UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 16, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-------------
Commission file number 333-57931
TUMBLEWEED, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1327945
(State or other jurisdiction of ( I.R.S. Employer Identification No.)
incorporation or organization)
2301 River Road, Suite 200, Louisville, Kentucky 40206
(Address of principal executive offices)
(502) 893-0323
(Registrants 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
The number of shares of common stock, par value of $.01 per share, outstanding
on July 12, 2002 was 5,916,153.
1
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Operations for the twenty-four
weeks and twelve weeks ended June 16, 2002 and the six
months and three months ended June 30, 2001 3
b) Consolidated Balance Sheets as of June 16, 2002 and
December 31, 2001 4
c) Consolidated Statements of Cash Flows for the twenty-four
weeks ended June 16, 2002 and the six months ended
June 30, 2001 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
Twenty-Four Six Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
June 16, June 30, June 16, June 30,
2002 2001 2002 2001
---------------- -------------- ---------------- ---------------
Revenues:
Restaurant sales $ 26,559,567 $ 27,744,945 $ 13,095,974 $ 14,093,293
Commissary sales 796,479 917,058 414,593 461,311
Franchise fees and royalties 541,557 657,607 291,709 321,161
Other revenues 294,890 260,699 205,462 70,280
---------------- -------------- ---------------- ---------------
Total revenues 28,192,493 29,580,309 14,007,738 14,946,045
Operating expenses:
Restaurant cost of sales 8,055,402 8,823,012 3,982,795 4,444,606
Commissary cost of sales 711,597 800,233 364,662 402,717
Operating expenses 14,660,313 15,172,415 7,269,656 7,642,136
Selling, general and administrative expenses 2,847,591 3,025,240 1,410,514 1,464,361
Depreciation and amortization 909,861 1,169,943 452,542 595,375
---------------- -------------- ---------------- ---------------
Total operating expenses 27,184,764 28,990,843 13,480,169 14,549,195
---------------- -------------- ---------------- ---------------
Income from operations 1,007,729 589,466 527,569 396,850
Other income (expense):
Interest expense, net (464,472) (725,014) (230,394) (342,990)
Equity in income of TW-Springhurst - 33,902 - 21,219
---------------- -------------- ---------------- ---------------
Total other expense (464,472) (691,112) (230,394) (321,771)
---------------- -------------- ---------------- ---------------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 543,257 (101,646) 297,175 75,079
Provision (benefit) for income taxes - current and (30,494
deferred 239,036 ) 130,757 27,828
---------------- -------------- ---------------- ---------------
Income (loss) before cumulative effect of a change
in accounting principle 304,221 (71,152) 166,418 47,251
Cumulative effect of a change in accounting
principle, net of tax ($845,873) (1,503,773) - - -
---------------- -------------- ---------------- ---------------
Net income (loss) $ (1,199,552) $ (71,152) $ 166,418 $ 47,251
================ ============== ================ ===============
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of a
change in accounting principle $ 0.05 $ (0.01) $ 0.03 $ 0.01
Cumulative effect of a change in accounting
principle,net of tax (0.25) - - -
---------------- -------------- ---------------- ---------------
Net income (loss) $ (0.20) $ (0.01) $ 0.03 $ 0.01
================ ============== ================ ===============
See accompanying notes.
3
Tumbleweed, Inc.
Consolidated Balance Sheets
June 16,
2002 December 31,
(Unaudited) 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 331,852 $ 757,266
Accounts receivable, net of allowance of $4,202
in 2001 681,134 350,586
Inventories 1,831,426 1,785,481
Deferred income taxes - 123,318
Prepaid expenses and other assets 562,787 517,280
-------------- --------------
Total current assets 3,407,199 3,533,931
Property and equipment, net 28,112,710 28,380,038
Goodwill, net of accumulated amortization of
$723,897 in 2001 174,657 2,349,646
Intangible assets 1,497,966 -
Investment in TW-Springhurst - 126,415
Deferred income taxes 833,865 -
Other assets 645,786 507,320
-------------- --------------
Total assets $ 34,672,183 $ 34,897,350
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,585,620 $ 1,269,967
Accrued liabilities 2,951,839 3,542,511
Deferred income taxes 299,105 -
Current maturities on long-term
debt and capital leases 4,402,265 1,601,374
-------------- --------------
Total current liabilities 9,238,829 6,413,852
Long-term liabilities:
Long-term debt, less current maturities 10,308,774 11,843,939
Capital lease obligations, less current maturities 1,660,111 1,989,820
Deferred income taxes - 30,716
Other liabilities 65,000 120,000
-------------- --------------
Total long-term liabilities 12,033,885 13,984,475
-------------- --------------
Total liabilities 21,272,714 20,398,327
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued
and outstanding - -
Common stock, $.01 par value, 16,500,000
shares authorized; 5,916,153 and 5,881,630 shares issued
at June 16, 2002 and December 31, 2001, respectively 59,587 58,818
Paid-in capital 16,393,235 16,294,006
Treasury stock, 42,400 shares (254,695) (254,695)
Retained deficit (2,798,658) (1,599,106)
-------------- --------------
Total stockholders' equity 13,399,469 14,499,023
-------------- --------------
Total liabilities and stockholders' equity $ 34,672,183 $ 34,897,350
============== ==============
See accompanying notes.
