UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 15, 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
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The number of shares of common stock, par value of $.01 per share, outstanding
on July 15, 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 twenty-four
weeks and twelve weeks ended June 15, 2003 and June 16, 2002 3
b) Consolidated Balance Sheets as of June 15, 2003 and
December 29, 2002 4
c) Consolidated Statements of Cash Flows for the twenty-four
weeks ended June 15, 2003 and June 16, 2002 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
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
2
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
Twenty-Four Twelve Weeks
Weeks Ended Ended
----------------------------- -----------------------------
June 15, June 16, June 15, June 16,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues:
Restaurant sales $ 25,949,248 $ 26,559,567 $ 13,303,918 $ 13,095,974
Commissary sales 1,051,495 796,479 542,706 414,593
Franchise fees and royalties 635,509 541,557 350,662 291,709
Other revenues 210,256 294,890 96,053 205,462
-------------- ------------- ------------- -------------
Total revenues 27,846,508 28,192,493 14,293,339 14,007,738
Operating expenses:
Restaurant cost of sales 7,557,912 8,055,402 3,877,175 3,982,795
Commissary cost of sales 903,375 711,597 461,586 364,662
Operating expenses 14,057,820 14,660,313 7,190,269 7,269,656
Selling, general and administrative
expenses 3,002,759 2,847,591 1,489,590 1,410,514
Preopening expenses 28,865 - 28,865 -
Depreciation and amortization 945,897 909,861 482,031 452,542
-------------- ------------- ------------- -------------
Total operating expenses 26,496,628 27,184,764 13,529,516 13,480,169
-------------- ------------- ------------- -------------
Income from operations 1,349,880 1,007,729 763,823 527,569
Interest expense, net (630,890) (464,472) (309,750) (230,394)
-------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 718,990 543,257 454,073 297,175
Provision for income taxes - current and
deferred 316,356 239,036 199,792 130,757
-------------- ------------- ------------- -------------
Income before cumulative effect of a change
in accounting principle 402,634 304,221 254,281 166,418
Cumulative effect of a change in accounting
principle, net of tax ($845,873) - (1,503,773) - -
-------------- ------------- ------------- -------------
Net income (loss) 402,634 (1,199,552) 254,281 166,418
============== ============= ============= =============
Basic and diluted earnings (loss) per share:
Income before cumulative effect of a
change in accounting principle $ 0.07 $ 0.05 $ 0.04 $ 0.03
Cumulative effect of a change in accounting
principle, net of tax - (0.25) - -
-------------- ------------- ------------- -------------
Net income (loss) $ 0.07 $ (0.20) $ 0.04 $ 0.03
============== ============= ============= =============
See accompanying notes.
3
Tumbleweed, Inc.
Consolidated Balance Sheets
As of
June 15, As of
2003 December 29,
(Unaudited) 2002
-------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 5,550,579 $ 1,334,631
Accounts receivable 772,335 942,241
Inventories 1,880,258 1,786,207
Prepaid expenses and other assets 650,847 601,751
-------------- ---------------
Total current assets 8,854,019 4,664,830
Property and equipment, net 26,777,543 26,699,920
Goodwill 174,657 174,657
Intangible assets, net 1,523,812 1,524,530
Deferred income taxes 231,688 281,840
Other assets 878,433 631,365
-------------- ---------------
Total assets $ 38,440,152 $ 33,977,142
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,458,577 $ 1,292,871
Accrued liabilities 2,716,187 2,951,024
Deferred income taxes 282,375 153,249
Current maturities on long-term
debt and capital leases 893,626 1,191,874
-------------- ---------------
Total current liabilities 6,350,765 5,589,018
Long-term liabilities:
Long-term debt, less current maturities 16,806,627 13,251,083
Capital lease obligations, less current maturities 1,190,768 1,437,683
Other liabilities 55,000 65,000
-------------- ---------------
Total long-term liabilities 18,052,395 14,753,766
-------------- ---------------
Total liabilities 24,403,160 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 June 15, 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 (2,161,135) (2,563,769)
-------------- ---------------
Total stockholders' equity 14,036,992 13,634,358
-------------- ---------------
Total liabilities and stockholders' equity $ 38,440,152 $ 33,977,142
============== ===============
See accompanying notes.
