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 March 23, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
The number of shares of common stock, par value of $.01 per share, outstanding
on April 30, 2003 was 5,916,153.
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Operations for the twelve
weeks ended March 23, 2003 and March 24, 2002 3
b) Consolidated Balance Sheets as of March 23, 2003 and
December 29, 2002 4
c) Consolidated Statements of Cash Flows for the twelve
weeks ended March 23, 2003 and March 24, 2002 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 20
2
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
Twelve Weeks Twelve Weeks
Ended Ended
March 23, March 24,
2003 2002
---------------- -----------------
Revenues:
Restaurant sales $ 12,645,330 $ 13,463,593
Commissary sales 508,789 381,886
Franchise fees and royalties 284,847 249,848
Other revenues 114,203 89,427
---------------- -----------------
Total revenues 13,553,169 14,184,754
Operating expenses:
Restaurant cost of sales 3,680,737 4,072,607
Commissary cost of sales 441,789 346,935
Operating expenses 6,867,551 7,390,657
Selling, general and administrative expenses 1,513,169 1,437,077
Depreciation and amortization 463,866 457,319
---------------- -----------------
Total operating expenses 12,967,112 13,704,595
---------------- -----------------
Income from operations 586,057 480,159
Interest expense, net (321,139) (234,078)
---------------- -----------------
Income before income taxes and cumulative effect of a
change in accounting principle 264,918 246,081
Provision for income taxes - current and deferred 116,562 108,276
---------------- -----------------
Income before cumulative effect of a change in
accounting principle 148,356 137,805
Cumulative effect of a change in accounting principle, net
of tax ($845,873) - (1,503,773)
---------------- -----------------
Net income (loss) $ 148,356 $ (1,365,968)
================ =================
Basic and diluted earnings (loss) per share:
Income before cumulative effect of a change in
accounting principle $ 0.03 $ 0.02
Cumulative effect of a change in accounting principle,
net of tax - (0.25)
---------------- -----------------
Net income (loss) $ 0.03 $ (0.23)
================ =================
See accompanying notes.
3
Tumbleweed, Inc.
Consolidated Balance Sheets
As of
March 23, As of
2002 December 29,
(Unaudited) 2002
-------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 4,525,536 $ 1,334,631
Accounts receivable 967,906 942,241
Inventories 1,764,623 1,786,207
Prepaid expenses and other assets 631,143 601,751
-------------- --------------
Total current assets 7,889,208 4,664,830
Property and equipment, net 26,942,536 26,699,920
Goodwill 174,657 174,657
Intangible assets, net 1,524,171 1,524,530
Deferred income taxes 258,564 281,840
Other assets 877,379 631,365
-------------- --------------
Total assets $ 37,666,515 $ 33,977,142
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,384,320 $ 1,292,871
Accrued liabilities 3,082,070 2,951,024
Deferred income taxes 251,884 153,249
Current maturities on long-term
debt and capital leases 859,747 1,191,874
-------------- --------------
Total current liabilities 5,578,021 5,589,018
Long-term liabilities:
Long-term debt, less current maturities 17,040,144 13,251,083
Capital lease obligations, less current maturities 1,200,636 1,437,683
Other liabilities 65,000 65,000
-------------- --------------
Total long-term liabilities 18,305,780 14,753,766
-------------- --------------
Total liabilities 23,883,801 20,342,784
Commitments and contingencies (Note 11)
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;
5,958,553 shares issued at March 23, 2003 and
December 29, 2002 59,587 59,587
Paid-in capital 16,393,235 16,393,235
Treasury stock, 42,400 shares (254,695) (254,695)
Retained deficit (2,415,413) (2,563,769)
-------------- --------------
Total stockholders' equity 13,782,714 13,634,358
-------------- --------------
Total liabilities and stockholders' equity $ 37,666,515 $ 33,977,142
============== ==============
See accompanying notes.