4
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Twenty-Four Six Months
Weeks Ended Ended
June 16, June 30,
2002 2001
----------------- ----------------
Operating activities:
Net loss $ (1,199,552) $ (71,152)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 909,861 1,169,943
Deferred income taxes (442,158) 235,341
Equity in income of TW-Springhurst - (33,902)
Loss on disposition of property and equipment 42,107 18,567
Cumulative effect of a change in accounting principle 2,349,646 -
Changes in operating assets and liabilities:
Accounts receivable (329,673) 291,022
Income tax receivable (102,285) (62,600)
Inventories 9,729 (247,445)
Prepaid expenses 49,350 74,968
Other assets (143,624) 17,720
Accounts payable 317,739 306,218
Accrued liabilities (590,672) (562,566)
Other liabilities (55,000) (20,000)
----------------- ----------------
Net cash provided by operating activities 815,468 1,116,114
Investing activities:
Purchases of property and equipment (350,537) (836,211)
Business acquisition (267,000) -
Distribution from TW-Springhurst - 73,500
----------------- ----------------
Net cash used in investing activities (617,537) (762,711)
Financing activities:
Proceeds from issuance of long-term debt 1,037,000 2,979,120
Payments on long-term debt and capital lease obligations (1,660,345) (3,417,340)
----------------- ----------------
Net cash used in investing activities (623,345) (438,220)
----------------- ----------------
Net decrease in cash and cash equivalents (425,414) (84,817)
Cash and cash equivalents at beginning of period 757,266 281,829
----------------- ----------------
Cash and cash equivalents at end of period $ 331,852 $ 197,012
================= ================
See accompanying notes.
5
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 16, 2002
1. BASIS OF PRESENTATION
RESTAURANT FACILITIES
As of June 16, 2002, the Company owned, franchised or licensed 57 Tumbleweed
restaurants. The Company owned and operated 31 restaurants in Kentucky, Indiana
and Ohio. There were 20 franchised restaurants located in Indiana, Illinois,
Kentucky, Michigan, and Wisconsin and six licensed restaurants located outside
the United States in Germany, Jordan, Egypt, England and Turkey. The following
table reflects changes in the number of Company- owned, franchise and licensed
restaurants during the twenty-four weeks ended June 16, 2002.
Company-owned restaurants:
In operation, beginning of period 36
Restaurants opened 0
Restaurant sold to franchisee (1)
Restaurants closed (4)
---------
In operation, end of period 31
Franchise and licensed restaurants:
In operation, beginning of period 29
Restaurants opened 0
Restaurant purchased from Tumbleweed, Inc. 1
Restaurants closed (4)
---------
In operation, end of period 26
---------
System Total 57
=========
During the first quarter of 2002, the Company closed four Company-owned
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the
continued improvement of per-store average sales volumes. On January 1, 2002,
the Company purchased from its joint venture partner the remaining 50% interest
in a restaurant location. See Note 7 for a further discussion of this
transaction.
During the second quarter of 2002, the Company sold one of its restaurant
locations to a franchisee. This was in accordance with the Company's plan it
established in the fourth quarter of 2001. In connection with the plan, the
Company had taken a charge to earnings in accordance with SFAS No. 121,
"Impairment of Long-Lived Assets." The personal property had no value on the
books of the Company as a result of this special charge. The franchisee assumed
the building lease and purchased the inventory for $11,000.
INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements have been prepared by the
Company without audit, with the exception of the December 31, 2001 consolidated
balance sheet which was derived from the audited consolidated financial
statements included in the Company's Form 10-K. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X. These
consolidated financial statements, note disclosures and other information should
be read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
In the opinion of management, the unaudited interim consolidated financial
statements contained in this report reflect all adjustments, consisting of a
change in accounting principle and normal recurring accruals, which are
necessary for a fair presentation. The results of operations for the twenty-four
weeks and twelve weeks ended June 16, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
6
1. BASIS OF PRESENTATION (continued)
FISCAL YEAR
Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. The first three quarters of
each fiscal year, beginning in 2002, consist of 12 weeks and the fourth quarter
consists of 16 weeks. The first two quarters of 2002 consists of 167 days
compared to 181 days in 2001 which resulted in lower revenues of approximately
$2,230,000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,"
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144
requires that one accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and it broadens
the presentation of discontinued operations to include more disposal
transactions. The Company adopted the provisions of SFAS No. 144 as of January
1, 2002 and determined that SFAS No. 144 had no impact on its financial position
and results of operations.
2. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 eliminates the pooling of interest
method of accounting and amortization of goodwill for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment annually, or more frequently if certain
indicators arise. The provisions of SFAS No. 142 also require the completion of
a transitional impairment test within six months of adoption, with any
impairments identified treated as a cumulative effect of a change in accounting
principle.
During the first quarter of 2002, the Company determined that all goodwill as of
January 1, 2002 related to two reporting units. The fair value of each unit was
determined using certain valuation techniques. As a result of the transitional
impairment test, an impairment loss in the amount of $1,503,773, net of tax, was
recorded as a cumulative effect of a change in accounting principle during the
first quarter of 2002.
If the Company had accounted for its goodwill under SFAS No. 142 for all periods
presented, the Company's net income (loss) and income (loss) per share would
have been as follows:
Twenty-Four Six Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
June 16, June 30, June 16, June 30,
2002 2001 2002 2001
-------------- ---------------- ----------------- --------------
Net income (loss) $ (1,199,552) $ (71,152) $ 166,418 $ 47,251
Add back:
Goodwill amortization, net of tax - 70,126 - 35,063
-------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ (1,199,552) $ (1,026) $ 166,418 $ 82,314
============== ================ ================= ==============
Basic and diluted loss per share:
Net income (loss) $ (0.20) $ (0.01) $ 0.03 $ 0.01
Goodwill amortization, net of tax - 0.01 - 0.00
-------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ (0.20) $ 0.00 $ 0.03 $ 0.01
============== ================ ================= ==============
7
2. GOODWILL AND INTANGIBLE ASSETS (continued)
The following table sets forth the Company's goodwill transactions in the first
quarter of 2002. All transactions occurred in the restaurant segment.