4
Consolidated Statements of Cash Flows
(Unaudited)
Twenty-Four Twenty-Four
Weeks Ended Weeks Ended
June 15, June 16,
2003 2002
----------------- ----------------
Operating activities:
Net income (loss) $ 402,634 $ (1,199,552)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 945,897 909,861
Deferred income taxes 179,278 (442,158)
Loss on disposition of property and equipment 58,817 42,107
Cumulative effect of a change in accounting
principle - 2,349,646
Changes in operating assets and liabilities:
Accounts receivable 169,906 (329,673)
Income tax receivable 104,055 (102,285)
Inventories (94,051) 9,729
Prepaid expenses (169,809) 49,350
Other assets (255,569) (143,624)
Accounts payable 1,165,706 317,739
Accrued liabilities (234,837) (590,672)
Other liabilities (10,000) (55,000)
----------------- ----------------
Net cash provided by operating activities 2,262,027 815,468
Investing activities:
Purchases of property and equipment (1,056,461) (350,537)
Business acquisition - (150,000)
----------------- ----------------
Net cash used in investing activities (1,056,461) (500,537)
Financing activities:
Proceeds from issuance of long-term debt 18,000,000 920,000
Payments on long-term debt and capital lease obligations (14,989,618) (1,660,345)
----------------- ----------------
Net cash provided by (used in) financing activities 3,010,382 (740,345)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 4,215,948 (425,414)
Cash and cash equivalents at beginning of period 1,334,631 757,266
----------------- ----------------
Cash and cash equivalents at end of period $ 5,550,579 $ 331,852
================= ================
See accompanying notes.
5
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 15, 2003
1. BASIS OF PRESENTATION
Restaurant Facilities
As of June 15, 2003, the Company owned, franchised or licensed 57 Tumbleweed
restaurants. The Company owned and operated 31 restaurants in Kentucky, Indiana
and Ohio. There were 21 franchised restaurants located in Indiana, Illinois,
Kentucky and Wisconsin and five licensed restaurants located outside the United
States in Germany, Jordan, Egypt, England and Turkey. The following table
reflects changes in the number of Company-owned, franchise and licensed
restaurants during the twenty-four weeks ended June 15, 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 2
Restaurants closed (1)
--------
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 twenty-four
weeks and twelve weeks ended June 15, 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.
6
1. BASIS OF PRESENTATION (continued)
145 rescinds SFAS No. 44 and 64 because the statements are no longer applicable.
Tumbleweed will 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses the consolidation of entities whose equity holders have either (a) not
provided sufficient equity at risk to allow the entity to finance its own
activities or (b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of these entities, known
as variable interest entities ("VIEs"), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that is subject to a
majority of the risk of loss from the VIE's activities, entitled to receive a
majority of the VIE's residual returns, or both. FIN 46 applies immediately to
variable interests in VIEs created or obtained after January 31, 2003. For
variable interests in a VIE created before February 1, 2003, FIN 46 is applied
to the VIE no later than the beginning of the first interim or annual reporting
period beginning after June 15, 2003 (the quarter beginning June 16, 2003 for
the Company). The Interpretation requires certain disclosures in financial
statements issued after January 31, 2003, if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective. The Company's management is
currently evaluating the requirements of FIN 46 with respect to the Company's
specific facts in order to determine the impact, if any, on its financial
statements.
