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 March 31, 2003
Commission File Number: 000-26223
TUMBLEWEED COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
| DELAWARE |
94-3336053 | |
| (State of other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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 x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of shares of common stock outstanding as of April 30, 2003 was 30,508,926.
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; consummation of the pending merger with Valicert; benefits of the pending merger with Valicert; the future business, financial condition and results of operations of the combined company 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, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “predicts,” “projects,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” or the negative of these terms and other comparable terminology; including, but not limited to, the following:
| • | any projections of revenues, earnings, synergies or other financial items; |
| • | any statements of the plans, strategies and objectives of management for future operations; |
| • | any statements regarding future economic conditions or performance; |
| • | any statements relating to integration or restructuring plans; |
| • | any statements of belief; and |
| • | any statements of assumptions underlying any of the foregoing. |
These forward-looking statements are only predictions, not historical facts. These forward-looking statements involve certain risks and uncertainties, as well as assumptions, that could cause actual results, levels of activity, performance, achievements and events to differ materially from those stated, anticipated 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” in section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. You should consider the risks factors and uncertainties under the caption “Risks and Uncertainties That You Should Consider Before Investing in Tumbleweed,” among other things, in evaluating Tumbleweed’s prospects and future financial performance. Before making a decision to invest in Tumbleweed, you should be aware that the occurrence of the events described in the risk factors could harm the business, results of operations and financial condition of Tumbleweed. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. Tumbleweed disclaims any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, or any obligation to explain the reasons why actual results may differ.
TUMBLEWEED COMMUNICATIONS CORP.
| Page | ||||
| Item 1 |
3 | |||
| Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 |
3 | |||
| 4 | ||||
| 5 | ||||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
6 | |||
| Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | ||
| Item 3 |
31 | |||
| Item 4 |
31 | |||
| Item 1 |
32 | |||
| Item 6 |
33 | |||
| 35 | ||||
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™.
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
| March 31, 2003 |
December 31, 2002 |
|||||||
| (unaudited) |
||||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ |
27,001 |
|
$ |
29,210 |
| ||
| Accounts receivable, net |
|
4,017 |
|
|
4,764 |
| ||
| Other current assets |
|
1,110 |
|
|
1,149 |
| ||
| Total current assets |
|
32,128 |
|
|
35,123 |
| ||
| Property and equipment, net |
|
1,469 |
|
|
1,794 |
| ||
| Other assets |
|
1,519 |
|
|
892 |
| ||
| Total assets |
$ |
35,116 |
|
$ |
37,809 |
| ||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ |
1,958 |
|
$ |
1,653 |
| ||
| Current installments of long-term debt |
|
— |
|
|
33 |
| ||
| Accrued liabilities |
|
4,968 |
|
|
5,234 |
| ||
| Deferred revenue |
|
6,643 |
|
|
6,903 |
| ||
| Total current liabilities |
|
13,569 |
|
|
13,823 |
| ||
| Deferred revenue, excluding current portion |
|
1,915 |
|
|
2,061 |
| ||
| Other long-term liabilities |
|
77 |
|
|
94 |
| ||
| Total liabilities |
|
15,561 |
|
|
15,978 |
| ||
| Stockholders’ equity: |
||||||||
| Common stock |
|
31 |
|
|
31 |
| ||
| Additional paid-in capital |
|
293,463 |
|
|
293,443 |
| ||
| Treasury stock |
|
(796 |
) |
|
(796 |
) | ||
| Deferred compensation expense |
|
(32 |
) |
|
(61 |
) | ||
| Accumulated other comprehensive loss |
|
(519 |
) |
|
(676 |
) | ||
| Accumulated deficit |
|
(272,592 |
) |
|
(270,110 |
) | ||
| Total stockholders’ equity |
|
19,555 |
|
|
21,831 |
| ||
| Total liabilities and stockholders’ equity |
$ |
35,116 |
|
$ |
37,809 |
| ||
See accompanying Notes to Condensed Consolidated Financial Statements
3
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2003 |
2002 |
|||||||
| Revenue: |
||||||||
| Product and IP revenue |
$ |
2,910 |
|
$ |
5,524 |
| ||
| Service revenue |
|
2,871 |
|
|
2,570 |
| ||
| Total revenue |
|
5,781 |
|
|
8,094 |
| ||
| Cost of revenue(1) |
|
1,413 |
|
|
2,183 |
| ||
| Gross profit |
|
4,368 |
|
|
5,911 |
| ||
| Operating expenses: |
||||||||
| Research and development(2) |
|
1,963 |
|
|
3,208 |
| ||
| Sales and marketing(3) |
|
3,441 |
|
|
5,616 |
| ||
| General and administrative(4) |
|
1,422 |
|
|
1,603 |
| ||
| Stock-based compensation |
|
34 |
|
|
262 |
| ||
| Total operating expenses |
|
6,860 |
|
|
10,689 |
| ||
| Operating loss |
|
(2,492 |
) |
|
(4,778 |
) | ||
| Other income, net |
|
14 |
|
|
407 |
| ||
| Net loss before provision for taxes |
|
(2,478 |
) |
|
(4,371 |
) | ||
| Provision for taxes |
|
4 |
|
|
4 |
| ||
| Net loss before cumulative effect of change in accounting principle |
|
(2,482 |
) |
|
(4,375 |
) | ||
| Cumulative effect of change in accounting principle |
|
— |
|
|
974 |
| ||
| Net loss |
$ |
(2,482 |
) |
$ |
(5,349 |
) | ||
| Net loss per share before cumulative effect of change in accounting principle—basic and diluted |
$ |
(0.08 |
) |
$ |
(0.14 |
) | ||
| Cumulative effect of change in accounting principle per share—basic and diluted |
|
— |
|
|
(0.04 |
) | ||
| Net loss per share—basic and diluted |
$ |
(0.08 |
) |
$ |
(0.18 |
) | ||
| Weighted average shares—basic and diluted |
|
30,494 |
|
|
30,527 |
| ||
| (1) | Exclusive of non-cash stock-based compensation expense of $8 and $77 for the three months ended March 31, 2003 and 2002, respectively. |
| (2) | Exclusive of non-cash stock-based compensation expense of $5 and $23 for the three months ended March 31, 2003 and 2002, respectively. |
| (3) | Exclusive of non-cash stock-based compensation expense of $11 and $131 for the three months ended March 31, 2003 and 2002, respectively. |
| (4) | Exclusive of non-cash stock-based compensation expense of $10 and $31 for the three months ended March 31, 2003 and 2002, respectively. |
See accompanying Notes to Condensed Consolidated Financial Statements
4
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three months ended March 31, |
||||||||
| 2003 |
2002 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ |
(2,482 |
) |
$ |
(5,349 |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Stock-based compensation expense |
|
34 |
|
|
262 |
| ||
| Depreciation and amortization |
|
359 |
|
|
859 |
| ||
| Bad debt expense |
|
31 |
|
|
375 |
| ||
| Minority interest |
|
— |
|
|
(148 |
) | ||
| Cumulative effect of change in accounting principle |
|
— |
|
|
974 |
| ||
| Loss on disposal of property and equipment |
|
30 |
|
|
48 |
| ||
| Other non-cash items |
|
— |
|
|
(762 |
) | ||
| Changes in operating assets and liabilities |
||||||||
| Accounts receivable |
|
716 |
|
|
952 |
| ||
| Other current assets and other assets |
|
(588 |
) |
|
3,113 |
| ||
| Accounts payable and accrued liabilities |
|
39 |
||||||