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 September 8, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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 October 14, 2002 was 5,916,153.
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Operations for
the thirty-six weeks and twelve weeks ended
September 8, 2002 and the nine months and three
months ended September 30, 2001 3
b) Consolidated Balance Sheets as of September 8,
2002 and December 31, 2001 4
c) Consolidated Statements of Cash Flows for the
thirty-six weeks ended September 8, 2002 and the
nine months ended September 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 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
Thirty-Six Nine Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
September 8, September 30, September 8, September 30,
2002 2001 2002 2001
---------------- --------------- ---------------- ---------------
Revenues:
Restaurant sales $ 38,842,539 $ 42,111,345 $ 12,282,972 $ 14,366,401
Commissary sales 1,184,254 1,360,618 387,775 443,560
Franchise fees and royalties 842,695 964,761 301,138 307,154
Other revenues 433,857 333,379 138,967 72,680
---------------- --------------- ---------------- ---------------
Total revenues 41,303,345 44,770,103 13,110,852 15,189,795
Operating expenses:
Restaurant cost of sales 11,734,799 13,221,757 3,679,397 4,398,746
Commissary cost of sales 1,058,016 1,189,510 346,419 389,276
Operating expenses 21,571,863 22,994,702 6,911,550 7,822,287
Selling, general and administrative expenses 4,058,398 4,612,473 1,210,807 1,587,233
Depreciation and amortization 1,356,633 1,769,962 446,772 600,020
---------------- --------------- ---------------- ---------------
Total operating expenses 39,779,709 43,788,404 12,594,945 14,797,562
---------------- --------------- ---------------- ---------------
Income from operations 1,523,636 981,699 515,907 392,233
Other income (expense):
Interest expense, net (699,960) (1,018,271) (235,488) (293,257)
Equity in income of TW-Springhurst - 54,531 - 20,629
---------------- --------------- ---------------- ---------------
Total other expense (699,960) (963,740) (235,488) (272,628)
---------------- --------------- ---------------- ---------------
Income before income taxes and cumulative
effect of a change in accounting principle 823,676 17,959 280,419 119,605
Provision for income taxes - current and
deferred 477,713 898 238,698 31,391
---------------- --------------- ---------------- ---------------
Income before cumulative effect of a change in
accounting principle 345,945 17,061 41,721 88,214
Cumulative effect of a change in accounting
principle, net of tax ($845,873) (1,503,773) - - -
---------------- --------------- ---------------- ---------------
Net income (loss)
$ (1,157,828) $ 17,061 $ 41,721 $ 88,214
================ =============== ================ ===============
Basic and diluted earnings (loss) per share:
Income before cumulative effect of a
change in accounting principle $ 0.06 $ 0.00 $ 0.01 $ 0.02
Cumulative effect of a change in accounting
principle,net of tax (0.25) - - -
---------------- --------------- ---------------- ---------------
Net income (loss) $ (0.19) $ 0.00 $ 0.01 $ 0,02
================ =============== ================ ===============
See accompanying notes.
3
Tumbleweed, Inc.
Consolidated Balance Sheets
September 8,
2002 December 31,
(Unaudited) 2001
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 271,444 $ 757,266
Accounts receivable, net allowance of $4,202 in 2001 902,067 350,586
Inventories 1,815,886 1,785,481
Deferred income taxes - 123,318
Prepaid expenses and other assets 521,724 517,280
-------------- --------------
Total current assets 3,511,121 3,533,931
Property and equipment, net accumulated depreciation of
$8,532,905 in 2002 and $7,410,775 in 2001 27,682,243 28,380,038
Goodwill, net of accumulated amortization of
$723,897 in 2001 174,657 2,349,646
Intangible assets, net of accumulated amortization of
$1,077 in 2002 1,524,889 -
Investment in TW-Springhurst - 126,415
Deferred income taxes 740,151 -
Other assets 664,885 507,320
-------------- --------------
Total assets $ 34,297,946 $ 34,897,350
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,719,580 $ 1,269,967
Accrued liabilities 2,626,604 3,542,511
Deferred income taxes 338,519 -
Current maturities on long-term
debt and capital leases 4,340,609 1,601,374
-------------- --------------
Total current liabilities 9,025,312 6,413,852
Long-term liabilities:
Long-term debt, less current maturities 10,217,204 11,843,939
Capital lease obligations, less current maturities 1,549,237 1,989,820
Deferred income taxes - 30,716
Other liabilities 65,000 120,000
-------------- --------------
Total long-term liabilities 11,831,441 13,984,475
-------------- --------------
Total liabilities 20,856,753 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 (2,756,934) (1,599,106)
-------------- --------------
Total stockholders' equity 13,441,193 14,499,023
-------------- --------------
Total liabilities and stockholders' equity $ 34,297,946 $ 34,897,350
============== ==============
See accompanying notes.
