<PAGE>
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 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-------------
Commission file number 333-57931
TUMBLEWEED, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1327945
(State or other jurisdiction of ( I.R.S. Employer Identification No.)
incorporation or organization)
1900 Mellwood Avenue, Louisville, Kentucky 40206
(Address of principal executive offices)
(502) 893-0323
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
The number of shares of common stock, par value of $.01 per share, outstanding
on November 1, 2000 was 5,839,230.
Exhibit Index: Page 21
<PAGE>
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Operations for the nine months
and three months ended September 30, 2000 and 1999 3
b) Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 4
c) Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
<PAGE>
<TABLE>
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales $ 39,186,377 $ 36,719,970 $ 13,478,991 $ 12,792,753
Commissary sales 1,250,098 875,842 394,830 313,194
Franchise fees and royalties 926,960 800,430 273,192 267,768
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets 434,311 - - -
Other revenues 667,872 358,558 294,584 152,161
------------ ------------ ------------ ------------
Total revenues 42,465,618 38,754,800 14,441,597 13,525,876
Operating expenses:
Restaurant cost of sales 11,380,258 10,658,321 4,014,588 3,694,473
Commissary cost of sales 1,100,899 789,530 352,403 274,647
Operating expenses 20,569,433 18,409,630 7,156,736 6,454,667
Selling, general and administrative expenses 4,832,216 3,761,375 2,033,807 1,269,845
Preopening expenses 486,728 318,320 110,977 63,287
Depreciation and amortization 1,571,356 1,321,989 536,878 459,254
Loss on guarantees of indebtedness 725,000 - 250,000 -
------------ ------------ ------------ ------------
Total operating expenses 40,665,890 35,259,165 14,455,389 12,216,173
------------ ------------ ------------ ------------
Income (loss) from operations 1,799,728 3,495,635 (13,792) 1,309,703
Other income (expense):
Interest income 11,630 35,949 3,470 12,352
Interest expense (1,041,981) (851,972) (383,262) (305,851)
Loss from investment in TW-Springhurst (2,939) - (2,939) -
------------ ------------ ------------ ------------
Total other expense (1,033,290) (816,023) (382,731) (293,499)
------------ ------------ ------------ ------------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle 766,438 2,679,612 (396,523) 1,016,204
Provision (benefit) for income taxes:
Current and deferred 268,254 937,864 (138,783) 355,671
Deferred taxes related to change in tax status - 639,623 - -
------------ ------------ ------------ ------------
Total provision (benefit) for income taxes 268,254 1,577,487 (138,783) 355,671
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of a change
in accounting principle 498,184 1,102,125 (257,740) 660,533
Cumulative effect of a change in accounting principle, net
of tax - (341,035) - -
------------ ------------ ------------ ------------
Net income (loss) $ 498,184 $ 761,090 $ (257,740) $ 660,533
============ ============ ============ ============
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.08 $ 0.19 $ (0.04) $ 0.11
Cumulative effect of a change in accounting principle,
net of tax - (0.06) - -
------------ ------------ ------------ ------------
Net income (loss) $ 0.08 $ 0.13 $ (0.04) $ 0.11
============ ============ ============ ============
Pro forma income data:
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 2,679,612
Pro forma income taxes (937,864)
-----------
Pro forma income before cumulative effect of a change
in accounting principle 1,741,748
Cumulative effect of a change in accounting principle,
net of tax (341,035)
-----------
Pro forma net income $ 1,400,713
===========
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.30
Cumulative effect of a change in accounting principle,
net of tax (0.06)
-----------
Pro forma net income $ 0.24
===========
</TABLE>
3
<PAGE>
<TABLE>
Tumbleweed, Inc.
Consolidated Balance Sheets
<CAPTION>
September 30 December 31
2000 1999
(Unaudited)
------------- ------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 843,534 $ 640,189
Accounts receivable 797,537 606,283
Receivable from insurance company 258,421 -
Inventories 1,750,734 1,597,794
Prepaid expenses 445,496 389,271
------------ ------------
Total current assets 4,095,722 3,233,537
Property and equipment, net 31,769,465 30,147,559
Goodwill, net of accumulated amortization of
$635,973 in 2000 and $551,478 in 1999 2,919,422 2,737,265
Investment in TW-Springhurst 77,061 -
Other assets 484,049 460,817
------------ ------------
Total assets $ 39,345,719 $ 36,579,178
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,768,686 $ 1,102,024
Accrued liabilities 2,478,296 1,832,736
Deferred income taxes 201,962 286,885
Current maturities on long-term
debt and capital leases 1,987,327 1,028,443
------------ ------------
Total current liabilities 6,436,271 4,250,088
Long-term liabilities:
Long-term debt, less current maturities 11,419,547 11,347,047
Capital lease obligations, less current maturities 2,730,076 2,769,339
Deferred income taxes 798,501 489,869
Other liabilities 155,000 160,000
------------ ------------
Total long-term liabilities 15,103,124 14,766,255
------------ ------------
Total liabilities 21,539,395 19,016,343
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; 5,881,630 shares issued
at September 30, 2000 and December 31, 1999 58,818 58,818
Paid-in capital 16,294,006 16,294,006
Treasury stock, 42,400 shares at September 30, 2000 (254,695) -
Retained earnings 1,708,195 1,210,011
------------ ------------
Total stockholders' equity 17,806,324 17,562,835
------------ ------------
Total liabilities and stockholders' equity $ 39,345,719 $ 36,579,178
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
2000 1999
----------- -----------
Operating activities:
<S> <C> <C>
Net income $ 498,184 $ 761,090
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,571,356 1,321,989
Deferred income taxes 223,709 714,982
Loss on guarantees of indebtedness 725,000 -
Loss from investment in TW-Springhurst 2,939 -
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets (434,311) -
Loss on disposition of property and equipment 18,225 23,004
Changes in operating assets and liabilities:
Accounts receivable (150,233) (53,683)
Inventories (148,571) (104,851)
Deferred preopening expenses - 524,669
Prepaid expenses (57,642) (47,080)
Other assets (40,756) (45,671)
Accounts payable 666,662 44,563
Accrued liabilities (90,040) (24,604)
Other liabilities (5,000) 110,252
----------- -----------
Net cash provided by operating activities 2,779,522 3,224,660
Investing activities:
Purchases of property and equipment (2,742,942) (6,054,489)
Insurance proceeds for property and equipment 860,654 -
Acquisition of business (929,400) -
Investment in TW-Springhurst (80,000) -
----------- -----------
Net cash used in investing activities (2,891,688) (6,054,489)
Financing activities:
Proceeds from common stock offering - 7,765,397
Proceeds from issuance of long-term debt 3,981,804 6,493,435
Payments on long-term debt and capital lease obligations (3,411,598) (5,480,652)
Payment on short-term borrowings - (6,990,348)
Purchase of treasury stock (254,695) -
Payment of public offering costs - (492,571)
----------- -----------
Net cash provided by financing activities 315,511 1,295,261
----------- -----------
Net increase (decrease) in cash and cash equivalents 203,345 (1,534,568)
Cash and cash equivalents at beginning of period 640,189 1,898,973
----------- -----------
Cash and cash equivalents at end of period $ 843,534 $ 364,405
=========== ===========
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 1,044,637 $ 853,523
=========== ===========
Cash paid for income taxes $ 300,410 $ 623,945
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000
1. BASIS OF PRESENTATION
MERGER OF TUMBLEWEED, LLC AND TUMBLEWEED, INC.