Balance as of January 1, 2002 $ 2,349,646
Goodwill acquired in the TW-Springhurst acquisition 174,657
Impairment loss (2,349,646)
--------------
Balance as of June 16, 2002 $ 174,657
==============
The Company acquired Tumbleweed International, LLC (see Note 8) during the first
quarter of 2002, which resulted in the acquisition of an intangible asset in the
amount of $1,497,966 and is included in the corporate segment.
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
June 16, December 31,
2002 2001
--------------- --------------
Accrued payroll, severance and related taxes $ 1,007,780 $ 946,545
Accrued insurance and fees 220,714 192,978
Accrued taxes, other than payroll 770,756 683,449
Gift certificate liability 250,561 475,914
Reserve for loss on guarantees of indebtedness 95,157 565,000
Reserve for store closing costs 410,228 601,186
Other 196,643 77,439
--------------- --------------
$ 2,951,839 $ 3,542,511
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
June 16, December 31,
2002 2001
--------------- ---------------
Secured $5,960,000 mortgage revolving line of credit
note, bearing interest at prime rate plus .25% (5.0% at
June 16, 2002), due December 31, 2003 $ 5,501,148 $ 5,726,148
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (4.41% at June 16,
2002), due April 1, 2003 2,204,550 2,299,567
Secured mortgage note payable, bearing interest at
7.50%, payable in monthly installments through
January 22, 2007 with a lump sum payment due February
22, 2007 1,386,966 -
Secured mortgage note payable, bearing interest at prime
rate plus 1% (5.75% at June 16, 2002), payable in monthly
installments through October 1, 2017 989,861 1,009,847
(Continued next page)
8
4. LONG-TERM DEBT (continued)
June 16, December 31,
2002 2001
--------------- ---------------
Secured mortgage note payable, bearing interest at 8.75%,
payable in monthly installments through February 15, 2008 $ 860,553 $ 881,933
Secured $975,000 mortgage revolving line of credit
note, bearing interest at prime rate plus 2.0% (6.75%
at June 16, 2002), due April 1, 2003 924,868 964,868
Secured mortgage note payable, bearing interest at prime
rate (4.75% at June 16, 2002), payable in monthly
installments through March 1, 2006 594,454 613,632
Secured mortgage note payable, bearing interest at prime
rate plus 1.25% (6.0% at June 16), payable in monthly
installments through November 27, 2016 540,625 559,375
Secured mortgage note payable, bearing interest at 10.52%,
payable in monthly installments through August 18, 2005 378,119 417,937
Unsecured note payable bearing interest at 7.50%, due
February 22, 2007 292,663 -
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (4.41% at June 16,
2002), due April 1, 2003 224,611 224,611
Other installment notes payable 359,802 206,167
--------------- ---------------
14,258,220 12,904,085
Less Current maturities 3,949,446 1,060,146
--------------- ---------------
Long-term debt $ 10,308,774 $ 11,843,939
=============== ===============
Property and equipment with a net book value of approximately $21,550,000 at
June 16, 2002 collateralize the Company's long-term debt.
In accordance with the loan agreement, the $975,000 mortgage revolving line of
credit note was reduced to $925,000 on June 30, 2002.
The Company was in violation of the debt coverage ratio covenant related to the
revolving lines of credit (balances as of June 16, 2002 were $5,501,148 and
$924,868) as of June 16, 2002. The covenant violation resulted primarily from
the amount of the current maturities of debt. The lenders have waived the debt
covenant violation as of June 16, 2002. The Company is currently seeking
financing which would replace the majority of the Company's debt. There can be
no assurances that this financing will be obtained or that such financing will
be available on terms acceptable to the Company. If the refinancing is not
obtained by the end of the third quarter, it is uncertain at this time if the
Company will be in compliance with the debt coverage ratio covenant in future
periods as a result of the current maturities of debt. If it does not comply
with the covenants in future periods, the lenders would be entitled, at their
discretion, to exercise certain remedies including acceleration of repayment.
9
5. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
(loss) per share data for the twenty- four weeks and twelve weeks ended June 16,
2002 and the six months and three months ended June 30, 2001 in accordance with
FAS 128, "Earnings per Share."
Twenty-Four Six Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
June 16, June 30, June 16, June 30,
2002 2001 2002 2001
-------------- ------------- --------------- ----------------
Numerator:
Income (loss) before cumulative effect of
a change in accounting principle $ 304,221 $ (71,152) $ 166,418 $ 47,251
Cumulative effect of a change in
accounting principle, net of tax (1,503,773) - - -
-------------- ------------- --------------- ----------------
Net income (loss) $ (1,199,552) $ (71,152) $ 116,418 $ 47,251
============== ============= =============== ================
Denominator:
Weighted average shares
outstanding - basic 5,916,153 5,839,230 5,916,153 5,839,230
Effect of dilutive securities:
Director and employee stock options 3,577 329 3,064 259
-------------- ------------- --------------- ----------------
Denominator for diluted earnings per share
- adjusted weighted average and assumed
conversions 5,919,730 5,839,559 5,919,217 5,839,489
============== ============= =============== ================
6. SEGMENT INFORMATION
The Company has three reportable segments: restaurants, commissary and
corporate. The restaurant segment consists of the operations of all
Company-owned restaurants and derives its revenues from the sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to Company- owned and franchised restaurants. The
corporate segment derives revenues from sale of franchise rights, franchise
royalties and related services used in restaurant operations, and contains the
selling, general and administrative activities of the Company.
Generally, the Company evaluates performance and allocates resources based on
pre-tax income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K.