4
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Thirty-Six Nine Months
Weeks Ended Ended
September 8, September 30,
2002 2001
----------------- ----------------
Operating activities:
Net income (loss) $ (1,157,828) $ 17,061
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,356,633 1,769,962
Provision for doubtful accounts (4,202) -
Deferred income taxes (309,030) 307,717
Equity in income of TW-Springhurst - (54,531)
Loss on disposition of property and equipment 72,735 37,646
Cumulative effect of a change in accounting principle 2,349,646 -
Changes in operating assets and liabilities:
Accounts receivable (233,453) 272,567
Inventories (45,393) (273,462)
Prepaid expenses (35,779) (58,291)
Income tax receivable 4,593 74,170
Other assets (165,767) 26,894
Accounts payable 451,699 347,564
Accrued liabilities (901,328) (489,445)
Other liabilities (55,000) (20,000)
----------------- ----------------
Net cash provided by operating activities 1,327,526 1,957,852
Investing activities:
Purchases of property and equipment (630,905) (969,194)
Business acquisition (267,000) -
Distribution from TW-Springhurst - 96,000
----------------- ----------------
Net cash used in investing activities (897,905) (873,194)
Financing activities:
Proceeds from issuance of long-term debt 1,131,812 3,379,120
Payments on long-term debt and capital lease obligations (2,047,255) (4,532,514)
----------------- ----------------
Net cash used in investing activities (915,443) (1,153,394)
----------------- ----------------
Net decrease in cash and cash equivalents (485,822) (68,736)
Cash and cash equivalents at beginning of period 757,266 281,829
----------------- ----------------
Cash and cash equivalents at end of period $ 271,444 $ 213,093
================= ================
See accompanying notes.
5
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 8, 2002
1. BASIS OF PRESENTATION
RESTAURANT FACILITIES
As of September 8, 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 thirty-six weeks ended September 8, 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 thirty-six
weeks and twelve weeks ended September 8 , 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 three quarters of 2002 consists of 251 days
compared to 273 days in 2001 which resulted in lower revenues of approximately
$3,400,000.
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:
Thirty-Six Nine Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
September 8, September 30, September 8, September 30,
2002 2001 2002 2001
-------------- ---------------- ----------------- --------------
Net income (loss) $ (1,157,828) $ 17,061 $ 41,721 $ 88,214
Add back:
Goodwill amortization, net of tax - 105,189 - 35,063
-------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ (1,157,828) $ 122,250 $ 41,721 $ 123,277
============== ================ ================= ==============
Basic and diluted loss per share:
Net income (loss) $ (0.19) $ 0.00 $ 0.01 $ 0.02
Goodwill amortization, net of tax - 0.02 - 0.00
-------------- ---------------- ----------------- --------------
Adjusted net income (loss) $ (0.19) $ 0.02 $ 0.01 $ 0.02
============== ================ ================= ==============
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 September 8, 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 $1,525,966 and is included in the corporate segment.