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 twenty-four weeks and
twelve weeks ended June 15, 2003 and June 16, 2002:
Twenty-Four Twelve
Weeks Ended Weeks Ended
------------------------------ -------------------------------
June 15, June 16, June 15, June 16,
2003 2002 2003 2003
-------------- ------------- --------------- -------------
Net income (loss) as reported $ 402,634 $ (1,199,552) $ 254,281 $ 166,418
Stock-based compensation cost using fair
value method, net of related tax effects 292,631 381,935 142,690 159,427
-------------- ------------- --------------- -------------
Pro forma net income (loss) $ 110,003 $ (1,581,487) $ 111,591 $ 6,991
============== ============= =============== =============
Earnings (loss) per share:
Basic and diluted, as reported $ 0.07 $ (0.20) $ 0.04 $ 0.03
Pro forma basic and diluted 0.02 (0.27) 0.02 0.00
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 two quarters of
2003, the Company recorded amortization expense totaling $718 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:
June 15, December 29,
2003 2002
--------------- --------------
Accrued payroll and related taxes $ 1,126,343 $ 979,082
Accrued taxes, other than payroll 724,269 609,900
Gift card and certificate liability 269,138 524,870
Reserve for loss on guarantees of indebtedness 54,214 74,573
Reserve for store closing costs 233,407 290,990
Other 308,816 471,609
--------------- --------------
$ 2,716,187 $ 2,951,024
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
June 15, December 29,
2003 2002
--------------- ---------------
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.52% at June 15, 2003), payable in monthly
installments through January 1, 2018 $ 7,242,234 $ -
Secured mortgage payable, bearing interest at 8.52%,
payable in monthly installments through January 1, 2018 7,021,420 -
Secured mortgage payable, bearing interest at 8.32%,
payable in monthly installments through January 1, 2013 1,702,200 -
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.52% at June 15, 2003), payable in monthly
installments through January 1, 2013 1,694,185 -
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
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
(Continued next page)
8
4. LONG-TERM DEBT (continued)
June 15, December 29,
2003 2002
--------------- ---------------
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 - 288,703
--------------- ---------------
17,660,039 13,995,623
Less current maturities 853,412 744,540
--------------- ---------------
Long-term debt $ 16,806,627 $ 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 $22,700,000 at June 15, 2003. The Company is in
compliance with various financial covenants at the end of the second 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 twenty-four weeks and twelve weeks ended June 15,
2003 and June 16, 2002 in accordance with FAS 128, "Earnings per Share."
Twenty-Four Twenty-Four Twelve Weeks Twelve Weeks
Weeks Ended Weeks Ended Ended Ended
June 15, June 16, June 15, June 16,
2003 2002 2003 2002
--------------- -------------- --------------- ---------------
Numerator:
Income before cumulative effect of a
change in accounting principle $ 402,634 $ 304,221 $ 254,281 $ 166,418
Cumulative effect of a change in accounting
principle, net of tax - (1,503,773) - -
--------------- -------------- --------------- ---------------
Net income (loss) $ 402,634 $ (1,199,552)$ 254,281 $ 166,418
=============== ============== =============== ===============
Denominator:
Weighted average shares outstanding - basic 5,916,153 5,916,153 5,916,153 5,916,153
Effect of dilutive securities:
Director and employee stock options 9,090 3,577 9,180 3,064
--------------- -------------- --------------- ---------------
Denominator for diluted earnings per share
- adjusted weighted average and assumed
conversions 5,925,243 5,919,730 5,925,333 5,919,217
=============== ============== =============== ===============
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 twenty-four weeks ended June 15, 2003 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- ------------
Revenues from external
customers $ 25,949,248 $ 1,051,495 $ 845,765 $ 27,846,508
Intersegment revenues - 1,171,083 - 1,171,083
General and
administrative expenses - - 2,121,899 2,121,899
Advertising expenses - - 880,860 880,860
Depreciation and amortization 767,920 46,001 131,976 945,897
Net interest expense - 68,358 562,532 630,890
Income (loss) before income taxes 3,296,979 102,376 (2,680,365) 718,990
10
6. SEGMENT INFORMATION (continued)
Segment information for the twenty-four weeks ended June 16, 2002 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 26,559,567 $ 796,479 $ 836,447 $ 28,192,493