4
Consolidated Statements of Cash Flows
(Unaudited)
Twelve Weeks Twelve Weeks
Ended Ended
March 23, March 24,
2003 2002
----------------- ----------------
Operating activities:
Net income (loss) $ 148,356 $ (1,365,968)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 463,866 457,319
Deferred income taxes 121,911 (557,852)
Loss on disposition of property and equipment 7,978 19,496
Cumulative effect of a change in accounting principle - 2,349,646
Changes in operating assets and liabilities:
Accounts receivable (25,665) (53,240)
Income tax receivable (5,347) (154,968)
Inventories 21,584 19,084
Prepaid expenses (32,297) 16,951
Other assets (249,940) (129,685)
Accounts payable 91,449 384,972
Accrued liabilities 131,046 (473,633)
----------------- ----------------
Net cash provided by operating activities 672,941 512,122
Investing activities:
Purchases of property and equipment (701,923) (72,707)
Business acquisition - (267,000)
----------------- ----------------
Net cash used in investing activities (701,923) (339,707)
Financing activities:
Proceeds from issuance of long-term debt 18,000,000 1,113,394
Payments on long-term debt and capital lease obligations (14,780,113) (1,325,754)
----------------- ----------------
Net cash provided by (used in) financing activities 3,219,887 (212,360)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 3,190,905 (39,945)
Cash and cash equivalents at beginning of period 1,334,631 757,266
----------------- ----------------
Cash and cash equivalents at end of period $ 4,525,536 $ 717,321
================= ================
See accompanying notes.
5
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 23, 2003
1. BASIS OF PRESENTATION
Restaurant Facilities
As of March 23, 2003, 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 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 twelve weeks ended March 23, 2003.
Company-owned restaurants:
In operation, beginning of period 31
Restaurants opened 0
Restaurants closed 0
--------
In operation, end of period 31
Franchise and licensed restaurants:
In operation, beginning of period 25
Restaurants opened 1
Restaurants closed 0
--------
In operation, end of period 26
--------
System Total 57
========
Interim Financial Reporting
The accompanying consolidated financial statements have been prepared by the
Company without audit, with the exception of the December 29, 2002 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 29, 2002.
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 twelve
weeks ended March 23, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ended December 28, 2003.
Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which is effective for the Company in 2003. SFAS No. 145 eliminates SFAS No. 4,
which required all gains (losses) from extinguishment of debt to be classified
as an extraordinary item, net of related income tax effect, and thus, gains
(losses) from extinguishment of debt should be classified as extraordinary items
only if they meet the criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS
No. 13 to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Additionally, SFAS No. 145 rescinds SFAS No. 44 and 64 because the
statements are no longer applicable. Tumbleweed plans to adopt SFAS No. 145 in
2003 which will result in reclassifying its loss on unamortized loan costs,
which occured during the fourth quarter of 2002, from an extraordinary item to
an operating item in the Consolidated Statement of Operations for the fiscal
year ended December 29, 2002.
6
1. BASIS OF PRESENTATION (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities," which is effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 nullifies
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. A commitment to an exit or disposal plan no longer
will be sufficient basis for recording a liability for those activities. The
adoption of SFAS No. 146 in the first quarter of 2003 had no immediate impact on
the Company's financial condition or results of operations; however, the Company
may have future exit or disposal activities to which SFAS No. 146 would apply.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." EITF Issue No. 02-16 clarified that cash
consideration received by a customer from a vendor is a reduction of the price
of the vendor's products or services and therefore, should be characterized as a
reduction of cost of sales when recognized in the customer's income statement
(Issue 1). The EITF Issue No. 02-16 also clarified that a rebate of a specified
amount of cash consideration should be accrued and recognized as a reduction of
cost of sales as terms of a binding arrangement are met by the customer and the
amount of the rebate is reasonably estimable (Issue 2). The consensus on Issue 1
should be applied to fiscal periods beginning after December 15, 2002. The
consensus on Issue 2 is effective for arrangements entered into after November
21, 2002. The adoption of EITF Issue No. 02-16 in the first quarter of 2003 had
no impact on the Company's consolidated statement of operations as the Company
accounted for rebates in the manner prescribed by Issue No. 02-16 prior to the
EITF's consensus on this matter.