Segment information for the twenty-four weeks ended June 16, 2002 is as follows:
Restaurant Commissary Corporate Totals
------------- --------------- -------------- ------------
Revenues from external
customers $ 26,559,567 $ 796,479 $ 836,447 $ 28,192,493
Intersegment revenues - 1,194,719 - 1,194,719
General and
administrative expenses - - 1,956,234 1,956,234
Advertising expenses - - 891,357 891,357
Depreciation and
amortization 745,986 37,662 126,213 909,861
Net interest expense - 70,584 393,888 464,472
Income (loss) before income taxes
and cumulative effect of a change in
accounting principle 2,816,112 41,584 (2,314,439) 543,257
10
6. SEGMENT INFORMATION (continued)
Segment information for the six months ended June 30, 2001 is as follows:
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 27,744,945 $ 917,058 $ 918,306 $ 29,580,309
Intersegment revenues - 1,375,587 - 1,375,587
General and
administrative expenses - - 2,093,059 2,093,059
Advertising expenses - - 932,181 932,181
Depreciation and
amortization 926,782 53,298 189,863 1,169,943
Net interest expense - 88,050 636,964 725,014
Income (loss) before income taxes 2,479,384 60,285 (2,641,315 ) (101,646)
Segment information for the twelve weeks ended June 16, 2002 is as follows::
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 13,095,974 $ 414,593 $ 497,171 $ 14,007,738
Intersegment revenues - 621,890 - 621,890
General and
administrative expenses - - 973,072 973,072
Advertising expenses - - 437,442 437,442
Depreciation and
amortization 371,373 18,831 62,338 452,542
Net interest expense - 35,292 195,102 230,394
Income (loss) before income taxes
and cumulative effect of a
change in accounting principle 1,316,413 28,284 (1,047,522 ) 297,175
Segment information for the three months ended June 30, 2001 is as follows:
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 14,093,293 $ 461,311 $ 391,441 $ 14,946,045
Intersegment revenues - 691,967 - 691,967
General and
administrative expenses - - 990,692 990,692
Advertising expenses - - 473,669 473,669
Depreciation and
amortization 473,866 26,649 94,860 595,375
Net interest expense - 44,025 298,965 342,990
Income (loss) before income taxes 1,400,219 30,326 (1,355,466 ) 75,079
7. INVESTMENT IN TW-SPRINGHURST
During the year ended December 31, 2000, the Company made a $200,000 investment
in TW-Springhurst, LLC ("TW-Springhurst"), the owner and operator of a
Tumbleweed restaurant in Louisville, Kentucky. During the six months ended June
30, 2001, the Company received a cash distribution of $73,500 from
TW-Springhurst. Through December 31, 2001, the Company had a 50% interest with
the remaining 50% held by TW-Springhurst Investors, LLC. A current and former
director of the Company own TW-Springhurst Investors, LLC. The Company's share
of TW-Springhurst's net income was $33,902 for the six months ended June 30,
2001. On January 1, 2002, the Company acquired the remaining 50% interest held
by TW-Springhurst Investors for $267,000. The Company also assumed
TW-Springhurst, LLC's note payable to a bank which had a balance of
approximately
11
7. INVESTMENT IN TW-SPRINGHURST (continued)
$161,000 on the date of purchase. An independent business valuation appraisal
was used to assist Company management in determining the purchase price. The
purchase price has been allocated as follows:
Assets and liabilities acquired:
Inventory $ 55,674
Property and equipment 317,601
Deposits 1,200
Other 5,677
Note payable (161,394)
-------------
218,758
Investment in TW-Springhurst (126,415)
Goodwill 174,657
-------------
$ 267,000
=============
8. ACQUISITION OF INTERNATIONAL
On January 1, 2002, the Company purchased the ownership interest in Tumbleweed
International, LLC ("International") for $1.5 million from TW-International
Investors, Inc. and Chi-Chi's International Operations, Inc. ("CCIO"). CCIO
owned 40% of International. The President and Chief Executive Officer of the
Company is the sole shareholder of CCIO. Members of TW-International Investors,
Inc. include three current directors of the Company. The acquisition gives the
Company direct control and benefit of the international licensing of the
Tumbleweed concept. In connection with the acquisition, the Company assumed an
existing $1.4 million bank loan of TW-International Investors, Inc. and has
issued 76,923 shares of its common stock to CCIO. The Company has entered into a
commission agreement with CCIO in connection with the sale of international
regional licenses by International.
The transaction was accounted for as a purchase and the purchase price was
allocated to the intangible assets acquired - the Tumbleweed international
licensing rights and existing franchise contracts. The allocation of the
purchase price is summarized as follows:
Note payable $ 1,397,968
Common stock 769
Paid-in capital 99,229
-------------
$ 1,497,966
=============
Intangible assets:
Tumbleweed licensing rights $ 1,427,966
Contracts in place 70,000
-------------
$ 1,497,966
=============
9. INCOME TAXES
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the twenty-four weeks ended June 16,
2002 and the six months ended June 30, 2001 have been provided for at an
estimated effective tax rate of 44% and 30%, respectively. The effective tax
rate differs from the statutory federal tax rate of 34% as a result of the
impact of employment tax credits and state income taxes.
10. CONTINGENCIES
The Company guaranteed certain equipment leases with a bank for TW-Tennessee,
LLC, a former franchisee (TW- Tennessee) of the Company in which the Company and
David M. Roth, a Director of the Company, were formerly members. The Company is
in negotiation with the bank under the equipment leases and the other guarantors
to resolve the Company's obligations relative to the equipment leases. The
Company believes that it will be obligated to assume and pay one of the
equipment leases totaling approximately $125,000 and will remain contingently
liable on two other equipment leases which the Company believes will be assumed
and paid by other guarantors. These negotiations are ongoing and no agreement
has been reached. If no agreement is reached, the Company would have
12
10. CONTINGENCIES (continued)
additional exposure totaling approximately $180,000. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it expects to assume. The Company's management believes it will not incur
significant additional losses in connection with this matter.
