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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission File Number: 000-26223

TUMBLEWEED COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)

700 SAGINAW DRIVE
REDWOOD CITY, CA 94063
(Address of principal executive offices, including zip code)

(650) 216-2000
(Registrant's telephone number, including area code)

        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 ý    No o

        The number of shares of common stock outstanding as of October 31, 2002 was 30,452,275.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

        This Quarterly Report on Form 10-Q 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; 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; our stock repurchase program; 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 involve certain risks and uncertainties that could cause actual results, levels of activity, performance, achievements and events to differ materially from those stated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption "Risks And Uncertainties That You Should Consider Before Investing In Tumbleweed" contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. Tumbleweed disclaims any obligation to update these statements or to explain the reasons why actual results may differ. The risks and uncertainties under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risks and Uncertainties That You Should Consider Before Investing in Tumbleweed" contained herein, among other things, should be considered in evaluating Tumbleweed's prospects and future financial performance.

TUMBLEWEED COMMUNICATIONS CORP.

INDEX

TRADEMARKS

        Our registered trademarks include Tumbleweed®, Tumbleweed Communications®, Secure Envelope®, Secure Inbox®, Tumbleweed IME Integrated Messaging Exchange®, WorldSecure® and Worldtalk®. Additional trademarks belonging to us include Tumbleweed Secure Guardian™, Tumbleweed Secure Policy Gateway™, Tumbleweed Secure Staging Server™, Tumbleweed Staging Server™, Tumbleweed Secure Mail™, Tumbleweed Secure Redirect™, Tumbleweed Secure Public Network™, Tumbleweed SPN™, Tumbleweed Secure Archive™, Tumbleweed Secure Web™, Tumbleweed Secure CRM™, Tumbleweed Secure Messenger™, Tumbleweed Secure Statements™, Tumbleweed My Copy™, Tumbleweed L2i™, Tumbleweed IME Developer™, Tumbleweed IME Personalize™, WorldSecure/Mail™ and Tumbleweed IME Alert™.

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

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TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

(1)

Exclusive of non-cash stock-based compensation expense (credit) of $(85) and $97 for the three months ended September 30, 2002, and 2001, respectively, and $2 and $261 for the nine months ended September 30, 2002, and 2001, respectively. Amounts are included in stock-based compensation expenses.

(2)

Exclusive of non-cash stock-based compensation expense (credit) of $(1) and $90 for the three months ended September 30, 2002, and 2001, respectively, and $28 and $593 for the nine months ended September 30, 2002, and 2001, respectively. Amounts are included in stock-based compensation expenses.

(3)

Exclusive of non-cash stock-based compensation expense (credit) of $(99) and $366 for the three months ended September 30, 2002, and 2001, respectively, and $(363) and $1,470 for the nine months ended September 30, 2002, and 2001, respectively. Amounts are included in stock-based compensation expenses.

(4)

Exclusive of non-cash stock-based compensation expense of $10 and $65 for the three months ended September 30, 2002, and 2001, respectively, and $53 and $619 for the nine months ended September 30, 2002, and 2001, respectively. Amounts are included in stock-based compensation expenses.

(5)

Exclusive of non-cash stock-based compensation credit of $0 and $(336) for the nine months ended September 30, 2002 and 2001, respectively. Amounts are included in stock-based compensation expenses.

See accompanying Notes to Condensed Consolidated Financial Statements

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TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

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TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

(1)  Basis of Presentation

        The condensed consolidated financial statements included herein have been prepared by Tumbleweed Communications Corp. ("Tumbleweed" or "we") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the SEC on March 29, 2002.

        The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the financial position of Tumbleweed and its subsidiaries as of September 30, 2002, and the results of operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. The results for the three and nine months ended September 30, 2002 and 2001 are not necessarily indicative of the results expected for the full fiscal year.

        The accompanying consolidated condensed financial statements include the accounts of Tumbleweed and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2)  Restructuring

        In January 2001, our Board of Directors approved a restructuring program intended to align our cost structures with our company-wide focus on customer service, sales and research and development. The restructuring involved consolidating our facilities in the United States and closing international sales office locations in Paris, France; Chatsworth, Australia; and Stockholm, Sweden. The restructuring program also realigned our professional services organization and reduced headcount in most areas of our business.

        Restructuring and related charges expensed during the nine months ended September 30, 2001 were comprised of the following (in thousands):

        Employee separation for approximately 100 employees included severance pay and medical and other benefits. The restructuring charges were partially offset by a non-cash credit related to previously recorded stock-based compensation on unvested options held by terminated employees. During the quarter ended March 31, 2002, we made lease settlement payments of $2.3 million on facilities no longer required primarily due to the reduction in headcount. As of September 30, 2002, we had no remaining liabilities from the January 2001 restructuring.

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(3)  Goodwill Impairment

        During the three months ended March 31, 2001, we performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Interface Systems, Inc. The assessment was performed primarily due to changes in the economy, the overall decline in the industry growth rate, and our lower actual and projected operating results including that of the business acquired from Interface. Our assessment was supported by the significant sustained decline in our stock price since the valuation date of the shares issued in the Interface acquisition. As a result of the assessment, we recorded a $51.0 million impairment charge to reduce goodwill and other intangible assets to their estimated fair value. The charge was based upon the estimated discounted cash flows over the remaining useful life of the goodwill and other intangible assets using a discount rate of 15%. The assumptions supporting the cash flows, including the discount rate, were determined using our best estimates as of March 31, 2001. The remaining intangible assets were amortized in full over their remaining useful life during 2001. The impairment consisted of the following charge (in thousands):

        We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets, on January 1, 2002. In connection with SFAS 142's transitional goodwill impairment evaluation, we engaged a third-party independent valuation specialist to assess whether there was an indication that goodwill recorded in connection with our acquisition of Tumbleweed Communications KK ("TKK"), our majority-owned subsidiary in Japan, was impaired as of the date of adoption. To accomplish this, we determined the carrying value of our reporting unit by assigning our assets and liabilities, including the existing goodwill and intangible assets, to our reporting unit as of the date of adoption. As our TKK reporting unit's carrying amount exceeded its fair value, indicating that TKK's goodwill might be impaired, we performed the second step of the transitional impairment test. In the second step, we compared the implied fair value of TKK's goodwill, determined by allocating TKK's fair value to all of its assets (recognized and unrecognized) and liabilities to its carrying amount, both of which were measured as of the date of adoption. A transitional impairment loss of $974,000 was recognized as the cumulative effect of a change in accounting principle in our consolidated statement of operations.