Tumbleweed, Inc. (the Company) was legally formed in December 1997 and
capitalized on June 23, 1998 with the issuance of 13 shares of Company common
stock at $10 per share. Effective January 1, 1999, and as a result of the sale
of 776,630 shares of common stock in an initial public offering (IPO),
Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of
Tumbleweed members at the time of the merger were converted into a total of
5,105,000 shares of Company common stock.
RESTAURANT FACILITIES
As of September 30, 2000, the Company owns and operates 34 restaurants in
Kentucky, Indiana and Ohio and franchises an additional 19 restaurants in
Kentucky, Indiana, Illinois, Wisconsin, West Virginia and Michigan. The Company
also licenses seven restaurants in Germany, Jordan, Saudi Arabia, Egypt and
England. The following table reflects changes in the number of Company-owned,
franchise and licensed restaurants during the nine months ended September 30,
2000.
Company-owned restaurants:
In operation, beginning of year 29
Restaurants opened 4
Restaurants purchased from franchisee 1
--------
34
--------
Franchise and licensed restaurants:
In operation, beginning of year 22
Restaurants opened 7
Restaurants closed (2)
Restaurants sold to Tumbleweed, Inc. (1)
--------
26
--------
System Total 60
========
Subsequent to September 30, 2000, one franchise restaurant opened in
Mechanicsville, Virginia, one franchise restaurant ceased operations in Beckley,
West Virginia and one licensed restaurant opened in Istanbul, Turkey.
INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements have been prepared by the
Company without audit, with the exception of the December 31, 1999 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
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. These consolidated financial
statements, note disclosures and other information should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999.
In the opinion of management, the unaudited interim consolidated financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals, which are necessary for a fair presentation. The
results of operations for the nine months and three months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000.
6
<PAGE>
1. BASIS OF PRESENTATION (continued)
PRO FORMA FINANCIAL INFORMATION
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the pro forma net income in the accompanying pro forma income data for the nine
months ended September 30, 1999 reflects a pro forma adjustment to income before
income taxes and cumulative effect of a change in accounting principle for
federal and state income taxes as if the Company had been a regular corporate
taxpayer since its inception. Pro forma income taxes for 1999 excludes the
deferred tax effects of Tumbleweed changing from a limited liability company
(which is taxed as a partnership) to a regular corporate taxable status on
January 1, 1999. Pro forma income taxes for 1999 are at an estimated effective
rate of 35%.
2. CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs be expensed as incurred. Prior to 1999, the Company capitalized its
preopening costs incurred in connection with opening new restaurant locations.
The unamortized balance of the Company's deferred preopening costs ($524,669 as
of December 31, 1998) was written-off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
September 30 December 31
2000 1999
---------------- -------------
Accrued payroll and related taxes $ 1,362,568 $ 611,566
Accrued insurance and fees 54,596 251,923
Accrued taxes, other than payroll 353,895 423,954
Gift certificate liability 145,159 396,747
Reserve for loss on guarantees of
indebtedness 481,316 -
Other 80,762 148,546
--------------- --------------
$ 2,478,296 $ 1,832,736
=============== ==============
4. LONG-TERM DEBT
Long-term debt consists of:
September 30 December 31
2000 1999
------------ -----------
Secured $6,500,000 mortgage revolving line of
credit note, bearing interest at prime rate
plus .25% (9.75% at September 30, 2000), due
December 31, 2003 $ 5,251,148 $ 5,242,148
Secured mortgage note payable, bearing interest
at commercial paper rate plus 2.65% (9.21% at
September 30, 2000), due February 17, 2006 2,548,907 2,691,433
Secured mortgage note payable, bearing interest at
prime rate plus 1% (10.5% at September 30, 2000),
payable in monthly installments through October 1,
2017 1,044,372 1,061,614
(Continued next page)
7
<PAGE>
4. LONG-TERM DEBT (continued)
September 30 December 31
2000 1999
----------- ------------
Secured mortgage note payable, bearing interest at
8.75%, payable in monthly installments through
February 15, 2008 $ 931,002 $ 957,992
Secured mortgage note payable bearing interest at
commercial paper rate plus 2.65% (9.21% at
September 30, 2000), due December 31, 2000 800,000 4,395
Secured mortgage note payable, bearing interest
at prime rate (9.5% at September 30, 2000), payable
in monthly installments through March 1, 2006 647,245 658,071
Secured mortgage note payable, bearing interest at
prime rate plus 1.25% (10.75% at September 30,
2000), payable in monthly installments through
November 27, 2016 606,250 634,375
Secured mortgage note payable, bearing interest at
10.52%, payable in monthly installments through
August 18, 2005 527,476 -
Other installment notes payable 467,655 620,204
----------- -----------
12,824,055 11,870,232
Less current maturities 1,404,508 523,185
----------- -----------
Long-term debt $ 11,419,547 $ 11,347,047
=========== ===========
Property and equipment with a net book value of approximately $20,000,000 at
September 30, 2000 collateralize the Company's long-term debt.