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
September 8, December 31,
2002 2001
--------------- --------------
Accrued payroll, severance and related taxes $ 904,080 $ 946,545
Accrued insurance and fees 192,169 192,978
Accrued taxes, other than payroll 725,051 683,449
Gift certificate liability 217,264 475,914
Reserve for loss on guarantees of indebtedness 84,752 565,000
Reserve for store closing costs 344,445 601,186
Other 158,843 77,439
--------------- --------------
$ 2,626,604 $ 3,542,511
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
September 8, December 31,
2002 2001
--------------- ---------------
Secured $5,960,000 mortgage revolving line of credit note,
bearing interest at prime rate plus .25% (5.0% at September
8, 2002), due December 31, 2003 $ 5,456,148 $ 5,726,148
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (4.35% at September 8,
2002), due April 1, 2003 2,157,041 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 1,407,185 -
Secured mortgage note payable, bearing interest at prime
rate plus 1% (5.75% at September 8, 2002), payable in
monthly installments through October 1, 2017 983,101 1,009,847
(Continued next page)
8
4. LONG-TERM DEBT (continued)
September 8, December 31,
2002 2001
--------------- ---------------
Secured mortgage note payable, bearing interest at 8.75%,
payable in monthly installments through February 15, 2008 $ 849,711 $ 881,933
Secured $925,000 mortgage revolving line of credit note,
bearing interest at prime rate plus 2.0% (6.75% at
September 8, 2002), due April 1, 2003 924,868 964,868
Secured mortgage note payable, bearing interest at prime
rate (4.75% at September 8, 2002), payable in monthly
installments through March 1, 2006 582,873 613,632
Secured mortgage note payable, bearing interest at prime
rate plus 1.25% (6.0% at September 8, 2002), payable in
monthly installments through November 27, 2016 534,375 559,375
Secured mortgage note payable, bearing interest at 10.52%,
payable in monthly installments through August 18, 2005 353,381 417,937
Unsecured note payable bearing interest at 7.50%, due
February 22, 2007 289,066 -
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (4.35% at September 8,
2002), due April 1, 2003 224,611 224,611
Other installment notes payable 329,402 206,167
--------------- ---------------
14,091,762 12,904,085
Less Current maturities 3,874,558 1,060,146
--------------- ---------------
Long-term debt $ 10,217,204 $ 11,843,939
=============== ===============
Property and equipment with a net book value of approximately $21,500,000 at
September 8, 2002 collateralize the Company's long-term debt.
In accordance with the loan agreement, the $925,000 mortgage revolving line of
credit note was reduced to $875,000 on September 30, 2002.
The Company was in violation of the debt coverage ratio covenant related to the
revolving lines of credit (balances as of September 8, 2002 were $5,456,148 and
$924,868) as of September 8, 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 September 8, 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
obtained, there will be a write-off of unamortized loan costs of approximately
$90,000. If the refinancing is not obtained by the end of the fourth 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 thirty-six weeks and twelve weeks ended September
8, 2002 and the nine months and three months ended September 30, 2001 in
accordance with FAS 128, "Earnings per Share."
Thirty-Six Nine Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
September 8, September 30, September 8, September 30,
2002 2001 2002 2001
-------------- -------------- --------------- ----------------
Numerator:
Income (loss) before cumulative effect of
a change in accounting principle $ 345,945 $ 17,061 $ 41,721 $ 88,214
Cumulative effect of a change in
accounting principle, net of tax (1,503,773) - - -
-------------- -------------- --------------- ----------------
Net income (loss) $ (1,157,828) $ 17,061 $ 41,721 $ 88,214
============== ============== =============== ================
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 7,324 9,849 8,052 -
-------------- -------------- --------------- ----------------
Denominator for diluted earnings per share
- adjusted weighted average and assumed
conversions 5,923,477 5,849,079 5,924,205 5,839,230
============== ============== =============== ================
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 thirty-six weeks ended September 8, 2002 is as
follows:
Restaurant Commissary Corporate Totals
------------- --------------- -------------- ------------
Revenues from external
customers $ 38,842,539 $ 1,184,254 $ 1,276,552 $ 41,303,345
Intersegment revenues - 1,776,380 - 1,776,380
General and
administrative expenses - - 2,749,542 2,749,542
Advertising expenses - - 1,308,856 1,308,856
Depreciation and
amortization 1,110,979 56,493 189,161 1,356,633
Net interest expense - 105,876 594,084 699,960
Income (loss) before income taxes
and cumulative effect of a change in
accounting principle 3,997,506 61,278 (3,235,108) 823,676
Total assets 28,120,956 1,448,733 4,728,257 34,297,946
10
6. SEGMENT INFORMATION (continued)
Segment information for the nine months ended September 30, 2001 is as follows:
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 42,111,345 $ 1,360,618 $ 1,298,140 $ 44,770,103
Intersegment revenues - 2,040,928 - 2,040,928
General and