Intersegment revenues - 1,194,719 - 1,194,719
General and
administrative expenses - - 1,956,234 1,956,234
Advertising expenses - - 891,357 891,357
Depreciation and
amortization 745,986 37,662 126,213 909,861
Net interest expense - 70,584 393,888 464,472
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle 2,816,112 41,584 (2,314,439) 543,257
Segment information for the twelve weeks ended June 15, 2003 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 13,303,918 $ 542,706 $ 446,715 $ 14,293,339
Intersegment revenues - 609,141 - 609,141
General and
administrative expenses - - 1,039,911 1,039,911
Advertising expenses - - 449,679 449,679
Depreciation and amortization 392,811 23,160 66,060 482,031
Net interest expense - 34,179 275,571 309,750
Income (loss) before income taxes 1,694,446 58,184 (1,298,557) 454,073
Segment information for the twelve weeks ended June 16, 2002 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 13,095,974 $ 414,593 $ 497,171 $ 14,007,738
Intersegment revenues - 621,890 - 621,890
General and
administrative expenses - - 973,072 973,072
Advertising expenses - - 437,442 437,442
Depreciation and
amortization 371,373 18,831 62,338 452,542
Net interest expense - 35,292 195,102 230,394
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle 1,316,413 28,284 (1,047,522) 297,175
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.
11
7. INVESTMENT IN TW-SPRINGHURST (continued)
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 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. INCOME TAXES
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the twenty-four weeks and twelve weeks
ended June 15, 2003 and June 16, 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 permanent timing
differences.
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 twenty-four
weeks ended June 15, 2003, the Company recorded as other revenues approximately
$30,000 of business interruption income which was reimbursed by the Company's
insurance.
12
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 $25,000 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 June 15, 2003, the reserve balance is approximately $54,000
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
approximately $500,000 which includes a $405,000 commitment fee plus additional
charges, fees and costs related 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 June
15, 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. SUBSEQUENT EVENTS
On June 16, 2003, the Company's Board of Directors approved a one-for-5000
reverse stock split to be immediately followed by a 5000-for-one forward stock
split, subject to stockholder approval. Persons otherwise entitled to receive
less than one share in the reverse stock split would receive cash in the amount
of $1.10 per share. The Board had preliminarily approved the transaction on May
19, 2003, subject to receipt of a fairness opinion from FTN Financial Securities
Corp. ("FTN"), financial advisor to the special committee of the Board, and
stockholder approval. On June 16, 2003, the Board approved the transaction
following the Committee's receipt of a fairness opinion with regard to the per
share cash amount to be paid in the reverse split from FTN and the
recommendation of the special committee. The transaction is subject to the
approval of the stockholders. Stockholders will be asked to approve the
transaction at the annual meeting of stockholders currently expected to be held
in September. The transaction, if approved by the stockholders, would reduce the
number of stockholders below the level at which the Company would be required to
continue to file reports with the SEC, and the Company's stock would no longer
be traded on the Nasdaq Small Cap Market. Any trading of the Company's common
stock after the transaction would only occur in the "pink sheets" or in
privately negotiated sales. Company's management currently estimates that the
total funds required to pay the consideration to stockholders entitled to
receive cash for their shares and to pay fees and expenses relating to the
transaction will be approximately $1.0 million. Cash reserves will be used to
fund the transaction. If the above described transaction is completed, the
remaining stockholders will be asked to approve a conversion of the Company from
a Delaware corporation to a Delaware limited liability company. The conversion
would be accomplished through the transfer of the Company's assets and
liabilities to a newly-formed Delaware limited liability company and liquidation
of the existing Delaware corporation. No additional equity contributions to the
Company or the limited liability company would be required.