See Note 13 for information regarding an additional mortgage revolving line of
credit which was obtained by the Company subsequent to September 30, 2000.
5. RELATED PARTY TRANSACTIONS
As of September 30, 2000, accounts receivable includes $142,604 of management
fees, royalties, a franchise fee and reimbursement of store payroll costs due
from three related party limited liability companies who own three Tumbleweed
franchise restaurants. The management fees are a result of agreements which
require the related franchisee to pay certain fees to the Company in exchange
for the Company providing operations management and accounting services to the
franchisee. The royalties and franchise fee are a result of the franchise
agreements between the Company and related companies. The Company anticipates
that the amounts due will be collected in full. Franchise fees and royalties
recorded by the Company in relation to the three related party companies were
$158,004 during the nine months ended September 30, 2000 and were $24,324 during
the three months ended September 30, 2000. Management fees related to these
entities totaled $35,336 during the nine month period and were $16,215 during
the three month period. There were no revenues from these related companies
during the 1999 nine month period.
The Company has guaranteed, under its letter of credit with an equipment
supplier, the purchase of a related franchisee's equipment package. As of
September 30, 2000, the franchisee owes the supplier $157,442.
8
<PAGE>
5. RELATED PARTY TRANSACTIONS (continued)
Certain directors and officers of the Company own substantial interests in the
limited liability companies discussed above.
During the quarter ended September 30, 2000, the Company assumed a TW-Tennessee,
LLC equipment lease which it had previously guaranteed (see Note 14). The
equipment will be utilized in the reconstruction of the Company- owned
restaurant which was destroyed as a result of a fire (see Note 10). The capital
lease had a balance of approximately $225,000 on the date the lease was assumed.
See Note 6, Note 7 and Note 13 for additional related party transactions.
6. INVESTMENT IN TW-SPRINGHURST
During the three months ended September 30, 2000, the Company made an initial
$80,000 investment in TW- Springhurst, LLC. ("TW-Springhurst"). The Company has
a 50% member interest with the remaining 50% held by TW-Springhurst Investors,
LLC. A director of the Company and an officer of the Company own TW-Springhurst
Investors, LLC. The initial purpose of the limited liability company is to
construct and operate a Tumbleweed restaurant in Louisville, Kentucky. On August
29, 2000, a Management Agreement was signed between TW- Springhurst and the
Company which provides that the Company will manage the day-to-day operations of
the restaurant. As of September 30, 2000, TW-Springhurst had a commitment of
approximately $450,000 in connection with the construction of the restaurant.
7. ACQUISITION OF BUSINESS
On August 14, 2000, the Company purchased the assets of an Evansville, Indiana
Tumbleweed restaurant from TW- Evansville, LLC (a limited liability company in
which certain directors and officers of the Company own a substantial interest)
for $929,400. The Company also assumed TW-Evansville, LLC's equipment capital
lease which had a balance of approximately $197,000 on the date of purchase. The
purchase price for the business and property was at fair market value as
determined by an independent business valuation appraisal. The purchase price
was funded by cash reserves and funds drawn on the Company's mortgage revolving
lines of credit. The acquisition has been accounted for as a purchase and
accordingly, the results of operations of the acquired business are included in
the Company's results of operations since the date of acquisition.
The purchase price has been allocated as follows based upon the fair values of
the assets acquired and liabilities assumed.
Assets and liabilities acquired:
Inventory $ 47,356
Building 585,000
Equipment 235,000
Deposits 3,000
Accrued property taxes (10,600)
Capital lease obligation (197,008)
-------------
662,748
Goodwill 266,652
-------------
$ 929,400
=============
9
<PAGE>
8. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
(loss) per share data for the nine months and three months ended September 30,
2000 and 1999 in accordance with FAS 128, "Earnings per Share."
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
---------- ---------- ---------- ---------
Numerator:
Income (loss) before cumulative effect of a change
<S> <C> <C> <C> <C>
in accounting principle $ 498,184 $ 1,102,125 $ (257,740) $ 660,533
Cumulative effect of a change in accounting principle,
net of tax - (341,035) - -
---------- ---------- ---------- ---------
Net income (loss) $ 498,184 $ 761,090 $ (257,740) $ 660,533
========== ========== ========== =========
Pro forma income data :
Pro forma income before cumulative effect of a change
in accounting principle $ 1,741,748
Cumulative effect of a change in accounting principle,
net of tax (341,035)
----------
Pro forma net income $ 1,400,713
==========
Denominator :
Weighted average shares
outstanding - basic 5,852,947 5,881,630 5,840,871 5,881,630
Effect of dilutive securities:
Employee stock options 127,687 - 23,001 -
---------- ---------- ---------- ---------
Denominator for diluted earnings
per share-adjusted weighted
average and assumed conversions 5,980,634 5,881,630 5,863,872 5,881,630
========== ========== ========== =========
</TABLE>
9. SEGMENT INFORMATION
The Company has three reportable segments: restaurants, commissary and
corporate. The restaurant segment consists of the operations of all
Company-owned restaurants and derives its revenues from the sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to company- owned and franchised restaurants. The
corporate segment derives revenues from sale of franchise rights, franchise
royalties and related services used in restaurant operations, and contains the
selling, general and administrative activities of the Company.