administrative expenses - - 3,198,236 3,198,236
Advertising expenses - - 1,414,237 1,414,237
Depreciation and
amortization 1,400,628 79,947 289,387 1,769,9,62
Net interest expense - 132,075 886,196 1,018,271
Income (loss) before income taxes 4,137,979 86,300 (4,206,320 ) 17,959
Total assets 31,560,175 1,496,081 5,406,135 38,462,391
Segment information for the twelve weeks ended September 8, 2002 is as follows::
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 12,282,972 $ 387,775 $ 440,105 $ 13,110,852
Intersegment revenues - 581,661 - 581,661
General and
administrative expenses - - 793,308 793,308
Advertising expenses - - 417,499 417,499
Depreciation and
amortization 364,993 18,831 62,948 446,772
Net interest expense - 35,292 200,196 235,488
Income (loss) before income taxes
and cumulative effect of a
change in accounting principal 1,181,394 19,694 (920,669 ) 280,419
Segment information for the three months ended September 30, 2001 is as follows:
Restaurant Commissary Corporate Totals
------------- --------------- ------------- ------------
Revenues from external
customers $ 14,366,401 $ 443,560 $ 379,834 $ 15,189,795
Intersegment revenues - 665,341 - 665,341
General and
administrative expenses - - 1,105,177 1,105,177
Advertising expenses - - 482,056 482,056
Depreciation and
amortization 473,846 26,649 99,525 600,020
Net interest expense - 44,025 249,232 293,257
Income (loss) before income taxes 1,566,977 26,015 (1,473,387 ) 119,605
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 $54,531 for the nine months ended September
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 $ 1,425,968
Common stock 769
Paid-in capital 99,229
-------------
$ 1,525,966
=============
Intangible assets:
Tumbleweed licensing rights $ 1,455,966
Contracts in place 70,000
-------------
$ 1,525,966
=============
9. INVOLUNTARY CONVERSION OF NON-MONETARY ASSETS
As a result of a fire on July 11, 2002 at a Company-owned restaurant in Ohio, an
involuntary conversion of a non- monetary asset occurred. The Company has
accrued a receivable of approximately $450,000 during the quarter ended
September 8, 2002 from the insurance company in relation to inventory and
equipment that was destroyed in the fire ($320,000), business interruption
($70,000) and continuing expenses ($60,000). The Company's management does not
anticipate that there will be a loss as a result of the fire.
10. INCOME TAXES
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the thirty-six weeks ended September 8,
2002 and the nine months ended September 30, 2001 have been provided for at an
estimated effective tax rate of 58% and 5%, respectively. The effective tax rate
differs from the statutory
12
10. INCOME TAXES (continued)
federal tax rate of 34% as a result of the impact of employment tax credits,
state income taxes and increase in the valuation allowance for the deferred tax
asset. The valuation allowance was increased $115,314 in the third quarter
because it is more likely than not that an additional portion of the deferred
tax asset related to certain tax credits will not be realized.
11. 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 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.
We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
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 September 8, 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.
12
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.
Thirty-Six Nine Months Twelve Weeks Three Months
Weeks Ended Ended Ended Ended
September 8, September 30, September 8, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- ----------------
Revenues:
Restaurant sales 94.0 % 94.1 % 93.7 % 94.6 %
Commissary sales 2.9 3.0 3.0 2.9
Franchise fees and royalties 2.0 2.2 2.3 2.0
Other revenues 1.1 0.7 1.0 0.5
-------------- -------------- -------------- ----------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 30.2 31.4 30.0 30.6
Commissary cost of sales (2) 89.3 87.4 89.3 87.8
Operating expenses (1) 55.5 54.6 56.3 54.4
Selling, general and administrative expenses 9.8 10.3 9.2 10.4
Depreciation and amortization 3.3 4.0 3.4 4.0
-------------- -------------- -------------- ----------------
Total operating expenses 96.3 97.8 96.1 97.4
-------------- -------------- -------------- ----------------
Income from operations 3.7 2.2 3.9 2.6
Other expense, net (1.7) (2.2) (1.8) (1.8)
-------------- -------------- -------------- ----------------
Income before income taxes and cumulative
effect of a change in accounting principle 2.0 0.0 2.1 0.8
Provision for income taxes - current
and deferred 1.2 0.0 1.8 0.2
-------------- -------------- ----------------
Income before cumulative effect of a
change in accounting principle 0.8 0.0 0.3 0.6
Cumulative effect of a change in accounting
principle, net of tax (3.6) - - -
-------------- -------------- -------------- ----------------
Net income (loss) (2.8) % 0.0 % 0.3 % 0.6 %
============== ============== ============== ================
(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 three quarters of
2002 consists of 251 days compared to 273 days in 2001 and the third quarter of
2002 consists of 84 days compared to 92 days in 2001. On an overall basis,
revenues and expenses decreased as a result of 22 fewer days in the first three
quarters of 2002 compared to the first three quarters of 2001 and eight fewer
days in the third quarter of 2002 compared to the third quarter of 2001.