Subsequent to June 15, 2003, the Company purchased 2.2 acres of land in Dublin,
Ohio for approximately $630,000 and entered into a $975,000 contract for the
construction of a 5,100 square foot Tumbleweed restaurant. The total project
cost, including preopening costs, is currently estimated at $2,600,000. The
Company is currently negotiating construction financing in the amount of
$1,300,000 with a term of eighteen months. Upon its maturity, the Company plans
to replace the construction loan with permanent financing. In negotiating such
financing, there can be no assurance that the Company will be able to obtain
financing on terms satisfactory to the Company's management. The remaining
project cost will be funded by cash reserves and an equipment operating lease.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward-looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in the
forward-looking statements we make. Factors that realistically could cause
results to differ materially from those projected in the forward-looking
statements include the availability and cost of financing and other events that
affect our restaurant expansion program, changes in food and other costs,
changes in national, regional or local economic conditions, changes in consumer
tastes, competitive factors such as changes in the number and location of
competing restaurants, the availability of experienced management and hourly
employees, and other factors set forth below.
As of June 15, 2003, we owned, franchised or licensed 57 Tumbleweed restaurants.
The Company owned and operated 31 restaurants in Kentucky, Indiana and Ohio.
There were 21 franchised restaurants in Indiana, Illinois, Kentucky and
Wisconsin and five licensed restaurants located outside the United States in
Germany, Jordan, Egypt, England and Turkey.
During the first quarter of 2002, the Company closed four Company-owned
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the
continued improvement of per-store average sales volumes. On January 1, 2002,
the Company purchased from its joint venture partner the remaining 50% interest
in a restaurant location. See Note 7 to the consolidated financial statements
for a further discussion of this transaction.
During the second quarter of 2002, the Company sold one of its restaurant
locations to a franchisee. This was in accordance with the Company's plan it
established in the fourth quarter of 2001. In connection with the plan, the
Company had taken a charge to earnings in accordance with SFAS No. 121,
"Impairment of Long-Lived Assets." The personal property had no value on the
books of the Company as a result of this special charge. The franchisee assumed
the building lease and purchased the inventory for $11,000.
The following section should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing.
14
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total revenues of
certain income statement data, except where noted, for the periods indicated.
Twenty-Four Twelve Weeks
Weeks Ended Ended
------------------------------- ------------------------------
June 15, June 16, June 15, June 16,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues:
Restaurant sales 93.2% 94.2% 93.1% 93.5%
Commissary sales 3.8 2.8 3.8 2.9
Franchise fees and royalties 2.3 1.9 2.4 2.1
Other revenues 0.7 1.1 0.7 1.5
-------------- ------------- ------------- -------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.1 30.3 29.1 30.4
Commissary cost of sales (2) 85.9 89.3 85.1 88.0
Operating expenses (1) 54.2 55.2 54.0 55.5
Selling, general and administrative expenses 10.8 10.1 10.4 10.1
Preopening expenses 0.1 - 0.1 -
Depreciation and amortization 3.4 3.2 3.4 3.2
-------------- ------------- ------------- -------------
Total operating expenses 95.2 96.4 94.7 96.2
-------------- ------------- ------------- -------------
Income from operations 4.8 3.6 5.3 3.8
Interest expense, net (2.3) (1.7) (2.1) (1.7)
-------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 2.5 1.9 3.2 2.1
Provision for income taxes - current
and deferred 1.1 0.8 1.4 0.9
-------------- ------------- ------------- -------------
Income before cumulative effect of a
change in accounting principle 1.4 1.1 1.8 1.2
Cumulative effect of a change in accounting
principle, net of tax - (5.3) - -
-------------- ------------- ------------- -------------
Net income (loss) 1.4% (4.2)% 1.8 % 1.2%
============== ============= ============= =============
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
COMPARISON OF THE FIRST TWO QUARTERS OF 2003 AND 2002
Total revenues decreased by $345,985 or 1.2% for the first two quarters of 2003
compared to the same period in 2002 primarily as a result of the following:
Restaurant sales decreased by $610,319 or 2.3% for the first two quarters 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 is partially offset by a 0.4% increase in same store sales for the
first two quarters of 2003 and a 2.0% menu price increase in mid-February
2003.
