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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 000-26223
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TUMBLEWEED COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3336053
(State of other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
700 SAGINAW DRIVE
REDWOOD CITY, CA 94063
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (650) 216-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACTS:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 Par Value per Share
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / /
THE APPROXIMATE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE LAST SALE PRICE OF THE COMMON
STOCK REPORTED ON THE NASDAQ NATIONAL MARKET ON FEBRUARY 15, 2001 WAS
APPROXIMATELY $97,090,144 (BASED ON THE CLOSING PRICE FOR SHARES OF THE
REGISTRANT'S COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET OF $4.53 ON
THAT DATE). SHARES HELD BY EACH OFFICER, DIRECTOR, AND HOLDER OF 5% OR MORE OF
THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE
DEEMED AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A
CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 15, 2001 WAS
29,859,162.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Tumbleweed Communications Corp. Proxy Statement relating to
the annual meeting of stockholders to be held on May 30, 2001 (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report on
Form 10-K.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by those sections. The forward-looking statements are based on our current
expectations and projections about future events, including, but not limited to,
implementing our business strategy and new pricing models; attracting and
retaining customers; obtaining and expanding market acceptance of the products
and services we offer; forecasts of Internet usage and the size and growth of
relevant markets; rapid technological changes in our industry and relevant
markets; and competition in our market. Discussions containing such
forward-looking statements may be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations." In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates," and
similar expressions. These forward-looking statements are based on current
beliefs, expectations and assumptions and involve certain risks and
uncertainties that could cause actual results, levels of activity, performance,
achievements and events to differ materially from those implied by such
forward-looking statements. These forward-looking statements are made as of the
date of this Annual Report on Form 10-K. We disclaim any obligation to update
these forward-looking statements or to explain the reasons why actual results
may differ. We reserve the right to update these statements for any reason,
including the occurrence of material events. The risks and uncertainties under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risks and Uncertainties" contained herein, among other
things, should be considered in evaluating our prospects and future financial
performance.
TUMBLEWEED COMMUNICATIONS CORP.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business.................................................... 4
Item 2 Properties and Facilities................................... 13
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market For The Registrant's Common Equity And Related
Stockholder Matters....................................... 16
Item 6 Selected Financial Data..................................... 17
Item 7 Management's Discussion And Analysis of Financial Condition
And Results of Operations................................. 20
Item 7a Quantitative and Qualitative Disclosures About Market
Risk...................................................... 38
Item 8 Financial Statements And Supplementary Data................. 40
Item 9 Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure.................................. 65
PART III
Item 10 Directors And Executive Officers............................ 66
Item 11 Executive Compensation...................................... 66
Item 12 Security Ownership of Certain Beneficial Owners And
Management................................................ 66
Item 13 Certain Relationships And Related Transactions.............. 66
PART IV
Item 14 Exhibits, Financial Statement Schedules And Reports on Form
8-K....................................................... 67
TRADEMARKS
Tumbleweed-Registered Trademark-, WorldSecure-Registered Trademark- and
Worldtalk-Registered Trademark- are registered trademarks and Integrated
Messaging Exchange-TM-, IME-TM-, Messaging Management System (MMS)-TM-,
Tumbleweed Secure Redirect-TM-, Tumbleweed SPN-TM-, Tumbleweed Message
Monitor-TM-, Tumbleweed Web Filter-TM-, WorldSecure/Mail-TM-, Secure Inbox-TM-,
Secure Envelope-TM-, Tumbleweed IME Platform-TM-, Tumbleweed IME
Applications-TM-, IME Statements-TM-, Tumbleweed My Copy-TM-, Tumbleweed
L2i-TM-, IME Developer-TM-, IME Messenger-TM-, IME Personalize-TM-, and IME
Alert-TM- are our trademarks.
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PART I
ITEM 1--BUSINESS.
OVERVIEW
We are a leading provider of mission-critical messaging solutions that
enable organizations to manage and secure online business communications and
processes. Our customers use our solutions to centrally control and monitor the
corporate communications stream to comply with policies and government
regulations, communicate securely with business partners, suppliers and
customers, and integrate business communications and processes online.
Tumbleweed software creates a foundation for automated legacy data extraction,
preparation and secure two-way communication of sensitive or confidential
business information, such as electronic statements and customer service
inquiries. Tumbleweed solutions integrate with existing systems and end user
behavior. Tumblweed solutions are centrally controlled by IT managers while
remaining transparent to end users -- who do not need to deploy new software or
behavior to comply with corporate security and communications policies.
INDUSTRY BACKGROUND
E-mail has become a ubiquitous communications channel. Messaging
applications that integrate business applications and business data with e-mail
as a communications channel are poised to transform business communications--and
business itself. The volume of e-mail traffic continues to demonstrate its
transformation into a critical business tool. International Data Corporation
estimates that the number of e-mail messages sent daily will grow from 5.3
billion in 1999 to 26.1 billion in 2005.
To leverage the power of messaging applications businesses must address
security, automation, legacy integration, and end user behavior issues.
Messaging applications, effectively implemented, are active and engaging with
global reach and full scalability. Messaging applications are the most cost-
efficient means of bringing the benefits of the Internet to business processes.
On the right messaging foundation, businesses can deploy messaging
management and secure communications systems that address the significant
challenges and opportunities created by the Internet.
TUMBLEWEED'S MESSAGING SOLUTIONS AND SERVICES
We offer comprehensive messaging solutions that seamlessly integrate with
existing business systems and e-mail networks and enable our customers to
leverage the cost-efficiencies and productivity of Internet communications. Our
solutions can be used independently or together to create a powerful and
complete messaging solution for businesses. All of our solutions offer
multi-level security using industry standards, universal access, and proven
scalability for high volume message traffic.
TUMBLEWEED MESSAGING MANAGEMENT SOLUTIONS
Our messaging management solutions enable companies to centrally control and
monitor the Internet communications stream. By controlling and monitoring e-mail
and browser-based communications our customers can better comply with their own
internal corporate policies as well as government regulations. Our solutions
combine not only all of the elements required to establish and manage
communications policies but also allow for virus and spam protection, archival
and regulatory compliance.
Every day, high volumes of e-mail messages flow in and out of businesses
carrying intellectual assets (such as business plans, engineering
specifications, and contracts), personal communications, and harmful content
such as viruses and spam. By neglecting to monitor and manage this
communications stream, businesses risk:
- Interception of valuable business data by competitors or hackers;
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- Loss of data and productivity from damage by viruses;
- Clogging of network bandwidth by spam and recreational multimedia files;
- Liability for accidental exposure of confidential customer or employee
information;
- Liability for the distribution of racist, sexist, or otherwise harmful
content; and
- Liability for violation of industry regulations (including, for example,
SEC or health regulations).
Businesses need to monitor and manage their communications so that e-mail
can in fact become a tool for fast, cost-effective communications. They need to
centrally manage and globally enforce communications policies. They need a
solution that complements, rather than replaces, their e-mail infrastructure.
They also need a solution that enforces communication controls automatically,
without relying on the initiative or retraining of individual users.
By integrating our solution for messaging management with existing e-mail
networks, a business can take control of its online communications and set
policies to apply content control, encryption, access control, attachment
management, virus scanning and digital signatures to e-mail traffic. Because our
solutions allow policies to be administered centrally and enforced universally
across an enterprise, our server-based solutions offer several advantages over
desktop solutions, including:
- Rapid deployment (installed, configured, and tuned within a week);
- Universal coverage (all e-mail communications are automatically managed);
- Centralized policy enforcement (identification of sensitive digital
information, including the use of industry-specific lexicons);
- Expedited training (end users need not learn new procedures or new
software tools); and
- Cost-effectiveness (no expenses for end user training or distributing,
installing, or maintaining new desktop software).
Our messaging management products include Tumbleweed Messaging Management
System (MMS), Tumbleweed Message Monitor and Tumbleweed Web Filter. 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. Tumbleweed Message Monitor allows organizations to archive
all or selected messages to an external device, such as an optical jukebox.
Messages can be tagged with information such as violation type and retention
period prior to archiving. Tumbleweed Message Monitor provides Web-based
reviewer tools for performing queries and running reports. Tumbleweed Web Filter
provides URL filtering and monitors HTTP and FTP traffic for inappropriate
content, viruses, and malicious mobile code. Tumbleweed Web Filter can also
monitor the content of Web-based e-mail and message board postings.
TUMBLEWEED SECURE COMMUNICATIONS SOLUTIONS
Businesses use our secure communications solutions to establish secure
Internet communications channels with partners, suppliers and customers. Our
server-based solution integrates with existing e-mail networks and secures
communications automatically. Without retraining users or changing desktop
software, businesses can take advantage of the speed, convenience, and ubiquity
of the Internet for communicating vital business information securely.