COMPARISON OF THE FIRST THREE QUARTERS OF 2002 AND 2001
Total revenues decreased by $3,466,758 or 7.7% for the first three quarters of
2002 compared to the same period in 2001 primarily as a result of the following:
Restaurant sales decreased by $3,268,806 or 7.8% for the first three 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 2.4% increase in same store sales
for the first thirty-six weeks.
Commissary sales to franchised and licensed restaurants decreased by $176,364
or 13.0% for the first three 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.
Franchise fees and royalties decreased by $122,066 or 12.6% for the first
three quarters of 2002 compared to the same period in 2001. Franchise income
decreased $110,000 as a result of having three franchise restaurant openings
15
in the first three quarters of 2001 compared to no franchise restaurant
openings during the first three quarters of 2002. Royalty income decreased
$12,066 primarily as a result of the Company's change in its fiscal year.
Other revenues increased by $100,478 or 30.1% for the first three quarters of
2002 compared to the same period in 2001 primarily as a result of recognizing
as income $55,000 of development fees which were forfeited by a franchisee.
The increase in other revenues can also be attributed to increased purchasing
rebates in 2002 compared to the 2001 period. The increase in other revenues
is partially offset by a decrease in insurance proceeds which relate to
business interruptions as a result of fires at two Company-owned restaurants.
Other revenues includes $100,000 of insurance proceeds in the 2001 period, as
a result of a fire which occurred in June 2000, compared to $70,000 in the
2002 period, as a result of a fire which occurred in July 2002.
Restaurant cost of sales decreased by $1,486,958 or 11.2% for the first three
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 1.2% to 30.2% for the 2002 period compared to 31.4% during the same period in
2001. The 1.2% 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 $131,494 or 11.1% for the first three
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 1.9% 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 $1,422,839 or 6.2% for the first
three 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 0.9% to 55.5% for the 2002 period from 54.6% for the same
period in 2001 primarily as a result of increased local marketing costs and
increased repair and maintenance costs.
Selling, general and administrative expenses decreased by $554,075 or 12.0% for
the first three 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 and decreased advertising costs. As a percentage to total
revenues, selling, general and administrative expenses were 9.8% and 10.3% for
the 2002 and 2001 periods, respectively.
Depreciation and amortization expense decreased $413,329 or 23.3% for the first
three 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.
Net interest expense decreased $318,311 or 31.3% for the first three 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 thirty-six weeks ended September 8,
2002 and the nine months ended September 30, 2001 have been provided for at an
estimated effective tax rate of 58% and 5%, respectively. The effective tax rate
differs from the statutory federal tax rate of 34% as a result of the impact of
employment tax credits, state income taxes and increase in the valuation
allowance for the deferred tax asset. The valuation allowance was increased
$115,314 in the third quarter because it is more likely than not that an
additional portion of the deferred tax asset related to certain tax credits will
not be realized.
COMPARISON OF THE THIRD QUARTER OF 2002 VERSUS THE THIRD QUARTER OF 2001
Total revenues decreased by $2,078,943 or 13.7% for the third quarter of 2002
period compared to the same period in 2001 primarily as a result of the
following:
Restaurant sales decreased by $2,083,429 or 14.5% for the third 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
16
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 0.1% increase in same store sales for the
third quarter.
Commissary sales to franchised and licensed restaurants decreased by $55,785
or 12.6% for the third 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.
Franchise fees and royalties decreased by $6,016 or 2.0% for the third
quarter of 2002 compared to the same period in 2001 as a result of a
decrease in royalty income. There was no franchise income in either the 2002
or 2001 periods.
