UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 7, 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 October 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 thirty-six weeks
and twelve weeks ended September 7, 2003 and September 8, 2002 3
b) Consolidated Balance Sheets as of September 7, 2003 and
December 29, 2002 4
c) Consolidated Statements of Cash Flows for the thirty-six weeks
ended September 7, 2003 and September 8, 2002 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
2
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
Thirty-Six Twelve Weeks
Weeks Ended Ended
----------------------------- -----------------------------
September 7, September 8, September 7, September 8,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues:
Restaurant sales $ 38,788,974 $ 38,842,539 $ 12,839,727 $ 12,282,972
Commissary sales 1,556,226 1,184,254 504,731 387,775
Franchise fees and royalties 978,226 842,695 342,717 301,138
Other revenues 280,873 433,857 70,616 138,967
-------------- ------------- ------------- -------------
Total revenues 41,604,299 41,303,345 13,757,791 13,110,852
Operating expenses:
Restaurant cost of sales 11,365,157 11,734,799 3,807,245 3,679,397
Commissary cost of sales 1,313,716 1,058,016 410,341 346,419
Operating expenses 21,169,816 21,571,863 7,111,996 6,911,550
Selling, general and administrative
expenses 4,369,118 4,058,398 1,366,359 1,210,807
Preopening expenses 65,846 - 36,981 -
Depreciation and amortization 1,429,047 1,356,633 483,150 446,772
-------------- ------------- ------------- -------------
Total operating expenses 39,712,700 39,779,709 13,216,072 12,594,945
-------------- ------------- ------------- -------------
Income from operations 1,891,599 1,523,636 541,719 515,907
Interest expense, net (933,450) (699,960) (302,560) (235,488)
-------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 958,149 823,676 239,159 280,419
Provision for income taxes - current and
deferred 421,586 477,731 105,230 238,698
-------------- ------------- ------------- -------------
Income before cumulative effect of a change
in accounting principle 536,563 345,945 133,929 41,721
Cumulative effect of a change in accounting
principle, net of tax ($845,873) - (1,503,773) - -
-------------- ------------- ------------- -------------
Net income (loss) $ 536,563 $ (1,157,828) $ 133,929 $ 41,721
============== ============= ============= =============
Basic and diluted earnings (loss) per share:
Income before cumulative effect of a
change in accounting principle $ 0.09 $ 0.06 $ 0.02 $ 0.01
Cumulative effect of a change in accounting
principle, net of tax - (0.25) - -
-------------- ------------- ------------- -------------
Net income (loss) $ 0.09 $ (0.19) $ 0.02 $ 0.01
============== ============= ============= =============
See accompanying notes.
3
Tumbleweed, Inc.
Consolidated Balance Sheets
As of
September 7, As of
2003 December 29,
(Unaudited) 2002
-------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 4,272,896 $ 1,334,631
Accounts receivable 544,260 942,241
Inventories 1,969,855 1,786,207
Prepaid expenses and other assets 840,003 601,751
-------------- ---------------
Total current assets 7,627,014 4,664,830
Property and equipment, net 27,788,029 26,699,920
Goodwill 174,657 174,657
Intangible assets, net 1,523,453 1,524,530
Deferred income taxes 226,411 281,840
Other assets 866,798 631,365
-------------- ---------------
Total assets $ 38,206,362 $ 33,977,142
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,994,187 $ 1,292,871
Accrued liabilities 2,630,585 2,951,024
Deferred income taxes 307,961 153,249
Current maturities on long-term
debt and capital leases 922,025 1,191,874
-------------- ---------------
Total current liabilities 5,854,758 5,589,018
Long-term liabilities:
Long-term debt, less current maturities 16,894,812 13,251,083
Capital lease obligations, less current maturities 1,180,871 1,437,683
Other liabilities 105,000 65,000
-------------- ---------------
Total long-term liabilities 18,180,683 14,753,766
-------------- ---------------
Total liabilities 24,035,441 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 September 7, 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 (2,027,206) (2,563,769)
-------------- ---------------
Total stockholders' equity 14,170,921 13,634,358
-------------- ---------------
Total liabilities and stockholders' equity $ 38,206,362 $ 33,977,142
============== ===============
See accompanying notes.
