 increased 100% to $1.7 million from $816,000 for the same
three months in 1999. The increase in general and administrative expenses was
due to increased staffing expenses, increased legal fees corresponding to the
patent infringement lawsuit Tumbleweed brought against The docSpace
Company, Inc., which is still pending, and increased professional fees.
Tumbleweed expects that general and administrative expenses will increase in
absolute dollars in future periods as it continues to grow its infrastructure in
line with its business growth.
DEFERRED COMPENSATION EXPENSE. Deferred compensation expense is recorded in
connection with the grant of certain stock options to non-employees and options
granted to employees at exercise prices less than the deemed fair value on the
grant date. During the three months ended March 31, 2000, Tumbleweed recorded
aggregate deferred stock compensation expense of $1.3 million compared to
$2.3 million for the same three months in 1999. 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, $1.1 million and $336,000 was amortized in the three
months ended March 31, 2000 and 1999, respectively.
MERGER RELATED AND RESTRUCTURING EXPENSES. Merger related and restructuring
expenses, which were recorded in connection with the acquisition of Worldtalk,
are primarily comprised of investment banker's fees, legal fees, severance
payments and accounting and printer fees. Merger related and restructuring
expenses for the three months ended March 31, 2000, were $10.8 million.
OTHER INCOME, NET. Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net, for the three months
ended March 31, 2000 increased 375% to $656,000 from $138,000 for the same three
months in 1999 due to increased interest income from cash invested in money
market accounts and commercial paper. The increase in cash balances available
for investment resulted from proceeds from the issuance of equity securities,
including common stock issued in Tumbleweed's initial public offering completed
in August 1999.
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YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUE. Total revenue increased 45% to $15.3 million in 1999 from
$10.6 million in 1998 (excluding revenue of $1.5 million and $4.9 million from
discontinued products in 1999 and 1998) due to increases in license, services
and transaction revenue. License revenue from continuing product lines increased
25% to $11.3 million in 1999 from $9.0 million in 1998 due to bringing new
customers into production and to additional license fees paid by existing
customers. Services revenue from continuing product lines increased 122% to
$3.0 million in 1999 from $1.4 million in 1998. The increase in services revenue
was due to an increase in contract development work by Tumbleweed's professional
services organization, and, to a lesser extent, increases in maintenance fees.
Transaction revenue from continuing product lines was $981,000 in 1999 compared
to zero in 1998. The increase in transaction fees revenue resulted from minimum
transaction fee payments made by new customers who launched IME-based services
and, to a lesser extent, transaction fee payments from existing customers.
Total revenue from the IME product line increased 222% to $5.8 million in
1999 from $1.8 million in 1998 due to increases in license revenue, services,
and transaction revenue. License revenue from the IME product line increased
285% to $3.4 million in 1999 from $885,000 in 1998 due to bringing new customers
into production and to additional license fees paid by existing customers.
Services revenue from the IME product line increased 52% to $1.4 million in 1999
from $910,000 in 1998. The increase in services revenue was due to an increase
in contract development work by Tumbleweed's professional services organization,
and, to a lesser extent, increases in maintenance fees. Transaction revenue from
the IME product line was $981,000 in 1999 compared to zero in 1998. The increase
in transaction fees revenue resulted from minimum transaction fee payments made
by new customers who launched IME-based services and, to a lesser extent,
transaction fee payments from existing customers.
Total revenue from the MMS product line increased 11% to $9.5 million in
1999 from $8.6 million (excluding revenues of $1.5 million and $4.9 million from
discontinued products in 1999 and 1998) in 1998. License revenue from the MMS
product line decreased 3% to $7.9 million in 1999 from $8.1 million in 1998 due
to termination of a Japanese distributor in the third quarter of 1998, resulting
in no license revenue from Japan for the first six months of 1999. Services
revenue from the MMS product line increased 263% to $1.6 million in 1999 from
$449,000 in 1998. The increase in services revenue was due to an increase in
contract development work by Tumbleweed's professional services organization,
and, to a lesser extent, increases in maintenance fees.
COST OF REVENUE. Cost of revenue increased 15% to $4.9 million in 1999 from
$4.3 million in 1998. License cost decreased 21% to $737,000 in 1999 from
$931,000 in 1998. License costs decreased primarily due to reductions in certain
royalty and other amortized costs. Services cost increased 23% to $4.1 million
in 1999 from $3.3 million in 1998. The increase was primarily due to increased
personnel costs supporting an increase in new contract development projects and
an increase in facilities-related expenses. Transaction fees cost was $78,000 in
1999 compared to $0 in 1998. The increase in transaction fees cost resulted from
royalties due on transaction fees revenue and, to a lesser extent, depreciation
expense and connectivity costs incurred in generating transaction fees revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 49% to $8.9 million in 1999 from $6.0 million in 1998. The increase
was primarily due to increased head count supporting development of the
Tumbleweed IME platforms and new applications developed for Tumbleweed's target
markets, increases in average salaries for development personnel and increased
facilities related expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 73% to
$19.9 million in 1999 from $11.5 million in 1998. The increase in sales and
marketing expenses was primarily due to increased sales staffing and incentive
compensation costs.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6% to $5.6 million in 1999 from $5.2 million in 1998. The increase in
general and administrative expenses was due to an increase in legal fees
corresponding to the patent infringement lawsuit we brought against The docSpace
Company, Inc., which remains pending, as well as increased staffing expenses and
professional fees.
OTHER INCOME, NET. Other income, net, increased 306% to $2.1 million in
1999 from $524,000 in 1998 due to increased cash balances invested in money
market accounts and commercial paper. The increase in cash balances available
for investment in 1999 resulted from proceeds from the issuance of equity
securities, including common stock issued in Tumbleweed's initial public
offering completed in August 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE. Total revenue increased 28% to $15.5 million in 1998 from
$12.1 million in 1997. Approximately 3% of total revenue in 1997 was derived
from prior agreements relating to Tumbleweed's Envoy technology that was sold to
Novell, Inc., which is excluded from the IME and MMS product line revenues
described below. License revenue from continuing product lines increased 120% to
$9.0 million in 1998 from $4.1 million in 1997 due primarily to increased sales
of Tumbleweed's MMS product lines, which were first shipped in September 1997
and increases in initial license fees from Tumbleweed IME customers. Tumbleweed
has recognized revenue from Tumbleweed IME commencing with its launch in
July 1997. The level of software license revenue in 1998 was impacted by the
termination of the MMS distributor agreement with a Japanese distributor in the
third quarter resulting in no MMS software license revenue from the Japanese
market in the third and fourth quarters of 1998. Services revenue increased 425%
to $1.4 million in 1998 from $259,000 in 1997 due to increases in custom
development work performed for Tumbleweed's customers.
Total revenue from the IME product line increased 722% to $2.0 million in
1998 from $245,000 in 1997. License revenue increased 352% to $885,000 in 1998
from $196,000 in 1997 due to increases in initial license fees from customers.
Services revenue increased 1,757% to $910,000 in 1998 from $49,000 in 1997 due
to increases in custom development work performed for Tumbleweed's customers.
Total revenue from the MMS product line increased 128% to $8.6 million in
1998 from $3.7 million (excluding revenue of $4.9 million and $7.6 million from
discontinued products in 1998 and 1997) in 1997. License revenue from the MMS
product line increased 117% to $8.1 million in 1998 from $3.7 million in 1997.
The MMS products were first shipped in September 1997. The level of software
license revenue in 1998 was impacted by the termination of the MMS Japanese
distributor in the third quarter of 1998 resulting in no software license
revenue from the Japanese market in the third and fourth quarters of 1998.
Services revenue from the MMS product line increased 49% to $449,000 in 1999
from $9,000 in 1998. The increase in services revenue was due to an increase in
contract development work by Tumbleweed's professional services organization,
and, to a lesser extent, increases in maintenance fees.
COST OF REVENUE. Cost of revenue increased 3% to $4.3 million in 1998 from
$4.1 million in 1997. License cost decreased 15% to $931,000 in 1998 from
$1.1 million in 1997 due to product mix and certain fixed price royalty
arrangements with third-party vendors. Services cost increased 10% to
$3.3 million in 1998 from $3.0 million in 1997 due to increased personnel costs
to support new projects associated with the launch of Tumbleweed IME, partially
offset by lower outside contracting expenses associated with the MMS product
line.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 3% to $6.0 million in 1998 from $6.2 million in 1997. The decrease was
primarily due to the reduction of headcount dedicated to the MMS product lines
early in the second half of 1997.
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<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 16% to
$11.5 million in 1998 from $10.0 million in 1997. The increase was primarily due
to increased staffing as well as increased spending on marketing programs
associated with the launch of Tumbleweed IME and the MMS product lines.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 52% to $5.2 million in 1998 from $3.5 million in 1997. The increase
was primarily due to the termination of the distributor agreement with the MMS
Japanese distributor which resulted in a $1.7 million allowance for doubtful
accounts charge for the full amount owed by the MMS Japanese distributor.
OTHER INCOME, NET. Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net, decreased 22% to
$524,000 in 1998 from $673,000 in 1998 due to fluctuations in the cash and cash
equivalent and short-term investments balances, coupled with interest rate
fluctuations.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents selected unaudited quarterly consolidated
statements of operations data for the five quarters ended March 31, 2000. In the
opinion of management, this information has been presented on the same basis as
the audited consolidated financial statements and related notes 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.
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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, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
----------- ----------- -------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
License................................. $ 2,702 $ 2,382 $ 3,081 $ 3,120 $ 4,356
Services................................ 564 491 999 964 1,524
Transaction fees........................ 3 203 318 457 730
------- ------- ------- ------- --------
Revenue from continuing product lines... 3,269 3,076 4,398 4,541 6,610
Discontinued product line............... 638 561 273 -- --
------- ------- ------- ------- --------
Total revenue......................... 3,907 3,637 4,671 4,541 6,610
Cost of revenue:
License cost............................ 117 125 248 247 267
Services cost........................... 782 983 1,246 1,077 1,941
Transaction fees........................ 5 15 24 34 40
------- ------- ------- ------- --------
Total cost of revenue................. 904 1,123 1,518 1,358 2,248
------- ------- ------- ------- --------
Gross profit.............................. 3,003 2,514 3,153 3,183 4,362
77% 69% 68% 70% 66%
Operating expenses:
Research and development(1)............. 1,794 2,077 2,296 2,756 2,843
Sales and marketing(2).................. 3,144 4,177 5,428 7,168 7,192
General and administrative(3)........... 816 1,067 2,006 1,635 1,640
Stock compensation...................... 336 969 1,115 1,116 1,074
Merger related and restructuring
expenses.............................. -- -- -- -- 10,803
------- ------- ------- ------- --------
Total operating expenses.............. 6,090 8,290 10,845 12,675 23,552
------- ------- ------- ------- --------
Operating loss............................ (3,087) (5,776) (7,692) (9,492) (19,190)
Other income (expense), net............... 138 157 956 875 656
------- ------- ------- ------- --------
Net loss before provision for taxes....... (2,949) (5,619) (6,736) (8,617) (18,534)
Provision for (benefits from) taxes....... (18) 93 136 90 88
------- ------- ------- ------- --------
Net loss.................................. $(2,931) $(5,712) $(6,872) $(8,707) $(18,622)
======= ======= ======= ======= ========
</TABLE>
--------------------------
(1) Exclusive of non-cash compensation expense of $140,000, $293,000, $318,000,
$298,000 and $274,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.
(2) Exclusive of non-cash compensation expense of $146,000, $545,000, $623,000,
$647,000 and $636,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.
(3) Exclusive of non-cash compensation expense of $50,000, $131,000, $174,000,
$171,000 and $164,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.
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Revenue from continuing product lines decreased in the quarter ended
June 30, 1999. Revenue from the MMS product line declined $508,000 due to
declines in both MMS license and services revenue. MMS license revenue declined
due to termination of a Japanese distributor in the third quarter of 1998,
resulting in no license revenue from Japan for the first six months of 1999. The
decline in MMS revenue was partially offset by an increase in IME license and
transaction revenue during the quarter.
Revenue from continuing product lines increased $1.3 million in the quarter
ended September 30, 1999. Revenue from the IME product line increased $677,000
due to increased license fees from new customer contracts and to an increase in
services revenue. MMS license revenue also increased during the quarter due to
new customer licenses.
Revenue from continuing product lines increased $143,000 in the quarter
ended December 31, 1999. IME product line revenue increased $706,000 during the
quarter due to increased license fees from new contracts and due to an increase
in transaction based fees. The increase in IME revenue was partially offset by a
decline of $563,000 in MMS revenue. MMS revenue declined due to lower license
fees compared to the third quarter.
Revenue from continuing product lines for the quarter ended March 31, 2000
increased $2.1 million. IME product line revenue increased $1.6 million due to
increased license fees, services fees and transaction fees. MMS product line
revenue increased $486,000 due to increased license fees from new customer
contracts.
Gross profit declined as a percentage of sales from 77% in the quarter ended
March 31, 1999 to 69% in the quarter ended June 30, 1999. Services costs
increased during the period as Tumbleweed added personnel to support new
development contracts and anticipated growth in services revenue in future
quarters.
Research and development increased each quarter due to increased headcount
supporting the development of the IME and MMS product lines and new applications
developed for Tumbleweed's target markets.
Sales and marketing expenses increased each quarter due to increased sales
staffing, the opening of additional sales offices, incentive compensation
expenses and increased expenses related to the expansion into international
markets.
General and administrative expenses increased for the quarters ended
June 30, 1999 and September 30, 1999 while decreasing for the quarters ended
December 31, 1999 and March 31, 2000. The increases were primarily due to
increased legal fees corresponding to the patent infringement lawsuit Tumbleweed
filed. The decreases were due primarily to lower staffing expenses.
FLUCTUATIONS IN QUARTERLY RESULTS
As a result of Tumbleweed's limited operating history and the emerging
nature of the markets in which it competes, it is unable to accurately forecast
its revenue or expenses. Tumbleweed's success is dependent upon its ability to
enter into and maintain strategic relationships with customers and to develop
and maintain volume usage of its products by its customers and their end-users.
Tumbleweed's revenue has fluctuated and its quarterly operating results will
continue to fluctuate based on the timing of the execution of new customer
licenses in a given quarter. Tumbleweed's license revenue is comprised entirely
of initial license and distribution fees. As a result, Tumbleweed 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.
Tumbleweed's services revenue historically has been comprised almost
entirely of implementation, customization and consulting fees and support and
maintenance fees, as actual transaction-based
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revenue to date has been minimal. As a result, Tumbleweed will be required to
increase its 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 its services. Unless and until
Tumbleweed has developed a significant and recurring transaction-based revenue
stream from communications that are sent with its services, its revenue will
continue to fluctuate significantly. Accordingly, Tumbleweed may be unable to
achieve and recognize quarterly or annual revenue consistent with its historical
operating results or expectations.
In addition, sales to a limited number of customers have constituted a
majority of Tumbleweed's revenue in any given quarter. In particular, five
customers comprised approximately 30% of Tumbleweed's revenue in the three
months ended March 31, 2000. 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 Tumbleweed's
operating results for a quarter or annual period. Tumbleweed has experienced,
and expects 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 -- Tumbleweed's Quarterly Financial Results Are
Subject to Significant Fluctuations."
As a result of these factors, Tumbleweed believes that quarter-to-quarter
comparisons of its revenue and operating results are not necessarily meaningful,
and that these comparisons may not be accurate indicators of future performance.
Because Tumbleweed's staffing and operating expenses are based on anticipated
revenue levels, and because a high percentage of its 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
Tumbleweed is 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 its operating results. Moreover,
Tumbleweed's operating results in one or more future quarters may fail to meet
the expectations of securities analysts or investors. If this occurs, Tumbleweed
would expect to experience an immediate and significant decline in the trading
price of its stock.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Tumbleweed has financed its operations primarily through
the issuance of equity securities. On March 31, 2000, December 31, 1999,
December 31, 1998 and December 31, 1997, Tumbleweed had $46.5 million,
$60.5 million, $4.6 million and $11.0 million in cash and cash equivalents,
respectively.
Net cash used in operating activities for the three months ended March 31,
2000 was $12.9 million. Cash used in operating activities was primarily the
result of net operating losses which included $10.8 million of merger related
and restructuring expenses, offset by certain non-cash charges. Net cash used by
operating activities for 1999 was $18.1 million which was primarily the result
of a net operating loss, offset by certain non-cash charges and increases in
accounts payable and accrued liabilities. Net cash used in operating activities
for 1998 was $10.9 million which was primarily the result of a net operating
loss, offset by certain non-cash charges and increases in accounts payable and
other liabilities, and prepaid expenses and other current assets. Net cash used
in operating activities for 1997 was $6.5 million which was primarily the result
of a net operating loss, offset by certain non-cash charges and an increase in
deferred revenue and a decrease in accounts receivable.
Net cash used in investing activities for the three months ended March 31,
2000 was $2.1 million. Net cash used in investing activities was primarily the
result of capital expenditures related to computer equipment for new employees
and sales and services mainframe software. Net cash used in investing activities
for 1999 was $2.3 million which was primarily the result of capital expenditures
related to increased facilities expansion offset by the sale of short-term
investments. Net cash provided by
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investing activities for 1998 was $3.7 million which was primarily the result of
sales and maturities of short-term investments, partially offset by the purchase
of short-term investments. Net cash used in investing activities for 1997 was
$1.0 million which was primarily the result of capital expenditures related to
increased personnel.
Net cash provided by financing activities for the three months ended
March 31, 2000 was $885,000. Cash provided by financing activities was primarily
attributable to proceeds from the exercise of stock options. Net cash provided
by financing activities for 1999 was $76.4 million, which was primarily
attributable to net proceeds from the issuance of equity securities to investors
including Tumbleweed's initial public offering of common stock completed in
August 1999 and its Series C financing completed in February 1999. Net cash
provided by financing activities for 1998 was $778,000, which was primarily due
to an increase in borrowings and proceeds from the issuance of common stock upon
the exercise of stock options and sale of Tumbleweed common stock under its
employee stock purchase plan. Cash provided by financing activities for 1997 was
$8.8 million, which was primarily attributable to net proceeds from the issuance
of equity securities to investors.
As of March 31, 2000 and December 31, 1999, Tumbleweed's principal
commitments consisted of obligations outstanding under equipment and operating
leases. Tumbleweed's equipment leases require payment of rental fees to third
party leasing providers at interest rates of approximately 8.45%. In most cases,
Tumbleweed has no obligations to purchase the equipment at the end of the lease
term. Tumbleweed's anticipates a substantial increase in capital expenditures
consistent with potential growth in operations, infrastructure and personnel.
In July 1998, Tumbleweed entered into an agreement with a bank, which
included a $1.5 million revolving credit facility, with availability based on
outstanding accounts receivable, and a $1.75 million 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 equipment facility are due in 36 equal monthly installments
and are secured by certain of our assets. As of March 31, 2000 and December 31,
1999, total borrowings under the equipment loan facility were $1.3 million and
$1.3 million in the aggregate and $300,000 and $200,000 remained available under
the facility, respectively. There were no borrowings under the credit facility
as of March 31, 2000 and December 31, 1999.
In September 1999, Tumbleweed entered into a $525,000 financing arrangement
with another company to finance its directors' and officers' liability insurance
premium. Borrowings under the loan agreement are payable in nine equal monthly
installments. As of March 31, 2000 and December 31, 1999, total debt outstanding
under this financing arrangement was $61,000 and $302,000, respectively, and is
classified as a current liability.
In connection with the proposed Interface transaction, Tumbleweed agreed to
purchase an aggregate of $3.0 million of convertible subordinated promissory
notes of Interface, pursuant to a convertible subordinated note purchase
agreement dated June 28, 2000. At Tumbleweed's option, or upon the occurrence of
certain other events, the notes are convertible into Interface common stock at
an initial conversion price of $9.50 per share, subject to adjustment.
Tumbleweed's capital requirements depend on numerous factors, including
revenue generated from operations and market acceptance of its products and
services, the resources devoted to the development of its products and services
and the resources devoted to sales and marketing. Tumbleweed has experienced a
substantial increase in capital expenditures and operating expenses since
inception consistent with relocation and the growth in operations and staffing.
Tumbleweed anticipate that these increases will continue for the foreseeable
future. Additionally, Tumbleweed expects to make additional investments in
technologies, and plans to expand its sales and marketing programs. Tumbleweed
believes that its existing capital resources, including the proceeds to it from
this offering,
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will enable it to maintain its current and planned operations for at least the
next 12 months. However, Tumbleweed may need to raise funds prior to that time.
Tumbleweed intends to continue to consider 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 the revolving credit and equipment loan facilities and the insurance
premium financing arrangement, Tumbleweed has no present commitments or
arrangements assuring it of any future equity or debt financing, and additional
equity or debt financing may not be available to it on favorable terms, if at
all. Tumbleweed is not aware of seasonal aspects of its business that will
affect its business on a short or long-term basis.
YEAR 2000 COMPLIANCE
Tumbleweed is not aware of any Year 2000 problems in any of its critical
systems and products. However, the success to date of Tumbleweed's Year 2000
efforts cannot guarantee that a Year 2000 problem affecting third parties upon
which it relies will not become apparent in the future that could harm its
business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Tumbleweed transacts business in various foreign currencies. Accordingly, it
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. To
date, Tumbleweed has not entered into any derivative financial instruments or
hedging activities.
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 it 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.
INTEREST RATE SENSITIVITY
The primary objective of Tumbleweed's investment activities is to preserve
principal while at the same time maximizing the income it receives from its
investments without significantly increasing risk. Some of the securities that
Tumbleweed has invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if Tumbleweed holds a security that was
issued with a fixed rate equal to the then-prevailing interest rate and the
prevailing interest rate later rises, the fair value of our investment will
decline. To minimize this risk, Tumbleweed maintains its portfolio of cash
equivalents in commercial paper and money market funds. In general, money market
funds are not subject to market risk because the interest paid on these funds
fluctuates with the prevailing interest rate.
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The following table presents the amounts of Tumbleweed's cash equivalents
that are subject to market risk by range of expected maturity and
weighted-average interest rates as of March 31, 2000. This table does not
include money market funds because these funds are not subject to market risk.
<TABLE>
<CAPTION>
MATURING IN
-----------------------------
NINETY DAYS NINETY DAYS OVER FAIR
OR LESS TO ONE YEAR ONE YEAR TOTAL VALUE
------------ -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Included in cash and
cash equivalents.... $16,887 None None $16,887 $16,887
Weighted-average
interest rate....... 6.22%
</TABLE>
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, limit 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, 1999, the weighted
average interest rate on the investment portfolio was approximately 5.5%
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting For Derivative Instruments And Hedging Activities. SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. To date,
Tumbleweed has not entered into any derivative financial instruments or hedging
activities.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101, as amended by SAB No. 101B, and any resulting change in accounting
principle that a registrant would have to report, is effective no later than the
company's fiscal quarter ending December 31, 2000. Tumbleweed does not expect
the application of SAB No. 101 to have a material effect on its financial
position or results of operations, nor does it expect to report a change in
accounting principles resulting from its application.
In March 2000, FASB issued Financial Interpretation No. 44 ("FIN 44").
FIN 44 clarifies (a) the definition of employee for purposes of applying
Accounting Principles Board ("APB") Opinion 25, Accounting For Stock Issued To
Employees, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. Tumbleweed does not expect the application
of FIN 44 to have a material effect on its financial position or results of
operations.
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TUMBLEWEED MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The information table sets forth certain information with respect to
Tumbleweed's directors and executive officers as of March 31, 2000:
<TABLE>
<CAPTION>
NAME TITLE AGE
---- ----- --------
<S> <C> <C>
Jeffrey C. Smith................... Chairman, President and Chief Executive Officer 33
Pehong Chen........................ Director 41
Timothy C. Draper(2)............... Director 41
Eric J. Hautemont(1)............... Director 34
Kenneth R. Klein................... Director 40
David F. Marquardt(1).............. Director 50
Standish H. O'Grady(2)............. Director 39
Jean-Christophe D. Bandini......... Chief Technical Officer 36
Joseph C. Consul................... Chief Financial Officer and Vice 40
President--Finance
Kerry S. Champion.................. Senior Vice President--Product Development 37
Shomit A. Ghose.................... Senior Vice President--Operations 38
Bernard J. Cassidy................. Vice President, General Counsel and Secretary 45
Michael J. Earhart................. Vice President--Corporate Marketing 35
Donald R. Gammon................... Vice President--North American Sales 54
Mark R. Pastore.................... Vice President--Corporate Development 33
Donald N. Taylor................... Vice President--International Sales 46
Shinji Eura........................ President--Tumbleweed Communications, K.K. 64
</TABLE>
------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
--------------------------------------------------------------------------------
JEFFREY C. SMITH, President and Chief Executive Officer and Chairman of the
Board of Directors, is responsible for strategic planning and business
development. Before founding Tumbleweed in June 1993, Mr. Smith held various
senior positions in research and development with the following firms: Frame
Technology from January 1991 to June 1993; Aeon Corp. from January 1990 to
January 1991; Hewlett Packard from June 1988 to June 1989; and IBM Scientific
Research Center in Palo Alto from June 1987 to June 1988. Mr. Smith served as a
lecturer in Software Engineering at Stanford University in 1988 and 1989.
Mr. Smith holds a B.S. in Computer Science from Stanford University.
PEHONG CHEN has been a Director of Tumbleweed since December 1999. Dr. Chen
has been the Chairman of the Board, Chief Executive Officer, and President of
Broadvision, Inc. since its incorporation in May 1993. From 1992 to 1993,
Dr. Chen served as the Vice President of Multimedia Technology at Sybase, a
supplier of client-server software products. Dr. Chen founded and, from 1989 to
1992, served as President of Gain Technology, a provider of multimedia
applications development systems, which was acquired by Sybase. He received a
B.S. in Computer Science from National Taiwan University, an M.S. in Computer
Science from Indiana University and a Ph.D. in Computer Science from the
University of California at Berkeley.
TIMOTHY C. DRAPER has been a Director of Tumbleweed since August 1996.
Mr. Draper is the Founder and Managing Director of Draper Fisher Jurvetson,
formed in 1985. He currently serves on the boards of directors of PLX
Technology, GoTo.com, and various private companies. Mr. Draper holds a B.S. in
Electrical Engineering from Stanford University and an M.B.A. from Harvard
Business School.
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ERIC J. HAUTEMONT has been a Director of Tumbleweed since October 1996.
Mr. Hautemont is Managing Director of Ridge Ventures LLC, 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 boards of directors of Xenote Corporation, Tincell
Corporation and Luckysurf.com. Mr. Hautemont holds a M.Sc. in Computer Science
and Applied Mathematics from Enseeiht, University of Toulouse, France.
KENNETH R. KLEIN has been a Director of Tumbleweed since February 2000.
Mr. Klein has been Chief Operating Officer of Mercury Interactive since
February of 2000. Prior to that he served as President, North American
Operations from July 1998 to February 2000. From April 1995 to July 1998 he
served as Vice President of North American Sales. From May 1992 to March 1995,
he served as the Company's Western Area Sales Director. From March 1990 to May
1992, Mr. Klein served as Regional Sales Manager for Interactive Development
Environments, a CASE tool company. Prior to that Mr. Klein served in a variety
of engineering, sales and management roles in the software industry. Mr. Klein
holds degrees in electrical engineering and biomedical engineering from the
University of Southern California.
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. 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.
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.
JOSEPH C. CONSUL, Chief Financial Officer and Vice President--Finance, is
responsible for finance, administration, legal and human resources at
Tumbleweed. Before joining Tumbleweed in June 1997, Mr. Consul was Vice
President, Operations for Fractal Design Corporation from May 1996 to May 1997.
From November 1991 to May 1996, Mr. Consul served as Vice President, Finance and
Administration, CFO for Ray Dream, Inc. Mr. Consul has also held senior
financial management positions at XA Systems Corporation from December 1989 to
November 1991 and at Adobe Systems Corporation from February 1987 to
November 1989. Mr. Consul received his M.B.A. from the University of Southern
California, his B.S. from San Jose State University and is a licensed C.P.A.
KERRY S. CHAMPION, Senior Vice President--Product Development, is
responsible for all aspects of engineering, including development, quality
assurance, documentation and information systems. Before joining Tumbleweed in
March 1998, Mr. Champion served as Director of Engineering at Zentek
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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.
SHOMIT A. GHOSE, Senior Vice President--Operations, is responsible for
consulting services, customer support, 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.A. in
Computer Science from the University of California at Berkeley.
BERNARD J. CASSIDY, Vice President, General Counsel and Secretary, is
responsible for the corporate and legal affairs of Tumbleweed. Before joining
Tumbleweed in May 1999, Mr. Cassidy was in private practice at Wilson Sonsini
Goodrich & Rosati from August 1992 to May 1999, and at Skadden, Arps, Slate
Meagher & Flom LLP from September 1989 to July 1992. Mr. Cassidy holds a B.A. in
Philosophy from Loyola University, an M.A. in Philosophy from the University of
Toronto and a J.D. from Harvard Law School.
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.
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.
MARK R. PASTORE, Vice President--Corporate Development, is responsible for
strategic technology and marketing and sales alliances. Over the course of
Mr. Pastore's tenure at Tumbleweed, he has been responsible for finance and
operations, business development, and strategic planning and alliances. Before
joining Tumbleweed in September 1993, Mr. Pastore held various strategic
marketing and finance positions at Sun Microsystems, Inc. from March 1991 to
August 1993. Mr. Pastore holds a B.S. in Values, Technology, Science, and
Society from Stanford University.
DONALD N. TAYLOR, Vice President--International, 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.
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SHINJI EURA, President--Tumbleweed Communications, 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 Management Director
of NIHON UNISYS. Mr. Eura holds a B.S. in Statistics from the Tokyo College of
Science.
CLASSIFIED BOARD OF DIRECTORS
Tumbleweed's 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 Tumbleweed's board of directors will
be elected each year. Each of Jeffrey C. Smith, Dr. Pehong Chen and Kenneth R.
Klein has been designated a Class I director whose term expires at the 2003
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 Tumbleweed's directors, officers
or key employees.
BOARD COMMITTEES
Tumbleweed has established an audit committee and a compensation committee.
The audit committee reviews Tumbleweed's internal accounting procedures and
considers and reports to the board of directors with respect to other auditing
and accounting matters, including the selection of its independent auditors, the
scope of annual audits, fees to be paid to its independent auditors and the
performance of its independent auditors. The audit committee consists of
Messrs. Draper, Hautemont 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 Tumbleweed. The compensation committee also administers
Tumbleweed's stock option and other employee benefit plans. The compensation
committee consists of Messrs. Hautemont and Marquardt.
DIRECTOR COMPENSATION
Tumbleweed reimburses our non-employee directors for all out-of-pocket
expenses incurred in the performance of their duties as directors of Tumbleweed.
Tumbleweed currently does not pay fees to its directors for attendance at
meetings or for their services as members of the board of directors.
On October 15, 1996 and September 15, 1998, the board of directors granted
options to purchase an aggregate of 18,000 and 42,000 respectively, shares of
common stock to Mr. Hautemont at an exercise price per share of $0.50. On
May 27, 1999, the board of directors granted an option to purchase an aggregate
of 60,000 shares of common stock to each continuing director at an exercise
price per share of $12.00. On December 1, 1999, Dr. Chen was granted an option
to purchase 15,000 shares pursuant to the automatic grant provisions to
non-employee directors contained in the Plan at an exercise price per share of
$39.75. Also on December 1, 1999 the Board of Directors granted Dr. Chen an
option to purchase an additional 85,000 shares at an exercise price per share of
$39.75. On February 29, 2000, Kenneth R. Klein was granted an option to purchase
15,000 shares pursuant to the automatic grant provisions to non-employee
directors contained in the Plan at an exercise price per share of $71.50. Also
on February 29, 2000 the Board of Directors granted Mr. Klein an option to
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purchase an additional 85,000 shares at an exercise price per share of $71.50,
and on May 1, 2000 the Board of Directors granted Mr. Klein an option to
purchase an additional 40,000 shares at an exercise price per share of $31.75.
Each non-employee director elected to the board of directors for the first
time will receive upon 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 Tumbleweed's 1999 Omnibus 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 Tumbleweed's board of directors
or compensation committee.
EXECUTIVE COMPENSATION
The following table indicates information concerning compensation of
Tumbleweed's Chief Executive Officer and its four most highly compensated
executive officers other than the Chief Executive Officer whose salary and bonus
exceeded $100,000 for the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------- OPTIONS
NAME AND SALARY BONUS OTHER LONG-TERM
PRINCIPAL POSITION YEAR ($) ($) ($) COMPENSATION AWARDS
------------------------------------------ -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
Jeffrey C. Smith
Founder, Chairman, President and Chief
Executive Officer....................... 1999 142,708 14,375 -- 60,000
Donald R. Gammon
Vice President-North American Sales..... 1999 150,167 71,277 -- 205,000
Shomit A. Ghose
Senior Vice President-Operations........ 1999 177,876 61,380 -- 90,000
Robert A. Krauss
Vice President-Business Development..... 1999 125,500 83,619 -- 42,000
Donald Taylor
Vice President-International............ 1999 163,050 144,651 13,035 195,000
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning grants of options to
purchase Tumbleweed common stock made during the fiscal year ended December 31,
1999 to the named executive officers.
In the fiscal year ended December 31, 1999, Tumbleweed granted options to
purchase up to an aggregate of 2,503,500 shares to employees, directors and
consultants. Most of these options were granted under Tumbleweed's 1993 stock
option plan at exercise prices equal to the fair market value of its 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. Most 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.
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The potential realizable values are based on an assumption that the price of
Tumbleweed 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 Tumbleweed's estimate of future stock price growth of the shares of its
common stock.
With respect to the named executive officers, the option agreements of
Donald Gammon, Shomit Ghose and Donald Taylor provide for the acceleration of a
portion of their stock options upon the occurrence of specified changes in
control of Tumbleweed.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------- AT ASSUMED ANNUAL RATE
PERCENT OF STOCK PRICE APPRECIATION
NUMBER TOTAL OPTIONS FOR OPTION TERM
OF SECURITIES GRANTED TO EXERCISE ---------------------------
UNDERLYING EMPLOYEES PRICE EXPIRATION
NAME OPTION GRANTED(#) IN FISCAL YEAR ($/SHARE) DATE 5%($) 10%
---- ----------------- -------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Smith.......... 60,000 2.4% 12.00 2009 $1,172,804 $1,827,495
Donald R. Gammon.......... 195,000 7.8% 0.80 2009 $ 254,108 $ 404,624
10,000 0.4% 22.00 2009 $ 358,257 $ 570,623
Shomit A. Ghose........... 10,000 0.4% 0.80 2009 $ 13,031 $ 20,750
80,000 3.2% 22.00 2009 $2,866,855 $4,564,987
Robert A. Krauss.......... 10,000 0.4% 0.50 2009 $ 8,144 $ 12,969
20,000 0.8% 0.80 2009 $ 26,062 $ 41,500
12,000 0.5% 12.00 2009 $ 234,561 $ 373,499
Donald N. Taylor.......... 140,000 5.6% 0.50 2009 $ 114,023 $ 181,562
30,000 1.2% 0.80 2009 $ 39,093 $ 62,250
25,000 1.0% 22.00 2009 $ 895,892 $1,426,558
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table describes for the named executive officers the
exercisable and unexercisable options held by them as of December 31, 1999. No
options were exercised by the named executive officers during the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Smith................ -- -- -- 60,000 -- 4,365,000
Donald R. Gammon................ -- -- 36,978 168,022 3,104,303 13,893,447
Shomit A. Ghose................. -- -- 65,000 265,000 5,476,250 20,603,250
Robert A. Krauss................ -- -- 54,373 67,627 4,580,925 5,553,574
Donald N. Taylor................ -- -- -- 195,000 -- 15,882,250
</TABLE>
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The "Value of Unexercised In-the-Money Options at Fiscal Year End" is based
on a value of $84.75 per share, the fair market value of Tumbleweed common stock
as of December 31, 1999, 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 Tumbleweed's 1993 stock option plan.
EMPLOYMENT AGREEMENTS
Except as described below, Tumbleweed has not entered into employment
agreements with its named executive officers, and their employment may be
terminated at any time at the discretion of its board of directors.
Effective January 7, 1999, Tumbleweed 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.
EQUITY INCENTIVE PLANS
1993 STOCK OPTION PLAN
The 1993 stock option plan was adopted by Tumbleweed's board of directors on
September 30, 1993, and approved by its stockholders on the same date for the
benefit of its officers, directors and consultants. This plan has been amended,
most recently on August 3, 1999 to approve an additional 150,000 shares of
common stock for issuance under this plan, and this amendment was concurrently
approved by Tumbleweed's stockholders. This plan provides for the grant of
incentive stock options and nonstatutory stock options. An aggregate of
3,768,500 shares of common stock is reserved for issuance under this plan. As of
August 3, 1999, Tumbleweed had granted options to purchase an aggregate of
3,747,016 shares of common stock under this plan. Tumbleweed has not granted
options under this plan since its initial public offering.
In the event of certain mergers or consolidations of Tumbleweed, outstanding
options will be assumed or similar options substituted. In the event outstanding
options are not assumed or substituted for, these options will terminate if not
exercised before the event. In the event of a dissolution or liquidation of
Tumbleweed, outstanding options will terminate if not exercised before these
events.
1999 OMNIBUS STOCK INCENTIVE PLAN
The 1999 Omnibus Stock Incentive Plan was adopted by Tumbleweed's board of
directors on May 27, 1999 and approved by its stockholders on June 22, 1999 for
the benefit of its officers, directors, employees, advisors and consultants.
This plan was amended with shareholder approval on May 15, 2000 to annually
increase the total number of shares reserved for issuance under the plan. This
plan now covers an aggregate of 4,381,500 shares of common stock, plus an annual
increase to be added on the first day of its fiscal year beginning in 2001 equal
to the lesser of (a) 2,000,000 shares or (b) five percent (5%) of the number of
outstanding shares on the last day of the immediately preceding fiscal year. As
of March 31, 2000, options to purchase an aggregate of 1,712,110 shares of
common stock with a weighted-average exercise price of $40.43 were outstanding
under this plan. This plan 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 such 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.
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This plan is administered by the compensation committee, although it may be
administered by either Tumbleweed's board of directors or any committee of its
board of directors. The group authorized to administer the plan 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.
Tumbleweed 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 Tumbleweed's stockholders. Further, no action may
be taken which adversely affects any rights under outstanding awards without the
holder's consent.
Each non-employee director elected to the board of directors for the first
time 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.
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2000 NSO INCENTIVE STOCK PLAN
Our 2000 NSO Incentive Stock Plan was adopted by its board of directors on
July 10, 2000. This plan qualifies as a "broadly based" plan for purposes of the
rules promulgated by the National Association of Securities Dealers, Inc. This
plan is for the benefit of Tumbleweed's officers, directors, employees, advisors
and consultants and provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, restricted stock, deferred
stock, and performance shares or any combination of the foregoing. An aggregate
of 500,000 shares of common stock was reserved for issuance under this plan.
This plan is administered by Tumbleweed's board of directors, although it
may be administered by either its board of directors or any committee appointed
by its board of directors. The plan administrator may interpret the plan and may
prescribe, amend and rescind rules, make all other determinations necessary or
desirable for the administration of the plan and generally to determine the
terms and conditions of awards granted under the plan. Employees, advisors and
consultants of Tumbleweed or of any parent or subsidiary (other than any officer
or director of Tumbleweed or of any parent or subsidiary) and those individuals
who first become an officer or director of Tumbleweed or of any parent or
subsidiary following July 10, 2000, are eligible to receive awards under this
plan.
Tumbleweed may issue non-qualified stock options, or NSOs, under the plan.
The stock options granted under the plan are not intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986. The option price of each stock option granted under the
plan must be at least equal to the par value of a share of common stock on the
date the stock option is granted.
Stock appreciation rights, or SARs, may be granted under the plan either
alone or in conjunction with all or part of any stock option granted under the
plan. An SAR granted under the plan entitles its holder to receive, at the time
of exercise, an amount per share equal to the excess of the fair market value
(at the date of exercise) of a share of common stock over a specified price
fixed by the plan administrator.
Restricted stock, deferred stock and performance shares may be granted under
the 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. With
respect to deferred stock, during the deferral period, subject to the terms and
conditions imposed by the plan administrator, the deferred stock units may be
credited with dividend equivalent rights. 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 any merger, reorganization, consolidation, recapitalization,
stock dividend or other change in corporate structure affecting Tumbleweed
stock, the plan administrator, in its sole discretion, will make equitable
substitution or proportionate adjustments in (i) the aggregate number of shares
of Tumbleweed stock reserved for issuance under the plan, (ii) the kind, number
and option price of shares of Tumbleweed stock subject to outstanding stock
options granted under the plan and (iii) the kind, number and purchase price of
shares of Tumbleweed stock subject to outstanding awards of restricted stock,
deferred stock and performance shares granted under the plan. In connection with
any event described in this paragraph, the plan administrator may provide, in
its sole discretion, for the cancellation of any outstanding awards and payment
in cash or other property therefor.
The terms of the plan provide that the plan administrator may amend, suspend
or terminate the plan at any time. Further, no action may be taken which
adversely affects any rights under outstanding awards without the holder's
consent. The plan will terminate on July 10, 2010.
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1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted Tumbleweed's 1999 employee stock purchase
plan, which was approved by its board of directors on May 27, 1999 and approved
by its stockholders on June 25, 1999, which allows eligible employees to
purchase its 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 Tumbleweed's 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. Employees are eligible to
participate if they are employed by Tumbleweed 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 Tumbleweed capital
stock, or
- holds rights to purchase stock under any of Tumbleweed 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 Tumbleweed's 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 Tumbleweed.
Rights granted under this plan are not transferable by an employee other
than by will or the laws of descent and distribution. This plan provides that,
in the event of a merger, consolidation, reorganization, recapitalization, stock
dividend or other change in corporate structure affecting the number of issued
shares of Tumbleweed common stock, the plan administrator will conclusively
determine the appropriate equitable adjustments. This plan will terminate in
2009. Tumbleweed's board of directors have the authority to amend or terminate
this plan, except that no amendment or termination may adversely affect any
outstanding rights under this plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Tumbleweed's certificate of incorporation includes provisions that eliminate
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;
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- for acts or omissions not in good faith or that involved intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware law; or
- for any transaction from which the director derives an improper personal
benefit.
Tumbleweed's certificate of incorporation and bylaws further provide for the
indemnification of its directors and officers to the fullest extent permitted by
Section 145 of the Delaware law, including circumstances in which
indemnification is otherwise discretionary. Indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of Tumbleweed under the foregoing provisions, or otherwise.
Tumbleweed has been advised that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Tumbleweed has entered into agreements to indemnify its directors and
executive officers in addition to the indemnification provided for in its
charter and bylaws. These agreements, among other things, provide for
indemnification of Tumbleweed's directors and executive officers for expenses,
judgements, fines and settlement amounts incurred by any of these people in any
action or proceeding arising out of his or her services as a directors or
executive officer or at Tumbleweed's request. Tumbleweed believes that these
provisions and agreements are necessary to attract and retain qualified people
as directors and executive officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which Tumbleweed was or is
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 Tumbleweed 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 above; and
- the transactions described below.
SERIES C PREFERRED STOCK FINANCING ROUND. In February and May 1999,
Tumbleweed sold shares of Series C preferred stock, at a purchase price of $3.58
per share, to the following investors, among others:
- 3,914,989 shares of Series C preferred stock to Hikari Tsushin, Inc.;
- 1,118,569 shares of Series C preferred stock to United Parcel Service
General Services Co.;
- 165,093 shares of Series C preferred stock to August Capital, L.P.;
- 154,351 shares of Series C preferred stock to Draper Fisher Associates
Fund III, or to entities affiliated with it; and
- 112,159 shares of Series C preferred stock to Adobe Ventures II, L.P.
SERIES B PREFERRED STOCK FINANCING ROUND. In August and September 1997,
Tumbleweed 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.
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- 12,588 shares of Series B preferred stock to Jeffrey C. Smith,
Tumbleweed's President and Chief Executive Officer, and Chairman of its
board of directors.
Hikari Tsushin, Inc. is a 5% or greater shareholder of us. In August 1999,
in connection with Tumbleweed's initial public offering, Hikari was allocated
and purchased 400,000 shares of its common stock at $12.00 per share.
HIKARI LICENSE AGREEMENT. On March 31, 1999, Tumbleweed entered into a
one-year license and distribution agreement with Hikari Tsushin, Inc. Between
March 31, 1999 and August 31, 1999, Tumbleweed recognized approximately $769,700
of revenue which was associated with the perpetual license fee, transaction fees
and distribution rights and which was paid by Hikari to Tumbleweed KK, at that
time a wholly-owned Japanese subsidiary of Tumbleweed.
CHANGES IN OWNERSHIP OF SUBSIDIARY. On August 31, 1999, Tumbleweed KK sold
200 shares of its common stock, representing a 50% ownership interest in
Tumbleweed KK, to Hikari for Y350,000,000 (which approximated $3.2 million as of
August 31, 1999). Following Hikari's investment, Hikari and Tumbleweed had equal
board representation in Tumbleweed KK. On May 15, 2000, Tumbleweed repurchased
from Hikari 5% of the outstanding stock of Tumbleweed KK, for a price of
Y70,000,000 (which approximated $700,000 as of May 15, 2000).
LEGAL COUNSEL. Gregory C. Smith, a brother of Jeffrey C. Smith (the
President, Chief Executive Officer and Chairman of the Board of Directors of
Tumbleweed), is a partner of the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP, which began providing legal services to Tumbleweed in July 1998 and is
advising Tumbleweed on the merger. Before that time, Gregory Smith was a partner
of the law firm of Cooley Godward LLP, which provided legal services to
Tumbleweed as well. During the year ended December 31, 1999, the total fees paid
to Skadden, Arps was approximately $1.1 million. The total fees paid to Skadden,
Arps in 1998 was $11,281. The total fees paid to Cooley Godward in 1998 and 1997
were $326,442 and $174,515 respectively. Gregory Smith acted as Secretary of
Tumbleweed during 1997, 1998 and part of 1999.
INVESTMENT BANKING. Curtis H. Smith, a brother of Jeffrey C. Smith (the
President, Chief Executive Officer and Chairman of the Board of Directors of
Tumbleweed), is a Vice President at Credit Suisse First Boston, the lead
underwriter of Tumbleweed's proposed public offering and financial advisor to
Tumbleweed in connection with the acquisition of Worldtalk. Previously,
Curtis H. Smith was an Associate at ING Barings, a co-manager in Tumbleweed's
initial public offering. Credit Suisse First Boston will receive a customary
portion of the aggregate discount and commissions of Tumbleweed's proposed
public offering, as set forth on the cover page of that prospectus, and ING
Barings received a customary portion of the aggregate discounts and commissions
in the initial public offering, as set forth on the cover page of that
prospectus. Credit Suisse First Boston received a customary fee of approximately
$3 million in connection with the Worldtalk acquisition.
INVESTORS' RIGHTS AGREEMENT. Tumbleweed has entered into an investors'
rights agreement with all of the purchasers of preferred stock, its founders and
certain persons or entities which acquired shares of its common stock in
connection with its acquisition of Worldtalk. The agreement provides for
registration rights in favor of such persons.
INDEMNITY AGREEMENTS. Tumbleweed has entered into indemnity agreements with
each of its officers and directors.
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PRINCIPAL STOCKHOLDERS OF TUMBLEWEED
The following table sets forth certain information with respect to
beneficial ownership of Tumbleweed common stock by:
- Each person or entity who beneficially owns more than 5% of Tumbleweed
common stock;
- Each of Tumbleweed's named executive officers;
- Each of Tumbleweed's directors; and
- All executive officers and directors as a group.
Information with respect to beneficial ownership has been furnished by each
director, officer, selling stockholder, 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 posses 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 26,270,104 shares of common
stock outstanding as of June 30, 2000. This information does not give effect to
the proposed public offering of Tumbleweed.
<TABLE>
<CAPTION>
NUMBER PERCENT
OF SHARES OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING
---------------- --------------------- --------------
<S> <C> <C>
FMR Corp................................ 2,790,800 10.6
82 Devonshire Street
Boston, Massachusetts 02109
Hikari Tsushin, Inc..................... 1,952,314 7.4
22F Ohtemachi Nomura Bldg.
2-1-1 Ohtemachi, Chiyoda-ku, Tokyo,
Japan
Jeffrey C. Smith........................ 1,867,031(4)(6) 7.1
Jean-Christophe D. Bandini.............. 1,978,580 7.3
Donald N. Taylor........................ 47,820(6) *
Shomit A. Ghose......................... 92,324(6) *
Donald R. Gammon........................ 87,794(5)(6) *
Robert A. Krauss........................ 39,706(6) *
Pehong Chen............................. 15,000(6) *
Kenneth Klein........................... 15,000(6) *
Tim Draper.............................. 382,219(2)(6) 1.5
Eric Hautemont.......................... 68,241(6) *
David Marquardt......................... 308,544(6) 1.2
Standish O'Grady........................ 129,036(3)(6) *
Executive officers and directors as a
group (18 persons).................... 5,559,434(7) 21.2
</TABLE>
------------------------
* Less than 1% of the outstanding shares of common stock.
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(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Tumbleweed believes that each of the stockholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
26,270,104 outstanding shares on June 30, 2000 adjusted as required by
rules promulgated by the SEC.
(2) Includes 159,858 Shares held by Draper Associates, L.P. Voting and
dispositive power over the shares is held by all the general partners of
Draper Fisher Jurvetson. Mr. Draper is Managing Director 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 10,007 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 76,141 shares held by H&Q Venture
Associates, L.L.C. is held by all its members. Mr. O'Grady is a member of
H&Q Venture Associates, 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.
(4) Includes 260,000 shares held by the Jeffrey C. Smith 1999 Annuity Trust.
Mr. Smith is the sole trustee of the trust.
(5) Includes 500 shares held by Donald R. Gammon; 500 shares held by Bonnie I.
Gammon; 500 shares held by Erin A. Gammon; and 500 shares held by Morgan L.
Gammon.
(6) The following table indicates those people whose total number of
beneficially owned shares include shares subject to options exercisable
within 60 days of June 30, 2000:
<TABLE>
<CAPTION>
SHARES SUBJECT
TO OPTIONS
--------------
<S> <C>
Jeffrey C. Smith............................................ 15,000
Donald N. Taylor............................................ 41,041
Shomit A. Ghose............................................. 92,041
Donald R. Gammon............................................ 73,125
Robert A. Krauss............................................ 34,706
Pehong Chen................................................. 15,000
Kenneth Klein............................................... 15,000
Tim Draper.................................................. 15,000
Eric Hautemont.............................................. 38,125
David Marquardt............................................. 15,000
Standish O'Grady............................................ 15,000
</TABLE>
(7) Includes shares issuable upon the exercise of stock options exercisable
within 60 days of June 30, 2000.
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DESCRIPTION OF TUMBLEWEED CAPITAL STOCK
Tumbleweed's certificate of incorporation authorizes the issuance of
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 Tumbleweed 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, Tumbleweed's certificate of
incorporation and its 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. 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 Tumbleweed's affairs, holders of
common stock will be entitled to share ratably in its 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 Tumbleweed 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. Tumbleweed 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 Tumbleweed without further
action by the stockholders.
Upon the consummation of this offering, no shares of preferred stock will be
outstanding, and Tumbleweed has no present plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
Some of Tumbleweed's stockholders have rights with respect to the
registration of their 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
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registration rights may require Tumbleweed to file additional registration
statements on Form S-3, subject to conditions and limitations.