Generally, the Company evaluates performance and allocates resources based on
pre-tax income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K.
Segment information for the nine months ended September 30 is as follows:
<TABLE>
<CAPTION>
2000:
Restaurant Commissary Corporate Totals
------------ -------------- ------------- ------------
Revenues from external
<S> <C> <C> <C> <C>
customers $ 39,186,377 $ 1,250,098 $ 2,029,143 $ 42,465,618
Intersegment revenues - 1,875,137 - 1,875,137
General and
administrative expenses - - 3,705,115 3,705,115
Advertising expenses - - 1,127,101 1,127,101
Depreciation and
amortization 1,240,553 89,564 241,239 1,571,356
Net interest expense - 132,075 898,276 1,030,351
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 5,299,579 60,520 (4,593,661) 766,438
</TABLE>
10
<PAGE>
9. SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
1999:
Restaurant Commissary Corporate Totals
------------ -------------- ------------- ------------
Revenues from external
<S> <C> <C> <C> <C>
customers $ 36,719,970 $ 875,842 $ 1,158,988 $ 38,754,800
Intersegment revenues - 2,043,630 - 2,043,630
General and
administrative expenses - - 2,780,399 2,780,399
Advertising expenses - - 980,976 980,976
Depreciation and
amortization 1,059,729 89,064 173,196 1,321,989
Net interest expense - 128,875 687,148 816,023
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 5,873,097 69,769 (3,263,254) 2,679,612
Segment information for the three months ended September 30 is as follows:
2000:
Restaurant Commissary Corporate Totals
------------- -------------- ------------ -------------
Revenues from external
customers $ 13,478,991 $ 394,830 $ 567,776 $ 14,441,597
Intersegment revenues - 592,246 - 592,246
General and
administrative expenses - - 1,523,793 1,523,793
Advertising expenses - - 510,014 510,014
Depreciation and
amortization 426,553 29,988 80,337 536,878
Net interest expense - 44,025 335,767 379,792
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1,695,634 12,824 (2,104,981) (396,523)
1999:
Restaurant Commissary Corporate Totals
------------- -------------- ------------ -------------
Revenues from external
customers $ 12,792,753 $ 313,194 $ 419,929 $ 13,525,876
Intersegment revenues - 730,787 - 730,787
General and
administrative expenses - - 899,253 899,253
Advertising expenses - - 370,592 370,592
Depreciation and
amortization 371,036 29,688 58,530 459,254
Net interest expense - 44,025 249,474 293,499
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1,925,026 54,776 (963,598) 1,016,204
</TABLE>
11
<PAGE>
10. INVOLUNTARY CONVERSION OF NON-MONETARY ASSETS
As a result of a fire which occurred June 7, 2000 at a Company-owned restaurant
in Kentucky, an involuntary conversion of non-monetary assets occurred which
resulted in a $434,311 gain. The gain represents the difference between the
carrying amount of the restaurant's assets which were destroyed (building,
equipment and inventory of $725,785, in total, at the time of the fire) and the
amount to be collected from the insurance company ($1,160,096). In addition, the
Company has accrued a receivable of approximately $225,000 from the insurance
company in relation to business interruption ($160,000) and continuing expenses
($65,000) of which approximately $165,000 was accrued during the three months
ended September 30, 2000 for business interruption ($120,000) and continuing
expenses ($45,000).
11. INCOME TAXES
Concurrent with the merger of the Company as described in Note 1, Tumbleweed
converted from a limited liability company into a C corporation and is now
subject to federal and state income taxes. As of the date of the merger, the
Company recorded a net deferred tax liability and corresponding income tax
expense for cumulative temporary differences between the tax basis and the
reported amounts of the Company's assets and liabilities. At the date of the
merger, the net differences equaled approximately $1,780,000 resulting in a net
deferred tax liability and corresponding income tax expense of $639,623 which is
included in the deferred income tax provision in the accompanying statement of
income for the nine months ended September 30, 1999.
Income taxes on the Company's income for the nine months and three months ended
September 30, 2000 and 1999 have been provided for at an estimated effective tax
rate of 35%.
12. TREASURY STOCK
On January 14, 2000, the Board of Directors approved the repurchase from time to
time of up to $500,000 of the Company's Common Stock. Purchases may be made in
the open market as well as by private transaction at times and prices considered
appropriate by the Company, subject to applicable rules and regulations. The
purchases will be funded by cash reserves. Through September 30, 2000, the
Company has repurchased 42,400 shares at a total cost of $254,695.
13. SUBSEQUENT EVENTS
On October 1, 2000, the Company purchased the assets of the Medina, Ohio
Tumbleweed restaurant from TW- Medina, LLC (a limited liability company in which
certain directors of the Company own a substantial interest) for $860,000. The
purchase price was at fair market value as determined by an independent business
valuation appraisal. The purchase price was funded by cash reserves and funds
drawn on the Company's mortgage revolving lines of credit.
On October 3, 2000, the Company obtained an additional $6,500,000 mortgage
revolving line of credit with a bank. The note bears interest at the Prime Rate
plus .25% and is due October 3, 2001. The current maximum amount available on
the revolving line of credit is $1,440,000 which can be increased up to
$6,500,000 as additional collateral is provided by the Company. The note imposes
restrictions on the Company with respect to the maintenance of certain financial
ratios, the incurrence of indebtedness, the sale of assets, mergers, capital
expenditures and the payment of dividends.