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A great deal of a business's most important communications--such as business
plans, contracts and legal documents and engineering specifications--take place
among branch offices, between branch offices and headquarters or among
businesses and their long-standing partners and customers. Until now, businesses
have not had a cost-effective solution for securing and automating these
communications. Courier services, such as FedEx, are relatively secure, but much
slower and more expensive than e-mail. Virtual Private Networks, or VPNs,
typically involve the installation and maintenance of custom hardware and
software. E-mail is fast and convenient, but not secure. E-mail risks exposing
important confidential information to competitors and hackers. Businesses need a
way to secure these communications--quickly, easily, and automatically. The
solution should:
- Complement rather than replace e-mail and IT systems at each site;
- Be based on open standards, so that it works with whatever e-mail software
and hardware a particular partner is using; and
- Secure communications automatically, without requiring end users to learn
new procedures or replace the desktop software they are already familiar
with.
By deploying our secure communication solutions, a business can create
secure networks among its offices, partners, suppliers, and customers.
Meanwhile, end users continue using their own e-mail software. Our server-based
solution can automatically encrypt outgoing e-mail messages and sign them with
an organization's digital certificate. Tumbleweed's solution also monitors,
authenticates, and decrypts incoming messages, and delivers them as standard
e-mail to the recipient's desktop. Security is automatic and transparent.
For communications to individuals at locations outside the network, we offer
Tumbleweed Secure Redirect, which encrypts messages and delivers them securely
to the recipient's Web browser. Tumbleweed Secure Redirect enables businesses to
automatically encrypt, deliver, and track communications to any Internet user
with a standard e-mail program. The advantages of Tumbleweed's secure
communications solutions are:
- Universal coverage (all e-mail communications are automatically managed);
- Expedited training (end users need not learn new procedures or new
software tools); and
- Cost-effective (no expenses for end user training or distributing,
installing, or maintaining new desktop software).
Our secure communication solutions also support secure ad hoc online
communication with our IME platform and IME Messenger application. IME Messenger
is an application that runs on the Tumbleweed Integrated Messaging Exchange
(IME) platform. Tumbleweed IME, a set of products and services that leverage the
Internet and existing e-mail systems, is designed to enable secure, trackable
online communication. IME Messenger enables secure, browser-based,
person-to-person messaging. Using IME Messenger, Internet users can securely
compose, send, receive, store and search messages and files.
Our secure communications products are Tumbleweed MMS, Tumbleweed SPN,
Tumbleweed Secure Redirect, Tumbleweed Secure Redirect Link.
TUMBLEWEED STATEMENT PRESENTMENT SOLUTIONS
Using our statement presentment solutions, companies can create a foundation
for the automated preparation, secure Internet delivery, tracking and managed
response of sensitive business information. Our solutions integrate with
existing systems, and can automatically extract legacy data and prepare
statements for delivery. In addition, our solutions can automatically forward
important communications to electronic archives. To receive a statement sent via
Tumbleweed, an end user only needs an e-mail program and a browser. New desktop
software is not required.
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Businesses send more than 20 billion paper bills annually. In the United
States alone, there are more than 350 million financial accounts, each requiring
the periodic delivery of statements. Businesses can save time and money and
improve service by moving these paper statements online. In most industries, a
paper statement costs between $1 and $1.50 to print and mail. Electronic
statements delivered by our solutions cost significantly less because we
eliminate printing and postage costs.
E-mail and the Web are ubiquitous, and consumers are expecting to find more
and more of their information online. If businesses deliver statements securely
over the Internet, they can dramatically lower costs while improving service.
Our solutions for statement delivery can dramatically lower communication costs
and improve customer service. Tumbleweed's solution also provides a foundation
for additional messaging services that can promote sales, increase customer
loyalty, and streamline customer service.
Our statement presentment solutions, Tumbleweed IME Statements, run on
Tumbleweed Integrated Messaging Exchange (IME), a platform and set of
applications for creating secure communications channels between a business and
its customers, partners and suppliers. Tumbleweed IME Statements prepares,
delivers, and tracks Internet statements. Businesses can provide each statement
recipient with an IME Secure Inbox--a protected online repository for securely
receiving, storing, organizing, searching, and forwarding online communications.
Tumbleweed's solution for statement presentment offers several advantages
over traditional paper-based delivery and other electronic delivery methods,
including:
- Cost reduction (no printing and mailing documents to customers);
- Existing system integration (extracts statement information from business
applications, databases, and mainframe print streams);
- Universal delivery (reaches any Internet user with a standard e-mail
program and a Web browser);
- Security and authentication (includes passwords, PINs, and digital
certificates);
- Thorough tracking (enables businesses to create an audit trail or
otherwise track the transmission and receipt of statements);
- Payment system integration (integrates with payment systems, such as
VeriSign's Payment Services); and
- Cost-effective deployment (no expenses for end user training or
distributing, installing, or maintaining new desktop software).
Our statement delivery products include Tumbleweed IME, Tumbleweed IME
Statements, Tumbleweed My Copy, and Tumbleweed L2i.
Built upon the foundation of the IME Platform, IME applications integrate
with e-mail and legacy systems, interact with business applications, and
automate transactions and exchanges to provide a complete internal and external
communications solution for the enterprise. These applications typically
automate specific business processes, such as statement delivery for brokerages
or positive pay in commercial banking. The Tumbleweed application, IME
Statements, enables businesses to automatically compose, deliver, and track
electronic documents, such as monthly statements, trade confirmations, and
invoices. IME Statements can create statements from information in legacy
databases or, using Tumbleweed L2i, it can extract, translate, and format the
information from mainframe print streams. Tumbleweed's IME Developer package
enables third parties and Tumbleweed customers to further customize IME
applications or to develop new applications to run on the IME Platform.
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TUMBLEWEED PROFESSIONAL SERVICES
Our professional services organization provides consulting, integration
engineering, custom application development, training and educational services
and support used to build online communication systems based on our products.
The following are examples of the professional services we offer:
CUSTOM APPLICATION DEVELOPMENT, which extends the functionality of our
solutions with custom engineering used to create unique online communication
solutions that can be deployed to precisely meet a company's business needs.
INTEGRATION CONSULTING, which allows our customers to integrate our
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 our products, including determining hardware
requirements, backup and redundancy processes, and physically implementing our
solution in the customer's data center. Our professional services organization
may also provide ongoing support of the customer's data center.
TECHNICAL TRAINING, which provides the customer with formal training in the
administration and operation of our products and use of the Tumbleweed IME
application programming interfaces.
SUPPORT, which assists customers in managing Tumbleweed products they have
deployed.
Our products are generally deployed in business-critical environments, where
highly responsive customer support is critical to the continuing success of the
deployed solution. We maintain 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 closely
with our professional services and product development organizations in order to
ensure continuity in the areas of problem resolution and priority response.
We also offer 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 our standard fees.
Professional services are performed for an additional fee and are offered in
conjunction with the licensing or deployment of our products.
CUSTOMERS AND TARGET MARKETS
Enterprise customers use Tumbleweed solutions to secure online
communications and other business delivery processes originating within their
own enterprise. These communications and processes reach customers, business
partners, suppliers and employees. Examples of Tumbleweed customers include: ABN
Amro Bank, American Century, American Express Travel Related Services Company,
Inc., Amgen, Beckman Coulter, Inc., Broadcom Corporation, Commonwealth of
Pennsylvania, Diners Club, the Food & Drug Administration, Gap Inc., JP Morgan
Chase & Co., Merck, National Semiconductor Corp., Northern Trust, Phoenix Home
Life Insurance Co., Salomon Smith Barney, Skandaniska Enskilda Banken AB, Union
Miniere and Wachovia Securities, Inc.
Tumbleweed also has a number of service provider customers that principally
use Tumbleweed's IME solution to provide secure, outsourced online
communications services to their customers. Examples of service providers
include Canada Post, La Poste in France, Nippon Telegraph & Telephone
Corporation, Norway Post, Pitney Bowes, Inc., Swiss Post, Toyo Information
Systems, United States Postal Service and UPS.
Tumbleweed solutions and related services are sold directly to enterprises
across a number of vertical industries. Our strategic markets include:
healthcare, banking, brokerage, insurance,
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pharmaceutical, government, manufacturing, technology and telecommunications. In
addition, our solutions are offered through the service providers such as those
listed above that offer their customers secure, reliable and trackable
communication services for a fee. Tumbleweed's distribution strategy addresses
the requirements of small companies and large enterprises alike. The primary
geographic markets we are focused on are the United States, Japan, Germany and
the UK. We have a reseller program for our messaging management solutions and
may offer our other solutions through a reseller channel in the future.
STRATEGY
Our objective is to provide comprehensive secure Internet messaging
solutions to businesses worldwide. Key elements of our strategy are:
ESTABLISH TUMBLEWEED AS A LEADING PROVIDER OF MESSAGING SOFTWARE SOLUTIONS THAT
OFFER CUSTOMERS INCREASED PRODUCTIVITY, LOWERED COSTS AND REDUCED LIABILITY.