Stock-Based Compensation Costs
The Company has a stock-based compensation (stock option) plan which is
described more fully in the Company's annual report. The Company accounts for
the plan using the intrinsic value method of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Because all options granted under this
plan had an exercise price equal to the market value of the underlying common
stock on the date of grant, no stock-based compensation cost has been recognized
in the consolidated statements of operations. Had stock-based compensation cost
for the plan been determined using the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the effect on the Company's consolidated net income
and earnings per share would have been as follows for the twelve weeks ended
March 23, 2003 and March 24, 2002:
2003 2002
--------------- ----------------
Net income (loss) as reported $ 148,356 $ (1,365,968)
Stock-based compensation cost using fair
value method, net of related tax effects 149,899 224,369
--------------- ----------------
Pro forma net loss $ (1,543) $ (1,590,337)
=============== ================
Earnings (loss) per share:
Basic and diluted, as reported $ 0.03 $ (0.23)
Pro forma basic and diluted 0.00 (0.27)
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." During the first quarter of 2002, the Company
determined that all goodwill as of January 1, 2002 related to two reporting
units was impaired. The fair value of each unit was determined using appropriate
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.
During the fourth quarter of 2002, the Company completed the annual test of
impairment and determined that there was no impairment of the $174,657 goodwill
acquired during the purchase of the remaining 50% interest in TW- Springhurst.
See Note 7 for further discussion of this transaction.
7
2. GOODWILL AND INTANGIBLE ASSETS (continued)
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. The intangible
asset consists of $1,455,966 in international licensing rights, which are
indefinitely lived assets not subject to amortization under SFAS No. 142, and
$70,000 of existing franchise contracts, which are definite lived assets
amortized over the 45 year contract period. During the first quarter of 2003,
the Company recorded amortization expense totaling $359 for the definite lived
intangible. The amortization expense for each of the next five years will
approximate $1,555 per year.
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
March 23, December 29,
2003 2002
--------------- --------------
Accrued payroll, severance and related taxes $ 1,105,256 $ 979,082
Accrued insurance and fees 168,350 178,117
Accrued taxes, other than payroll 843,673 609,900
Gift card and certificate liability 307,293 524,870
Reserve for loss on guarantees of indebtedness 64,393 74,573
Reserve for store closing costs 269,758 290,990
Other 323,347 293,492
--------------- --------------
$ 3,082,070 $ 2,951,024
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
March 23, December 29,
2003 2002
--------------- ---------------
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.54% at March 23, 2003), payable in monthly
installments through January 1, 2018 $ 7,322,826 $ -
Secured mortgage payable, bearing interest at 8.52%,
payable in monthly installments through January 1, 2018 7,079,871
Secured mortgage payable, bearing interest at 8.32%,
payable in monthly installments through January 1, 2013 1,730,524 -
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.54% at March 23, 2003), payable in monthly
installments through January 1, 2013 1,727,535 -
Secured $5,960,000 mortgage revolving line of credit note,
bearing interest at prime rate plus .25%, due December 31,
2003 - 5,801,148
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65%, due April 1, 2003 - 2,130,342
(Continued next page)
8
4. LONG-TERM DEBT (continued)
March 23, December 29,
2003 2002
--------------- ---------------
Secured mortgage payable, bearing interest at 7.5%,
payable in monthly installments through January 22, 2007
with a lump sum payment due February 22, 2002 $ - $ 1,395,253
Secured mortgage note payable, bearing interest at prime
rate plus 1%, payable in monthly installments through
October 1, 2017 - 972,916
Secured mortgage note payable, bearing interest at 8.75%,
payable in monthly installments through February 15, 2008 - 838,428
Secured $875,000 mortgage revolving line of credit note,
bearing interest at prime rate plus 2.0%, due April 1, 2003 - 874,868
Secured mortgage note payable, bearing interest at prime
rate, payable in monthly installments through March 1,
2006 - 570,604
Secured mortgage note payable, bearing interest at prime
rate plus 1.25%, payable in monthly installments through
November 27, 2016 - 521,875
Secured mortgage note payable, bearing interest at 10.52%,
payable in monthly installments through August 18, 2005 - 319,373
Unsecured note payable bearing interest at 7.5%, due
February 22, 2007 - 282,113
Other installment notes payable - 288,733
--------------- ---------------
17,860,756 13,995,623
Less current maturities 820,612 744,540
--------------- ---------------
Long-term debt $ 17,040,144 $ 13,251,083
=============== ===============
Based on the borrowing rates currently available to the Company for mortgages
with similar terms and average maturities, the fair value of long term debt
approximates carrying value.