14. CONTINGENCIES
The Company has guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW-Tennessee, LLC, a franchisee (TW-Tennessee), to
the extent and in amounts not to exceed the amounts guaranteed as of September
30, 1998. As of September 30, 2000, the Company had guaranteed certain TW-
Tennessee obligations as follows, jointly and severally with TW-Tennessee common
members: a) up to $1,200,000 under a bank line of credit, b) approximately
$2,800,000 of a lease financing agreement, and c) equipment leases with a bank
totaling approximately $560,000.
During 1999, the Landlord under the lease financing agreement declared
TW-Tennessee to be in default, and accelerated the rent obligations under the
leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for
Davidson County, Tennessee, against TW-Tennessee and against certain guarantors
of the lease obligations,
12
<PAGE>
14. CONTINGENCIES (continued)
including the Company and a Director of the Company. Subsequent to September 30,
2000, the Company and certain guarantors of the lease obligations reached an
agreement with the Landlord, under which the Company and
such guarantors paid certain sums to the Landlord as a final settlement of all
claims of the Landlord, and the Landlord dismissed its legal action against and
released the Company from further liability under its guarantees.
Subsequent to September 30, 2000, the lessor under the equipment leases with
TW-Tennessee declared TW- Tennessee to be in default thereunder and demanded
payment in full from all guarantors of the leases, including the Company. The
Company is unaware of the institution of any legal action by the lessor to
enforce the guarantees.
As a result of the settlement with the Landlord under the TW-Tennessee lease
financing agreement, and given the demand for payment by the lessor under the
TW-Tennessee equipment leases, the Company has incurred a loss, and the
Company's management believes that it is probable that it will incur additional
losses, related to the Company's guarantees of TW-Tennessee's obligations. In
light of the recent developments during the three months ended September 30,
2000, the Company provided an additional reserve of $250,000 related to the
Company's guarantees of the TW-Tennessee obligations which increased the
previously established reserve to $725,000. The reserve amount was based on the
Company's payment to the Landlord under the TW-Tennessee lease financing
agreement, the Company's share of the various remaining guarantees of TW
Tennessee obligations and an estimated amount for legal costs which will likely
be incurred in connection with the resolution of this matter.
13
<PAGE>
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.
Of the 60 Tumbleweed restaurants as of September 30, 2000, we owned and operated
34 restaurants in Kentucky, Indiana and Ohio, franchised 19 restaurants in
Indiana, Illinois, Kentucky, Wisconsin, West Virginia and Michigan, and licensed
seven restaurants in Germany, Jordan, Saudi Arabia, Egypt and England. Since
September 30, 2000, one franchise restaurant opened in Mechanicsville, Virginia
and one licensed restaurant opened in Istanbul, Turkey. Also subsequent to
September 30, 2000, the Company acquired a Tumbleweed restaurant from a related
party. See Note13 in the accompanying financial statements for details of the
transaction.
The following section should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing.
RESULTS OF OPERATIONS
The table, on the next page, sets forth the percentage relationship to total
revenues of certain income statement data, except where noted, for the periods
indicated.
14
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales 92.3 % 94.7 % 93.3 % 94.6 %
Commissary sales 2.9 2.3 2.7 2.3
Franchise fees and royalties 2.2 2.1 1.9 2.0
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets 1.0 - - -
Other revenues 1.6 0.9 2.1 1.1
------------- ------------- ------------- -------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.0 29.0 29.8 28.9
Commissary cost of sales (2) 88.1 90.1 89.2 87.7
Operating expenses (1) 52.5 50.1 53.1 50.5
Selling, general and administrative expenses 11.4 9.7 14.1 9.4
Preopening expenses 1.1 0.8 0.8 0.5
Depreciation and amortization 3.7 3.4 3.7 3.4
Loss on guarantees of indebtedness 1.7 - 1.7 -
------------- ------------- ------------- -------------
Total operating expenses 95.8 91.0 100.1 90.3
------------- ------------- ------------- -------------
Income from operations 4.2 9.0 (0.1) 9.7
Other expense, net (2.4) (2.1) (2.6) (2.2)
------------- ------------- ------------- -------------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1.8 6.9 (2.7) 7.5
Provision (benefit) for income taxes:
Current and deferred 0.6 2.4 (0.9) 2.6
Deferred taxes related to change in tax status - 1.6 -
------------- ------------- ------------- -------------
Total provision (benefit) for income taxes 0.6 4.0 (0.9) 2.6
------------- ------------- ------------- -------------
Income (loss) before cumulative effect
of a change in accounting principle 1.2 2.9 (1.8) 4.9
Cumulative effect of a change in
accounting principle, net of tax - (0.9) - -
------------- ------------- ------------- -------------
Net income (loss) 1.2 % 2.0 % (1.8 )% 4.9%
============= ============= ============= =============
Pro forma income data:
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 6.9 %
Pro forma income taxes (3) (2.4)
-------------
Pro forma income before cumulative
effect of a change in accounting principle 4.5
Cumulative effect of a change in
accounting principle, net of tax (0.9)
-------------
Pro forma net income 3.6 %
=============
<FN>
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The pro forma income taxes reflect the effect of the corporate
reorganization on the historical net income assuming the Company was
taxed as a C corporation for income tax purposes since its inception with
an assumed combined federal and state effective tax rate of 35%.
</FN>
</TABLE>
15
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenues increased by $3,710,818 or 9.6% for the nine months ended
September 30, 2000 compared to the same period in 1999 primarily as a result of
the following:
Restaurant sales increased by $2,466,407 or 6.7% for the nine months ended
September 30, 2000 compared to the same period in 1999. The increase is due
primarily to the addition of six Company-owned restaurants since September
30, 1999. The increase is partially offset by a 3.0% decrease in same store
sales for the nine month period.
Commissary sales to franchised and licensed restaurants increased by $374,256
or 42.7% for the nine months ended September 30, 2000 compared to the same
period in 1999. The increase is due primarily to the addition of nine
franchised or licensed restaurants since September 30, 1999.