11. SUBSEQUENT EVENT
On July 11, 2002, a Company-owned restaurant in Ohio was destroyed by fire. The
Company has insurance which will cover the assets lost in the fire and will also
cover the lost profit and continuing expenses as a result of the business
interruption. Management does not believe this event will have a material impact
on the Company's cash flow.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward-looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in the
forward-looking statements we make. Factors that realistically could cause
results to differ materially from those projected in the forward-looking
statements include the availability and cost of financing and other events that
affect our restaurant expansion program, changes in food and other costs,
changes in national, regional or local economic conditions, changes in consumer
tastes, competitive factors such as changes in the number and location of
competing restaurants, the availability of experienced management and hourly
employees, and other factors set forth below.
As of June 16, 2002, we owned, franchised or licensed 57 Tumbleweed restaurants.
The Company owned and operated 31 restaurants in Kentucky, Indiana and Ohio.
There were 20 franchised restaurants in Indiana, Illinois, Kentucky, Wisconsin,
and Michigan, and six licensed restaurants located outside the United States in
Germany, Jordan, Egypt, England and Turkey.
During the first quarter of 2002, the Company closed four Company-owned
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the
continued improvement of per-store average sales volumes. On January 1, 2002,
the Company purchased from its joint venture partner the remaining 50% interest
in a restaurant location. See Note 7 to the consolidated financial statements
for a further discussion of this transaction.
During the second quarter of 2002, the Company sold one of its restaurant
locations to a franchisee. This was in accordance with the Company's plan it
established in the fourth quarter of 2001. In connection with the plan, the
Company had taken a charge to earnings in accordance with SFAS No. 121,
"Impairment of Long-Lived Assets." The personal property had no value on the
books of the Company as a result of this special charge. The franchisee assumed
the building lease and purchased the inventory for $11,000.
The following section should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing.
14
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total revenues of
certain income statement data, except where noted, for the periods indicated.
Twenty-Four Six Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
June 16, June 30, June 16, June 30,
2002 2001 2002 2001
-------------- -------------- -------------- ----------------
Revenues:
Restaurant sales 94.2 % 93.8 % 93.5 % 94.3 %
Commissary sales 2.8 3.1 2.9 3.1
Franchise fees and royalties 1.9 2.2 2.1 2.1
Other revenues 1.1 0.9 1.5 0.5
-------------- -------------- -------------- ----------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 30.3 31.8 30.4 31.5
Commissary cost of sales (2) 89.3 87.3 88.0 87.3
Operating expenses (1) 55.2 54.7 55.5 54.2
Selling, general and administrative expenses 10.1 10.2 10.1 9.8
Depreciation and amortization 3.2 4.0 3.2 4.0
Total operating expenses 96.4 98.0 96.2 97.3
-------------- -------------- -------------- ----------------
Income from operations 3.6 2.0 3.8 2.7
Other expense, net (1.7) (2.3) (1.7) (2.2)
-------------- -------------- -------------- ----------------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 1.9 (0.3) 2.1 0.5
Provision (benefit) for income taxes - current
and deferred 0.8 (0.1) 0.9 0.2
-------------- -------------- -------------- ----------------
Income (loss) before cumulative effect of a
change in accounting principle 1.1 (0.2) 1.2 0.3
Cumulative effect of a change in accounting
principle, net of tax (5.3) - - -
-------------- -------------- -------------- ----------------
Net income (loss) (4.2) % (0.2)% 1.2 % 0.3 %
============== ============== ============== ================
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. The first two quarters of
2002 consists of 167 days compared to 181 days in 2001 and the second quarter of
2002 consists of 84 days compared to 91 days in 2001. On an overall basis,
revenues and expenses decreased as a result of 14 fewer days in the first two
quarters of 2002 compared to the first two quarters of 2001 and seven fewer days
in the second quarter of 2002 compared to the second quarter of 2001.
COMPARISON OF THE FIRST TWO QUARTERS OF 2002 AND 2001
Total revenues decreased by $1,387,816 or 4.7% for the first two quarters of
2002 compared to the same period in 2001 primarily as a result of the following:
Restaurant sales decreased by $1,185,378 or 4.3% for the first two quarters
of 2002 compared to the same period in 2001. The decrease in restaurant sales
is primarily a result of the Company's change in its fiscal year, the closing
of four Company-owned restaurants during the first quarter of 2002 and the
sale of one Company-owned restaurant to a franchisee during the second
quarter of 2002 (see above for discussion of all items). The decrease in
restaurant sales is partially offset by a 3.6% increase in same store sales
for the first twenty-four weeks.
Commissary sales to franchised and licensed restaurants decreased by $120,579
or 13.2% for the first two quarters of 2002 compared to the same period in
2001. The decrease in commissary sales is primarily a result of the Company's
change in its fiscal year, as discussed above.
15
Franchise fees and royalties decreased by $116,050 or 17.6% for the first two
quarters of 2002 compared to the same period in 2001. Franchise income
decreased $110,000 as a result of having three franchise restaurant openings
in the first two quarters of 2001 compared to no franchise restaurant
openings during the first two quarters of 2002. Royalty income decreased
$6,050 primarily as a result of the Company's change in its fiscal year, as
discussed above.
Other revenues increased by $34,191 or 13.1% for the first two quarters of
2002 compared to the same period in 2001 primarily as a result of increased
purchasing rebates in 2002 compared to the 2001 period. The increase in other
revenues can also be attributed to recognizing as income $55,000 of
development fees which were forfeited by a franchisee. The increase in other
revenues is partially offset by a decrease in insurance proceeds which relate
to a business interruption as a result of a fire which occurred in June 2000
at a Company-owned restaurant. Other revenues includes $100,000 of insurance
proceeds for the 2001 period. There is no similar income in the 2002 period.