4
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Thirty-Six Thirty-Six
Weeks Ended Weeks Ended
September 7, September 8,
2003 2002
----------------- ----------------
Operating activities:
Net income (loss) $ 536,563 $ (1,157,828)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,429,047 1,356,633
Provision for doubtful accounts - (4,202)
Deferred income taxes 210,141 (309,030)
Loss on disposition of property and equipment 98,232 72,735
Cumulative effect of a change in accounting
principle - 2,349,646
Changes in operating assets and liabilities:
Accounts receivable 397,981 (233,453)
Income tax receivable (payable) 379,645 4,593
Inventories (183,648) (45,393)
Prepaid expenses (642,239) (35,779)
Other assets (248,364) (165,767)
Accounts payable 701,316 451,699
Accrued liabilities (320,439) (901,328)
Other liabilities 40,000 (55,000)
----------------- ----------------
Net cash provided by operating activities 2,398,235 1,327,526
Investing activities:
Purchases of property and equipment (2,577,038) (630,905)
Business acquisition - (150,000)
----------------- ----------------
Net cash used in investing activities (2,577,038) (780,905)
Financing activities:
Proceeds from issuance of long-term debt 18,322,877 1,014,812
Payments on long-term debt and capital lease obligations (15,205,809) (2,047,255)
----------------- ----------------
Net cash provided by (used in) financing activities 3,117,068 (1,032,443)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 2,938,265 (485,822)
Cash and cash equivalents at beginning of period 1,334,631 757,266
----------------- ----------------
Cash and cash equivalents at end of period $ 4,272,896 $ 271,444
================= ================
See accompanying notes.
5
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 7, 2003
1. BASIS OF PRESENTATION
Restaurant Facilities
As of September 7, 2003, the Company owned, franchised or licensed 56 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 four licensed restaurants located outside the United
States in Germany, Jordan, Egypt and Turkey. The following table reflects
changes in the number of Company-owned, franchise and licensed restaurants
during the thirty-six weeks ended September 7, 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 (2)
--------
In operation, end of period 25
--------
System Total 56
========
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 thirty-six
weeks and twelve weeks ended September 7, 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 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.
6
1. BASIS OF PRESENTATION (continued)
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 was
originally effective 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). However, on October 8, 2003, the FASB delayed the
effective date for consolidating variable interests created before February 1,
2003 until the end of the period ending after December 15, 2003 (December 28,
2003 for the Company). The Company's management continues to evaluate the
requirements of FIN 46 with respect to the Company's specific facts, including
but not limited to certain advertising funds and franchise agreements, 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 Form 10-K. 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 thirty-six weeks and
twelve weeks ended September 7, 2003 and September 8, 2002:
Thirty-Six Twelve
Weeks Ended Weeks Ended
------------------------------ -------------------------------
September 7, September 8, September 7, September 8,
2003 2002 2003 2002
-------------- -------------- --------------- -------------
Net income (loss) as reported $ 536,563 $ (1,157,828) $ 133,929 $ 41,721
Stock-based compensation cost using fair
value method, net of related tax effects 356,944 539,502 94,829 158,267
-------------- -------------- --------------- -------------
Pro forma net income (loss) $ 179,619 $ (1,697,330) $ 39,100 $ (116,546)
============== ============== =============== =============
Earnings (loss) per share:
Basic and diluted, as reported $ 0.09 $ (0.19) $ 0.02 $ 0.01
Pro forma basic and diluted 0.03 (0.29) 0.01 (0.02)
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 nor
the $1,455,966 in Tumbleweed licensing rights acquired from Tumbleweed
International, LLC. See Notes 7 and 8 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 three quarters of
2003, the Company recorded amortization expense totaling $1,077 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:
September 7, December 29,
2003 2002
