TUMBLEWEED FACES TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY
PREVENT IT FROM SUCCESSFULLY INTEGRATING WORLDTALK, INTERFACE, OR ANY OTHER
COMPANY IT 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 be a complex, time consuming and expensive process that may disrupt Tumbleweed's business if not completed in a timely and efficient manner. Additionally, the integration of any other company or business Tumbleweed may acquire in the future will be a complex, time consuming and expensive process that may disrupt its business if not completed in a timely and efficient manner. Whenever an acquisition is completed, Tumbleweed must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. In particular, Tumbleweed is currently evaluating and upgrading its management information systems and establishing uniformity among its systems and those formerly operated by Worldtalk and Interface. Tumbleweed will be required to do the same for any subsequently acquired company. Tumbleweed may encounter substantial difficulties, costs and delays involved in integrating the operations of the Worldtalk, Interface, or any other company, 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, Tumbleweed may not be successful in integrating Worldtalk, Interface or any other business or technologies it acquires and may not achieve anticipated revenue and cost benefits. Tumbleweed also cannot guarantee that these acquisitions will result in sufficient revenues or earnings to justify its investment in, or expenses related to, this acquisition. Nor can Tumbleweed guarantee that any anticipated synergies will develop. If Tumbleweed fails to execute its acquisition strategy successfully for any reason, its business will suffer significantly.
TUMBLEWEED'S PRODUCT DEVELOPMENT EFFORTS MAY BE HINDERED BY A VARIETY OF
FACTORS.
Tumbleweed's new product releases may not be as timely scalable, or successful enough to meet customers' requirements. In addition, Tumbleweed also faces 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 Tumbleweed has created a platform-independent
architecture for the Tumbleweed IME products, the integration of products from Worldtalk may result in unanticipated architectural incompatibilities that would require additional time and engineering resources to resolve. The loss of key engineering personnel from Worldtalk, Interface or any other entities Tumbleweed may acquire may increase the time and resources needed to resolve these and other technical integration issues. Tumbleweed's offices and Interface's offices are in different locations, which may create coordination issues and could increase employee turnover. In addition, the installation of integrated or complementary software products at customer sites may result in difficulties associated with customer-specific installation processes.
TUMBLEWEED HAS EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON ITS
RESOURCES AND TUMBLEWEED'S FAILURE TO MANAGE GROWTH COULD CAUSE ITS
BUSINESS TO SUFFER.
Tumbleweed has expanded its operations rapidly and intends to continue this expansion. For example, the number of Tumbleweed's employees increased from 179 as of September 30, 1999 to 375 as of September 30, 2000. This expansion has placed, and is expected to continue to place, a significant strain on managerial, informational, and operational resources. To manage any further growth, Tumbleweed will need to enhance and improve its managerial capacity, and improve or replace its existing operational, customer service and financial systems, procedures and controls. Any failure to properly manage these systems and procedural transitions could impair Tumbleweed's ability to attract and service customers, and could cause Tumbleweed to incur higher operating costs and delays in the execution of Tumbleweed's business plan. Tumbleweed will also need to continue the expansion of Tumbleweed's operations and employee base. Tumbleweed's management may not be able to hire, train, retain, motivate and manage required personnel. In addition, Tumbleweed's management may not be able to successfully identify, manage and exploit existing and potential market opportunities. If Tumbleweed cannot manage growth effectively, Tumbleweed's business and operating results could suffer.
TUMBLEWEED HAS A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM
TUMBLEWEED'S BUSINESS.
If Tumbleweed is unable to license its services to new customers on a timely basis or if its existing and proposed customers and their end-users suffer delays in the implementation and adoption of Tumbleweed's services, Tumbleweed's revenue may be limited and business and prospects may be harmed. Tumbleweed's customers must evaluate its technology and integrate its products and services into the products and services they provide. In addition, Tumbleweed's customers may need to adopt a comprehensive sales, marketing and training program in order to effectively implement Tumbleweed IME. Finally, Tumbleweed must coordinate with its customers using its product for third-party communications in order to assist end-users in the adoption of its products in order to generate usage fees. For these and other reasons, the cycle associated with establishing licenses in order to generate initial license fees and implementation of Tumbleweed products in order to generate material transaction-based services revenue can be lengthy. This cycle is also subject to a number of significant delays over which Tumbleweed has little or no control. Forecasts about license revenue may be inaccurate as a result of any or all of these factors, and inaccurate forecasts may cause Tumbleweed's business, or market valuation, to suffer.