Restaurant cost of sales decreased by $767,610 or 8.7% for the first two
quarters of 2002 compared to the same period in 2001. The decrease in restaurant
cost of sales is primarily a result of the Company's change in its fiscal year,
as discussed above. Restaurant cost of sales decreased as a percentage of sales
by 1.5% to 30.3% for the 2002 period compared to 31.8% during the same period in
2001. The 1.5% decrease in cost of sales is primarily the result of a temporary
increase in the cost of beef and pork (primarily steaks and ribs, respectively)
during the first part of 2001.
Commissary cost of sales decreased $88,636 or 11.1% for the first two quarters
of 2002 compared to the same period in 2001. The decrease in commissary cost of
sales is due primarily to the Company's change in its fiscal year, as discussed
above. As a percentage to commissary sales, commissary cost of sales increased
2.0% for the 2002 period compared to the same period in 2001 as a result of
higher raw material product costs.
Restaurant operating expenses decreased by $512,102 or 3.4% for the first two
quarters of 2002 compared to the same period in 2001. The decrease in operating
expenses is primarily a result of the Company's change in its fiscal year, as
discussed above. Operating expenses increased as a percentage of restaurant
sales by 0.5% to 55.2% for the 2002 period from 54.7% for the same period in
2001 primarily as a result of increased local marketing costs.
Selling, general and administrative expenses decreased by $177,649 or 5.9% for
the first two quarters of 2002 compared to the same period in 2001. The decrease
in selling, general and administrative expenses primarily is due to the fact
that the 2001 period includes the cost of implementing a new menu of
approximately $95,000. There was no similar expense in 2002. The decrease in
selling, general and administrative expenses is also attributable to decreased
payroll costs as a result of the elimination of several positions in the
corporate segment. As a percentage to total revenues, selling, general and
administrative expenses were 10.1% and 10.2% for the 2002 and 2001 periods,
respectively.
Depreciation and amortization expense decreased $260,082 or 22.2% for the first
two quarters of 2002 compared to the same period in 2001 as a result of goodwill
no longer being amortized in accordance with SFAS No. 142, and the write-down of
assets in the fourth quarter of 2001 (see above for discussion of both items).
The decrease in depreciation and amortization expense is also attributed to the
Company's change in its fiscal year, as discussed above.
Net interest expense decreased $260,542 or 35.9% for the first two quarters of
2002 compared to the same period in 2001. The decrease in net interest expense
is the result of decreases in the prime interest rate during 2001.
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the twenty-four weeks ended June 16,
2002 and the six months ended June 30, 2001 have been provided for at an
estimated effective tax rate of 44% and 30%, respectively. The effective tax
rate differs from the statutory federal tax rate of 34% as a result of the
impact of employment tax credits and state income taxes.
COMPARISON OF THE SECOND QUARTER OF 2002 VERSUS THE SECOND QUARTER OF 2001
Total revenues decreased by $938,307 or 6.3% for the second quarter of 2002
period compared to the same period in 2001 primarily as a result of the
following:
16
Restaurant sales decreased by $997,319 or 7.1% for the second quarter of 2002
compared to the same period in 2001. The decrease in restaurant sales is a
result of the Company's change in its fiscal year, the closing of four
Company-owned restaurants during the first quarter of 2002 and the sale of
one Company-owned restaurant to a franchisee during the second quarter of
2002 (see above for discussion of all items). The decrease in restaurant
sales is partially offset by a 4.1% increase in same store sales for the
second quarter.
Commissary sales to franchised and licensed restaurants decreased by $46,718
or 10.1% for the second quarter of 2002 compared to the same period in 2001.
The decrease in commissary sales is primarily a result of the Company's
change in its fiscal year, as discussed above.
Franchise fees and royalties decreased by $29,452 or 9.2% for the second
quarter of 2002 compared to the same period in 2001. Franchise income
decreased $35,000 primarily as a result of having one franchise restaurant
opening in the second quarter of 2001 compared to no franchise restaurant
openings during the second quarter of 2002. The decrease in franchise income
is partially offset by a $5,548 increase in royalty income.
Other revenues increased by $135,182 or 192.3% for the second quarter of
2002 compared to the same period in 2001 as a result of increased purchasing
rebates. The increase in other revenues can also be attributed to $55,000 of
development fees which were forfeited by a franchisee.
Restaurant cost of sales decreased by $461,811 or 10.4% for the second quarter
of 2002 compared to the same period in 2001. The decrease in restaurant cost of
sales is a result of the Company's change in its fiscal year, the closing of
four Company-owned restaurants during the first quarter of 2002 and the sale of
one Company-owned restaurant to a franchisee during the second quarter of 2002
(see above for discussion of all items). Restaurant cost of sales decreased as a
percentage of sales by 1.1% to 30.4% for the second quarter of 2002 compared to
31.5% during the same period in 2001. The 1.1% decrease in cost of sales is
primarily the result of a temporary increase in the cost of beef and pork
(primarily steaks and ribs, respectively) during the first part of 2001.
Commissary cost of sales decreased $38,055 or 9.4% for the second quarter of
2002 compared to the same period in 2001. The decrease in commissary cost of
sales is primarily a result of the Company's change in its fiscal year, as
discussed above. As a percentage to commissary sales, commissary cost of sales
increased 0.7% for the second quarter of 2002 compared to the same period in
2001 as a result of higher raw material product costs.
Restaurant operating expenses decreased by $372,480 or 4.9% for the second
quarter of 2002 compared to the same period in 2001. The decrease in operating
expenses is a result of the Company's change in its fiscal year, the closing of
four Company-owned restaurants during the first quarter of 2002 and the sale of
one Company-owned restaurant to a franchisee during the second quarter of 2002
(see above for discussion of all items). Operating expenses increased as a
percentage of restaurant sales by 1.3% to 55.5% for the second quarter of 2002
from 54.2% for the same period in 2001 primarily as a result of increased repair
and maintenance costs and local marketing expenses.