--------------- --------------
Accrued payroll and related taxes $ 1,080,626 $ 979,082
Accrued taxes, other than payroll 1,022,499 609,900
Gift card and certificate liability 233,193 524,870
Reserve for loss on guarantees of indebtedness 44,034 74,573
Reserve for store closing costs 208,449 290,990
Other 41,784 471,609
--------------- --------------
$ 2,630,585 $ 2,951,024
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
September 7, December 29,
2003 2002
--------------- ---------------
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.3% at September 7, 2003), payable in monthly
installments through January 1, 2018 $ 7,157,938 $ -
Secured mortgage payable, bearing interest at 8.52%, payable
in monthly installments through January 1, 2018 6,961,671 -
Secured mortgage payable, bearing interest at 8.32%, payable
in monthly installments through January 1, 2013 1,673,264 -
Secured mortgage payable, bearing interest at LIBOR plus
4.20% (5.3% at September 7, 2003), payable in monthly
installments through January 1, 2013 1,659,764 -
Secured $1,300,000 note payable, bearing interest at prime
rate plus 1/2% (4.5% at September 7, 2003), due February 1,
2005 322,878 -
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)
September 7, 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 - 319,373
18, 2005
Unsecured note payable bearing interest at 7.5%, due
February 22, 2007 - 282,113
Other installment notes payable - 288,703
--------------- ---------------
17,775,515 13,995,623
Less current maturities 880,703 744,540
--------------- ---------------
Long-term debt $ 16,894,812 $ 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 September 7, 2003. The Company is in
compliance with various financial covenants at the end of the third quarter of
2003 and management expects to be in compliance with the various financial
covenants throughout 2003.
On August 4, 2003, the Company obtained construction financing in the amount of
$1,300,000. The note bears interest at the prime rate plus 1/2% and is due
February 1, 2005. At September 7, 2003, the note had a balance of $322,878. The
proceeds of the loan along with cash reserves and an equipment operating lease
will be used to fund the estimated new restaurant facility construction cost of
$2,600,000. The restaurant is located in Dublin, Ohio and is currently expected
to open in the fourth quarter of 2003. Upon its maturity, the Company plans to
replace the construction loan with permanent financing.
9
5. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
(loss) per share data for the thirty-six weeks and twelve weeks ended September
7, 2003 and September 8, 2002 in accordance with SFAS 128, "Earnings per Share."
Thirty-Six Thirty-Six Twelve Weeks Twelve Weeks
Weeks Ended Weeks Ended Ended Ended
September 7, September 8, September 7, September 8,
2003 2002 2003 2002
--------------- -------------- --------------- ---------------
Numerator:
Income before cumulative effect of a
change in accounting principle $ 536,563 $ 345,945 $ 133,929 $ 41,721
Cumulative effect of a change in accounting
principle, net of tax - (1,503,773) - -
--------------- -------------- --------------- ---------------
Net income (loss) $ 536,563 $ (1,157,828)$ 133,929 $ 41,721
=============== ============== =============== ===============
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 8,986 7,324 9,266 8,052
--------------- -------------- --------------- ---------------
Denominator for diluted earnings per share
- adjusted weighted average and assumed
conversions 5,925,139 5,923,477 5,925,419 5,924,205
=============== ============== =============== ===============
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 thirty-six weeks ended September 7, 2003 is as
follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- ------------
Revenues from external
customers $ 38,788,974 $ 1,556,226 $ 1,259,099 $ 41,604,299
Intersegment revenues - 1,742,694 - 1,742,694
General and
administrative expenses - - 3,054,193 3,054,193
Advertising expenses - - 1,314,925 1,314,925
Depreciation and amortization 1,164,213 68,645 196,189 1,429,047
Net interest expense - 102,537 830,913 933,450
Income (loss) before income taxes 4,674,318 174,037 (3,890,206 ) 958,149
10
6. SEGMENT INFORMATION (continued)
Segment information for the thirty-six weeks ended September 8, 2002 is as
follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 38,842,539 $ 1,184,254 $ 1,276,552 $ 41,303,345
Intersegment revenues - 1,776,380 - 1,776,380