A FAILURE TO PROTECT TUMBLEWEED'S INTELLECTUAL PROPERTY MAY SIGNIFICANTLY
HARM ITS BUSINESS.
Tumbleweed currently relies on a combination of patents, trade secrets, copyrights, trademarks and licenses, together with non-disclosure and confidentiality agreements to establish and protect its proprietary rights in its products. Tumbleweed holds certain patent rights with respect to some of its products and currently has a lawsuit pending against The docSpace Company, Inc. alleging infringement of one of its patents by docSpace. Tumbleweed has filed, and expects in the future to file,
additional patent applications. Tumbleweed's existing patents or trademarks, as well as any future patents or trademarks obtained by it, may be challenged, invalidated or circumvented, or its competitors may independently develop or patent technologies that are substantially equivalent or superior to its technology. Further patent or trademark protection may not be obtained, in the United States or elsewhere, for Tumbleweed's existing or new products, applications or services. In addition, further protection, if obtained, may not be effective. In some countries, meaningful patent or trademark protection is not available.
To date, Tumbleweed has not received any claims of infringement upon the proprietary rights of third parties. However, third parties could assert infringement claims against it in the future, and the cost of responding to such assertions, regardless of their validity, could be significant. In addition, such claims may be found to be valid and could result in awards against Tumbleweed, which could harm its business.
Tumbleweed also relies, to some extent, on unpatented trade secrets and other unpatented proprietary information. Tumbleweed's policy is to have employees sign confidentiality agreements, to have selected parties sign non-competition agreements and to have third parties sign non-disclosure agreements. Although Tumbleweed takes precautionary measures to maintain its unpatented proprietary information, others may acquire equivalent information or otherwise gain access to or disclose its proprietary information and it may be unable to meaningfully protect its rights to its proprietary information.
TUMBLEWEED'S EXPANSION INTO INTERNATIONAL MARKETS MAY BE DIFFICULT OR
UNPROFITABLE.
Tumbleweed has recently begun to invest significant financial and managerial resources to expand its sales and marketing operations in international markets and has opened sales offices in Germany, the United Kingdom, Japan, France, Hong Kong, Australia, The Netherlands and Sweden. In the first nine months of fiscal 2000 and in fiscal 1999, Tumbleweed derived 37% and 41%, respectively, of its revenue from international operations. However, to date, Tumbleweed has limited experience in international operations and may not be able to compete effectively in international markets. A key component of its long-term strategy is to further expand into international markets, and Tumbleweed must continue to devote substantial resources to its international operations in order to succeed in these markets. In this regard, Tumbleweed may encounter difficulties such as:
- unexpected changes in regulatory requirements and trade barriers applicable to the Internet or its business;
- challenges in staffing and managing foreign operations, including employment laws and practices as it expands into continental Europe;
- seasonal reductions in business activity and economic downturns, in particular, in Europe and Asia;
- longer payment cycles and problems in collecting accounts receivable;
- problems associated with the conversion of various European currencies into a single currency, the Euro;
- legal challenges or regulatory requirements related to the export or import of encryption technologies;
- differing technology standards; and
- reduced protection for intellectual property rights in certain countries in which it operates or plans to operate.
In addition, Tumbleweed's expansion into international markets will increasingly subject it to fluctuations in currency exchange rates. In the future, an increasing number of our contracts may be denominated in currencies other than U.S. dollars. Tumbleweed does not presently engage in hedging or similar transactions to protect it from currency fluctuations. Any of the foregoing difficulties of conducting business internationally could harm Tumbleweed's international operations and, consequently, its business and prospects.
IF TUMBLEWEED DOES NOT PROVIDE ADEQUATE SUPPORT SERVICES TO ITS CUSTOMERS TO
IMPLEMENT ITS PRODUCTS, IT MAY LOSE CUSTOMERS OR REALIZE LOWER TRANSACTION
VOLUME.