DELAWARE ANTI-TAKEOVER LAW
Tumbleweed is 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 Tumbleweed's 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 Tumbleweed
common stock. Its phone number is (781) 575-2000.
LISTING
Tumbleweed common stock has been approved for quotation and trading on the
Nasdaq Stock Market's National Market under the trading symbol "TMWD."
MAIZE
Maize Acquisition Sub, Inc. is a newly formed wholly-owned subsidiary of
Tumbleweed, incorporated in Delaware on June 19, 2000 for the sole purpose of
effecting the transactions contemplated by the Merger Agreement. Prior to the
consummation of the merger, Maize will not engage in any activity other than
activities related to the transactions contemplated by the Merger Agreement.
Maize's principal executive offices are located at 700 Saginaw Drive, Redwood
City, California 94063, and its telephone number is (650) 216-2000.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
Tumbleweed is incorporated under the laws of the State of Delaware.
Interface is incorporated under the laws of the State of Michigan. As a result
of the Merger, holders of Interface common stock will become stockholders of
Tumbleweed and the rights of all such former Interface shareholders will
thereafter be governed by the Amended Restated Certificate of Incorporation of
Tumbleweed, or the Tumbleweed certificate, the Tumbleweed bylaws and Delaware
law. The rights of the holders of Interface common stock are currently governed
by the Interface Articles of Incorporation, as amended, or the Interface
articles, Interface bylaws and Michigan law. The following summary, which does
not purport to be a complete statement of the general differences between the
rights of the stockholders of Tumbleweed and shareholders of Interface, sets
forth some of the differences between Delaware law and Michigan law, the
Tumbleweed certificate and the Interface articles and between the Tumbleweed
bylaws and the Interface bylaws. This summary is qualified in its entirety by
reference to the full text of each of those documents and Delaware law and
Michigan law. For information as to how such documents may be obtained, see
"Where You Can Find More Information."
CLASSIFIED BOARD OF DIRECTORS
Delaware law and Michigan law provide that a corporation's board of
directors may be divided into various classes with staggered terms of office.
The Tumbleweed certificate provides for classified boards. Pursuant to the
Tumbleweed certificate, the board of directors are divided into three classes of
directors, with each class consisting of one-third of the total number of
directors, with any remaining directors to be included in such group or groups
as the board of directors designates. One class of directors is elected each
year for a three-year term. The Interface certificate does not provide for
classified boards.
Classification of directors has the effect of making it more difficult for
stockholders to change the composition of the boards of directors. At least two
annual meetings of stockholders, instead of one, would generally be required to
effect a change in the majority of the boards of directors. A delay like this
may help ensure that directors, if confronted by a third party attempting to
force a proxy contest, a tender or exchange offer or other extraordinary
corporate transaction, have sufficient time to review the proposal, as well as
any available alternatives to the proposal, and to act in what they believe to
be the best interests of the stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Tumbleweed, even though such a transaction could
be beneficial to Tumbleweed, or its stockholders. The classification of the
board of directors might also increase the likelihood that incumbent directors
will retain their positions.
NUMBER OF DIRECTORS
Under Delaware law and Michigan law, unless a corporation's certificate or
articles of incorporation specifies the number of directors, such number shall
be fixed by, or in the manner provided in, its bylaws. If a corporation's
certificate or articles of incorporation expressly authorizes its board of
directors to amend its bylaws, its board of directors may change the authorized
number of directors by an amendment to the corporation's bylaws, if fixed
therein, or in such manner as is provided therein. If the certificate or
articles of incorporation specifies the number of directors, the number of
directors can only be changed by amending the certificate of incorporation.
The Tumbleweed certificate provides that the number of directors will be
fixed by the Tumbleweed board of directors, but in no event will be less than
one nor more than ten. The authorized number of directors for the Tumbleweed
board of directors currently is seven.
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Interface's bylaws provide that the board of directors shall consist of not
less than 3 nor more than 12 directors. The number of directors on the Interface
board of directors is currently six.
REMOVAL OF DIRECTORS; FILLING VACANCIES
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Tumbleweed certificate provides that subject to
the rights, if any, of the holders of shares of preferred stock and provided
that Tumbleweed is not subject to Section 2115 of the California General
Corporation Law, or the CGCL, any or all of the directors may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least 66 2/3% of the voting power of Tumbleweed's outstanding
capital stock entitled to vote generally in the election of directors. During
such time or times that Tumbleweed is subject to Section 2115(b) of the CGCL,
the board of directors or any individual director may be removed from office at
any time without cause by the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote on such removal; provided,
however, that no individual director may be removed when the votes cast against
such director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively (without regard to
whether shares may otherwise be voted cumulatively) at an election which the
same total number of votes were cast and either the number of directors elected
at the most recent annual meeting of stockholders or, if greater, the number of
directors for whom removal is being sought, were then being elected. Whenever
the holders of any one or more classes or series of preferred stock issued by
Tumbleweed shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of the Tumbleweed certificate.
The Tumbleweed certificate provides that any vacancy occurring in the
Tumbleweed board of directors for any reason other than an increase in the
number of directors may be filled by a majority of the remaining members of the
Tumbleweed board of directors, even if less than a quorum, or by a sole
remaining director. Any vacancy occurring by reason of an increase in the number
of directors may only be filled by action of a majority of the Tumbleweed board
of directors provided that a quorum is present.
Under Michigan law, the shareholders may remove one or more directors with
or without cause unless the articles of incorporation provide that directors may
be removed only for cause. The vote for removal must be by a majority of shares
entitled to vote at an election of directors except that the articles of
incorporation may require a higher vote for removal without cause. Unless
otherwise limited by the articles of incorporation, a vacancy resulting from an
increase in the number of directors, may be filled by the shareholders or
directors. If the directors remaining in office constitute fewer than a quorum,
they may fill the vacancy by the affirmative vote of a majority of all the
directors remaining in office.
Interface's articles of incorporation provide that any director or the
entire board of directors may be removed, but only for cause, and only by the
affirmative vote of holders of a majority of the outstanding shares then
entitled to vote at an election of directors given at a meeting specifically
called for that purpose. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Under Delaware law, unless otherwise provided for in a corporation's
certificate of incorporation, any action by a corporation's stockholders must be
taken at a meeting of such stockholders, unless a consent in writing setting
forth the action so taken is signed by stockholders of the corporation having
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not less than the minimum number of votes necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
The Tumbleweed certificate provides that stockholder action can be taken
only at an annual or special meeting of stockholders and not by written consent
of stockholders. The Tumbleweed bylaws provide that special meetings of
stockholders can be called only by the Chairman of the board of directors,
Tumbleweed board of directors or a committee of the Tumbleweed board of
directors. Stockholders are not permitted to call a special meeting or to
require that the Tumbleweed board of directors call a special meeting of
stockholders. As a result of the foregoing provisions, a stockholder may not
force stockholder consideration of a proposal over the opposition of the
Chairman of the board of directors and the Tumbleweed board of directors by
calling a special meeting of stockholders prior to the time the Chairman of the
board of directors, the Tumbleweed board of directors or a committee of the
Tumbleweed board of directors believes such consideration to be appropriate.
Under Michigan law, the articles of incorporation may provide that any
action required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting, without prior notice, and without a
vote, if consents in writing, setting forth the action so taken are signed by
the holders of outstanding shares having not less than a minimum number of votes
that would be necessary to authorize or take the action at a meeting at which
all shares entitled to take the corporate action were presented and voted. The
Interface articles of incorporation do not provide for such action.
Interface's bylaws provide that action required or permitted at any meeting
of shareholders, may be taken without a meeting, without prior notice and
without a vote, if all the shareholders entitled to vote consent in writing.
Additionally, Interface's bylaws provide that special meetings of the
shareholders, for any purpose or purposes, may be called by the board of
directors, the Chairman of the board or the President.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Tumbleweed bylaws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors, or bring other
business before a meeting of stockholders of Tumbleweed, which we refer to as
the Tumbleweed stockholder notice procedure.
The Tumbleweed stockholder notice procedure provides that only persons who
are nominated at the direction of the Tumbleweed board of directors, by any
nominating committee or person appointed by the Tumbleweed board of directors,
or by a stockholder who has given timely written notice to the Secretary of
Tumbleweed prior to the meeting at which directors are to be elected, will be
eligible for election as a director of Tumbleweed. The Tumbleweed stockholder
notice procedure provides that at an meeting only such business may be conducted
as has been brought before the meeting by or at the direction of the Tumbleweed
board of directors or by a stockholder who has given timely written notice to
the Secretary of Tumbleweed of such stockholder's intention to bring such
business before such meeting. Under the Tumbleweed stockholder notice procedure,
to be timely, notice of stockholder nominations must be received by Tumbleweed:
- in the case of an annual meeting, not less than 60 days nor more than
90 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders; PROVIDED, HOWEVER, that in the event that the
annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual
meeting was made, whichever first occurs; and
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- in the case of a special meeting of stockholders called for the purpose of
electing directors, not later than the close of business on the tenth day
following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.
To be timely, notice of stockholder proposals must be received by Tumbleweed
not less than 60 days or more than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in
the event that the annual meeting is called for a date that is not within
30 days before or after such anniversary date, notice by the stockholder in
order to be timely must be so received not later than the close of business on
the tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
Under the Tumbleweed stockholder notice procedure, a stockholder's notice to
Tumbleweed proposing to nominate a person for election as a director must
contain certain information, including, without limitation, the identity and
address of the proposed nominee, the class and number of shares of stock of
Tumbleweed which are beneficially owned by the proposed nominee, the principal
occupation of the proposed nominee and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee. Under the Tumbleweed
stockholder notice procedure, a stockholder's notice relating to the conduct of
business other than the nomination of directors must contain certain information
about such business and about the proposing stockholder, including, without
limitation, a brief description of the business the stockholder proposes to
bring before the meeting, the reasons for conducting such business at such
meeting, the name and address of such stockholder, the class and number of
shares of stock of Tumbleweed beneficially owned by such stockholder, any
material interest of such stockholder in the business so proposed and a
representation that the stockholder intends to appear at the meeting in person
or by proxy. If the nomination or business was not brought before the meeting in
accordance with the Tumbleweed stockholder notice procedure, such person will
not be eligible for election as a director or such business will not be
conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Tumbleweed
stockholder notice procedure affords the Tumbleweed board of directors an
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Tumbleweed board of directors, to
inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the Tumbleweed stockholder notice procedure provides a
more orderly procedure for conducting annual meetings of stockholders and, to
the extent deemed necessary or desirable by the Tumbleweed board of directors,
provides the Tumbleweed board of directors with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the Tumbleweed board
of director's position regarding action to be taken with respect to such
business, so that stockholders can better decide whether to attend the meeting
or to grant a proxy regarding the disposition of any such business.
The foregoing provisions may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Tumbleweed and its stockholders.
The Interface bylaws also establish an advance notice procedure for
shareholders to make nominations of candidates for election as directors, or
bring other business before an annual meeting of shareholders of Interface.
For nominations or other business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary and such
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other business must otherwise be a proper matter for shareholder action. To be
timely, a shareholder's notice must be delivered to the Secretary at the
principal executive offices of Interface not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that in the event that the date of the annual meeting is more
than 30 days before or more than 60 days after such anniversary date, notice by
the shareholder to be timely must be so delivered not earlier than the 90(th)
day prior to such annual meeting and not later than the close of business on the
later of the 60(th) day prior to such annual meeting or the 10(th) day following
the day on which public announcement of the date of such meeting is first made
by Interface.
This shareholder's notice must set forth:
- as to each person whom the shareholder proposes to nominate for election
or reelection as a director all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act, including such person's written
consent to being named in the proxy statement as a nominee and to serving
as a director if elected;
- as to any other business that the shareholder proposes to bring before the
meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and the
beneficial owner, if any, on whose behalf the proposal is made; and
- as to the shareholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made the name and address of
such shareholder, as they appear on Interface's books, and of such
beneficial owner, and the class and number of shares of Interface that are
owned beneficially and held of record by such shareholder and such
beneficial owner.
In the event that the number of directors to be elected to the board of
directors of Interface is increased and there is no public announcement by
Interface naming all of the nominees for director or specifying the size of the
increased board of directors at least 70 days prior to the first anniversary of
the preceding year's annual meeting, a shareholder's notice shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary not later
than the close of business on the tenth day following the day on which such
public announcement is first made by Interface.
AUTHORIZED CAPITAL STOCK
Delaware law and Michigan law require that a corporation's certificate or
articles of incorporation set forth the total number of shares of all classes of
stock which the corporation has authority to issue and a statement of the
designations and the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof. The authorized capital stock of Tumbleweed
consists of 100,000,000 shares of Tumbleweed common stock, par value $0.001 per
share, and 10,000,000 shares of Tumbleweed preferred stock, par value $0.001 per
share. The authorized capital stock of Interface consists of 25,000,000 shares
of Interface common stock, no par value.
VOTING RIGHTS
The holders of Tumbleweed common stock are entitled to one vote for each
share held on all matters and, except as otherwise provided in Tumbleweed's
certificate with respect to the Tumbleweed preferred stock, will have the
exclusive right to vote for the election of directors and for all other
purposes.
The holders of Interface common stock are entitled to one vote for each
share held on all matters.
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PREFERRED STOCK
Pursuant to the Tumbleweed certificate, the Tumbleweed board of directors is
authorized to provide for the issuance of shares of Tumbleweed preferred stock,
in one or more classes or series, and to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof.
The Interface articles of incorporation do not authorize Interface to issue
shares of preferred stock.
Tumbleweed believes that the ability of the board of directors to issue one
or more series of preferred stock provides Tumbleweed with flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise.
Although neither board of directors has any intention at the present time of
doing so, it could issue a series of Tumbleweed preferred stock that could,
depending on the terms of such series, impede the completion of a merger, tender
offer or other takeover attempt. The boards of directors will make any
determination to issue such shares based on their judgments as to the best
interests of Tumbleweed or Interface and their respective stockholders. The
boards of directors, in so acting, could issue preferred stock having terms that
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the board of directors, including a tender offer or
other transaction that some of the stockholders might believe to be in the
stockholders' best interests or in which stockholders might receive a premium
for their stock over the then current market price of such stock.
AMENDMENT OF THE CERTIFICATE AND ARTICLES OF INCORPORATION AND BYLAWS
Delaware law allows amendment of a corporation's certificate of
incorporation if its board of directors adopts a resolution setting forth the
amendment proposed and declaring its advisability and the stockholders
thereafter approve such proposed amendment, either at a special meeting called
by the board for the purpose of approval of such amendment by the stockholders
or, if so directed by the board, at the next annual stockholders' meeting. At
any such meeting, the proposed amendment generally must be approved by a
majority of the outstanding shares entitled to vote. The holders of the
outstanding shares of a class are entitled to vote as a separate class upon a
proposed amendment, whether or not entitled to vote thereon by the certificate
of incorporation, if the amendment would increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
the shares of such class or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely. If any
proposed amendment would alter or change the powers, preferences or special
rights of one or more series of any class so as to affect them adversely, but
not affect the entire class, then only the shares of the series so affected by
the amendment will be considered a separate class for the purposes of a vote on
the amendment. Under Delaware law, a corporation's certificate of incorporation
also may require, for action by the board or by the holders of any class or
series of voting securities, the vote of a greater number or proportion than is
required by Delaware law and the provision of the certificate of incorporation
requiring such greater vote also provide that such provision cannot be altered,
amended or repealed except by such greater vote.
Under Delaware law, the power to adopt, amend or repeal a corporation's
by-laws resides with the stockholder entitled to vote thereon, and with the
directors of such corporation if such power is conferred upon the board of
directors by the certificate of incorporation.
The Tumbleweed certificate contains no provisions requiring a vote greater
than that specified by Delaware law to amend the Tumbleweed certificate. The
Tumbleweed certificate provides that the Tumbleweed board of directors is
expressly authorized to adopt, alter and repeal the Tumbleweed bylaws. The
affirmative vote of at least a majority of the Tumbleweed board of directors
shall be
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required to adopt, alter or repeal the Tumbleweed bylaws. The Tumbleweed bylaws
may also be adopted, altered and repealed by the affirmative vote of the holders
of at least 66 2/3% of the voting power of the shares entitled to vote at an
election of directors.
Under Michigan law, a corporation may amend its articles of incorporation if
the amendment contains only provisions that might lawfully be contained in the
original articles of incorporation filed at the time of making the amendment.
Unless the articles of incorporation provide otherwise, the board may adopt
certain amendments to the corporation's articles of incorporation without
shareholder action. Other amendments of the articles of incorporation must be
approved by shareholder action. Notice of a meeting setting forth the proposed
amendment or a summary of the changes to be effected by the proposed amendment
shall be given to each shareholder of record entitled to vote on the proposed
amendment within the time and in the manner provided by Michigan law for giving
notice of meetings of shareholders. The proposed amendment shall be adopted upon
receiving the affirmative vote of a majority of the outstanding shares entitled
to vote on the proposed amendment and, in addition, if any class or series of
shares is entitled to vote on the proposed amendment as a class, the affirmative
vote of a majority of the outstanding shares of each such class or series. If
the amendment would increase or decrease the aggregate number of authorized
shares of the class, or alter or change the powers, preferences or special
rights of the shares of the class or other classes so as to affect the class
adversely, the holders of the outstanding shares of the class may vote as a
class upon the proposed amendment, whether or not entitled to vote by the
articles of incorporation. If a proposed amendment would alter or change the
powers, preferences or special rights of a class so as to affect adversely one
or more series of a class, but not the entire class, then only the shares of the
one or more series affected by the amendment shall as a group be considered a
single class.
Michigan law provides that the shareholders or the board of directors may
amend or repeal the bylaws or adopt new bylaws unless the articles of
incorporation provide that the power to adopt new bylaws is reserved exclusively
to the shareholders or that the bylaws or any particular bylaw shall not be
altered or repealed by the board.
The Interface articles provide that the shareholders shall not have the
right to amend or repeal any or all provisions of the bylaws, unless so adopted
by the affirmative vote of the holders of not less than three-fourths of the
outstanding shares of stock generally entitled to vote in the election of
directors.
BUSINESS COMBINATIONS
Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified therein, a corporation shall not engage in any
business combination with any interested stockholder for a three-year period
following the date that such stockholder becomes an interested stockholder
unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding shares held by directors who are also
officers and employee stock purchase plans in which employee participants
do not have the right to determine confidentially whether plan shares will
be tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and by the affirmative vote at an
annual or special meeting, and not by written
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consent, of at least 66 2/3% of the outstanding voting stock which is not
owned by the interested stockholder.
Except as specified in Section 203 of the Delaware General Corporation Law,
an interested stockholder is defined to include any person that is the owner of
15% or more of the outstanding voting stock of the corporation or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date, and the affiliates and associates of any
such person.
Under certain circumstances, Section 203 of the Delaware General Corporation
Law may make it more difficult for a person who would be an interested
stockholder to effect various business combinations with a corporation for a
three-year period, although the corporation's certificate of incorporation or
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder.
The Tumbleweed certificate does not exclude Tumbleweed from the restrictions
imposed under Section 203 of the Delaware General Corporation Law. It is
anticipated that the provisions of Section 203 of the Delaware General
Corporation Law may encourage companies interested in acquiring a corporation to
negotiate in advance with the corporation's board of directors, since the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the stockholder becoming an interested stockholder.
Chapter 7A of the Michigan Business Corporation Act provides that business
combinations between covered Michigan business corporations, or their
subsidiaries and an interested shareholder or its affiliate can be consummated
only if approved by at least 90% of the votes of each class of the corporation's
stock entitled to vote and by at least two-thirds of the votes of each class of
stock other than voting shares beneficially owned by the interested shareholder
or its affiliate or associate, unless five years have elapsed after the person
involved became an interested shareholder and unless certain fair price and
other conditions are satisfied. The board of directors may exempt business
combinations with a particular interested shareholder by resolution adopted
prior to the time the interested shareholder attained that status.
Under Michigan law, an interested shareholder is defined as the direct or
indirect beneficial owner of 10% or more of the voting power of the outstanding
voting shares of the corporation, or an affiliate of the corporation which was
the direct or indirect beneficial owner of 10% or more of the voting power of
the outstanding voting shares of the corporation within the preceding two years.
Chapter 7B of the Michigan Business Corporation Act provides that, "control
shares" of a corporation subject to Chapter 7B that are acquired in a control
share acquisition have no voting rights except as granted by the corporation.
"Control shares" are shares that, when added to all shares previously owned by a
stockholder, increase such stockholder's voting stock to 20% or more, 33 1/3% or
more or a majority of the outstanding voting power of the corporation. A control
share acquisition must be approved by a majority of the votes cast by the
corporation's shareholders entitled to vote, excluding shares owned by the
acquirer and certain officers and directors.
Chapters 7A and 7B of the Michigan Business Corporation Act, like the
anti-takeover provisions under Delaware Law, may discourage persons seeking to
acquire control of a corporation from proceeding without negotiating the terms
of such acquisition with the Board of Directors.
The Interface articles of incorporation do not exclude Interface from the
restrictions imposed under Michigan law with regard to business combinations.
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LIMITATION OF LIABILITY OF DIRECTORS
Delaware law and Michigan law permit a corporation to include a provision in
its certificate of incorporation eliminating or limiting the personal liability
of a director or officer to the corporation or its stockholders for damages for
a breach of the director's fiduciary duty, subject to certain limitations. The
Tumbleweed certificate includes such a provision to the maximum extent permitted
by law. The Interface certificate contains an analogous provision.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law and Michigan law permit a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. Delaware law provides that a
corporation may advance expenses of defense, upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate,
and must reimburse a successful defendant for expenses, including attorneys'
fees, actually and reasonably incurred.
Michigan law has a similar provision that provides expenses incurred by a
person in defending a civil or criminal action, suit or proceeding may be paid
in advance of the final disposition of such action, suit or proceeding, upon
written affirmation of the person's good faith belief that the person has met
the applicable standard of conduct set forth in the bylaws and a written
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that the person is not entitled to be indemnified by the
corporation. A director need not affirm a good faith belief that the director
has met the applicable standard of conduct if the articles of incorporation
include a provision eliminating or limiting the liability of a director, unless
the director received a financial benefit to which he or she was not entitled,
intentionally inflicted harm on the corporation or its shareholders, violated
Michigan Corporation Business Act Section 551 or intentionally violated a
criminal law. Delaware and Michigan both permit a corporation to purchase and
maintain liability insurance for its directors and officers. Delaware law
provides that no indemnification may be made for any claim, issue or matter as
to which a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses as the court deems proper.
The Tumbleweed bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of Tumbleweed, or is or was serving at the request of
Tumbleweed as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan, will be indemnified by Tumbleweed to
the full extent permitted by Delaware law if he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of Tumbleweed. The indemnification rights conferred by the Tumbleweed
bylaws are not exclusive of any other right to which persons seeking
indemnification may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Tumbleweed is authorized
to purchase and maintain (and Tumbleweed maintains) insurance on behalf of its
directors and officers.
Additionally, the Tumbleweed bylaws provide that expenses incurred by a
person in defending a civil or criminal action, suit or proceeding by reason of
the fact that he or she is a director, officer employee or agent may be paid in
advance of the final disposition of such action, suit or proceeding,
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upon receipt of an undertaking by or on behalf of such director, officer,
employee or agent to repay such amount unless it shall ultimately be determined
that he or she is entitled to be indemnified by Tumbleweed, as authorized by
Delaware law.
The Interface bylaws provide that it shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, by reason of the fact that the
person is or was a director or officer of the corporation, or is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, whether for profit or not, against
expenses (including attorneys' fees), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with such action, suit or proceeding, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders, and with respect to any
criminal action or proceeding, if the person had no reasonable cause to believe
his or her conduct was unlawful.
Additionally, the Interface bylaws provide that it shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director or officer of the corporation, or is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, whether for profit or not, against
expenses (including attorneys' fees), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with such action, suit or proceeding, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders.
The Interface bylaws provide that indemnification rights conferred by the
Interface bylaws are not exclusive of any other right to which persons seeking
indemnification may be entitled under a contractual arrangement with Interface.
Interface is authorized to purchase and maintain (and Interface maintains)
insurance on behalf of its directors and officers.
The Interface bylaws provide that expenses incurred by a person in defending
a civil or criminal action, suit or proceeding may be paid in advance of the
final disposition of such action, suit or proceeding, upon written affirmation
of the person's good faith belief that the person has met the applicable
standard of conduct set forth in the bylaws and a written undertaking by or on
behalf of such person to repay such amount if it is ultimately determined that
the person is not entitled to be indemnified by Interface. A director need not
affirm a good faith belief that the director has met the applicable standard of
conduct if the articles of incorporation include a provision eliminating or
limiting the liability of a director, unless the director received a financial
benefit to which he or she was not entitled, intentionally inflicted harm on the
corporation or its shareholders, violated Michigan Corporation Business Act
Section 551 or intentionally violated a criminal law.
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MARKET PRICE AND DIVIDEND INFORMATION
Each of the Tumbleweed common stock and the Interface common stock is listed
and quoted on the Nasdaq National Market. The following table sets forth the
high and low trading prices per share of each of the Tumbleweed common stock and
Interface common stock as reported on the Nasdaq National Market, based on
published financial sources:
<TABLE>
<CAPTION>
TUMBLEWEED INTERFACE
COMMON STOCK COMMON STOCK
PRICES PRICES
---------------------- ----------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
First Quarter...................................... -- -- $ 6.38 $3.63
Second Quarter..................................... -- -- 5.38 2.63
Third Quarter...................................... -- -- 4.63 2.88
Fourth Quarter..................................... -- -- 3.50 2.10
1998
First Quarter...................................... -- -- 3.75 2.31
Second Quarter..................................... -- -- 3.38 2.63
Third Quarter...................................... -- -- 3.19 1.50
Fourth Quarter..................................... -- -- 6.50 1.50
1999
First Quarter...................................... -- -- 4.38 1.94
Second Quarter..................................... -- -- 3.63 1.63
Third Quarter...................................... $30.50 $ 10.25 10.88 3.13
Fourth Quarter..................................... 89.50 17.75 26.88 8.13
2000
First Quarter...................................... 136.00 48.00 82.00 22.00
Second Quarter..................................... 112.00 28.88 71.48 6.19
Third Quarter (through July 17, 2000).............. 62.50 50.81 15.88 12.00
</TABLE>
On June 28, 2000, the last full trading day prior to the first public
announcement of the execution of the Merger Agreement, the reported high and low
sale prices per share and closing price per share of Tumbleweed common stock and
Interface common stock on the Nasdaq were as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
-------- -------- --------
<S> <C> <C> <C>
Tumbleweed.......................................... 53.00 49.88 50.50
Interface........................................... 9.75 8.50 9.50
</TABLE>
On July 17, 2000, the last full trading day prior to the date of this proxy
statement/prospectus, the reported high and low sale prices per share and
closing price per share of Tumbleweed common stock and Interface common stock on
Nasdaq were as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSE
-------- -------- --------
<S> <C> <C> <C>
Tumbleweed.......................................... 62.50 56.88 62.13
Interface........................................... 15.88 14.31 15.88
</TABLE>
Stockholders are urged to obtain current market quotations for shares of
Tumbleweed common stock and Interface common stock.
Tumbleweed presently anticipates that it will retain any future earnings to
finance the development and expansion of its business and provide working
capital. Interface has not declared or paid dividends
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since 1996 and anticipates that it will retain any future earnings to finance
the development and expansion of its business and provide working capital.
Neither Tumbleweed nor Interface anticipates paying any cash dividends on their
common stock for the foreseeable future. The terms of Tumbleweed's and
Interface's existing credit facilities prohibit the payment of dividends in
specified circumstances.
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INTERFACE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The information table sets forth certain information with respect to
Interface's directors and executive officers as of July 12, 2000:
<TABLE>
<CAPTION>
NAME TITLE AGE
---- ----------------------------------------------- --------
<S> <C> <C>
Robert A. Nero..................... Director, President and Chief Executive Officer 54
Garnel F. Graber................... Director 69
Bruce E. Rhoades................... Director 52
David C. Seigle.................... Director 60
Lloyd A. Semple.................... Director 61
Thomas L. Thomas................... Director 57
Keith N. Bauserman................. Vice President of Channel Sales 56
Brian D. Brooks.................... Chief Financial Officer 37
Robert F. Granger.................. Vice President of L2i Sales 48
Brian G. Niemiec................... Vice President of Product & Service Delivery 39
Richard B. Sheridan................ Vice President of Product Development 42
Donald D. Redding.................. Vice President of Cleo Solutions Group 59
</TABLE>
Mr. Nero was appointed President and Chief Executive Officer of the Company
in January 1997. Mr. Nero also serves on the Board of Directors of Quality
Communications Inc. Prior to that time, he was, from 1994 to 1996, President of
Bell & Howell PSC and, from 1989 to 1994, Vice President of Legent Corp.
Mr. Graber retired in 1994, prior to which time he was Chairman and Chief
Executive Officer of Applied Dynamics International for at least the five years
preceding the date of his retirement. Mr. Graber currently serves on the Board
of Directors and Compensation Committee of Nematron Corporation.
Mr. Rhoades is a Corporate Vice President for Bell & Howell Company.
Previously, from 1995 to 1999, he was President of Bruce E. Rhoades Consulting,
Inc. Prior to that time, Mr. Rhoades was, from 1992 to 1995, Vice President of
Strategy and Business Development of Lexis-Nexis, Inc., an electronic
information retrieval company and a division of Mead Corp.
Mr. David C. Seigle has been an Affiliated Executive of Black Diamond
Capital, LLC since November 1998. Mr. Seigle has been a director of Field
Centrix Corp. since February 1998. From 1996 until 1998 he was the President of
Technology Edge, Inc. Prior to his retirement in 1991, Mr. Seigle was Vice
President of File Net Corporation, a manufacturer of document image processors.
Mr. Semple has been an attorney with Dykema Gossett PLLC for 36 years and
Chairman of such law firm since January 1, 1996. Dykema Gossett provides legal
services to the Company. Mr. Semple also serves as the Chairman, Trustee and
Chair of the Compensation Committee of the Detroit Medical Center, a non-profit
health care provider.
Mr. Thomas retired in 1999. Prior to his retirement, Mr. Thomas was Chairman
of Creative Solutions, Inc. since July 1998 and was its President and Chief
Executive Officer from 1990 to 1998. Creative Solutions, Inc. is a leading
supplier of a full line of integrated tax, accounting and office management
software products for small and medium-sized accounting firms. Currently,
Mr. Thomas is a director of both the Ohio State University Research Foundation
and Innovative IT.
Mr. Bauserman was appointed Vice President of Channel Sales of the Company
in 1994 after having served as the Company's National Sales Manager from 1992 to
1994.
Mr. Brooks was appointed Chief Financial Officer of the Company in November
1999. Prior to joining the Company, Mr. Brooks was a Vice President of Finance
of Interim Services, a human
119
<PAGE>
resources consulting firm, from 1997 to 1999; and Vice President of Finance
(1996-1997) and Controller (1992-1996) of Aim Executive Holdings, also a human
resources consulting firm.
Mr. Granger was appointed Vice President of Marketing of the Company in July
1998 after having served as a sales account executive since October 1997. Prior
to joining the Company, Mr. Granger was Vice President of Sales of HUBLink, Inc.
from 1995 to 1997, and served as Senior Account Manager at Legent Corporation
from 1992 to 1995.
Mr. Niemiec was appointed Vice President of Product & Service Delivery of
the Company in 1999 after having served as a Company Vice President since 1998.
Prior to joining the Company, Mr. Niemiec was President of Bright Ideas Group, a
consulting firm, from 1996 to 1998, and Senior Vice President of Operations of
National Tech Team, a computer services firm, from 1990 to 1996.
Mr. Sheridan was appointed Vice President of Development of the Company in
July 1998 after having served as Director of OASIS/Printer development
(effective October 1997) and Manager of Cleo EN product development since
September 1990.
Mr. Redding was appointed Vice President of Cleo Products Group of the
Company in November 1999. Mr. Redding had served as Vice President of Cleo
Communications, a division of the Company, until May 1995. Prior to rejoining
the Company, Mr. Redding was Vice President/Director of Engineering and
Operations for Applied Intelligent Systems, Inc.
120
<PAGE>
PRINCIPAL SHAREHOLDERS OF INTERFACE
The following table sets forth information with respect to the beneficial
ownership of Interface common stock by:
- Each shareholder known by Interface to be the beneficial owner of more
than 5% of Interface's common stock;
- Each director and executive officer; and
- All current directors and executive officers as a group.
Applicable percentage ownership in the following table is based on
4,720,675 shares of Interface common stock outstanding as of June 30, 2000. The
table treats as outstanding, for purposes of calculating each specific
shareholder's percent ownership, all shares subject to options held by the
shareholder that are exercisable within 60 days after June 30, 2000. Except as
noted below, the address for each person listed on the table is c/o Interface
Systems, Inc., 5855 Interface Drive, Ann Arbor, Michigan 48103. Unless otherwise
indicated below, the persons and entities named in the table have sole voting
and sole investment power with respect to all shares beneficially owned, subject
to community property laws.
<TABLE>
<CAPTION>
COMMON STOCK OF
COMPANY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) PERCENT
------------------------ -------------------- --------
<S> <C> <C>
Congressional Securities, Inc. and David H. Zimmer ......... 450,000(2) 9.53%
2 Martin Dale Road
Greenwich, CT 06830
Garnel F. Graber............................................ 69,554(3) 1.47
Robert A. Nero.............................................. 196,667(4) 4.17
Bruce E. Rhoades............................................ 21,100(5) *
David C. Seigle............................................. 27,100(6) *
Lloyd A. Semple............................................. 23,100(7) *
Thomas L. Thomas............................................ 17,000(8) *
Keith N. Bauserman.......................................... 51,888(9) 1.10
Robert F. Granger........................................... 42,844(10) *
Richard B. Sheridan......................................... 48,332(11) 1.02
Donald D. Redding........................................... 1,163 *
Brian G. Niemiec............................................ 14,509(12) *
Brian D. Brooks............................................. 724 *
All executive officers and directors as a group 513,981(13) 10.89
(12 persons)..............................................
</TABLE>
------------------------
* Less than one percent
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, the
Company believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned.
(2) Based on information reported by Congressional Securities, Inc. ("CSI") and
David H. Zimmer, the beneficial ownership of CSI is by virtue of its
investment discretion and voting power over accounts of its customers,
including David H. Zimmer, Chief Executive Officer of CSI. CSI and
Mr. Zimmer claim shared voting and dispositive power with respect to the
450,000 shares. CSI and Mr. Zimmer filed separate Schedules 13G pursuant to
Rule 13d-1(b) and Rule 13d-1(c), respectively, with respect to the shared
beneficial ownership of the 450,000 shares. On May 10, 2000, Fiserv
Correspondent Services, Inc. ("FCS"), a securities clearing firm, filed a
121
<PAGE>
Schedule 13G indicating dispositive power over 503,583 shares as a result
of defaults in certain margin accounts. FCS has informed Interface that all
such margin accounts were established by CSI for its customers and/or
Mr. Zimmer and that all of such 503,583 shares have been sold pursuant to
the applicable margin agreements and in accordance with securities industry
practice. FCS has informed Interface an amended Schedule 13G will be filed
by FCS shortly.
(3) Includes 27,100 shares which Mr. Graber has, or within 60 days of June 30,
2000 will have, the right to acquire pursuant to the presently exercisable
portion of options granted under the Directors Plan.
(4) Includes 181,667 shares which Mr. Nero has, or within 60 days of June 30,
2000 will have, the right to acquire pursuant to the presently exercisable
portion of options granted under the 1992 Stock Option Plan and 15,000
shares beld by Mr. Nero's wife. Mr. Nero shares voting and dispositive
power with respect to the 15,000 shares.
(5) Includes 21,100 shares which Mr. Rhoades has, or within 60 days of
June 30, 2000 will have, the right to acquire pursuant to the presently
exercisable portion of options granted under the Directors Plan.
(6) Includes 27,100 shares which Mr. Seigle has, or within 60 days of June 30,
2000 will have, the right to acquire pursuant to the presently exercisable
portion of options granted under the Directors Plan.
(7) Includes 21,100 shares which Mr. Semple has, or within 60 days of June 30,
2000 will have, the right to acquire pursuant to the presently exercisable
portion of options granted under the Directors Plan.
(8) Includes 16,000 shares which Mr. Thomas has, or within 60 days of June 30,
2000 will have, the right to acquire pursuant to the presently exercisable
portion of options granted under the Directors Plan.
(9) Includes 41,000 shares which Mr. Bauserman has, or within 60 days of
June 30, 2000 will have, the right to acquire pursuant to the presently
exercisable portion of options granted under the 1992 Stock Option Plan.
(10) Includes 40,333 shares which Mr. Granger has, or within 60 days of
June 30, 2000 will have, the right to acquire pursuant to the presently
exercisable portion of options granted under the 1992 Stock Option Plan.
(11) Includes 42,167 shares which Mr. Sheridan has, or within 60 days of
June 30, 2000 will have, the right to acquire pursuant to the presently
exercisable portion of options granted under the 1992 Stock Option Plan.
(12) Includes 45,000 shares which Mr. Niemiec has, or within 60 days of
June 30, 2000 will have, the right to acquire pursuant to the presently
exercisable portion of options under the 1992 Stock Option Plan.
(13) Includes 430,900 shares which certain directors and executive officers
have, or within 60 days of June 30, 2000 will have, the right to acquire
pursuant to the presently exercisable portion of options granted under the
Directors Plan and the 1992 Stock Option Plan.
122
<PAGE>
EXPERTS
The consolidated financial statements of Tumbleweed as of December 31, 1998
and 1999 and for each of the years in the three-year period ended December 31,
1999, and the related financial statement schedule have been included herein and
in the Registration Statement on Form S-4 and this proxy statement/prospectus in
reliance upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheets of Interface and its subsidiaries as of
September 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the three-year period ended September 30, 1999, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included in the Registration Statement on Form S-4 and
this proxy statement/ prospectus in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP will issue an opinion about the
validity of the shares of Tumbleweed common stock to be issued by Tumbleweed
pursuant to the merger. Two attorneys at Skadden, Arps beneficially own a total
of approximately 40,244 shares of the common stock, of which approximately
39,146 shares are owned by Gregory C. Smith, brother of Jeffrey C. Smith, the
President, Chief Executive Officer and Chairman of the Board of Directors of
Tumbleweed.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998
and March 31, 2000 (unaudited)............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999 (unaudited)................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 and the
three months ended March 31, 2000 (unaudited)............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999 (unaudited)................. F-7
Notes to Consolidated Financial Statements.................. F-8
INTERFACE SYSTEMS, INC.
AND SUBSIDIARIES
<CAPTION>
PAGE
--------
Report of Arthur Andersen LLP, Independent Auditors. F-29
<S> <C>
Consolidated Balance Sheets as of September 30, 1999 and
1998 and March 31, 2000 (unaudited)....................... F-30
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997 and the six months ended
March 31, 2000 and 1999 (unaudited)....................... F-31
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 1999, 1998 and 1997 and
the six months ended March 31, 2000 (unaudited)........... F-32
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 and the six months ended
March 31, 2000 and 1999 (unaudited)....................... F-33
Notes to Consolidated Financial Statements.................. F-34
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Pro Forma Condensed Combined Financial Information:
Introduction................................................ F-50
Pro Forma Condensed Combined Balance Sheet at March 31,
2000...................................................... F-51
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1999.............................. F-52
Pro Forma Condensed Combined Statement of Operations for the
three months ended March 31, 2000......................... F-53
Notes to Pro Forma Condensed Combined Financial
Information............................................... F-54
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed Communications Corp.:
We have audited the accompanying consolidated balance sheets of Tumbleweed
Communications Corp. (the Company) and subsidiaries as of December 31, 1999 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, 1999. 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 subsidiaries as of December 31, 1999 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, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
San Francisco, California
January 17, 2000
F-2
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $60,544 $ 4,556 $46,447
Short-term investments.................................... -- 2,166 --
Accounts receivable, net of allowance for doubtful
accounts of $816, $1,840 and $516, respectively......... 5,182 3,241 4,980
Prepaid expenses and other current assets................. 3,574 779 3,134
------- ------- -------
Total current assets.................................... 69,300 10,742 54,561
Property and equipment, net................................. 3,485 1,428 5,001
Other assets................................................ 2,898 549 3,014
------- ------- -------
Total assets............................................ $75,683 $12,719 $62,576
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,878 $ 923 $ 5,514
Current installments of long-term debt.................... 840 506 594
Accrued liabilities....................................... 6,398 3,867 6,822
Deferred revenue.......................................... 2,579 2,604 2,639
------- ------- -------
Total current liabilities............................... 12,695 7,900 15,569
Long-term debt, excluding current installments.............. 1,017 382 858
Other long-term liabilities................................. 258 -- 266
------- ------- -------
Total liabilities....................................... 13,970 8,282 16,693
------- ------- -------
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, zero issued or outstanding as of December 31,
1999 and 1998 and March 31, 2000.......................... -- -- --
Convertible preferred stock (29,000,000 shares authorized):
Series A, $0.001 par value; zero, 2,700,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero, 2,657,971, and zero
shares issued and outstanding as of December 31, 1999 and
1998 and March 31, 2000, respectively; (aggregate
liquidation preference of $3,668 as of December 31,
1998)..................................................... -- 3 --
Series B, $0.001 par value; zero, 4,250,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero, 4,065,960, and zero
shares issued and outstanding as of December 31, 1999 and
1998 and March 31, 2000, respectively; (aggregate
liquidation preference of $8,105 as of December 31,
1998)..................................................... -- 4 --
Series C, $0.001 par value; zero, 6,000,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero shares issued and
outstanding as of December 31, 1999 and 1998 and
March 31, 2000............................................ -- -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 25,423,718, 6,994,189 and 25,830,098 shares
issued and outstanding as of December 31, 1999 and 1998
and March 31, 2000, respectively.......................... 26 7 26
Additional paid-in capital.................................. 132,167 47,001 134,764
Deferred compensation expense............................... (5,283) (1,548) (5,105)
Accumulated other comprehensive income (loss)............... 53 (2) 70
Accumulated deficit......................................... (65,250) (41,028) (83,872)
------- ------- -------
Total stockholders' equity.............................. 61,713 4,437 45,883
------- ------- -------
Total liabilities and stockholders' equity.............. $75,683 $12,719 $62,576
======= ======= =======
</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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------------
1999 1998 1997 2000 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License............................................ $ 11,285 $ 8,996 $ 4,097 $ 4,356 $ 2,702
Services........................................... 3,018 1,359 259 1,524 564
Transaction fees................................... 981 -- -- 730 3
Sale of technology................................. -- 220 120 -- --
-------- -------- -------- -------- -------
Revenue from continuing product lines.......... 15,284 10,575 4,476 6,610 3,269
Discountinued product line......................... 1,472 4,888 7,580 -- 638
-------- -------- -------- -------- -------
Total revenue.................................. 16,756 15,463 12,056 6,610 3,907
Cost of revenue
License............................................ 737 931 1,090 267 117
Services........................................... 4,088 3,319 3,020 1,941 782
Transaction fees................................... 78 -- -- 40 5
-------- -------- -------- -------- -------
Total cost of revenue.......................... 4,903 4,250 4,110 2,248 904
-------- -------- -------- -------- -------
Gross profit................................... 11,853 11,213 7,946 4,362 3,003
Operating expenses:
Research & development (exclusive of non-cash
compensation expense of $1,049, $249 and $84 in
1999, 1998 and 1997, respectively, and $274 and
$140 as of March 31, 2000 and 1999,
respectively)...................................... 8,923 5,975 6,154 2,843 1,794
Sales & marketing (exclusive of non-cash
compensation expense of $1,961, $300 and $102 in
1999, 1998 and 1997, respectively, and $636 and
$146 as of March 31, 2000 and 1999,
respectively)...................................... 19,917 11,546 9,988 7,192 3,144
General & administrative (exclusive of non-cash
compensation expense of $526, $166 and $102 in
1999, 1998 and 1997, respectively, and $164 and $50
as of March 31, 2000 and 1999, respectively)....... 5,524 5,220 3,467 1,640 816
Stock compensation................................. 3,536 715 288 1,074 336
Merger related and restructuring expenses.......... -- -- -- 10,803 --
-------- -------- -------- -------- -------
Total operating expenses....................... 37,900 23,456 19,897 23,552 6,090
-------- -------- -------- -------- -------
Operating loss................................. (26,047) (12,243) (11,951) (19,190) (3,087)
Other income, net.................................... 2,126 524 673 656 138
-------- -------- -------- -------- -------
Net loss before provision for taxes................ (23,921) (11,719) (11,278) (18,534) (2,949)
Provision for (benefit from) taxes................. 301 1 183 88 (18)
-------- -------- -------- -------- -------
Net loss........................................... (24,222) (11,720) (11,461) (18,622) (2,931)
Other comprehensive income (loss)--translation
adjustment......................................... 55 (2) -- 17 4
-------- -------- -------- -------- -------
Comprehensive loss................................. $(24,167) $(11,722) $(11,461) $(18,605) $(2,927)
======== ======== ======== ======== =======
Net loss per share--basic and diluted................ $ (1.65) $ (1.79) $ (1.90) $ (0.73) $ (0.43)
======== ======== ======== ======== =======
Weighted average shares--basic and diluted........... 14,650 6,549 6,023 25,588 6,889
======== ======== ======== ======== =======
</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, 1999, 1998 AND 1997 AND THREE MONTHS ENDED MARCH 31,
2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
-------------------- --------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ---------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996............ 2,657,971 $3 -- $ -- -- $ -- 6,710,400 $7
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 common stock to
nonemployees....................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants................ -- -- -- -- -- -- -- --
Amortization of deferred compensation
expense............................ -- -- -- -- -- -- -- --
Repayment of stockholders' notes
receivable......................... -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options.......... -- -- -- -- -- -- 38,559 --
Purchases under Employee Stock
Purchases Plan..................... -- -- -- -- -- -- 32,240 --
Repurchase of common stock........... -- -- -- -- -- -- (19,500) --
Net loss............................. -- -- -- -- -- -- -- --
--------- -- ---------- ---- --- ---- --------- --
BALANCES, DECEMBER 31, 1997............ 2,657,971 3 4,065,960 4 -- -- 6,761,699 7
Issuance of common stock to
nonemployees....................... -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options.......... -- -- -- -- -- -- 204,150 --
Purchases under Employee Stock
Purchases Plan..................... -- -- -- -- -- -- 40,300 --
Repurchase of common stock........... -- -- -- -- -- -- (11,960) --
Issuance of Series C preferred stock
warrant............................ -- -- -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants................ -- -- -- -- -- -- -- --
Amortization of deferred compensation
expense............................ -- -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- -- --
--------- -- ---------- ---- --- ---- --------- --
BALANCES, DECEMBER 31, 1998............ 2,657,971 3 4,065,960 4 -- -- 6,994,189 7
<CAPTION>
ACCUMULATED
ADDITIONAL STOCKHOLDER DEFERRED OTHER
PAID-IN NOTE COMPENSATION COMPREHENSIVE ACCUMULATED
CAPITAL RECEIVABLE EXPENSE INCOME (LOSS) DEFICIT
---------- ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996............ $ 35,496 $ (265) $ (382) $ -- $ (17,847)
Issuance of Series B preferred stock,
net of issuance costs of $47....... 8,024 -- -- -- --
Issuance of Series B preferred stock
warrant............................ 28 -- -- -- --
Issuance of common stock to
nonemployees....................... 7 -- -- -- --
Deferred compensation expense on
stock option grants................ 469 -- (469) -- --
Amortization of deferred compensation
expense............................ -- -- 288 -- --
Repayment of stockholders' notes
receivable......................... -- 265 -- -- --
Issuance of common stock upon
exercise of stock options.......... 204 -- -- -- --
Purchases under Employee Stock
Purchases Plan..................... 462 -- -- -- --
Repurchase of common stock........... (13) -- -- -- --
Net loss............................. -- -- -- -- (11,461)
-------- ------ -------- ---- ---------
BALANCES, DECEMBER 31, 1997............ 44,677 -- (563) -- (29,308)
Issuance of common stock to
nonemployees....................... 8 -- -- -- --
Issuance of common stock upon
exercise of stock options.......... 217 -- -- -- --
Purchases under Employee Stock
Purchases Plan..................... 358 -- -- -- --
Repurchase of common stock........... (14) -- -- -- --
Issuance of Series C preferred stock
warrant............................ 55 -- -- -- --
Foreign currency translation
adjustment......................... -- -- (2) --
Deferred compensation expense on
stock option grants................ 1,700 -- (1,700) -- --
Amortization of deferred compensation
expense............................ -- -- 715 -- --
Net loss............................. -- -- -- -- (11,720)
-------- ------ -------- ---- ---------
BALANCES, DECEMBER 31, 1998............ 47,001 -- (1,548) (2) (41,028)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, DECEMBER 31, 1996............ $ 17,012
Issuance of Series B preferred stock,
net of issuance costs of $47....... 8,028
Issuance of Series B preferred stock
warrant............................ 28
Issuance of common stock to
nonemployees....................... 7
Deferred compensation expense on
stock option grants................ --
Amortization of deferred compensation
expense............................ 288
Repayment of stockholders' notes
receivable......................... 265
Issuance of common stock upon
exercise of stock options.......... 204
Purchases under Employee Stock
Purchases Plan..................... 462
Repurchase of common stock........... (13)
Net loss............................. (11,461)
----------
BALANCES, DECEMBER 31, 1997............ 14,820
Issuance of common stock to
nonemployees....................... 8
Issuance of common stock upon
exercise of stock options.......... 217
Purchases under Employee Stock
Purchases Plan..................... 358
Repurchase of common stock........... (14)
Issuance of Series C preferred stock
warrant............................ 55
Foreign currency translation
adjustment......................... (2)
Deferred compensation expense on
stock option grants................ --
Amortization of deferred compensation
expense............................ 715
Net loss............................. (11,720)
----------
BALANCES, DECEMBER 31, 1998............ 4,437
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
--------------------- --------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options...... -- -- -- -- -- -- 877,893 1
Issuance of Series B preferred
stock in exchange for
services....................... -- -- 15,000 -- -- -- -- --
Issuance of Series C preferred
stock and warrants net of
issuance costs of $1,337....... -- -- -- -- 5,586,003 5 -- --
Issuance of Series C preferred
stock in exchange for
services....................... -- -- -- -- 6,500 -- -- --
Issuance of common stock
warrant........................ -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of warrants........... -- -- -- -- -- -- 94,610 --
Purchases under Employee Stock
Purchase Plan.................. -- -- -- -- -- 39,000
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants............ -- -- -- -- -- -- -- --
Amortization of deferred
compensation expense........... -- -- -- -- -- -- -- --
Conversion of preferred stock to
common stock................... (2,657,971) (3) (4,080,960) (4) (5,592,503) (5) 12,331,434 12
Gain on sale of TKK subsidiary... -- -- -- -- -- -- -- --
Repurchase of common stock....... -- -- -- -- -- -- -- --
Issuance of common stock--IPO,
net of issuance costs of
$4,855......................... -- -- -- -- -- -- 4,219,592 5
Issuance of common stock for
equity financing............... -- -- -- -- -- -- 867,000 1
Net loss......................... -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ------ ---------- ---
BALANCES, DECEMBER 31, 1999........ -- -- -- -- -- -- 25,423,718 26
Issuance of commons stock upon
exercise of stock options
(unaudited).................... -- -- -- -- -- -- 406,380 --
Foreign currency translation
adjustment (unaudited)......... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants
(unaudited).................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option vesting
acceleration (unaudited)....... -- -- -- -- -- -- -- --
Amortization of deferred
compensation expense
(unaudited).................... -- -- -- -- -- -- -- --
Net Loss (unaudited)............. -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ------ ---------- ---
BALANCES, MARCH 31, 2000
(UNAUDITED)....................... -- $ -- -- $ -- -- $ -- 25,830,098 $26
========== ==== ========== ==== ========== ====== ========== ===
<CAPTION>
ACCUMULATED
ADDITIONAL STOCKHOLDER DEFERRED OTHER TOTAL
PAID-IN NOTE COMPENSATION COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL RECEIVABLE EXPENSE INCOME (LOSS) DEFICIT EQUITY
---------- ------------ -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options...... 1,247 -- -- -- -- 1,248
Issuance of Series B preferred
stock in exchange for
services....................... 54 -- -- -- -- 54
Issuance of Series C preferred
stock and warrants net of
issuance costs of $1,337....... 18,748 -- -- -- -- 18,753
Issuance of Series C preferred
stock in exchange for
services....................... 23 -- -- -- -- 23
Issuance of common stock
warrant........................ 127 -- -- -- -- 127
Issuance of common stock upon
exercise of warrants........... 270 -- -- -- -- 270
Purchases under Employee Stock
Purchase Plan.................. 311 -- -- -- -- 311
Foreign currency translation
adjustment..................... -- -- -- 55 -- 55
Deferred compensation expense on
stock option grants............ 7,271 -- (7,271) -- -- --
Amortization of deferred
compensation expense........... -- -- 3,536 -- -- 3,536
Conversion of preferred stock to
common stock................... -- -- -- -- -- --
Gain on sale of TKK subsidiary... 1,491 -- -- -- -- 1,491
Repurchase of common stock....... (36) -- -- -- -- (36)
Issuance of common stock--IPO,
net of issuance costs of
$4,855......................... 45,769 -- -- -- -- 45,774
Issuance of common stock for
equity financing............... 9,891 -- -- -- -- 9,892
Net loss......................... -- -- -- -- (24,222) (24,222)
-------- ---- ------- --- -------- --------
BALANCES, DECEMBER 31, 1999........ 132,167 -- (5,283) 53 (65,250) 61,713
Issuance of commons stock upon
exercise of stock options
(unaudited).................... 1,290 -- -- -- -- 1,290
Foreign currency translation
adjustment (unaudited)......... -- -- -- 17 -- 17
Deferred compensation expense on
stock option grants
(unaudited).................... 1,032 -- (1,032) -- -- --
Deferred compensation expense on
stock option vesting
acceleration (unaudited)....... 275 -- 136 -- -- 411
Amortization of deferred
compensation expense
(unaudited).................... -- -- 1,074 -- -- 1,074
Net Loss (unaudited)............. -- -- -- -- (18,622) (18,622)
-------- ---- ------- --- -------- --------
BALANCES, MARCH 31, 2000
(UNAUDITED)....................... $134,764 $ -- $(5,105) $70 $(83,872) $ 45,883
======== ==== ======= === ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------------
1999 1998 1997 2000 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(24,222) $(11,720) $(11,461) $(18,622) $(2,931)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation for grant of non-employee stock options
and warrant issuances............................... 464 8 34 411 78
Amortization of deferred compensation................. 3,536 715 288 1,074 336
Depreciation and amortization......................... 1,161 1,030 894 447 247
Change in allowance for doubtful accounts............. (1,024) 1,719 -- -- --
Amortization of debt discount......................... -- 12 -- -- 43
Changes in operating assets and liabilities:
Accounts receivable............................... (1,202) (1,640) 2,281 202 224
Prepaid expenses and other current assets......... (2,000) 298 (414) 440 (84)
Accounts payable and other liabilities............ 5,103 452 (870) 3,068 (42)
Deferred revenue.................................. 44 (1,798) 2,732 60 (792)
-------- -------- -------- -------- -------
Net cash used in operating activities........... (18,140) (10,924) (6,516) (12,920) (2,921)
-------- -------- -------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (3,246) (524) (872) (1,963) (277)
Cash transferred to TKK................................... (683) -- -- -- --
Purchase of short-term investments........................ -- (56,383) (7,418) -- --
Sales and maturities of short-term investments............ 2,166 60,632 7,030 -- 1,666
Other assets.............................................. (580) 7 247 (116) 18
-------- -------- -------- -------- -------
Net cash (used in) provided by investing
activities...................................... (2,343) 3,732 (1,013) (2,079) 1,407
-------- -------- -------- -------- -------
Cash flows from financing activities:
Increase in borrowings.................................... 2,103 560 243 -- 1,167
Repayments of borrowings.................................. (1,639) (343) (351) (405) (1,107)
Proceeds from the issuance of preferred stock and
warrants, net............................................. 18,493 -- 8,028 -- 14,949
Proceeds from the issuance of common stock, net........... 55,666 -- -- -- --
Repurchase of common stock................................ (36) (14) (13) -- --
Issuance of common stock upon exercise of stock options... 1,248 217 204 1,290 301
Issuance of common stock under Employee Stock Purchase
Plan...................................................... 311 358 462 -- --
Issuance of common stock upon exercise of warrants........ 270 -- -- -- --
Payments on stockholder note payable...................... -- -- (19) -- --
Repayment of shareholder receivable....................... -- -- 265 -- --
-------- -------- -------- -------- -------
Net cash provided by financing activities:...... 76,416 778 8,819 885 15,310
-------- -------- -------- -------- -------
Effect of exchange rate fluctuations........................ 55 (2) -- 17 4
-------- -------- -------- -------- -------
Net (decrease) increase in cash and cash equivalents........ 55,988 (6,416) 1,290 (14,097) 13,800
Cash and cash equivalents, beginning of period.............. 4,556 10,972 9,682 60,544 4,556
-------- -------- -------- -------- -------
Cash and cash equivalents, end of period.................... $ 60,544 $ 4,556 $ 10,972 $ 46,447 $18,356
======== ======== ======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 97 $ 79 $ 92 $ 39 $ 82
======== ======== ======== ======== =======
Noncash investing and financing activities:
Issuance of warrants and options for services, debt
issuance costs or equity offering costs................. $ 464 $ 63 $ 34 $ -- $ --
======== ======== ======== ======== =======
Equipment acquired under capital lease agreement.......... $ 85 $ -- $ 110 $ -- $ --
======== ======== ======== ======== =======
Deferred compensation expense associated with stock option
activity.................................................. $ 7,271 $ 1,700 $ 469 $ 1,307 $ 2,326
======== ======== ======== ======== =======
Issuance of debt to acquire insurance contract............ $ 525 $ -- $ -- $ -- $ --
======== ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Tumbleweed Communications Corp. ("Tumbleweed" or "the Company"), a Delaware
corporation initially incorporated in California in June 1993, is a leading
provider of internet infrastructure for business messaging worldwide. We offer
two product lines: Tumbleweed Integrated Messaging Exchange (IME) and Tumbleweed
Messaging Management System (MMS). Tumbleweed IME is a comprehensive set of
products and services that enables businesses to use e-mail and the Web for
secure, trackable online communication. In addition to our core IME technology,
Tumbleweed offers applications aimed at specific vertical markets and common
business processes, and an extensive development toolkit for building customized
online services. Tumbleweed IME is a scalable, feature rich communication
solution, and serves as the foundation for online business services offered by
our customers. Tumbleweed MMS is a set of e-mail management products and
services that enables businesses to protect valuable corporate information on
the Internet. MMS enables businesses to set and enforce policies for security,
archiving, distribution, monitoring and regulatory compliance related to
Internet e-mail. Using MMS, companies can set policies to apply content control,
encryption, access control, attachment management, virus scanning and digital
signature policies that are administered centrally and universally across an
enterprise. MMS can also enable centralized control over communications security
policies by automatically re-routing e-mail traffic that should be sent securely
to Tumbleweed IME.