General and
administrative expenses - - 2,749,542 2,749,542
Advertising expenses - - 1,308,856 1,308,856
Depreciation and
amortization 1,110,979 56,493 189,161 1,356,633
Net interest expense - 105,876 594,084 699,960
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle 3,997,506 61,287 (3,235,108 ) 823,676
Segment information for the twelve weeks ended September 7, 2003 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 12,839,727 $ 504,731 $ 413,333 $ 13,757,791
Intersegment revenues - 571,607 - 571,607
General and
administrative expenses - - 932,294 932,294
Advertising expenses - - 434,065 434,065
Depreciation and amortization 396,293 22,644 64,213 483,150
Net interest expense - 34,179 268,381 302,560
Income (loss) before income taxes 1,377,339 71,661 (1,209,841 ) 239,159
Segment information for the twelve weeks ended September 8, 2002 is as follows:
Restaurant Commissary Corporate Totals
------------- ------------ ------------- -------------
Revenues from external
customers $ 12,282,972 $ 387,775 $ 440,105 $ 13,110,852
Intersegment revenues - 581,661 - 581,661
General and
administrative expenses - - 793,308 793,308
Advertising expenses - - 417,499 417,499
Depreciation and
amortization 364,993 18,831 62,948 446,772
Net interest expense - 35,292 200,196 235,488
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle 1,181,394 19,694 (920,669 ) 280,419
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 thirty-six weeks ended September 7,
2003 and September 8, 2002 have been provided for at an estimated effective tax
rate of 44% and 58%, respectively. The effective tax rate differs from the
statutory federal tax rate of 34% substantially due to the impact of permanent
differences.
10. INVOLUNTARY CONVERSION OF NON-MONETARY ASSETS
As a result of a fire on July 11, 2002 at a Company-owned restaurant in Ohio, an
involuntary conversion of a non- monetary asset occurred. During the thirty-six
weeks ended September 7, 2003 and September 8, 2002, the Company recorded as
other revenues approximately $34,000 and $70,000, respectively, of business
interruption income which was reimbursed by the Company's insurance.
12
11. COMMITMENTS AND CONTINGENCIES
At September 7, 2003, the Company had a commitment of approximately $860,000 for
the completion of the construction of one restaurant facility. The commitment
will be funded by proceeds from the $1,300,000 note payable which had a balance
of $322,878 at September 7, 2003 (see Note 4).
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 $17,000 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 September 7, 2003, the reserve balance is approximately
$44,000 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.
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 September 7, 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. OTHER 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 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 the fourth quarter of 2003. 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,
it is expected that 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.
13
13. SUBSEQUENT EVENTS
Subsequent to September 7, 2003, the Company purchased approximately 1.5 acres
of land in Louisville, Kentucky for approximately $824,000. The Company plans to
construct a 5,100 square foot Tumbleweed restaurant on this property. The total
project cost, including preopening costs, is currently estimated at $2,500,000.
The Company currently anticipates using sale leaseback financing and cash
reserves to fund the project cost.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward-looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in the
forward-looking statements we make. Factors that realistically could cause
results to differ materially from those projected in the forward-looking
statements include the availability and cost of financing and other events that
affect our restaurant expansion program, changes in food and other costs,
changes in national, regional or local economic conditions, changes in consumer
tastes, competitive factors such as changes in the number and location of
competing restaurants, the availability of experienced management and hourly
employees, and other factors set forth below.
As of September 7, 2003, we owned, franchised or licensed 56 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 four licensed restaurants located outside the United States in
Germany, Jordan, Egypt 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.