On December 31, 2002, the Company completed an $18.0 million financing package
with GE Capital Franchise Finance Corporation. The financing package
consolidated all of the Company's outstanding debt and equipment capital leases
and provided approximately $2.9 million for the remodel and expansion of Company
restaurants. The debt bears interest at both fixed rates ranging from 8.32% to
8.52% ($8,872,000) and a variable rate of LIBOR plus 4.20% ($9,128,000) with
terms of 10 to 15 years. The debt is secured by fifteen fee simple properties
and substantially all of the equipment owned by the Company with a net book
value of approximately $22,500,000 at March 23, 2003. The Company is in
compliance with various financial covenants at the end of the first quarter of
2003 and, management expects to be in compliance with the various financial
covenants throughout 2003.
9
5. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
(loss) per share data for the twelve weeks ended March 23, 2003 and March 24,
2002 in accordance with FAS 128, "Earnings per Share."
Twelve Weeks Twelve Weeks
Ended Ended
March 23, March 24,
2003 2002
---------------- -----------------
Numerator:
Income before cumulative effect of a change in accounting
principle $ 148,356 $ 137,805
Cumulative effect of a change in accounting principle, net of tax - (1,503,773)
---------------- -----------------
Net income (loss) $ 148,356 $ (1,365,968)
================ =================
Denominator:
Weighted average shares
outstanding - basic 5,916,153 5,916,153
Effect of dilutive securities:
Director and employee stock options 9,000 3,463
---------------- -----------------
Denominator for diluted earnings per share -
adjusted weighted average and assumed conversions 5,925,153 5,919,616
================ =================
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 and
non-affiliated restaurant concepts. 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 twelve weeks ended March 23, 2003 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 12,645,330 $ 508,789 $ 399,050 $ 13,553,169
Intersegment revenues - 561,946 - 561,946
General and
administrative expenses - - 1,081,988 1,081,988
Advertising expenses - - 431,181 431,181
Depreciation and amortization 375,109 22,841 65,916 463,866
Net interest expense - 34,179 286,960 321,139
Income (loss) before income taxes 1,602,533 67,000 (1,404,615 ) 264,918
10
6. SEGMENT INFORMATION (continued)
Segment information for the twelve weeks ended March 24, 2002 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 13,463,593 $ 381,886 $ 339,275 $ 14,184,754
Intersegment revenues - 572,829 - 572,829
General and
administrative expenses - - 983,162 983,162
Advertising expenses - - 453,915 453,915
Depreciation and
amortization 374,613 18,831 63,875 457,319
Net interest expense - 35,292 198,786 234,078
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle 1,499,699 13,300 (1,266,918 ) 246,081
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. 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 owned
TW-Springhurst Investors, LLC. 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 $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 issued
76,923 shares of its common stock to CCIO. The Company has enterd into a
commission agreement with CCIO in connection with the sale of international
regional licenses by International.
11
8. ACQUISITION OF INTERNATIONAL (continued)
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. INCOME TAXES
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the twelve weeks ended March 23, 2003
and March 24, 2002 have been provided for at an estimated effective tax rate of
44%. The effective tax rate differs from the statutory federal tax rate of 34%
due substantially to the impact of employment tax credits and state income
taxes.