On January 31, 2000, the Company completed its acquisition of Worldtalk
Communications Corp. ("Worldtalk"). Under the terms of the merger agreement,
each Worldtalk share of common stock has been converted into 0.26 of a share of
the Company's common stock. A total of 3,798,398 shares of the Company's common
stock was exchanged for 14,609,374 shares of Worldtalk common stock. The
business combination was accounted for as a pooling of interests and,
accordingly, the Company's historical financial statements have been restated to
include the accounts and results of operations of Worldtalk.
In March of 1994, the Company sold a technology known as Envoy to
Novell, Inc. pursuant to an asset transfer, and the Company thereafter effected
a substantial distribution to its stockholders. In connection with this sale,
the Company 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 the Company's revenue
recognized before June of 1997, which marked the initial launch of Tumbleweed
IME, was derived from these agreements. The Company 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 the Company's operating results in subsequent
periods. In addition, in 1998 and 1997, the Company recognized revenue derived
from a sale of ancillary technology to a third party.
On June 28, 1999, the Company 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.
F-8
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
On May 27, 1999, the board of directors approved the Company's
reincorporation in the state of Delaware. On August 2, 1999, the reincorporation
was completed. The Certificate of Incorporation of the Delaware successor
corporation authorizes 100 million shares of common stock, $0.001 par value per
share, and 10 million shares of preferred stock, $0.001 par value per share. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.
In August 1999, the Company sold 4,219,592 shares of its common stock (of
which 219,592 shares were sold pursuant to the Underwriters' over-allotment
option) through its initial public offering (IPO). Net proceeds from the
offering were approximately $45.8 million after deducting the underwriting
discount and other offering expenses. At the time of the IPO, all of the
Company's outstanding preferred stock automatically converted into 12,331,434
shares of common stock.
The Company maintains its headquarters in Redwood City, California. During
1999, the Company incorporated subsidiaries in the United Kingdom, Germany, and
France. During the three months ended March 31, 2000, the Company incorporated
subsidiaries in Australia, the Netherlands and Sweden.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiary, Worldtalk, and the Company's wholly
owned subsidiary in the United Kingdom, in addition to the United Kingdom's
wholly owned subsidiaries in France, Germany, Australia, the Netherlands and
Sweden. In addition, the Company's consolidated financial statements include its
former wholly owned subsidiary in Japan until August 31, 1999, when it became an
equity method investee. All significant intercompany accounts and transactions
have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited consolidated financial information as of March 31, 2000 and
for the three months ended March 31, 2000 and 1999 has been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, includes all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. Results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for any future period.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents. As of December 31,
1999 and 1998, the Company had $47.1 million and $604,000 in money market
accounts, respectively. As of December 31, 1999 and 1998, the Company had
$11.9 million and $3.9 million in commercial paper. As of March 31, 2000, the
Company had $27.3 million in money market accounts and $16.9 million in
commercial paper.
F-9
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company 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. The Company generally has classified its
short-term investment securities as available-for-sale and accounts for them at
estimated fair value. As of December 31, 1998, short-term investments consisted
of commercial paper due within one year or less. Realized and unrealized gains
and losses were not significant for 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999, respectively. The cost of securities sold is
based on the specific identification method.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment, which is stated at
cost, is computed using the straight-line method over the estimated useful life
of the asset, which is 3 to 5 years for computers, furniture and equipment and
the shorter of the estimated useful life of the asset or the remaining lease
term for leasehold improvements. Equipment under capital lease is amortized over
the shorter of the estimated useful life of the asset or the lease term.
CAPITALIZED SOFTWARE
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility in the form of a working model has been
established. To date, capitalized costs for the Company's software development
have not been material.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents, short-term
investments and accounts receivable. The Company's cash equivalents generally
consist of money market funds with qualified financial institutions. To reduce
credit risk with accounts receivable, the Company performs ongoing evaluations
of its customers' financial conditions and maintains allowances for credit
losses, when necessary.
REVENUE RECOGNITION
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. Effective January 1, 1998, the
Company 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 such 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
F-10
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the arrangement are delivered. There was no material change to the Company'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 the Company's accounting for revenue as a result of
the adoption of SOP 98-4.
The Company's customer contracts are generally multiple-element
arrangements; that is, they involve the Company 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.
License revenue consists of initial license fees and the sale of
distribution rights. License revenue typically is recognized upon shipment of
the software. Revenue from the sale of distribution rights is recognized upon
the execution of a distribution agreement. Service fee revenue consists of
consulting fees and support and maintenance fees. Consulting fees related to
installation are recognized upon acceptance of the installation while all other
consulting fees are recognized based on percentage of completion. Support and
maintenance fees are paid for ongoing customer support as well as for the right
to receive future upgrades to the Company's products during the term of the
maintenance agreement. Revenue from support and maintenance is recognized
ratably over the period the support is provided. Transaction fees are based on
the volume of transactions by the Company's customers, and the related revenue
is recognized based on payment schedules and transaction reports from the
Company's customers. A number of the Company's 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.
Technology revenue relates to the sale of certain intellectual property. The
Company recognized technology revenue as the payments were collected.
The Company 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 the
Company's year ending December 31, 1999. As a result of the provisions of
F-11
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOP 98-9, the Company did not have a material change to its accounting for
revenue through December 31, 1999.
ADVERTISING
The Company expenses advertising costs as incurred. Total advertising
expense was $399,000, $565,000, and $489,000 for 1999, 1998, and 1997,
respectively.
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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements for
employees using the intrinsic-value method pursuant to Accounting Principles
Board Opinion ("APB") 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. The Company 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 (See Note 6.).
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 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 the Company 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
F-12
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options..................... 4,475 3,116 2,212 4,496 3,207
Shares of restricted stock subject to repurchase........ -- 197 535 -- 113
Shares issuable pursuant to warrants or rights to
purchase convertible preferred stock.................. -- 61 40 -- --
Shares issuable pursuant to warrants or rights to
purchase common stock................................. 540 14 7 540 14
Shares of convertible preferred stock on an
"as-if-converted" basis............................... -- 6,724 6,724 -- 120
----- ------ ----- ----- -----
5,015 10,112 9,518 5,036 3,454
===== ====== ===== ===== =====
</TABLE>
As of December 31, 1999, 1998, 1997 and March 31, 2000 and 1999, the
weighted average exercise prices of stock options were $9.39, $3.45, $5.36,
$18.03 and $3.21, respectively. As of December 31, 1999, 1998, 1997 and
March 31, 2000 and 1999, the weighted average exercise prices of warrants or
rights to purchase common stock outstanding were $27.04, $2.87, $2.50, $27.04
and $3.58, respectively.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists entirely of cumulative
translation adjustments resulting from the Company's application of its foreign
currency translation policy. The tax effects of translation adjustments were not
significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company'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.
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.
F-13
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency for each foreign subsidiary is its respective local
currency. Accordingly, all assets and liabilities related to these operations
are translated at the current exchange rates at the end of each period. The
resulting cumulative translation adjustments are recorded directly to the
accumulated other comprehensive income (loss) account in stockholders' equity.
Revenues and expenses are translated at average exchange rates in effect during
the period. Foreign currency transaction gains and losses are included in
results of operations. These amounts were not significant in 1999, 1998, 1997
and the three months March 31, 2000 and 1999. At March 31, 2000, December 31,
1999 and December 31, 1998, no foreign currency translation exposures were
hedged.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company 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 undiscounted 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. SFAS No.133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. To date,
Tumbleweed has not entered into any derivative financial instruments or hedging
activities.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101, as amended by SAB No. 101B, and any resulting change in accounting
principle that a registrant would have to report, is effective no later than the
company's fiscal quarter ending December 31, 2000. Tumbleweed does not expect
the application of SAB No. 101 to have a material effect on its financial
position or results of operations, nor do we expect to report a change in
accounting principle resulting from its application.
In March 2000, FASB issued Financial Interpretation No. 44 ("FIN 44"). FIN
44 clarifies (a) the definition of employee for purposes of applying Accounting
Principles Board ("APB") Opinion 25, Accounting for Stock Issued to Employees,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. To
F-14
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. Tumbleweed does not expect the application
of FIN 44 to have a material effect on its financial position or results of
operations.
(2) FINANCIAL STATEMENT COMPONENTS
A summary of property and equipment as of December 31, 1999 and 1998,
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $1,601 $ 771
Computers and equipment..................................... 5,457 3,679
Leasehold improvements...................................... 691 111
------ ------
7,749 4,561
Less accumulated depreciation............................... 4,264 3,133
------ ------
$3,485 $1,428
====== ======
</TABLE>
Property and equipment as of December 31, 1999 and 1998 includes equipment
under capital leases of approximately $85,000 and $1.5 million and related
accumulated amortization of approximately $12,000 and $1.5 million,
respectively.
A summary of accrued liabilities as of December 31, 1999 and 1998, follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued compensation........................................ $2,801 $1,542
Professional fees........................................... 1,632 1,100
Accrued sales and foreign taxes............................. 399 114
Other....................................................... 1,566 1,111
------ ------
$6,398 $3,867
====== ======
</TABLE>
Other income, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income........................................ $1,761 $622 $782
Interest expense....................................... (200) (108) (109)
Equity loss in TKK..................................... (22) -- --
Miscellaneous income................................... 587 10 --
------ ---- ----
$2,126 $524 $673
====== ==== ====
</TABLE>
F-15
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(3) RELATED PARTY TRANSACTIONS
HIKARI TSUSHIN
In February 1999, the Company issued 3,914,989 shares of Series C preferred
stock at a price of $3.58 to Hikari Tsushin ("Hikari"), a Japanese company,
resulting in gross proceeds to the Company of approximately $14.0 million. In
August 1999, in connection with the initial public offering, Hikari purchased
400,000 shares of common stock at $12.00 per share, resulting in gross proceeds
to the Company of approximately $4.8 million. As of December 31, 1999, Hikari
owns approximately 20% of the Company's outstanding common stock.
On March 31, 1999, Tumbleweed KK (TKK), a wholly-owned Japanese subsidiary
of the Company until August 31, 1999 when it became an equity investee, entered
into a one-year License and Distribution Agreement with Hikari. A summary of the
terms of this agreement is as follows:
- TKK granted Hikari a perpetual license to use the Company's product in
consideration of a one-time, non-refundable fee of Y30,000,000 (which
approximated $251,000 as of March 31, 1999).
- Hikari was granted distribution rights to sell the Company's products to
third parties in consideration of a one-time, non-refundable fee of
Y20,000,000 (which approximated $167,000 as of March 31, 1999).
- Beginning on April 1, 1999, Hikari began making quarterly, non-refundable
prepaid transaction fees of Y23,625,000 (which approximated $231,000 as of
December 31, 1999). The quarterly transaction fees are based on quarterly
minimum volume commitments, and will be recognized as revenue in the
quarter that the amounts are due and payable. The Company recognized
$331,000 in transaction fees from Hikari during 1999.
On July 1, 1999, the Company entered into a Technology License Agreement
with TKK. A summary of the terms of this agreement is as follows:
- The Company granted TKK a five year, non-exclusive license to use
Tumbleweed IME products in connection with the marketing and sub-licensing
of Tumbleweed IME products in Japan.
- Beginning on July 1, 1999, and as consideration for the license grant, TKK
is obligated to pay the Company a royalty based on license and transaction
fees revenue achieved by TKK. The royalty rate begins at 60% of TKK's net
license revenue in 1999, declining to 55% in 2000 and 50% in 2001 and
thereafter. The Company's management believes that these terms approximate
arms-length rates for such sublicensing activities.
- During the term of the agreement, the Company will provide maintenance and
support services to TKK. The Company receives an annual fee of $100,000
for the services.
On August 31, 1999, TKK sold 200 shares of its common stock, representing a
50% ownership interest in TKK, to Hikari for Y350,000,000 (which approximated
$3.2 million as of August 31, 1999). Following Hikari's investment, Hikari and
the Company have equal board representation in TKK. As a result of the equity
transaction and the change in board constituency, the Company no longer believes
that it has control of TKK. Consequently, beginning September 1, 1999, the
Company began accounting
F-16
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(3) RELATED PARTY TRANSACTIONS (CONTINUED)
for its investment in TKK on the equity method of accounting rather than the
consolidation method. Because TKK sold shares to Hikari, the Company's share of
the book value of TKK's net assets exceeded the carrying amount of the
investment by $1.49 million. As a result the Company has recorded $1.49 million
in additional paid-in capital in 1999.
Prior to selling a 50% ownership interest in TKK on August 31, 1999, the
Company recorded consolidated revenues from third-party customers of TKK of
$914,000, $0, and $0 in 1999, 1998 and 1997, respectively. Hikari has
historically been a significant customer of TKK, representing approximately 84%,
0%, and 0% of TKK's third party revenues recorded during the aforementioned
periods. Subsequent to the divestiture on August 31, 1999, the Company recorded
$300,000 in royalties received from TKK based on license revenue TKK earned from
Hikari and an additional $17,000 in service revenue resulting from support and
maintenance the Company provided directly to Hikari. The total amount due from
Hikari was $17,000 as of December 31, 1999. There were no amounts due by the
Company to Hikari as of December 31, 1999. During the three months ended
March 31, 2000, the Company recorded revenues from TKK of approximately
$367,000.
OTHER RELATED PARTY TRANSACTIONS
In July 1999, in exchange for marketing and publicity services, the Company
issued a warrant to a customer to acquire 100,000 shares of the Company's common
stock. The warrant is exercisable immediately in three tranches: 50,000 shares
at an exercise price of $20 per share; 25,000 shares at an exercise price of $30
per share; and 25,000 shares at an exercise price of $40 per share (see
Note 6). In June 1999, the Company entered into a license agreement and a
consulting agreement with this customer and recorded revenues of $374,000 in
1999 and deferred revenues of $650,000 as of December 31, 1999. The total amount
due from this customer was $650,000 and total amount due by the Company to this
customer was $72,000 as of December 31, 1999.
In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999 the Company issued warrants to purchase 447 shares of common stock at
prices ranging from $0.39 per share to $4.72 per share and 2 shares of Series B
redeemable preferred stock now exercisable for common stock in lieu of the
preferred stock at $0.58 per share. Of these warrants to purchase common stock,
433 related to an equity financing with affiliates of Hilal Capital Management
and others completed in July 1999. A total of 440 warrants to purchase common
stock remain available through December 31, 1999. These warrants expire at
various dates through July 7, 2006.
F-17
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(4) DEBT
Long-term debt at December 31, 1999 and 1998 and March 31, 2000 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- ---------
1999 1998 2000
-------- -------- ---------
<S> <C> <C> <C>
Equipment loan facilities................................... $1,335 $510 $1,211
Financing arrangement for directors' and officers' insurance
premium................................................... 302 -- 61
Capital leases.............................................. 85 128 76
Term facility............................................... 135 250 104
------ ---- ------
Total long-term debt........................................ 1,857 888 1,452
Less current portion........................................ 840 506 594
------ ---- ------
Total long-term portion..................................... $1,017 $382 $ 858
====== ==== ======
</TABLE>
REVOLVING CREDIT FACILITY
In July 1998, the Company entered into a debt agreement with a bank, which
includes a $1.5 million revolving credit facility. Borrowings under the
revolving credit facility bear interest at the prime rate plus 0.5%, with
interest payable monthly and an unamortized discount of $43,000. At March 31,
2000, there were no outstanding borrowings under the revolving credit facility.
Under the terms of the revolving credit facility, availability is based on
outstanding accounts receivable of which $1.4 million was available to the
Company at March 31, 2000. The revolving credit facility expires in July 2000.
EQUIPMENT LOAN FACILITIES
In July 1998, the Company entered into a debt agreement with a bank, which
includes a $750,000 equipment loan facility. In June 1999, the Company obtained
a second equipment loan facility in the amount of $1.0 million with the same
bank. The first equipment loan in the amount of $750,000 expires in
December 2001 and the second equipment loan in the amount of $1.0 million
expires in December 2002. Borrowings under both equipment loan facilities bear
interest at prime rate plus 0.75% and are due and payable in 36 equal monthly
installments and are secured by certain assets of the Company. As of March 31,
2000, total borrowings under both equipment loan facilities were $1.2 million in
the aggregate and $500,000 remained available under the facilities. The weighted
average interest rate for the equipment loans was 8.45%, 8.5%, 9.75%, and 8.45%
for 1999, 1998 and the three months ended March 31, 2000 and 1999, respectively.
(See Note 8 for future minimum payments.)
BRIDGE LOAN FACILITY
In November 1998, the Company obtained a $1.5 million bridge loan facility
from the same bank from which the Company obtained its revolving credit facility
and equipment loan facilities. Under the terms of the bridge loan facility,
availability is based on several factors, including the proposed amount of the
Company's Series C equity financing. In addition, the bridge loan facility
prohibited the
F-18
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(4) DEBT (CONTINUED)
Company from making additional borrowings against the revolving credit facility
until the maturity date or February 1999. Borrowings under the Bridge Loan
Facility were due the earlier of (i) the closing of the Company'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, the Company
issued a warrant to purchase preferred stock with a fair value of $55,000, which
was amortized over the term of the Bridge Loan Facility (see Note 6). Borrowings
under the Bridge Loan Facility bear interest at prime rate plus 1% and are
payable monthly. Upon the closing of the February 1999 Series C preferred stock
financing, the Company repaid all outstanding borrowings against the bridge loan
facility. The weighted average interest rate for the bridge loan facility was
8.8% for 1999, 1998, and for the three months ended March 31, 2000 and 1999.
LOAN AND SECURITY AGREEMENT
On December 30, 1998, the Company entered into a loan and security agreement
comprised of a $1.5 million line of credit, which expired on December 29, 1999
and a $250,000 term facility, which expires on December 29, 2000, bearing
interest at the prime rate (9.5% and 7.75% as of December 1999 and 1998) plus
0.25% and prime rate plus 0.50%, respectively. The agreement is collateralized
by the assets of the Company, contains certain financial covenants and restricts
the Company's ability to incur other indebtedness and pay dividends. As of
December 31, 1999 and 1998, there were no outstanding balances under the line of
credit agreement. Borrowings under the term facility were $135,000 and $0 as of
December 31, 1999 and 1998, respectively, and $104,000 as of March 31, 2000.
FINANCING ARRANGEMENT FOR DIRECTORS' AND OFFICERS' INSURANCE PREMIUM
In September 1999, the Company entered into a $525,000 financing arrangement
with another company to finance its directors' and officers' liability insurance
premium. Borrowings under the loan agreement are payable in nine equal monthly
installments of $60,000. As of March 31, 2000, total debt outstanding under this
financing arrangement was $61,000 and is classified as a current liability. The
weighted average interest rate for the financing arrangement for directors' and
officers' insurance was 7.5% for both 1999 and the three months ended March 31,
2000.
F-19
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES
The difference between the amount of income tax expense recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% for the years ended December 31, 1999, 1998 and 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax benefit........................ $(8,133) $(3,984) $(3,835)
Net operating losses not benefited.......................... 6,945 3,755 3,692
State income tax............................................ -- 1 37
Nondeductible stock compensation expense.................... 1,188 229 84
Foreign income tax expense.................................. 301 -- 115
Other....................................................... -- -- 90
------- ------- -------
Income tax expense.......................................... $ 301 $ 1 $ 183
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1999 and
1998, are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $16,516 $ 8,014
Tax credit carryforwards.................................. 2,260 1,730
Reserves and accruals not currently deductible............ 2,373 1,209
Deferred research and development costs................... 2,022 3,889
Other..................................................... -- (69)
------- -------
23,171 14,773
Less valuation allowance.................................... 23,171 14,773
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>
The Company believes that sufficient uncertainty exists with respect to
future realization of these deferred tax assets; therefore, it has established a
valuation allowance against all deferred tax assets.
The net change in the valuation allowance for the year ended December 31,
1999, was an increase of approximately $8.4 million.
As of December 31, 1999, the Company has federal and California net
operating loss carryforwards of approximately $44.1 million and $18.5 million,
respectively.
The net operating loss carryforwards expire in the years 2008 through 2019
for federal income tax purposes and the years 2000 through 2004 for California
income tax purposes.
As of December 31, 1999, the Company has federal and California research and
development tax credit carryforwards of approximately $1.3 million and
$1.0 million, respectively. The research and development tax credit
carryforwards for federal income tax purposes expire in the years 2012 through
F-20
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(5) INCOME TAXES (CONTINUED)
2019. The research and development tax credit carryforwards for California
income tax purposes can be carried forward indefinitely.
The Company's future ability to utilize the net operating loss and research
credit carryforwards may be subject to limitations in the event of ownership
changes as defined in the Internal Revenue Code.
(6) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In August 1999, the Company sold 4,219,592 shares of its common stock (of
which 219,592 shares were sold pursuant to the Underwriters' over-allotment
option) through its initial public offering (IPO). At the time of the IPO, all
of the Company's outstanding preferred stock automatically converted into
12,331,434 shares of common stock.
STOCK REPURCHASE AGREEMENTS
On August 16, 1996, stock repurchase agreements were signed with the
Company's Chief Technical Officer and Chief Executive Officer (the Officers).
Under these agreements, the Company could repurchase a ratable portion of the
shares of common stock held by the Officers if the Officers terminated their
employment with the Company 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 repurchase price would be $0.005 per share, and the total number of
shares available for repurchase by the Company was reduced ratably over the
three-year term of the agreements. The number of shares subject to repurchase by
the Company as of December 31, 1999 and 1998, was zero and approximately
197,000, respectively.
1993 STOCK OPTION PLAN
On September 30, 1993, the Company adopted the 1993 Stock Option Plan.
During 1999 and 1998, the board of directors approved an amendment to the plan
to increase the number of shares authorized for issuance by 650,000 shares and
1,000,000 shares, respectively, to a total of 3,768,500 authorized shares.
Under the plan, the exercise price for incentive options is at least 100% of
the fair market value on the date of grant. The exercise price for nonqualified
stock options is at least 85% of the fair market value on the date of grant.
Options generally expire in 10 years. Vesting periods are determined by the
board of directors and generally provide for 25% of the options to vest on the
first anniversary date of the grant with the remaining options vesting monthly
over the following 36 months.
1999 OMNIBUS STOCK INCENTIVE PLAN
The 1999 Omnibus Stock Incentive Plan (the Incentive Plan) was approved by
stockholders on August 3, 1999, for the benefit of the officers, directors, key
employees, advisors and consultants of the Company. An aggregate of 4,381,500
shares of common stock is reserved for issuance under the
F-21
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
Incentive Plan, which provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock, deferred stock, and performance shares.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan (the Purchase Plan) was approved by
stockholders on August 3, 1999, 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).
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................................. 3,273,404 1,617,748 $ 4.78
Authorized.................................................. 750,000 -- --
Granted..................................................... (1,033,116) 1,033,116 8.88
Exercised................................................... -- (38,559) 5.29
Canceled.................................................... 400,512 (400,512) 12.13
---------- --------- ------
Balances, December 31, 1997................................. 3,390,800 2,211,793 5.36
Authorized.................................................. 2,000,000 -- --
Granted..................................................... (1,616,130) 1,616,130 2.40
Exercised................................................... -- (204,150) 1.08
Canceled.................................................... 508,103 (508,103) 9.33
---------- --------- ------
Balances, December 31, 1998................................. 4,282,773 3,115,670 3.45
Authorized.................................................. 5,031,500 -- --
Granted..................................................... (2,887,186) 2,887,186 13.32
Exercised................................................... -- (877,893) 1.42
Canceled.................................................... 650,376 (650,376) 9.15
---------- --------- ------
Balances, December 31, 1999................................. 7,077,463 4,474,587 $ 9.39
========== ========= ======
Options vested as of December 31, 1999...................... 893,660
=========
</TABLE>
<TABLE>
<S> <C>
Weighted-average fair value of options granted during the
year:
1999...................................................... $6.44
=====
1998...................................................... $1.19
=====
1997...................................................... $3.93
=====
</TABLE>
F-22
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE NUMBER
PRICES OUTSTANDING (YEARS) EXERCISABLE
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.50......... 1,623,000 8.1 640,762
0.77 - 0.80.. 735,715 9.3 43,505
1.92.......... 455 5.9 455
7.69 - 11.06.. 283,430 9.3 43,787
11.54 -
17.13......... 988,002 8.7 151,631
17.73 -
26.00......... 565,170 9.8 3,900
30.77 -
41.00......... 223,470 9.7 8,775
49.04 -
57.25......... 45,345 9.8 845
81.44......... 10,000 10.0 --
-------------- --------- ---- -------
$0.50 -
81.44......... 4,474,587 8.8 893,660
============== ========= ==== =======
</TABLE>
STOCK-BASED COMPENSATION
The Company 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 exceeds the exercise price of the stock options at the
date of grant. The Company has recorded deferred compensation expense of
$7.3 million, $1.7 million and $469,000, 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, 1999, 1998 and 1997,
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 $3.5 million, $715,000 and $288,000 was recognized in the years
ended December 31, 1999, 1998 and 1997, respectively. Had compensation cost for
the Company's stock-based compensation plan been determined consistent with the
fair value approach set
F-23
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
forth in SFAS No. 123, the Company's net losses for the years ended
December 31, 1999, 1998, and 1997, would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported........................................ $(24,222) $(11,720) $(11,461)
APB No. 25 compensation expense recorded.................... 3,536 715 288
Additional stock-based compensation under SFAS No. 123...... (3,052) (1,171) (1,896)
-------- -------- --------
Net loss pro forma.......................................... $(23,738) $(12,176) $(13,069)
======== ======== ========
Basic and diluted net loss per share as reported............ $ (1.65) $ (1.79) $ (1.90)
Basic and diluted net loss per share pro forma.............. $ (1.62) $ (1.86) $ (2.17)
</TABLE>
For the year ended December 31, 1999, the fair value of options was
estimated at the date of grant using a Black-Scholes option pricing model for
the multiple-option approach, with the following weighted average assumptions:
no dividend yield; risk-free interest rate of 5.42%, volatility factor of the
expected market price of the Company's common stock of 78.0%, and a
weighted-average expected life of the option of 2.0 years for all options
granted prior to the IPO and 1.0 year for all options granted subsequent to the
IPO. The fair value for the 1999 stock purchases under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model, with the following
weighted-average assumptions: no dividend yield; risk-free interest rate of
5.08%; volatility factor of the expected market price of the Company's common
stock of 78.0%; and the expected life of the purchase period (August 1999
through May 2000). For the years ended December 31, 1998 and 1997, the fair
value of options was estimated on the date of grant using the minimum value
method with the following weighted-average assumptions: no dividend yield;
risk-free interest rates of 5.02% and 6.11%, respectively; and an expected life
of four years.
WARRANTS
In connection with the Company's sale of certain technology rights to a
third party in December 1997, the Company licensed the rights back from the
third party in exchange for a warrant to purchase 40,000 shares of the Company's
Series B convertible preferred stock at an exercise price of $2.50 per share.
The warrant expired upon the closing of the IPO offering of the Company's common
stock. Using the Black-Scholes option pricing model, the Company calculated the
value of the warrant based on the following assumptions: no dividends;
contractual term of 5 years; risk-free interest rate of 5.75%; expected
volatility of 55%. The resultant expense of $28,000 is included in research and
development expenses in 1997.
In connection with the November 1998 Bridge Loan Facility (see Note 4), the
Company 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 was 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
F-24
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
an initial public offering; or (iii) the closing of an acquisition of the
Company in which the Company's stock is sold for at least three times the
initial exercise price. In December 1999, an option for a cash-less exercise was
completed resulting in the issuance of 19,107 shares of the Company common stock
and eliminating the outstanding warrant balance.
In connection with the February 1999 Series C financing, the Company'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 was exercised at the time of the IPO in August 1999.
In connection with the May 1999 Series C financing, the Company issued a
warrant to acquire 16,778 shares of Series C convertible preferred stock at an
exercise price of $3.58. Using the Black-Scholes model, the warrant was 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 was included as an issuance
cost of the Series C financing. The warrant was exercised at the time of the IPO
in August 1999.
In July 1999, in exchange for marketing and publicity assistance from a
customer, the Company issued a warrant to acquire 100,000 shares of its common
stock. The warrant is exercisable immediately in three tranches: 50,000 shares
at an exercise price of $20 per share; 25,000 shares at an exercise price of $30
per share; and 25,000 shares at an exercise price of $40 per share. Using the
Black-Scholes option pricing model, the total fair value of the warrant was
estimated to be $127,000, based on the following assumptions: no dividends;
contractual term of three years; risk-free interest rate of 4.8%; and expected
volatility of 60%. The fair value of the warrant was charged to sales and
marketing expense in the third quarter of 1999. In June 1999, the Company
entered into a license agreement and a consulting agreement with the customer
for a total of $355,000.
In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999 the Company issued warrants to purchase 447,000 shares of common stock at
prices ranging from $5.77 per share to $69.85 per share and 2 shares of
Series B redeemable preferred stock now exercisable for common stock in lieu of
the preferred stock at $8.62 per share. Of these warrants to purchase common
stock, 433,000 related to an equity financing with affiliates of Hilal Capital
Management and others completed in July 1999. A total of 440,000 warrants to
purchase common stock remain available through December 31, 1999. These warrants
expire at various dates through July 7, 2006.
(7) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute a
percentage of their compensation, limited to $10,000 in 1999 and 1998. The
Company made no contributions in 1999 and 1998. Beginning April 1, 2000, the
Company will match each eligible employee's contribution dollar for dollar up to
4% of the employee's salary. The Company matching contributions and earnings
thereon vest immediately.
F-25
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(8) COMMITMENTS
LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements. The facilities leases expire at various dates through 2004.
The Company also leases certain equipment under capital lease agreements. These
leases expire at various dates through 2003. Future minimum lease payments as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- --------
<S> <C> <C>
2000....................................................... $1,980 $34
2001....................................................... 1,897 26
2002....................................................... 1,900 26
2003....................................................... 1,944 8
2004....................................................... 1,757 --
Thereafter................................................. 377 --
------ ---
Future minimum lease payments.............................. $9,855 94
======
Less amount representing interest.......................... 9
---
85
Less current portion....................................... 32
---
Long-term portion.......................................... $53
===
</TABLE>
Total rent expense under operating leases for the years ended December 31,
1999, 1998 and 1997, was $1.9 million, $942,000 and $799,000, respectively.
ROYALTY AGREEMENTS
During 1997 and 1998, the Company entered into royalty agreements with
various companies whereby the Company was granted a right to sublicense certain
software technology. Under the terms of the agreements, the Company pays
royalties based on the number of software licenses sold or a percentage of
revenue. Royalty expense under these agreements in 1999, 1998 and 1997 was
approximately $223,000, $128,000 and $39,000, respectively, and was recorded as
cost of revenue.
(9) SEGMENT INFORMATION
The Company 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 the Company for
making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company'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
F-26
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is identical to the information presented in the
accompanying consolidated statements of operations. Therefore, the Company
operates in a single operating segment.
Revenue information regarding operations in the different geographic regions
is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
United States..................................... $ 9,084 $ 6,919 $2,895 $4,348 $1,980
Europe:
Belgium......................................... 663 560 -- -- 108
Switzerland..................................... 663 -- -- 685 --
Other........................................... 2,947 2,429 1,403 791 717
Asia:
Japan........................................... 1,479 -- -- 384 439
Hong Kong....................................... -- -- -- 322 --
Taiwan.......................................... 58 667 178 -- --
Australia....................................... 390 -- -- 80 --
Other........................................... -- -- -- -- 25
------- ------- ------ ------ ------
Total revenue from continuing product lines....... $15,284 $10,575 $4,476 $6,610 $3,269
======= ======= ====== ====== ======
</TABLE>
Revenue and net loss information for the Company's product lines is as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
IME...................................... $ 5,777 $ 2,015 $ 245 $ 3,974 $ 693
MMS...................................... 9,507 8,560 3,747 2,636 2,576
Other.................................... -- -- 484 -- --
-------- -------- -------- -------- --------
Revenue from continuing product
lines................................ 15,284 10,575 4,476 6,610 3,269
Discontinued product line.................. 1,472 4,888 7,580 -- 638
-------- -------- -------- -------- --------
Total revenue.......................... $ 16,756 $ 15,463 $ 12,056 $ 6,610 $ 3,907
======== ======== ======== ======== ========
Net loss:
IME and other............................ $(16,416) $ (6,590) $ (4,691) $(10,955) $ (2,056)
MMS and discontinued products............ (7,806) (5,130) (6,770) (7,667) (875)
-------- -------- -------- -------- --------
Total net loss......................... $(24,222) $(11,720) $(11,461) $(18,622) $ (2,931)
======== ======== ======== ======== ========
</TABLE>
F-27
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)
(9) SEGMENT INFORMATION (CONTINUED)
Revenue aggregating 7%, 6%, 0%, 1% and 11% of total revenue for the years
ended December 31, 1999, 1998 and 1997 and for the three months ended March 31,
2000, respectively, was generated from two customers who, or whose 50%
stockholders, are stockholders of Tumbleweed, and whose ownership percentages as
of March 31, 2000 were 17% and 4%, respectively.
Substantially all of the Company's long-lived assets are located in the
United States.
(10) SUBSEQUENT EVENTS (UNAUDITED)
On May 15, 2000, the Company repurchased from Hikari 5% of the outstanding
stock of Tumbleweed KK, for a price of Y70,000,000.
On June 28, 2000, the Company entered into a merger agreement providing for
the acquisition of Interface Systems, Inc. Pursuant to the merger agreement,
each outstanding share of Interface common stock will be converted into the
right to receive 0.264 of a share of the Company's common stock upon the closing
of the merger, and the Company will assume all outstanding options and warrants
of Interface. The Company will account for the transaction under the purchase
method of accounting. In connection with the transaction, the Company agreed to
purchase an aggregate of $3.0 million of convertible subordinated promissory
notes of Interface, pursuant to a convertible subordinated note purchase
agreement dated June 28, 2000. At the Company's option, or upon the occurrence
of certain events, the notes are convertible into Interface common stock at an
initial conversion price of $9.50 per share, subject to adjustment.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Interface Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Interface
Systems, Inc. (a Michigan corporation) and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of Interface Systems, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
October 29, 1999 (except with
respect to the matters discussed in
Notes 12 and 14, as to which date
is July 7, 2000)
F-29
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1999 1998 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,575,139 $ 301,206 $ 931,201
Accounts receivable, less allowance for doubtful
accounts of $101,555, $129,381 and $88,789 at
September 30, 1999, 1998 and March 31, 2000,
respectively...................................... 3,689,511 4,162,320 2,655,961
Refundable income taxes............................. 6,723 1,507,634 --
Inventories......................................... 915,977 2,218,887 527,499
Current portion of note receivable.................. -- -- 6,751
Prepaid expenses and other.......................... 303,676 243,957 311,172
----------- ----------- -----------
Total current assets.............................. 6,491,026 8,434,004 4,432,584
Property and equipment, net........................... 3,188,071 3,443,349 2,407,446
Goodwill, net......................................... 789,140 974,888 696,266
Software development costs, net....................... -- 90,549 --
Note receivable....................................... -- -- 262,972
Other assets.......................................... 55,194 234,280 32,713
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... $ -- $ 1,350,000 $ --
Accounts payable.................................... 912,018 1,392,146 877,718
Accrued expenses.................................... 1,140,155 1,666,940 1,132,865
Deferred revenue.................................... 431,252 684,406 472,027
Current portion of long-term debt................... 50,200 50,200 50,200
----------- ----------- -----------
Total current liabilities......................... 2,533,625 5,143,692 2,532,810
Long-term debt, less current portion.................. 70,633 120,633 45,633
Commitments
Stockholders' equity (see Note 6):
Common stock, no par value, 12,500,000, 12,500,000
and 25,000,000 shares authorized at September 30,
1999, 1998 and March 31, 2000 (unaudited),
respectively; 4,539,529, 4,452,349 and
4,686,432 shares issued and outstanding at
September 30, 1999, 1998 and March 31, 2000
(unaudited), respectively......................... 11,324,418 11,059,810 11,799,884
Accumulated other comprehensive loss................ (53,117) (59,824) (56,106)
Accumulated deficit................................. (3,352,128) (3,087,241) (6,490,240)
----------- ----------- -----------
Total stockholders' equity........................ 7,919,173 7,912,745 5,253,538
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
---------------------------------------- ---------------------------
1999 1998 1997 2000 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................... $20,169,116 $21,610,542 $ 19,084,624 $ 6,394,575 $10,073,228
Cost of revenues............... 7,899,004 9,471,755 14,641,081 1,959,428 4,167,813
----------- ----------- ------------ ----------- -----------
Gross profit............... 12,270,112 12,138,787 4,443,543 4,435,147 5,905,415
Expenses:
Product development.......... 3,854,576 3,735,002 3,718,807 1,436,844 804,320
Selling, general and
administrative............. 8,682,677 8,004,242 9,467,720 6,296,076 5,466,485
----------- ----------- ------------ ----------- -----------
Operating income (loss)
from continuing
operations............... (267,141) 399,543 (8,742,984) (3,297,773) (365,390)
Interest expense............... (23,164) (85,496) (79,512) (14,791) (17,112)
Other income................... 66,009 40,672 116,568 181,175 70,855
----------- ----------- ------------ ----------- -----------
Income (loss) from
continuing operations
before income taxes...... (224,296) 354,719 (8,705,928) (3,131,389) (311,647)
Income tax (benefit)
provision.................... 40,591 (412,243) (2,100,810) 6,723 --
----------- ----------- ------------ ----------- -----------
Income (loss) from continuing
operations................... (264,887) 766,962 (6,605,118) (3,138,112) (311,647)
Loss from discontinued
operations................... -- (748,243) (4,273,964) -- --
Loss on disposal of
discontinued operations...... -- (2,140,262) -- -- --
----------- ----------- ------------ ----------- -----------
Net loss................... $ (264,887) $(2,121,543) $(10,879,082) $(3,138,112) $ (311,647)
=========== =========== ============ =========== ===========
Basic and diluted income (loss)
per share:
Income (loss) from continuing
operations................. $ (0.06) $ 0.17 $ (1.50) $ (0.68) $ (0.07)
Loss from discontinued
operations................. -- (0.65) (0.97) -- --
----------- ----------- ------------ ----------- -----------
Net loss per share............. $ (0.06) $ (0.48) $ (2.47) $ (0.68) $ (0.07)
=========== =========== ============ =========== ===========
Weighted average shares
outstanding.................. 4,480,842 4,434,083 4,411,328 4,607,993 4,463,867
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER RETAINED
----------------------- COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES AMOUNT LOSS (DEFICIT) TOTAL LOSS
--------- ----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996....................... 4,535,879 $11,575,651 $(236,051) $ 9,913,384 $ 21,252,984
Net loss................... -- -- -- (10,879,082) (10,879,082) $(10,879,082)
Sale of stock.............. 16,566 51,768 -- -- 51,768
Retirement of stock........ (127,495) (637,477) -- -- (637,477)
Foreign currency
translation.............. -- -- (45,390) -- (45,390) (45,390)
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $(10,924,472)
============
Balance, September 30,
1997....................... 4,424,950 10,989,942 (281,441) (965,698) 9,742,803
Net loss................... -- -- -- (2,121,543) (2,121,543) $ (2,121,543)
Sale of stock.............. 27,399 69,868 -- -- 69,868
Foreign currency
translation.............. -- -- 221,617 -- 221,617 221,617
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $ (1,899,926)
============
Balance, September 30,
1998....................... 4,452,349 11,059,810 (59,824) (3,087,241) 7,912,745
Net loss................... -- -- -- (264,887) (264,887) $ (264,887)
Sale of stock.............. 87,180 264,608 -- -- 264,608
Foreign currency
translation.............. -- -- 6,707 -- 6,707 6,707
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $ (258,180)
============
Balance, September 30,
1999....................... 4,539,529 11,324,418 (53,117) (3,352,128) 7,919,173
Net loss (unaudited)....... -- -- -- (3,138,112) (3,138,112) $ (3,138,112)
Sale of stock
(unaudited).............. 146,903 475,466 -- -- 475,466
Foreign currency
translation
(unaudited).............. -- -- (2,989) -- (2,989) (2,989)
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss
(unaudited).............. $ (3,141,101)
============
Balance, March 31, 2000
(unaudited)................ 4,686,432 $11,799,884 $ (56,106) $ (6,490,240) $ 5,253,538
========= =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- -------------------------
1999 1998 1997 2000 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (264,887) $(2,121,543) $(10,879,082) $(3,138,112) $ (311,647)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 1,019,758 1,866,555 3,170,787 403,464 558,040
Inventory write-off and obsolescence
provision..................................... 312,500 445,580 2,811,573 -- --
Loss on disposal of fixed assets................ 38,269 9,785 52,639 -- --
Deferred income taxes........................... -- (140,000) (895,000) -- --
Gain on sale of IGK............................. -- -- -- (36,736) --
Loss on disposal of discontinued operations..... -- 2,140,262 -- -- --
Gain on sale of securities...................... -- -- (74,777) -- --
Write-off of software development costs......... -- -- 1,616,358 -- --
Change in operating assets and liabilities:
Accounts receivable........................... 472,809 (881,774) (701,182) 633,608 809,432
Refundable income taxes....................... 1,500,911 (325,452) 195,911 6,723 1,459,874
Inventories................................... 990,410 1,177,280 246,880 (37,447) 577,523
Prepaid expenses and other.................... (59,719) 574,068 (328,265) (27,427) (54,354)
Other assets.................................. 178,136 (59,517) (119,750) 22,481 1,774
Accounts payable.............................. (480,128) (346,450) 207,047 199,752 (121,881)
Accrued expenses.............................. (526,785) 247,072 (10,020) (44,479) (530,461)
Deferred revenue.............................. (253,154) 45,697 358,006 40,775 (75,686)
Discontinued operations--non-cash charges
and working capital changes............... -- 1,056,317 2,124,241 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities.................................... 2,928,120 3,687,880 (2,224,634) (1,977,398) 2,312,614
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of IGK....................... -- -- -- 1,078,556 --
Proceeds received on note issued on sale of
IGK........................................... -- -- -- 80,277 --
Additions to property and equipment............. (525,502) (289,134) (487,047) (272,850) (233,886)
Proceeds from disposal of discontinued
operations.................................... -- 3,121,500 -- -- --
Investing activities of discontinued
operations.................................... -- -- (300,790) -- --
Additions to software development costs......... -- -- (953,675) -- --
Change in notes receivable...................... -- -- 86,581 -- --
Proceeds from sale of securities................ -- -- 177,612 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) investing
activities.................................... (525,502) 2,832,366 (1,477,319) 885,983 (233,886)
----------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under notes
payable....................................... (1,350,000) (7,290,611) 2,949,065 -- (1,350,000)
Reduction of long-term debt..................... (50,000) (50,000) (66,361) (25,000) (25,000)
Proceeds from sale of common stock.............. 264,608 69,868 -- 475,466 44,056
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities.................................... (1,135,392) (7,270,743) 2,882,704 450,466 (1,330,944)
----------- ----------- ------------ ----------- -----------
Effect of exchange rate changes on cash........... 6,707 221,617 (45,390) (2,989) 49,632
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 1,273,933 (528,880) (864,639) (643,938) 797,416
Cash and cash equivalents, beginning of period.... 301,206 830,086 1,694,725 1,575,139 301,206
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of period.......... $ 1,575,139 $ 301,206 $ 830,086 $ 931,201 $ 1,098,622
=========== =========== ============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 23,164 $ 85,496 $ 79,512 $ 14,791 $ 17,112
=========== =========== ============ =========== ===========
Cash refunded for income taxes.................. $(1,558,668) $ -- $ (1,323,683) $ -- $(1,558,221)
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Interface Systems, Inc. (the "Company") primarily
develops and sells software-based tools and solutions to integrate legacy
systems with Internet technology, distribute mainframe documents, and provide
host connectivity. The Company specializes in Internet bill presentment and
payment, as well as electronic delivery of statements and other legacy content
to the Internet, fax, e-mail, and other destinations. The Company operates
primarily in the United States and Europe.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of Interface Systems, Inc. and its wholly-owned
subsidiaries, IGK Industries, Inc. ("IGK") and Interface Systems
International, Ltd. ("ISIL"). All significant intercompany transactions and
balances have been eliminated in consolidation.