Franchise fees and royalties increased by $126,530 or 15.8% for the nine
months ended September 30, 2000 compared to the same period in 1999 as a
result of an increase in royalty income due primarily to additional franchise
stores. Franchise fees were the same in both periods.
The gain from insurance proceeds was due to the involuntary conversion of
non-monetary assets from a fire at a Company-owned restaurant. See Note 10
of the accompanying financial statements for a detail discussion.
Other revenues increased by $309,314 or 86.3% for the nine months ended
September 30, 2000 compared to the same period in 1999 primarily due to an
increase in volume related purchasing rebates. In addition, other revenues
for the 2000 nine month period includes $160,000 of insurance proceeds as it
relates to a business interruption as a result of a fire at a Company-owned
restaurant. See Note 10 of the accompanying financial statements for a detail
discussion. There was no similar income in the 1999 nine month period.
Restaurant cost of sales increased by $721,937 or 6.8% for the nine months ended
September 30, 2000 compared to the same period in 1999. The increase was
principally due to the opening of six additional Company-owned restaurants since
September 30, 1999. Restaurant cost of sales as a percentage of sales was 29.0%
for the nine months ended September 30, 2000 and 1999.
Commissary cost of sales increased $311,369 or 39.4% for the nine months ended
September 30, 2000 compared to the same period in 1999. The increase in
commissary cost of sales is due primarily to the addition of nine franchised or
licensed restaurants since September 30, 1999. As a percentage to commissary
sales, commissary cost of sales decreased 2.0% for the nine months ended
September 30, 2000 compared to the same period in 1999 due to lower manufactured
food costs in 2000.
Restaurant operating expenses increased by $2,159,803 or 11.7% for the nine
months ended September 30, 2000 compared to the same period in 1999. The
increase reflects the addition of six Company-owned restaurants since September
30, 1999. Operating expenses increased as a percentage of restaurant sales to
52.5% for the nine months ended September 30, 2000 from 50.1% for the same
period in 1999 primarily due to a 0.5% increase in promotional costs and a 0.7%
increase in management payroll costs.
Selling, general and administrative expenses increased by $1,070,841 or 28.5%
for the nine months ended September 30, 2000 compared to the same period in
1999. The increase was due in part to additional payroll costs of approximately
$280,000 which were incurred as a result of the retirement of the President and
CEO of the Company and the restructuring of the corporate staff. The increase in
selling, general and administrative expenses for the nine month period is also
due in part to the addition of management personnel to support the growing
restaurant base and increased advertising and outside professional service
costs. As a percentage to total revenues, selling, general and administrative
expenses were 11.4% and 9.7% of revenues for the nine months ended September 30,
2000 and 1999, respectively.
Preopening expenses were $486,728 and $318,320 for the nine months ended
September 30, 2000 and 1999, respectively. Preopening expenses are start-up
costs which are incurred in connection with opening new restaurant locations.
These costs are expensed as incurred and will fluctuate based on the number of
restaurant locations which are in the process of being prepared for opening.
16
<PAGE>
Depreciation and amortization expense increased $249,367 or 18.9% for the nine
months ended September 30, 2000 compared to the same period in 1999 due
primarily to the addition of six Company-owned restaurants since September 30,
1999.
Net interest expense increased $214,328 or 26.3% for the nine months ended
September 30, 2000 compared to the same period in 1999. The increase resulted
from increased borrowing to fund the growth in Company-owned restaurants and
increases in the prime interest rate during 1999 and 2000.
The combined effective federal and state income tax rate was approximately 35%
for the nine months ended September 30, 2000 and 1999 excluding the charge
related to change in tax status. As a result of a change in tax status from a
limited liability corporation to a C corporation effective January 1, 1999, we
recorded a net deferred income tax liability and income tax expense of $639,623
in 1999.
The Company's income before cumulative effect of a change in accounting
principle decreased $1,243,564 or 71.4% for the nine months ended September 30,
2000 compared to pro forma income before cumulative effect of a change in
accounting principle for the nine months ended September 30, 1999. Earnings per
share before cumulative effect of a change in accounting principle was $0.08 for
the nine months ended September 30, 2000 as compared to pro forma earnings per
share before cumulative effect of a change in accounting principle of $0.30 for
the nine months ended September 30, 1999.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenues increased by $915,721 or 6.8% for the three months ended
September 30, 2000 compared to the same period in 1999 primarily as a result of
the following:
Restaurant sales increased by $686,238 or 5.4% for the three months ended
September 30, 2000 compared to the same period in 1999. The increase is due
primarily to the addition of six Company-owned restaurants since September
30, 1999. The increase is partially offset by a 3.1% decrease in same store
sales for the three month period.
Commissary sales to franchised and licensed restaurants increased by $81,636
or 26.1% for the three months ended September 30, 2000 compared to the same
period in 1999. The increase is due primarily to the addition of nine
franchised or licensed restaurants since September 30, 1999.
Franchise fees and royalties increased by $5,424 or 2.0% for the three months
ended September 30, 2000 compared to same period in 1999. The increase in
franchise fees and royalty income was due to increased royalty income of
$40,424 during the three months ended September 30, 2000 compared to the same
period in 1999. The increase in royalty income was partially offset by a
$35,000 decrease in franchise fees for the three month period due to the fact
that during the 1999 three month period, one new franchised restaurant opened
compared to none during the 2000 three month period.
Other revenues increased by $142,423 or 93.6% for the three months ended
September 30, 2000 compared to the same period in 1999 primarily due to the
fact that other revenues for the 2000 three month period includes $120,000 of
insurance proceeds as it relates to a business interruption as a result of a
fire at a Company-owned restaurant. See Note 10 of the accompanying financial
statements for a detail discussion. There was no similar income in the 1999
three month period.