Selling, general and administrative expenses decreased by $53,847 or 3.7% for
the second quarter of 2002 compared to the same period in 2001. The decrease in
selling, general and administrative expenses for the second quarter is
attributable to decreased payroll costs as a result of the elimination of
several positions in the corporate segment. As a percentage to total revenues,
selling, general and administrative expenses were 10.1% and 9.8% for the second
quarter of 2002 and 2001, respectively
Depreciation and amortization expense decreased $142,833 or 24.0% for the second
quarter of 2002 compared to the same period in 2001 as a result of goodwill no
longer being amortized in accordance with SFAS No. 142, and the write-down of
assets in the fourth quarter of 2001(see above for discussion of both items).
The decrease in depreciation and amortization expense is also attributed to the
Company's change in its fiscal year, as discussed above.
Net interest expense decreased $112,596 or 32.8% for the second quarter of 2002
compared to the same period in 2001. The decrease in net interest expense for
the second quarter is the result of decreases in the prime interest rate during
2001.
LIQUIDITY AND CAPITAL RESOURCES
In 2002, the Company expects to construct one additional restaurant facility.
Our ability to expand our number of restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the
17
negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance that we will be successful in
opening the number of restaurants anticipated in a timely manner. Furthermore,
there can be no assurance that our new restaurants will generate sales revenue
or profit margins consistent with those of our existing restaurants, or that
these new restaurants will be operated profitably.
Our capital needs during the period ended June 16, 2002 arose from maintenance
and improvement of existing restaurant facilities. The source of capital to fund
the maintenance and improvement expenditures was internally generated cash flow.
Our capital needs for the period ended June 30, 2001 arose from the
reconstruction of a restaurant facility which was damaged by fire during June
2000, and to a lesser extent, maintenance and improvement of existing restaurant
facilities. The source of capital to fund the reconstruction was insurance
proceeds received during 2000. The maintenance and improvement expenditures were
funded by internally generated cash flow.
The table below provides certain information regarding our sources and uses of
cash for the periods presented.
Twenty-Four Six Months
Weeks Ended Ended
June 16, June 30,
2002 2001
---------------- -----------------
Net cash provided by operations $ 815,466 $ 1,116,114
Purchases of property and equipment (350,537) (836,211)
Business acquisition (267,000) -
Net payments on long-term
debt and capital lease obligations (623,343) (438,220)
Our largest use of funds during the 2002 period was for the payment of long-term
debt and capital lease obligations and for the acquisition of the remaining 50%
interest in TW-Springhurst. Our largest use of funds during the 2001 period was
for the reconstruction of a restaurant facility which was damaged by fire during
2000 and for payments on long-term debt and capital lease obligations. Sales are
predominantly for cash and the business does not require the maintenance of
significant receivables or inventories. In addition, it is common within the
restaurant industry to receive trade credit on the purchase of food, beverage
and supplies, thereby reducing the need for incremental working capital to
support sales increases.
The Company guaranteed certain equipment leases with a bank for TW-Tennessee,
LLC, a former franchisee (TW- Tennessee) of the Company in which the Company and
David M. Roth, a Director of the Company, were formerly members. The Company is
in negotiation with the bank under the equipment leases and the other guarantors
to resolve the Company's obligations relative to the equipment leases. The
Company believes that it will be obligated to assume and pay one of the
equipment leases totaling approximately $125,000 and will remain contingently
liable on two other equipment leases which the Company believes will be assumed
and paid by other guarantors. These negotiations are ongoing and no agreement
has been reached. If no agreement is reached, the Company would have additional
exposure totaling approximately $180,000. In the fourth quarter of 2001, the
Company reserved $125,000 to cover its portion of the equipment lease it expects
to assume. The Company's management believes it will not incur significant
additional losses in connection with this matter.
The Company both owns and leases its restaurant facilities. Management
determines whether to acquire or lease a restaurant facility based on its
evaluation of the financing alternatives available for a particular site.
In the next 12 months, the Company expects the demand on future liquidity to be
principally from the ongoing maintenance and improvement of existing restaurant
facilities and from the construction of one to two additional restaurant
facilities. As of June 16, 2002, the Company had no material commitments for the
construction of new restaurants, maintenance or improvement of existing
restaurant facilities. We will utilize mortgage, sale/leaseback and/or landlord
financing, as well as equipment leasing and financing, for a portion of the
development cost of the restaurant we plan to open in 2002. The remaining costs
will be funded by available cash reserves, cash provided from operations and
borrowing capacity. Management believes such sources will be sufficient to fund
our expansion plans through 2002. Should our actual results of operations fall
short of, or our rate of expansion significantly exceed plans, or should our
costs of capital expenditures exceed expectations, we may need to seek
additional
18
financing in the future. In negotiating such financing, there can be no
assurance that we will be able to raise additional capital on terms satisfactory
to us.
The Company has a $5,960,000 mortgage revolving line of credit with a bank. As
of June 16, 2002, we had outstanding borrowings under the line of credit of
$5,501,148. The note bears interest at the prime rate plus .25% (5.0% at June
16, 2002) and is due December 31, 2003. The Company also has a $975,000 mortgage
revolving line of credit with a bank. As of June 16, 2002, we had outstanding
borrowings under the line of credit of $924,868. The note bears interest at the
prime rate plus 2.0% (6.75% at June 16, 2002). In accordance with the loan
agreement, the $975,000 mortgage revolving line of credit note was reduced to
$925,000 on June 30, 2002. The note matures April 1, 2003. Both of the revolving
lines of credit impose restrictions on the Company with respect to the
maintenance of certain financial ratios, the incurrence of indebtedness, the
sale of assets, mergers, capital expenditures and the payment of dividends.