As discussed in Note 2, in May 1998, the Company sold substantially all
assets and certain liabilities of the ISIL distribution business. Accordingly,
the assets, liabilities and operating results of ISIL have been presented as a
discontinued operation in the accompanying consolidated financial statements.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
foreign operations are translated at exchange rates in effect on the balance
sheet date, and revenue and expenses are translated using a weighted average
exchange rate during the period. Cumulative adjustments resulting from
translation of financial statements are reflected as a separate component of
stockholders' equity.
REVENUE RECOGNITION. Revenues from product sales are recognized upon
shipment to the customer. Lease and service revenues are recognized ratably over
the contractual period or as the services are performed. Revenues from licenses
of software products are recognized when the product is shipped and the Company
has no further obligation to the customer. Deferred revenue represents advance
billings on service contracts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
expensed in the period incurred. These costs, representing development salaries,
fringe benefits, other direct expenses and a portion of the Company's overhead,
are included in the accompanying consolidated financial statements as product
development costs.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes investments
in highly liquid financial instruments with maturities of ninety days or less.
F-34
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES. Inventories are valued at the lower of cost (determined on a
first-in, first-out basis) or market, and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
--------------------- -----------
1999 1998 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.............................. $ 64,386 $ 897,050 $ --
Purchased parts............................. 557,703 650,346 527,499
Work-in-process............................. 293,888 293,590 --
Service and demo............................ -- 377,901 --
-------- ---------- --------
$915,977 $2,218,887 $527,499
======== ========== ========
</TABLE>
PROPERTY AND EQUIPMENT. Additions to property and equipment are stated at
cost. Depreciation is provided using the straight-line method over the following
estimated useful lives of the assets: building and improvements--33 years; and
machinery and equipment--3 to 10 years. The components of property and equipment
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------- -----------
1999 1998 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $ 231,383 $ 231,383 $ 231,383
Buildings and improvements............... 2,406,039 2,397,603 1,692,854
Machinery and equipment.................. 4,721,948 4,865,444 3,265,245
---------- ---------- ----------
7,359,370 7,494,430 5,189,482
Less--accumulated depreciation........... 4,171,299 4,051,081 2,782,036
---------- ---------- ----------
$3,188,071 $3,443,349 $2,407,446
========== ========== ==========
</TABLE>
GOODWILL. Goodwill represents the cost in excess of fair value of the net
assets of businesses acquired and is being amortized using the straight-line
method over 15 years. Accumulated amortization expense at September 30, 1999,
1998 and March 31, 2000, was $1,899,272, $1,713,524 and $1,992,146,
respectively. Goodwill amortization expense totaled $185,748, $185,748 and
$260,532 for the years ended September 30, 1999, 1998 and 1997, respectively,
and is included in selling, general and administrative expense in the
accompanying consolidated statements of operations. Goodwill amortization
expense totaled $92,874 for the six months ended March 31, 2000 and 1999.
IMPAIRMENT OF LONG-LIVED ASSETS. In fiscal 1997, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which requires an evaluation of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. During the third quarter of
fiscal 1997, management's evaluation indicated that the goodwill related to the
Company's investment in its operations in the United Kingdom was impaired and,
consequently, the $1,456,320 carrying value of the related goodwill was written
off as a component of the loss from discontinued operations during fiscal 1997.
F-35
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS. The costs of developing new software products
are capitalized after technological feasibility is established which the Company
defines as having a working model that has been confirmed by testing. The
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic product lives and changes in software and hardware
technology. With the increase in frequency of product upgrades and a reduction
in the time between establishing technological feasibility and general release
to the public, the Company expects that it will not capitalize any software
development costs in the future.
Amortization of capitalized software development costs is provided on a
product-by-product basis using the straight-line method over the remaining
estimated economic lives of the respective products or three years, whichever is
less. Accumulated amortization was $3,003,596, $2,913,047 and $3,003,596 at
September 30, 1999, 1998 and March 31, 2000, respectively. Amortization expense
was $90,549, $784,103 and $2,033,210 for the years ended September 30, 1999,
1998 and 1997, respectively, and is included in cost of revenues in the
accompanying consolidated statements of operations. Amortization expense was $0
and $46,466 for the six months ended March 31, 2000 and 1999, respectively.
On an ongoing basis, management reviews the valuation and amortization of
capitalized software development costs. As part of its review, management
considers the value of future cash flows attributable to the capitalized
development costs in evaluating potential impairment of the asset. Based on such
review, the Company wrote off $1,616,358 of capitalized software development
costs as a component of cost of revenues during fiscal 1997. No such costs were
written off in fiscal 2000, 1999 or 1998.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the stock at grant date over the amount an employee must
pay to acquire the stock. As supplemental information, the Company has provided
pro forma disclosures of stock options granted during fiscal 2000, 1999 and 1998
in accordance with the requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" (see Note 8).
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash, cash equivalents and accounts receivable. At times, such cash and
equivalents in banks are in excess of the respective financial institution's
FDIC insurance limit. With respect to accounts receivable, the Company attempts
to minimize credit risk by reviewing all customers' credit history before
extending credit and by monitoring customers' credit exposure on a continuing
basis. The Company establishes an allowance for possible losses on accounts
receivable based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The amounts reported for cash and
cash equivalents, accounts receivable, accounts payable, notes payable and
accrued expenses approximate fair value due to the short maturity of these
items.
F-36
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE. Income (loss) per share amounts have been
calculated using the weighted average number of shares of common stock
outstanding during the period. Outstanding stock options do not have a dilutive
effect on income (loss) per share for any periods presented due to the net loss.
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share." No
amounts from prior periods needed to be restated to conform to the requirements
of SFAS No. 128.
In 1999, 1998 and 1997, the dilutive effect of certain stock options
outstanding for the purchase of 818,202, 696,867 and 531,767 shares,
respectively, were not included in the calculation of diluted earnings per share
due to the net loss for those periods as doing so would have been anti-dilutive.
For the six months ended March 31, 2000, the excluded options were 811,118
shares.
COMPREHENSIVE INCOME. Effective October 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which established standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity. The difference between net income (loss), as
reported in the accompanying consolidated statements of operations, and
comprehensive income (loss) is the foreign currency translation adjustment for
the respective periods. The accumulated other comprehensive loss consists solely
of the cumulative translation adjustment as presented in the accompanying
consolidated balance sheets.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. The Financial Accounting
Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company is required to adopt the provisions of
SFAS 133 in fiscal 2000. The Company expects the adoption will not affect
results of operations or financial statements.
RECLASSIFICATIONS. For comparative purposes, certain amounts reported in
prior years' financial statements have been reclassified to conform to current
year presentations.
2. SALE OF INTERFACE SYSTEMS INTERNATIONAL LTD. DISTRIBUTION BUSINESS;
DISCONTINUED OPERATIONS
In May 1998, the Company sold substantially all assets and certain
liabilities of its ISIL distribution business to Fayrewood plc for approximately
$3.1 million cash. The liabilities not assumed by Fayrewood include the lease on
the building in the United Kingdom (see Note 9) and certain accounts payable of
approximately $385,000. The sale resulted in a loss of $2,140,262. The sale did
not include the assumption by Fayrewood of all of ISIL's liabilities, and
therefore, no assurances can be given that claims will not be made against the
Company in the future arising out of ISIL's former operations. In management's
opinion, such claims will not have a material adverse effect on the Company's
financial condition and results of operations.
The operating results of ISIL have been segregated from continuing
operations and reported as a separate line item on the Company's consolidated
statement of operations. The Company has restated
F-37
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
2. SALE OF INTERFACE SYSTEMS INTERNATIONAL LTD. DISTRIBUTION BUSINESS;
DISCONTINUED OPERATIONS (CONTINUED)
its prior financial statements to present the operating results of ISIL as a
discontinued operation. Net revenues of the ISIL distribution business totaled
$38.8 million and $62.8 million, for fiscal 1998 and 1997, respectively.
3. LINE OF CREDIT
The Company had a $3.5 million bank credit facility that expired on
February 28, 2000. As of September 30, 1999, there were no borrowings
outstanding under this facility. Advances bore interest at the bank's prime rate
(8.25% at September 30, 1999) plus 1%, were payable on demand and were
collateralized by substantially all of the Company's assets. The amount
available for borrowing at any time was based on borrowing base formulas
relating to levels of accounts receivable, inventories and other bank covenants.
Under such formulas, the entire facility was available to the Company as of
September 30, 1999.
In May 2000, the Company completed the renewal of its bank credit facility
expanding the borrowing capability from $3.5 to $5.0 million. The new credit
facility expires on May 31, 2001. Advances bear interest at the bank's prime
rate (9.0% at March 31, 2000) plus 1%, are payable on demand and are
collateralized by substantially all of the Company's assets. The amount
available for borrowing at any time is based on borrowing base formulas relating
to levels of accounts receivable and other bank covenants. Under such formulas,
$4.2 million was available to the Company at March 31, 2000.
Under the terms of the credit agreement, the Company is required to maintain
certain minimum working capital, net worth and profitability levels and other
specific financial ratios. In addition, the credit agreement prohibits the
payment of cash dividends and contains certain restrictions on the Company's
ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. At March 31, 2000, the Company
was in compliance with the new bank covenants.
4. LONG-TERM DEBT
Long-term debt consists of an installment loan payable to a bank in monthly
installments of $4,167 plus interest at the bank's prime rate (8.25% at
September 30, 1999) plus 1%, due February 2002, and is collateralized by
substantially all of the Company's assets. Long-term debt consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Installment loan payable..................... $120,833 $170,833 $95,833
Less--current maturities..................... 50,200 50,200 50,200
-------- -------- -------
$ 70,633 $120,633 $45,633
======== ======== =======
</TABLE>
F-38
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
5. RETIREMENT PLAN
The Company has a 401(k) plan covering substantially all United States
employees. The Company matches 100% of the amount contributed by participants,
up to 4% of participant compensation, and may make additional contributions as
approved by the Board of Directors. The Company recognized approximately
$242,676, $211,247, and $274,000 of expense related to this plan for the years
ended September 30, 1999, 1998 and 1997, respectively. The Company recognized
approximately $122,000 and $99,000 of expense for the six months ended
March 31, 2000 and 1999, respectively.
6. STOCKHOLDERS' EQUITY
In March 1998, the Company changed its state of incorporation from Delaware
to Michigan. In connection therewith, the number of shares of Common Stock
authorized was changed from 20,000,000 to 12,500,000 and the par value of the
Common Stock was changed from $0.10 to no par value. In February 2000, the
Company increased the number of shares of authorized Common Stock from
12,500,000 to 25,000,000.
In January 1997, the Company acquired 127,495 shares of its Common Stock
valued at $637,477, upon the default in payment of all principal and interest
due and owing as of such date by a former officer of the Company under the terms
of a note payable owed by such officer to the Company. The value of the shares
is equal to all indebtedness which was owed to the Company at the time of
default. In August 1997, the Company issued 16,566 shares of common stock to
employees in exchange for accrued vacation.
7. EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the
Company's Board of Directors in February 1998. A total of 225,000 shares of
common stock have been reserved for issuance under the ESPP. The ESPP provides
that the Company will sell shares to employees who elect to participate in the
ESPP at a price equal to 85% of the lesser of the fair market value of the
common stock on the first or last trading day of the six month period beginning
either June 1 or December 1. Under the ESPP, the Company issued 40,688, 36,549
and 27,399 shares of common stock in fiscal 2000, 1999 and 1998, respectively.
8. STOCK OPTIONS
The Company currently grants stock options under two plans, the 1992 Stock
Option Plan (the "1992 Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors Plan"). The Company had previously granted options
under the 1982 Stock Option Plan ("the 1982 Plan"), which expired in 1992. At
September 30, 1999, options to purchase 12,700 shares of common stock were
outstanding and exercisable under the 1982 Plan. In fiscal 1998, the Company
also granted non-qualified stock options to employees and to an employee
director upon his retirement to purchase 40,100 shares of common stock. At
September 30, 1999, options to purchase 33,900 shares of common stock were
outstanding and 24,500 were exercisable under these non-qualified grants.
The 1992 Plan provides for the grant of both incentive stock options and
non-qualified options to officers and key employees. Options under the 1992 Plan
are granted at not less than market price on the date of grant, are exercisable
at the rate of 33% per year after one year from the date of grant and
F-39
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
8. STOCK OPTIONS (CONTINUED)
have a term of ten years. The 1992 Plan has 800,000 shares of common stock
authorized for grant which was increased to 1,100,000 in February 2000. At
September 30, 1999, 105,567 shares were available for grant, 644,102 were
outstanding and 261,969 were exercisable under the 1992 Plan.
Effective June 10, 1997, the Company offered current option holders except
for executive officers the opportunity to exchange outstanding options for an
equal number of options of the Company's common stock, at a price of $4 per
share (market price $3). Option holders representing 106,067 shares of common
stock accepted this offer and the Company canceled the previous options and
granted new options under the 1992 Plan. The options vest over three years
effective from the new date of grant.
The Directors Plan provides for the grant to non-employee directors of
options to purchase up to 175,000 shares of common stock. The Plan provides for
discretionary grants with vesting determined at the time of grant. Options are
granted at market price on the date of grant and have a term of ten years. At
September 30, 1999, 47,500 shares were available for grant, 127,500 were
outstanding and exercisable under the Directors Plan.
The following table summarizes stock option activity through March 31, 2000:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, September 30, 1996........................ 408,666 $ 6.86
Granted.......................................... 419,268 3.94
Canceled......................................... (296,167) 7.10
--------
Balance, September 30, 1997........................ 531,767 4.59
Granted.......................................... 295,900 2.67
Canceled......................................... (130,800) 3.93
--------
Balance, September 30, 1998........................ 696,867 3.90
Granted.......................................... 212,100 2.94
Exercised........................................ (50,631) 3.61
Canceled......................................... (40,134) 3.93
--------
Balance, September 30, 1999........................ 818,202 3.67
Granted (unaudited).............................. 118,300 16.45
Exercised (unaudited)............................ (108,215) 3.77
Canceled (unaudited)............................. (17,169) 3.31
--------
Balance, March 31, 2000 (unaudited)................ 811,118 5.49
========
</TABLE>
F-40
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
8. STOCK OPTIONS (CONTINUED)
The following table summarizes information about options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
RANGE WEIGHTED AVERAGE WEIGHTED WEIGHTED
OF EXERCISE NUMBER CONTRACTUAL REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------- ----------- --------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.25..................... 121,600 8.89 $ 2.25 40,766 $ 2.25
2.75-4.13................ 612,702 8.18 3.50 304,003 3.75
4.75-5.38................ 62,000 4.89 5.16 62,000 5.16
7.19..................... 1,500 5.11 7.19 1,500 7.19
11.00-16.25............... 20,400 6.32 12.31 20,400 12.31
------- -------
Total.................... 818,202 7.98 $ 3.67 428,669 $ 4.23
======= =======
</TABLE>
The following table summarizes information about options outstanding at
March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
RANGE WEIGHTED AVERAGE WEIGHTED WEIGHTED
OF EXERCISE NUMBER CONTRACTUAL REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------- ----------- --------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.25..................... 114,566 8.39 $ 2.25 33,535 $ 2.25
2.75-4.13................ 534,402 7.65 3.55 370,711 3.73
4.31-5.38................ 25,500 3.56 5.28 25,500 5.28
7.19-7.50................ 250 4.61 7.19 250 7.19
11.00-16.25............... 124,400 9.01 13.74 20,400 12.31
37.50..................... 12,000 9.88 37.50 12,000 37.50
------- -------
Total.................... 811,118 7.87 $ 5.49 462,396 $ 4.97
======= =======
</TABLE>
STOCK-BASED COMPENSATION
Using the intrinsic value method of accounting for the value of stock
options granted during fiscal 2000, 1999, 1998 and 1997, no compensation cost
was recorded in the accompanying consolidated statements of operations. Had
compensation cost been determined based on the fair value at the date of grant
for awards in fiscal 2000, 1999 and 1998 consistent with the provisions of SFAS
No. 123,
F-41
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
8. STOCK OPTIONS (CONTINUED)
income (loss) from continuing operations and income (loss) per share from
continuing operations would have been reduced (increased) to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------- -----------
1999 1998 1997 2000
--------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations:
As reported.................. $(264,887) $766,962 $(6,605,118) $(3,138,112)
Pro forma.................... $(668,630) $412,716 $(6,749,711) $(3,565,601)
Income (loss) per share from
continuing operations:
As reported.................. $ (0.06) $ 0.17 $ (1.50) $ (0.68)
Pro forma.................... $ (0.15) $ 0.09 $ (1.53) $ (0.77)
</TABLE>
The weighted average estimated fair value of stock options granted during
fiscal 2000, 1999, 1998 and 1997 was $11.39, $1.61, $1.42 and $2.32,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model. Because the SFAS No. 123
method of accounting has not been applied to options granted prior to
October 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The following weighted
average assumptions were used in valuing the option grants:
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------------------------ ----------
1999 1998 1997 2000
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Expected life (years)........................... 3.0 3.0 3.0 3.0
Risk free interest rate......................... 5.0% 5.5% 6.3% 6.1%
Expected stock price volatility................. 79.0% 78.8% 67.8% 107.7%
Expected dividend yield......................... 0.0% 0.0% 0.0% 0.0%
</TABLE>
9. COMMITMENTS
The Company has various non-cancelable operating leases which require future
minimum rental payments in excess of one year as follows: 2000--$133,000;
2001--$65,000; 2002--$24,000; and 2003--$2,500. Rent expense under all leases
for the years ended September 30, 1999, 1998 and 1997 was approximately
$241,000, $296,000 and $338,000, respectively. Rent expense for the six months
ended March 31, 2000 and 1999, was approximately $85,000 and $69,000,
respectively.
In connection with the sale of the ISIL distribution business, the Company
assumed the operating lease obligation for ISIL's former office building. The
building lease has future minimum payments of approximately $177,000 per year
and expires in April 2020. The building has been sublet through April 2003 on
the same terms and conditions as the master lease. The Company believes that it
will continue to be able to sublease the office building throughout the master
lease period and that its
F-42
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
9. COMMITMENTS (CONTINUED)
ultimate exposure will not have a material impact on the consolidated financial
statements. Therefore, no liability has been recorded in the accompanying
consolidated balance sheets for this lease.
10. INCOME TAXES
A summary of income (loss) from continuing operations before income taxes
and components of the provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
----------------------------------- -----------
1999 1998 1997 2000
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before income taxes:
Domestic.................................... $(122,179) $ 581,628 $(7,572,504) $(2,965,105)
Foreign..................................... (102,117) (226,909) (1,133,424) (166,284)
--------- --------- ----------- -----------
$(224,296) $ 354,719 $(8,705,928) $(3,131,389)
========= ========= =========== ===========
Provision (benefit) for income taxes:
Current--federal............................ $ 40,591 $(272,243) $(1,205,810) $ 6,723
Deferred--federal........................... -- (140,000) (895,000) --
--------- --------- ----------- -----------
$ 40,591 $(412,243) $(2,100,810) $ 6,723
========= ========= =========== ===========
</TABLE>
A reconciliation of the consolidated income tax provision (benefit) at the
Federal statutory rate and the consolidated income tax provision (benefit) at
the Company's effective rate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------- -----------
1999 1998 1997 2000
-------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal statutory provision (benefit).......... $(76,000) $ 121,000 $(2,960,000) $(1,065,000)
Utilization of tax benefits.................... -- (336,000) -- --
Increase to (reduction of) taxes provided in
prior years.................................. 40,591 (272,243) -- 6,723
Losses without tax benefit..................... 25,000 -- 682,000 1,026,000
Amortization of goodwill....................... 63,000 63,000 63,000 32,000
Other.......................................... (12,000) 12,000 114,190 7,000
-------- --------- ----------- -----------
Consolidated income tax provision (benefit).... $ 40,591 $(412,243) $(2,100,810) $ 6,723
======== ========= =========== ===========
</TABLE>
F-43
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
10. INCOME TAXES (CONTINUED)
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1999 1998 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities--
Depreciation and amortization.......... $ (260,000) $ (375,000) $ (226,000)
Deferred tax assets--
Net operating loss carry forwards.... 3,069,000 3,044,000 4,116,000
Receivable and inventory reserves.... 174,000 311,000 170,000
Accrued liabilities.................. 44,000 107,000 15,000
Tax credits.......................... 354,000 162,000 431,000
----------- ----------- -----------
Gross deferred income taxes........ 3,381,000 3,249,000 4,506,000
Valuation allowance.................... (3,381,000) (3,249,000) (4,506,000)
----------- ----------- -----------
Net deferred income taxes.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company has pre-tax net operating loss carryforwards of approximately
$12,100,000 available for tax reporting purposes which can be used to offset its
future taxable income whereby $8,954,000 of the loss carryforward expires in
2018, $134,000 expires in 2019 and $3,012,000 expires in 2020. The related
deferred tax benefit is fully offset by a valuation allowance as management does
not believe that realization of the tax benefit is more likely than not.
F-44
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
11. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION
Effective in fiscal 1999, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Under the provisions
of SFAS No. 131, the Company operates in one segment--the development, marketing
and support of software products and computer peripherals. The Company operates
in two geographic regions: the United States and Europe.
Management evaluates business segment performance based on income from
continuing operations.
The following table shows net revenues, net income (loss) and identifiable
assets by geographic region:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------- ------------------------
1999 1998 1997 2000 1999
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
United States............... $18,893,190 $20,321,710 $18,505,583 $5,999,608 $ 9,524,388
Europe...................... 2,013,197 1,726,486 1,927,508 456,295 956,064
Intercompany................ (737,271) (437,654) (1,348,467) (61,328) (407,224)
----------- ----------- ----------- ---------- -----------
$20,169,116 $21,610,542 $19,084,624 $6,394,575 $10,073,228
=========== =========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1999 1998 2000
----------- ----------- -----------
<S> <C> <C> <C> <C>
Identifiable assets:
United States........................... $11,365,644 $12,196,307 $ 8,772,083
Europe.................................. 1,260,997 1,208,934 1,007,122
Discontinued business................... -- -- --
Eliminations............................ (2,103,210) (228,171) (1,947,224)
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========
</TABLE>
One Cleo Enterprise Networking products customer accounted for 13% of 1998
consolidated net revenue. No customer accounted for more than 10% of
consolidated net revenue in fiscal 2000, 1999 or 1997.
12. SUBSEQUENT EVENTS
On December 22, 1999, the Company sold its subsidiary, IGK Industries, Inc.
for $1,450,000 which resulted in a small gain. The purchaser acquired all assets
and assumed all current liabilities of IGK. Also included in the sale was the
building that houses IGK's operations which was owned by the Company and leased
to IGK. See Note 14 for unaudited pro forma data related to this transaction.
On June 28, 2000, the Company entered into a merger agreement with
Tumbleweed Communications Corp. ("Tumbleweed") whereby the Company agreed to
merge with a newly formed subsidiary of Tumbleweed. The Company's stockholders
are expected to receive 0.264 shares of Tumbleweed common stock for each share
of the Company's common stock. In addition, outstanding
F-45
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
12. SUBSEQUENT EVENTS (CONTINUED)
options and warrants will be converted into options or warrants to purchase
0.264 shares of Tumbleweed common stock with an appropriate adjustment to the
exercise price to reflect the exchange ratio. In connection with the merger, the
Company granted Tumbleweed an option to purchase 19.9% of the total number of
shares of the Company issued and outstanding at June 28, 2000 if an event occurs
which would entitle Tumbleweed to terminate the merger agreement and which would
entitle Tumbleweed to receive a termination fee. In connection with the merger,
Tumbleweed also agreed to purchase $3,000,000 of convertible subordinate
promissory notes of the Company.
On July 7, 2000, several parties, including Congressional Securities, Inc.
and David H. Zimmer, filed complaints against the Company, its President and
Chief Executive Officer and certain other third parties. The complaints
generally allege that the Company and its officers intentionally made statements
containing material omissions or misrepresentations in an effort to induce
plaintiffs to purchase stock in the Company. The complaints allege violations of
the federal securities laws and other complaints allege fraudulent and negligent
misrepresentation, defamation and tortious interference with business relations.
The complaints seek compensatory and punitive damages allegedly incurred as a
result of the decline in the market price of shares of the Company's common
stock after a dramatic stock market correction that occurred in April 2000. On
July 17, 2000, at least one of the complaints was amended. These actions are in
a preliminary stage and the Company and its named officer have not yet been
served process in these actions. However, the Company believes that these
actions are without merit, and the Company and its named officer intend to
vigorously defend these claims. Although the final resolution of this litigation
cannot be presently determined, management of the Company does not believe it
will have a material adverse effect on the Company's business, or the future
consolidated financial statements, although such adverse effects could be
possible.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------- FISCAL
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1999
Net revenues...................... $5,211,186 $4,862,042 $5,201,865 $4,894,023 $20,169,116
Gross profit...................... 3,109,747 2,795,668 3,205,635 3,159,062 12,270,112
Net income (loss)................. 130,098 (441,745) 228,753 (181,993) (264,887)
Net earnings (loss) per share..... 0.03 (0.10) 0.05 (0.04) (0.06)
</TABLE>
F-46
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------- FISCAL
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998
Net revenues...................... $5,623,214 $5,066,318 $4,826,340 $6,094,670 $21,610,542
Gross profit...................... 3,231,276 2,730,135 2,806,289 3,371,087 12,138,787
Income (loss) from continuing
operations:
Income (loss)................... 151,652 21,287 (66,858) 660,881 766,962
Income (loss) per share......... 0.03 0.01 (0.02) 0.15 0.17
Net income (loss)................. (62,628) (2,303,676) (66,858) 311,619 (2,121,543)
Net earnings (loss) per share..... (0.01) (0.52) (0.02) 0.07 (0.48)
</TABLE>
14. PRO FORMA DATA (UNAUDITED)
The following unaudited pro forma consolidated condensed balance sheet as of
September 30, 1999, and unaudited pro forma consolidated condensed statement of
operations for the year then ended, give pro forma effect to the disposition of
IGK as if it had occurred as of October 1, 1998. The unaudited pro forma
consolidated condensed balance sheet and statement of operations do not purport
to be indicative of the financial position or the results of operations of the
Company had the transaction actually been completed as of October 1, 1998, or
which may be obtained in the future. The pro forma effects of this disposition
for the six months ended March 31, 2000 are not material.
F-47
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
14. PRO FORMA DATA (UNAUDITED) (CONTINUED)
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO
INTERFACE IGK PRO FORMA FORMA
SYSTEMS, INC. INDUSTRIES, INC. ADJUSTMENTS HISTORICAL
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 1,575 $ -- $1,100 $ 2,675
Accounts receivable, net..................... 3,690 359 106 3,437
Inventories.................................. 916 466 -- 450
Prepaid expenses and other................... 310 12 -- 298
------- ------ ------ -------
Total current assets....................... 6,491 837 1,206 6,860
------- ------ ------ -------
Property and equipment, net.................... 3,188 509 (224) 2,455
Goodwill, net.................................. 789 -- -- 789
Note receivable................................ -- -- 270 270
Other assets................................... 55 -- -- 55
------- ------ ------ -------
$10,523 $1,346 $1,252 $10,429
======= ====== ====== =======
Current Liabilities:
Accounts payable............................. $ 912 $ 92 $ -- $ 820
Accrued expenses............................. 1,190 65 -- 1,125
Deferred revenue............................. 431 -- -- 431
------- ------ ------ -------
Total current liabilities.................. 2,533 157 -- 2,376
------- ------ ------ -------
Long-term debt................................. 71 -- -- 71
Stockholders' Equity:
Common stock................................. 11,324 450 450 11,324
Accumulated deficit.......................... (3,352) 739 802 (3,289)
Accumulated other comprehensive loss......... (53) -- -- (53)
------- ------ ------ -------
Total stockholders' equity................. 7,919 1,189 1,252 7,982
------- ------ ------ -------
$10,523 $1,346 $1,252 $10,429
======= ====== ====== =======
</TABLE>
F-48
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)
14. PRO FORMA DATA (UNAUDITED) (CONTINUED)
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO
INTERFACE IGK PRO FORMA FORMA
SYSTEMS, INC. INDUSTRIES, INC. ADJUSTMENTS HISTORICAL
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues................................... $20,169 $2,717 $ -- $17,452
Cost of revenues............................... 7,899 2,400 -- 5,499
------- ------ --------- -------
Gross profit................................. 12,270 317 -- 11,953
Product development............................ 3,854 -- -- 3,854
Selling, general & administrative.............. 8,683 419 -- 8,264
------- ------ --------- -------
Loss from operations......................... (267) (102) -- (165)
Other income................................... 43 -- 26 69
------- ------ --------- -------
Loss before taxes............................ (224) (102) 26 (96)
Income tax provision (credit).................. 41 (4) -- 45
------- ------ --------- -------
Loss from continuing operations................ $ (265) $ (98) $ 26 $ (141)
======= ====== ========= =======
Basic loss per share........................... $ (0.06) $ (0.03)
======= =======
Weighted average shares outstanding............ 4,481 4,481
======= =======
</TABLE>
The above pro forma consolidated condensed financial statements include the
following pro forma adjustments:
(1) Recognition of twelve months of interest income on the note receivable
from the sale.
(2) Removal of the building owned by ISI that was sold in the transaction.
(3) Recognition of the proceeds from the disposition of IGK.
F-49
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
for Tumbleweed set forth below gives effect to the acquisition of Interface
Systems, Inc. ("Interface"). The historical financial information set forth
below has been derived from, and is qualified by reference to, the consolidated
financial information of Tumbleweed and Interface and should be read in
conjunction with those financial statements and the notes thereto included
elsewhere herein. The selected unaudited pro forma condensed combined balance
sheet as of March 31, 2000 gives effect to the acquisition of Interface as if it
occurred on that date. The selected unaudited pro forma condensed combined
statement of operations data for the year ended December 31, 1999 and the three
months ended March 31, 2000 give effect to the acquisition as if it occurred on
the first day of each of those periods under the purchase method of accounting
by combining the results for the year ended December 31, 1999 of Tumbleweed with
the results for the year ended September 30, 1999 of Interface, and combining
the results for the three months ended March 31, 2000 of Tumbleweed with the
same period of Interface. The selected unaudited pro forma condensed combined
financial information reflects certain adjustments, including adjustments to
reflect the amortization of goodwill resulting from the acquisition. The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 reflects the elimination of the results of operations of
Interface's non-L2i businesses from October 1, 1998 to September 30, 1999 and
from January 1, 2000 to March 31, 2000. The unaudited pro forma condensed
combined statements of operations and balance sheet do not include the financial
results and accounting for the Company's additional investment in Tumbleweed KK
because the additional investment and Tumbleweed's resulting change to
consolidation accounting were not deemed significant. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes of Tumbleweed and Interface included elsewhere in
this prospectus. The pro forma condensed combined financial information does not
purport to represent what the consolidated results of operations or financial
condition of Tumbleweed would actually have been if the Interface acquisition
had in fact occurred on such dates or the future consolidated results of
operations or financial condition of Tumbleweed.
F-50
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTERFACE NON-L2I PRO FORMA PRO FORMA
TUMBLEWEED SYSTEMS BUSINESSES L2I ADUSTMENTS PRO FORMA
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................ $ 46,447 $ 931 $ (102) $ 829 $ -- $ 47,276
Accounts Receivable................. 4,980 2,656 (979) 1,677 -- 6,657
Other Current Assets................ 3,134 1,109 (585) 524 -- 3,658
-------- ------- ------- ------- -------- --------
TOTAL CURRENT ASSETS.............. 54,561 4,696 (1,666) 3,030 -- 57,591
-------- ------- ------- ------- -------- --------
NET PROPERTY & EQUIPMENT.............. 5,001 2,407 (166) 2,241 1,400 8,642
GOODWILL AND INTANGIBLES.............. -- 696 (696) -- 61,536 61,536
OTHER ASSETS.......................... 3,014 33 (1) 32 -- 3,046
NET ASSETS HELD FOR DISPOSAL.......... -- -- 1,656 1,656 (1,043) 613
-------- ------- ------- ------- -------- --------
TOTAL ASSETS.................... $ 62,576 $ 7,832 $ (873) $ 6,959 $ 61,893 $131,428
======== ======= ======= ======= ======== ========
LIABILITIES & EQUITY
CURRENT LIABILITIES:
Notes Payable....................... $ 594 $ 50 $ -- $ 50 $ -- $ 644
Accounts Payable.................... 5,514 878 (214) 664 -- 6,178
Accrued Liabilities................. 6,822 1,133 (474) 659 -- 7,481
Deferred Revenue.................... 2,639 471 (207) 264 (264) 2,639
-------- ------- ------- ------- -------- --------
TOTAL CURRENT LIABILITIES......... 15,569 2,532 (895) 1,637 (264) 16,942
-------- ------- ------- ------- -------- --------
LONG TERM DEBT:....................... --
Long Term Debt...................... 858 46 -- 46 -- 904
Other Long term Liabilities......... 266 -- -- -- -- 266
-------- ------- ------- ------- -------- --------
TOTAL LONG TERM DEBT.............. 1,124 46 -- 46 -- 1,170
-------- ------- ------- ------- -------- --------
TOTAL LIABILITIES................. 16,693 2,578 (895) 1,683 (264) 18,112
-------- ------- ------- ------- -------- --------
SHAREHOLDERS' EQUITY.................. --
Par Value........................... 26 11,800 -- 11,800 (11,799) 27
Additional Paid-in Capital.......... 134,764 -- -- -- 71,687 206,451
Deferred Compensation Expense....... (5,105) -- -- -- (2,255) (7,360)
Translation Gain (Loss)............. 70 (56) 22 (34) 34 70
Retained Earnings (Deficit)......... (83,872) (6,490) -- (6,490) 4,490 (85,872)
-------- ------- ------- ------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........ 45,883 5,254 22 5,276 62,157 113,316
-------- ------- ------- ------- -------- --------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY.......... $ 62,576 $ 7,832 $ (873) $ 6,959 $ 61,893 $131,428
======== ======= ======= ======= ======== ========
</TABLE>
F-51
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INTERFACE NON-L2I
TUMBLEWEED SYSTEMS BUSINESSES
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA PRO FORMA
1999 1999 1999 L2I ADUSTMENTS PRO FORMA
------------ ------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
License Fees.................... $ 11,285 $12,647 $ 9,849 $ 2,798 $ -- $ 14,083
Transaction Fees................ 981 -- -- -- -- 981
Services and Support Fees....... 3,018 1,992 1,623 369 -- 3,387
Other........................... 1,472 5,530 5,345 185 -- 1,657
-------- ------- ------- ------- -------- --------
NET REVENUE..................... 16,756 20,169 16,817 3,352 -- 20,108
License......................... 737 2,672 2,609 63 -- 800
Transaction..................... 78 -- -- -- -- 78
Services........................ 4,088 1,030 733 297 -- 4,385
Other........................... -- 4,197 4,037 160 -- 160
-------- ------- ------- ------- -------- --------
COST OF REVENUES................ 4,903 7,899 7,379 520 -- 5,423
-------- ------- ------- ------- -------- --------
GROSS PROFIT.................... 11,853 12,270 9,438 2,832 -- 14,685
-------- ------- ------- ------- -------- --------
OPERATING EXPENSES:
Research and Development...... 8,923 3,855 2,312 1,543 -- 10,466
Sales and Marketing........... 19,917 5,392 1,893 3,499 -- 23,416
General & Administrative...... 5,524 3,290 671 2,619 21 8,164
Stock Compensation............ 3,536 -- -- -- 1,127 4,663
Acquired in-process research
and development............. -- -- -- -- 2,000 2,000
Goodwill and other intangibles
amortization................ -- -- -- -- 22,702 22,702
-------- ------- ------- ------- -------- --------
TOTAL OPERATING EXPENSES........ 37,900 12,537 4,876 7,661 25,850 71,411
-------- ------- ------- ------- -------- --------
OPERATING PROFIT (LOSS)......... (26,047) (267) 4,562 (4,829) (25,850) (56,726)
-------- ------- ------- ------- -------- --------
OTHER INCOME, NET............. 2,126 2 -- 2 -- 2,128
-------- ------- ------- ------- -------- --------
LOSS BEFORE PROVISION FOR INCOME
TAXES......................... (23,921) (265) 4,562 (4,827) (25,850) (54,598)
-------- ------- ------- ------- -------- --------
Income Tax Expense.............. 301 -- -- -- -- 301
-------- ------- ------- ------- -------- --------
NET INCOME (LOSS) AFTER TAX..... $(24,222) $ (265) $ 4,562 $(4,827) $(25,850) $(54,899)
======== ======= ======= ======= ======== ========
Net loss per share--basic and
diluted....................... $ (1.65) $ (3.45)
Shares used in computing net
loss per share--basic and
diluted....................... 14,650 15,896
</TABLE>
See accompanying notes to selected unaudited pro forma condensed combined
financial information.
F-52
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INTERFACE NON-L2I PRO FORMA PRO FORMA
TUMBLEWEED SYSTEMS BUSINESSES L2I ADUSTMENTS PRO FORMA
---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
License Fees........................ $ 4,356 $ 1,957 $1,181 $ 776 $ -- $ 5,132
Transaction Fees.................... 730 11 -- 11 -- 741
Services and Support Fees........... 1,524 685 151 534 -- 2,058
Other............................... -- 322 322 -- -- --
-------- ------- ------ ------- ------- --------
NET REVENUE......................... 6,610 2,975 1,654 1,321 -- 7,931
License............................. 267 318 318 -- -- 267
Transaction......................... 40 -- -- -- -- 40
Services............................ 1,941 281 -- 281 -- 2,222
Other............................... -- 274 274 -- -- --
-------- ------- ------ ------- ------- --------
COST OF REVENUES.................... 2,248 873 592 281 -- 2,529
-------- ------- ------ ------- ------- --------
GROSS PROFIT........................ 4,362 2,102 1,062 1,040 -- 5,402
-------- ------- ------ ------- ------- --------
OPERATING EXPENSES:.................
Research and Development............ 2,843 752 84 668 -- 3,511
Sales and Marketing................. 7,192 1,448 157 1,291 -- 8,483
General & Administrative............ 1,640 1,590 279 1,311 5 2,956
Stock Compensation.................. 1,074 -- -- -- 282 1,356
Acquired in-process research and
development....................... -- -- -- -- 2,000 2,000
Goodwill and other intangibles
amortization...................... -- -- -- -- 5,676 5,676
Merger related expenses............. 10,803 -- -- -- -- 10,803
-------- ------- ------ ------- ------- --------
TOTAL OPERATING EXPENSES............ 23,552 3,790 520 3,270 7,963 34,785
-------- ------- ------ ------- ------- --------
OPERATING PROFIT (LOSS)............. (19,190) (1,688) 542 (2,230) (7,963) (29,383)
-------- ------- ------ ------- ------- --------
OTHER INCOME, NET................. 656 12 -- 12 -- 668
-------- ------- ------ ------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME
TAXES............................. (18,534) (1,676) 542 (2,218) (7,963) (28,715)
-------- ------- ------ ------- ------- --------
Income Tax Expense.................. 88 -- -- -- -- 88
-------- ------- ------ ------- ------- --------
NET INCOME (LOSS) AFTER TAX......... $(18,622) $(1,676) $ 542 $(2,218) $(7,963) $(28,803)
======== ======= ====== ======= ======= ========
Net loss per share--basic and
diluted........................... $ (0.73) $ (1.07)
Shares used in computing net loss
per share--basic and diluted.... 25,588 26,834
</TABLE>
See accompanying notes to selected unaudited pro forma condensed combined
financial information.
F-53
<PAGE>
NOTES TO PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The Company entered into an agreement on June 28, 2000 to purchase the
common stock and assume stock options and warrants of Interface Systems, Inc. in
a transaction planned to be accounted for under the purchase method of
accounting. The preliminary estimate of the total purchase price is
approximately $74.7 million consisting of cash surrendered of $3.0 million,
approximately 1.25 million shares of the Company's common stock (with a fair
value of approximately $64.1 million) the assumption of outstanding stock
options with a fair value of approximately $4.1 million, and transaction costs
of approximately $3.5 million.
The Interface historical financials have been adjusted to reflect the
Company's assumed divestiture of Interface's non-L2i operations and product
lines assuming such divestitures had occurred as of the beginning of the periods
presented. Interface's non-L2i net assets have been reflected in the pro forma
combined balance sheet as net assets held for disposal. Interface's non-L2i
operations are reflected in the pro forma combined statements of operations
using the following allocation guidelines:
- Revenues and expenses directly attributable to non-L2i operations and
products;
- For centralized functions that served all of Interface's operations, costs
were allocated to non-L2i operations and products based on headcount and
certain activity measures such as revenue; and
- For corporate level activities, all costs not directly attributable to
non-L2i operations were allocated to L2i operations.
Pro forma adjustments for the unaudited pro forma condensed combined balance
sheet as of March 31, 2000 and statements of operations for the year ended
December 31, 1999 and the three months ended March 31, 2000 are as follows:
1. To reflect the preliminary allocation of the estimated purchase price.
The total estimated purchase price for the acquisition has been allocated on
a preliminary basis to assets and liabilities based on management's best
estimates of their fair value with the excess costs over the net assets
acquired allocated to goodwill. The preliminary allocation has resulted in
unearned stock compensation of approximately $2.3 million, purchased
in-process research and development estimated to be $2.0 million, and
estimated goodwill and identified intangible assets of $61.6 million which
are being amortized over periods ranging from one to three years. The net
assets held for disposal have been adjusted to their estimated net
realizable value. This allocation is subject to change pending a final
analysis of the value of the assets acquired and liabilities assumed.
2. To reflect amortization of goodwill and other intangible assets resulting
from the acquisition.
3. To reflect the acquisition of all of the outstanding stock of Interface.
4. Basic and diluted net loss per share has been adjusted to reflect the
issuance of approximately 1.25 million shares of the Company's common stock
as if these shares had been outstanding for the entire period. Dilutive
options and warrants are excluded from the computation as their effect is
antidilutive.
F-54
<PAGE>
ANNEX A
AGREEMENT
and
PLAN OF MERGER
by and among
TUMBLEWEED COMMUNICATIONS CORP.,
MAIZE ACQUISITION SUB, INC.
and
INTERFACE SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE I MERGER................................................................... 1
Section 1.1 THE MERGER.................................................. 1
Section 1.2 EFFECTIVE TIME.............................................. 2
Section 1.3 CLOSING..................................................... 2
Section 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION......... 2
ARTICLE II CONVERSION OF SHARES.................................................... 2
Section 2.1 CONVERSION OF SHARES........................................ 2
Section 2.2 SURRENDER OF CERTIFICATES................................... 3
Section 2.3 NO FRACTIONAL SHARES........................................ 3
Section 2.4 NO DIVIDENDS................................................ 3
Section 2.5 RETURN TO PARENT............................................ 4
Section 2.6 COMPANY OPTION PLANS........................................ 4
Section 2.7 COMPANY WARRANTS............................................ 5
Section 2.8 STOCK TRANSFER BOOKS........................................ 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY.............................. 6
Section 3.1 ORGANIZATION................................................ 6
Section 3.2 CAPITALIZATION.............................................. 6
CORPORATE AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY
Section 3.3 ACTION...................................................... 7
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS....................... 8
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS........................ 8
Section 3.6 ABSENCE OF CERTAIN CHANGES.................................. 9
Section 3.7 NO UNDISCLOSED LIABILITIES.................................. 9
Section 3.8 INFORMATION IN PROXY STATEMENT/PROSPECTUS................... 10
Section 3.9 EMPLOYEE BENEFIT MATTERS.................................... 10
Section 3.10 LITIGATION; COMPLIANCE WITH LAW............................. 11
Section 3.11 NO DEFAULT.................................................. 12
Section 3.12 TAXES....................................................... 12
Section 3.13 CONTRACTS................................................... 13
Section 3.14 ASSETS; REAL PROPERTY....................................... 13
Section 3.15 ENVIRONMENTAL MATTERS....................................... 13
Section 3.16 PRODUCT LIABILITY........................................... 14
Section 3.17 INTELLECTUAL PROPERTY....................................... 14
Section 3.18 PROPRIETARY RIGHTS AND CONFIDENTIALITY AGREEMENTS........... 16
Section 3.19 INSURANCE................................................... 16
Section 3.20 SUPPLIERS AND CUSTOMERS..................................... 17
Section 3.21 LABOR MATTERS............................................... 17
Section 3.22 ACCOUNTS RECEIVABLE; INVENTORY.............................. 17
Section 3.23 TRANSACTIONS WITH AFFILIATES................................ 18
Section 3.24 OPINION OF FINANCIAL ADVISOR................................ 18
Section 3.25 BROKERS OR FINDERS.......................................... 18
Section 3.26 TAX MATTERS................................................. 18
Section 3.27 STATE TAKEOVER STATUTES..................................... 18
Section 3.28 FULL DISCLOSURE............................................. 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........................ 19
Section 4.1 ORGANIZATION................................................ 19
Section 4.2 CAPITALIZATION.............................................. 19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C> <C>
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION...... 19
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS....................... 20
Section 4.5 INFORMATION IN PROXY STATEMENT/PROSPECTUS................... 20
Section 4.6 SEC REPORTS AND FINANCIAL STATEMENTS........................ 20
Section 4.7 ABSENCE OF CERTAIN CHANGES.................................. 21
Section 4.8 LITIGATION; COMPLIANCE WITH LAW............................. 21
Section 4.9 BROKERS OR FINDERS.......................................... 22
Section 4.10 TAX MATTERS................................................. 22
Section 4.11 OPERATIONS OF SUB........................................... 22
ARTICLE V COVENANTS................................................................ 22
Section 5.1 INTERIM OPERATIONS OF THE COMPANY........................... 22
Section 5.2 INTERIM OPERATIONS OF PARENT................................ 24
Section 5.3 ACCESS TO INFORMATION....................................... 25
Section 5.4 CONSENTS AND APPROVALS...................................... 25
Section 5.5 EMPLOYMENT AGREEMENTS....................................... 25
Section 5.6 NO SOLICITATION BY THE COMPANY.............................. 25
Section 5.7 SHAREHOLDERS' MEETING....................................... 27
Section 5.8 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT.......... 27
Section 5.9 ADDITIONAL AGREEMENTS....................................... 28
Section 5.10 PUBLICITY................................................... 28
Section 5.11 NOTIFICATION OF CERTAIN MATTERS............................. 28
Section 5.12 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION...... 28
Section 5.13 AFFILIATE AGREEMENTS........................................ 29
Section 5.14 COOPERATION................................................. 29
Section 5.15 LETTERS OF ACCOUNTANTS...................................... 30
Section 5.16 CONSENTS OF ACCOUNTANTS..................................... 30
Section 5.17 SUBSEQUENT FINANCIAL STATEMENTS............................. 30
Section 5.18 NASDAQ QUALIFICATION........................................ 30
Section 5.19 EMPLOYEE PLANS AND ARRANGEMENTS............................. 30
ARTICLE VI CONDITIONS.............................................................. 31
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY................. 31
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB............. 31
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY................ 32
ARTICLE VII TERMINATION............................................................ 33
Section 7.1 TERMINATION................................................. 33
Section 7.2 EFFECT OF TERMINATION....................................... 33
Section 7.3 AMENDMENT................................................... 34
Section 7.4 EXTENSION; WAIVER........................................... 34
ARTICLE VIII MISCELLANEOUS......................................................... 35
Section 8.1 FEES AND EXPENSES........................................... 35
Section 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES............... 35
Section 8.3 NOTICES..................................................... 35
Section 8.4 INTERPRETATION.............................................. 36
Section 8.5 COUNTERPARTS................................................ 36
ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
Section 8.6 OWNERSHIP................................................... 36
Section 8.7 SEVERABILITY................................................ 36
Section 8.8 GOVERNING LAW............................................... 36
Section 8.9 ASSIGNMENT.................................................. 36
</TABLE>
ii
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
A Form of Voting Agreement
B-1 Form of Non-Competition Agreement
B-2 Form of Employment Agreement
C Form of Option Agreement
D-1 Form of Certificate of Merger
D-2 Form of Delaware Certificate of Merger
E Form of Affiliate Agreement
F-1 Form of Dykema Gossett PLLC Opinion
F-2 Form of Skadden, Arps, Slate, Meagher & Flom LLP Opinion
</TABLE>
iii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Agreement....................................... 5.7(b)
Agreement................................................... Preamble
Alternative Transaction..................................... 5.7(a)
Ancillary Agreements........................................ Recitals
Assertion................................................... 5.12
Audit....................................................... 3.11(j)
Certificate of Merger....................................... 1.2
Certificates................................................ 2.1(d)
Closing..................................................... 1.3
Closing Date................................................ 1.3
Code........................................................ Recitals
Company..................................................... Preamble
Company Agreement........................................... 3.3(c)
Company Balance Sheet....................................... 3.21
Company Benefit Plans....................................... 3.8(a)
Company Board............................................... 3.3(b)
Company Common Stock........................................ 2.1(a)
Company Financial Statements................................ 3.4
Company Option Plans........................................ 2.6
Company Options............................................. 2.6
Company SEC Documents....................................... 3.4
Special Meeting............................................. 5.7(a)
Company Shareholder Approval................................ 3.3(a)
Company Warrants............................................ 2.7
Confidentiality Agreement................................... 5.3
DGCL........................................................ 1.1
Disclosure Schedule......................................... Article III
Effective Time.............................................. 1.2
Employment Agreements....................................... Recitals
Environmental Claims........................................ 3.14
Environmental Laws.......................................... 3.14
ERISA....................................................... 3.8(a)
Exchange Act................................................ 3.3(c)
Exchange Agent.............................................. 2.2
Exchange Ratio.............................................. 2.1(a)
GAAP........................................................ 3.4
Governmental Entity......................................... 3.3(c)
HMO......................................................... 3.8(d)
Indemnified Liability....................................... 5.12
Indemnified Parties......................................... 5.12
Indemnified Party........................................... 5.12
Indemnitors................................................. 5.12
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Intellectual Property....................................... 3.16(a)
IRS......................................................... 3.8(a)
License Agreements.......................................... 3.16(b)
Licensed Software........................................... 3.16(k)
Liens....................................................... 3.2(c)
material adverse effect..................................... 3.1
Materials of Environmental Concern.......................... 3.14
Merger...................................................... 1.1
Merger Consideration........................................ 2.1(a)
Merger Filing............................................... 1.2
Michigan Secretary of State................................. 1.2
Millennial Date Data........................................ 3.16(k)
Non-Competition Agreements.................................. Recitals
Option Agreement............................................ Recitals
Parent...................................................... Preamble
Parent Common Stock......................................... 2.1(a)
Parent Preferred Stock...................................... 4.2(a)
Parent Registration Statement............................... 5.8(a)
Parent SEC Documents........................................ 4.6
Proxy Statement/Prospectus.................................. 5.8(a)
Real Property............................................... 3.11
Requisite Regulatory Approvals.............................. 5.4
Restraints.................................................. 6.1(b)
Rights...................................................... 3.2(b)
SEC......................................................... 3.4
Securities Act.............................................. 3.4
Software.................................................... 3.16(j)
Sub......................................................... Preamble
Subsequent Determination.................................... 5.6(b)
Subsidiary.................................................. 3.1
Superior Proposal........................................... 5.6(b)
Surviving Corporation....................................... 1.1
System...................................................... 3.16(l)
Tax......................................................... 3.11(j)
Tax Authority............................................... 3.11(j)
Tax Returns................................................. 3.11(j)
Taxes....................................................... 3.11(j)
Third Party................................................. 5.6(a)
Third Party Expenses........................................ 8.1
Trade Secrets............................................... 3.16(a)
Trademarks.................................................. 3.16(a)
Voting Agreements........................................... Recitals
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of June 28, 2000,
by and among Tumbleweed Communications Corp., a Delaware corporation ("PARENT"),
Maize Acquisition Sub, Inc., a Delaware corporation and a direct wholly-owned
subsidiary of Parent ("SUB"), and Interface Systems, Inc., a Michigan
corporation (the "COMPANY").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent and Sub have approved, and deem
it advisable and in the best interests of their respective stockholders to
consummate, a strategic business combination between the Company and Parent upon
the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company, having determined that such
combination is desirable, has approved the transactions contemplated by this
Agreement and the Ancillary Agreements (as defined below);
WHEREAS, as a condition and inducement to Parent's and Sub's willingness to
enter into this Agreement and incur the obligations set forth herein,
concurrently with the execution and delivery of this Agreement, (i) Parent and
each of the directors, executive officers and other designated employees of the
Company have entered into a Voting Agreement in the form of EXHIBIT A hereto
(the "VOTING AGREEMENTS"), pursuant to which, among other things, such persons
agree to vote in favor of approval and adoption of this Agreement; (ii) the
Company and certain key employees of the Company identified in SCHEDULE B hereto
have entered into non-competition agreements (the "NON-COMPETITION AGREEMENTS")
in the form of EXHIBIT B-1 hereto, and employment agreements (the "EMPLOYMENT
AGREEMENTS") in the form of EXHIBIT B-2 hereto, the effectiveness of which are
conditioned upon the consummation of the transactions contemplated hereby; and
(iii) Parent and the Company have entered into an Option Agreement in the form
of EXHIBIT C hereto (the "OPTION AGREEMENT"), pursuant to which, among other
things, the Company grants to Parent an option to purchase newly issued shares
of Company Common Stock representing nineteen and nine-tenths percent (19.9%) of
the total outstanding shares of Company Common Stock (the Voting Agreements, the
Non-Competition Agreements, the Employment Agreements and the Option Agreement
are collectively referred to herein as the "ANCILLARY AGREEMENTS"); and
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger (as defined in Section 1.1 hereof) shall qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "CODE"), and
this Agreement is intended to be and is adopted as a plan of reorganization
within the meaning of Section 368 of the Code.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements, and other good and
valuable consideration, set forth herein and in the Ancillary Agreements, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
MERGER
Section 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), the Company
and Sub shall consummate a merger (the "MERGER") pursuant to which (a) Sub shall
be merged with and into the Company and the separate corporate existence of Sub
shall thereupon cease, (b) the Company shall be the successor or surviving
corporation (the "SURVIVING CORPORATION") in the Merger and shall continue to be
governed by the laws of the State of Michigan and (c) the separate corporate
existence of the Company, with all its rights, privileges, immunities, powers
and franchises, shall continue unaffected by the Merger.