We intend to establish Tumbleweed messaging platforms as the leading
foundation upon which to build mission-critical business communications. Our
focus is on offering solutions that allow our customers to rapidly recoup their
original investment and earn a significant return on that investment. Our
customers use our solutions to increase their productivity, efficiency and
reduce costs. By moving business processes online and extending messaging
communications to include a number of different applications, our software
solutions can eliminate costs associated with traditional paper, fax or voice-
based business processes. Our solutions enable our customers to define and
implement multi-layer security policies, ensuring the safe and efficient use of
corporate e-mail systems and the privacy of confidential information. Through a
direct sales force, a reseller channel and service-providers, we are pursuing
customers in healthcare, pharmaceutical, banking, brokerage, insurance,
telecommunications, technology and manufacturing.
FOCUS ON PROVIDING MESSAGING SOLUTIONS IN MARKETS WHERE WE HAVE SOLID MARKET
TRACTION AND WHICH REPRESENT THE LARGEST OPPORTUNITIES FOR US.
Our strategy is to offer messaging solutions with a number of key
characteristics. We offer solutions that have a horizontal application across a
number of vertical industries thereby reducing our exposure to any single
specific vertical market. We focus on solutions that have a relatively short
deployment time, and therefore a lower services load--reducing the cost of
running our professional services organization and changing the mix of services
revenue in our revenue stream. Our strategy is intended to ultimately help us
improve our overall gross margins and serve our customers better. Our strategy
is to target geographic markets where Internet usage has matured and where we
have reached critical mass in product sales, such as the United States, Japan,
the UK and Germany.
CULTIVATE A CHANNEL OF RESELLERS AND KEY SERVICE PROVIDERS TO AUGMENT OUR DIRECT
SALES EFFORT.
We intend to promote and leverage our channel of resellers, including
value-added resellers and key service providers, to expand the sales of our
messaging solutions in strategic vertical and geographic markets. By choosing
best-of-breed partners and customers to offer our solutions to the marketplace,
we can better capture the opportunity of a growing market and leverage the brand
recognition and extensive sales and marketing resources of leading technology
providers and consultants.
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OFFER ADDITIONAL SERVICES THAT ALLOW OUR CUSTOMERS TO MANAGE THEIR
ORGANIZATION'S MESSAGE TRAFFIC AND EXPAND INTO ACCOUNTS BY UPSELLING OUR
SOLUTIONS.
We intend to focus on selling additional applications and value-added
services to our installed customer base, selling MMS customers IME products and
services and selling IME customers MMS products and applications. We plan to
pursue sales of combined products, such as Tumbleweed Secure Redirect, which use
policies in Tumbleweed MMS products to send confidential messages over
Tumbleweed IME. We intend to continue to enter into additional strategic
relationships with other companies to allow us to expand our value-added
services. For example, in 2000, we entered into a strategic relationship with
one of our customers, Iron Mountain Incorporated. With Iron Mountain, we are
developing a solution that will offer digital archiving for e-mail messages and
online documents to both Iron Mountain and Tumbleweed customers. In addition, we
may acquire complementary businesses to increase our message traffic flow as
well.
PROVIDE COMPREHENSIVE PROFESSIONAL AND/OR OUTSOURCING SERVICES THROUGH OUR
IN-HOUSE TEAM OR THROUGH OUR SYSTEMS INTEGRATORS OR SERVICE PROVIDERS.
Our customers have the option of deploying our products on their premises or
outsourcing the deployment to us. Outsourcing such services enables our
customers to reduce their cost of ownership and the deployment time of our
solutions, thereby helping to reduce our sales cycle in those enterprises. We
offer a full suite of professional and consulting services that are end-to-end
and designed to help customers implement our solutions as rapidly as possible.
The services include business-specific applications consulting, software
development, training and complete technical support. In addition, services and
outsourcing can also be provided through our best-of-breed systems integrators
and service providers.
SALES
We maintain a direct sales force that focuses on signing key enterprise
customers and additional service providers, as well as further penetrating
existing accounts by selling them new applications. Our sales force is comprised
of domestic and international sales groups consisting of a total of 72 employees
as of February 28, 2001. Offices in the U.S. currently include Redwood City,
California; Santa Clara, California; New York, New York; Los Angeles,
California; San Ramon, California; Chicago, Illinois; Redmond, Washington;
Reston, Virginia; Charlotte, North Carolina and Dallas, Texas. Our offices
outside the U.S. currently include Germany, Japan, and the United Kingdom. Our
sales force includes field sales engineers and inside sales personnel who
support the account executives. Field sales engineers assist our account
executives with technical presentations, customer requirements analysis and
initial solution designs. Our inside sales personnel assist the account
executives in managing their customer relationships. Our sales effort is
augmented by the sales forces of our service providers.
The sales force also works with resellers 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
Our marketing efforts are organized around three primary areas: product
marketing, product management and corporate marketing. Product marketing
identifies target markets and customer opportunities, then develops the
positioning, programs and materials to reach customers and support sales
activities.
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. Corporate marketing
drives lead generation activities to support Tumbleweed sales, as well as
overall market awareness of us and our products through media and
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analyst relations, events and speaking engagements. Corporate marketing is also
responsible for branding, corporate identity, and the Tumbleweed website.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, Internet transaction taxation, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. For
example, the Federal Communications Commission could determine through one of
its ongoing proceedings that the Internet is subject to regulation. 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 our products and
services and increase our cost of doing business, or otherwise have a material
adverse effect on our business, financial condition and results of operations.
Permits or licenses may be required from federal, state, local or foreign
governmental authorities to operate or to sell some products on the Internet. We
may not be able to obtain these permits or licenses. We may be required to
comply with future national and/or international legislation and statutes
\regarding conducting commerce on the Internet in all or specific countries
throughout the world. It may not be possible to comply with this legislation or
these statutes on a commercially reasonable basis, if at all.
In addition, our products rely on encryption and authentication technology
from third parties to provide the security and authentication necessary to
achieve secure transmission of confidential information. Exports of software
products utilizing encryption technology are generally restricted by the U.S.
and various foreign governments. We have obtained approval to export products
using up to 255-bit symmetric encryption and 2048-bit public key encryption,
including the IME Server, IME Desktop, IME Receive Applet, IME Remote API using
OmniORB with SSL, and MMS Worldwide/255. We are not exporting other hardware,
software or technology that is subject to export control under U.S. law.
However, the list of countries and products for which exports are restricted and
the related regulatory policies could be revised in the future, and we may not
be able to obtain required government approvals.
INTELLECTUAL PROPERTY
To date, the U.S. Patent and Trademark Office has issued us six U.S.
patents--five utility patents and one design patent related to the user
interface of our products. We have filed an additional seventeen utility patent
applications that are now pending in the U.S. Patent and Trademark Office. We
also have twenty-three patent applications now pending in foreign jurisdictions,
including three pending applications filed under the Patent Cooperation Treaty.
In addition, we currently have nine registered trademarks worldwide, including
the mark Tumbleweed, and are pursuing other key trademarks and service marks in
the U.S. and internationally.
We regard our patents, trademarks and other intellectual property as
critical to our success, and rely on patent and trademark law together with
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. Despite these
precautions,
11
we may not be successful in protecting our rights. For example, it may be
possible for unauthorized third parties to copy particular portions of our
products or reverse engineer or obtain and use information that we regard as
proprietary. Some end-user license provisions protecting against unauthorized
use, copying transfer and disclosure of the licensed program may be
unenforceable under the laws of some jurisdictions and foreign countries. In
addition, the laws of some foreign countries do not protect proprietary rights,
particularly software based patents, to the same extent as do the laws of the
U.S. our means of protecting our proprietary rights in the U.S. or abroad may
not be adequate and competing companies may independently develop similar
technology. In particular, we are currently engaged in litigation to enforce our
intellectual property rights, which may not be successful and in any event will
result in substantial expenditures of resources to pursue.
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. Our patent applications may not be issued with
the scope of the claims sought by us, if at all. Our 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 our software products.
Third parties could claim infringement by us with respect to current or
future products or services. We may increasingly be subject to claims of
intellectual property infringement as the number of our competitors grows and
the functionality of their products and services increasingly overlap with ours.
Any of these claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources, limit
use of our services or require us to enter into royalty or license agreements. A
successful claim of product infringement against us could harm our business and
prospects.
COMPETITION
The markets in which we compete are intensely competitive and rapidly
changing. We believe there is no single competitor that offers the complete
package of mission-critical messaging software that Tumbleweed sells. We are
aware of competitors that exist for each of our product lines and for combined
components of our solution sets.
Our principal competition in the areas of messaging management and secure
communications are companies that offer various Internet content security, web
security, messaging policy management, and enterprise relationship management
products. Companies that sell products that compete with some of the features
within our products include: Baltimore Technologies plc, Critical Path, Inc.,
Kana Communications, Inc., Symantec Corp., Tivoli Systems, Inc., an IBM company,
Trend Micro Incorporated, ValiCert Inc., and Zixit Corporation.
Our principal competition in the statement presentment market area comes
from other online communication or information security service providers, some
of which have services or products that are intended to compete directly with
our products or that could be used as alternatives to our products. Examples of
some of these providers are Automatic Data Processing, Inc., Critical
Path, Inc., New River Systems, PostX Corporation and Vestcom Corporation. Our
solution statement presentment and secure delivery solutions can be 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. In addition, companies with
which we do not presently directly compete may become competitors in the future,
either through the expansion of our products or through their product
development in the area of secure online communication services. These
12
companies include International Business Machines Corporation/Lotus Development
Corporation, Microsoft Corporation and VeriSign, Inc.