The Company was in violation of the debt coverage ratio covenant related to the
revolving lines of credit (balances as of June 16, 2002 were $5,501,148 and
$924,868) as of June 16, 2002. The covenant violation resulted primarily from
the amount of the current maturities of debt. The lenders have waived the debt
covenant violation as of June 16, 2002. The Company is currently seeking
financing which would replace the majority of the Company's debt. There can be
no assurances that this financing will be obtained or that such financing will
be available on terms acceptable to the Company. If the refinancing is not
obtained by the end of the third quarter, it is uncertain at this time if the
Company will be in compliance with the debt coverage ratio covenant in future
periods as a result of the current maturities of debt. If it does not comply
with the covenants in future periods, the lenders would be entitled, at their
discretion, to exercise certain remedies including acceleration of repayment.
OTHER EVENTS
Beginning January 1, 2002, the Company implemented a 401(k) plan. All employees
who are at least 21 years of age with one year of service in which they worked a
minimum of 1,000 hours are eligible. An employee can contribute up to 15% of
their gross salary. The Company will match 25% of the first 4% an employee
contributes. The employee becomes vested in the Company contribution based on a
five-year vesting schedule.
During the second quarter of 2002, the Company was notified that its application
to list its Common Stock on The Nasdaq SmallCap Market had been approved. The
Company's securities were transferred to The Nasdaq SmallCap Market at the
opening of business on Tuesday, May 28, 2002 and continues to trade under the
symbol of TWED.
On June 3, 2002, a group consisting of Gerald Mansbach, the Company's largest
stockholder, Terrance A. Smith, the Company's Chairman, President and Chief
Executive Officer, and David M. Roth, a director of the Company, submitted a
proposal to the Company's Board of Directors to acquire all the Company's common
stock not currently owned by them or others they may invite to join their group.
The proposal contemplates a cash tender offer price of $1.75 per share. On June
5, 2002, three additional directors, Minx Auerbach, George Keller and Lewis Bass
joined Gerald Mansbach, Terrance A. Smith and David M. Roth in their proposal to
acquire all the Company's common stock not owned by their group at a price of
$1.75 per share. The group owns approximately 60% of the Company's outstanding
common stock.
The Board has appointed a Special Committee of independent directors to evaluate
the proposal. The Special Committee has engaged an investment banking firm and a
law firm to act as advisors in connection with its review of the tender offer
proposal.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. The Company pays a majority of its
employees hourly rates related to federal and state minimum wage laws. As a
result of increased competition and the low unemployment rates in the markets in
which the Company's restaurants are located, the Company has continued to
increase wages and benefits in order to attract and retain management personnel
and hourly workers. In addition, most of the Company's leases require the
Company to pay taxes, insurance, maintenance, repairs and utility costs, and
these costs are subject to inflationary pressures. Most of the leases provide
for increases in rent based on increases in the consumer price index when the
leases are renewed. The Company may attempt to offset the effect of inflation
through periodic menu price increases, economies of scale in purchasing and cost
controls and efficiencies at existing restaurants.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into derivative transactions or speculate on the
future direction of interest rates. The Company is exposed to interest rate
changes primarily as a result of variable rate debt instruments. As of June 16,
2002, approximately $11,050,000 of the Company's debt bore interest at variable
rates. A 1% change in the variable interest rate on this debt equates to an
approximate $100,000 change in interest for a twelve month period.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company guaranteed certain equipment leases with a bank for TW-Tennessee,
LLC, a former franchisee (TW- Tennessee) of the Company in which the Company and
David M. Roth, a Director of the Company, were formerly members. The Company is
in negotiation with the bank under the equipment leases and the other guarantors
to resolve the Company's obligations relative to the equipment leases. The
Company believes that it will be obligated to assume and pay one of the
equipment leases totaling approximately $125,000 and will remain contingently
liable on two other equipment leases which the Company believes will be assumed
and paid by other guarantors. These negotiations are ongoing and no agreement
has been reached. If no agreement is reached, the Company would have additional
exposure totaling approximately $180,000. In the fourth quarter of 2001, the
Company reserved $125,000 to cover its portion of the equipment lease it expects
to assume. The Company's management believes it will not incur significant
additional losses in connection with this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Tumbleweed, Inc. (the Company) filed Form 8-K on May 24, 2002 to
report under Item 5 and Item 7, Exhibit 99.1, that the Company's
securities were being transferred to The Nasdaq SmallCap Market at the
opening of business on Tuesday, May 28, 2002.
The Company filed Form 8-K on June 3, 2002 to report under Item 5 and
Item 7, Exhibit 99.1, that a group consisting of Gerald Mansbach, the
Company's largest stockholder, Terrance A. Smith, the Company's
Chairman, President and Chief Executive Officer, and David M. Roth, a
director of the Company, submitted a proposal to the Company's Board of
Directors to acquire all the Company's stock not currently owned by
them or by others they may invite to join their group. The proposal
contemplates a cash tender offer price of $1.75 per share.
The Company filed Form 8-K on June 5, 2002 to report under Item 5 and
Item 7, Exhibit 99.1, that three additional directors were joining the
group which had, on June 3, 2002, made a proposal to the Company's
Board of Directors to acquire all the Company's stock. The Form 8-K
also reported that a Special Committee of independent directors had
been appointed by the Board to evaluate the proposal.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Dated: July 30, 2002 Tumbleweed, Inc.
By: /s/ Glennon F. Mattingly
--------------------
Glennon F. Mattingly
Vice President
Chief Financial Officer
20