<PAGE>
Pursuant to the Merger, (a) the Articles of Incorporation set forth in the
Certificate of Merger (as defined in Section 1.2 hereof), shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Articles of Incorporation, and (b) the By-laws, in the
form of ANNEX A hereto, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, such Articles of Incorporation and such
By-laws. The Merger shall have the effects set forth in the Michigan Business
Corporation Act (the "MBCA") and the Delaware General Corporation Law (the
"DGCL").
Section 1.2 EFFECTIVE TIME. Parent, Sub and the Company will cause (i) a
certificate of merger (the "CERTIFICATE OF MERGER") in the form of EXHIBIT D-1
hereto, to be filed on the Closing Date (as defined in Section 1.3 hereof) (or
on such other date as Parent and the Company may agree) with the Department of
Consumer and Industry Services, Corporations Bureau, of the State of Michigan
(the "MICHIGAN DEPARTMENT") as provided in the MBCA, and (ii) a certificate of
merger (the "DELAWARE CERTIFICATE OF MERGER") in the form of EXHIBIT D-2 hereto,
to be filed on the Closing Date with the Secretary of State of the State of
Delaware as provided in the DGCL. The Merger shall become effective on the date
on which the Certificate of Merger and any other documents necessary to effect
the Merger in accordance with the MBCA are duly filed with the Michigan
Department (the "MERGER FILING") or such time as is agreed upon by the parties
and specified in the Certificate of Merger, and such time is hereinafter
referred to as the "EFFECTIVE TIME."
Section 1.3 CLOSING. The closing of the Merger (the "CLOSING") will take
place at 8:00 a.m., local time, on a date to be specified by the parties, which
shall be no later than the second business day after satisfaction or waiver of
all of the conditions set forth in Article VI hereof (the "CLOSING DATE"), at
the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue,
Palo Alto, California 94301, or such other date or place as agreed to in writing
by the parties hereto.
Section 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors and officers of the Sub at the Effective Time shall, from and after
the Effective Time, be the directors and officers, respectively, of the
Surviving Corporation until their successors shall have been duly elected or
appointed or qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
By-laws.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 CONVERSION OF SHARES.
(a) Each share of common stock, no par value per share ("COMPANY COMMON
STOCK"), of the Company issued and outstanding immediately prior to the
Effective Time (other than any Shares to be canceled pursuant to Section 2.1(c)
hereof) shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into the right to receive .264 (the "EXCHANGE
RATIO") of a fully paid and nonassessable share (the "MERGER CONSIDERATION") of
common stock, par value $.001 per share, of Parent (the "PARENT COMMON STOCK").
(b) Each share of common stock, par value $.001 per share, of Sub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of Parent, be converted into one fully
paid and nonassessable share of common stock, no par value per share, of the
Surviving Corporation.
(c) Any shares of Company Common Stock that are owned by Parent, Sub or any
other wholly owned Subsidiary (as defined in Section 3.1) of Parent shall be
canceled and retired and shall cease to exist and no Parent Common Stock or
other consideration shall be delivered in exchange therefor.
Annex A-2
<PAGE>
(d) On and after the Effective Time, holders of certificates (the
"CERTIFICATES"), which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock, shall cease to have any rights as
shareholders of the Company, except the right to receive, subject to Section 2.5
hereof, the Merger Consideration (and cash in lieu of any fractional share as
contemplated by Section 2.3) for each share of Company Common Stock held by
them.
Section 2.2 SURRENDER OF CERTIFICATES. At or promptly after the Effective
Time, Parent shall make available to Equiserve L.P., or a bank reasonably
acceptable to the Company (the "EXCHANGE AGENT"), in trust for the benefit of
the holders of shares of Company Common Stock for exchange in accordance with
this Article II, (i) cash in an amount sufficient to pay cash in lieu of
fractional shares pursuant to Section 2.3, and (ii) certificates representing
the aggregate number of shares of Parent Common Stock issuable pursuant to
Section 2.1 hereof. Promptly after the Effective Time, the Exchange Agent shall
mail to each holder of record of a Certificate or Certificates a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing Parent
Common Stock and cash in lieu of fractional shares, if applicable. Upon
surrender of a Certificate or Certificates to the Exchange Agent, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor the Merger Consideration for each
share of Company Common Stock formerly represented by such Certificate or
Certificates, and the Certificate(s) so surrendered shall forthwith be canceled.
Until surrendered as contemplated by this Article II, from and after the
Effective Time each Certificate shall be deemed to represent only the right to
receive the Merger Consideration (and cash in lieu of any fractional share as
contemplated by Section 2.3) for each share of Company Common Stock formerly
represented by such Certificate, and shall not evidence any interest in, or any
right to exercise the rights of a stockholder of, Parent. If a certificate
representing Parent Common Stock is to be issued or a cash payment in lieu of
fractional share interests is to be made to a person other than the one in whose
name the Certificate surrendered in exchange therefor is registered, it shall be
a condition to such issuance or payment that such Certificate be properly
endorsed (or accompanied by an appropriate instrument of transfer) and
accompanied by evidence that any applicable stock transfer taxes have been paid
or provided for.
Section 2.3 NO FRACTIONAL SHARES. (a) No certificates representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests shall not entitle
the owner thereof to vote or to any other rights of a stockholder of Parent. In
lieu of such fractional shares, any holder of Company Common Stock who would
otherwise be entitled to receive a fraction of a share of Parent Common Stock (
after aggregating all shares of Parent Common Stock issuable to such holder)
shall, upon surrender of such holder"s Certificate or Certificates, be paid in
cash the dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the closing price of a share of
Parent Common Stock on Nasdaq Stock Market on the date the Merger became
effective.
(b) As promptly as practicable following the Effective Time, the Exchange
Agent shall deliver the Merger Consideration, whether in the form of Parent
Common Stock or cash in lieu of fractional shares, or both to each holder of a
Certificate or Certificates which have been surrendered.
Section 2.4 NO DIVIDENDS. No dividends or other distributions declared or
made after the Effective Time with respect to shares of Parent Common Stock with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the Parent Common Stock represented
thereby until the holder of such Certificate shall surrender such Certificate.
Dividends or other distributions with a record date after the Effective Time
payable in respect of shares of Parent Common Stock held by the Exchange Agent
shall be held in trust for the benefit of such holders of unsurrendered
Certificates. Following surrender of any previously unsurrendered Certificate,
there shall be paid to the holder of the certificates representing whole shares
of Parent
Annex A-3
<PAGE>
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole shares
of Parent Common Stock and (ii) at the date of payment of any dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender, the amount of such dividends or
other distributions payable with respect to such whole shares of Parent Common
Stock.
Section 2.5 RETURN TO PARENT. Any shares of Parent Common Stock made
available to the Exchange Agent and not exchanged for Certificates within six
(6) months after the Effective Time and any dividends and distributions held by
the Exchange Agent for payment or delivery to the holders of unsurrendered
Certificates formerly representing shares of Company Common Stock and unclaimed
at the end of such six (6) month period shall be redelivered or repaid by the
Exchange Agent to Parent, after which time any holder of Certificates who has
not theretofore delivered or surrendered such Certificates to the Exchange
Agent, subject to applicable law, shall look as a general creditor only to
Parent for payment of the Merger Consideration, cash in lieu of fractional share
interests, and any such dividends or distributions with respect to its shares of
Parent Common Stock. Notwithstanding the foregoing, none of Parent, the Exchange
Agent, the Surviving Corporation or any other party shall be liable to any
holder of a Certificate formerly representing shares of Company Common Stock for
any Merger Consideration, cash in lieu of fractional share interests or
dividends or distributions properly delivered to a public official pursuant to
applicable property, escheat or similar laws. If Certificates are not
surrendered prior to two (2) years after the Effective Time, unclaimed Merger
Consideration (or funds with respect to fractional shares) payable with respect
to such shares of Company Common Stock shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
Section 2.6 COMPANY OPTION PLANS. At the Effective Time, all options (the
"COMPANY OPTIONS") then outstanding, whether or not vested and exercisable,
under the Company's 1982 Stock Option Plan, 1992 Stock Option Plan, 1993 Stock
Option Plan for Non-Employee Directors and the Company's Employee Stock Purchase
Plan, in each case as in effect on the date hereof (collectively, the "COMPANY
OPTION PLANS"), shall be assumed by Parent. Each Company Option assumed by
Parent, other than Company Options issued pursuant to the Company's Employee
Stock Purchase Plan, shall be subject to, and exercisable upon, the same terms
and conditions as under the applicable Company Option Plan and the applicable
option agreement issued thereunder, except that (a) each assumed Company Option
shall be exercisable for, and represent the right to acquire, that number of
shares of Parent Common Stock (rounded down to the nearest whole share) equal to
(i) the number of shares of Company Common Stock subject to such Company Option
immediately prior to the Effective Time multiplied by (ii) the Exchange Ratio;
and (b) the option price per share of Parent Common Stock subject to each
assumed Company Option shall be an amount equal to (i) the option price per
share of Company Common Stock subject to such Company Option in effect
immediately prior to the Effective Time divided by (ii) the Exchange Ratio
(rounded up to the nearest whole cent). The Company represents and warrants that
each of the foregoing actions may be taken and effected by the Company without
the consent of any holder of Company Options. Each assumed purchase right under
the Company's Employee Stock Purchase Plan shall continue to have, and be
subject to, the terms and conditions set forth in the Company's Employee Stock
Purchase Plan and the documents governing the assumed purchase right, except
that the purchase price of such shares of Parent Common Stock for each
respective purchase date under each assumed purchase right shall be the lower of
(i) the quotient determined by dividing eighty-five percent (85%) of the fair
market value of Company Common Stock on the offering date of each assumed
offering period by the Exchange Ratio or (ii) eighty-five percent (85%) of the
fair market value of the Parent Common Stock on each purchase date of each
assumed offering period occurring after the Effective Time (with the number of
shares rounded to the nearest whole share and the purchase price rounded to the
nearest whole cent). The assumed purchase rights shall be exercised at such
times following the Effective Time as set forth in the Company's Employee
Annex A-4
<PAGE>
Stock Purchase Plan and each participant shall, accordingly, be issued shares of
Parent Common Stock at such times pursuant to the Company's Employee Stock
Purchase Plan. The Company's Employee Stock Purchase Plan shall terminate with
the exercise of the last assumed purchase right, and no additional purchase
rights shall be granted under the Company's Employee Stock Purchase Plan
following the Effective Time. Parent agrees that from and after the Effective
Time, employees of the Surviving Corporation may participate in Parent's
employee stock purchase plan, subject to the terms and conditions of such plan.
The adjustment provided herein with respect to Company Options shall be and
is intended to be effected in a manner which is consistent with Section 424(a)
of the Internal Revenue Code of 1986, as amended (the "CODE"). The duration,
vesting schedule, exercisability and other terms of each Company Option
immediately after the Effective Time shall be the same as the corresponding
terms in effect immediately before the Effective Time, except that all
references to Company in the Company Option Plans (and the corresponding
references in the option agreement documenting such option) shall be deemed to
be references to Parent. Except as set forth in Section 3.2(d) of the Disclosure
Schedule (as defined in Article III hereof), vesting of Company Options shall
not be accelerated as a result of the Merger. Continuous employment with the
Company or its Subsidiaries shall be credited to the optionee for purposes of
determining the vesting of all assumed Company Options after the Effective Time.
As soon as reasonably practicable, but in no event later than thirty (30) days
after the Effective Time, Parent will issue to each holder of an assumed Company
Option notice of the foregoing assumption by Parent.
Parent shall file with the SEC, no later than thirty (30) business days
after the Effective Time, a Registration Statement on Form S-8 relating to the
shares of Parent Common Stock issuable with respect to the Company Options
assumed by Parent in accordance with this Section 2.6.
Section 2.7 COMPANY WARRANTS. At the Effective Time, all warrants to
purchase Company Common Stock (the "COMPANY WARRANTS") then outstanding, whether
or not exercisable, shall be assumed by Parent. Each Company Warrant assumed by
Parent shall be subject to, and exercisable upon, the same terms and conditions
as under the applicable warrant agreement issued thereunder, except that
(a) each assumed Company Warrant shall be exercisable for, and represent the
right to acquire, that number of shares of Parent Common Stock (rounded down to
the nearest whole share) equal to (i) the number of shares of Company Common
Stock subject to such Company Warrant immediately prior to the Effective Time
multiplied by (ii) the Exchange Ratio; and (b) the exercise price per share of
Parent Common Stock subject to each assumed Company Warrant shall be an amount
equal to (i) the price per share of Company Common Stock subject to such Company
Warrant in effect immediately prior to the Effective Time divided by (ii) the
Exchange Ratio (rounded up to the nearest whole cent). The Company represents
and warrants that each of the foregoing actions may be taken and effected by the
Company without the consent of any holder of Company Warrants.
Section 2.8 STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock shall thereafter be made. If, after the Effective Time,
certificates formerly representing shares of Company Common Stock are presented
to the Surviving Corporation, they shall be canceled and exchanged for cash
and/or certificates representing Parent Common Stock pursuant to this Article
II.
Annex A-5
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in the disclosure schedule prepared and signed by the
Company and delivered to Parent simultaneously with the execution hereof (the
"DISCLOSURE SCHEDULE"), the Company represents and warrants to Parent and Sub
all of the statements contained in this Article III. Each exception set forth in
the Disclosure Schedule and each other response to this Agreement set forth in
the Disclosure Schedule is identified by reference to, or has been grouped under
a heading referring to, a specific individual section of this Agreement and
relates only to such section, except to the extent that one portion of the
Disclosure Schedule specifically refers to another portion thereof, identifying
such other portion by section reference or similar specific cross reference.
Section 3.1 ORGANIZATION. Each of the Company and its Subsidiaries is a
corporation or other entity duly organized, validly existing, duly qualified or
licensed to do business and in good standing under the laws of the jurisdiction
of its incorporation or organization and in each jurisdiction in which the
nature of the business conducted by it makes such qualification or licensing
necessary, and has all requisite corporate or other power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority, and
governmental approvals would not have a material adverse effect on the Company
and its Subsidiaries. As used in this Agreement, the word "SUBSIDIARY" means,
with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding such partnerships where such party
or any Subsidiary of such party do not have a majority of the voting interest in
such partnership) or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party or by any one or more of its Subsidiaries, or by such party and
one or more of its Subsidiaries. As used in this Agreement, any reference to any
event, change or effect having a "MATERIAL ADVERSE EFFECT" on or with respect to
any entity (or group of entities taken as a whole) means such event, change or
effect, individually or in the aggregate with such other events, changes, or
effects, which is materially adverse to the financial condition, businesses,
results of operations, assets, liabilities, properties or prospects of such
entity (or, if used with respect thereto, of such group of entities taken as a
whole), it being understood that none of the following shall be deemed by itself
or by themselves, either alone or in combination, to constitute a material
adverse effect: (i) a change in the market price or trading volume of Company
Common Stock or Parent Common Stock, as the case may be, (ii) conditions
affecting the economy of the United States of America as a whole,
(iii) conditions affecting generally the industry in which Parent or the
Company, as applicable, operates, or (iv) changes after the date hereof in laws
or regulations applicable to Parent or the Company, as the case may be.
Section 3.1 of the Disclosure Schedule, sets forth a complete list of the names,
jurisdiction of incorporation or other formation and capitalization of each of
the Company's Subsidiaries and the jurisdictions in which the Company and each
of its Subsidiaries are qualified to do business.
Section 3.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 25,000,000
shares of Company Common Stock. As of the date hereof, (i) 4,719,675 shares of
Company Common Stock were issued and outstanding, (ii) 1,275,000 shares of
Company Common Stock were reserved for issuance upon the exercise of outstanding
Company Options pursuant to the Company Option Plans and (iii) no shares of
Company Common Stock were reserved for issuance upon the exercise of Company
Warrants. All of the issued and outstanding shares of Company Common Stock are
validly issued, fully paid and
Annex A-6
<PAGE>
nonassessable, were issued in compliance with applicable law, and are not
subject to any preemptive or similar rights.
(b) Except as set forth in Section 3.2(b) of the Disclosure Schedule and
other than pursuant to the Option Agreement, there are not now, and at the
Effective Time there will not be, any (i) outstanding right, subscription,
warrant, call, option or other agreement or arrangement of any kind
(collectively, "RIGHTS") to purchase or otherwise to receive from the Company or
any of its Subsidiaries any of the outstanding authorized but unissued or
treasury shares of the capital stock or any other security of the Company or any
of its Subsidiaries, (ii) outstanding security of any kind convertible into or
exchangeable for such capital stock or (iii) voting trust or other agreement or
understanding to which the Company or any of its Subsidiaries is a party or is
bound with respect to the voting of the capital stock of the Company or any of
its Subsidiaries, and, in the case of each of clause (i), (ii) and (iii), there
is not now any agreement, contract, commitment or arrangement to which the
Company or any of its Subsidiaries is a party or is bound to issue or enter
into, as applicable, any of the foregoing.
(c) Each outstanding share of capital stock of each Subsidiary of the
Company is duly authorized, validly issued, fully paid and nonassessable and
each such share is owned by the Company, free and clear of any mortgage, pledge,
assessment, security interest, lease, sublease, lien, adverse claim, levy,
charge, option, right of others or restriction (whether on voting, sale,
transfer, disposition or otherwise) or other encumbrance of any kind, whether
imposed by agreement, understanding, law or equity, or any conditional sale
contract, title retention contract or other contract to give or to refrain from
giving any of the foregoing (collectively, "LIENS").
(d) Section 3.2(d) of the Disclosure Schedule sets forth a listing of
(i) all outstanding Company Options as of the date hereof, which schedule shows
the portion of each Company Option which is then vested, the vesting and
acceleration provisions thereof, if any, the date upon which each Company Option
expires and whether or not such Company Option is intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Code;
(ii) all outstanding Company Warrants as of the date hereof, which schedule
shows the portion of each Company Warrant which is exercisable and the date upon
which each Company Warrant expires; and (iii) each outstanding Company Option
and Company Warrant that will accelerate, in whole or in part, pursuant to its
terms as a result of the transactions contemplated hereby, which schedule
summarizes the terms of acceleration pursuant to such Company Option, Company
Warrant or Company Option Plan.
Section 3.3 CORPORATE AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY
ACTION. (a) The Company has full corporate power and authority to execute and
deliver this Agreement and the Ancillary Agreements to which it is a party and,
subject to obtaining approval and adoption of this Agreement by the affirmative
vote of the holders of a majority of the outstanding shares of Company Common
Stock (the "COMPANY SHAREHOLDER APPROVAL"), to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by the
Company of this Agreement and the Ancillary Agreements to which the Company is a
party, and the consummation by it of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary corporate action
on the part of the Company and, except for obtaining the Company Shareholder
Approval, no other corporate action on the part of the Company is necessary to
authorize the execution and delivery by the Company of this Agreement and the
Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby. Each of this Agreement and the
Ancillary Agreements to which it is a party have been duly executed and
delivered by the Company and, assuming each of this Agreement and such Ancillary
Agreements constitutes a valid and binding obligation of the other parties
hereto and thereto, constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive
Annex A-7
<PAGE>
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought.
(b) The Board of Directors of the Company (the "COMPANY BOARD") has duly and
validly approved and taken all corporate action required to be taken by such
Company Board for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements, and resolved to recommend that the
shareholders of the Company approve and adopt this Agreement. The Company
Shareholder Approval is the only vote of the holders of any class or series of
Company capital stock necessary to approve this Agreement and to consummate the
Merger. The Company has taken all actions necessary with respect to the entering
into of this Agreement and the Ancillary Agreements to which it is a party, the
consummation of the Merger and the other transactions contemplated by this
Agreement and the Ancillary Agreements so as to render inapplicable to such
transactions the restrictions on business combinations contained in Chapter 7A
of the MBCA.
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as disclosed in
Section 3.4 of the Disclosure Schedule and except for the Company Shareholder
Approval, the Merger Filing, and filings, permits, authorizations, consents and
approvals as may be required under, and other applicable requirements of, the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the Securities
Act and state blue sky laws, neither the execution, delivery or performance of
this Agreement or any Ancillary Agreements by the Company nor the consummation
by the Company of the transactions contemplated hereby or thereby nor compliance
by the Company with any of the provisions hereof or thereof will (i) conflict
with or result in any breach of any provision of the articles of incorporation
or by-laws or similar organizational documents of the Company or of any of its
Subsidiaries, (ii) require any filing with, or permit, authorization, consent or
approval of, any court, arbitral tribunal, administrative agency or commission
or other governmental or other regulatory authority or agency (a "GOVERNMENTAL
ENTITY"), (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration or result in the
creation of any lien) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, guarantee, other evidence of indebtedness,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its Subsidiaries is a party or by which any of them or any
of their properties or assets may be bound (a "COMPANY AGREEMENT") or
(iv) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, any of its Subsidiaries or any of their properties or
assets, except in the case of clauses (ii), (iii) or (iv) where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings, or where such violations, breaches or defaults would not, individually
or in the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole, and will not materially impair the ability of
the Company to consummate the transactions contemplated hereby or by the
Ancillary Agreements.
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed
with the Securities and Exchange Commission (the "SEC"), and has heretofore made
available to Parent true and complete copies of, all forms, reports, schedules,
statements and other documents required to be filed by it and its Subsidiaries
since June 1, 1995 under the Exchange Act and the Securities Act of 1933, as
amended (the "SECURITIES ACT") (as such documents have been amended since the
time of their filing, collectively, the "COMPANY SEC DOCUMENTS"). As of their
respective dates or, if amended, as of the date of the last such amendment, the
Company SEC Documents, including, without limitation, any financial statements
or schedules included therein (the "COMPANY FINANCIAL STATEMENTS") (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied in all material respects with the applicable
requirements of the Exchange Act or the Securities Act, as the case may be, and
the applicable rules and regulations of the SEC thereunder. The Company SEC
Documents include all the documents that
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the Company was required to file with the SEC since June 1, 1995. The Company
Financial Statements have been prepared from, and are in accordance with, the
books and records of the Company and its consolidated Subsidiaries, comply in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and present fairly
the consolidated financial position and the consolidated results of operations
and cash flows of the Company and its consolidated Subsidiaries as at the dates
thereof or for the periods presented therein. The Company has not received
notice (written or oral) from and, to its knowledge, is not under any review by
any Governmental Entity in connection with its revenue recognition policies and
procedures. Without limiting the foregoing, for any period after December 31,
1998, the Company has complied in all material respects with Statement of
Position 97-2 (Software Revenue Recognition), as amended by Statement of
Position 9804.
Section 3.6 ABSENCE OF CERTAIN CHANGES. Except as and to the extent
disclosed in the Company SEC Documents filed prior to the date of this
Agreement, since March 31, 2000, the Company and its Subsidiaries have conducted
their respective businesses and operations consistent with past practice only in
the ordinary and usual course. From March 31, 2000 through the date of this
Agreement, there has not occurred (i) any events, changes or effects (including
the incurrence of any liabilities of any nature, whether or not accrued,
contingent or otherwise) having or, which would be reasonably likely to have,
individually or in the aggregate, a material adverse effect on the Company and
its Subsidiaries; (ii) any declaration, setting aside or payment of any dividend
or other distribution (whether in cash, stock or property) with respect to the
equity interests of the Company or of any of its Subsidiaries; or (iii) any
change by the Company or any of its Subsidiaries in accounting principles or
methods, except insofar as may be required by a change in GAAP. Except as set
forth in Section 3.6 of the Disclosure Schedule, since March 31, 2000 neither
the Company nor any of its Subsidiaries has taken any of the actions prohibited
by Section 5.1 hereof.
Section 3.7 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 3.7
of the Disclosure Schedule, since March 31, 2000, neither the Company nor any of
its Subsidiaries has incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, that (a) have, or would be
reasonably likely to have, a material adverse effect on the Company and its
Subsidiaries or (b) would be required to be reflected or reserved against on a
consolidated balance sheet of the Company and its Subsidiaries (including the
notes thereto) prepared in accordance with GAAP as applied in preparing the
consolidated balance sheet of the Company and its Subsidiaries as of March 31,
2000. Section 3.7 of the Disclosure Schedule sets forth the amount of principal
and unpaid interest outstanding under each instrument evidencing indebtedness of
the Company and its Subsidiaries which will accelerate or become due or result
in a right of redemption or repurchase on the part of the holder of such
indebtedness (with or without due notice or lapse of time) as a result of this
Agreement, any of the Ancillary Agreements, the Merger or the other transactions
contemplated hereby or thereby.
Annex A-9
<PAGE>
Section 3.8 INFORMATION IN PROXY STATEMENT/PROSPECTUS. The Proxy
Statement/Prospectus (as defined in Section 5.8 hereof) (or any amendment
thereof or supplement thereto) will not, at the date mailed to Company
shareholders or at the times of the Special Meeting (as defined in
Section 5.7(b) hereof), contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading, except that no representation is made by the Company
with respect to statements made therein based on information supplied by Parent
or Sub specifically for inclusion in the Proxy Statement/Prospectus. None of the
information supplied by the Company specifically for inclusion or incorporation
by reference in the Parent Registration Statement (as defined in Section 5.8
hereof) will, at the date it becomes effective and at the time of the Special
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement/Prospectus specifically, as to information
supplied by the Company for inclusion therein, will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
Section 3.9 EMPLOYEE BENEFIT MATTERS.
(a) All employee benefit plans and other incentive, compensation or benefit
agreements or arrangements covering any current or former employee or director
of, or consultant to, the Company or any Subsidiary are listed in Section
3.9(a) of the Disclosure Schedule (the "COMPANY BENEFIT PLANS"). True and
complete copies of the Company Benefit Plans, trusts and reports and summaries
required under the Code or the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and the favorable determination letter from the Internal
Revenue Service (the "IRS") for each plan intended to be qualified under Section
401(a) of the Code, have been provided to the Purchaser. Except as set forth in
Section 3.9(a) of the Disclosure Schedule, each Company Benefit Plan has been
administered and maintained in all material respects in compliance with its
terms and with all applicable laws, including, but not limited to, ERISA and the
Code. Each Company Benefit Plan intended to be qualified under Section
401(a) of the Code has been determined by the IRS to be so qualified and to the
knowledge of the Company no event has occurred that could reasonably be expected
to adversely affect the qualified status of such Company Benefit Plan. Neither
the Company nor any of its Subsidiaries has incurred (and to the knowledge of
the Company no transaction has occurred which could reasonably be expected to
give rise to) any liability or penalty under Section 4975 of the Code or Section
502(i) of ERISA with respect to any Company Benefit Plan. To the knowledge of
the Company, there are no pending, nor has the Company or any of its
Subsidiaries received notice of any threatened, claims against or otherwise
involving any of the Company Benefit Plans. No Company Benefit Plan is under
audit or investigation by the IRS, the Department of Labor or the Pension
Benefit Guaranty Corporation, and to the knowledge of the Company, no such audit
or investigation is pending or threatened. All material contributions and other
payments required to be made as of the date of this Agreement to, or pursuant
to, the Company Benefit Plans have been made or accrued for in the Company
Financial Statements. Neither the Company nor any entity under "common control"
with the Company within the meaning of Section 4001 of ERISA has at any time
contributed to, or been required to contribute to, any "pension plan" (as
defined in Section 3(2) of ERISA) that is subject to Title IV of ERISA or
Section 412 of the Code, including, without limitation, any "multi-employer
plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA), and neither the
Company nor any such entity has at any time incurred or could reasonably expect
to incur any liability under Title IV of ERISA.
(b) The consummation of the Transactions will not (either alone or upon the
occurrence of any additional or subsequent events) (i) constitute an event under
any Company Benefit Plan, employment or severance agreement, trust, loan or
other compensation or benefits agreement or arrangement that will or may result
in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of
Annex A-10
<PAGE>
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any current or former employee, officer, director,
agent or consultant of the Company or any Subsidiary, or (ii) result in the
triggering or imposition of any restrictions or limitations on the right of the
Company or the Purchaser to amend or terminate any Company Benefit Plan and
receive the full amount of any excess assets remaining or resulting from such
amendment or termination, subject to applicable taxes. No payment or benefit
which will or may be made by the Company, any of its Subsidiaries, the Purchaser
or any of their respective affiliates with respect to any employee, officer or
director of the Company or its Subsidiaries will be characterized as an "excess
parachute payment," within the meaning of Section 280G(b)(1) of the Code and no
amount of any such payment or benefit will fail to be deductible by the Company
by reason of Section 162(m) of the Code.
(c) Neither the Company nor any of its Subsidiaries (i) maintains or
contributes to any Company Benefit Plan which provides, or has any liability to
provide, life insurance, medical, severance or other employee welfare benefits
to any employee upon or with respect to periods following his retirement or
termination of employment, except as may be required by Section 4980B of the
Code; or (ii) has ever represented, promised or contracted (whether in oral or
written form) to any employee (either individually or to employees as a group)
that such employee(s) would be provided with life insurance, medical, severance
or other employee welfare benefits upon their retirement or termination of
employment, except to the extent required by Section 4980B of the Code. All
amounts of deferred compensation benefits under any Company Benefit Plan have
been properly accrued for in the Financial Statements.
(d) With respect to each Company Benefit Plan which is an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA, all material claims
incurred (including claims incurred but not reported) by employees thereunder
for which the Company is, or will become, liable are (i) insured pursuant to a
contract of insurance whereby the insurance company bears any risk of loss with
respect to such claims; (ii) covered under a contract with a health maintenance
organization (an "HMO") pursuant to which the HMO bears the liability for such
claims, or (iii) reflected as a liability in Section 3.9(d) of the Disclosure
Schedule.
Section 3.10 LITIGATION; COMPLIANCE WITH LAW.
(a) There is no suit, claim, action, proceeding, arbitration or
investigation pending or, to the knowledge of the Company, threatened against or
affecting, the Company or any of its Subsidiaries which, individually or in the
aggregate, is reasonably likely, individually or in the aggregate, to have a
material adverse effect on the Company and its Subsidiaries, or materially
impair the ability of the Company to consummate the Merger or the other
transactions contemplated hereby or by the Ancillary Agreements. The foregoing
includes, without limitation, actions pending or, to the knowledge of the
Company, threatened (or any basis therefor known to the Company) involving the
prior employment of any of the Company's or any of its Subsidiaries' employees,
their use in connection with the Company's or any of its Subsidiaries' business
of any information, techniques, patents, patent applications, copyrights, trade
secrets, inventions, technology, know-how, Software (as defined in Section
3.17(j)) or other intellectual property rights allegedly proprietary to any of
their former employers, or their obligations under any agreements with prior
employers.
(b) The Company and its Subsidiaries have complied in a timely manner and in
all material respects, with all laws, statutes, regulations, rules, ordinances,
and judgments, decrees, orders, writs and injunctions, of any court or
Governmental Entity relating to any of the property owned, leased or used by
them, or applicable to their business, including, but not limited to, (1) the
Foreign Corrupt Practices Act of 1977 and any other laws regarding use of funds
for political activity or commercial bribery and (2) laws relating to equal
employment opportunity, discrimination, occupational safety and health,
environmental, interstate commerce and antitrust.
Annex A-11
<PAGE>
Section 3.11 NO DEFAULT. The business of the Company and each of its
Subsidiaries has not been and is not being conducted in default or violation of
any term, condition or provision of (i) its respective articles of incorporation
or bylaws or similar organizational documents, (ii) any Company Agreement or
(iii) any federal, state, local or foreign law, statute, regulation, rule,
ordinance, judgment, decree, order, writ, injunction, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to the Company or any of its Subsidiaries or relating to any of the
property owned, leased or used by them, or applicable to their business,
excluding from the foregoing clauses (ii) and (iii), defaults or violations that
would not, individually or in the aggregate, have a material adverse effect on
the Company and its Subsidiaries or materially impair the ability of the Company
to consummate the Merger or the other transactions contemplated hereby or by the
Ancillary Agreements. No investigation or review by any Governmental Entity or
other entity with respect to the Company or any of its Subsidiaries is pending
or, to the knowledge of the Company, threatened, nor has any Governmental Entity
or other entity indicated an intention to conduct the same, other than, in each
case, those the outcome of which, as far as reasonably can be foreseen, in the
future will not, individually or in the aggregate, have a material adverse
effect on the Company and its Subsidiaries.
Section 3.12 TAXES.
(a) Except as set forth in Section 3.12 of the Disclosure Schedule, the
Company and each of its Subsidiaries has timely filed (or has had timely filed
on its behalf) with the appropriate Tax Authorities all Tax Returns required to
be filed by the Company and each of its Subsidiaries, and such Tax Returns are
true, correct, and complete in all material respects.
(b) The Company and each of its Subsidiaries has paid, or where payment is
not yet due, has established an adequate accrual in accordance with GAAP for the
payment of, all Taxes for all periods ending through the date hereof.
(c) There are no liens for Taxes upon any property or assets of the Company
or any of its Subsidiaries, except for liens for Taxes not yet due and for which
adequate reserves have been established in accordance with GAAP.
(d) No federal, state, local or foreign Audits are presently pending with
regard to any Taxes or Tax Returns of the Company and its Subsidiaries and to
the knowledge of the Company, no such Audit is threatened.
(e) Except as set forth in Section 3.12(e) of the Disclosure Schedule, the
Tax Returns of the Company and each of its Subsidiaries have been examined by
the applicable Tax Authority (or the applicable statutes of limitation for the
assessment of Taxes for such periods have expired), and for any year that a Tax
Return was examined, no material adjustments were asserted as a result of such
examination which have not been resolved and fully paid, and no issue has been
raised by any Tax Authority in any Audit of the Company or any of its
Subsidiaries that, if raised with respect to any other period not so audited,
could be expected to result in a proposed deficiency for any such period not so
audited.
(f) There are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against the Company or any of its Subsidiaries, and no
power of attorney granted by the Company or any of its Subsidiaries with respect
to any Taxes is currently in force.
(g) Neither the Company nor any of its Subsidiaries is a party to any
agreement providing for the allocation, indemnification, or sharing of Taxes.
(h) Except as set forth in Section 3.12(h) of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries has been a member of any
"affiliated group" (as defined in section 1504(a) of the Code) and is not
subject to Treas. Reg. 1.1502-6 for any period.
Annex A-12
<PAGE>
(i) Neither the Company nor any of its Subsidiaries is or has been a U.S.
real property holding company (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(j) "AUDIT" means any audit, assessment, or other examination relating to
Taxes by any Tax Authority or any judicial or administrative proceedings
relating to Taxes. "TAX" or "TAXES" means all federal, state, local, and foreign
taxes, and other assessments of a similar nature (whether imposed directly or
through withholding), including any interest, additions to tax, or penalties
applicable thereto, imposed by any Tax Authority. "TAX AUTHORITY" means the IRS
and any other domestic or foreign governmental authority responsible for the
administration of any Taxes. "TAX RETURNS" mean all federal, state, local, and
foreign tax returns, declarations, statements, reports, schedules, forms, and
information returns and any amendments thereto.
Section 3.13 CONTRACTS. Each Company Agreement is valid, binding and
enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a material
adverse effect on the Company and its Subsidiaries, and there are no defaults
thereunder, except those defaults that would not have a material adverse effect
on the Company and its Subsidiaries. Section 3.13 of the Disclosure Schedule
sets forth a true and complete list of (i) all Company Agreements entered into
by the Company or any of its Subsidiaries and included as exhibits to the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999 that have been altered, amended or otherwise modified in any manner, and
(ii) all non-competition agreements imposing restrictions on the ability of the
Company or any of its Subsidiaries to conduct business in any jurisdiction or
territory.
Section 3.14 ASSETS; REAL PROPERTY. The Company and its Subsidiaries have
all assets, properties, rights and contracts necessary to permit the Company and
its Subsidiaries to conduct their business as it is currently being conducted,
except where the failure to have such assets, properties, rights and contracts
would not have a material adverse effect on the Company and its Subsidiaries.
The Company SEC Documents accurately identify all material real property or
material interests in material real property owned by the Company and its
Subsidiaries (the "REAL PROPERTY"). The Company or its Subsidiaries has good and
marketable title to the real property owned by them, free and clear of all
liens, charges, security interests, options, claims, mortgages, pledges,
easements, rights-of-way or other encumbrances and restrictions of any nature
whatsoever, except as described in Section 3.14 of the Disclosure Schedule and
those that do not adversely affect the value of such real property.
Section 3.15 ENVIRONMENTAL MATTERS. Except as disclosed in the Company SEC
Documents filed prior to the date of this Agreement, (a) the Company and its
Subsidiaries are in compliance in all material respects with federal, state,
local and foreign laws and regulations relating to pollution, protection or
preservation of human health or the environment, including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of toxic or hazardous substances, materials or wastes, petroleum and
petroleum products, asbestos or asbestos-containing materials, polychlorinated
biphenyls, radon, or lead or lead-based paints or materials ("MATERIALS OF
ENVIRONMENTAL CONCERN"), or otherwise relating to the generation, storage,
containment (whether above ground or underground), disposal, transport or
handling of Materials of Environmental Concern, or the preservation of the
environment or mitigation of adverse effects thereon (collectively,
"ENVIRONMENTAL LAWS"), and including, but not limited to, compliance with any
permits or other governmental authorizations or the terms and conditions
thereof; (b) neither the Company nor any of its Subsidiaries has received any
communication or notice, whether from a governmental authority or otherwise,
alleging any violation of or noncompliance with any Environmental Laws by any of
the Company or its Subsidiaries or for which the any of them is responsible, and
there is no pending or threatened claim, action, investigation or notice by any
person or entity alleging potential liability for investigatory, cleanup or
governmental response costs, or natural resources or property damages, or
personal injuries, attorney's fees or penalties relating to (i) the presence, or
release into the environment, of any
Annex A-13
<PAGE>
Materials of Environmental Concern at any location owned or operated by the
Company or its Subsidiaries, now or in the past, or (ii) any violation, or
alleged violation, of any Environmental Law (collectively, "ENVIRONMENTAL
CLAIMS"), except where such Environmental Claims would not have a material
adverse effect or otherwise require disclosure in the Company SEC Documents; and
(c) there are no past or present facts or circumstances that could form the
basis of any Environmental Claim against the Company or its Subsidiaries or
against any person or entity whose liability for any Environmental Claim the
Company or its Subsidiaries have retained or assumed either contractually or by
operation of law, except where such Environmental Claim, if made, would not have
a material adverse effect or otherwise require disclosure in the Company SEC
Documents. All permits and other governmental authorizations currently held or
required to be held by the Company and its Subsidiaries pursuant to any
Environmental Laws are identified in Section 3.15 of the Disclosure Schedule.
The Company has provided to Parent all assessments, reports, data, results of
investigations or audits, and other information that is in the possession of or
reasonably available to the Company regarding environmental matters pertaining
to the environmental condition of the business of the Company and its
Subsidiaries, or the compliance (or noncompliance) by the Company or its
Subsidiaries with any Environmental Laws.
Section 3.16 PRODUCT LIABILITY. Except as described in Section 3.16 of the
Disclosure Schedule, there are not presently pending or, to the knowledge of the
Company, threatened any civil, criminal or administrative actions, suits,
demands, claims, hearings, notices of violation, investigations, proceedings or
demand letters relating to any alleged hazard or alleged defect in design,
manufacture, materials or workmanship, including any failure to warn or alleged
breach of express or implied warranty or representation, relating to any product
manufactured, distributed or sold by or on behalf of the Company and its
Subsidiaries, which if adversely determined, would reasonably be expected to
have a material adverse effect on the Company and its Subsidiaries. Neither the
Company nor any of its Subsidiaries has extended to its customers any written
non-uniform product warranties, indemnifications or guarantees.
Section 3.17 INTELLECTUAL PROPERTY.
(a) The Company or its Subsidiaries own or have a valid right to use all
trademarks, service marks, trade names, Internet domain names, designs, slogans,
and general intangibles of like nature, together with all goodwill related to
the foregoing (collectively, "TRADEMARKS"); patents; copyrights (including any
registrations, renewals and applications for any of the foregoing); Software;
technology, trade secrets and other confidential information, know-how,
proprietary processes, formulae, algorithms, models, and methodologies
(collectively, "TRADE SECRETS," and together with the foregoing, the
"INTELLECTUAL PROPERTY") used in or necessary for the conduct of the Company and
each Subsidiaries' business as currently conducted or contemplated to be
conducted.
(b) Section 3.17(b)(1) of the Disclosure Schedule sets forth, for the
Intellectual Property owned by the Company or its Subsidiaries, a complete and
accurate list of all U.S. and foreign (1) patents and patent applications;
(2) Trademark registrations (including Internet domain registrations) and
applications and material unregistered Trademarks; (3) copyright registrations
and applications, and material unregistered copyrights, including those in
Software, indicating for each, the applicable jurisdiction, registration number
(or application number), and date issued (or date filed). Section
3.17(b)(2) sets forth a complete and accurate list of all license agreements
granting any right to use or practice any rights under any Intellectual Property
that call for the payment or receipt of more than $25,000, whether the Company
or any of its Subsidiaries is the licensee or licensor thereunder, and any
written settlements relating to any Intellectual Property to which the Company
or any of its Subsidiaries is a party or otherwise bound (collectively, the
"LICENSE AGREEMENTS"), indicating for each the title, the parties, the date
executed and the Intellectual Property covered thereby.
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(c) The Intellectual Property owned by the Company or any of its
Subsidiaries is free and clear of all Liens, and the Company or a Subsidiary of
the Company, as noted in Section 3.17(c) of the Disclosure Schedule is listed in
the records of the appropriate United States, state or foreign agency as the
sole owner of record for each application and registration listed in Section
3.17(c) of the Disclosure Schedule.
(d) Except as set forth in Section 3.17(d) of the Disclosure Schedule, the
Intellectual Property owned by the Company or any Subsidiary and, to the best of
the Company's knowledge, any Intellectual Property used by the Company, is valid
and subsisting, in full force and effect, and has not been canceled, expired, or
abandoned. There is no pending or, to the knowledge of the Company, threatened
opposition, interference or cancellation proceeding before any court or
registration authority in any jurisdiction against the registrations listed in
Section 3.17(d) of the Disclosure Schedule, or, to the best of the Company 's
knowledge, against any Intellectual Property licensed to the Company or its
Subsidiaries.
(e) The conduct of the Company's and its Subsidiaries' business as currently
conducted or planned to be conducted does not infringe upon any Intellectual
Property rights owned or controlled by any third party (either directly or
indirectly such as through contributory infringement or inducement to infringe).
Except as set forth in Section 3.17(e) of the Disclosure Schedule, there are no
claims or suits pending or, to the knowledge of the Company, threatened, and
neither the Company nor any of its Subsidiaries has received any notice of a
third party claim or suit (1) alleging that its activities or the conduct of its
businesses infringes upon, violates, or constitutes the unauthorized use of the
Intellectual Property rights of any third party or (2) challenging the
ownership, use, validity or enforceability of any Intellectual Property.
(f) Except as set forth in Section 3.17(f) of the Disclosure Schedule, there
are no settlements, forebearances to sue, consents, judgments, or orders or
similar obligations which (1) restrict the Company's or its Subsidiaries' rights
to use any Intellectual Property, (2) restrict the Company's or its
Subsidiaries' business in order to accommodate a third party's Intellectual
Property or (3) permit third parties to use any Intellectual Property owned or
controlled by the Company or any of its Subsidiaries. The Company or its
Subsidiaries has not licensed or sublicensed its rights in any material
Intellectual Property other than pursuant to the License Agreements, and no
royalties, honoraria or other fees are payable by the Company or its
Subsidiaries for the use of or right to use any Intellectual Property, except
pursuant to the License Agreements. The License Agreements are valid and binding
obligations of all parties thereto, enforceable in accordance with their terms,
and there exists no event or condition which will result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default by the Company or, to the knowledge of the Company, any other party
under any such License Agreement.
(g) The Company and each of its Subsidiaries take reasonable measures to
protect the confidentiality of Trade Secrets, including, except as set forth in
Section 3.17(g) of the Disclosure Schedule, requiring its employees and
independent contractors having access thereto to execute written non-disclosure
agreements. Except as set forth in Section 3.17(g) of the Disclosure Schedule,
to the knowledge of the Company, no Trade Secret has been disclosed or
authorized to be disclosed to any third party other than pursuant to a
non-disclosure agreement that adequately protects the Company and the applicable
Subsidiary's proprietary interests in and to such Trade Secrets. Neither the
Company nor, to the knowledge of the Company, any other party to any
non-disclosure agreement relating to the Company's Trade Secrets is in breach or
default thereof.
(h) To the knowledge of the Company, no third party is misappropriating,
infringing, diluting, or violating any Intellectual Property owned by the
Company or any of its Subsidiaries and, except as set forth in Section
3.17(h) of the Disclosure Schedule, no such claims have been brought against any
third party by the Company or any of its Subsidiaries.
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(i) Except as set forth in Section 3.17(i) of the Disclosure Schedule, the
consummation of the transactions contemplated hereby will not result in the loss
or impairment of the Company or any of its Subsidiaries' right to own or use any
of the Intellectual Property, nor will require the consent of any governmental
authority or third party in respect of any such Intellectual Property.
(j) Section 3.17(j) of the Disclosure Schedule lists all Software (other
than off-the-shelf software applications programs having an acquisition price of
less than $25,000) which are owned, licensed, leased, or otherwise used by the
Company or any of its Subsidiaries, and identifies which of such Software is
owned, licensed, leased, or otherwise used, as the case may be. Section 3.17(j)
of the Disclosure Schedule lists all Software sold, licensed, leased or
otherwise distributed by the Company or any of its Subsidiaries to any third
party, and identifies which Software is sold, licensed, leased, or otherwise
distributed as the case may be. With respect to the Software set forth in
Section 3.17(j) of the Disclosure Schedule which the Company or any of its
Subsidiaries purports to own, such Software was either developed (1) by
employees of the Company or any of its Subsidiaries within the scope of their
employment; or (2) by independent contractors who have assigned their rights to
the Company or any of its Subsidiaries pursuant to written agreements. For
purposes of this Section 3.17, "SOFTWARE" means any and all (v) computer
programs, including any and all software implementations of algorithms, models
and methodologies, whether in source code or object code, (w) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (x) descriptions, flowcharts and other work
product used to design, plan, organize and develop any of the foregoing,
(y) the technology supporting any Internet site(s) operated by or on behalf of
the Company or any of its Subsidiaries, and (z) all documentation, including
user manuals and training materials, relating to any of the foregoing.
(k) Any Software that the Company or any of its Subsidiaries licenses and
maintains pursuant to contracts with third parties ("LICENSED SOFTWARE") in
order to enable such Software to process accurately (including calculating,
comparing and sequencing) in all material respects date data from, into and
between the twentieth and twenty-first centuries, including leap year
calculations ("MILLENNIAL DATE DATA"). All such Licensed Software processes
Millennial Date Data without material errors or omissions and without materially
affecting functionality when used in accordance with the product documentation
provided by the Company therefor and provided that all other software and all
hardware and firmware used in combination with such Licensed Software properly
exchanges date data with it. To the knowledge of the Company, neither the
Company nor any of its Subsidiaries has made any representation or warranty to
any third party that imposes any liability (whether or not accrued, contingent
or otherwise) on the Company or any of its Subsidiaries greater than the
preceding representation.
Section 3.18 PROPRIETARY RIGHTS AND CONFIDENTIALITY AGREEMENTS. Except as
set forth in Section 3.18 of the Disclosure Schedule, each current and former
employee and officer of the Company and its Subsidiaries has executed a
Proprietary Rights and Confidentiality Agreement or similar such agreement, in
substantially the form previously provided to Parent. The Company is not aware
that any of the current or former employees of the Company or any of its
Subsidiaries is in violation thereof.
Section 3.19 INSURANCE. The Company and each of its Subsidiaries has
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting businesses or owning assets similar to those of the
Company and its Subsidiaries. There is no material claim pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and the Company and its
Subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds. The Company has not been notified of any threatened
termination of, or material premium increase with respect to, any of such
policies.