10. INVOLUNTARY CONVERSION OF NON-MONETARY ASSETS
As a result of a fire July 11, 2002 at a Company-owned restaurant in Ohio, an
involuntary conversion of a non- monetary asset occurred. During the twelve
weeks ended March 23, 2003, the Company recorded as other revenues approximately
$30,000 of business interruption income which will be reimbursed by the
Company's insurance.
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 has
agreed to assume and pay one of the equipment leases totaling approximately
$125,000 and remains contingently liable on two other equipment leases that
currently have a remaining balance of approximately $35,000 which the Company
believes will be assumed and paid by other guarantors. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it assumed. As of March 23, 2003, the reserve balance is approximately $64,000
which management believes is sufficient to satisfy the remaining lease
obligation. The Company's management believes it will not incur significant
additional losses in connection with this matter.
On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company has no contractual obligation to pay a
commission to AFI, in connection with a Conditional Commitment entered into
between AFI and the Company and is seeking damages for fraud and
misrepresentation when AFI provided a commitment for a $20.1 million financing
which the Company believes AFI never intended to fund as they had represented,
but instead acted as a broker. In response, AFI filed suit in the United States
District Court for the Eastern District of Missouri seeking payment of a
commitment fee plus additional charges, fees and costs aggregating approximately
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discovery stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of March 23, 2003,
the Company has not made an accrual in the accompanying consolidated financial
statements for a potential liability 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.
12
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 March 23, 2003, 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
and Wisconsin 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.
13
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.
Twelve Weeks Twelve Weeks
Ended Ended
March 23, March 24,
2003 2002
-------------- -------------
Revenues:
Restaurant sales 93.3% 94.9%
Commissary sales 3.8 2.7
Franchise fees and royalties 2.1 1.8
Other revenues 0.8 0.6
-------------- -------------
Total revenues 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.1 30.2
Commissary cost of sales (2) 86.8 90.8
Operating expenses (1) 54.3 54.9
Selling, general and administrative expenses 11.2 10.1
Depreciation and amortization 3.4 3.2
-------------- -------------
Total operating expenses 95.7 96.6
-------------- -------------
Income from operations 4.3 3.4
Interest expense, net (2.4) (1.7)
-------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 1.9 1.7
Provision for income taxes - current
and deferred 0.8 0.7
-------------- -------------
Income before cumulative effect of a
change in accounting principle 1.1 1.0
Cumulative effect of a change in accounting
principle, net of tax - (10.6)
-------------- -------------
Net income (loss) 1.1 % (9.6)%
============== =============
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
COMPARISON OF THE FIRST QUARTER OF 2003 AND 2002
Total revenues decreased by $631,585 or 4.5% for the first quarter of 2003
compared to the same period in 2002 primarily as a result of the following:
Restaurant sales decreased by $818,263 or 6.1% for the first quarter of 2003
compared to the same period in 2002. The decrease in restaurant sales is
primarily a result of the closing of four Company-owned restaurants during
the first quarter of 2002, the temporary closing of one Company-owned
restaurant in July 2002 as a result of a fire (restaurant reopened
mid-February 2003), and the sale of one Company-owned restaurant to a
franchisee during the second quarter of 2002. The decrease in restaurant
sales can also be attributed to a 1.7% decrease in same store sales for the
first quarter.
Commissary sales to franchised and licensed restaurants and non-affiliated
restaurant concepts increased by $126,903 or 33.3% for the first quarter of
2003 compared to the same period in 2002. The increase in commissary sales is
primarily a result of an increase in sales to non-affiliated restaurant
concepts.
Franchise fees and royalties increased by $34,999 or 14.0% for the first
quarter of 2003 compared to the same period in 2002. Franchise income
increased $35,000 primarily as a result of having one franchise restaurant
opening in the first quarter of 2003 compared to no franchise restaurant
openings during the first quarter of 2002. Royalty income remained fairly in
constant in the first quarter of 2003 compared to the same period in 2002.
14
Other revenues increased by $24,776 or 27.7% for the first quarter of 2003
compared to the same period in 2002 primarily due to approximately $30,000 of
insurance proceeds (business interruption income) as a result of a fire in
July 2002 at a Company-owned restaurant. There was no similar income in the
first quarter of 2002.