Commissary sales to franchised and licensed restaurants and non-affiliated
restaurant concepts increased by $255,016 or 32.0% for the first two quarters
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 and the addition of two franchised restaurants during 2003.
15
Franchise fees and royalties increased by $93,952 or 17.3% for the first two
quarters of 2003 compared to the same period in 2002. Franchise income
increased $70,000 as a result of having two franchise restaurant openings in
the first two quarters of 2003 compared to no franchise restaurant openings
during the first two quarters of 2002. Royalty income increased $18,952
primarily as a result of the two franchise restaurant openings during the
first two quarters of 2003.
Other revenues decreased by $84,634 or 28.7% for the first two quarters of
2003 compared to the same period in 2002 partially as a result of a temporary
decrease in purchasing rebates. The decrease in other revenues can also be
attributed to recognizing as income, in 2002, $55,000 of development fees
which were forfeited by a franchisee. There was no similar income in 2003.
The decrease in other revenues is partially offset by $30,000 of insurance
proceeds (business interruption income recorded as other revenue in 2003)
which were a result of a fire in July 2002 at a Company-owned restaurant.
There was no similar income in the first two quarters of 2002.
Restaurant cost of sales decreased by $497,490 or 6.2% for the first two
quarters 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 restaurant sales by 1.2% to 29.1% for the first two quarters of
2003 compared to 30.3% during the same period in 2002. The 1.2% 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% menu price increase in mid-February 2003.
Commissary cost of sales increased $191,778 or 27.0% for the first two quarters
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 of commissary
sales, commissary cost of sales decreased 3.4% for the first two quarters 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 $602,493 or 4.1% for the first two
quarters 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 1.0% to 54.2% for the first two quarters of 2003 from 55.2%
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% menu price increase in
mid-February 2003.
Selling, general and administrative expenses increased by $155,168 or 5.4% for
the first two quarters 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 two franchise restaurant openings in the
first two quarters of 2003 (no similar expense was incurred in the first two
quarters of 2002) and increased management development costs for Company-owned
restaurants. As a percentage to total revenues, selling, general and
administrative expenses were 10.8% and 10.1% for the first two quarters of 2003
and 2002, respectively.
Preopening expenses were $28,865 for the first two quarters of 2003. These
expenses represent the portion of preopening costs which were incurred in
connection with the 2003 reopening of the restaurant which had been destroyed by
fire in July 2002 that were not recoverable from insurance.
Depreciation and amortization expense increased $36,036 or 4.0% for the first
two quarters of 2003 compared to the same period in 2002 primarily as a result
of capital improvements made to existing Company-owned restaurants.
Net interest expense increased $166,418 or 35.8% for the first two quarters of
2003 compared to the same period in 2002. The increase in net interest expense
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 on
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 two quarters 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% due substantially to
the impact of permanent timing differences.
16
COMPARISON OF THE SECOND QUARTER OF 2003 AND 2002
Total revenues increased by $285,601 or 2.0% for the second quarter of 2003
compared to the same period in 2002 primarily as a result of the following:
Restaurant sales increased by $207,944 or 1.6% for the second quarter of 2003
compared to the same period in 2002. The increase in restaurant sales is
primarily a result of a 2.4% increase in same store sales and a 2.0% menu
price increase in mid-February 2003. The increase in restaurant sales is
partially offset by the sale of one Company-owned restaurant to a franchisee
during the second quarter of 2002.
Commissary sales to franchised and licensed restaurants and non-affiliated
restaurant concepts increased by $128,113 or 30.9% for the second 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 and the addition of two franchised restaurants during 2003.
Franchise fees and royalties increased $58,953 or 20.2% for the second
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 second quarter of 2003 compared to no franchise restaurant
openings during the second quarter of 2002. Royalty income increased $23,953
primarily as a result of two franchise restaurant openings during the first
two quarters of 2003.