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Section 3.20 SUPPLIERS AND CUSTOMERS. Since March 31, 2000, no material
licensor, vendor, supplier, licensee or customer of the Company or any of its
Subsidiaries has canceled or otherwise modified its relationship with the
Company or its Subsidiaries and, to the Company's knowledge, (a) no such person
has any intention to do so, and (b) the consummation of the transactions
contemplated hereby will not adversely affect any of such relationships.
Section 3.21 LABOR MATTERS.
(a) Except as set forth in Section 3.21(a) of the Disclosure Schedule,
(i) the Company and its Subsidiaries are in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment, health and safety, and wages and hours; (ii) neither the Company nor
any of its Subsidiaries has received written notice of any charge or complaint
against the Company or any of its Subsidiaries pending before the Equal
Employment Opportunity Commission, the National Labor Relations Board, or any
other government agency or court or other tribunal regarding an unlawful
employment practice; (iii) neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement and there is no labor strike,
slowdown or stoppage actually pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries;
(iv) neither the Company nor any of its Subsidiaries has received notice that
any representation petition respecting the employees of the Company or any of
its Subsidiaries has been filed with the National Labor Relations Board, and, to
the knowledge of the Company, there has been no labor union prior to the date
hereof organizing any employees of the Company or any of its Subsidiaries into
one or more collective bargaining units; (v) there are no complaints, lawsuits,
arbitrations or other proceedings pending, or to the knowledge of the Company,
threatened by or on behalf of any present or former employee of the Company or
any of its Subsidiaries alleging breach of any express or implied contract of
employment; (vi) to the knowledge of the Company, no federal, state, or local
agency responsible for the enforcement of labor or employment laws intends to
conduct an investigation with respect to or relating to the Company or any of
its Subsidiaries and no such investigation is in progress; (vii) there are no
personnel arrangements, understandings, policies, rules or procedures (whether
written or oral) applicable to employees of the Company or any of its
Subsidiaries other than those set forth in Section 3.21(a) of the Disclosure
Schedule, true, correct and complete copies of which have heretofore been
delivered to Parent; and (viii) there are no employment contracts, severance
agreements, confidentiality agreements (other than standard employee
non-disclosure agreements as contemplated by Section 3.21(vii)) or any other
agreements (whether written or oral) with any employees of the Company or any
Subsidiary thereto.
(b) The Company and its Subsidiaries are and have been in substantial
compliance with all notice and other requirements under the Worker Adjustment
and Retaining Notification Act ("WARN") or similar state statute. Except as set
forth in Section 3.21(b) of the Disclosure Schedule, none of the employees of
the Company or any of its Subsidiaries have suffered an "employment loss" (as
defined in WARN) during the ninety (90)-day period prior to the execution of
this Agreement.
(c) Neither the Company nor any of its Subsidiaries is bound by any
contract, arrangement, understanding, policy, rule or procedure (whether written
or oral) that restricts its ability to terminate the employment of any of its
employees at any time without payment or other liability.
Section 3.22 ACCOUNTS RECEIVABLE; INVENTORY. Subject to any reserves set
forth in the balance sheet of the Company included in the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, as filed with the SEC
prior to the date of this Agreement (the "COMPANY BALANCE SHEET"), the accounts
receivable shown in the Company Balance Sheet arose in the ordinary course of
business; were not, as of the date of the Company Balance Sheet, subject to any
material discount, contingency, claim of offset or recoupment or counterclaim;
and represented, as of the date of the Company Balance Sheet, bona fide claims
against debtors for sales, leases, licenses and other charges. All accounts
receivable of the Company and its Subsidiaries arising after the date of the
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Company Balance Sheet through the date of this Agreement arose in the ordinary
course of business and, as of the date of this Agreement, are not subject to any
material discount, contingency, claim of offset or recoupment or counterclaim,
except for normal reserves consistent with past practice. The amount carried for
doubtful accounts and allowances disclosed in the Company Balance Sheet is
believed by the Company as of the date of this Agreement to be sufficient to
provide for any losses which may be sustained or realization of the accounts
receivable shown in the Company Balance Sheet. As of the date of the Company
Balance Sheet, the inventories shown on the Company Balance Sheet consisted in
all material respects of items of a quantity and quality usable or saleable in
the ordinary course of business. All of such inventories were acquired in the
ordinary course of business and, as of the date of this Agreement, have been
replenished in all material respects in the ordinary course of business
consistent with past practices. All such inventories are valued on the Company
Balance Sheet in accordance with GAAP applied on a basis consistent with the
Company's past practices, and provision has been made or reserves have been
established on the Company Balance Sheet, in each case in an amount believed by
the Company as of the date of this Agreement to be adequate, for all
slow-moving, obsolete or unusable inventories.
Section 3.23 TRANSACTIONS WITH AFFILIATES. Except to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement or as
disclosed in Section 3.23 of the Disclosure Schedule, since March 31, 2000,
there have been no transactions, agreements, arrangements or understandings
between the Company and its affiliates that would be required to be disclosed
under Item 404 of Regulation S-K under the Securities Act.
Section 3.24 OPINION OF FINANCIAL ADVISOR. The Company has received the
written opinion of Newbury, Piret & Company, Inc., dated the date hereof, to the
effect that, as of such date, the consideration to be received by the
shareholders of the Company in the Merger is fair to such shareholders from a
financial point of view, a signed copy of which opinion has been delivered to
Parent.
Section 3.25 BROKERS OR FINDERS. The Company represents, as to itself, its
Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person, other than Newbury, Piret &
Company, Inc., is or will be entitled to any brokers' or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and the Company agrees to indemnify and hold
Parent and Sub harmless from and against any and all claims, liabilities or
obligations with respect to any other commissions or similar fees in connection
with any of the transactions contemplated by this Agreement which are asserted
by any person on the basis of any act or statement alleged to have been made by
or on behalf of the Company. The Company has heretofore furnished to Parent a
complete and correct copy of all agreements between the Company and Newbury,
Piret & Company, Inc., pursuant to which such firm would be entitled to any
payment relating to the transactions contemplated hereby. The aggregate payments
payable to Newbury, Piret & Company, Inc. as a result of the consummation of the
Merger, the purchase of any Securities, the issuance of any securities, and
otherwise in connection with the transactions contemplated hereby and by the
Ancillary Agreements, is $930,000.
Section 3.26 TAX MATTERS. None of the Company, any of its Subsidiaries or,
to the knowledge of the Company, any of their respective directors, officers or
shareholders, has taken any action which would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section
368(a) of the Code.
Section 3.27 STATE TAKEOVER STATUTES. To the knowledge of the Company, no
state takeover statute (other than Chapter 7A of the MBCA, which is
inapplicable) is applicable to the Merger or the transactions contemplated by
this Agreement and the Ancillary Agreements.
Section 3.28 FULL DISCLOSURE. The Company has not failed to disclose to
Parent any facts material to the Company's business, results of operations,
assets, liabilities, financial condition or prospects. No
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representation or warranty by the Company in this Agreement and no statement by
the Company contained in any document (including the Company Financial
Statements), schedule or certificate furnished or to be furnished by the Company
to Parent pursuant to the terms hereof, the Option Agreement or in connection
with the transactions contemplated hereby or thereby, contains as of the date
hereof or will contain as of the Effective Time, any untrue statements of a
material fact or omit or will omit to state any material fact necessary, in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 ORGANIZATION. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite corporate or other
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing and in good standing or to
have such power, authority, and governmental approvals would not have a material
adverse effect on Parent and its Subsidiaries. Parent and each of its
Subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, in the aggregate, have a material adverse effect on
Parent and its Subsidiaries.
Section 4.2 CAPITALIZATION.
(a) The authorized capital stock of Parent consists of 100,000,000 shares of
Parent Common Stock and 10,000,000 shares of preferred stock, par value $.001
per share (the "PARENT PREFERRED STOCK"). As of March 31, 2000, (i) 25,789,588
shares of Parent Common Stock were issued and outstanding, (ii) no shares of
Parent Preferred Stock were issued and outstanding, and (iii) 4,652,405 shares
of Parent Common Stock were reserved for issuance upon the exercise of
outstanding options to purchase shares of Parent Common Stock pursuant to
employee stock option plans of Parent. All of the issued and outstanding shares
of Parent Common Stock are validly issued, fully paid and nonassessable and are
not subject to any preemptive or similar rights.
(b) Except as disclosed in this Section 4.2, as of the date of this
Agreement, there is no outstanding (i) Right to purchase or otherwise to receive
from Parent or any of its Subsidiaries any of the outstanding authorized but
unissued or treasury shares of the capital stock of Parent or any of its
Subsidiaries, (ii) security of any kind convertible into or exchangeable for
such capital stock and (iii) voting trust or other agreement or understanding to
which Parent or any of its Subsidiaries is a party or is bound with respect to
the voting of the capital stock of Parent or any of its Subsidiaries.
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY ACTION.
(a) Each of Parent and Sub has full corporate power and authority to execute
and deliver this Agreement and the Ancillary Agreements to which it is a party
and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance of this Agreement and the Ancillary
Agreements to which each of Parent and Sub, respectively, is a party and the
consummation by Parent and Sub of the Merger and of the other transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Sub, respectively, and no
other corporate actions on the part of Parent and Sub are necessary to authorize
the execution and delivery of this Agreement or such Ancillary Agreements and
the consummation by each of them of the transactions contemplated hereby and
thereby. Each of this Agreement and the
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Ancillary Agreements to which each of Parent and Sub, respectively, is a party
has been duly executed and delivered by Parent or Sub, as the case may be,
assuming each of this Agreement and such Ancillary Agreements constitutes a
valid and binding obligation of the other parties hereto and thereto,
constitutes a valid and binding obligation of Parent or Sub, as the case may be,
enforceable against Parent or Sub, as the case may be, in accordance with their
respective terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The shares of Parent Common Stock to be
issued pursuant to the Merger, when issued in accordance with the terms hereof,
will be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights.
(b) The Boards of Directors of Parent and Sub each have duly and validly
approved and taken all corporate action required to be taken by such Board of
Directors for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements to which Parent or Sub, as the case may
be, is a party.
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the Merger
Filing and filings, permits, authorizations, consents and approvals as may be
required under, and other applicable requirements of, the Exchange Act, the
Securities Act and state blue sky laws, neither the execution, delivery or
performance of this Agreement or any Ancillary Agreements by Parent and Sub nor
the consummation by Parent and Sub of the transactions contemplated hereby or
thereby nor compliance by Parent and Sub with any of the provisions hereof or
thereof will (i) conflict with or result in any breach of any provision of the
respective certificates of incorporation or by-laws of Parent or Sub,
(ii) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity, (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, license, lease, contract, agreement
or other instrument or obligation to which Parent or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound or (iv) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Parent, any of its Subsidiaries or any of their
properties or assets, except in the case of clauses (ii), (iii) and (iv) where
the failure to obtain such permits, authorizations, consents or approvals or to
make such filings, or where such violations, breaches or defaults would not,
individually or in the aggregate, have a material adverse effect on Parent and
will not materially impair the ability of Parent or Sub to consummate the
transactions contemplated hereby or by the Ancillary Agreements.
Section 4.5 INFORMATION IN PROXY STATEMENT/PROSPECTUS. The Registration
Statement (or any amendment thereof or supplement thereto) will not, at the date
it becomes effective and at the times of the Special Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by Parent or Sub with respect to statements made therein
based on information supplied by the Company for inclusion in the Registration
Statement. None of the information supplied by Parent or Sub for inclusion or
incorporation by reference in the Proxy Statement/Prospectus, at the date mailed
to shareholders and at the time of the Special Meeting, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Registration
Statement, as to information supplied by Parent or Sub, will comply in all
material respects with the provisions of the Securities Act and the rules and
regulations thereunder.
Section 4.6 SEC REPORTS AND FINANCIAL STATEMENTS. Parent has filed with
the SEC, and has heretofore made available to the Company true and complete
copies of, all forms, reports, schedules,
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statements and other documents required to be filed by it and its Subsidiaries
since August 5, 1999 under the Exchange Act or the Securities Act (as such
documents have been amended since the time of their filing, collectively, the
"PARENT SEC DOCUMENTS"). As of their respective dates or, if amended, as of the
date of the last such amendment, the Parent SEC Documents, including, without
limitation, any financial statements or schedules included therein (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied in all material respects with the applicable
requirements of the Exchange Act or the Securities Act, as the case may be, and
the applicable rules and regulations of the SEC thereunder. The Parent SEC
Documents include all the documents that Parent was required to file with the
SEC since August 5, 1999. Each of the consolidated financial statements included
in the Parent SEC Documents have been prepared from, and are in accordance with,
the books and records of Parent and its consolidated Subsidiaries, comply in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and present fairly
the consolidated financial position and the consolidated results of operations
and cash flows of Certificate of Incorporation and its consolidated Subsidiaries
as at the dates thereof or for the periods presented therein. Parent has not
received notice (written or oral) from and, to its knowledge, is not under any
review by any Governmental Entity in connection with its revenue recognition
policies and procedures. Without limiting the foregoing, for any period after
December 31, 1998, Parent has complied in all material respects with Statement
of Position 97-2 (Software Revenue Recognition), as amended by Statement of
Position 9804.
Section 4.7 ABSENCE OF CERTAIN CHANGES. Except as and tod the extent
disclosed in the Parent SEC Documents filed prior to the date of this Agreement,
since March 31, 2000, Parent and its Subsidiaries have conducted their
respective businesses and operations in all material respects consistent with
past practice only in the ordinary and usual course. From March 31, 2000 through
the date of this Agreement, there has not occurred (i) any events, changes or
effects (including the incurrence of any liabilities of any nature, whether or
not accrued, contingent or otherwise) having or, which would be reasonably
likely to have, individually or in the aggregate, a material adverse effect on
Parent and its Subsidiaries; (ii) any declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property) with
respect to the equity interests of Parent or of any of its Subsidiaries other
than regular quarterly cash dividends or dividends paid by wholly owned
Subsidiaries; or (iii) any change by Parent or any of its Subsidiaries in
accounting principles or methods, except insofar as may be required by a change
in GAAP. Since March 31, 2000 neither Parent nor any of its Subsidiaries has
taken any of the actions prohibited by Section 5.2 hereof.
Section 4.8 LITIGATION; COMPLIANCE WITH LAW.
(a) Except for the suits disclosed in the Parent SEC Documents filed prior
to the date of this Agreement, there is no suit, claim, action, proceeding,
arbitration or investigation pending or, to the knowledge of Parent, threatened
against or affecting, Parent or any of its Subsidiaries which, individually or
in the aggregate, is reasonably likely, individually or in the aggregate, to
have a material adverse effect on Parent and its Subsidiaries, or materially
impair the ability of Parent to consummate the Merger or the other transactions
contemplated hereby or by the Ancillary Agreements. The foregoing includes,
without limitation, actions pending or, to the knowledge of Parent, threatened
(or any basis therefor known to Parent) involving the prior employment of any of
Parent's or any of its Subsidiaries' employees, their use in connection with
Parent's or any of its Subsidiaries' business of any information, techniques,
patents, patent applications, copyrights, trade secrets, inventions, technology,
know-how, software or other intellectual property rights allegedly proprietary
to any of their former employers, or their obligations under any agreements with
prior employers.
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(b) Parent and its Subsidiaries have complied in a timely manner and in all
material respects, with all laws, statutes, regulations, rules, ordinances, and
judgments, decrees, orders, writs and injunctions, of any court or Governmental
Entity relating to any of the property owned, leased or used by them, or
applicable to their business, including, but not limited to, (1) the Foreign
Corrupt Practices Act of 1977 and any other laws regarding use of funds for
political activity or commercial bribery and (2) laws relating to equal
employment opportunity, discrimination, occupational safety and health,
environmental, interstate commerce and antitrust.
Section 4.9 BROKERS OR FINDERS. No agent, broker, investment banker,
financial advisor or other firm or person, other than Dain Rauscher, Inc., is or
will be entitled to any brokers' or finder's fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement, and Parent agrees to indemnify and hold the Company harmless from and
against any and all claims, liabilities or obligations with respect to any other
fees, commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by or on behalf of such party.
(l) Except as set forth in Section 3.17(l) of the Disclosure Schedule, the
Company and its Subsidiaries have obtained written representations or assurances
from each third party that (A) provides or will provide Millennial Date Data to
the Company or its Subsidiaries, (B) processes or will process Millennial Date
Data for the Company or its Subsidiaries or (C) otherwise provides or will
provide any material product or service to the Company or its Subsidiaries that
is dependent upon any Software, microcode, chip or hardware system or component,
including any electronic or electronically controlled system or component (a
"SYSTEM") that processes any Millennial Date Data, stating that all of such
Systems that are used for, or on behalf of, the Company or its Subsidiaries will
process Millennial Date Data without materially affecting the supply of such
product or service to the Company or its Subsidiaries after December 31, 1999.
Section 4.10 TAX MATTERS. None of Parent, any of its Subsidiaries or, to
the knowledge of Parent, any of their respective directors, officers or
shareholders, has taken any action which would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code.
Section 4.11 OPERATIONS OF SUB. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement, has engaged in no
other business activities and has conducted its operations only as contemplated
by this Agreement.
ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and
agrees that, except (i) as expressly provided in this Agreement or (ii) with the
prior written consent of Parent, after the date hereof and prior to the
Effective Time:
(a) the business of the Company and its Subsidiaries will be conducted in
the ordinary and customary course consistent with past practice and each of the
Company and its Subsidiaries shall use its best efforts to preserve its business
organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners;
(b) the Company will not, directly or indirectly, split, combine or
reclassify the outstanding Company Common Stock, or any outstanding capital
stock of any of the Subsidiaries of the Company;
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(c) neither the Company nor any of its Subsidiaries shall (i) amend its
certificate of incorporation or by-laws or similar organizational documents;
(ii) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock; (iii) issue, sell,
transfer, pledge, dispose of or encumber any additional shares of, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire, any shares of capital stock of any class of
the Company or its Subsidiaries, other than issuances pursuant to the exercise
of Company Options outstanding on the date hereof, in accordance with their
present terms; (iv) transfer, lease, license, sell, mortgage, pledge, dispose
of, or encumber any material assets other than in the ordinary and usual course
of business and consistent with past practice; or (v) redeem, purchase or
otherwise acquire directly or indirectly any of its capital stock;
(d) neither the Company nor any of its Subsidiaries shall (i) grant any
increase in the compensation payable or to become payable by the Company or any
of its Subsidiaries to any of its officers, directors, employees, agents or
consultants (other than increases for non-executive level employees in the
ordinary course of business consistent with past practice); (ii) adopt or enter
into any new plan, policy, agreement or arrangement that would constitute a
Company Benefit Plan, or amend or otherwise increase, or accelerate the payment
or vesting of the amounts payable or to become payable under any existing
Company Benefit Plan; (iii) enter into any, or amend any existing, employment or
severance agreement with or, except in accordance with the existing written
policies of the Company previously delivered to Parent, grant any severance or
termination pay to any officer, director or employee of the Company or any of
its Subsidiaries; or (iv) make any loans to any of its officers, directors,
employees, agents or consultants or make any changes in its existing borrowing
or lending arrangements for or on behalf of any of such persons, whether
contingent on the Merger or otherwise;
(e) neither the Company nor any of its Subsidiaries shall modify, amend or
terminate any of the Company Agreements or waive, release or assign any material
rights or claims, except in the ordinary course of business and consistent with
past practice;
(f) neither the Company nor any of its Subsidiaries shall permit any
material insurance policy naming it as a beneficiary or a loss payable payee to
be canceled or terminated without notice to Parent, except in the ordinary
course of business and consistent with past practice;
(g) neither the Company nor any of its Subsidiaries shall license or
otherwise transfer, dispose of, permit to lapse or otherwise fail to preserve
any of the Company's or any of its Subsidiaries' Intellectual Property Rights,
or dispose of or disclose to any person any trade secret, formula, process or
know-how not theretofore a matter of public knowledge, except in the ordinary
course of business and consistent with past practice;
(h) neither the Company nor any of its Subsidiaries shall cancel any debts
or waive, release or relinquish any contract rights or other rights of
substantial value, except settlements of accounts receivable in the ordinary
course of business and consistent with past practice;
(i) neither the Company nor any of its Subsidiaries shall: (i) incur or
assume any long-term debt except for amounts set forth in the Company's budget
previously delivered to Parent and, except in the ordinary course of business
consistent with past practice, incur or assume any short-term indebtedness in
amounts not consistent with past practice; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, except in the ordinary
course of business and consistent with past practice; (iii) make any loans,
advances or capital contributions to, or investments in, any other person (other
than to wholly owned Subsidiaries of the Company or customary advances to
employees for travel and business expenses in the ordinary course of business
and consistent with past practice); or (iv) enter into any material commitment
or transaction (including, but not limited to, any borrowing, capital
expenditure or purchase, sale or lease of assets) other than capital
expenditures pursuant to the Company's capital
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expenditures budget previously delivered to Parent and other capital
expenditures that do not exceed $25,000 in the aggregate since March 31, 2000;
(j) neither the Company nor any of its Subsidiaries shall (i) change any of
the accounting principles used by it unless required by GAAP; or (ii) take or
allow to be taken any action which would jeopardize qualification of the Merger
as a reorganization within the meaning of Section 368(a) of the Code;
(k) neither the Company nor any of its Subsidiaries shall pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction of any such claims, liabilities or obligations (i) in the ordinary
course of business and consistent with past practice, or claims, liabilities or
obligations reflected or reserved against in, or contemplated by, the
consolidated financial statements (or the notes thereto) of the Company and its
consolidated Subsidiaries, (ii) incurred in the ordinary course of business and
consistent with past practice or (iii) which are legally required to be paid,
discharged or satisfied (provided that if such claims, liabilities or
obligations referred to in this clause (iii) are legally required to be paid and
are also not otherwise payable in accordance with clauses (i) or (ii) above, the
Company will notify Parent in writing if such claims, liabilities or obligations
exceed, individually or in the aggregate, $25,000 in value, reasonably in
advance of their payment);
(l) neither the Company nor any of its Subsidiaries will adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or any of
its Subsidiaries or any agreement relating to an Alternative Transaction (as
defined in Section 5.6(a) hereof);
(m) neither the Company nor any of its Subsidiaries will take, or agree to
commit to take, any action that would make any representation or warranty of the
Company contained herein inaccurate in any respect at, or as of any time prior
to, the Effective Time;
(n) neither the Company nor any of its Subsidiaries will voluntarily make or
agree to make any changes in Tax accounting methods, waive or consent to the
extension of any statute of limitations with respect to Taxes, or consent to any
assessment of Taxes, or settle any judicial or administrative proceeding
affecting Taxes; and
(o) neither the Company nor any of its Subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing, or to
authorize, recommend, propose or announce an intention to do any of the
foregoing.
Section 5.2 INTERIM OPERATIONS OF PARENT. Parent covenants and agrees
that, except (i) as expressly provided in this Agreement, or (ii) with the prior
written consent of the Company, after the date hereof and prior to the Effective
Time:
(a) Parent will not, directly or indirectly, split, combine or reclassify
the outstanding Parent Common Stock;
(b) Parent shall not: (i) amend its certificate of incorporation or by-laws;
or (ii) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock other than regular
quarterly cash dividends consistent with past practice;
(c) neither Parent nor any of its Subsidiaries shall (i) change any of the
accounting principles used by it unless required by GAAP; or (ii) take or allow
to be taken any action which would jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code;
(d) neither Parent nor any of its Subsidiaries will take, or agree to commit
to take, any action that would make any representation or warranty of Parent and
Sub contained herein inaccurate in any respect at, or as of any time prior to,
the Effective Time; and
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(e) neither Parent nor any of its Subsidiaries will enter into an agreement,
contract, commitment or arrangement to do any of the foregoing, or to authorize,
recommend, propose or announce an intention to do any of the foregoing.
Section 5.3 ACCESS TO INFORMATION. The Company shall (and shall cause each
of its Subsidiaries to) afford to the officers, employees, accountants, counsel,
financing sources and other representatives of Parent, access, during normal
business hours, during the period prior to the Effective Time, to all of its and
its Subsidiaries' properties, books, contracts, commitments and records and,
during such period, the Company shall (and shall cause each of its Subsidiaries
to) furnish promptly to Parent (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as Parent may reasonably
request. Unless otherwise required by law, until the Effective Time, Parent will
hold, and cause its officers, employees, accountants, counsel, financing sources
and other representatives to hold, any such information which is nonpublic in
confidence in accordance with the provisions of the Mutual Confidentiality
Agreement between the Company and Parent, dated as of June 14, 2000 (the
"CONFIDENTIALITY AGREEMENT").
Section 5.4 CONSENTS AND APPROVALS. Each of the Company, Parent and Sub
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to this Agreement and the
transactions contemplated hereby (which actions shall include, without
limitation, furnishing all information in connection with approvals of or
filings with any Governmental Entity) and will promptly cooperate with and
furnish information to each other in connection with any such requirements
imposed upon any of them or any of their Subsidiaries in connection with this
Agreement, the Ancillary Agreements and the transactions contemplated hereby and
thereby. Each of the Company, Parent and Sub will, and will cause its respective
Subsidiaries to, take all reasonable actions necessary to obtain any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity or other public or private third party required to be obtained or made by
Parent, Sub, the Company or any of their Subsidiaries in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement or
the Ancillary Agreements (collectively, the "REQUISITE REGULATORY APPROVALS").
Section 5.5 EMPLOYMENT AGREEMENTS. Prior to the Closing, the Company
shall, upon Parent's request, extend offers of employment, to be effective as of
the Effective Time and to be subject to consummation of the Merger, to certain
key employees of the Company identified by Parent, in each case on terms to be
proposed by Parent, subject to execution of Parent's standard form of offer
letter, in the form of Exhibits B-1 and B-2 hereto, the effectiveness of which
offer letters shall be conditioned upon the consummation of the transactions
consummated hereby.
Section 5.6 NO SOLICITATION BY THE COMPANY.
(a) The Company shall not, nor shall it permit any of its Subsidiaries to,
nor shall it authorize or permit any of its officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its Subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage (including
by way of furnishing information), or take any other action designed to
facilitate, any inquiries or the making of any proposal the consummation of
which would constitute an Alternative Transaction or (ii) participate in any
discussions or negotiations regarding any Alternative Transaction; provided,
however, that if, at any time prior to the adoption of this Agreement by the
holders of the Company Common Stock, the Company Board determines in good faith,
after receipt of advice from outside counsel, that such action is required for
the Company Board to comply with its fiduciary obligations to the Company's
shareholders under applicable law, the Company may, in response to any such
proposal that was not solicited by it or which did not otherwise result from a
breach of this Section 5.6(a), and subject to compliance with Section 5.6(c)
hereof, (A) furnish information with respect to the Company and its
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<PAGE>
Subsidiaries to any person pursuant to a customary confidentiality agreement
containing terms as to confidentiality no less restrictive than the
Confidentiality Agreement and (B) participate in negotiations regarding such
proposal. For purposes of this Agreement "ALTERNATIVE TRANSACTION" means any of
(i) a transaction or series of transactions pursuant to which any person (or
group of persons) other than the Company and its Subsidiaries and other than
Parent and its Subsidiaries (a) "THIRD PARTY") acquires or would acquire,
directly or indirectly, beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of more than twenty percent (20%) of the outstanding shares of the
Company, whether from the Company or pursuant to a tender offer or exchange
offer or otherwise, (ii) any acquisition or proposed acquisition of the Company
or any of its significant Subsidiaries by a merger or other business combination
whether or not the Company or any of its significant Subsidiaries is the entity
surviving any such merger or business combination) or (iii) any other
transaction pursuant to which any Third Party acquires or would acquire,
directly or indirectly, control of assets (including for this purpose the
outstanding equity securities of Subsidiaries of the Company and any entity
surviving any merger or combination including any of them) of the Company or any
of its Subsidiaries for consideration equal to twenty percent (20%) or more of
the fair market value of all of the outstanding shares of the Company Common
Stock on the date prior to the date hereof.
(b) Neither the Company Board nor any committee thereof shall (i) except as
expressly permitted by this Section 5.6, withdraw, qualify or modify, or propose
publicly to withdraw, qualify or modify, in a manner adverse to Parent, the
approval or recommendation by such Board of Directors or such committee of the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Alternative Transaction, or (iii) cause the Company to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement (each, a "ACQUISITION AGREEMENT") related to any
Alternative Transaction. Notwithstanding the foregoing, in the event that prior
to the adoption of this Agreement by the holders of the Company Common Stock the
Company Board determines in good faith, after it has received a Superior
Proposal (as defined below) and after receipt of advice from outside counsel,
that such action is required for the Company Board to comply with its fiduciary
obligations to the Company's shareholders under applicable law, the Company
Board may (subject to this and the following sentences) inform the Company
shareholders that it no longer believes that the Merger or this Agreement is
advisable and no longer recommends approval of the Merger or this Agreement (a
"SUBSEQUENT DETERMINATION"), but only at a time that is after the fifth business
day following Parent's receipt of written notice advising Parent that the
Company Board has received a Superior Proposal, specifying the material terms
and conditions of such Superior Proposal, identifying the person making such
Superior Proposal and stating that it intends to make a Subsequent
Determination. After providing such notice, the Company shall provide a
reasonable opportunity to Parent to make such adjustments in the terms and
conditions of this Agreement as would enable the Company to proceed with its
original recommendation to shareholders without making a Subsequent
Determination; provided, however, that any such adjustments shall be at the
discretion of the parties at such time. For purposes of this Agreement, a
"SUPERIOR PROPOSAL" means any proposal (on its most recently amended or modified
terms, if amended or modified) made by a Third Party to enter into an
Alternative Transaction on terms which the Company Board determines in its good
faith judgment (after receiving the advice of a financial advisor of nationally
recognized reputation) to be more favorable to the Company's shareholders than
the Merger taking into account all relevant factors (including whether, in the
good faith judgment of the Company Board, after obtaining advice from a
financial advisor of nationally recognized reputation, the Third Party is
reasonably able to finance the transaction, and any proposed changes to this
Agreement that may have been proposed by Parent in response to such Alternative
Transaction). Notwithstanding any other provision of this Agreement, the Company
shall submit this Agreement to its shareholders whether or not the Company Board
makes a Subsequent Determination.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 5.6, the Company shall promptly advise Parent orally
and in writing of any request for
Annex A-26
<PAGE>
information or of any proposal in connection with an Alternative Transaction,
the material terms and conditions of such request or proposal and the identity
of the person making such request or proposal. The Company will keep Parent
reasonably informed of the status and details (including amendments or proposed
amendments) of any such request or proposal on a current basis.
(d) Nothing contained in this Section 5.6 shall prohibit the Company from
(i) taking and disclosing to its shareholders a position contemplated by Rule
14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or (ii) from making
any disclosure to its shareholders if, in the good faith judgment of the Company
Board, after receipt of advice from outside counsel, failure so to disclose
would violate its fiduciary duties to the Company's shareholders under
applicable law.
Section 5.7 SHAREHOLDERS' MEETING. (a) In order to consummate the Merger,
the Company, acting through its Board of Directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting of
its shareholders (the "SPECIAL MEETING"), as soon as practicable after the
Registration Statement is declared effective, for the purpose of considering and
voting upon this Agreement. The Company shall include in the Proxy
Statement/Prospectus the unanimous recommendation of the Company Board that
shareholders of the Company vote in favor of the adoption of this Agreement.
Nothing contained in the preceding sentence shall prohibit the Company from
(i) taking and disclosing to its shareholders a position contemplated by Rule
14d-9 or 14e-2 promulgated under the Exchange Act or (ii) from making any
disclosure to its shareholders if, in the good faith judgment of the Company
Board, after receipt of advice from outside counsel, failure so to disclose
would violate its fiduciary duties to the Company's shareholders under
applicable law.
(b) The Company shall use all commercially reasonable efforts to hold the
Special Meeting as soon as reasonably practicable after the date hereof.
Section 5.8 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT.
(a) Parent and the Company shall use commercially reasonable efforts to
prepare and file with the SEC, as promptly as practicable after the execution of
this Agreement, a proxy statement relating to the Special Meeting to be held in
connection with the Transactions (together with any amendments thereof or
supplements thereto, the "PROXY STATEMENT/PROSPECTUS"). Parent shall use
commercially reasonable efforts to prepare and file with the SEC, as promptly as
practicable after the execution of this Agreement, a registration statement on
Form S-4 (together with all amendments thereto, the "PARENT REGISTRATION
STATEMENT"), in which the Proxy Statement/Prospectus shall be included as a
prospectus, in connection with the registration under the Securities Act of the
shares of Parent Common Stock and warrants to purchase shares of Parent Common
Stock to be issued pursuant to the Merger. Each of Parent and the Company
(i) shall cause the Proxy Statement/Prospectus and the Parent Registration
Statement to comply as to form in all material respects with the applicable
provision of the Securities Act, the Exchange Act and the rules and regulations
thereunder, (ii) shall use all reasonable efforts to have or cause the Parent
Registration Statement to become effective as promptly as practicable, and
(iii) shall take any and all action required under any applicable Federal or
state securities laws in connection with the issuance of shares of Parent Common
Stock pursuant to the Merger. Parent and the Company shall furnish to the other
all information concerning Parent and the Company as the other may reasonably
request in connection with the preparation of the documents referred to herein.
As promptly as practicable after the Parent Registration Statement shall have
become effective, the Company shall deliver the Proxy Statement/Prospectus to
its shareholders.
Annex A-27
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(b) The information supplied by each of Parent and the Company for inclusion
in the Parent Registration Statement and the Proxy Statement/Prospectus shall
not (i) at the time the Parent Registration Statement is declared effective,
(ii) at the time the Proxy Statement/Prospectus (or any amendment thereof or
supplement thereto) is first mailed to the shareholders of the Company,
(iii) at the time of the Special Meeting, or (iv) at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. If, at any time prior to the Effective Time, any event
or circumstance relating to the Company, any Subsidiary of the Company, Parent,
any Subsidiary of Parent, or their respective officers or directors, should
arise or be discovered by such party which should be set forth in an amendment
or a supplement to the Parent Registration Statement or the Proxy
Statement/Prospectus, such party shall promptly inform the other thereof and
take appropriate action in respect thereof. Parent may suspend the effectiveness
or distribution of the Proxy Statement/ Prospectus, as reasonably deemed
appropriate, pending resolution of such event or circumstance.
Section 5.9 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable, whether under applicable laws and
regulations or otherwise, or to remove any injunctions or other impediments or
delays, legal or otherwise, to consummate and make effective the Merger and the
other transactions contemplated by this Agreement and the Ancillary Agreements.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or the Ancillary
Agreements, the proper officers and directors of the Company and Parent shall
use all reasonable efforts to take, or cause to be taken, all such necessary
actions.
Section 5.10 PUBLICITY. So long as this Agreement is in effect, neither
the Company, Parent nor any of their respective affiliates shall issue or cause
the publication of any press release or other announcement with respect to the
Merger, this Agreement, the Ancillary Agreements, or the other transactions
contemplated hereby or thereby without the prior consultation of the other
party, except as may be required by law or by any listing agreement with a
national securities exchange. Without limiting the foregoing, so long as this
Agreement is in effect, the Company shall not issue or cause the publication of
any press release or other announcement without the prior consent of Parent,
which consent shall not be unreasonably withheld.
Section 5.11 NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Parent and Parent shall give prompt notice to the Company, of
(i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Effective Time and (ii) any material failure of the Company or Parent, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder or under any Ancillary
Agreement; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 5.11 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 5.12 DIRECTORS' AND OFFICERS' INSURANCE AND
INDEMNIFICATION. Parent agrees that at all times after the Effective Time, it
shall indemnify, or shall cause the Company (or the Surviving Corporation if
after the Effective Time) and its Subsidiaries to indemnify, each person who is
now, or has been at any time prior to the date hereof, a director or officer of
the Company or of any of the Company's Subsidiaries, successors and assigns
(individually an "INDEMNIFIED PARTY" and collectively the "INDEMNIFIED
PARTIES"), to the same extent and in the same manner as is now provided in the
respective certificates of incorporation or by-laws of the Company and such
Subsidiaries or otherwise in effect on the date hereof, with respect to any
claim, liability, loss, damage, cost or expense (whenever asserted or claimed)
("INDEMNIFIED LIABILITY") based in whole or in part on, or arising in whole or
in part out of, any matter existing or occurring at or prior to the Effective
Time. Parent shall, and shall cause the Company (or the Surviving Corporation if
after the Effective Time) to, maintain in effect for not less
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than six (6) years after the Effective Time the current policies of directors'
and officers' liability insurance maintained by the Company and its Subsidiaries
on the date hereof (provided that Parent may substitute therefor policies having
at least the same coverage and containing terms and conditions which are no less
advantageous to the persons currently covered by such policies as insured) with
respect to matters existing or occurring at or prior to the Effective Time;
PROVIDED, HOWEVER, that if the aggregate annual premiums for such insurance at
any time during such period shall exceed one hundred fifty percent (150%) of the
per annum rate of premium currently paid by the Company and its Subsidiaries for
such insurance on the date of this Agreement, which amount is set forth in
Section 5.14 of the Disclosure Schedule, then Parent shall cause the Company (or
the Surviving Corporation if after the Effective Time) to, and the Company (or
the Surviving Corporation if after the Effective Time) shall, provide the
maximum coverage that shall then be available at an annual premium equal to one
hundred fifty (150%) of such rate. Without limiting the foregoing, in the event
any Indemnified Party becomes involved in any capacity in any action, proceeding
or investigation based in whole or in part on, or arising in whole or in part
out of, any matter, including the transactions contemplated hereby, existing or
occurring at or prior to the Effective Time, then to the extent permitted by law
Parent shall, or shall cause the Company (or the Surviving Corporation if after
the Effective Time) to, periodically advance to such Indemnified Party its legal
and other expenses (including the cost of any investigation and preparation
incurred in connection therewith), subject to the provision by such Indemnified
Party of an undertaking to reimburse the amounts so advanced in the event of a
final determination by a court of competent jurisdiction that such Indemnified
Party is not entitled thereto. Promptly after receipt by an Indemnified Party of
notice of the assertion (an "ASSERTION") of any claim or the commencement of any
action against him in respect to which indemnity or reimbursement may be sought
against Parent, the Company, the Surviving Corporation or a Subsidiary of the
Company or the Surviving Corporation ("INDEMNITORS") hereunder, such Indemnified
Party shall notify any Indemnitor in writing of the Assertion, but the failure
to so notify any Indemnitor shall not relieve any Indemnitor of any liability it
may have to such Indemnified Party hereunder except where such failure shall
have materially prejudiced Indemnitor in defending against such Assertion.
Indemnitors shall be entitled to participate in and, to the extent Indemnitors
elect by written notice to such Indemnified Party within thirty (30) days after
receipt by any Indemnitor of notice of such Assertion, to assume, the defense of
such Assertion, at their own expense, with counsel chosen by Indemnitors and
reasonably satisfactory to such Indemnified Party. Notwithstanding that
Indemnitors shall have elected by such written notice to assume the defense of
any Assertion, such Indemnified Party shall have the right to participate in the
investigation and defense thereof, with separate counsel chosen by such
Indemnified Party, but, until there is a conflict between the positions of the
Indemnified Party and the Indemnitors, the fees and expenses of such counsel
shall be paid by such Indemnified Party. No Indemnified Party shall settle any
Assertion without the prior written consent of Parent, nor shall Parent settle
any Assertion without either (i) the written consent of all Indemnified Parties
against whom such Assertion was made, or (ii) obtaining a general release from
the party making the Assertion for all Indemnified Parties as a condition of
such settlement. The provisions of this Section 5.12 are intended for the
benefit of, and shall be enforceable by, the respective Indemnified Parties.
Section 5.13 AFFILIATE AGREEMENTS. The Company has previously delivered to
Parent a list setting forth the names of all persons who are expected to be, at
the time of the Special Meeting, in the Company's reasonable judgment,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall furnish such information and documents as Parent may
reasonably request for the purpose of reviewing such list. The Company shall use
its reasonable best efforts to cause each person who is identified as an
"affiliate" in the list furnished pursuant to this Section 5.13 to execute a
written agreement as soon as practicable after the date hereof, but in no event
later than the day preceding the filing of the Registration Statement, in
substantially the form of EXHIBIT E hereto.
Section 5.14 COOPERATION. Parent and the Company shall together, or
pursuant to an allocation of responsibility to be agreed upon between them,
coordinate and cooperate (i) with respect to the
Annex A-29
<PAGE>
timing of the Special Meeting, (ii) in determining whether any action by or in
respect of, or filing with, any Governmental Entity is required, or any actions,
consents approvals or waivers are required to be obtained from parties to any
material contracts, in connection with the consummation of the transactions
contemplated by this Agreement and the Ancillary Agreements, and (iii) in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith and timely
seeking to obtain any such actions, consents approvals or waivers. Subject to
the terms and conditions of this Agreement, Parent and the Company will each use
its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after the
Registration Statement is filed, and Parent and the Company shall, subject to
applicable law, confer on a regular and frequent basis with one or more
representatives of one another to report operational matters of significance to
the Merger and the general status of ongoing operations insofar as relevant to
the Merger, provided that the parties will not confer on any matter to the
extent inconsistent with law.
Section 5.15 LETTERS OF ACCOUNTANTS.
(a) Parent shall use all reasonable efforts to cause to be delivered to the
Company a comfort letter of KPMG LLP, Parent's independent auditors, dated
within two (2) business days before the date on which the Registration Statement
shall become effective and addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, which letter
shall be brought down to the Effective Time.
(b) The Company shall use all reasonable best efforts to cause to be
delivered to Parent a comfort letter of Arthur Andersen LLP, the Company's
independent auditors, dated within two (2) business days before the date on
which the Registration Statement shall become effective and addressed to Parent,
in form and substance reasonably satisfactory to Parent and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement,
which letter shall be brought down to the Effective Time.
Section 5.16 CONSENTS OF ACCOUNTANTS. Parent and the Company will each use
reasonable best efforts to cause to be delivered to each other consents from
their respective independent auditors, dated the date on which the Registration
Statement shall become effective, in form reasonably satisfactory to the
recipient and customary in scope and substance for consents delivered by
independent public accountants in connection with registration statements on
Form S-4 under the Securities Act.
Section 5.17 SUBSEQUENT FINANCIAL STATEMENTS. The Company shall consult
with Parent prior to making publicly available its financial results for any
period after the date of this Agreement and prior to filing any Company SEC
Documents after the date of this Agreement, it being understood that Parent
shall have no liability by reason of such consultation.
Section 5.18 NASDAQ QUALIFICATION. Parent shall use all reasonable efforts
to cause the shares of Parent Common Stock to be issued in the Merger to be
qualified for inclusion in the Nasdaq Stock Market, subject to official notice
of issuance, as of or prior to the Effective Time.
Section 5.19 EMPLOYEE PLANS AND ARRANGEMENTS. As soon as practicable after
the execution of this Agreement, the Company and Parent shall confer and work
together in good faith to agree upon mutually acceptable employee benefit and
compensation arrangements (and amend or terminate Company employee plans
immediately prior to the Effective Time, if appropriate). Parent shall use
commercially reasonable efforts to ensure that continuous employment with the
Company or its Subsidiaries shall be credited to Company employees who become
Parent employees or become Continuing Employees for all purposes of eligibility
and vesting of benefits but not for purposes of
Annex A-30
<PAGE>
accrual of benefits. Parent shall take commercially reasonable steps to
(a) cause to be waived all limitations as to preexisting condition limitations,
exclusions and waiting periods with respect to participation and coverage
requirements applicable to the employees of the Company and its Subsidiaries
under any welfare benefit plans that such employees are eligible to participate
in after the Effective Time, other than limitations, exclusions or waiting
periods that are already in effect with respect to such employees and that have
not been satisfied as of the Effective Time under any welfare benefit plan
maintained for such employees immediately prior to the Effective Time and
(b) provide each employee of the Company and its Subsidiaries with credit for
any co-payments and deductibles paid during the plan year commencing immediately
prior to the Effective Time in satisfying any applicable deductible or
out-of-pocket requirements under any welfare plans that such employees are
eligible to participate in after the Effective Time for such plan year. For
purposes of this Section 5.19, "Continuing Employee" means any employee of the
Company who continues as an employee of the Surviving Corporation or Parent
after the Effective Time.
ARTICLE VI
CONDITIONS
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations
of the Company, on the one hand, and Parent and Sub, on the other hand, to
consummate the Merger are subject to the satisfaction (or, if permissible,
waiver by the party for whose benefit such conditions exist) of the following
conditions:
(a) the Company shall have received the Company Shareholder Approval;
(b) no court, arbitrator or governmental body, agency or official shall have
issued any order, and there shall not be any statute, rule or regulation,
restraining or prohibiting (collectively, "RESTRAINTS") the consummation of the
Merger or the effective operation of the business of the Company and its
respective Subsidiaries after the Effective Time;
(c) all Requisite Regulatory Approvals shall have been obtained but
excluding any Requisite Regulatory Approval the failure to obtain which would
not have a material adverse effect on Parent, Sub, the Company or, after the
Effective Time, the Surviving Corporation;
(d) the shares of Parent Common Stock to be issued in the Merger shall have
been qualified for inclusion in Nasdaq Stock Market; and
(e) the Registration Statement shall have become effective under the
Securities Act and no stop order suspending effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the SEC.
Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB. The
obligations of Parent and Sub to consummate the Merger are subject to the
satisfaction (or waiver by Parent) of the following further conditions:
(a) the representations and warranties of the Company shall have been true
and accurate both when made and (except for those representations and warranties
that address matters only as of a particular date which need only be true and
accurate as of such date) as of the Effective Time as if made at and as of such
time, except where the failure of such representations and warranties to be so
true and correct (without giving effect to any limitation as to "materiality" or
"material adverse effect" set forth therein), does not have, and is not likely
to have, individually or in the aggregate, a material adverse effect on the
Company and its Subsidiaries taken as a whole; PROVIDED, that the
representations and warranties set forth in Sections 3.2 and 3.3 shall be true
and correct in all respects;
(b) the Company shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time;
Annex A-31
<PAGE>
(c) the Company shall have obtained, and there shall be in full force and
effect, the consents described in Section 6.2 of the Disclosure Schedule;
(d) each of the Ancillary Agreements shall be valid, in full force and
effect and complied with in all material respects;
(e) since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which could be reasonably likely to have,
individually or in the aggregate, a material adverse effect on the Company and
its Subsidiaries;
(f) Parent shall have received an opinion of Dykema Gossett PLLC,
substantially in the form attached as EXHIBIT F-1 hereto and otherwise
reasonably satisfactory in form and substance to Parent, addressed to Parent and
dated the Closing Date;
(g) The Company shall have furnished Parent with a certificate dated the
Closing Date signed on behalf of it by the Chairman of the Board of Directors of
the Company or the President and Chief Financial Officer of the Company to the
effect that the conditions set forth in Sections 6.2(a) through (e) have been
satisfied;
(h) The Company shall deliver to Parent a certification, in form and
substance reasonably satisfactory to Parent, that neither the Company nor any of
its Subsidiaries is or has been a U.S. real property holding company (as defined
in Section 897(c)(2) of the Code) during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code; and
(i) Each employee of the Company shall have executed and delivered a
Proprietary Rights and Confidentiality Agreement to Parent and confirmation of
"at will" employment, in each case in form and substance acceptable to Parent.
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the Merger are subject to the satisfaction (or
waiver by the Company) of the following further conditions:
(a) the representations and warranties of Parent and Sub shall have been
true and accurate both when made and (except for those representations and
warranties that address matters only as of a particular date which need only be
true and accurate as of such date) as of the Effective Time as if made at and as
of such time, except where the failure of such representations and warranties to
be so true and correct (without giving effect to any limitation as to
"materiality" or "material adverse effect" set forth therein), does not have,
and is not likely to have, individually or in the aggregate, a material adverse
effect on Parent and its Subsidiaries taken as a whole; PROVIDED, that the
representations and warranties set forth in Sections 4.2 and 4.3 shall be true
and correct in all respects;
(b) Each of Parent and Sub shall have performed in all material respects all
of the respective obligations hereunder required to be performed by Parent or
Sub, as the case may be, at or prior to the Effective Time;
(c) Since the date of this Agreement, there shall not have occurred any
event, change or effect having, or which could be reasonably likely to have,
individually or in the aggregate, a material adverse effect on Parent and its
Subsidiaries, taken as a whole;
(d) The Company shall have received an opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, substantially in the form attached as EXHIBIT F-2 hereto and
otherwise reasonably satisfactory in form and substance to the Company,
addressed to the Company and dated the Closing Date;
(e) Parent shall have furnished the Company with a certificate dated the
Closing Date signed on behalf of it by the President of Parent to the effect
that the conditions set forth in Sections 6.3(a) through (c) have been
satisfied.
Annex A-32
<PAGE>
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated at any time prior to the
Effective Time, and (except in the case of 7.1(e)) whether before or after the
Company Shareholder Approval:
(a) by mutual written consent of the Company and Parent, if the Board of
Directors of each so determines by a vote of a majority of its entire Board;
(b) by either the Company Board or the Parent Board:
(i) if the Merger shall not have been consummated by December 15, 2000
unless the Company Board or Parent Board, as the case may be, has expressly
restricted in writing its right to terminate this Agreement pursuant to this
Section 7.1(b)(i); PROVIDED, HOWEVER, that the right to terminate this
Agreement pursuant to this Section 7.1(b)(i) shall not be available to any
party whose failure to perform any of its obligations under this Agreement
results in the failure of the Merger to be consummated by such time;
(ii) if the Company Shareholder Approval shall not have been obtained at
the Special Meeting duly convened therefor or at any adjournment or
postponement thereof; or
(iii) if any Restraint having any of the effects set forth in Section
6.1(c) shall be in effect and shall have become final and nonappealable, or
if any Governmental Entity that must grant a Requisite Regulatory Approval
has denied approval of the Merger and such denial has become final and
nonappealable; PROVIDED, HOWEVER, that the party seeking to terminate this
Agreement pursuant to this Section 7.1(b)(iii) shall have used commercially
reasonable efforts to prevent the entry of and to remove such Restraint or
to obtain such Requisite Regulatory Approval, as the case may be;
(c) by the Company Board (PROVIDED that the Company is not then in material
breach of any representation, warranty, covenant or other agreement contained
herein), if Parent shall have materially breached or failed to perform any of
its representations, warranties, covenants or other agreements contained in this
Agreement, which breach or failure to perform (A) would give rise to the failure
of a condition set forth in Section 6.3(a) or (b), and (B) is incapable of being
cured by Parent or is not cured within thirty (30) days of written notice
thereof;
(d) by the Parent Board (PROVIDED that Parent is not then in material breach
of any representation, warranty, covenant or other agreement contained herein),
if the Company shall have materially breached or failed to perform in any
material respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
(A) would give rise to the failure of a condition set forth in Section
6.2(a) or (b), and (B) is incapable of being cured by the Company or is not
cured within thirty (30) days of written notice thereof; and
(e) by the Parent Board, at any time prior to the Special Meeting, if the
Company Board shall have (A) failed to include in the Proxy Statement/Prospectus
to the shareholders of the Company its recommendation without modification or
qualification that such shareholders approve this Agreement and the transaction
contemplated hereby, (B) failed to reaffirm such recommendation upon Parent's
request, (C) subsequently withdrawn such recommendation or (D) modified or
qualified such recommendation in a manner adverse to the interests of Parent.