Tumbleweed's professional services organization assists its customers in implementing its products through software installation, integration with existing customer systems, contract engineering, consulting and training. If the professional services organization does not adequately assess customer requirements or address technical problems, customers may seek to discontinue their relationships with Tumbleweed due to dissatisfaction with the product or its customer support. Furthermore, these customers may realize lower transaction volume than they could have otherwise achieved because they did not fully capitalize on the product in ways that could have been addressed by Tumbleweed's professional services organization. Tumbleweed's products must be integrated with existing hardware and complex software products of its customers or other third parties, and its customers may not have significant experience with the implementation of products similar to its own. In addition, the provision of contract engineering and integration services is an increasingly important aspect of Tumbleweed's strategy to strengthen customer loyalty to its product and company. Therefore, Tumbleweed's business and future prospects significantly depend on the strength of its professional services organization and Tumbleweed's ability to leverage this organization by augmenting its reach through trained and qualified systems integrators.
PRODUCT PERFORMANCE PROBLEMS, SYSTEM FAILURES AND INTERNET PROBLEMS COULD
SEVERELY DAMAGE TUMBLEWEED'S BUSINESS.
The ability of Tumbleweed's customers to use Tumbleweed-based services depends on stable product performance, and the efficient and uninterrupted operation of the computer and communications hardware as well as the software and Internet network systems that they maintain. Although Tumbleweed's ability to manage the effects of system failures which occur in computer hardware, software and network systems is limited, the occurrences of these failures could harm its reputation, business and prospects. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and the Internet could face similar outages and delays in the future. In addition, an increasing number of its customers require Tumbleweed to provide computer and communications hardware, software and Internet networking systems to them as an outsourced data center service. All data centers, whether hosted by Tumbleweed, its customers or by an independent third party to which it outsources this function, are vulnerable to damage or interruption from fire, flood, earthquake, power loss, telecommunications failure or other similar events.
IF TUMBLEWEED'S SOFTWARE CONTAINS ERRORS, IT MAY LOSE CUSTOMERS OR
EXPERIENCE REDUCED MARKET ACCEPTANCE OF ITS PRODUCTS.
Tumbleweed's software products are inherently complex and may contain defects and errors that are detected only when the products are in use. In addition, some of Tumbleweed's customers require or may require enhanced customization of our software for their specific needs, and these modifications may increase the likelihood of undetected defects or errors. Further, Tumbleweed often renders implementation, consulting and other technical services, the performance of which typically involves working with sophisticated software, computing and networking systems, and it could fail to meet customer expectations as a result of any defects or errors. As a result, we may lose customers,
customers may fail to implement our products more broadly within their organization and it may experience reduced market acceptance of its products. Tumbleweed's products are designed to facilitate the secure transmission of sensitive business information to specified parties outside the business over the internet. As a result, the reputation of its software products for providing good security is vital to their acceptance by customers. Tumbleweed's products may be vulnerable to break-ins, theft or other improper activity that could jeopardize the security of information for which it is responsible. Problems caused by product defects, failure to meet project milestones for services or security breaches could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of research and development resources, harm to Tumbleweed's reputation, or increased insurance, service and warranty costs. To address these problems, Tumbleweed may need to expend significant capital resources that may not have been budgeted.
IF TUMBLEWEED LOSES THE SERVICES OF KEY MANAGEMENT PERSONNEL, ITS ABILITY TO
DEVELOP OUR BUSINESS AND SECURE CUSTOMER RELATIONSHIPS WILL SUFFER.
Tumbleweed is substantially dependent on the continued services and performance of its senior management and other key personnel. The loss of the services of any of its executive officers or other key employees, particularly our co-founders, Jeffrey C. Smith and Jean-Christophe D. Bandini, could significantly delay or prevent the achievement of Tumbleweed's development and strategic objectives. In addition, the loss of key members of Tumbleweed's senior management, including Kerry S. Champion and Shomit A. Ghose, could harm its ability to develop its business. Moreover, the loss of key members of its sales organization, including Donald R. Gammon and Donald N. Taylor, could harm Tumbleweed's ability to secure key relationships contemplated by its business plan. Tumbleweed does not have long-term employment agreements with any of its key personnel. The loss of services of any of our senior management or other key personnel could significantly harm Tumbleweed's business and prospects.