15
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total revenues of
certain income statement data, except where noted, for the periods indicated.
Thirty-Six Twelve Weeks
Weeks Ended Ended
------------------------------- ------------------------------
September 7, September 8, September 7, September 8,
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues:
Restaurant sales 93.2% 94.0% 93.3% 93.7%
Commissary sales 3.7 2.9 3.7 3.0
Franchise fees and royalties 2.4 2.0 2.5 2.3
Other revenues 0.7 1.1 0.5 1.0
-------------- ------------- ------------- -------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.3 30.2 29.7 30.0
Commissary cost of sales (2) 84.4 89.3 81.3 89.3
Operating expenses (1) 54.6 55.5 55.4 56.3
Selling, general and administrative expenses 10.5 9.8 9.9 9.2
Preopening expenses 0.2 - 0.3 -
Depreciation and amortization 3.4 3.3 3.5 3.4
-------------- ------------- ------------- -------------
Total operating expenses 95.5 96.3 96.1 96.1
-------------- ------------- ------------- -------------
Income from operations 4.5 3.7 3.9 3.9
Interest expense, net (2.2) (1.7) (2.2) (1.8)
-------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of a change in accounting principle 2.3 2.0 1.7 2.1
Provision for income taxes - current
and deferred 1.0 1.2 0.7 1.8
-------------- ------------- ------------- -------------
Income before cumulative effect of a
change in accounting principle 1.3 0.8 1.0 0.3
Cumulative effect of a change in accounting
principle, net of tax - (3.6) - -
-------------- ------------- ------------- -------------
Net income (loss) 1.3% (2.8)% 1.0 % 0.3%
============== ============= ============= =============
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
COMPARISON OF THE FIRST THREE QUARTERS OF 2003 AND 2002
Total revenues increased by $300,954 or 0.7% for the first three quarters of
2003 compared to the same period in 2002 primarily as a result of the following:
Restaurant sales decreased by $53,565 or 0.1% for the first three 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 0.7% increase in same store sales for the
first three 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 $371,972 or 31.4% for the first three
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.
Franchise fees and royalties increased by $135,531 or 16.1% for the first
three 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 three quarters of 2003 compared to no franchise restaurant openings
during the first three quarters of 2002. Royalty
16
income increased $65,531 primarily as a result of the two franchise
restaurant openings during the first three quarters of 2003 and increased
royalties received from international licensees.
Other revenues decreased by $152,984 or 35.3% for the first three 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.
Additionally, the decrease in other income is due to the fact that other
income for the 2002 period includes $70,000 of insurance proceeds (business
interruption income) compared to $34,000 of insurance proceeds in the 2003
period. The insurance proceeds were a result of a fire which occurred at a
Company-owned restaurant in July 2002.
Restaurant cost of sales decreased by $369,642 or 3.1% for the first three
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 0.9% to 29.3% for the first three quarters of
2003 compared to 30.2% during the same period in 2002. The 0.9% 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 $255,700 or 24.2% for the first three
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 4.9% for the first three
quarters of 2003 compared to the same period in 2002 primarily as a result of an
increase in sales to non-affiliated restaurant concepts.
Restaurant operating expenses decreased by $402,047 or 1.9% for the first three
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 0.9% to 54.6% for the first three quarters of 2003 from
55.5% for the same period in 2002 primarily as a result of decreased hourly
labor costs and administrative costs and a 2.0% menu price increase in
mid-February 2003.
Selling, general and administrative expenses increased by $310,720 or 7.7% for
the first three 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 three quarters of 2003 (no similar expense was incurred in the first
three quarters of 2002), increased management development costs for
Company-owned restaurants and increased incentive based compensation costs. As a
percentage to total revenues, selling, general and administrative expenses were
10.5% and 9.8% for the first three quarters of 2003 and 2002, respectively.