The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. Some of our
competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base. Additionally, some of these competitors have research and
development capabilities that may allow them to develop new or improved products
that may compete with product lines we market and distribute. We expect that the
market for mission-critical messaging software, which has been fragmented
historically, will become more consolidated with larger companies being better
positioned to compete in such an environment in the long term. As this market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners. Our success will
depend on our ability to adapt to these competing forces, to develop more
advanced products more rapidly and less expensively than our competitors, and to
educate potential customers as to the benefits of licensing our products rather
than developing their own products. Competitors could introduce products with
superior features, scalability and functionality at lower prices than our
products and could also bundle existing or new products with other more
established products in order to compete with us. In addition, because there are
relatively low barriers to entry for the software market, we expect additional
competition from other established and emerging companies. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.
EMPLOYEES
As of February 28, 2001, we employed 294 people worldwide, including 100 in
engineering, 72 in sales, 41 in professional services, 21 in marketing, and 48
combined in human resources, finance, information technology, corporate
management and other administration. Our employees are not represented by any
collective bargaining organization. We have never experienced a work stoppage
and consider our relations with our employees to be good. See "Risks and
Uncertainties--If we lose the services of executive officers and other key
employees, our ability to develop our business and secure customer relationships
will suffer."
ITEM 2--PROPERTIES AND FACILITIES.
We lease approximately 40,000 square feet for our corporate headquarters
located in Redwood City, California under a lease with a term of five years
commencing June 8, 1999. In September 2000, we leased an additional 42,000
square feet in an adjacent building with a term of five years. We currently
sublease this space. This sublease is scheduled to expire with respect to half
of the space in September 2001 and with respect to the other half in April 2002.
We are currently searching for a new tenant to sublease this space. We also
lease 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. We currently sublease 15,000 square feet of this
space. We have additional office space in New York, NY under a lease that
expires in April 2005. This lease covers 18,000 square feet of which 10,000
square feet is currently subleased. We also own a building in Ann Arbor,
Michigan consisting of approximately 44,000 square feet. This property is
currently on the market for sale. We also maintain domestic sales offices
including in Redwood City, California; Santa Clara, California; New York, New
York; Los Angeles, California; San Ramon, California; Chicago, Illinois;
Redmond, Washington; Reston, Virginia; Charlotte, North Carolina and Dallas,
Texas. Further, we maintain sales offices in various locations overseas,
including Germany, Japan and the United Kingdom.
13
ITEM 3--LEGAL PROCEEDINGS.
On March 3, 1999, we sued The docSpace Company, Inc. in the United States
District Court for the Northern District of California alleging infringement of
our U.S. Patent No. 5,790,790. In its answer, docSpace raised counterclaims
alleging, among other things, antitrust violations and unfair competition. On
March 9, 2000, Critical Path, Inc. acquired docSpace. On March 9, 2001 the court
issued an order that (i) granted in part and denied in part our motion for
summary judgment of literal infringement, and (ii) granted in part docSpace's
motion for summary judgment of no infringement. Essentially, the court ruled
that the docSpace products Express 4.0 and Express 5.0 violate our patent at
issue and that Express 5.1 and later versions, all designed after the lawsuit
was initiated, do not literally infringe that patent. The order does not address
U.S. Patent No. 6,192,407 which was issued to us on February 20, 2001. We
believe all versions of the docSpace Express product violate our U.S. Patent No.
6,192,407. On March 16, 2001, docSpace filed a motion for reconsideration of the
order dated March 9, 2001.
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. 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 September 27,
2000, we filed (i) a motion to strike or dismiss for failure to meet the
certification requirements of the Private Securities Litigation Reform Act,
(ii) a motion to dismiss for failure to state a claim, and (iii) a motion to
dismiss because of improper venue, or in the alternative, motion to transfer the
lawsuits to the Eastern District of Michigan. These motions remain pending. We
intend vigorously to defend the Interface lawsuits and seek their dismissal.
Although we 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, the costs in defending these complaints could harm future operating
results.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our stockholders during the fourth
quarter of fiscal 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are our executive officers as of March 30, 2001. There are no
family relationships between any of the executive officers and there is no
arrangement or understanding between any executive officer and any other person
pursuant to which the executive officer was selected. At the annual meeting of
our Board of Directors, which follows the Annual Meeting of Stockholders,
executive officers are elected by the Board to hold office for one year and
until their respective successors are elected and qualified, or until their
earlier resignation or removal.
NAME TITLE AGE
- ---- ------------------------------------------------------- ------------------------
Jeffrey C. Smith............ Chairman and Chief Executive Officer 34
Douglas A. Sabella.......... President and Chief Operating Officer 42
Joseph C. Consul............ Chief Financial Officer and Vice President--Finance 41
JEFFREY C. SMITH, 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
14
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.
DOUGLAS A. SABELLA, President and Chief Operating Officer, is responsible
for worldwide operations, including research and development, sales,
professional services, and marketing, at Tumbleweed. Prior to joining
Tumbleweed, Mr. Sabella was the president and chief executive officer of Bidcom,
Inc. Prior to joining Bidcom, Mr. Sabella held various senior management
positions at Lucent Technology from February 1985 to February 2000. Mr. Sabella
holds a B.B.A. in Business Administration from Hofstra University.
JOSEPH C. CONSUL, Chief Financial Officer and Vice President--Finance, is
responsible for financial administration and facilities 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.
15
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Tumbleweed's common stock is traded on the Nasdaq National Market under the
symbol "TMWD." The table below sets forth, during the periods indicated, the
high and low sales price for Tumbleweed's common stock as reported on the Nasdaq
National Market.
PRICE RANGE
-------------------
HIGH LOW
-------- --------
Year ended December 31, 1999................................ $ 89.50 $10.25
Third Quarter (beginning August 6, 1999).................... $ 30.50 $10.25
Fourth Quarter.............................................. $ 89.50 $17.75
Year ended December 31, 2000................................ $136.00 $14.00
First Quarter............................................... $136.00 $48.00
Second Quarter.............................................. $112.00 $28.88
Third Quarter............................................... $ 70.63 $38.00
Fourth Quarter.............................................. $ 54.00 $14.00
As of March 15, 2001, there were approximately 976 holders of record of our
common stock. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock during
any period for which financial information is provided in this Annual Report on
Form 10-K. We currently intend to retain future earnings, if any, to fund the
development and growth of our business and do not anticipate paying any cash
dividends on our common stock in the foreseeable future.
OFFERINGS OF SECURITIES
On August 11, 1999, we completed an initial public offering of our common
stock, $0.001 par value. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-79687). The Registration Statement was declared
effective by the Securities and Exchange Commission on August 5, 1999.
On August 1, 2000, we completed a primary and secondary public offering of
3,000,000 shares of our common stock at a price of $56.00 per share. Of the
3,000,000 shares of common stock, 1,500,000 primary shares were sold by us and
1,500,000 secondary shares were sold by our stockholders. The managing
underwriters in the offering were Credit Suisse First Boston Corporation, Chase
Securities, Inc., Dain Rauscher Incorporated, U.S. Bancorp Piper Jaffray Inc.
and ING Barings LLC. Tumbleweed did not receive any of the proceeds from shares
sold by its stockholders. Net proceeds of $77.6 million from the offering of
primary shares will be used for working capital and other general corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses.
16
ITEM 6--SELECTED FINANCIAL DATA.
SELECTED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue from continuing product lines....... $ 37,338 $ 15,284 $ 10,575 $ 4,476 $ 597
Gross profit (1)............................ 24,221 11,853 11,213 7,946 11,225
Operating expenses (2)...................... 97,061 37,900 23,456 19,897 18,226
Operating loss before goodwill amortization
and merger expenses....................... (48,262) (26,047) (12,243) (11,951) (7,001)
Operating loss.............................. (72,840) (26,047) (12,243) (11,951) (7,001)
Net loss.................................... (69,829) (24,222) (11,720) (11,461) (6,420)
Net loss per share--basic and diluted....... (2.51) (1.65) (1.79) (1.90) (1.15)
Shares used in calculating basic and diluted
loss per share............................ 27,829 14,650 6,549 6,023 5,592
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 75,497 $60,544 $ 4,556 $10,972 $ 9,682
Total assets.................................. 178,900 75,683 12,719 24,272 24,658
Long-term debt, excluding current
installments................................ 497 1,017 382 132 719
Total stockholders' equity.................... 153,612 61,713 4,437 14,818 17,048
- ------------------------
(1) Includes gross profit from product lines we discontinued prior to
January 1, 2000.
(2) Includes stock compensation expense of $5.8 million, $3.5 million, $715,000,
and $288,000 for the years ended December 31, 2000, 1999, 1998, and 1997,
respectively.