Other revenues increased by $66,287 or 91.2% for the third quarter of 2002
compared to the same period in 2001 due to $70,000 of insurance proceeds
which relate to a business interruption as a result of a fire which occurred
in July 2002 at a Company-owned restaurant.
Restaurant cost of sales decreased by $719,349 or 16.3% for the third 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 0.6% to 30.0% for the third quarter of 2002 compared to
30.6% during the same period in 2001. The 0.6% 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 2001.
Commissary cost of sales decreased $42,857 or 11.0% for the third 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 1.5% for the third quarter of 2002 compared to the same period in 2001
as a result of higher raw material product costs.
Restaurant operating expenses decreased by $910,737 or 11.6% for the third
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 1.9% to 56.3% for the third quarter of 2002
from 54.4% 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 $376,426 or 23.7% for
the third quarter of 2002 compared to the same period in 2001. The decrease in
selling, general and administrative expenses for the second quarter is primarily
attributable to decreased payroll costs as a result of the elimination of
several positions in the corporate segment, decreased corporate bonus expense
and decreased advertising costs. As a percentage to total revenues, selling,
general and administrative expenses were 9.2% and 10.4% for the third quarter of
2002 and 2001, respectively
Depreciation and amortization expense decreased $153,248 or 25.5% for the third
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.
Net interest expense decreased $57,769 or 19.7% for the third quarter of 2002
compared to the same period in 2001. The decrease in net interest expense for
the third quarter is the result of decreases in the prime interest rate during
2001.
The Company has provided for income taxes based on income before income taxes
and cumulative effect of a change in accounting principle for the twelve weeks
ended September 8, 2002 and the three months ended September 30, 2001. The
effective tax rate differs from the statutory federal tax rate of 34% as a
result of the impact of employment tax credits, state income taxes and increase
in the valuation allowance for the deferred tax asset. The valuation allowance
was increased $115,314 in the third quarter because it is more likely than not
that an additional portion of the deferred tax asset related to certain tax
credits will not be realized.
17
LIQUIDITY AND CAPITAL RESOURCES
In 2002, the Company expects to begin construction of 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 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 September 8, 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 September 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.
Thirty-Six Nine Months
Weeks Ended Ended
September 8, September 30,
2002 2001
---------------- -----------------
Net cash provided by operations $ 1,327,526 $ 1,957,852
Purchases of property and equipment (630,905) (969,194)
Business acquisition (267,000) -
Net payments on long-term
debt and capital lease obligations (915,443) (1,153,394)
Our largest use of funds during the 2002 period was for the payment of long-term
debt and capital lease obligations, maintenance and improvement of existing
restaurant facilities, 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.
We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
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.
18
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 September 8, 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 the next 12 months. 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 in the next 12 months. 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 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 September 8, 2002, we had outstanding borrowings under the line of credit of
$5,456,148. The note bears interest at the prime rate plus .25% (5.0% at
September 8, 2002) and is due December 31, 2003. In accordance with the loan
agreement, the availability on the mortgage revolving line of credit will be
reduced to $5,420,000 on December 31, 2002. The Company also has a $925,000
mortgage revolving line of credit with a bank. As of September 8, 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 September 8, 2002). In accordance
with the loan agreement, the $925,000 mortgage revolving line of credit note was
reduced to $875,000 on September 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 September 8, 2002 were $5,456,148 and
$924,868) as of September 8, 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 September 8, 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
obtained, there will be a write-off of unamortized loan costs of approximately
$90,000. If the refinancing is not obtained by the end of the fourth 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.
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
19
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.
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 September
8, 2002, approximately $10,925,000 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 $109,000 change in interest for a twelve month period.
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.
We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99 - Sarbanes Section 906 Certification
(b) Reports on Form 8-K
None
Items 2, 3, 4 and 5 are not applicable and have been omitted.
20
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.
Date: October 18, 2002 Tumbleweed, Inc.
By: /s/ Glennon F. Mattingly
--------------------
Glennon F. Mattingly
Vice President and
Chief Financial Officer
I, Glennon F. Mattingly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tumbleweed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 18, 2002 /s/ Glennon F. Mattingly
------------------------
Glennon F. Mattingly
Vice President and
Chief Financial Officer
I, Terrance A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tumbleweed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
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4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 18, 2002 /s/ Terrance A. Smith
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Terrance A. Smith
President and Chief
Executive Officer
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