Restaurant cost of sales decreased by $391,870 or 9.6% for the first quarter of
2003 compared to the same period in 2002. The decrease in restaurant cost of
sales is primarily a result of the closing of four Company-owned restaurants
during the first quarter of 2002, the temporary closing of one Company-owned
restaurant in July 2002 as a result of a fire (restaurant reopened mid-February
2003), and the sale of one Company-owned restaurant to a franchisee during the
second quarter of 2002. Restaurant cost of sales decreased as a percentage of
sales by 1.1% to 29.1% for the first quarter of 2003 compared to 30.2% during
the same period in 2002. The 1.1% decrease in cost of sales as a percentage of
restaurant sales is primarily the result of improved operating efficiencies and
lower product costs at the restaurant level combined with a 2.0% price increase
in mid-February 2003.
Commissary cost of sales increased $94,854 or 27.3% for the first quarter of
2003 compared to the same period in 2002. The increase in commissary cost of
sales is due primarily to the increase in sales. As a percentage to commissary
sales, commissary cost of sales decreased 4.0% for the first quarter of 2003
compared to the same period in 2002 as a result of an increase in sales to
non-affiliated restaurant concepts.
Restaurant operating expenses decreased by $523,106 or 7.1% for the first
quarter of 2003 compared to the same period in 2002. The decrease in operating
expenses is primarily a result of the closing of four Company-owned restaurants
during the first quarter of 2002, the temporary closing of one Company-owned
restaurant in July 2002 as a result of a fire (restaurant reopened mid-February
2003), and the sale of one Company-owned restaurant to a franchisee during the
second quarter of 2002. Operating expenses decreased as a percentage of
restaurant sales by 0.6% to 54.3% for the first quarter of 2003 from 54.9% for
the same period in 2002 primarily as a result of decreased hourly labor costs
and administrative costs and as a result of a 2.0% price increase in
mid-February 2003.
Selling, general and administrative expenses increased by $76,092 or 5.3% for
the first quarter of 2003 compared to the same period in 2002. The increase in
selling, general and administrative expenses is primarily a result of training
costs incurred as a result of a franchise restaurant opening in the first
quarter of 2003 (no similar expense incurred in the first quarter of 2002) and
increased management development costs for Company-owned restaurants. As a
percentage to total revenues, selling, general and administrative expenses were
11.2% and 10.1% for the first quarter of 2003 and 2002, respectively.
Depreciation and amortization expense increased $6,547 or 1.4% for the first
quarter of 2003 compared to the same period in 2002 primarily as a result of
capital improvements made to existing Company-owned restaurants during 2002.
Net interest expense increased $87,061 or 37.2% for the first quarter of 2003
compared to the same period in 2002. The increase in net interest expense for
the first quarter is primarily a result of the approximately $3.2 million of
additional debt the Company incurred in connection with the debt refinancing
which was completed December 31, 2002. See below for a further discussion of
this transaction.