TUMBLEWEED'S EFFORTS TO ESTABLISH, MAINTAIN AND STRENGTHEN ITS BRANDS WILL
REQUIRE SIGNIFICANT EXPENDITURES AND MAY NOT BE SUCCESSFUL.
If the marketplace does not associate Tumbleweed's brands with high quality Internet communication services, it may be more difficult for it to attract new customers or introduce future products and services. The market for Tumbleweed's services is new. Therefore, Tumbleweed's failure to establish brand recognition at this stage could harm its ability to compete in the future with other companies that successfully establish a brand name for their services. Tumbleweed must succeed in its marketing efforts, provide high quality services and increase its user base in order to build its brand awareness and differentiate its products from those of Tumbleweed's competitors. These efforts have required significant expenditures to date. Moreover, Tumbleweed believes that these efforts will require substantial commitments of resources in the future as its brands become increasingly important to its overall strategy and as the market for its services grows.
BECAUSE TUMBLEWEED PRODUCTS UTILIZE THE INTERNET, IF USE OF THE INTERNET
DOES NOT INCREASE, THE LEVEL OF USE OF ITS PRODUCTS WILL SUFFER.
If the Internet and other products and services necessary for the utilization of Tumbleweed's products are not sufficiently developed, fewer customers and end-users will use its products and its business will be harmed. In particular, the success of Tumbleweed's products and services will depend on the development and maintenance of adequate Internet infrastructure, such as a reliable network backbone with the necessary speed, data capacity and other features demanded by users. Moreover, Tumbleweed's success will also depend on the timely development of complementary products or services such as high-speed modems for providing reliable Internet access and services and this may not occur. Because the online exchange of information is new and evolving, the Internet may not prove to
be a viable platform for secure online communication services in the long term. The Internet has experienced, and is expected to continue to experience, significant growth in the numbers of users and amount of traffic. As the Internet continues to experience increased numbers of users and frequency of use, or if its users require increasingly more resources, the Internet infrastructure may not be able to support the demands placed on it. As a result, the performance or reliability of the Internet may be harmed. This in turn could decrease the level of Internet usage and also the level of utilization of Tumbleweed products and services.
GOVERNMENT REGULATION RELATING TO THE INTERNET MAY INCREASE COSTS OF DOING
BUSINESS OR REQUIRE CHANGES IN TUMBLEWEED'S BUSINESS MODEL.
Tumbleweed is subject to regulations applicable to businesses generally and laws or regulations directly applicable to companies utilizing the Internet. Although there are currently few laws and regulations directly applicable to the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws could cover issues like user privacy, pricing, content, intellectual property, distribution, taxation, antitrust, legal liability and characteristics and quality of products and services. The adoption of any additional laws or regulations could decrease the demand for Tumbleweed products and services and increase its cost of doing business or otherwise harm its business or prospects. Delays in the enactment of expected regulations may result in delayed software purchasing by our customers who are subject to such regulations, which in turn may harm our business.
Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues like property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce. New state tax regulations may subject Tumbleweed to additional state sales and income taxes. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to Tumbleweed's business, or the application of existing laws and regulations to the Internet and commercial online services could harm its ability to conduct business and harm operating results.
TUMBLEWEED'S PRODUCTS ARE SUBJECT TO IMPORT AND EXPORT CONTROLS, AND IT
MAY BE UNABLE TO OBTAIN NECESSARY APPROVALS.
Exports of software products utilizing encryption technology are generally restricted by the U.S. and various foreign governments. All cryptographic products require export licenses from certain U.S. government agencies. Tumbleweed has obtained approval to export products using up to 128-bit symmetric encryption and 1024-bit public key encryption, including IME Server, IME Desktop, IME Receive Applet, IME Remote API using OmniORB with SSL, MMS WorldWide/56 and MMS Strong WorldWide/128. Tumbleweed is not exporting other products and services that are subject to export control under U.S. law. However, the list of products and countries for which export approval is required, and the related regulatory policies, could be revised, and Tumbleweed may not be able to obtain necessary approval for the export of future products. The inability to obtain required approvals under these regulations could limit Tumbleweed's ability to make international sales. Furthermore, competitors may also seek to obtain approvals to export products that could increase the amount of competition Tumbleweed faces. Additionally, countries outside of the U.S. could impose regulatory restrictions impairing Tumbleweed's ability to import its products into those countries.