        During the six months ended June 30, 2002, TKK experienced a sustained decline in operations. As a result of this decline, as of June 30, 2002, we wrote-off $5.7 million in goodwill, which was the remainder of the goodwill balance. During the three months ended September 30, 2002 we decided to change our sales distribution model in Japan from direct sales operations to indirect sales operations. To initiate this change in Japan and based on our review of the financial position of TKK, we began the liquidation of TKK. As a result of the liquidation of TKK, during the three months ended September 30, 2002 we recorded a net operating expense of $377,000 related to the write-off of the balance sheet of TKK and our eighty percent equity position in TKK.

(4)  Net Loss Per Share

        Basic and diluted net loss per common share are presented in conformity with SFAS 128, Earnings Per Share, for all periods presented. In accordance with SFAS 128, basic net loss per common share has been computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase.

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        The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

        We exclude potentially dilutive securities from our diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following common stock equivalents were excluded from the net loss per share computation (in thousands):

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(5)  Comprehensive Loss

        Comprehensive loss includes our net loss as well as foreign currency translation adjustments, recorded net of tax. Comprehensive loss for the three and nine months ending September 30, 2002 and 2001, respectively, is as follows (in thousands):

(6)  Segment Information

        As defined by SFAS 131, Disclosure About Segments of an Enterprise and Related Information, our chief operating decision-makers are our Chief Executive Officer ("CEO") and our Chief Operating Officer ("COO"). Our CEO and COO review financial information presented on a consolidated basis accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. The consolidated financial information reviewed by our CEO and COO is the information presented in the accompanying consolidated statement of operations. Therefore, we operate in a single operating segment, secure messaging applications for businesses using the Internet.

        Revenue information regarding operations in the different geographic regions is as follows (in thousands):

        Substantially all of our long-lived assets are located in the United States.

(7)  Contingencies

        On July 7, 2000, three complaints were filed by David H. Zimmer, Congressional Securities, Inc. and other plaintiffs against Interface Systems, Inc. (a company Tumbleweed acquired in 2000) and various additional defendants, including Interface's prior 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 complaints contained substantially similar allegations of false and misleading representations by various defendants allegedly designed to inflate Interface's stock price. The complaints sought relief under the federal securities laws on behalf of purported classes of persons who purchased, held, or sold shares of Interface stock, and under various other causes of action. On July 27, 2001, the Court granted our motion to transfer the lawsuits to the United States District Court for the Eastern District of Michigan, which, on April 19, 2002, dismissed with prejudice plaintiffs' class allegations and federal securities law claims that purportedly arose under Section 10(b) of the Securities Exchange Act of 1934. Also on April 19, 2002, plaintiffs filed a Second Amended

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Consolidated Complaint that (i) consolidated the separate actions into one action, (ii) added certain new plaintiffs, (iii) withdrew Congressional Securities, Inc. as a plaintiff, and (iv) added claims for breach of fiduciary duty and negligent misrepresentation, which are the sole remaining claims in the case. On May 20, 2002, we filed a motion to dismiss these claims, which motion has remained pending before the Court while the case has continued to proceed through the discovery phase. The accompanying financial statements do not include a reserve for any costs for damages, if any, that might result from this uncertainty. We believe this consolidated action is without merit and intend to vigorously defend against it and seek its dismissal.

        Although we believe this lawsuit is without merit, no assurance can be given about its outcome, and an adverse outcome could significantly harm our business and operating results. Moreover, the costs in defending this lawsuit could harm future operating results.

(8)  Recent Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

        We adopted the provisions of SFAS 142 on January 1, 2002. In connection with SFAS 142's transitional goodwill impairment evaluation, we engaged a third-party independent valuation specialist to assess whether there was an indication that goodwill recorded in connection with our acquisition of TKK was impaired as of the date of adoption. To accomplish this, we determined the carrying value of our reporting unit by assigning our assets and liabilities, including the existing goodwill and intangible assets, to our reporting unit as of the date of adoption. As our TKK reporting unit's carrying amount exceeded its fair value, indicating that TKK's goodwill might be impaired, we performed the second step of the transitional impairment test. In the second step, we compared the implied fair value of TKK's goodwill, determined by allocating TKK's fair value to all of its assets (recognized and unrecognized) and liabilities to its carrying amount, both of which were measured as of the date of adoption. A transitional impairment loss of $974,000 was recognized as the cumulative effect of a change in accounting principle in our consolidated statement of operations.

        In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. We are required to adopt the provisions of SFAS 143 as of January 1, 2003. We do not expect the adoption of SFAS 143 to have a material impact on our financial position or results of operations.

        In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of SFAS 121. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion 30 for the disposal of a segment of a business. By broadening the presentation of discontinued operations to include more disposal transactions, SFAS 144 enhances companies' ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations

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of an entity. We adopted SFAS 144 as of January 1, 2002. The adoption of SFAS 144 did not have a material impact on our financial position or results of operations.

        In June 2002, the FASB issued SFAS 146, Accounting f