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the first quarter of 2003 and 2002 have
been provided for at an estimated effective tax rate of 44%. 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.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2002, the Company completed an $18.0 million financing package
with GE Capital Franchise Finance Corporation (GE). The loan was divided into
two real estate loans totaling $14.5 million secured by fifteen fee simple
properties, one loan ($7,122,000) bearing interest at a fixed rate of 8.52% for
15 years and the other ($7,378,000) at a variable rate of LIBOR plus 4.20% over
15 years. The Company also entered into two equipment loan agreements totaling
$3.5 million secured by substantially all the equipment of the Company. One
equipment loan ($1,750,000) bears interest at a fixed rate of 8.32% over 10
years while the other equipment loan ($1,750,000) has a variable rate of LIBOR
plus 4.20% over 10 years. The financing package consolidates all of the
Company's outstanding debt and provides approximately $1.7 million for the
remodel, modernization and / or upgrade to the properties described in the
renovation agreements signed with GE. The Company has until June 30, 2004 to
complete
15
the renovations, unless the Company obtains GE's written consent for an
extension of such date. Additionally, the financing package provides for $1.2
million to be used for expansion of Company restaurants. The loan imposes
restrictions on the Company with respect to the maintenance of certain financial
covenants, the incurrence of indebtedness, the sale of assets and capital
expenditures. The Company is required to maintain two separate Fixed Charge
Coverage Ratios. One is a Corporate Fixed Charge Coverage Ratio of 1.25:1 based
on results of the entire company and the second, an aggregate Fixed Charge
Coverage Ratio of at least 1.25:1 on the properties used as collateral on these
loans. Both ratios are determined as of the last day of each fiscal year with
respect to the twelve- month period of time immediately preceding the date of
determination. The Company must also maintain a Funded Debt to EBITDA ratio not
to exceed 5.5 to 1.0, determined as of the last day of each fiscal quarter for
the twelve- month period of time immediately preceding the date of
determination. With the exception of new store development, the Company shall
not incur debt in excess of $500,000 per year without prior written consent of
GE. The Company is in compliance with various financial covenants at the end of
the first quarter of 2003 and, management expects to be in compliance with the
financial covenants throughout 2003.
Our capital needs during the first quarter of 2003 arose from the reconstruction
of a restaurant facility which was damaged by fire in July 2001 and the
maintenance and improvement of existing restaurant facilities. Our capital needs
during the first quarter of 2002 arose from the maintenance and improvement of
existing restaurant facilities. The source of capital to fund the reconstruction
was primarily insurance proceeds received in 2002 and 2003. The maintenance and
improvement expenditures were funded by internally generated cash flow. The 2003
maintenance and improvement expenditures were also partially funded by the $1.7
million generated from the debt refinancing, as discussed above.
The table below provides certain information regarding our sources and uses of
cash for the periods presented.
Twelve Weeks Twelve Weeks
Ended Ended
March 23, March 24,
2003 2002
---------------- -----------------
Net cash provided by operations $ 672,941 $ 512,122
Purchases of property and equipment (701,923) (72,202)
Business acquisition - (267,000)
Net borrowings (payments) on long-term
debt and capital lease obligations 3,219,887 (212,360)
The Company's largest use of funds during the first quarter of 2003 was for the
reconstruction of a restaurant facility which was damaged by fire in July 2002
(restaurant reopened in mid-February 2003), for payments of long-term debt and
for the maintenance and improvement of existing restaurant facilities. The
Company's largest source of funds during the first quarter of 2003 was proceeds
from the debt refinancing, cash reserves, cash flow from operations and
insurance proceeds for the property and equipment which was destroyed in July
2002. The Company's largest use of funds during the first quarter of 2002 was
for the payment of long-term debt and capital lease obligations and for the
acquisition of the remaining 50% interest in TW-Springhurst. The Company's
largest source of funds during the first quarter of 2002 was proceeds from the
Company's two mortgage revolving lines of credit and cash flow from operations.
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.
We both own and lease our 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 to construct one to two additional
restaurant facilities. 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
16
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.
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 March 23, 2003, the Company had no material commitments for
the construction of new restaurants, maintenance or improvement of existing
restaurant facilities. In addition to the $1.2 million reserve established as a
result of the GE financing package, we will utilize mortgage, sale/leaseback
and/or landlord financing, as well as equipment leasing and financing, for a
portion of the development costs of restaurants we plan to open in the next 12
months. The remaining costs will be funded by available cash reserves and cash
provided from operations. Management believes such sources will be sufficient to
fund our expansion plans 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 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 has
agreed to assume and pay one of the equipment leases totaling approximately
$125,000 and remains contingently liable on two other equipment leases that
currently have a remaining balance of approximately $35,000 which the Company
believes will be assumed and paid by other guarantors. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it assumed. As of March 23, 2003, the reserve balance is approximately $64,000
which management believes is sufficient to satisfy the remaining lease
obligation. The Company's management believes it will not incur significant
additional losses in connection with this matter.