Preopening expenses were $65,846 for the first three 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 and start-up costs
incurred in connection with the opening of two restaurants. These costs are
expensed as incurred and will fluctuate based on the size of the restaurant and
the number of restaurant locations which are in the process of being prepared
for opening. The Company is currently preparing for restaurant openings in late
2003 and early 2004.
Depreciation and amortization expense increased $72,414 or 5.3% for the first
three 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 $233,490 or 33.4% for the first three 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 "Liquidity and Capital Resources" section below for a
further discussion of this transaction.
17
Income taxes on the Company's income before income taxes and cumulative effect
of a change in accounting principle for the first three quarters of 2003 and
2002 have been provided for at an estimated effective tax rate of 44% and 58%,
respectively. The effective tax rate differs from the statutory federal tax rate
of 34% substantially due to the impact of permanent differences.
COMPARISON OF THE THIRD QUARTER OF 2003 AND 2002
Total revenues increased by $646,939 or 4.9% for the third quarter of 2003
compared to the same period in 2002 primarily as a result of the following:
Restaurant sales increased by $556,755 or 4.5% for the third quarter of 2003
compared to the same period in 2002. The increase in restaurant sales is
primarily due to the fact that a Company-owned restaurant which had been
destroyed by fire in the third quarter of 2002 (July) was reopened in early
2003 (February). The increase in restaurant sales is also a result of a 1.3%
increase in same store sales for the third quarter 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 $116,956 or 30.2% for the third 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 $41,579 or 13.8% for the third quarter
of 2003 compared to the same period in 2002. Royalty income increased $41,579
primarily as a result of two franchise restaurant openings during the first
two quarters of 2003 and increased royalties received from international
licensees. There was no franchise income in either the 2003 or 2002 periods.
Other revenues decreased by $68,351 or 49.2% for the third quarter of 2003
compared to the same period in 2002. The decrease in other revenues is due to
the fact that the 2002 period includes $70,000 of insurance proceeds
(business interruption income recorded as other revenue in 2002) which were a
result of a fire in July 2002 at a Company-owned restaurant. There was no
similar income in the same period of 2003.
Restaurant cost of sales increased by $127,848 or 3.5% for the third quarter of
2003 compared to the same period in 2002. The increase in restaurant cost of
sales is primarily due to the fact that a Company-owned restaurant which had
been destroyed by fire in the third quarter of 2002 (July) was reopened in early
2003 (February). Restaurant cost of sales decreased as a percentage of sales by
0.3% to 29.7% for the third quarter of 2003 compared to 30.0% during the same
period in 2002. The 0.3% 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 $63,922 or 18.4% for the third 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 8.0% for the third 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 increased by $200,446 or 2.9% for the third
quarter of 2003 compared to the same period in 2002 due to the fact that a
Company-owned restaurant which had been destroyed by fire in the third quarter
of 2002 (July) was reopened in early 2003 (February). Operating expenses
decreased as a percentage of restaurant sales by 0.9% to 55.4% for the third
quarter of 2003 from 56.3% for the same period in 2002 primarily as a result of
decreased hourly labor costs and administrative costs and a 2.0% menu price
increase in mid-February 2003.
Selling, general and administrative expenses increased by $155,552 or 12.8% for
the third quarter of 2003 compared to the same period in 2002. The increase in
selling, general and administrative expenses is primarily a result of increased
incentive based compensation costs. As a percentage to total revenues, selling,
general and administrative expenses were 9.9% and 9.2% for the third quarter of
2003 and 2002, respectively.
Preopening expenses were $36,981 for the third quarter of 2003. The expenses
represent start-up costs incurred in connection with the opening of two
restaurants. These costs are expensed as incurred and will fluctuate based on
the size of the restaurant and the number of restaurant locations which are in
the process of being prepared for opening. The
18
Company is currently preparing for restaurant openings in late 2003 and early
2004.