17
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2000
REVENUE:
License......................................... $ 4,356 $ 6,824 $ 7,607 $ 3,703
Services........................................ 1,524 1,748 2,499 2,414
Transaction fees................................ 730 1,518 2,328 2,087
-------- ------- -------- --------
Total Revenue................................. 6,610 10,090 12,434 8,204
COST OF REVENUE:
License......................................... 267 290 514 52
Services (1).................................... 1,941 2,882 2,992 3,932
Transaction fees................................ 24 20 53 --
-------- ------- -------- --------
TOTAL COST OF REVENUE......................... 2,232 3,192 3,559 3,984
-------- ------- -------- --------
GROSS PROFIT...................................... 4,378 6,898 8,875 4,220
OPERATING EXPENSES:
Research and development (2).................... 2,843 3,171 4,205 4,660
Sales and marketing (3)......................... 7,192 9,742 10,777 12,912
General and administrative (4).................. 1,640 2,312 2,911 4,708
Stock compensation.............................. 1,485 1,451 1,864 1,171
Amortization of goodwill, intangibles and
in-process research and development........... -- 59 5,401 8,315
Merger related and restructuring expenses (5)... 10,392 -- -- --
-------- ------- -------- --------
Total operating expenses...................... 23,552 16,735 25,158 31,766
-------- ------- -------- --------
OPERATING LOSS.................................... (19,174) (9,837) (16,283) (27,546)
Other income, net............................... 656 365 991 1,341
-------- ------- -------- --------
LOSS BEFORE TAXES AND MINORITY INTEREST........... (18,518) (9,472) (15,292) (26,205)
Provision for taxes............................. 88 150 95 42
-------- ------- -------- --------
LOSS BEFORE MINORITY INTEREST..................... (18,606) (9,622) (15,387) (26,247)
Minority interest............................... -- (94) (30) 91
-------- ------- -------- --------
NET LOSS.......................................... (18,606) (9,528) (15,357) (26,338)
Other comprehensive income (loss)--translation
loss.......................................... 17 (301) (42) 212
-------- ------- -------- --------
COMPREHENSIVE LOSS................................ $(18,589) $(9,829) $(15,399) $(26,126)
======== ======= ======== ========
NET LOSS PER SHARE--BASIC AND DILUTED............. $ (0.73) $ (0.37) $ (0.55) $ (0.89)
======== ======= ======== ========
WEIGHTED AVERAGE SHARES--BASIC AND DILUTED........ 25,588 26,068 27,872 29,457
======== ======= ======== ========
- ------------------------
(1) Exclusive of non-cash compensation expense of $61,000, $48,000, $45,000, and
$(4,000) for the quarter ended March 31, 2000, June 30, 2000, September 30,
2000, and December 31, 2000, respectively.
(2) Exclusive of non-cash compensation expense of $274,000, $188,000, $455,000,
and $(89,000), for the quarter ended March 31, 2000, June 30, 2000,
September 30, 2000, and December 31, 2000, respectively.
(3) Exclusive of non-cash compensation expense of $575,000, $1,098,000,
$859,000, and $1,621,000 for the quarter ended March 31, 2000, June 30,
2000, September 30, 2000, and December 31, 2000, respectively.
18
(4) Exclusive of non-cash compensation expense of $164,000, $117,000, $505,000,
and $(357,000) for the quarter ended March 31, 2000, June 30, 2000,
September 30, 2000, and December 31, 2000, respectively.
(5) Exclusive of non-cash compensation expense of $411,000 for the quarter ended
March 31, 2000.
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1999
REVENUE:
License......................................... $ 2,702 $ 2,382 $ 3,081 $ 3,120
Services........................................ 564 491 999 964
Transaction fees................................ 3 203 318 457
-------- ------- -------- --------
Revenue from continuing product lines........... 3,269 3,076 4,398 4,541
Revenue from discontinued product lines......... 638 561 273 --
-------- ------- -------- --------
Total Revenue................................. 3,907 3,637 4,671 4,541
COST OF REVENUE:
License......................................... 117 125 248 247
Services........................................ 782 983 1,246 1,077
Transaction fees................................ 5 15 24 34
-------- ------- -------- --------
TOTAL COST OF REVENUE......................... 904 1,123 1,518 1,358
-------- ------- -------- --------
GROSS PROFIT...................................... 3,003 2,514 3,153 3,183
OPERATING EXPENSES:
Research & development (1)...................... 1,794 2,077 2,296 2,756
Sales & marketing (2)........................... 3,144 4,177 5,428 7,168
General & administrative (3).................... 816 1,067 2,006 1,635
Stock compensation.............................. 336 969 1,115 1,116
-------- ------- -------- --------
Total operating expenses...................... 6,090 8,290 10,845 12,675
-------- ------- -------- --------
OPERATING LOSS.................................... (3,087) (5,776) (7,692) (9,492)
Other income, net............................... 138 157 956 875
-------- ------- -------- --------
LOSS BEFORE TAXES................................. (2,949) (5,619) (6,736) (8,617)
Provision for taxes............................. (18) 93 136 90
-------- ------- -------- --------
NET LOSS.......................................... (2,931) (5,712) (6,872) (8,707)
Other comprehensive income (loss)--translation
loss.......................................... 4 2 5 44
-------- ------- -------- --------
COMPREHENSIVE LOSS................................ $ (2,927) $(5,710) $ (6,867) $ (8,663)
======== ======= ======== ========
NET LOSS PER SHARES -- BASIC AND DILUTED.......... $ (0.42) $ (0.79) $ (0.37) $ (0.34)
======== ======= ======== ========
WEIGHTED AVERAGE SHARES -- BASIC AND DILUTED...... 6,889 7,267 18,442 25,376
======== ======= ======== ========
- ------------------------
(1) Exclusive of non-cash compensation expense of $140,000, $293,000, $318,000,
and $298,000 for the quarter ended March 31, 2000, June 30, 2000,
September 30, 2000, and December 31, 2000, respectively.
(2) Exclusive of non-cash compensation expense of $146,000, $545,000, $623,000,
and $647,000 for the quarter ended March 31, 2000, June 30, 2000,
September 30, 2000, and December 31, 2000, respectively.
(3) Exclusive of non-cash compensation expense of $50,000, $131,000, $174,000,
and $171,000 for the quarter ended March 31, 2000, June 30, 2000,
September 30, 2000, and December 31, 2000, respectively.
19
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES AND BELIEFS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND THOSE
LISTED UNDER "RISKS AND UNCERTAINTIES".
OVERVIEW
We are a leading provider of mission-critical messaging solutions that
enable organizations to manage and secure online business communications and
processes. Our customers use our solutions to centrally control and monitor the
corporate communications stream to comply with policies and government
regulations, communicate securely with business partners, suppliers and
customers, and to integrate business communications and processes online.
Tumbleweed software creates a foundation for automated legacy data extraction,
preparation and secure two-way communication of sensitive or confidential
business information, such as electronic statements and customer service
inquiries. Tumbleweed solutions integrate with existing systems and end user
behavior. Tumblweed solutions are centrally controlled by IT managers while
remaining transparent to end users -- who do not need to deploy new software or
behavior to comply with corporate security and communications policies.
In 2000, our product offerings included the Tumbleweed Messaging Management
System (MMS), a comprehensive solution for enforcing corporate e-mail usage
policies and protecting information as it travels over the Internet; MMS Web
Filter, which provides organizations with the ability to control Internet usage
and to monitor and control submissions to Internet message boards and Web-based
e-mail services; MMS Message Monitor, which includes Enterprise Archiving and a
Web-based reviewer tool that enable an organization to copy all or selected
messages to an external storage medium; Tumbleweed Secure Redirect, which
provides a secure delivery channel directly from the desktop based on
communications policies defined in MMS that are transparent to the end user; and
Tumbleweed Integrated Messaging Exchange (IME), which combines an advanced
software platform and customized applications to establish an Internet
communication channel between a business and its customers, suppliers, and
partners. We announced the discontinuation of two products in April 2000:
WorldSecure Client, an S/MIME encryption plug-in for Microsoft Outlook 97, Lotus
Notes R4, and Eudora Pro, and NetTalk, an Intranet messaging and directory
server that provides directory synchronization and acts as a directory switch
between disparate e-mail systems.
On January 31, 2000, we completed the acquisition of Worldtalk
Communications Corporation (Worldtalk), a leading provider of Internet security
and policy management solutions that enable organizations to define and manage
e-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, our historical
financial statements have been restated to include the accounts and results of
operations of Worldtalk. Except as otherwise indicated, the terms "Tumbleweed,"
"we" and "our" refer to Tumbleweed and its subsidiaries, including Worldtalk, in
this discussion.
On September 1, 2000, we completed the acquisition of Interface
Systems, Inc. (Interface). Interface's Legacy to Internet, or L2i, products and
services simplify the process of transforming and using data found in legacy
computer systems into electronic content that is easy to distribute and use
online. The L2i products adapt legacy print streams and other data types to the
Internet and intelligently convert them into formats such as Portable Document
Format, HyperText Markup Language or eXtensible Markup Language for use online.