Section 7.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section 7.1
hereof, and subject to the provisions of Section 8.1 hereof, this Agreement
shall forthwith become void and there shall be no liability on the part of any
of the parties, except (i) as set forth in this Section 7.2, Section 8.1 and
Annex A-33
<PAGE>
in the last sentence of Section 5.3, and (ii) nothing herein shall relieve any
party from liability for any breach hereof.
(b) The Company shall pay to Parent a fee of $2.5 million, plus an amount
equal to all of the costs and expenses incurred by Parent in connection with
this Agreement, the Ancillary Agreements and the consummation of the
transactions contemplated hereby and thereby, upon the earliest to occur of the
following events:
(i) the termination of this Agreement by Parent pursuant to Section
7.1(e);
(ii) the termination of this Agreement by the Company or Parent pursuant
to Section 7.1(b)(ii); or
(iii) the termination of this Agreement by Parent pursuant to Section
7.1(d).
(c) The fee, costs and expenses payable pursuant to Section 7.2(b) hereof
shall be paid (1) within one (1) business day after the first to occur of any of
the events referred to in Section 7.2(b)(i) or 7.2(b)(iii) and (2) in the case
of Section 7.2(b)(ii) hereof, upon the earlier to occur of (A) the date of the
announcement of an Alternative Transaction or (B) 360 calendar days. Parent will
provide to the Company reasonable documentation in respect of the costs and
expenses payable pursuant to Section 7.2(b) hereof.
(d) Notwithstanding anything to the contrary in this Section 7.2, in the
event of termination of this Agreement pursuant to Section 7.2(b)(ii), if an
Alternative Transaction has not been entered into or announced prior to 360
calendar days from the date of such termination, the fee payable pursuant to
Section 7.2(b) shall be reduced from $2.5 million to $1 million.
(e) Notwithstanding anything to the contrary in this Section 7.2, the
payments provided for in this Section 7.2 shall not be deemed to be Parent's or
Sub's exclusive remedy, and Parent and Sub shall have the right to pursue any
remedies available to them at law or in equity.
Section 7.3 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties at any time before or after the Company
Shareholder Approval; PROVIDED, HOWEVER, that after any such approval, there may
not be, without further approval of such shareholders of the Company, any
amendment of this Agreement that changes the amount or the form of the
consideration to be delivered to the holders of Company Common Stock hereunder,
or which by law otherwise expressly requires the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto and duly approved by the
parties' respective Boards of Directors or a duly designated committee thereof.
Section 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, a
party may, subject to the provision of Section 7.3 (and for this purpose
treating any waiver referred to below as an amendment), (a) extend the time for
the performance of any of the obligations or other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement or (c) waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. Any extension or waiver
given in compliance with this Section 7.4 or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
Annex A-34
<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. (a) Except as otherwise contemplated by
this Agreement, including Section 7.2 hereof, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
the Ancillary Agreements, the consummation of the transactions contemplated
hereby and thereby, and the issuance of any securities, including all legal,
accounting and financial advisory fees and expenses ("THIRD PARTY EXPENSES"),
shall be paid by the party incurring such expenses, except that (i) those costs
and expenses incurred in connection with filing, printing and mailing the
Registration Statement and the Proxy Statement/Prospectus (including filing fees
related thereto) shall be shared equally by Parent and the Company and (ii) the
Company shall cause its Third Party Expenses to be invoiced at or before the
Closing and not to exceed, in the aggregate, $1,200,000.
Section 8.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.3 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, faxed (which is
confirmed) or sent by an overnight courier service, such as FedEx, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Sub, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, California 94063
Attention: Jeffrey C. Smith
Telephone: 650-216-2010
Facsimile: 650-216-2001
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue--Suite 220
Palo Alto, California 94301
Attention: Gregory C. Smith
Telephone: 650-470-4500
Facsimile: 650-470-4590
and
(b) if to the Company, to:
Interface Systems, Inc.
5855 Interface Drive
Ann Arbor, Michigan 48103
Attention: Robert A. Nero
Telephone: 734-769-5900
Facsimile: 734-769-1047
Annex A-35
<PAGE>
with a copy to:
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
Attention: Aleksandra A. Miziolek
Telephone: 313-568-6762
Facsimile: 313-568-6915
Section 8.4 INTERPRETATION. When a reference is made in this Agreement to
an Article or Section, such reference shall be to an Article or Section of this
Agreement, as the case may be, unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation." The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available. The phrases "the date of this Agreement", "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to June , 2000. As used in this Agreement, the term "affiliate(s)"
shall have the meaning set forth in Rule l2b-2 of the Exchange Act. The headings
and table of contents contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation hereof.
Section 8.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement, the Ancillary Agreements and the Confidentiality
Agreement (including the documents and the instruments referred to herein and
therein): (a) constitute the entire agreement and supersede all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 5.12 hereof, are
not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
Section 8.7 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.8 GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
Section 8.9 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned Subsidiary of Parent. Subject
to the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.
Annex A-36
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
<TABLE>
<S> <C> <C>
TUMBLEWEED COMMUNICATIONS CORP.
By:
-----------------------------------------
Name:
Title:
MAIZE ACQUISITION SUB, INC.
By:
-----------------------------------------
Name:
Title:
INTERFACE SYSTEMS, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
Annex A-37
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement"), dated as of June 28, 2000, by and
between Tumbleweed Communications Corp., a Delaware corporation ("Parent"), and
Interface Systems, Inc., a Michigan corporation (the "Company").
WITNESSETH:
WHEREAS, concurrently with the execution and delivery of this Agreement, the
Company, Parent and Maize Acquisition Sub, Inc., a Delaware corporation ("Sub"),
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), which provides that, among other things, upon the
terms and subject to the conditions thereof, Sub will be merged with and into
the Company (the "Merger"), with the Company continuing as the surviving
corporation; and
WHEREAS, as a condition and inducement to Parent's willingness to enter into
the Merger Agreement, Parent has required that the Company agree, and the
Company has so agreed, to grant to Parent an option with respect to certain
shares of the Company's authorized but unissued common stock on the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, to induce Parent and Sub to enter into the Merger Agreement
and in consideration of the representations, warranties, covenants and
agreements set forth herein and in the Merger Agreement, the parties hereto
intending to be legally bound, hereby agree as follows. Capitalized terms used
herein but not defined herein shall have the meanings set forth in the Merger
Agreement.
1. GRANT OF OPTION. The Company hereby grants Parent an irrevocable option
(the "Option") to purchase a number of shares (the "Shares") of common stock, no
par value per share, of the Company (the "Company Common Stock"), equal to the
Option Number (as defined hereinafter), on the terms and subject to the
conditions set forth below.
2. EXERCISE OF OPTION.
(a) EXERCISE. At any time or from time to time prior to the
termination of the Option granted hereunder in accordance with the terms of
this Agreement, Parent (or its designee) may exercise the Option, in whole
or in part, if on or after the date hereof:
(i) any corporation, partnership, individual, trust, unincorporated
association, or other entity or "person" (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other
than Parent or any of its "affiliates" (as defined in the Exchange Act) (a
"Third Party"), shall have:
(A) commenced or announced an intention to commence a BONA FIDE
tender offer or exchange offer for any shares of Company Common Stock,
the consummation of which would result in "beneficial ownership" (as
defined under Rule 13d-3 of the Exchange Act) by such Third Party
(together with all such Third Party's affiliates and "associates" (as
such term is defined in the Exchange Act)) of 20% or more of the then
voting equity of the Company (either on a primary or a fully diluted
basis);
(B) filed a Notification and Report Form under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
reflecting an intent to acquire the Company or any assets or securities
of the Company;
(C) solicited "proxies" in a "solicitation" subject to the proxy
rules under the Exchange Act, executed any written consent or become a
"participant" in any "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act), in each case with respect to the
Company Common Stock; or
<PAGE>
(ii) any of the events described in Section 7.2(b) of the Merger
Agreement that would require the Company to pay Parent the fee set forth
therein (but without the necessity of Parent having terminated the Merger
Agreement).
(iii) Each of the events described in clauses (i) and (ii) hereof shall
be referred to herein as a "Trigger Event." The Company shall notify Parent
promptly in writing of the occurrence of any Trigger Event; however, such
notice shall not be a condition to the right of Parent to exercise the
Option.
(b) EXERCISE PROCEDURE. In the event Parent wishes to exercise the Option,
Parent shall deliver to the Company a written notice (an "Exercise Notice")
specifying the total number of the Shares it wishes to purchase. To the extent
permitted by law and the Certificate of Incorporation of the Company and
provided that the conditions set forth in Section 3 hereof to Company's
obligation to issue the Shares to Parent hereunder have been satisfied or
waived, Parent shall, upon delivery of the Exercise Notice and tender of the
applicable aggregate Exercise Price, immediately be deemed to be the holder of
record of the shares of the Company Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of the Company Common Stock
shall not heretofore have been delivered to Parent. Each closing of a purchase
of the Shares (a "Closing") shall occur at a place, on a date and at a time
designated by Parent in an Exercise Notice delivered at least two business days
prior to the date of the Closing.
(c) TERMINATION OF THE OPTION. The Option shall terminate upon the earlier
of: (i) the Effective Time of the Merger; and (ii) the termination of the Merger
Agreement pursuant to Section 7.1(a), (b) or (c) thereof; and (iii) twelve (12)
months following the termination of the Merger Agreement pursuant to Section
7.1(d) or (e) thereof. Notwithstanding the foregoing, if the Option cannot be
exercised by reason of any applicable judgment, decree, order, law or
regulation, the Option shall remain exercisable and shall not terminate until
the earlier of (x) the date on which such impediment shall become final and not
subject to appeal and (y) 5:00 p.m. Pacific Standard Time, on the tenth (10th)
business day after such impediment shall have been removed. The rights of Parent
set forth in Sections 7 and 8 shall not terminate upon termination of Parent's
right to exercise the Option, but shall extend to the time provided in such
sections. Notwithstanding the termination of the Option, Parent shall be
entitled to purchase the shares of the Company Common Stock with respect to
which Parent had exercised the Option prior to such termination.
(d) OPTION NUMBER. The "Option Number" shall initially be the number of
shares equal to nineteen and nine-tenths percent (19.9%) of the total number of
shares of the Company Common Stock issued and outstanding as of the date of this
Agreement, and shall be adjusted hereafter to reflect changes in the Company's
capitalization occurring after the date hereof in accordance with Section 11
hereof. Notwithstanding any other provision of this Agreement, in no event shall
the Option Number exceed nineteen and nine-tenths percent (19.9%) of the total
number of shares of the Company Common Stock issued and outstanding as of the
date of this Agreement, adjusted in accordance with Section 11 hereof.
(e) EXERCISE PRICE. The purchase price per share of the Company Common
Stock pursuant to the Option (the "Exercise Price") shall be $13.33.
3. CONDITIONS TO CLOSING. The obligation of the Company to issue the
Shares to Parent hereunder is subject to the conditions that (i) all consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, any federal, state or local administrative agency or commission or
other federal state or local governmental authority or instrumentality, if any,
required in connection with the issuance of the Shares and the acquisition of
such shares by Parent hereunder shall have been obtained or made, as the case
may be; and (ii) no preliminary or permanent injunction or other order
Annex B-2
<PAGE>
by any court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect.
4. CLOSING. At any Closing,
(a) the Company shall deliver to Parent a single certificate in
definitive form representing the number of the Shares designated by Parent
in its Exercise Notice, such certificate to be registered in the name of
Parent and to bear the legend set forth in Section 11 hereof;
(b) Parent shall deliver to the Company the aggregate price for the
Shares so designated and being purchased by wire transfer of immediately
available funds to the account or accounts specified in writing by the
Company;
(c) the Company shall pay all expenses, and any and all federal, state
and local taxes and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section 4;
and
(d) the Company shall cause the shares of the Company Common Stock being
delivered at the Closing to be approved for quotation on the Nasdaq National
Market and shall pay all expenses in connection with the application for
approval of such quotation. At any Closing at which Parent is exercising the
Option in part, Parent shall present and surrender this Agreement to the
Company, and the Company shall deliver to Parent an executed new agreement
with the same terms as this Agreement evincing the right to purchase the
balance of the shares of the Company Common Stock purchasable hereunder.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Parent that:
(a) the Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan and has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder;
(b) the execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or any of the transactions
contemplated hereby;
(c) this Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, and, assuming
this Agreement constitutes a valid and binding obligation of Parent, is
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy and other laws affecting the
rights and remedies of creditors generally and general principles of equity;
(d) the Company has taken all necessary corporate action to authorize
and reserve for issuance and to permit it to issue, upon exercise of the
Option, and at all times from the date hereof through the expiration of the
Option will have reserved a number of authorized and unissued shares of the
Company Common Stock not less than the Option Number, such amount being
subject to adjustment as provided in Section 9 hereof, all of which, upon
their issuance and delivery in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable;
(e) upon delivery of the Shares to Parent upon the exercise of the
Option, Parent will acquire the Shares free and clear of all claims, liens,
charges, encumbrances and security interests of any nature whatsoever;
Annex B-3
<PAGE>
(f) the execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a benefit
under, or the creation of a lien, pledge, security interest or other
encumbrance on assets pursuant to (any such conflict, violation, default,
right of termination, cancellation or acceleration, loss or creation, a
"Violation"), (A) any provision of the Articles of Incorporation, or Bylaws,
of the Company or (B) any provisions of any mortgage, indenture, lease,
contract or other agreement, instrument, permit, concession, franchise, or
license or (C) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company or its properties or assets,
which Violation, in the case of each of clauses (B) and (C), would have a
material adverse effect on the Company;
(g) except as contemplated by Section 8(b) hereof and as may be required
under the Securities Act of 1933, as amended (the "Securities Act"), the
execution and delivery of this Agreement by the Company does not, and the
performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority; and
(h) none of the Company or any of its affiliates or anyone acting on its
or their behalf has issued, sold or offered any security of the Company to
any person or entity under circumstances that would cause the issuance and
sale of shares of the Company Common Stock hereunder to be subject to the
registration requirements of the Securities Act as in effect on the date
hereof, and, assuming the representations and warranties of Parent contained
in Section 6(f) are true and correct, the issuance, sale and delivery of the
shares of the Company Common Stock hereunder would be exempt from the
registration and prospectus delivery requirements of the Securities Act, as
in effect on the date hereof, and the Company shall not take any action
which would cause the issuance, sale, and delivery of shares of the Company
Common Stock hereunder not to be exempt from such requirements.
6. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent represents and
warrants to the Company that:
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power
and authority to enter into this Agreement and to carry out its obligations
hereunder;
(b) the execution and delivery of this Agreement by Parent and the
consummation by Parent of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Parent and
no other corporate proceedings on the part of Parent are necessary to
authorize this Agreement or any of the transactions contemplated hereby;
(c) this Agreement has been duly executed and delivered by Parent and
constitutes a valid and binding obligation of Parent, and, assuming this
Agreement constitutes a valid and binding obligation of the Company, is
enforceable against Parent in accordance with its terms, except as
enforceability may be limited by bankruptcy and other laws affecting the
rights and remedies of creditors generally and general principles of equity;
(d) the execution and delivery of this Agreement by Parent does not, and
the performance of this Agreement by Parent will not, result in any
Violation pursuant to, (A) any provision of the Certificate of Incorporation
or By-laws of Parent, (B) any provisions of any mortgage, indenture, lease,
contract or other agreement, instrument, permit, concession, franchise, or
license or (C) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent or its
Annex B-4
<PAGE>
properties or assets, which Violation, in the case of each of clauses
(B) and (C), would have a material adverse effect on Parent;
(e) except as contemplated by Section 8(b) hereof and as may be required
under the Securities Act, the execution and delivery of this Agreement by
Parent does not, and the performance of this Agreement by Parent will not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority;
(f) any shares of the Company Common Stock acquired by Parent upon
exercise of the Option will be acquired for Parent's own account, for
investment purposes only and will not be, and the Option is not being,
acquired by Parent with a view to the public distribution thereof, in
violation of any applicable provision of the Securities Act.
7. CERTAIN REPURCHASES.
(a) PARENT PUT. At any time during which the Option is exercisable
pursuant to Section 2 hereof (the "Repurchase Period"), upon demand by
Parent, Parent shall have the right to sell to the Company (or any successor
entity thereof) and the Company (or such successor entity) shall be
obligated to repurchase from Parent (the "Put"), all or any portion of the
Option, at the price set forth in subparagraph (i) below, or all or any
portion of the Shares purchased by Parent pursuant to the exercise of the
Option, at a price set forth in subparagraph (ii) below:
(i) The difference between the "Market/Tender Offer Price" for shares of
the Company Common Stock as of the date (the "Notice Date") notice of
exercise of the Put, is given to the Company (defined as the higher of (A)
the price per share offered as of the Notice Date pursuant to any tender or
exchange offer or other Alternative Transaction (as defined in the Merger
Agreement) which was made prior to the Notice Date and not terminated or
withdrawn as of the Notice Date (the "Tender Price") and (B) the average of
the closing prices of shares of the Company Common Stock on the Nasdaq
National Market for the ten trading days immediately preceding the Notice
Date, (the "Market Price")), and the Exercise Price, multiplied by the
number of the Shares purchasable pursuant to the Option (or portion thereof
with respect to which Parent is exercising its rights under this Section 7),
but only if the Market/Tender Offer Price is greater than the Exercise
Price. For purposes of determining the highest price offered pursuant to any
Alternative Transaction which involves consideration other than cash, the
value of such consideration shall be equal to the higher of (x) if
securities of the same class of the proponent as such consideration are
traded on any national securities exchange or by any registered securities
association, a value based on the closing sale price or asked price for such
securities on their principal trading market on such date and (y) the value
ascribed to such consideration by the proponent of such Alternative
Transaction, or if no such value is ascribed, a value determined in
reasonable good faith by the Board of Directors of the Company.
(ii) The Exercise Price paid by Parent for the Shares acquired pursuant
to the exercise of the Option plus the difference between the Market/Tender
Offer Price and the Exercise Price, but only if the Market/Tender Offer
Price is greater than the Exercise Price, multiplied by the number of the
Shares so purchased.
(iii) For purposes of clauses (i) and (ii) of this Section 7(a), the
Tender Price shall be the highest price per share offered pursuant to a
tender or exchange offer or other Alternative Transaction during the
Repurchase Period.
(b) Payment and Redelivery of the Option or Shares. In the event Parent
exercises its rights under this Section 7, the Company shall, within ten
business days of the Notice Date, pay the required amount to Parent in
immediately available funds and Parent shall surrender to the Company the
Option or the certificates evidencing the Shares purchased by Parent
pursuant
Annex B-5
<PAGE>
thereto, and Parent shall warrant that it owns such shares and that such
shares are then free and clear of all liens, claims, charges and
encumbrances of any kind or nature whatsoever.
8. REGISTRATION RIGHTS.
(a) Following the termination of the Merger Agreement and exercise of
the Option, Parent may by written notice request the Company to register for
resale under the Securities Act all or any part of the Shares beneficially
owned by Parent (the "Registrable Securities") in a firm commitment
offering. The Company shall use its reasonable best efforts to effect, as
promptly as practicable, the registration under the Securities Act of the
Registrable Securities; PROVIDED, HOWEVER, that (i) Parent shall not be
entitled to demand more than an aggregate of two (2) effective registration
statements hereunder, and (ii) the Company will not be required to file any
such registration statement during any period of time (not to exceed sixty
(60) days after such request in the case of clause (A) below or ninety (90)
days after such request in the case of clauses (B) and (C) below) when
(A) the Registrant is in possession of material non-public information which
it reasonably believes would be detrimental to be disclosed at such time
and, in the opinion of counsel to the Company, such information would be
required to be disclosed if a registration statement were filed at that
time; (B) the Company is required under the Securities Act to include
audited financial statements for any period in such registration statement
and such financial statements are not yet available for inclusion in such
registration statement; or (C) the Company determines, in its reasonable
judgment, that such registration would interfere with any financing,
acquisition or other transaction involving the Company or any of its
material subsidiaries and that such transaction is material to the
Registrant and its subsidiaries taken as a whole.
(b) The Company shall use its reasonable best efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified
for sale under the securities or Blue Sky laws of such jurisdictions as
Parent may reasonably request and shall continue such registration or
qualification in effect in such jurisdiction; PROVIDED, HOWEVER, that the
Company shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to
the condition that Parent shall provide the Company with such information
with respect to its Registrable Securities, the plans for the distribution
thereof, and such other information with respect to the Parent as, in the
reasonable judgment of counsel for the Company, is necessary to enable the
Registrant to include in such registration statement all material facts
required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at
the Company's expense, except for underwriting discounts and commissions and
the fees and the expenses of counsel to the Parent, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as is customary in
connection with underwritten public offerings as such underwriters may
reasonably require.
(e) In connection with any registration effected under this Section 8,
the parties agree (i) to indemnify each other and the underwriters, if any,
in the customary manner, (ii) to enter into an underwriting agreement in
form and substance customary for transactions of such type with the
underwriters participating in such offering, if any, and (iii) to take all
further actions which shall be reasonably necessary to effect such
registration and sale (including if the managing underwriter deems it
necessary, participating in road-show presentations).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) In the event of any change in the Company Common Stock by reason of
stock dividends, splitups, mergers (other than the Merger),
recapitalizations, combinations, exchange of shares or
Annex B-6
<PAGE>
the like, the type and number of shares or securities subject to the Option,
and the purchase price per share provided in Section 2(e) hereof, shall be
adjusted appropriately, and proper provision shall be made in the agreements
governing such transaction so that Parent shall receive, upon exercise of
the Option, the number and class of shares or other securities or property
that Parent would have received in respect of the Company Common Stock if
the Option had been exercised immediately prior to such event or the record
date therefor, as applicable.
(b) In the event that the Company shall enter in an agreement: (i) to
consolidate with or merge into any person, other than Parent or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger; (ii) to permit any person, other than Parent
or one of its Subsidiaries, to merge into the Company and the Company shall
be the continuing or surviving corporation, but, in connection with such
merger, in the then-outstanding shares of the Company Common Stock shall be
changed into or exchanged for stock or other securities of the Company or
any other person or cash or any other property or the outstanding shares of
the Company Common Stock immediately prior to such merger shall after such
merger represent less than 50% of the outstanding shares and share
equivalents of the merged company; or (iii) to sell or otherwise transfer
all or substantially all of its assets to any person, other than Parent or
one of its Subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that upon the
consummation of any such transaction and upon the terms and conditions set
forth herein, Parent shall receive for each the Share with respect to which
the Option has not been exercised an amount of consideration in the form of
and equal to the per share amount of consideration that would be received by
the holder of one share of the Company Common Stock less the Exercise Price
(and, in the event of an election or similar arrangement with respect to the
type of consideration to be received by the holders of the Company Common
Stock, subject to the foregoing, proper provision shall be made so that the
holder of the Option would have the same election or similar rights as would
the holder of the number of shares of the Company Common Stock for which the
Option is then exercisable).
10. LIMITATION OF PARENT PROFIT.
(a) Notwithstanding any other provision of this Agreement, in no event
shall Parent's Total Profit (as defined below) exceed the aggregate amount
of fees and expenses payable under the provisions of Section 7.2(b) of the
Merger Agreement, and, if Parent's Total Profit shall otherwise exceed such
amount, Parent, at its sole election, shall either (i) reduce the number of
shares of Company Common Stock subject to this Option, (ii) deliver to the
Company for cancellation Shares previously purchased by Parent (valued, for
purposes of this Section 10(a) at the average closing sales price per share
of Company Common Stock (or if there is no sale on such date then the
average between the closing bid and ask prices on any such day) as quoted on
the Nasdaq National Market based on published financial sources for the
twenty consecutive trading days preceding the day on which Parent's Total
Profit exceeds the aggregate amount of fees and expenses payable under the
provisions of Section 7.2(b) of the Merger Agreement, (iii) pay cash to the
Company, or (iv) any combination thereof, such that Parent's actually
realized Total Profit shall not exceed the aggregate amount of fees and
expenses payable under the provisions of Section 7.2(b) of the Merger
Agreement after taking into account the foregoing actions.
(b) As used herein, the term "Total Profit" shall mean the amount
(before taxes) of the following: (a) the aggregate amount of (i)(x) the net
cash amounts received by Parent or its permitted designees or any affiliated
party pursuant to the sale of Shares (or any other securities into which the
Option is converted or exchanged) to any unaffiliated party or to the
Company pursuant to this Agreement, less (y) Parent's or its permitted
designees purchase price of such Shares, (ii) any amounts received by Parent
or its permitted designees or any affiliated party on the transfer of the
Option (or any portion thereof) to any unaffiliated party or to the Company
Annex B-7
<PAGE>
pursuant to this Agreement, and (iii) any amounts received by Parent
pursuant to Section 7.2(b) of the Merger Agreement; minus (b) the amount of
cash theretofore paid to the Company pursuant to this Section 10 plus the
value of the Shares theretofore delivered to the Company for cancellation
pursuant to this Section 10.
11. RESTRICTIVE LEGENDS. Each certificate representing shares of the
Company Common Stock issued to Parent hereunder shall include a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
It is understood and agreed that (i) the reference to the resale
restrictions of the Securities Act and state securities or Blue Sky laws in the
foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if Parent shall have delivered to the Company a copy of a
letter from the staff of the Securities and Exchange Commission, or an opinion
of counsel, in form and substance reasonably satisfactory to the Company, to the
effect that such legend is not required for purposes of the Securities Act or
such laws; (ii) the reference to the provisions of this Agreement in the
foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may be
required by law. Certificates representing shares sold in a registered public
offering pursuant to Section 8 shall not be required to bear the legend set
forth in this Section 11.
12. BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Except as expressly provided for in this Agreement,
neither this Agreement nor the rights or the obligations of either party hereto
are assignable, except by operation of law, or with the written consent of the
other party. Nothing contained in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto and their
respective permitted assigns any rights or remedies of any nature whatsoever by
reason of this Agreement.
13. SPECIFIC PERFORMANCE. The parties recognize and agree that if for any
reason any of the provisions of this Agreement are not performed in accordance
with their specific terms or are otherwise breached, immediate and irreparable
harm or injury would be caused for which money damages would not be an adequate
remedy. Accordingly, each party agrees that, in addition to other remedies, the
other party shall be entitled to an injunction restraining any violation or
threatened violation of the provisions of this Agreement. In the event that any
action should be brought in equity to enforce the provisions of this Agreement,
neither party will allege, and each party hereby waives the defense, that there
is adequate remedy at law.
14. ENTIRE AGREEMENT. This Agreement, the Merger Agreement, the other
Ancillary Agreements and the Confidentiality Agreement constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof.
15. FURTHER ASSURANCE. Each party will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
16. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full
Annex B-8
<PAGE>
force and effect. In the event any court or other competent authority holds any
provision of this Agreement to be null, void or unenforceable, the parties
hereto shall negotiate in good faith the execution and delivery of an amendment
to this Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision. Each party agrees that, should any court or other competent authority
hold any provision of this Agreement or part hereof to be null, void or
unenforceable, or order any party to take any action inconsistent herewith, or
not take any action required herein, the other party shall not be entitled to
specific performance of such provision or part hereof or to any other remedy,
including but not limited to money damages, for breach hereof or of any other
provision of this Agreement or part hereof as the result of such holding or
order.
17. NOTICES. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed to
be given, dated and received when so delivered personally, telegraphed or
telecopied or, if mailed, five business days after the date of mailing to the
following address or facsimile number, or to such other address or addresses as
such person may subsequently designate by notice given hereunder.
(i) if to Parent, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, California 94063
Attention: Jeffrey C. Smith
Telephone: 650-216-2010
Facsimile: 650-216-2001
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue
Palo Alto, CA 94301
Attention: Gregory C. Smith
Telephone No: 650-470-4500
Facsimile No.: 650-470-4570
(ii) if to the Company, to:
Interface Systems, Inc.
5855 Interface Drive
Ann Arbor, Michigan 48103
Attention: Robert A. Nero
Telephone: 734-769-5900
Facsimile: 734-769-1047
with a copy to:
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
Attention: Aleksandra A. Miziolek
Telephone No.: 313-568-6762
Facsimile No.: 313-568-6915
Annex B-9
<PAGE>
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
19. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same instrument.
21. EXPENSES. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
22. AMENDMENTS; WAIVER. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
INTERFACE SYSTEMS, INC.
By:__________________________
Name:
Title:
TUMBLEWEED COMMUNICATIONS CORP.
By:__________________________
Name:
Title:
Annex B-10
<PAGE>
ANNEX C
FORM OF VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of July 28, 2000, by and among
Tumbleweed Communications Corp., a Delaware corporation ("Parent"), Maize
Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of
Parent (the "Sub"), and [STOCKHOLDER] ("Stockholder").
WITNESSETH:
WHEREAS, immediately prior to the execution of this Agreement, Parent, Sub
and Interface Systems, Inc., a Michigan corporation (the "Company"), have
entered into an Agreement and Plan of Merger of even date herewith (the "Merger
Agreement"), pursuant to which the parties thereto have agreed, upon the terms
and subject to the conditions set forth therein, to merge Sub with and into the
Company (the "Merger"); and
WHEREAS, as of the date hereof, Stockholder is the record and Beneficial
Owner (as defined hereinafter) of Existing Shares (as defined
hereinafter) of the common stock, no par value, of the Company (the "Company
Common Stock"); and
WHEREAS, as inducement and a condition to entering into the Merger
Agreement, Parent has required Stockholder to agree, and Stockholder has agreed,
to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
Section 1. CERTAIN DEFINITIONS. In addition to the terms defined elsewhere
herein, capitalized terms used and not defined herein have the respective
meanings ascribed to them in the Merger Agreement. For purposes of this
Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities as determined
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Without duplicative counting of the same securities by the
same holder, securities Beneficially Owned by a person include securities
Beneficially Owned by all other persons with whom such person would constitute a
"group" within the meaning of Section 13(d) of the Exchange Act with respect to
the securities of the same issuer.
(b) "Existing Shares" means shares of the Company Common Stock Beneficially
Owned by Stockholder as of the date hereof.
(c) "Securities" means the Existing Shares together with any shares of the
Company Common Stock or other securities of the Company acquired by Stockholder
in any capacity after the date hereof and prior to the termination of this
Agreement whether upon the exercise of options, warrants or rights, the
conversion or exchange of convertible or exchangeable securities, or by means of
purchase, dividend, distribution, split-up, recapitalization, combination,
exchange of shares or the like, gift, bequest, inheritance or as a successor in
interest in any capacity or otherwise.
Section 2. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder
represents and warrants to Parent and Sub as follows:
(a) OWNERSHIP OF SHARES. Stockholder is the sole record and Beneficial Owner
of (i) the Existing Shares, (ii) Company Options to purchase [ ] shares of
Company Common Stock ("Stockholder Options") and (iii) Company Warrants to
purchase [ ] shares of Company Common Stock ("Stockholder Warrants"). On the
date hereof, the Existing Shares constitute all of the shares of the Company
Common Stock owned of record or Beneficially Owned by Stockholder. There are no
outstanding options or other rights to acquire from Stockholder or obligations
of Stockholder to sell or to acquire, any shares of the Company Common Stock.
Stockholder has sole voting power and sole
<PAGE>
power to issue instructions with respect to the matters set forth in Sections 5
through 9 hereof, sole power of disposition, sole power of conversion, sole
power to demand appraisal rights and sole power to agree to all of the matters
set forth in this Agreement, in each case with respect to all of the Existing
Shares with no limitations, qualifications or restrictions on such rights,
subject to applicable securities laws and the terms of this Agreement.
(b) POWER; BINDING AGREEMENT. Stockholder has the legal capacity, power and
authority to enter into and perform all of Stockholder's obligations under this
Agreement. This Agreement has been duly and validly executed and delivered by
Stockholder and constitutes a valid and binding agreement of Stockholder,
enforceable against Stockholder in accordance with its terms except that
(i) such enforcement may be subject to applicable bankruptcy, insolvency or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(c) NO CONFLICTS. Except as contemplated by the Merger Agreement, no filing
with, and no permit, authorization, consent or approval of, any state or federal
public body or authority ("Governmental Entity") is necessary for the execution
of this Agreement by Stockholder and the consummation by Stockholder of the
transactions contemplated hereby, none of the execution and delivery of this
Agreement by Stockholder, the consummation by Stockholder of the transactions
contemplated hereby or compliance by Stockholder with any of the provisions
hereof shall (i) conflict with or result in any breach of any organizational
documents applicable to Stockholder, (ii) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or provisions
of any note, loan agreement, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which Stockholder is a party or by which Stockholder
or any of its properties or assets may be bound, or (iii) violate any order,
writ, injunction, decree, judgment, order, statute, rule or regulation
applicable to Stockholder or any of Stockholder's properties or assets, except
in the case of clauses (ii) and (iii) where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults would not, individually or in the aggregate,
materially impair the ability of Stockholder or the Company to consummate the
transactions contemplated by the Merger Agreement, this Agreement or by the
other Ancillary Agreements.
(d) NO ENCUMBRANCE. Except as permitted by this Agreement, the Existing
Shares are now and, at all times during the term hereof, and the Securities will
be, held by Stockholder, or by a nominee or custodian for the benefit of
Stockholder, free and clear of all mortgages, claims, charges, liens, security
interests, pledges or options, proxies, voting trusts or agreements,
understandings or arrangements or any other rights whatsoever ("Encumbrances"),
except for any such Encumbrances arising hereunder.
(e) NO FINDER'S FEES. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial adviser's or other
similar fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Stockholder.
(f) RELIANCE BY PARENT. Stockholder understands and acknowledges that Parent
is entering into, and causing Sub to enter into, the Merger Agreement in
reliance upon Stockholder's execution and delivery of this Agreement.
Section 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Each of
Parent and Sub hereby, jointly and severally, represents and warrants to
Stockholder as follows:
(a) POWER; BINDING AGREEMENT. Parent and Sub each has the corporate power
and authority to enter into and perform all of its obligations under this
Agreement. This Agreement has been duly and validly executed and delivered by
each of Parent and Sub and constitutes a valid and binding agreement
Annex C-2
<PAGE>
of Parent and Sub, enforceable against each of Parent and Sub in accordance with
its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) NO CONFLICTS. Except as contemplated by the Merger Agreement, no filing
with, and no permit, authorization, consent or approval of, any Governmental
Entity is necessary for the execution of this Agreement by Parent and Sub and
the consummation by Parent and Sub of the transactions contemplated hereby, and
none of the execution and delivery of this Agreement by each of Parent and Sub,
the consummation by each of Parent and Sub of the transactions contemplated
hereby or compliance by each of Parent and Sub with any of the provisions hereof
shall (i) conflict with or result in any breach of any provision of the
respective certificates of incorporation or by-laws of Parent and Sub,
(ii) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity, (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
license, lease, contract, agreement or other instrument or obligation to which
Parent or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Parent, any of its
Subsidiaries or any of their properties or assets, except in the case of clauses
(ii), (iii) and (iv) where the failure to obtain such permits, authorizations,
consents or approvals or to make such filings, or where such violations,
breaches or defaults would not, individually or in the aggregate, materially
impair the ability of Parent or Sub to consummate the transactions contemplated
by the Merger Agreement, this Agreement or by the other Ancillary Agreements.
Section 4. DISCLOSURE. Stockholder hereby agrees to permit Parent to
publish and disclose in the Registration Statement and the Proxy
Statement/Prospectus (including all documents and schedules filed with the
Securities and Exchange Commission), and any press release or other disclosure
document which Parent, in its sole discretion determines to be necessary or
desirable in connection with the Merger and any transactions related thereto,
Stockholder's identity and ownership of the Company Common Stock and the nature
of Stockholder's commitments, arrangements and understandings under this
Agreement.
Section 5. TRANSFER AND OTHER RESTRICTIONS. Prior to the termination of
this Agreement, Stockholder agrees not to, directly or indirectly:
(i) except pursuant to the terms of the Merger Agreement, offer for
sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose
of, or enter into any contract, option or other arrangement or understanding
with respect to or consent to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of any or all of the
Securities or any interest therein except as provided in Section 6 hereof;
(ii) grant any proxy, power of attorney, deposit any of the Securities
into a voting trust or enter into a voting agreement or arrangement with
respect to the Securities except as provided in this Agreement; or
(iii) take any other action that would make any representation or
warranty of Stockholder contained herein untrue or incorrect or have the
effect of preventing or disabling Stockholder from performing its
obligations under this Agreement.
Section 6. VOTING OF THE COMPANY COMMON STOCK. Stockholder hereby agrees
that, during the period commencing on the date hereof and continuing until the
first to occur of (a) the Effective Time or (b) termination of this Agreement in
accordance with its terms, at any meeting (whether annual or
Annex C-3
<PAGE>
special and whether or not an adjourned or postponed meeting) of the holders of
the Company Common Stock, however called, or in connection with any written
consent of the holders of the Company Common Stock, Stockholder will appear at
the meeting or otherwise cause the Securities to be counted as present thereat
for purposes of establishing a quorum and vote or consent (or cause to be voted
or consented) the Securities:
(A) in favor of the adoption of the Merger Agreement and the approval
of other actions contemplated by the Merger Agreement and this Agreement
and any actions required in furtherance thereof and hereof;
(B) against any action or agreement that would result in a breach in
any respect of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Merger Agreement or this
Agreement; and
Stockholder may not enter into any agreement or understanding with any
person the effect of which would be inconsistent with or violative of any
provision contained in this Section 6.
Section 7. PROXY.
(a) Stockholder hereby irrevocably grants to, and appoints, Parent and
Bernard J. Cassidy, Joseph C. Consul, or any of them in their respective
capacities as officers of Parent and any individual who shall hereafter succeed
to any such office of Parent and each of them individually, such Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of Stockholder, to vote the Securities, or grant a consent
or approval in respect of the Securities, in connection with any meeting of the
stockholders of the Company, as specified in Section 6 hereof.
(b) Stockholder represents that any other proxies heretofore given in
respect of the Existing Shares are not irrevocable, and that such proxies are
hereby revoked.
(c) Stockholder understands and acknowledges that Parent is entering into
the Merger Agreement in reliance upon such Stockholder's execution and delivery
of this Agreement. Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 7 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of Stockholder under this Agreement. Stockholder hereby further
affirms that the irrevocable proxy is coupled with an interest and may not be
revoked under any circumstances. Stockholder hereby ratifies and confirms all
that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 422 of the Michigan Business
Corporation Act.
Section 8. LOCK-UP. As a further inducement to Parent to enter into the
Merger Agreement, the Stockholder hereby agrees that until 90 days after the
Closing Date (as defined in the Merger Agreement), the Stockholder will not
offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale, transfer,
tender, pledge, encumbrance, assignment or other disposition of any or all of
the Parent Common Stock, or securities convertible into or exchangeable or
exercisable for any shares of Parent Common Stock, Beneficially Owned or
controlled by such Stockholder as of the date hereof or at any time hereafter,
in cash or otherwise, without, in each case, the prior written consent of
Parent; PROVIDED, that the foregoing prohibitions will not apply to shares sold
for the express purpose of covering the exercise price of Stockholder Options.
In furtherance of the foregoing, Parent and its transfer agent and registrar are
hereby authorized to decline to make any transfer of shares of such securities
if such transfer would constitute a violation or breach of this Agreement.
Section 9. STOP TRANSFER; LEGEND.
Annex C-4
<PAGE>
(a) Stockholder agrees with, and covenants to, Parent that Stockholder will
not request that the Company register the transfer (book-entry or otherwise) of
any certificate or uncertificated interest representing any of the Securities,
unless such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of share or the like other than pursuant
to the Merger, the term "Existing Shares" will be deemed to refer to and include
the shares of the Company Common Stock as well as all such stock dividends and
distributions and any shares into which or for which any or all of the
Securities may be changed or exchanged and appropriate adjustments shall be made
to the terms and provisions of this Agreement.
(c) Stockholder will promptly after the date hereof surrender to the Company
all certificates representing the Securities, the Company will place the
following legend on such certificates in addition to any other legend required
thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER PURSUANT TO AND OTHER PROVISIONS OF A VOTING
AGREEMENT, DATED AS OF JULY 28, 2000, BY AND AMONG TUMBLEWEED
COMMUNICATIONS CORP., MAIZE ACQUISITION SUB, INC. AND [STOCKHOLDER]."
Section 10. REASONABLE BEST EFFORTS. Subject to the terms and conditions
of this Agreement, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the Merger Agreement. Each party shall promptly consult with
the other and provide any necessary information and material with respect to all
filings made by such party with any Governmental Entity in connection with this
Agreement and the Merger Agreement and the transactions contemplated hereby and
thereby.
Section 11. TERMINATION. This Agreement shall terminate on the earliest of
(a) termination of the Merger Agreement pursuant to Section 7.1(a), (b) or (c)
thereof, (b) six months following the termination of the Merger Agreement
pursuant to Section 7.1(d) or (e) thereof, (c) the agreement of the parties
hereto to terminate this Agreement, or (d) the consummation of the Merger.
Section 12. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties hereto. This Agreement shall be binding upon, inure to the benefit of
and be enforceable by each party and such party's respective heirs,
beneficiaries, executors, representatives and permitted assigns.
(c) AMENDMENT AND MODIFICATION. This Agreement may not be amended, altered,
supplemented or otherwise modified or terminated except upon the execution and
delivery of a written agreement executed by the parties hereto.
(d) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as FedEx, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
Annex C-5
<PAGE>
If to Parent or Sub, to:
Tumbleweed Communications Corp.
700 Saginaw Drive
Redwood City, California 94063
Attention: Jeffrey C. Smith
Telephone: 650-216-2010
Facsimile: 650-216-2001
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
525 University Avenue--Suite 220
Palo Alto, California 94301
Telephone: (650) 470-4500
Telecopy No.: (650) 470-4570
Attention: Gregory C. Smith
If to Stockholder, to:
with a copy to:
(e) SEVERABILITY. Any term or provision of this Agreement which is held to
be invalid, illegal or unenforceable in any respect in any jurisdiction shall,
as to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
(f) SPECIFIC PERFORMANCE. Each of the parties hereto recognizes and
acknowledges a breach by it of any covenants or agreements contained in this
Agreement will cause the other party to sustain damages for which it would not
have an adequate remedy at law for money, damages, and therefore in the event of
any such breach the aggrieved party shall be entitled to the remedy of specified
performance of such covenants and agreements and injunctive and other equitable
relief in addition to any other remedy to which it may be entitled, at law or in
equity.
(g) NO WAIVER. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, will not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
(h) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
(i) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflict of law thereof, except in such cases as the laws of the
State of Michigan are mandatorily applicable.
Annex C-6
<PAGE>
(j) DESCRIPTIVE HEADING. The descriptive headings used herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(k) EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
(l) FURTHER ASSURANCES. From time to time, at any other party's request and
without further consideration, each party hereto shall execute and deliver such
additional documents and take all such further lawful action as may be necessary
or desirable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by this Agreement.
(m) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Parent, Sub and Stockholder have caused this Agreement
to be duly executed as of the day and year first written above.
<TABLE>
<S> <C> <C>
TUMBLEWEED COMMUNICATIONS CORP.
By:
------------------------------------------
Name:
Title:
MAIZE ACQUISITION SUB, INC.
By:
------------------------------------------
Name:
Title:
By:
------------------------------------------
[Stockholder]*
</TABLE>
------------------------
* In the event this agreement covers shars held jointly or held individually by
related parties who will sign this together, each joint or related party shall
sign.
Annex C-7
<PAGE>
ANNEX D
INTERFACE SYSTEMS, INC.
CONVERTIBLE SUBORDINATED NOTE
PURCHASE AGREEMENT
THIS CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT (this "Agreement") is
made as of the 28th day of June, 2000, by and between Interface Systems, Inc., a
Michigan corporation ("Interface" or the "Company"), and Tumbleweed
Communications Corp., a Delaware corporation ("Purchaser" or the "Parent").
RECITALS
WHEREAS, the Board of Directors of the Company has approved the issuance of
Common Stock, no par value (the "Common Stock") in accordance with the Notes, as
defined below;
WHEREAS, the Board of Directors of the Company has approved the sale and
issuance of an aggregate of up to $3,000,000 of Convertible Subordinated Notes
(individually, a "Note" and collectively, the "Notes") which can be converted
into Common Stock;
WHEREAS, the Purchaser desires to purchase Notes on the terms and conditions
set forth herein; and
WHEREAS, the Company desires to issue and sell Notes to the Purchaser on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF NOTES.
(a) Subject to the terms and conditions of this Agreement, the Purchaser
agrees, to purchase at the Closings and the Company agrees to sell and issue to
the Purchaser, a Note for $2,000,000 (the "$2,000,000 Note") and a Note for
$1,000,000 (the "$1,000,000 Note").
1.2 THE CLOSINGS.
(a) The purchase and sale of the $2,000,000 Note shall take place at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California, at
5:00 p.m., on July 3, 2000, or at such other time and place as the Company and
the Purchaser shall mutually agree, either orally or in writing (which time and
place are designated as the "$2,000,000 Closing").
(b) The purchase and sale of the $1,000,000 Note shall take place at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California, at
5:00 p.m., on September 5, 2000, or at such other time and place as the Company
and the Purchaser shall mutually agree, either orally or in writing (which time
and place are designated as the "$1,000,000 Closing" and together with the
$2,000,000 Closing, the "Closings").
(c) At each of the Closings, the Company shall deliver to the Purchaser a
Note in exchange for payment of the purchase price therefor by check, wire
transfer, or such other form of payment as shall be mutually agreed upon by the
Purchaser and the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Reference is made to that certain Agreement and Plan of Merger by and among
Parent, Maize Acquisition Sub, Inc., a Delaware corporation, and the Company
dated June 28, 2000 (the "Merger
<PAGE>
Agreement"). The Company hereby represents, warrants and covenants to the
Purchaser each of the representations, warranties and covenants set forth in
Article III of the Merger Agreement subject to the exceptions set forth in the
Disclosure Schedule thereto, which is incorporated by reference herein, and
further represents, warrants, and covenants, specifically identifying the
relevant subparagraph(s) hereof and attached hereto, as follows:
2.1 REGISTRATION RIGHTS.
Except as provided in the Merger Agreement, the Company is presently not
under any obligation and has not granted any rights to register under the
Securities Act any of its presently outstanding securities or any of its
securities that may subsequently be issued.
2.2 AUTHORIZATION.
All corporate action on the part of the Company, its officers, directors and
shareholders necessary for the authorization, execution and delivery of this
Agreement, that certain Registration Rights Agreement by and between the Company
and Parent (the "Registration Rights Agreement") and the Notes, the performance
of all obligations of the Company hereunder and thereunder at the Closings and
the authorization, issuance (or reservation for issuance), sale, and delivery of
the Notes being sold hereunder and the Common Stock issuable upon conversion
thereof has been taken or will be taken prior to the Closings, and this
Agreement, the Registration Rights Agreement, and the Notes, when executed and
delivered, will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally,
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent that the
indemnification provisions contained in the Registration Rights Agreement may be
limited by applicable laws. The sale of the Notes is not and the subsequent
conversion of the Notes into Common Stock will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or complied
with.
2.3 OFFERING.
Subject in part to the truth and accuracy of the Purchaser's representations
set forth in this Agreement, the offer, sale and issuance of the Notes as
contemplated by this Agreement are exempt from the registration requirements of
the Securities Act, and neither the Company nor any authorized agent acting on
its behalf will take any action hereafter that would cause the loss of such
exemption.
2.4 VALID ISSUANCE OF NOTES AND COMMON STOCK.
The Notes that are being purchased by the Investors hereunder, when issued,
sold, and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Registration Rights
Agreement and under applicable state and federal securities laws. The Common
Stock issuable upon conversion of the Notes being purchased under this Agreement
has been duly and validly reserved for issuance and will be duly and validly
issued, fully paid, and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and the
Registration Rights Agreement and under applicable state and federal securities
laws.
2.5 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of, or filing
with, any local, state, or federal governmental authority is required on the
part of the Company in connection with the
Annex D-2
<PAGE>
Company's valid execution, delivery, or performance of this Agreement, the
offer, sale or issuance of the Notes by the Company or the issuance of Common
Stock upon conversion of the Notes, except such filings as have been made prior
to the Closings, except any notices of sale required to be filed with the
Securities and Exchange Commission under Regulation D of the Securities Act of
1933, as amended (the "Securities Act"), or such post-closing filings as may be
required under applicable state securities laws, which will be timely filed
within the applicable periods therefor.
2.6 DISCLOSURE.
The Company has provided the Purchaser with all the information reasonably
available to it without undue expense that such Purchaser has requested for
deciding whether to purchase the Notes and all information that the Company
believes is reasonably necessary to enable such Purchaser to make such decision.
To the best of the Company's knowledge after reasonable investigation, neither
this Agreement nor any other agreements, written statements or certificates made
or delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby represents and warrants to the Company (severally and
not jointly) that:
3.1 AUTHORIZATION.
The Purchaser has full power and authority to enter into this Agreement and
the Registration Rights Agreement, and that this Agreement, when executed and
delivered, will constitute a valid and legally binding obligation of such
Purchaser.
3.2 LEGENDS.
To the extent applicable, each certificate or other document evidencing any
of the Notes or any Common Stock issued upon conversion thereof shall be
endorsed with the legends substantially in the form set forth below:
(a) The following legend under the Securities Act:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY SECURITIES LAW OF ANY STATE OF THE UNITED STATES
(COLLECTIVELY, THE "SECURITIES LAWS" AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE SECURITIES LAWS, PURSUANT TO REGISTRATION
UNDER SUCH SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION,
WHICH EXEMPTION FROM REGISTRATION SHALL BE DESCRIBED IN A WRITTEN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE PURCHASER AND DELIVERED TO THE
PURCHASER."
(b) Any legend imposed or required by the Company's Bylaws or applicable
state securities laws.
3.3 ACCREDITED INVESTOR.
(a) The Purchaser further represents to the Company that such Purchaser is
an Accredited Investor, as defined in Rule 501 of the Securities Act.
3.4 PURCHASE ENTIRELY FOR OWN ACCOUNT.
This Agreement is made with the Purchaser in reliance upon such Purchaser's
representation to the Company, which by such Purchaser's execution of this
Agreement such Purchaser hereby confirms,
Annex D-3
<PAGE>
that the Note to be purchased by such Purchaser and the Common Stock issuable
upon conversion thereof (collectively, the "Securities") will be acquired for
investment for such Purchaser's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Notes.
4. CONDITIONS OF PURCHASER'S OBLIGATIONS AT THE CLOSINGS.
The obligations of the Purchaser under subparagraph 1.2 of this Agreement
are subject to the fulfillment on or before each of the Closings of each of the
following conditions:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in Section 2
shall be true on and as of each Closing with the same effect as though such
representations and warranties had been made on and as of the date of each
Closing.
4.2 PERFORMANCE.
The Company shall have performed and complied with all agreements,
obligations, and conditions contained in this Agreement that are required to be
performed or complied with by it on or before each Closing.
4.3 COMPLIANCE CERTIFICATE.
The President of the Company shall deliver to the Purchaser at each Closing
a certificate certifying that the conditions specified in paragraphs 4.1, 4.2,
4.4, 4.5 and 4.6 have been fulfilled.
4.4 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Notes pursuant
to this Agreement shall be duly obtained and effective as of each Closing.
4.5 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the transactions
contemplated at each Closing and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Purchaser's special
counsel, which shall have received all such counterpart original and certified
or other copies of such documents as it may reasonably request.