Depreciation and amortization expense increased $36,378 or 8.1% for the third
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 $67,072 or 28.5% for the third quarter of 2003
compared to the same period in 2002. The increase in net interest expense for
the third 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 third quarter of 2003 and 2002 have
been provided for at an estimated effective tax rate of 44% and 85%,
respectively. The effective tax rate differs from the statutory federal tax rate
of 34% substantially due to the impact of permanent 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 original amount) bearing interest at a fixed
rate of 8.52% for 15 years and the other ($7,378,000 original amount) 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 original amount)
bears interest at a fixed rate of 8.32% over 10 years while the other equipment
loan ($1,750,000 original amount) 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 third quarter of
2003, and management expects to be in compliance with the financial covenants
throughout 2003.
On August 4, 2003, the Company obtained construction financing in the amount of
$1,300,000. The note bears interest at the prime rate plus 1/2% and is due
February 1, 2005. At September 7, 2003, the note had a balance of $322,878. The
proceeds of the loan along with cash reserves and an equipment operating lease
will be used to fund the estimated construction cost of $2,600,000. 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.
Our capital needs during the first three quarters of 2003 arose from the
reconstruction of a restaurant facility which was damaged by fire in July 2002,
the maintenance and improvement of existing restaurant facilities, the purchase
of 2.2 acres of land in Dublin, Ohio and the commencement of construction of a
restaurant facility on this site which is anticipated to open during the fourth
quarter of 2003. Our capital needs during the first three 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 source of capital to fund the land
purchase and restaurant facility construction costs was the $1.2 million
generated from the $18.0 million financing package and the $1.3 million
construction loan. (See discussion above regarding both loans).
19
The table below provides certain information regarding our sources and uses of
cash for the periods presented.
Thirty-Six Thirty-Six
Weeks Ended Weeks Ended
September 7, September 8,
2003 2002
---------------- -----------------
Net cash provided by operations $ 2,398,235 $ 1,327,526
Purchases of property and equipment (2,577,038) (630,905)
Business acquisition - (150,000)
Net borrowings (payments) on long-term
debt and capital lease obligations 3,117,068 (1,032,443)
The Company's largest use of funds during the first three 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), payments of long-term
debt, maintenance and improvement of existing restaurant facilities, the
purchase of land in Dublin, Ohio, and restaurant facility construction costs.
The Company's largest sources of funds during the first three quarters of 2003
were 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
three 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 sources of funds during the first three
quarters of 2002 were 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 in addition to the restaurant facility currently under
construction. 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 in addition to the restaurant facility currently under construction.
At September 7, 2003, the Company had a commitment of approximately $860,000 for
the completion of the construction of one restaurant facility. The commitment
will be funded by proceeds from the $1,300,000 note payable which had a balance
of $322,878 at September 7, 2003. 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 in 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 preliminarily approved the transaction on May 19,
2003, subject to receipt of a fairness opinion from FTN Financial
20
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 the fourth quarter of 2003. 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,
it is expected that 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 September 7, 2003, the Company purchased approximately 1.5 acres
of land in Louisville, Kentucky for approximately $824,000. The Company plans to
construct a 5,100 square foot Tumbleweed restaurant on this property. The total
project cost, including preopening costs, is currently estimated at $2,500,000.
The Company currently anticipates using sale leaseback financing and cash
reserves to fund the project cost. 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 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 $17,000 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 September 7, 2003, the reserve balance is approximately
$44,000 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.
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 September 7, 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
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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 September 7,
2003, a hypothetical 100 basis point increase in interest rates would result in
an approximately $450,000 decrease in fair value of debt and would increase
annual interest expense on the variable rate mortgages by approximately $91,000.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to 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 $17,000 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 September 7, 2003, the reserve balance is approximately
$44,000 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.
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 September 7, 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 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 the fourth quarter of 2003. 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: October 21, 2003 Tumbleweed, Inc.
By: /s/ Glennon F. Mattingly
--------------------
Glennon F. Mattingly
Senior Vice President
Chief Financial Officer
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