The combination of L2i with Tumbleweed IME gives our customers a comprehensive,
end-to-end solution for electronic statement presentment.
20
The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since September 1, 2000, Interface's results of operations have been
included in our consolidated statements of operations. The fair value of the
intangible assets was determined based upon a valuation using a combination of
methods, including a cost approach for the assembled workforce, and an income
approach for the core technology.
The purchase price of approximately $77.1 million consisted of an exchange
of 1,249,210 shares of the Company's common stock with a fair value of
approximately $64.2 million, assumed stock options with a fair value of
approximately $7.9 million, cash paid of $2.0 million, and other acquisition
related expenses of approximately $3.0 million consisting primarily of payments
for financial advisor and other professional fees.
Our historical 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, and time and material billings are
recognized based on a percentage of completion. Support and maintenance fees for
our predecessor Worldtalk products are paid for ongoing customer support as well
as for the right to receive future upgrades of our 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 our customers, and the related revenue is
recognized based on payment schedules and transaction reports from our
customers. A number of our contracts include minimum transaction volume
requirements. In these cases, the minimum guaranteed revenue is recognized when
fees are due and payable during those months where transaction volume does not
exceed the designated minimums. Transaction fees include routine maintenance and
product updates. Product upgrades are available to existing customers for
additional contractually specified fees.
A substantial portion of revenue relates to international customers or
operations. Most of our contracts are denominated in U.S. dollars, except in
Japan, where they are denominated in Japanese yen. However, in the future, an
increasing number of contracts may be denominated in foreign currencies. We
currently do not have hedging or similar arrangements to protect us against
foreign currency fluctuations. Therefore, we increasingly may be subject to
currency fluctuations, which could harm our operating results in future periods.
Our future net income and cash flow may be adversely affected by limitations
on our ability to apply net operating losses for federal income tax reporting
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 issuance of stock.
On May 15, 2000, we repurchased from Hikari Tsushin 5% of the outstanding
stock of Tumbleweed KK, or TKK, for a price of approximately $700,000. As a
result of this transaction, we own a controlling interest of the Japanese
subsidiary and began accounting for the Japanese subsidiary under the
consolidation method effective April 1, 2000. On August 29, 2000, we repurchased
an additional 25% of the outstanding shares of the jointly owned Japanese
subsidiary, increasing our ownership position to 80%.
On August 1, 2000, we completed a primary and secondary public offering of
3,000,000 shares of our common stock at a price of $56.00 per share. Of the
3,000,000 shares of common stock, 1,500,000 primary shares were sold by us and
1,500,000 secondary shares were sold by our stockholders. Tumbleweed did not
receive any of the proceeds from shares sold by its stockholders. Net proceeds
of $77.9 million from the offering of primary shares will be used for working
capital and other general
21
corporate purposes. In addition, we may use a portion of the net proceeds to
acquire complementary products, technologies or businesses.
In January 2001 our Board of Directors approved a restructuring program.
This restructuring program focuses our efforts towards concentrating on our
strongest opportunities, reducing operating expenses, and improving our
allocation of resources. The restructuring involved closing several
international locations, realigning our professional services organization, and
reducing headcount in most areas of our business. The reduction in force
involved approximately 20% of our staff and total charges incurred as a result
of the restructuring are anticipated to be approximately $9-10 million in the
first quarter of 2001, which includes severance and related charges associated
with the reduction in force and charges related to vacating leased facilities
domestically and abroad. This estimate includes a $5 million non-cash accrual
for potential losses on sub-leased facilities primarily due to reduced sub-
lease rental income expectations reflecting rapidly declining office rent rates
in and around Silicon Valley.
Beginning in 2001, we expect that new license agreements will generally
incorporate upgrade fees as part of the license and transaction offering, and
will recognize the combination of license, transaction and installation fees
ratably over the term of the contract. We expect that contract terms will be the
shorter of the term of the contractually committed transaction bundles or the
license term.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUE. Revenue is comprised of license revenue, services revenue and
transaction fees revenue. Total revenue increased 123% to $37.3 million in 2000
from $16.8 million in 1999 due to increased acceptance of our solutions in the
marketplace. License revenue increased 99% to $22.5 million in 2000 from
$11.3 million in 1999 due to an increase in the number of licenses sold,
additional license fees paid by existing customers, as well as an increase in
the average sales price of the MMS product line during 2000. Services revenue
increased 171% to $8.2 million in 2000 from $3.0 million in 1999 due to an
increase in contract development work by our professional services organization,
and, to a lesser extent, increases in maintenance fees. Transaction fees revenue
was $6.7 million in 2000 compared to $1.0 million in 1999. The increase in
transaction fees revenue resulted from minimum transaction fees from customers
due to the growth of our installed base, and to a lesser extent, due to the
introduction of a transaction pricing model for the MMS product line. Total
revenue excluding discontinued product lines increased 144% in 2000. There was
no revenue from discontinued product lines in 2000. Our sales were impacted by
an unexpected slowdown in technology spending that arrived late in the year. The
slowdown affected us in some larger customer agreements we were in the midst of
negotiating and subsequently, we were unable to complete sufficient sales in the
fourth quarter of 2000 to meet our expectations.
COST OF REVENUE. Cost of revenue is comprised of license cost, services
cost and transaction fees cost. License cost is primarily comprised of royalties
paid to third parties for software licensed by us for inclusion in our 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 paid to third parties for software licensed by
us for inclusion in our products and hardware and bandwidth costs associated
with hosting IME servers for some customers. Cost of revenue increased 168% to
$13.1 million in 2000 from $4.9 million in 1999. License cost increased 52% to
$1.1 million in 2000 from $737,000 in 1999. License costs increased primarily
due to increased 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 are on a fixed fee basis.
Services cost increased 191% to $11.9 million in 2000 from $4.0 million in 1999.
The increase was primarily due to increased personnel costs supporting an
increase in new contract development projects and the acquisition of Interface
from September 1, 2000. Transaction fees cost was $97,000 in 2000
22
compared to $78,000 in 1999. The increase in transaction fees cost resulted from
allocated royalties due on transaction fees revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised of engineering and related costs associated with the development of
our applications, quality assurance and testing. Research and development costs
increased 57% to $15.7 million in 2000 from $10.0 million in 1999. The increase
was primarily due to increased head count in part from our Interface
acquisition, increases in average salaries for development personnel, and
increased facilities related expenses. We expect that research and development
expenses will increase in absolute dollars in future periods due to increased
personnel required to support new projects that will allow us to expand the
functionality of the MMS and IME product lines, further integrate IME and L2i
into an integrated secure statement presentment platform and integrate all of
our products with targeted third party software packages and services.
SALES AND MARKETING EXPENSES. Sales and marketing expenses are comprised of
salaries, commissions, travel expenses and costs associated with trade shows,
lead generation, advertising and other marketing efforts. Sales and marketing
expenses increased 105% to $44.8 million in 2000 from $21.9 million in 1999. The
increase in sales and marketing expenses was primarily due to increased sales
staffing, commissions, and expanded marketing programs. We expect that sales and
marketing expenses will increase in absolute dollars in future periods as we
expand our sales force in core geographic markets.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and support costs for our finance, legal,
information systems and human resources departments as well as professional
fees. General and administrative expenses increased 107% to $12.0 million in
2000 from $6.1 million in 1999. The increase in general and administrative
expenses was due in part to an increase in legal fees corresponding to patent
infringement lawsuit we brought against The docSpace Company, Inc., which is
still pending, as well as increased staffing expenses and professional fees.
DEFERRED COMPENSATION EXPENSE. Deferred compensation expense is recorded in
connection with the grant of certain stock options to non-employees and
employees at exercise prices less than the deemed fair value on the grant date.
During the year ended December 31, 2000, we recorded aggregate deferred stock
compensation expense of $6.3 million compared to $7.3 million for the year ended
December 31, 1999. Deferred stock compensation expense for 2000 includes
$2.3 million related to the Interface acquisition and $3.0 million resulting
from the volatility of our stock price combined with certain stock option
commitments made to employees which were not processed in a timely fashion. The
deferred stock compensation expense is being amortized on an accelerated basis
over the vesting period of the options, which is generally four years.
Amortization of stock compensation expense for 2000 was approximately
$5.4 million compared to $3.5 million in 1999.
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 fiscal 2000 were $10.8 million.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $13.8 million for fiscal 2000. The goodwill and other
intangible assets resulted from the Interface purchase and, to a lesser extent,
our increase in ownership of Tumbleweed KK from 50% to 80% during 2000. Goodwill
and other intangibles are amortized over their respective lives, generally one
to three years.
23
OTHER INCOME, NET. Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net increased 62% to
$3.4 million in 2000 from $2.1 million in 1999. The increase in other income,
net, is due to increased cash balances 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 our initial public offering completed in August 1999 and our
offering completed in August 2000.
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 our 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.
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 obligations 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 our 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.
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 increased 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 our initial public offering
completed in August 1999.
24
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
issuance of equity securities. As of December 31, 2000, we had $75.5 million in
cash and cash equivalents.