4.6 OPINION OF COMPANY COUNSEL.
The Purchaser shall have received from Dykema Gossett PLLC, counsel for the
Company, an opinion, dated the date of each of the Closings, in the form
attached hereto as EXHIBIT A.
4.7 NO MATERIAL ADVERSE CHANGE.
Since the date of this Agreement, there shall not have occurred any event,
change or effect having, or which could be reasonably likely to have,
individually or in the aggregate, a material adverse effect on the Company and
its Subsidiaries.
Annex D-4
<PAGE>
4.8 NO TERMINATION OF THE MERGER AGREEMENT.
The Merger Agreement shall not have been terminated in accordance with its
terms.
4.9 NO BREACH OF THE MERGER AGREEMENT.
The Company shall not be in material breach of any representation, warranty,
covenant or other agreement contained in this Agreement, the Notes or the Merger
Agreement.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.
The obligations of the Company to the Purchaser under this Agreement are
subject to the fulfillment on or before each Closings of each of the following
conditions by the Purchaser:
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchaser contained in Section 3
shall be true on and as of each Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
5.2 QUALIFICATIONS.
All authorizations, approvals, or permits, if any, of any governmental
authority or regulatory body of the United States or of any state that are
required in connection with the lawful issuance and sale of the Notes pursuant
to this Agreement shall be duly obtained and effective as of each Closing.
6. MISCELLANEOUS
6.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute the entire
agreement among the parties and no party shall be liable or bound to any other
party in any manner by any warranties, representations, or covenants except as
specifically set forth herein or therein.
6.2 SURVIVAL OF WARRANTIES.
The warranties, representations, and covenants of the Company and the
Purchaser contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and both Closings.
6.3 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
Notes sold hereunder or any Common Stock issued upon conversion thereof).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
6.4 GOVERNING LAW.
This Agreement shall be governed and construed in accordance with the laws
of the State of Delaware without giving effect to the principles of conflicts of
law thereof.
Annex D-5
<PAGE>
6.5 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
6.6 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
6.7 NOTICES.
Unless otherwise provided, all notices and other communications required or
permitted under this Agreement shall be in writing and shall be mailed by United
States first-class mail, postage prepaid, sent by facsimile or delivered
personally by hand or by a nationally recognized courier addressed to the party
to be notified at the address or facsimile number indicated for such person on
the signature page hereof, or at such other address or facsimile number as such
party may designate by ten (10) days' advance notice to the other parties
hereto. All such notices and other written communications shall be effective on
the date of mailing, confirmed facsimile transfer or delivery.
6.8 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for any
finder's fee or commission in connection with this transaction.
The Purchaser agrees to indemnify and to hold harmless the Company from any
liability for any commission or compensation in the nature of a finder's fee
(and the cost and expenses of defending against such liability or asserted
liability) for which it or any of its officers, partners, employees, or
representatives is responsible.
The Company agrees to indemnify and hold harmless the Purchaser from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees, or
representatives is responsible.
6.9 EXPENSES.
Irrespective of whether either Closing is effected, the Company shall pay
all costs and expenses that it incurs with respect to the negotiation,
execution, delivery, and performance of this Agreement.
6.10 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs, and disbursements in addition to any other relief to
which such party may be entitled.
6.11 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the written consent of both
the Company and the Purchaser.
Annex D-6
<PAGE>
6.12 SEVERABILITY.
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement and
the balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
<TABLE>
<S> <C> <C>
INTERFACE SYSTEMS, INC.
By:
-------------------------------------
Address:
-------------------------------------
-------------------------------------
-------------------------------------
PURCHASER:
By:
-------------------------------------
Title:
-------------------------------------
Address:
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-------------------------------------
</TABLE>
Annex D-7
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY SECURITIES LAW OF ANY STATE OF THE UNITED STATES (COLLECTIVELY, THE
"SECURITIES LAWS" AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER
THE SECURITIES LAWS, PURSUANT TO REGISTRATION UNDER SUCH SECURITIES LAWS OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION, WHICH EXEMPTION FROM REGISTRATION
SHALL BE DESCRIBED IN A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE PURCHASER AND DELIVERED TO THE PURCHASER.
FORM OF
INTERFACE SYSTEMS, INC.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$ Palo Alto, California
June 28, 2000
Interface Systems, Inc., a Michigan corporation (the "Company"), the
principal office of which is located at 5855 Interface Drive, Ann Arbor, MI, for
value received hereby promises to pay to Tumbleweed Communications Corp., a
Delaware corporation ("Parent" or the "Purchaser"), or its registered assigns,
the sum ($ ), or such lesser amount as shall then equal the
outstanding principal amount hereof and any unpaid accrued interest hereon, as
set forth below, shall be due and payable on the earlier to occur of (i) June
28, 2001, or (ii) when declared due and payable by the Holder upon the
occurrence of an Event of Default (as defined below). Payment for all amounts
due hereunder shall be made by mail to the registered address of the Holder.
This Note is issued in connection with that certain Convertible Subordinated
Note Purchase Agreement between the Company and the Purchasers described
therein, dated as of June 28, 2000, as the same may from time to time be
amended, modified or supplemented (the "Purchase Agreement"). The holder of this
Note is subject to certain restrictions set forth in the Purchase Agreement and
shall be entitled to certain rights and privileges set forth in the Purchase
Agreement. This Note is one of the Notes referred to as the "Notes" in the
Purchase Agreement.
The following is a statement of the rights of the Holder of this Note and
the conditions to which this Note is subject, and to which the Holder hereof, by
the acceptance of this Note, agrees:
1. DEFINITIONS.
As used in this Note, the following terms, unless the context otherwise
requires, have the following meanings:
(i) "Company" includes any corporation which shall succeed to or assume
the obligations of the Company under this Note.
(ii) "Holder," when the context refers to a holder of this Note, shall
mean any person who shall at the time be the registered holder of this Note.
(iii) "Merger Agreement" shall refer to that certain Agreement and Plan
of Merger by and among the Company, Parent, and Maize Acquisition Sub, Inc.,
dated June 28, 2000.
2. INTEREST.
Commencing on December 31, 2000, and on each June 30 and December 31
thereafter until all outstanding principal and interest on this Note shall have
been paid in full, the Company shall pay interest at the rate of ten percent
(10%) per annum (the "Initial Interest Rate") on the principal of this Note
outstanding during the period beginning on the date of issuance of this Note and
ending on
Annex D-8
<PAGE>
the date that the principal amount of this Note becomes due and payable. In the
event that the principal amount of this Note is not paid in full when such
amount becomes due and payable, interest at the same rate as the Initial
Interest Rate plus three percent (3%) shall continue to accrue on the balance of
any unpaid principal until such balance is paid.
3. EVENTS OF DEFAULT.
If any of the events specified in this Section 3 shall occur (herein
individually referred to as an "Event of Default"), the Holder of the Note may,
so long as such condition exists, declare the entire principal and unpaid
accrued interest hereon immediately due and payable, by notice in writing to the
Company:
(i) Default in the payment of the principal and unpaid accrued interest of
this Note when due and payable if such default is not cured by the Company
within ten (10) days after the Holder has given the Company written notice of
such default; or
(ii) The institution by the Company of proceedings to be adjudicated as
bankrupt or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or answer or
consent seeking reorganization or release under the federal Bankruptcy Act, or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or the appointment of a receiver, liquidator, assignee,
trustee or other similar official of the Company, or of any substantial part of
its property, or the making by it of an assignment for the benefit of creditors,
or the taking of corporate action by the Company in furtherance of any such
action; or
(iii) If, within sixty (60) days after the commencement of an action against
the Company (and service of process in connection therewith on the Company)
seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or
similar relief under any present or future statute, law or regulation, such
action shall not have been resolved in favor of the Company or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within sixty (60) days after the appointment without the consent
or acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated; or
(iv) Any declared default of the Company under any Senior Indebtedness (as
defined below) that gives the holder thereof the right to accelerate such Senior
Indebtedness, and such Senior Indebtedness is in fact accelerated by the holder;
or
(v) If the Company or the Purchaser terminates the Merger Agreement under
any section other than Section 7.1(c) of the Merger Agreement, sixty (60) days
following such termination.
4. SUBORDINATION.
The indebtedness evidenced by this Note is hereby expressly subordinated, to
the extent and in the manner hereinafter set forth, in right of payment to the
prior payment in full of all the Company's Senior Indebtedness, as hereinafter
defined.
4.1 Senior Indebtedness. As used in this Note, the term "Senior
Indebtedness" shall mean the principal of and unpaid accrued interest on: (i)
all indebtedness of the Company to banks, commercial finance lenders, insurance
companies or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company (whether or not
secured), and (ii) any such indebtedness or any debentures, notes or other
evidence of indebtedness issued in exchange for or to refinance such Senior
Indebtedness, or any indebtedness arising from the satisfaction of such Senior
Indebtedness by a guarantor.
Annex D-9
<PAGE>
4.2 Default on Senior Indebtedness. If there should occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution,
liquidation or any other marshalling of the assets and liabilities of the
Company, or if this Note shall be declared due and payable upon the occurrence
of an Event of Default with respect to any Senior Indebtedness, then (i) no
amount shall be paid by the Company in respect of the principal of or interest
on this Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full, and
(ii) no claim or proof of claim shall be filed with the Company by or on behalf
of the Holder of this Note that shall assert any right to receive any payments
in respect of the principal of and interest on this Note, except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding. If there occurs an event of default that has been
declared in writing with respect to any Senior Indebtedness, or in the
instrument under which any Senior Indebtedness is outstanding, permitting the
holder of such Senior Indebtedness to accelerate the maturity thereof, then,
unless and until such event of default shall have been cured or waived or shall
have ceased to exist, or all Senior Indebtedness shall have been paid in full,
no payment shall be made in respect of the principal of or interest on this
Note, unless within three (3) months after the happening of such event of
default, the maturity of such Senior Indebtedness shall not have been
accelerated.
4.3 Effect of Subordination. Subject to the rights, if any, of the holders
of Senior Indebtedness under this Section 4 to receive cash, securities or other
properties otherwise payable or deliverable to the Holder of this Note, nothing
contained in this Section 4 shall impair, as between the Company and the Holder,
the obligation of the Company, subject to the terms and conditions hereof, to
pay to the Holder the principal hereof and interest hereon as and when the same
become due and payable, or shall prevent the Holder of this Note, upon default
hereunder, from exercising all rights, powers and remedies otherwise provided
herein or by applicable law.
4.4 Subrogation. Subject to the payment in full of all Senior Indebtedness
and until this Note shall be paid in full, the Holder shall be subrogated to the
rights of the holders of Senior Indebtedness (to the extent of payments or
distributions previously made to such holders of Senior Indebtedness pursuant to
the provisions of Section 4.2 above) to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness. No such payments or
distributions applicable to the Senior Indebtedness shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and the
Holder, be deemed to be a payment by the Company to or on account of this Note;
and for the purposes of such subrogation, no payments or distributions to the
holders of Senior Indebtedness to which the Holder would be entitled except for
the provisions of this Section 4 shall, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by the Company to or on account of the Senior
Indebtedness.
4.5 Undertaking. By its acceptance of this Note, the Holder agrees to
execute and deliver such documents as may be reasonably requested from time to
time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 4.
5. PREPAYMENT.
The principal amount of this note plus accrued and unpaid interest may be
prepaid upon thirty (30) days' prior written notice to the Holder.
6. CONVERSION.
6.1 Voluntary Conversion. Any Holder of this Note has the right, at the
Holder's option, at any time prior to payment in full of the principal balance
of this Note, to convert this Note, in accordance with the provisions of Section
6.3 hereof, in whole or in part, into fully paid and nonassessable shares
Annex D-10
<PAGE>
of Common Stock of the Company (the "Company Common Stock"). The number of
shares of Company Common Stock into which this Note may be converted
("Conversion Shares") shall be determined by dividing the aggregate principal
amount together with all accrued interest to the date of conversion by the
Conversion Price (as defined below) in effect at the time of such conversion.
The initial Conversion Price shall be equal to $9.50.
6.2 Automatic Conversion. If at any time the Merger Agreement is terminated
pursuant to Section 7.1(c) by the Company, the entire principal amount of this
Note shall be automatically converted into shares of Company Common Stock at the
Conversion Price in effect at that time.
6.3 Conversion Procedure.
6.3.1 NOTICE OF CONVERSION PURSUANT TO SECTION 6.1. Before the Holder
shall be entitled to convert this Note into shares of Company Common Stock,
it shall surrender this Note at the office of the Company and shall give
written notice by mail, postage prepaid, to the Company at its principal
corporate office, of the election to convert the same pursuant to this
Section 6.1, and shall state therein the name or names in which the
certificate or certificates for shares of Company Common Stock are to be
issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to the Holder of this Note a certificate or
certificates for the number of shares of Company Common Stock to which the
Holder of this Note shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the
date of such surrender of this Note, and the person or persons entitled to
receive the shares of Company Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Company Common Stock as of such date.
6.3.2 NOTICE OF CONVERSION PURSUANT TO SECTION 6.2. If this Note is
automatically converted, written notice shall be delivered to the Holder of
this Note at the address last shown on the records of the Company for the
Holder or given by the Holder to the Company for the purpose of notice or,
if no such address appears or is given, at the place where the principal
executive office of the Holder is located, notifying the Holder of the
conversion to be effected, specifying the Conversion Price, the principal
amount of the Note to be converted, the amount of accrued interest to be
converted, the date on which such conversion will occur and calling upon
such Holder to surrender to the Company, in the manner and at the place
designated, the Note.
6.4 Delivery of Stock Certificates. As promptly as practicable after the
conversion of this Note, the Company at its expense will issue and deliver to
the Holder of this Note a certificate or certificates for the number of full
shares of Company Common Stock issuable upon such conversion.
6.5 Mechanics and Effect of Conversion. No fractional shares of Company
Common Stock shall be issued upon conversion of this Note. In lieu of the
Company issuing any fractional shares to the Holder upon the conversion of this
Note, the Company shall pay to the Holder the amount of outstanding principal
that is not so converted, such payment to be in the form as provided below. Upon
the conversion of this Note pursuant to Section 6.1 above, the Holder shall
surrender this Note, duly endorsed, at the principal office of the Company. At
its expense, the Company shall, as soon as practicable thereafter, issue and
deliver to such Holder at such principal office a certificate or certificates
for the number of shares of such Common Stock to which the Holder shall be
entitled upon such conversion (bearing such legends as are required by the
Purchase Agreement and applicable state and federal securities laws in the
opinion of counsel to the Company), together with any other securities and
property to which the Holder is entitled upon such conversion under the terms of
this Note, including a check payable to the Holder for any cash amounts payable
as described above. In the event of any conversion of this Note pursuant to
Section 6.1 above, such conversion shall be deemed to have been made immediately
prior to the closing of the issuance and sale of such Company Common Stock and
on and after such date the Holder of this Note entitled to receive the shares of
such Company Common Stock issuable upon such conversion shall be treated for all
purpose as the record
Annex D-11
<PAGE>
Holder of such shares and a purchaser of such shares under the Purchase
Agreement and shall be bound by the terms of the Purchase Agreement. Upon
conversion of this Note, the Company shall be forever released from all its
obligations and liabilities under this Note, except that the Company shall be
obligated to pay the Holder, within ten (l0) days after the date of such
conversion, any interest accrued and unpaid or unconverted to and including the
date of such conversion, and no more.
7. CONVERSION PRICE ADJUSTMENTS.
7.1 Adjustments for Stock Splits and Subdivisions. In the event the Company
should at any time or from time to time after the date of issuance hereof fix a
record date for the effectuation of a split or subdivision of the outstanding
shares of Company Common Stock or the determination of holders of Company Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Company Common Stock or other securities or rights convertible into,
or entitling the holder thereof to receive directly or indirectly, additional
shares of Company Common Stock (hereinafter referred to as "Company Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Company Common Stock or the Company Common Stock
Equivalents (including the additional shares of Company Common Stock issuable
upon conversion or exercise thereof), then, as of such record date (or the date
of such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of this Note shall be appropriately decreased so that the
number of shares of Company Common Stock issuable upon conversion of this Note
shall be increased in proportion to such increase of outstanding shares.
7.2 Adjustments for Reverse Stock Splits. If the number of shares of Company
Common Stock outstanding at any time after the date hereof is decreased by a
combination of the outstanding shares of Company Common Stock, then, following
the record date of such combination, the Conversion Price for this Note shall be
appropriately increased so that the number of shares of Company Common Stock
issuable on conversion hereof shall be decreased in proportion to such decrease
in outstanding shares.
7.3 Restrictions and Limitations. So long as any Notes are outstanding, the
Company shall not, without the prior written consent by the Purchaser, authorize
or issue or obligate itself to issue, any other security (including any security
convertible into or exercisable for any equity security) senior to or on a
parity with the Note, or borrow any funds, or incur any indebtedness.
7.4 Notices of Record Date, etc. In the event of:
7.4.1 Any taking by the Company of a record of the holders of any class
of securities of the Company for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend
payable out of earned surplus at the same rate as that of the last such cash
dividend theretofore paid) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other Securities or property, or to receive any other right; or
7.4.2 Any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all of the assets of the Company to any other person or any
consolidation or merger involving the Company; or
7.4.3 Any voluntary or involuntary dissolution, liquidation or winding
up of the Company, the Company will mail to the holder of this Note at least
ten (10) days prior to the earliest date specified therein, a notice
specifying:
7.4.3.1 The date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right; and
Annex D-12
<PAGE>
7.4.3.2 The date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up
is expected to become effective and the record date for determining
stockholders entitled to vote thereon.
7.5 Reservation of Stock lssuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Company Common Stock solely for the purpose of effecting the conversion of the
Note such number of its shares of Company Common Stock as shall from time to
time be sufficient to effect the conversion of the Note; and if at any time the
number of authorized but unissued shares of Company Common Stock shall not be
sufficient to effect the conversion of the entire outstanding principal amount
of this Note, in addition to such other remedies as shall be available to the
holder of this Note, the Company will use its best efforts to take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Company Common Stock to such number of
shares as shall be sufficient for such purposes.
8. WAIVER AND AMENDMENT.
Any provision of this Note may be amended, waived or modified upon the
written consent of the Company and holders of at least two-thirds of the face
amount of all then outstanding Notes issued pursuant to the Purchase Agreement.
9. TREATMENT OF NOTE.
To the extent permitted by generally accepted accounting principles, the
Company will treat, account and report the Note as debt and not equity for
accounting purposes and with respect to any returns filed with federal, state or
local tax authorities.
10. NOTICES.
Any notice, request or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or if telegraphed or mailed by registered or certified mail, postage
prepaid, at the respective addresses of the parties as set forth herein. Any
party hereto may by notice so given change its address for future notice
hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail or telegraphed in the manner
set forth above and shall be deemed to have been received when delivered.
11. NO STOCKHOLDER RIGHTS.
Nothing contained in this Note shall be construed as conferring upon the
Holder or any other person the right to vote or to consent or to receive notice
as a stockholder in respect of meetings of stockholders for the election of
directors of the Company or any other matters or any rights whatsoever as a
stockholder of the Company; and no dividends or interest shall be payable or
accrued in respect of this Note or the interest represented hereby or the
Conversion Shares obtainable hereunder until, and only to the extent that, this
Note shall have been converted.
12. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, excluding that body of law relating to conflict
of laws.
13. HEADING; REFERENCES.
All headings used herein are used for convenience only and shall not be used
to construe or interpret this Note. Except where otherwise indicated, all
references herein to Sections refer to Sections hereof.
Annex D-13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be issued this day
of , 2000.
INTERFACE SYSTEMS, INC.
By:
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--------------------------------------
Holder: TUMBLEWEED COMMUNICATIONS CORP.
Address: 700 Saginaw Drive, Redwood City, CA
Annex D-14
<PAGE>
NOTICE OF CONVERSION
TO INTERFACE SYSTEMS, INC.
The undersigned, the holder of the foregoing Note, hereby surrenders such
Note for conversion into shares of Company Common Stock of Interface Systems,
Inc., to the extent of $ unpaid principal amount of such Note, and
requests that the certificates for such shares be issued in the name of, and
delivered to, , whose address is .
Dated:
--------------------------------------
Signature
--------------------------------------
Address
Annex D-15
<PAGE>
ANNEX E
FORM OF INTERFACE SYSTEMS, INC.
1992 STOCK OPTION PLAN
(AS AMENDED AND RESTATED ON JULY 14, 2000)
1. CERTAIN DEFINITIONS.
A "Change in Control" shall mean a change in control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or
not the Company is then subject to such reporting requirement; provided that,
without limitation, a Change in Control shall be deemed to have occurred if (i)
any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity (other than a Subsidiary or an
employee benefit plan or employee benefit plan trust maintained by the Company
or a Subsidiary), or any syndicate or group deemed to be a person under Section
14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities entitled to vote in the election of
directors of the Company, provided that a person shall not be deemed to
beneficially own shares solely because such person has the right to vote such
shares pursuant to a revocable proxy or proxies given in response to a public
solicitation made in accordance with the applicable rules promulgated under the
Exchange Act; (ii) consummation of any merger, consolidation or similar
transaction with respect to which the Company or any Parent is a constituent
corporation (other than a transaction for the purpose of changing the Company's
corporate domicile), if a majority of the members of the Board of Directors of
the surviving company are not Continuing Directors; (iii) any liquidation or
dissolution of the Company, or any sale of all or substantially all of the
Company's assets to an entity not controlled by persons who were members of the
Board of Directors or officers of the Company as of the 1997 Annual Meeting of
Stockholders or by any employee benefit plan or employee benefit plan trust
maintained by the Company or a Subsidiary; and (iv) a change in the identity of
a majority of the members of the Company's Board of Directors within any
twelve-month period, which change or changes are not recommended by the
incumbent directors immediately prior to any such change or changes.
The "Code" is the Internal Revenue Code of 1986, as amended.
The "Committee" is a committee of two or more directors of the Company, each
of whom is a "non-employee director" as defined in Rule 16b-3 under the Exchange
Act.
The "Common Stock" is the common stock, no par value per share, of the
Company.
The "Company" is Interface Systems, Inc., a Michigan corporation.
"Continuing Directors" means persons (A) who are members of the Board of
Directors immediately prior to the merger, consolidation or similar transaction
and (B) who also were members of the Board of Directors of the Company
immediately following the 1997 Annual Meeting of Stockholders or are new
directors whose election by the Board of Directors, or nomination for election
by the Company's stockholders, was approved by a vote of at least a majority of
the directors in office at the time of such election or nomination who either
were directors immediately following the 1997 Annual Meeting of Stockholders or
whose election or nomination for election was previously approved as provided
above.
"Disabled" or "Disability" means Permanently disabled as defined in Section
22(e)(3) of the Code.
"Employee" means an individual with an "employment relationship" with the
Company, or any Parent or Subsidiary, as defined in Regulation 1.421-7(h)
promulgated under the Code, and shall include, without limitation, employees who
are directors of the Company, or any Parent or Subsidiary.
"Employment" means the state of being an Employee.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the last sale price on the Nasdaq Stock
Market National Market, as reported in the Wall Street Journal, for the last
preceding day on which the Common Stock was traded prior to the date with
respect to which the fair market value is to be determined, as determined by the
Committee in its sole discretion.
An "Incentive Stock Option" is an option intended to meet the requirements
of Section 422 of the Code.
A "Nonqualified Stock Option" is an option granted under the Plan other than
an Incentive Stock Option.
"Parent" means any "parent corporation" of the Company as defined in Section
424(e) of the Code.
The "Plan" is the 1992 Stock Option Plan.
"Subsidiary" means any "subsidiary corporation" of the Company as defined in
Section 424(f) of the Code.
2. PURPOSE.
The purpose of the Plan is to promote the best interests of the Company and
its shareholders by encouraging participants to acquire a proprietary interest
in the Company, thus identifying their interests with those of its shareholders
and encouraging the participants to make greater efforts on behalf of the
Company.
3. ADMINISTRATION.
The selection of participants in the Plan and decisions concerning the
timing, pricing and amount of any grant of options under the Plan shall be made
by the Committee. Except as provided in Section 13 of the Plan, the Committee
shall interpret the Plan, prescribe, amend, and rescind rules and regulations
relating to the Plan, and make all other determinations necessary or advisable
for its administration. The decision of the Committee on any question concerning
the interpretation of the Plan or any option granted under the Plan shall be
final and binding upon all participants.
4. PARTICIPANTS.
Participants in the Plan shall be such key Employees as the Committee may
select from time to time. The Committee may grant options to an individual upon
the condition that the individual become an Employee, provided that the option
shall be deemed to be granted only on the date the individual becomes an
Employee.
5. STOCK.
The stock subject to options under the Plan shall be the Common Stock, and
may be either authorized and unissued shares or treasury shares held by the
Company. The total amount of Common Stock on which options may be granted under
the Plan shall not exceed 2,000,000 shares, subject to adjustment in accordance
with Section 11. Shares subject to any unexercised portion of a terminated,
canceled or expired option granted under the Plan may again be subjected to
options under the Plan.
6. AWARD OF OPTIONS.
Subject to the limitations set forth in the Plan, the Committee from time to
time may grant options to such participants and for such number of shares of
Common Stock and upon such other terms as it shall designate. Each option shall
be evidenced by a stock option agreement in such form and containing such
provisions as the Committee shall deem appropriate, provided that such terms
Annex E-2
<PAGE>
shall not be inconsistent with the Plan. The Committee may designate any option
granted as either an Incentive Stock Option or a Nonqualified Stock Option, or
the Committee may designate a portion of an option as an Incentive Stock Option
or a Nonqualified Stock Option. Any participant may hold more than one option
under the Plan and any other stock option plan of the Company. The date on which
an option is granted shall be the date of the Committee's authorization of the
option or such later date as shall be determined by the Committee at the time
the option is authorized.
Incentive Stock Options. Any option intended to constitute an Incentive
Stock Option shall comply with the following requirements in addition to the
other requirements of the Plan: (a) the exercise price per share for each
Incentive Stock Option granted under the Plan shall not be less than the Fair
Market Value per share of Common Stock on the date the option is granted;
provided that no Incentive Stock Option shall be granted to any participant who
owns (within the meaning of Section 424(d) of the Code) stock of the Company or
any Parent or Subsidiary possessing more than 10% of the total combined voting
power of all classes of stock of such Company, Parent or Subsidiary unless, at
the date of grant of an option to such participant, the exercise price for the
option is at least 110% of the Fair Market Value of the shares subject to option
and the option, by its terms, is not exercisable more than five years after the
date of grant; (b) the aggregate Fair Market Value of the underlying Common
Stock at the time of grant as to which Incentive Stock Options under the Plan
(or a plan of a Parent or Subsidiary) may first be exercised by a participant in
any calendar year shall not exceed $100,000 (to the extent that an option
intended to constitute an Incentive Stock Option shall exceed the $100,000
limitation, the portion of the option that exceeds such limitation shall be
deemed to constitute a Nonqualified Stock Option); (c) an Incentive Stock Option
shall not be exercisable after the tenth anniversary of the date of grant or
such lesser period as the Committee may specify from time to time.
Nonqualified Stock Options. A Nonqualified Stock Option shall not be
exercisable after the tenth anniversary of the date of grant. The exercise price
per share of a Nonqualified Stock Option shall not be less than the Fair Market
Value per share of the Common Stock on the date of grant.
7. EXERCISE OF OPTIONS.
Subject to any limitations on exercise contained in the stock option
agreement relating to a particular option which is not inconsistent with this
Section, options may be exercised in installments as follows:
(a) Beginning on the date after the first anniversary of the date of
grant, an option may be exercised up to 1/3 of the shares subject to the
option;
(b) After the expiration of each succeeding anniversary date of the date
of grant, the option may be exercised up to an additional 1/3 of the shares
subject to option, so that after the expiration of the third anniversary of
the date of grant the option shall be exercisable in full; and
(c) To the extent not exercised, installments shall be cumulative and
may be exercised in whole or in part.
8. PAYMENT FOR SHARES.
The purchase price for shares of Common Stock to be acquired upon exercise
of an option granted hereunder shall be paid in full, at the time of exercise,
in cash, by certified check, bank draft or money order or by tendering to the
Company shares of Common Stock then owned by the participant, duly endorsed for
transfer or with duly executed stock power attached, which shares shall be
valued at their Fair Market Value as of the date of such exercise and payment.
Notwithstanding the foregoing, the option exercise price may be paid by delivery
to the Company of a properly executed exercise notice, acceptable to the
Company, together with irrevocable instructions to the participant's broker to
deliver to the Company a sufficient amount of cash to pay the exercise price and
any applicable income
Annex E-3
<PAGE>
and employment withholding taxes, in accordance with a written agreement between
the Company and the brokerage firm ("Cashless Exercise").
9. WITHHOLDING TAXES.
The Company shall have the right to withhold from a participant's
compensation or require a participant to remit sufficient funds to satisfy
applicable withholding for income and employment taxes upon the exercise of an
option.
10. NON-ASSIGNABILITY.
No option shall be transferable by a participant except by will or the laws
of descent and distribution or, in the case of a Nonqualified Stock Option,
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act, or the rules thereunder.
During the lifetime of a participant, an option shall be exercised only by the
optionee. No transfer of an option shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and such
evidence as the Company may deem necessary to establish the validity of the
transfer and the acceptance by the transferee of the terms and conditions of the
option.
11. TERMINATION OF EMPLOYMENT.
Unless otherwise provided in the stock option agreement relating to a
particular option: (a) if, prior to the date that such option shall first become
exercisable, the participant's Employment shall be terminated, with or without
cause, or by the act, death, Disability, or retirement of the participant, the
participant's right to exercise the option shall terminate and all rights
thereunder shall cease; and (b) if, on or after the date that such option shall
first become exercisable, a participant's Employment shall be terminated for any
reason other than death or Disability, the participant shall have the right,
prior to the earlier of (i) the expiration of the option or (ii) three months
after such termination of Employment, to exercise the option to the extent that
it was exercisable and is unexercised on the date of such termination of
Employment, subject to any other limitation on the exercise of the option in
effect at the date of exercise; and (c) if, on or after the date that such
option shall have become exercisable, the participant shall die or become
Disabled while an Employee or while such option remains exercisable, the
participant or the executor or administrator of the estate of the participant
(as the case may be), or the person or persons to whom the option shall have
been transferred by will or by the laws of descent and distribution, shall have
the right, prior to the earlier of (i) the expiration of the option or (ii) one
year from the date of the participant's death or termination due to such
Disability to exercise the option to the extent that it was exercisable and
unexercised on the date of death, subject to any other limitation on exercise in
effect at the date of exercise.
The transfer of an Employee from one corporation to another among the
Company, any Parent and any Subsidiary, or a leave of absence with the written
consent of the Company, shall not constitute a termination of Employment for
purposes of the Plan.
12. ADJUSTMENTS.
In the event that the Committee shall determine that any dividend or other
distribution (whether in the form of cash, Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Common Stock or other securities of the Company,
issuance of warrants or other rights to purchase Common Stock, or other
securities of the Company, or other similar corporate transaction or event
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable,
Annex E-4
<PAGE>
adjust any or all of (a) the number and type of shares of Common Stock which
thereafter may be made the subject of options, (b) the number and type of shares
of Common Stock subject to outstanding options, and (c) the exercise price with
respect to any option, or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding option; provided, however, in each case,
that with respect to the Incentive Stock Options no such adjustment shall be
authorized to the extent that such authority would cause the Plan to violate
Section 422 of the Code or any successor provision thereto; and provided
further, however, that the number of shares of Common Stock subject to any
option shall always be a whole number. In the event of a Change of Control and
under such other circumstances as the Committee may designate, options under the
Plan shall be treated as the Committee may determine (including acceleration of
vesting and settlements of options) at the time of grant or at a subsequent date
as provided in the stock option agreement reflecting the grant of such options.
13. RIGHTS PRIOR TO ISSUANCE OF SHARES.
No participant shall have any rights as a shareholder with respect to any
shares covered by an option until the issuance of a stock certificate to the
participant for such shares. No adjustment shall be made for dividends or other
rights with respect to such shares for which the record date is prior to the
date such certificate is issued.
14. TERMINATION AND AMENDMENT.
The Board of Directors (the "Board") may terminate the Plan, or the granting
of options under the Plan, at any time. No Incentive Stock Option shall be
granted under the Plan ten years after adoption of the Plan by the Board or
approval of the Plan by the Company's shareholders, whichever is earlier.
Termination of the Plan shall not affect the rights of the holders of any
options previously granted.
The Board may amend or modify the Plan at any time and from time to time. No
amendment, modification, or termination of the Plan shall in any manner affect
any option granted under the Plan without the consent of the participant holding
the option.
15. APPROVAL OF PLAN.
The Plan shall be subject to the approval of the holders of at least a
majority of the shares of Common Stock of the Company present and entitled to
vote at a meeting of shareholders of the Company held within 12 months after
adoption of the Plan by the Board. No option granted under the Plan may be
exercised in whole or in part until the Plan has been approved by the
shareholders as provided herein. If not approved by shareholders within such
12-month period, the Plan and any options granted hereunder shall become void
and of no effect.
16. EFFECT ON EMPLOYMENT.
Neither the adoption of the Plan nor the granting of any option pursuant to
it shall be deemed to create any right in any individual to be retained as an
Employee.
17. USE OF PROCEEDS.
The proceeds received from the sale of Common Stock pursuant to exercises of
options granted under the Plan will be used for general corporate purposes of
the Company.
<TABLE>
<S> <C>
BOARD OF DIRECTOR APPROVAL: March 27, 1992
SHAREHOLDER APPROVAL: May 6, 1992
AMENDED: February 21, 1996
AMENDED AND RESTATED: August 8, 1997
AMENDED AND RESTATED: January 14, 2000
AMENDED AND RESTATED: July 14, 2000
</TABLE>
Annex E-5
<PAGE>
ANNEX F
[LETTERHEAD OF NEWBURY, PIRET COMPANIES, INC.]
June 28, 2000
Board of Directors
Interface Systems, Inc.
5855 Interface Drive
Ann Arbor, MI 48103
Gentlemen:
We understand that Interface Systems, Inc. ("Interface"), Tumbleweed
Communications Corp. ("Tumbleweed"), and Maize Acquisition Sub, Inc., a
wholly-owned subsidiary of Tumbleweed ("Merger Sub"), are proposing to enter
into an Agreement and Plan of Merger (the "Agreement") (a draft of which has
been provided to us dated June 28, 2000), pursuant to which Merger Sub will be
merged with and into Interface, which will be the surviving entity and which
will become a wholly-owned subsidiary of Tumbleweed (the "Merger"). Pursuant to
the Merger, we understand that each outstanding share of the common stock of
Interface ("Interface Common Stock") will be converted into the right to receive
0.264 (the "Exchange Ratio") of a share of Common Stock of Tumbleweed
("Tumbleweed Common Stock"). Outstanding options and warrants to acquire
Interface Common Stock will be assumed and converted into options and warrants
to acquire Tumbleweed Common Stock pursuant to the terms of the agreement. The
terms and conditions of the Merger are set forth in more detail in the
Agreement.
Newbury, Piret Companies, Inc., as part of its investment banking business,
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
estate, corporate and other purposes. You have asked for our opinion as to the
fairness, from a financial point of view as of the date hereof, to the
stockholders of Interface of the Exchange Ratio pursuant to the Merger.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In that
connection, we have, among other things: reviewed certain financial estimates
and other financial and operating data concerning the business and operations of
Interface prepared by the management of Interface; reviewed certain information
and estimates concerning the business and operations of Tumbleweed furnished to
us by Tumbleweed's management; reviewed certain publicly available information,
including but not limited to: Annual Reports to Shareholders and Annual Reports
on Form 10-K of Interface for the five fiscal years ended September 30, 1999,
1998, 1997, 1996 and 1995, Annual Report to Stockholders and Annual Report on
Form 10-K of Tumbleweed for the fiscal year ended December 31, 1999, the
Prospectus dated August 5, 1999 for Tumbleweed's IPO, Interim reports to
stockholders and Quarterly Reports on Form 10-Q of Interface and Tumbleweed,
other communications from Interface and Tumbleweed to their respective
stockholders, and publicly available assessments of Tumbleweed's financial
prospects ("Analyst Reports"); reviewed the draft Agreement in the form
presented to Interface's Board of Directors; reviewed the reported historical
price and trading activity for Interface Common Stock and Tumbleweed Common
Stock; evaluated market valuation multiples of certain other publicly traded
companies that we deemed relevant; compared the financial position and operating
results of Interface with those of other publicly traded companies that we
deemed relevant; reviewed the financial terms of certain recent business
combinations in the software and Internet industries specifically and in other
industries generally; compared the historical exchange ratios with the proposed
Exchange Ratio; prepared an analysis based upon certain historical operating and
financial information regarding Interface's contribution to the combined entity;
held discussions with members of the senior management of Interface and
Tumbleweed regarding the strategic rationale for, and potential benefits of, the
transaction contemplated by the Merger as well as the past and current business
operations,
<PAGE>
financial conditions, and future prospects of their respective companies; and
considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria which we deemed
relevant for the preparation of this opinion.
In preparing our opinion, we have relied without independent verification
upon the accuracy and completeness of all of the financial, accounting, legal,
tax, operating and other information provided to us by Interface and Tumbleweed
and have relied upon the assurances of Interface and Tumbleweed that all such
information provided by them is complete and accurate in all material respects
and that there is no additional material information known to them that would
make any of the information made available to us either incomplete or
misleading. In addition, we have not assumed responsibility for reviewing or
making an independent evaluation, appraisal, or physical inspection of any of
the assets or liabilities (contingent or otherwise) or technology of Interface
or Tumbleweed, nor have we been furnished with any such appraisals. We have also
assumed that there have been no material changes in Interface's or Tumbleweed's
assets, financial condition, results of operations, business, or prospects since
the respective dates of their last financial statements made available to us.
With respect to the financial forecasts for Interface provided to us by its
management, upon their advice and with your consent we have assumed for purposes
of our opinion that the forecasts have been reasonably prepared in good faith on
bases reflecting the best currently available estimates and judgments of
Interface's management at the time of preparation as to the future financial
performance of Interface and that they provide a reasonable basis upon which we
can form our opinion. We express no view with respect to such forecasts and
other information and data or the assumptions on which they are based.
We have performed no investigation relating to the representations and
warranties made by Interface or Tumbleweed, including the representations and
warranties made with respect to intellectual property or the status of any
litigation pending or threatened against either Interface or Tumbleweed. As you
are aware, internal financial projections for Tumbleweed were not available.
Accordingly, our review of Tumbleweed's future financial performance for
purposes of rendering our opinion was limited to discussions with the management
of Tumbleweed of certain research analysts' estimates of Tumbleweed's future
financial performance. We have relied upon, without independent verification,
the assessment by the managements of Interface and Tumbleweed of: (i) the
strategic and other benefits expected to result from the Merger; (ii) the timing
and risks associated with the integration of Interface and Tumbleweed; and
(iii) the validity of, and risks associated with, Interface's and Tumbleweed's
existing and future technologies, services or business models. We have relied
upon the assessment by the managements of Interface and Tumbleweed of their
ability to retain key employees of Interface.
We were not asked to, and did not, conduct a market survey to determine the
interest of other potential acquirers of Interface or otherwise solicit, or
assist Interface in soliciting, any third party indications of interest in
acquiring all or any part of Interface. Furthermore, this opinion addresses only
the financial fairness to the stockholders of Interface of the Exchange Ratio
pursuant to the Merger and does not address the relative merits of the Merger
and any alternative business strategies to the Merger, the effect of any other
transaction in which Interface might engage, Interface's underlying decision to
proceed with or affect the Merger or any other aspect of the Merger.
For purposes of this opinion, we have assumed that neither Interface nor
Tumbleweed is a party to any pending transactions, including external
financings, recapitalizations, or material merger discussions, other than the
Proposed Transaction and those activities undertaken in the ordinary course of
conducting their respective businesses. We have further assumed with your
consent that the Merger will be consummated substantially in accordance with the
terms described in the Agreement. You have informed us, and we have assumed,
that the Merger will be recorded as a purchase under generally accepted
accounting principles. We have relied on advice of counsel and independent
accountants to Interface as to all legal, tax and financial reporting matters
with respects to Interface, the Merger, and the Agreement. We are expressing no
opinion on such matters.
Annex F-2
<PAGE>
We have acted as financial advisor to Interface in connection with the
Merger and will receive a fee for our services, including rendering this
opinion, a significant portion of which is contingent upon the consummation of
the Merger. We are also currently engaged by Interface as an investment banker
in connection with a private equity financing for Interface, and we may in the
future provide additional investment banking or other financial advisory
services to Interface. In addition, Interface has agreed to indemnify us for
certain liabilities that may arise out of our engagement.
We are expressing no opinion herein as to actual value of Interface's common
stock at the consummation of the Merger nor as to the prices at which
Interface's and Tumbleweed's securities will actually trade prior to or
Tumbleweed's securities will actually trade after the consummation of the
Merger. The consideration to be received by the stockholders of Interface
pursuant to the Merger is based upon a fixed exchange ratio, with no floor or
collar, the trading prices of Interface's and Tumbleweed's common stock are both
highly volatile, and, accordingly, the actual transaction consideration may vary
significantly.
We are not expressing an opinion as to the fairness of the Exchange Ratio,
from a financial point of view, to Tumbleweed as a consequence of Tumbleweed's
anticipated purchase of Interface's convertible securities prior to the
consummation of the Merger.
Our opinion is based on financial, economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise, or reaffirm this
opinion, and any change in such conditions would require a reevaluation of this
opinion.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, we believe our analyses and the factors utilized in
such analyses must be considered as a whole and that considering any portion of
such analyses or factors, without considering all analyses and factors could
create a misleading or incomplete view of the process underlying our opinion. In
our analyses, we made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond
Interface's or Tumbleweed's control and are not susceptible to accurate
prediction.
In furnishing this opinion, we are not "experts" within the meaning of that
term as used in the Securities Act of 1933, as amended ("the Securities Act"),
and the rules and regulations promulgated thereunder, nor do we admit that this
opinion constitutes a report or valuation within the meaning of Section 11 of
the Securities Act.
This opinion is directed to the Board of Directors of Interface in its
consideration of the Merger and is not a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger. This opinion may
not be used or referred to by Interface, or quoted or disclosed to any person in
any manner, without our prior written consent, which consent is hereby given to
the inclusion of this opinion in any proxy statement or prospectus or the Proxy
Statement/Prospectus to be filed with the Securities and Exchange Commission in
connection with the Merger, provided that this opinion is reproduced therein in
full and any description of, or reference to, us or any summary of this opinion
included therein is in form and substance acceptable to us and our legal
counsel.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Exchange Ratio pursuant to the Merger is fair to the
stockholders of Interface, from a financial point of view, as of the date
hereof.
Very truly yours,
Newbury, Piret Companies, Inc.
Annex F-3
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the knowingly violated a
law, authorized the payment of a dividend or approved a stock repurchase in
violation of Delaware corporate law or obtained an improper personal benefit.
Section 145 of the DGCL provides, among other things, that Tumbleweed may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of Tumbleweed) by reason of the fact that the
person is or was a director, officer, agent or employee of Tumbleweed or is or
was serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with the
action, suit or proceeding. The power to indemnify applies (a) if the person is
successful on the merits or otherwise in defense of any action, suit or
proceeding, or (b) if the person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of Tumbleweed, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of Tumbleweed as well,
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in these actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to Tumbleweed, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, any avoid liability by causing his or her dissent to
these actions to be entered in the books containing the minutes of the meetings
of the board of directors at the time be entered in the books containing the
minutes of the meetings of the board of directors at the time the action
occurred or immediately after the absent director receives notice of the
unlawful acts.
Tumbleweed's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Tumbleweed or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL regarding unlawful dividends and stock
purchases; and
- for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Tumbleweed's Amended and Restated Bylaws provide that:
- it must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
II-1
<PAGE>
- it must indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our board of directors; and
- it must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain
insurance on behalf of our directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of this status.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of the
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<S> <C>
2.1(6) Agreement and Plan of Merger, dated as of January 28, 2000,
among Tumbleweed Communications Corp., Maize Acquisition
Sub, Inc. and Interface Systems, Inc. (included as Annex A
to the proxy statement/prospectus which forms a part of this
Registration Statement)
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant
3.2(1) Amended and Restated Bylaws of Registrant
4.1(1) Specimen common stock certificate
4.2(5) Amended and Restated Investors' Rights Agreement, dated as
of January 31, 2000
4.3(1) Warrant to Purchase Stock, dated November 30, 1998, issued
to Silicon Valley Bank
5.1* Opinion of Skadden, Arps, Slate, Meagher and Flom LLP
regarding the validity of the securities being registered
8.1* Opinion of Dykema Gossett PLLC regarding certain tax matters
10.1(6) Stock Option Agreement dated January 28, 2000 between
Tumbleweed Communications Corp. and Interface Systems, Inc.
(included as Annex B to the proxy statement/prospectus which
forms a part of this Registration Statement)
10.2(6) Form of Interface Voting Agreement dated June 28, 2000,
(included in Annex C to the proxy statement/prospectus which
forms a part of this Registration Statement)
10.3(1) 1993 Stock Option Plan
10.4(2) 1999 Omnibus Stock Incentive Plan, as Amended
10.5(1) 1999 Employee Stock Purchase Plan
10.6(2) 2000 NSO Incentive Stock Plan
10.6(1)+ Software License, Development and Services Agreement, dated
December 19, 1997, between the Registrant and United Parcel
Service General Services, Co.
10.7(1)+ Posta License and Distribution Agreement, dated as of
March 31, 1999, between Tumbleweed Software, K.K. and K.K.
Hikari Tsushin
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<S> <C>
10.8(1)+ OEM Object Code License Agreement, dated as of March 30,
1998, between the Registrant and RSA Data Security, Inc.
10.9(1) Employment Agreement, dated May 24, 1999, between Tumbleweed
Software Inc. and Tumbleweed Limited and Donald N. Taylor
10.10(6) Convertible Subordinated Note Purchase Agreement and Form of
Convertible Subordinated Note dated June 28, 2000, between
Tumbleweed Communications Corp. and Interface Systems, Inc.
(included as Annex D to the proxy statement/prospectus which
forms a part of this Registration Statement)
10.11 Form of Amended and Restated Interface Systems, Inc. 1992
Stock Option Plan (included as Annex E to the proxy
statement/prospectus which forms a part of this Registration
Statement)
21.1(2) Subsidiaries of Registrant
23.1* Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP relating to reports
concerning Interface Systems, Inc.
23.3 Consent of KPMG LLP relating to reports concerning
Registrant
23.4* Consent of Dykema Gossett PLLC (included in Exhibit 8.1)
24.1 Power of Attorney (included on signature page)
99.1* Form of Proxy
99.2 Consent of Newbury, Piret Companies, Inc. (included as
Annex F to the proxy statement/prospectus which forms a part
of this Registration Statement)
</TABLE>
------------------------
(1) Previously filed in Tumbleweed's Registration Statement on Form S-1 (File
No. 79687), as amended and incorporated herein by reference.
(2) Previously filed in Tumbleweed's Registration Statement on Form S-1, filed
July 11, 2000, and incorporated herein by reference.
(3) Previously filed in Tumbleweed's Quarterly Report on Form 10-Q, filed
November 15, 1999, and incorporated herein by reference.
(4) Previously filed in Tumbleweed's Registration Statement on Form S-4, filed
December 10, 1999 (File No. 333-92589), as amended and incorporated herein
by reference.
(5) Previously filed in Tumbleweed's Registration Statement on Form S-8, filed
February 23, 2000 (File No. 333-84683), and incorporated herein by
reference.
(6) Previously filed in Tumbleweed's Current Report on Form 8-K, filed July 6,
2000, and incorporated herein by reference.
+ 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.
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULE
Report on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.
(c) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES
The opinion of Newbury, Piret Companies, Inc. included as Annex E to the
Proxy Statement-Prospectus.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) (a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the application registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(b) that every prospectus: (A) that is filed pursuant to paragraph
(1)(a) immediately preceding, or (B) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any actions,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redwood City, State of
California, on July 17, 2000.
<TABLE>
<S> <C> <C>
TUMBLEWEED COMMUNICATIONS CORP.
By: /s/ JOSEPH C. CONSUL
-----------------------------------------
Joseph C. Consul
VICE PRESIDENT--FINANCE AND
CHIEF FINANCIAL OFFICER
</TABLE>
Each person whose signature appears below hereby constitutes and appoints
Jeffrey C. Smith and Joseph C. Consul, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) and addition to
this Registration Statement and relating to the offering contemplated pursuant
to Rule 462(b) under the Securities act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ JEFFREY C. SMITH Chairman of the Board, President and Chief
--------------------------------- Executive Officer (Principal Executive July 17, 2000
Jeffrey C. Smith Officer
Vice President--Finance and Chief
/s/ JOSEPH C. CONSUL Financial Officer (Principal Financial
--------------------------------- Officer and Principal Accounting July 17, 2000
Joseph C. Consul Officer)
/s/ DAVID F. MARQUARDT
--------------------------------- Director July 17, 2000
David F. Marquardt
/s/ TIMOTHY C. DRAPER
--------------------------------- Director July 17, 2000
Timothy C. Draper
/s/ STANDISH H. O'GRADY
--------------------------------- Director July 17, 2000
Standish H. O'Grady
/s/ ERIC J. HAUTEMONT
--------------------------------- Director July 17, 2000
Eric J. Hautemont
/s/ KENNETH R. KLEIN
--------------------------------- Director July 17, 2000
Kenneth R. Klein
/s/ PEHONG CHEN
--------------------------------- Director July 17, 2000
Pehong Chen
</TABLE>
II-5
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Tumbleweed Communications Corp.:
Under the date of January 17, 2000, we reported on the consolidated balance
sheets of Tumbleweed Communications Corp. as of December 31, 1999 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,
1999, which are included in the registration statement. In connection with our
audits of the aforementioned financial statements, we also audited the
accompanying financial statement schedule. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
a opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
January 17, 2000
S-1
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
AT CHARGED DEDUCTIONS: AT END
BEGINNING TO WRITE-OFFS OF
DESCRIPTION OF PERIOD EXPENSE OF ACCOUNTS PERIOD
----------- --------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for bad debt............................... $ 149 $ 41 $ (69) $ 121
====== ====== ======= ======
Year ended December 31, 1998:
Allowance for bad debt............................... $ 121 $1,720 $ (1) $1,840
====== ====== ======= ======
Year ended December 31, 1999:
Allowance for bad debt............................... $1,840 $ 215 $(1,239) $ 816
====== ====== ======= ======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<S> <C>
5.1* Opinion of Skadden, Arps, Slate, Meagher and Flom LLP
regarding the validity of the securities being registered
8.1* Opinion of Dykema Gossett PLLC regarding certain tax matters
10.11 Form of Amended and Restated Interface Systems, Inc. 1992
Stock Option Plan (included as Annex E to the proxy
statement/prospectus which forms a part of this Registration
Statement)
23.1* Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP relating to reports
concerning Interface Systems, Inc.
23.3 Consent of KPMG LLP relating to reports concerning
Registrant
23.4* Consent of Dykema Gossett PLLC (included in Exhibit 8.1)
24.1 Power of Attorney (included on signature page)
99.1* Form of Proxy
99.2 Consent of Newbury, Piret Companies, Inc. (included as
Annex F to the proxy statement/prospectus which forms a part
of this Registration Statement)
</TABLE>
------------------------
* To be filed by amendment.