Restaurant cost of sales increased by $320,115 or 8.7% for the three months
ended September 30, 2000 compared to the same period in 1999. The increase was
principally due to the opening of six additional Company-owned restaurants since
September 30, 1999. Restaurant cost of sales increased as a percentage of sales
by 0.9% to 29.8% for the three months ended September 30, 2000 compared to 28.9%
during the same period in 1999.
Commissary cost of sales increased $77,756 or 28.3% for the three months ended
September 30, 2000 compared to the same period in 1999. The increase in
commissary cost of sales is due primarily to the addition of nine franchised or
licensed restaurants since September 30, 1999 . As a percentage to sales,
commissary cost of sales increased 1.5% for the three months ended September 30,
2000 compared to the same period in 1999.
17
<PAGE>
Restaurant operating expenses increased by $702,069 or 10.9% for the three
months ended September 30, 2000 compared to the same period in 1999. The
increase reflects the addition of six Company-owned restaurants since
September 30, 1999. Operating expenses increased as a percentage of restaurant
sales to 53.1% for the three months ended September 30, 2000 from 50.5% for the
same period in 1999 primarily due to a 1.8% increase in payroll costs.
Selling, general and administrative expenses increased by $763,926 or 60.2% for
the three months ended September 30, 2000 compared to the same period in 1999.
The increase was due in part to additional payroll costs of approximately
$280,000 which were incurred as a result of the retirement of the President and
CEO of the Company and the restructuring of the corporate staff. The increase in
selling, general and administrative expenses for the three month period is also
due in part to the addition of management personnel to support the growing
restaurant base and increased advertising and outside professional service
costs. As a percentage to total revenues, selling, general and administrative
expenses were 14.1% and 9.4% of revenues for the three months ended September
30, 2000 and 1999, respectively.
Preopening expenses were $110,977 and $63,287 for the three months ended
September 30, 2000 and 1999, respectively. Preopening expenses are start-up
costs which are incurred in connection with opening new restaurant locations.
These costs are expensed as incurred and will fluctuate based on the number of
restaurant locations which are in the process of being prepared for opening.
Depreciation and amortization expense increased $77,624 or 16.9% for the three
months ended September 30, 2000 compared to the same period in 1999 due
primarily to the addition of six Company-owned restaurants since September 30,
1999.
Net interest expense increased $86,293 or 29.4% for the three months ended
September 30, 2000 compared to the same period in 1999. The increase resulted
from increased borrowing to fund the growth in Company-owned restaurants and
increases in the prime interest rate during 1999 and 2000.
The combined effective federal and state income tax rate was approximately 35%
for the three months ended September 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand the number of our restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance that we will be successful in
opening the number of restaurants anticipated in a timely manner. Furthermore,
there can be no assurance that our new restaurants will generate sales revenue
or profit margins consistent with those of our existing restaurants, or that
these new restaurants will be operated profitably.
Our principal capital needs arise from the development of new restaurants, and
to a lesser extent, maintenance and improvement of existing facilities. The
principal sources of capital to fund these expenditures were internally
generated cash flow, bank borrowings, lease financing and an equity offering.
The table below provides certain information regarding our sources and uses of
cash for the periods presented.
Nine Months Ended
September 30
2000 1999
------------- ------------
Net cash provided by operations $ 2,779,522 $ 3,224,660
Purchases of property and equipment 2,742,942 6,054,489
Acquisition of business 929,400 -
Insurance proceeds for property and equipment 860,654 -
Proceeds from common stock offering - 7,765,397
Net borrowings on long-term
debt and capital lease obligations 570,207 1,012,783
Payment on short-term borrowings - 6,990,348
18
<PAGE>
Our single largest use of funds has been for capital expenditures consisting of
land, building and equipment associated with our restaurant expansion program.
The substantial growth of the Company over the period has not required
significant additional working capital. Sales are predominantly for cash and the
business does not require the maintenance of significant receivables or
inventories. In addition, it is common within the restaurant industry to receive
trade credit on the purchase of food, beverage and supplies, thereby reducing
the need for incremental working capital to support sales increases.
The Company has guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee), to
the extent and in amounts not to exceed the amounts guaranteed as of September
30, 1998. As of September 30, 2000, the Company had guaranteed certain
TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee
common members: a) up to $1,200,000 under a bank line of credit, b)
approximately $2,800,000 of a lease financing agreement, and c) equipment leases
with a bank totaling approximately $560,000.
During 1999, the Landlord under the lease financing agreement declared
TW-Tennessee to be in default, and accelerated the rent obligations under the
leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for
Davidson County, Tennessee, against TW-Tennessee and against certain guarantors
of the lease obligations, including the Company and a Director of the Company.
Subsequent to September 30, 2000, the Company and certain guarantors of the
lease obligations reached an agreement with the Landlord, under which the
Company and such guarantors paid certain sums to the Landlord as a final
settlement of all claims of the Landlord, and the Landlord dismissed its legal
action against and released the Company from further liability under its
guarantees.
Subsequent to September 30, 2000, the lessor under the equipment leases with
TW-Tennessee declared TW-Tennessee to be in default thereunder and demanded
payment in full from all guarantors of the leases, including the Company. The
Company is unaware of the institution of any legal action by the lessor to
enforce the guarantees.
As a result of the settlement with the Landlord under the TW-Tennessee lease
financing agreement, and given the demand for payment by the lessor under the
TW-Tennessee equipment leases, the Company has incurred a loss, and the
Company's management believes that it is probable that it will incur additional
losses, related to the Company's guarantees of TW-Tennessee's obligations. In
light of the recent developments during the three months ended September 30,
2000, the Company provided an additional reserve of $250,000 related to the
Company's guarantees of the TW-Tennessee obligations which increased the
previously established reserve to $725,000. The reserve amount was based on the
Company's payment to the Landlord under the TW-Tennessee lease financing
agreement, the Company's share of the various remaining guarantees of TW
Tennessee obligations and an estimated amount for legal costs which will likely
be incurred in connection with the resolution of this matter.