Other revenues decreased by $109,409 or 53.2% for the second quarter of 2003
compared to the same period in 2002 partially as a result of a temporary
decrease in purchasing rebates. The decrease in other revenues can also be
attributed to recognizing as income, in the second quarter of 2002, $55,000
of development fees which were forfeited by a franchisee. There was no
similar income in 2003.
Restaurant cost of sales decreased by $105,620 or 2.7% for the second quarter of
2003 compared to the same period in 2002. The decrease in restaurant cost of
sales is primarily a result of 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 1.3% to 29.1% for the second quarter of 2003
compared to 30.4% during the same period in 2002. The 1.3% 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% menu price increase in mid-February 2003.
Commissary cost of sales increased $96,924 or 26.6% for the second 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 of commissary
sales, commissary cost of sales decreased 2.9% for the second 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 $79,387 or 1.1% for the second
quarter of 2003 compared to the same period in 2002. Operating expenses
decreased as a percentage of restaurant sales by 1.5% to 54.0% for the second
quarter of 2003 from 55.5% 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%
menu price increase in mid-February 2003.
Selling, general and administrative expenses increased by $79,076 or 5.6% for
the second 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 second
quarter of 2003 (no similar expense was incurred in the second quarter of 2002)
and increased management development costs for Company-owned restaurants. As a
percentage to total revenues, selling, general and administrative expenses were
10.4% and 10.1% for the second quarter of 2003 and 2002, respectively.
Preopening expenses were $28,865 for the second quarter of 2003. These expenses
represent the portion of preopening costs which were incurred in connection with
the 2003 reopening of the restaurant which had been destroyed by fire in July
2002 that were not recoverable from insurance.
Depreciation and amortization expense increased $29,489 or 6.5% for the second
quarter of 2003 compared to the same period in 2002 primarily as a result of
capital improvements made to existing Company-owned restaurants.
Net interest expense increased $79,356 or 34.4% for the second quarter of 2003
compared to the same period in 2002.
17
The increase in net interest expense for the second 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 second 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% due substantially to the
impact of permanent timing differences.
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 consolidated all of the
Company's outstanding debt and provides approximately $1.7 million for the
remodel, modernization and / or upgrade of the properties described in the
renovation agreements signed with GE. The Company has until June 30, 2004 to
complete 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 second quarter
of 2003, and management expects to be in compliance with the financial covenants
throughout 2003.
Our capital needs during the first two quarters of 2003 arose from the
reconstruction of a restaurant facility which was damaged by fire in July 2002
and the maintenance and improvement of existing restaurant facilities. Our
capital needs during the first two quarters 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.
Twenty-Four Twenty-Four
Weeks Ended Weeks Ended
June 15, June 16,
2003 2002
---------------- -----------------
Net cash provided by operations $ 2,262,027 $ 815,468
Purchases of property and equipment (1,056,461) (350,537)
Business acquisition - (267,000)
Net borrowings (payments) on long-term
debt and capital lease obligations 3,010,382 (623,345)
The Company's largest use of funds during the first two quarters 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 two quarters 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
18
funds during the first two quarters 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 two quarters 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 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 June 15, 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, the Company 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 the Company
plans 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 the Company's expansion plans the next
12 months. Should the Company's actual results of operations fall short of, or
the Company's rate of expansion significantly exceed plans, or should the
Company's costs of capital expenditures exceed expectations, the Company may
need to seek additional financing in the future. In negotiating such financing,
there can be no assurance that the Company will be able to raise additional
capital on terms satisfactory to the Company's management.