Net cash used by operating activities for 2000 was $41.0 million. Cash used
in operating activities was primarily the result of a net operating loss and
increased accounts receivable, offset by certain non-cash charges and increases
in accounts payable and accrued liabilities.
Net cash used in investing activities for 2000 was $28.3 million. Net cash
used in investing activities was primarily the result of merger costs incurred
as a part of the acquisitions of Worldtalk and Interface; the repurchase of
additional shares of Tumbleweed KK; capital expenditures related to increased
facilities expansion; and certain investments.
Net cash provided by financing activities for 2000 was $84.3 million. Cash
provided by financing activities was primarily attributable to net proceeds from
the issuance of equity securities to investors, including our public offering
completed in August 2000 and sales of shares under stock option plans and
warrants.
As of December 31, 2000, our principal commitments consisted of obligations
related to outstanding operating and equipment leases. We anticipate additional
capital expenditures consistent with establishing infrastructure to support our
growth.
In June 1999, we entered into an operating lease covering approximately
40,000 square feet of office space in Redwood City, California. The lease is for
a term of five years at monthly rent of approximately $96,000. In
September 2000, the Company entered into an operating lease covering
approximately 42,000 square feet of office space in an adjacent building in
Redwood City, California. The lease term is for five years at monthly rent of
approximately $286,000. We currently sublease this space. This sublease is
scheduled to expire with respect to half of the space in September 2001 and with
respect to the other half in April 2002. We are currently searching for a new
tenant to sublease this space. If we are unable to find suitable sub-tenants in
a timely manner, we may experience greater than anticipated operating expenses
in the future.
We have two equipment loan facilities totaling $1,750,000 with a 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 the prime rate
plus 0.75% and are due and payable in 36 equal monthly installments. As of
December 31, 2000, total borrowings under these equipment loan facilities were
$871,000 in the aggregate and $879,000 remained available under the facilities.
In September 1999, we entered into a $525,000 financing arrangement with
another company to finance our directors' and officers' liability insurance
premium. Borrowings under the loan agreement are payable in nine equal monthly
installments. As of December 31, 2000, there was no debt outstanding under this
financing arrangement.
Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we devote to development
of our products and services and the resources we devote to sales and marketing.
We have experienced a substantial increase in capital expenditures and operating
expenses since our inception consistent with our relocation and the growth in
operations and staffing. We anticipate that this growth will continue for the
foreseeable future, but not at the rate experienced during 2000. We also expect
to make targeted additional investments in technologies, and plan to expand our
sales force. We currently anticipate that our existing cash and sources of
liquidity will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 12 months.
We will continue to consider our future financing alternatives, which may
include the incurrence of indebtedness, additional public or private equity
offerings or an equity investment by a strategic partner. However, other than
the equipment loan facilities, we have no present commitments or arrangements
assuring us of any future equity or debt financing, and additional equity or
debt financing may not be available to us on favorable terms, if at all.
We expect to experience a seasonal reduction in sales in Europe during the
summer months. In addition, many of our customers delay purchases of our
products until the end of each quarter.
25
RISKS AND UNCERTAINTIES
BECAUSE WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND HAVE A HISTORY OF LOSSES, IT
IS DIFFICULT TO EVALUATE OUR BUSINESS AND WE MAY FACE EXPENSES, DELAYS AND
DIFFICULTIES.
We have only a limited operating history upon which an evaluation can be
based. Accordingly, our prospects must be considered in light of the risks,
expenses, delays and difficulties frequently encountered by companies in a
similarly early stage of development, particularly companies engaged in new and
rapidly evolving markets like secure online communication services. We incurred
net losses of $69.8 million, $24.2 million and $11.7 million in the years ended
December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, we had
incurred cumulative net losses as a C-corporation of $135 million. See
"Consolidated Statements of Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
WE ANTICIPATE CONTINUED LOSSES.
Our success will depend in large part upon our ability to generate
sufficient revenue to achieve profitability and to effectively maintain existing
relationships and develop new relationships with customers and strategic
partners. If we do not succeed, our revenue may not increase, and we may not
achieve or maintain profitability on a timely basis or at all. In particular, we
intend to expend significant financial and management resources on product
development, sales and marketing, strategic relationships, technology and
operating infrastructure. As a result, we expect to incur additional losses and
continued negative cash flow from operations for the foreseeable future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
As a result of our transition from a traditional software licensing model to
a subscription-based pricing model, our limited operating history and the
emerging nature of the markets in which we compete, we may not be able to
accurately forecast our revenue or expenses. Our success is dependent upon our
ability to enter into and maintain strategic relationships with customers and to
develop and maintain volume usage of our products by our customers and their
end-users.
Our revenue has fluctuated and our quarterly operating results will continue
to fluctuate based on the timing of the execution and termination of customer
agreements in a given quarter. Under the licensing model, our license revenue
was comprised of initial license and distribution fees. As a result, we
typically recognized initial license fees as revenue in the same quarter an
agreement was signed. Under the subscription-based pricing model, however, we
will account for and report our contracted revenue over the life of the
agreement. In the first two quarters of 2001, we will transition into the new
subscription-based pricing model. During these quarters, we expect a significant
decrease in recognized revenue as a result of our adoption of the new pricing
model.
Our services revenue historically has been comprised largely of
implementation, customization and consulting fees. Our ability to receive
revenue from services is subject to multiple risks, including the risk that we
may not be able to meet increasing customer demand because of a lack of
adequately trained personnel, and the risk that customers may not timely accept
the services provided and delay payment for such services.
Our transaction revenue historically has been comprised of contractual
transaction minimums. Our ability to increase our transaction revenue through
increased transaction volume depends on increased usage of our products by our
customers and their end users. Unless and until we have developed a significant
and recurring revenue stream our revenue will continue to fluctuate
significantly.
27
In addition, we have experienced, and expect to continue to experience,
fluctuations in revenue and operating results from quarter to quarter for other
reasons, including, but not limited to:
- the amount and timing of operating costs and capital expenditures relating
to our business, operations and infrastructure, including our
international operations;
- our ability to accurately estimate and control costs;
- our ability to timely collect fees owed by customers;
- the announcement or introduction of new or enhanced products and services
in the secure online communications or document delivery markets; and
- acquisitions that we complete or propose.
As a result of these factors, particularly our transition to a
subscription-based pricing model, we believe that quarter-to-quarter comparisons
of our revenue and operating results are not necessarily meaningful, and that
these comparisons may not be accurate indicators of future performance.
Quarterly financials for 2001 under the new subscription-based pricing model
will not be comparable with historical quarters under the our previous licensing
model. Because our staffing and operating expenses are based on anticipated
revenue levels, and because a high percentage of our costs are fixed, small
variations in the timing of the recognition of specific revenue could cause
significant variations in operating results from quarter to quarter. In
addition, many of our customers delay purchases of our products until the end of
each quarter. If we are unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, any significant revenue
shortfall would likely have an immediate negative effect on our operating
results. Moreover, we believe the difficulties outlined above with respect to
financial forecasts also apply to securities analysts that may publish estimates
of our financial results. Our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or investors due to any
of a wide variety of factors, including fluctuations in financial ratios or
other metrics used to measure our performance. If this occurs, we would expect
to experience an immediate and significant decline in the trading price of our
stock.
OUR RESTRUCTURING OF OPERATIONS MAY NOT ACHIEVE THE RESULTS WE INTEND AND MAY
HARM OUR BUSINESS.
In January 2001, we announced a restructuring of our business, which
included a reduction in force and the closure of three international locations,
among other steps we took to reduce expenses. The planning and implementation of
our restructuring has placed, and may continue to place, a significant strain on
our managerial, operational, financial and other resources. Additionally, the
restructuring may negatively affect our employee turnover, recruiting and
retention of important employees. If we are unable to implement our
restructuring effectively or if we experience difficulties in effecting the
restructuring, our expenses could increase more quickly than we expect. If we
find that our restructuring announced in January is insufficient to decrease the
growth of our expenses, we may find it necessary to implement further
streamlining of our expenses, to perform another reduction in our headcount or
to undertake a restructuring of our business.
A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE AND
THE FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS COULD HARM OUR BUSINESS.
The loss of one or more of our major customers, the failure to attract new
customers on a timely basis, or a reduction in usage and revenue associated with
the existing or proposed customers would harm our business and prospects. Five
customers comprised approximately 20% of our revenue in 2000, and approximately
36% of our revenue in 1999. We expect that a small number of customers will
continue to account for a majority of our revenue for the foreseeable future.
28
OUR SERVICE PROVIDER CUSTOMERS MAY COMPETE WITH US OR FAIL TO PROMOTE OUR
PRODUCT.
To date, we have generated a significant amount of Tumbleweed IME revenue
from contracts with a limited number of service provider customers, which use or
intend to use our products for the communication of third-party documents and
data. If these customers do not effectively promote the use of Tumbleweed IME to
their end-users, the adoption of our services and the recognition of associated
revenue could be limited. Because our contracts with our service provider
customers are non-exclusive, these customers could elect to offer competing
secure online communication services to their customers through our existing or
future competitors. The service provider customers also may compete with our
secure online communication services through their traditional physical delivery
channels.