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.
We plan to open by the end of the year the restaurant which will be owned by
TW-Springhurst as described in Note 6 in the accompanying financial statements.
This will depend on the hiring and training of sufficiently skilled management
and other personnel and other factors. As of September 30, 2000, TW-Springhurst
had a commitment of approximately $450,000 in connection with the construction
of the restaurant.
We have used and will continue to utilize mortgage, sale/leaseback and landlord
financing, as well as equipment leasing and financing, for a portion of the
development costs of restaurants which will open during 2000. The remaining
costs have been and will be funded by available cash reserves, cash provided
from operations and borrowing capacity. Management believes such sources will be
sufficient to fund our expansion plans through 2000. Should our actual results
of operations fall short of, or our rate of expansion significantly exceed our
plans, or should our costs or capital expenditures exceed expectations, we may
need to seek additional financing in the future. In negotiating such financing,
there can be no assurance that we will be able to raise additional capital on
terms satisfactory to us.
In order to provide any additional funds necessary to pursue our growth
strategy, we may incur, from time to time, additional short and long-term bank
indebtedness and may issue, in public or private transactions, our equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. There is no assurance that such additional financing will be
available on terms acceptable to us.
19
<PAGE>
We have a $6,500,000 mortgage revolving line of credit note (the "Credit
Facility"). At September 30, 2000 we had outstanding borrowings under the Credit
Facility of $5,251,148. The note bears interest at the Prime Rate plus .25%
(9.75% at September 30, 2000) and is due December 31, 2003. The Credit Facility
imposes restrictions on us with respect to the maintenance of certain financial
ratios, the incurrence of indebtedness, the sale of assets, mergers, capital
expenditures and the payment of dividends.
On October 3, 2000, the Company obtained an additional $6,500,000 mortgage
revolving line of credit with a bank. The note bears interest at the Prime Rate
plus .25% and is due October 3, 2001. The current maximum amount available on
the revolving line of credit is $1,440,000 which can be increased up to
$6,500,000 as additional collateral is provided by the Company. The note imposes
restrictions on the Company with respect to the maintenance of certain financial
ratios, the incurrence of indebtedness, the sale of assets, mergers, capital
expenditures and the payment of dividends.
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs be expensed as incurred. Prior to 1999, we capitalized our preopening
costs incurred in connection with opening new restaurant locations. The
unamortized balance of the Company's deferred preopening costs ($524,669 as of
December 31, 1998) were written- off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. We pay a majority of our 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 our
restaurants are located, we have continued to increase wages and benefits in
order to attract and retain management personnel and hourly workers. In
addition, most of our leases require us 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. We 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
We do not enter into derivative transactions or speculate on the future
direction of interest rates. We are exposed to interest rate changes primarily
as a result of our variable rate debt instruments. As of September 30, 2000
approximately $11,240,000 of our debt bore interest at variable rates. We
believe that the effect, if any, of reasonably possible near-term changes in
interest rates on our financial position, results of operations or cash flows
would not be significant.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee), to
the extent and in amounts not to exceed the amounts guaranteed as of September
30, 1998. As of September 30, 2000, the Company had guaranteed certain
TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee
common members: a) up to $1,200,000 under a bank line of credit, b)
approximately $2,800,000 of a lease financing agreement, and c) equipment leases
with a bank totaling approximately $560,000.
During 1999, the Landlord under the lease financing agreement declared
TW-Tennessee to be in default, and accelerated the rent obligations under the
leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for
Davidson County, Tennessee, against TW-Tennessee and against certain guarantors
of the lease obligations, including the Company and a Director of the Company.
Subsequent to September 30, 2000, the Company and certain guarantors of the
lease obligations reached an agreement with the Landlord, under which the
Company and such guarantors paid certain sums to the Landlord as a final
settlement of all claims of the Landlord, and the Landlord dismissed its legal
action against and released the Company from further liability under its
guarantees.
Subsequent to September 30, 2000, the lessor under the equipment leases with
TW-Tennessee declared TW-Tennessee to be in default thereunder and demanded
payment in full from all guarantors of the leases, including the Company. The
Company is unaware of the institution of any legal action by the lessor to
enforce the guarantees.
As a result of the settlement with the Landlord under the TW-Tennessee lease
financing agreement, and given the demand for payment by the lessor under the
TW-Tennessee equipment leases, the Company has incurred a loss, and the
Company's management believes that it is probable that it will incur additional
losses, related to the Company's guarantees of TW-Tennessee's obligations. In
light of the recent developments during the three months ended September 30,
2000, the Company provided an additional reserve of $250,000 related to the
Company's guarantees of the TW-Tennessee obligations which increased the
previously established reserve to $725,000 The reserve amount was based on the
Company's payment to the Landlord under the TW-Tennessee lease financing
agreement, the Company's share of the various remaining guarantees of TW
Tennessee obligations and an estimated amount for legal costs which will likely
be incurred in connection with the resolution of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Tumbleweed, Inc. filed Form 8-K on August 10, 2000 to report under Item
5 that, on August 2, 2000, the Board of Directors of the Company
appointed Mr. Terrance A. Smith the Chairman of the Board, President
and Chief Executive Officer. The appointment of Mr. Smith followed the
announcement by John A. Butorac of his decision to retire as President
and CEO of the Company. Mr. Butorac will continue as a director of the
Company.
The filing also reported that, on August 2, 2000, the Board of
Directors accepted the resignation of Mr. W. Roger Drury, formerly a
Director of the Company.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
21
<PAGE>
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: November 2, 2000 Tumbleweed, Inc.
By: /s/ James M. Mulrooney
------------------
James M. Mulrooney
Executive Vice President
Chief Financial Officer
22
<PAGE>