On June 16, 2003, the Company's Board of Directors approved a one-for-5000
reverse stock split to be immediately followed by a 5000-for-one forward stock
split, subject to stockholder approval. Persons otherwise entitled to receive
less than one share in the reverse stock split would receive cash in the amount
of $1.10 per share. The Board had preliminarily approved the transaction on May
19, 2003, subject to receipt of a fairness opinion from FTN Financial Securities
Corp. ("FTN"), financial advisor to the special committee of the Board, and
stockholder approval. On June 16, 2003, the Board approved the transaction
following the Committee's receipt of a fairness opinion with regard to the per
share cash amount to be paid in the reverse split from FTN and the
recommendation of the special committee. The transaction is subject to the
approval of the stockholders. Stockholders will be asked to approve the
transaction at the annual meeting of stockholders currently expected to be held
in September. The transaction, if approved by the stockholders, would reduce the
number of stockholders below the level at which the Company would be required to
continue to file reports with the SEC, and the Company's stock would no longer
be traded on the Nasdaq Small Cap Market. Any trading of the Company's common
stock after the transaction would only occur in the "pink sheets" or in
privately negotiated sales. Company's management currently estimates that the
total funds required to pay the consideration to stockholders entitled to
receive cash for their shares and to pay fees and expenses relating to the
transaction will be approximately $1.0 million. Cash reserves will be used to
fund the transaction. If the above described transaction is completed, the
remaining stockholders will be asked to approve a conversion of the Company from
a Delaware corporation to a Delaware limited liability company. The conversion
would be accomplished through the transfer of the Company's assets and
liabilities to a newly-formed Delaware limited liability company and liquidation
of the existing Delaware corporation. No additional equity contributions to the
Company or the limited liability company would be required.
Subsequent to June 15, 2003, the Company purchased 2.2 acres of land in Dublin,
Ohio for approximately $630,000 and entered into a $975,000 contract for the
construction of a 5,100 square foot Tumbleweed restaurant. The total project
cost, including preopening costs, is currently estimated at $2,600,000. The
Company is currently negotiating construction financing in the amount of
$1,300,000 with a term of eighteen months. Upon its maturity, the Company plans
to replace
19
the construction loan with permanent financing. In negotiating such financing,
there can be no assurance that the Company will be able to obtain financing on
terms satisfactory to the Company's management. The remaining project cost will
be funded by cash reserves and an equipment operating lease.
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 $25,000 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 June 15, 2003, the reserve balance is approximately $54,000
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
approximately $500,000 which includes a $405,000 commitment fee plus additional
charges, fees and costs related 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 June
15, 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.
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 June 15,
2003, a hypothetical 100 basis point increase in interest rates would result in
an approximately $460,000 decrease in fair value of debt and would increase
annual 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.
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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 $25,000 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 June 15, 2003, the reserve balance is approximately $54,000
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
approximately $500,000 which includes a $405,000 commitment fee plus additional
charges, fees and costs related 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 June
15, 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 31 Certifications pursuant to Section 302, of the Sarbanes-Oxley
Act of 2002
Exhibit 32 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
On May 19, 2003, Tumbleweed, Inc. (the Company) filed Form 8-K to
report under Item 5 that its Board of Directors had preliminarily
approved a proposed one-for-5000 reverse stock split to be immediately
followed by a 5000-for-one forward stock split.
On June 16, 2003, the Company filed Form 8-K to report under Item 5
that its Board of Directors had approved a one-for-5000 reverse stock
split to be immediately followed by a 5000-for-one forward stock split.
The Board approved the transaction following the Special Committee's
receipt of a fairness opinion with regard to the per share cash amount
to be paid in the reverse split from FTN Financial Securities Corp. and
the recommendation of the Special Committee. The transaction is subject
to the approval of stockholders. Stockholders will be asked to approve
the transaction at the annual meeting of stockholders currently
expected to be held in September. The transaction, if approved by
stockholders, would reduce the number of stockholders below the level
at which the Company would be required to continue to file reports with
the SEC.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Dated: July 29, 2003 Tumbleweed, Inc.
By: /s/ Glennon F. Mattingly
--------------------
Glennon F. Mattingly
Senior Vice President
Chief Financial Officer
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