IF WE DO NOT SECURE KEY RELATIONSHIPS WITH ENTERPRISE CUSTOMERS, OUR ACCESS TO
BROADER MARKETS WILL BE LIMITED.
Our enterprise customers, which use or intend to use our products to
intelligently manage the incoming and outgoing online communications of their
enterprises, are a significant source of our revenue. A key aspect of our
strategy is to access target markets prior to adoption of alternative online
distribution solutions by the larger participants in these markets. The failure
to secure key relationships with new enterprise customers in targeted markets
could limit or effectively preclude our entry into these target markets, which
would harm our business and prospects.
CUSTOMERS IN A PRELIMINARY PHASE OF IMPLEMENTING OUR PRODUCT MAY NOT PROCEED ON
A TIMELY BASIS OR AT ALL.
Some of our customers are currently in a pre-production or pre-launch stage
of implementing our 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 our businesses and prospects. We cannot predict when any customer that is
currently in a pilot or preliminary phase will implement broader use of our
services.
THE MARKETS FOR ENHANCED ONLINE COMMUNICATION SERVICES GENERALLY, AND FOR OUR
PRODUCTS SPECIFICALLY, ARE NEW AND MAY NOT DEVELOP.
The market for our products and services is new and evolving rapidly. If the
market for our products and services fails to develop and grow, or if our
products and services do not gain broad market acceptance, our business and
prospects will be harmed. In particular, our success will depend upon the
adoption and use by current and potential customers and their end-users of
secure online communication services. Our success will also depend upon
acceptance of our technology as the standard for providing these services. The
adoption and use of our products and services will involve changes in the manner
in which businesses have traditionally exchanged information. In addition, sales
and marketing of our products and services is to a large extent under the
control of our customers. In some cases, our customers have little experience
with products, services and technology like those offered by us. Our ability to
influence usage of our products and services by customers and end-users is
limited. For example, the usage of Tumbleweed IME by the end-users of our
service provider customers has been limited to date. We have spent, and intend
to continue to spend, considerable resources educating potential customers and
their end-users about the value of our products and services. It is difficult to
assess, or to predict with any assurance, the present and future size of the
potential market for our products and services, or our growth rate, if any.
Moreover, we cannot predict whether our products and services will achieve any
market acceptance. Our ability to achieve our goals also depends upon rapid
market acceptance of future enhancements of our products and our ability to
identify new markets as they emerge. Any enhancement that is not favorably
received by customers and end-users
29
may not be profitable and, furthermore, could damage our reputation or brand
name. Any failure to identify and address new market opportunities could harm
our business and prospects.
THE MARKETS WE ADDRESS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING, AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.
We may not be able to compete successfully against current and future
competitors, and the multiple competitive pressures we face could harm our
business and prospects. The markets in which we compete are intensely
competitive and rapidly changing.
Our principal competition in the areas of messaging management and secure
communications are companies that offer of various Internet content security,
web security, messaging policy management, and enterprise relationship
management products. Companies that sell products that compete with some of the
features within our products include: Baltimore Technologies plc, Critical
Path, Inc., Kana Communications, Inc., Symantec Corp., Tivoli Systems, Inc., an
IBM company, Trend Micro Incorporated, ValiCert Inc., and Zixit Corporation.
Our principal competition in the statement presentment market area comes
from other online communication or information security service providers, some
of which have services or products that are intended to compete directly with
our products or that could be used as alternatives to our products. Examples of
some of these providers are Automatic Data Processing, Inc., Critical
Path, Inc., New River Systems, PostX Corporation and Vestcom Corporation. Our
solution statement presentment and secure delivery solutions can be 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. In addition, companies with
which we do not presently directly compete may become competitors in the future,
either through the expansion of our products or through their product
development in the area of secure online communication services. These companies
include International Business Machines Corporation/Lotus Development
Corporation, Microsoft Corporation and VeriSign, Inc.
The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. Some of our
competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base. Additionally, some of these competitors have research and
development capabilities that may allow them to develop new or improved products
that may compete with product lines we market and distribute. We expect that the
market for mission-critical messaging software, which has been fragmented
historically, will become more consolidated with larger companies being better
positioned to compete in such an environment in the long term. As this market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners. Our success will
depend on our ability to adapt to these competing forces, to develop more
advanced products more rapidly and less expensively than our competitors, and to
educate potential customers as to the benefits of licensing our products rather
than developing their own products. Competitors could introduce products with
superior features, scalability and functionality at lower prices than our
products and could also bundle existing or new products with other more
established products in order to compete with us. In addition, because there are
relatively low barriers to entry for the software market, we expect additional
competition from other established and emerging companies. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.
30
WE FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US FROM
SUCCESSFULLY INTEGRATING COMPANIES WE MAY ACQUIRE.
The integration of the Worldtalk Communications Corporation business and the
Interface Systems, Inc. business, including the technology, operations and
personnel of each of them, has been and will continue to be a complex, time
consuming and expensive process that may disrupt our business if not completed
in a timely and efficient manner. Additionally, the integration of any other
company or business we may acquire in the future will be a complex, time
consuming and expensive process that may disrupt our business if not completed
in a timely and efficient manner. Whenever an acquisition is completed, we must
operate as a combined organization utilizing common information and
communication systems, operating procedures, financial controls and human
resources practices. We may encounter substantial difficulties, costs and delays
involved in integrating the operations of any company we acquire, including:
- potential inability to fully integrate products;
- 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, we may not be successful in integrating any business or
technologies we acquire and may not achieve anticipated revenue and cost
benefits. We also cannot guarantee that acquisitions will result in sufficient
revenues or earnings to justify our investment in, or expenses related to, such
acquisitions. Nor can we guarantee that any anticipated synergies will develop.
If we fail to execute our acquisition strategy successfully for any reason, our
business will suffer significantly.
OUR PRODUCT DEVELOPMENT EFFORTS MAY BE HINDERED BY A VARIETY OF FACTORS.
Our new product releases may not be timely, scalable, or successful enough
to meet customers' requirements. In addition, we also face certain risks
associated with the ongoing integration of the Worldtalk technology and
Interface technology. For example, because Worldtalk has historically based its
products on an NT platform and we have 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 we may
acquire may increase the time and resources needed to resolve these and other
technical integration issues. Our headquarters and the offices of the companies
we have acquired 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.
THE EXPANSION OF OUR BUSINESS HAS PLACED A STRAIN ON RESOURCES.
Our business has expanded considerably during 2000. For example, the number
of our employees increased from 111 as of December 31, 1999 to 389 as of
December 31, 2000. This expansion has placed, and is expected to continue to
place, a significant strain on managerial, informational, administrative and
operational resources. Our current systems, procedures and controls may not be
adequate to achieve the rapid execution necessary to effectively operate within
the market for our products and services. We need to enhance and improve our
managerial capacity, and improve or
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replace our existing operational, customer service and financial systems,
procedures and controls. Any failure to properly manage these systems and
procedural transitions could impair our ability to attract and service
customers, and could cause us to incur higher operating costs and delays in the
execution of our business plan. We will also need to continue the expansion of
our operations and employee base. Our management may not be able to hire, train,
retain, motivate and manage required personnel. In addition, our management may
not be able to successfully identify, manage and exploit existing and potential
market opportunities. If we cannot manage growth effectively, our business and
operating results could suffer.
WE HAVE A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM OUR BUSINESS.
If we are unable to license our services to new customers on a timely basis
or if our existing and proposed customers and their end-users suffer delays in
the implementation and adoption of our services, our revenue may be limited and
business and prospects may be harmed. Our customers must evaluate our technology
and integrate our products and services into the products and services they
provide. In addition, our customers may need to adopt a comprehensive sales,
marketing and training program in order to effectively implement Tumbleweed IME.
Finally, we must coordinate with our customers using our product for third-party
communications in order to assist end-users in the adoption of our products. For
these and other reasons, the cycle associated with establishing licenses and
implementing our products can be lengthy. This cycle is also subject to a number
of significant delays over which we have little or no control. Forecasts about
license revenue may be inaccurate as a result of any or all of these factors,
and inaccurate forecasts may cause our business, or market valuation, to suffer.
A FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM THE
BUSINESS.
We currently rely on a combination of patents, trade secrets, copyrights,
trademarks and licenses, together with non-disclosure and confidentiality
agreements to establish and protect our proprietary rights in our products. We
hold certain patent rights with respect to some of our products and currently
have a lawsuit pending against The docSpace Company, Inc. alleging infringement
of one of our patents by docSpace. We have filed, and expect in the future to
file, additional patent applications. Our existing patents or trademarks, as
well as any future patents or trademarks obtained by us, may be challenged,
invalidated or circumvented, or our competitors may independently develop or
patent technologies that are substantially equivalent or superior to our
technology. Further patent or trademark protection may not be obtained, in the
United States or elsewhere, for our existing or new products, applications or
services. In addition, further protection, if obtained, may not be effective.