COSTS OF COMMUNICATING VIA THE INTERNET COULD INCREASE IF ACCESS FEES ARE
IMPOSED.
Certain local telephone carriers have asserted that the increasing popularity and use of the Internet has burdened the existing telecommunications infrastructure, and that many areas with high Internet use have begun to experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service providers and online service providers. If these access fees are imposed, the costs of communicating on the Internet could increase substantially, potentially slowing the increasing use of the Internet. This could in turn decrease demand for Tumbleweed's services or increase the costs of doing business.
TUMBLEWEED MAY HAVE LIABILITY FOR INTERNET CONTENT.
As a provider of Internet communication products and services, Tumbleweed faces potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials transmitted online. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could be costly and could require Tumbleweed to implement measures to reduce exposure to this liability. This may require Tumbleweed to expend substantial resources or to discontinue selected service or product offerings.
Tumbleweed does not and cannot screen all of the content generated by users of its product but may be exposed to liability with respect to this content. Furthermore, certain foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the U.S. Other countries, such as China, regulate or prohibit the transport of telephonic data in their territories. Failure to comply with regulations in a particular jurisdiction could result in fines or criminal penalties or the termination of service in one or more jurisdictions. Moreover, the increased attention focused on liability issues as a result of lawsuits and legislative proposals could impact the growth of Internet use. Liability insurance may not cover claims of these types, or may not be adequate to indemnify against all liability that may be imposed.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY
MAY DEPRESS TUMBLEWEED'S STOCK PRICE.
The stock market has experienced significant price and volume fluctuations and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against companies. The institution of this type of litigation against Tumbleweed could result in substantial costs and a diversion of Tumbleweed management's attention and resources, which could harm its business and prospects.
TUMBLEWEED'S MANAGEMENT WILL BE ABLE TO SUBSTANTIALLY INFLUENCE CORPORATE
EVENTS BECAUSE THEY OWN A SIGNIFICANT PERCENTAGE OF ITS STOCK.
Tumbleweed's present directors, executive officers and principal stockholders as a group beneficially own approximately 31.6% of the outstanding common stock. Accordingly, if all or particular stockholders were to act together, they would be able to exercise significant influence over or control the election of Tumbleweed's board of directors, its management and policies and the outcome of particular corporate transactions or other matters submitted to its stockholders for approval, including mergers, consolidations and the sale of all or substantially all of its assets.
TUMBLEWEED'S CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT
COULD DISCOURAGE OR PREVENT AN ACQUISITION OF TUMBLEWEED, WHICH COULD
DEPRESS ITS STOCK PRICE.
Tumbleweed's certificate of incorporation and bylaws may inhibit changes of control that are not approved by its board of directors. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In particular, Tumbleweed's certificate of incorporation provides for a classified board of directors and prohibits stockholder action by written consent. These provisions require advance notice for nomination of directors and stockholders' proposals. In addition, as a Delaware corporation, Tumbleweed is subject to Section 203 of the
Delaware General Corporation Law. In general, this law prevents a person who becomes the owner of 15% or more of the corporation's outstanding voting stock from engaging in specified business combinations for three years unless specified conditions are satisfied. In addition, Tumbleweed's certificate of incorporation allows its board of directors to issue preferred stock without further stockholder approval. This could have the effect of delaying, deferring or preventing a change in control. The issuance of preferred stock also could effectively limit the voting power of the holders of Tumbleweed common stock. The provisions of Tumbleweed's certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage or prevent an acquisition or disposition of its business.
FUTURE SALES OF COMMON STOCK BY TUMBLEWEED STOCKHOLDERS COULD DEPRESS
TUMBLEWEED'S STOCK PRICE.
Tumbleweed cannot predict if future sales of its common stock, or the availability of its common stock for sale, will depress the market price for its common stock or its ability to raise capital by offering equity |