On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company has no contractual obligation to pay a
commission to AFI, in connection with a Conditional Commitment entered into
between AFI and the Company and is seeking damages for fraud and
misrepresentation when AFI provided a commitment for a $20.1 million financing
which the Company believes AFI never intended to fund as they had represented,
but instead acted as a broker. In response, AFI filed suit in the United States
District Court for the Eastern District of Missouri seeking payment of a
commitment fee plus additional charges, fees and costs aggregating approximately
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discovery stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of March 23, 2003,
the Company has not made an accrual in the accompanying consolidated financial
statements for a potential liability 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.
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.
17
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's primary market risk exposure
with regards to financial instruments is changes in interest rates. The
Company's debt bears interest at both fixed and variable rates. On March 23,
2002, a hypothetical 100 basis point increase in interest rates would result in
an approximately $480,000 decrease in fair value of debt and would increase
interest expense on the variable rate mortgages by approximately $90,000.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of the filing of this report, the Company's
Chief Executive Officer and Chief Financial Officer conducted an evaluation of
the effectiveness, design and operation of the Company's disclosure controls and
procedures as defined in Exchange Act Rule 13a-14. Based upon that evaluation,
such officers concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed is recorded,
processed, summarized, and reported in a timely manner. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly effect these controls subsequent to the date of the
evaluation referred to above.
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 has
agreed to assume and pay one of the equipment leases totaling approximately
$125,000 and remains contingently liable on two other equipment leases that
currently have a remaining balance of approximately $35,000 which the Company
believes will be assumed and paid by other guarantors. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it assumed. As of March 23, 2003, the reserve balance is approximately $64,000
which management believes is sufficient to satisfy the remaining lease
obligation. The Company's management believes it will not incur significant
additional losses in connection with this matter.
On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company has no contractual obligation to pay a
commission to AFI, in connection with a Conditional Commitment entered into
between AFI and the Company and is seeking damages for fraud and
misrepresentation when AFI provided a commitment for a $20.1 million financing
which the Company believes AFI never intended to fund as they had represented,
but instead acted as a broker. In response, AFI filed suit in the United States
District Court for the Eastern District of Missouri seeking payment of a
$405,000 commitment fee plus additional charges, fees and costs all in the
excess of $500,000 relating to the Conditional Commitment, as well as damages
for breach of contract, unjust enrichment and misrepresentation/fraud. This
matter is in the early discovery stage. Management believes that AFI's claims
are without merit, but it is too early to predict an outcome. The Company
intends to vigorously defend itself in connection with this matter. As of March
23, 2003, the Company has not made an accrual in the accompanying consolidated
financial statements for a potential liability 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.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 10.1 $7,122,000 Loan Agreement dated December 31, 2002
and related amendment between TW Real Estate I, LLC
and GE Capital Franchise Finance Corporation
Exhibit 10.2 $7,378,000 Loan Agreement dated December 31, 2002
and related amendment between TW Real Estate II, LLC
and GE Capital Franchise Finance Corporation
Exhibit 10.3 $1,750,000 Equipment Loan and Security Agreement
dated December 31, 2002 between TW Real Estate I, LLC
and GE Capital Franchise Finance Corporation
Exhibit 10.4 $1,750,000 Equipment Loan and Security Agreement
dated December 31, 2002 between TW Real Estate II,
LLC and GE Capital Franchise Finance Corporation
Exhibit 99.1 Certifications pursuant to Section 1350, Chapter
63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
Tumbleweed, Inc. (the Company) filed Form 8-K on January 9, 2003 to
report under Item 5 that the Company had completed an $18.0 million
financing package with GE Capital Franchise Finance Corporation.
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.
Dated: May 7, 2003 Tumbleweed, Inc.
By: /s/ Glennon F. Mattingly
--------------------
Glennon F. Mattingly
Senior Vice President
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: May 7, 2003 /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;
(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:
20
(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: May 7, 2003 /s/ Terrance A. Smith
---------------------
Terrance A. Smith
President and Chief
Executive Officer
21