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 June 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 August 1, 2000 was 5,842,230.
Exhibit Index: Page 19
<PAGE>
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Income for the six months and three
months ended June 30, 2000 and 1999 3
b) Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 4
c) Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 5
d) Consolidated Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
2
<PAGE>
Tumbleweed, Inc.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
------------ ------------ ------------ -----------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales $25,707,386 $23,927,217 $12,886,116 $12,594,899
Commissary sales 855,268 562,647 432,662 276,411
Franchise fees and royalties 653,768 532,662 424,802 281,493
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets 434,311 - 434,311 -
Other revenues 373,288 206,397 213,764 116,751
------------ ----------- ------------ -----------
Total revenues 28,024,021 25,228,923 14,391,655 13,269,554
Operating expenses:
Restaurant cost of sales 7,365,672 6,963,848 3,694,028 3,700,447
Commissary cost of sales 748,497 514,882 373,393 254,629
Operating expenses 13,412,697 11,954,963 6,667,642 6,122,553
Selling, general and administrative expenses 2,798,410 2,491,530 1,522,403 1,306,802
Preopening expenses 375,751 255,033 289,688 120,228
Depreciation and amortization 1,034,477 862,735 516,458 444,270
Loss on guarantees of indebtedness 475,000 - 475,000 -
------------ ----------- ------------ -----------
Total operating expenses 26,210,504 23,042,991 13,538,612 11,948,929
------------ ----------- ------------ -----------
Income from operations 1,813,517 2,185,932 853,043 1,320,625
Other income (expense):
Interest income 8,160 23,597 3,888 6,574
Interest expense (658,719) (546,121) (337,249) (282,756)
------------ ----------- ------------ -----------
Total other expense (650,559) (522,524) (333,361) (276,182)
------------ ----------- ------------ -----------
Income before income taxes and cumulative effect of a
change in accounting principle 1,162,958 1,663,408 519,682 1,044,443
Provision for income taxes:
Current and deferred (407,035) (582,193) (181,889) (365,555)
Deferred taxes related to change in tax status - (639,623) - -
------------ ----------- ------------ -----------
Total provision for income taxes (407,035) (1,221,816) (181,889) (365,555)
------------ ----------- ------------ -----------
Income before cumulative effect of a change
in accounting principle 755,923 441,592 337,793 678,888
Cumulative effect of a change in accounting principle,net
of tax - (341,035) - -
------------ ----------- ------------ -----------
Net income $ 755,923 $ 100,557 $ 337,793 $ 678,888
============ =========== ============ ===========
Basic and diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.13 $ 0.08 $ 0.06 $ 0.12
Cumulative effect of a change in accounting principle,
net of tax - (0.06) - -
------------ ----------- ------------ -----------
Net income $ 0.13 $ 0.02 $ 0.06 $ 0.12
============ =========== ============ ===========
Pro forma income data:
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 1,663,408
Pro forma income taxes (582,193)
-----------
Pro forma income before cumulative effect of a change
in accounting principle 1,081,215
Cumulative effect of a change in accounting principle,
net of tax (341,035)
-----------
Pro forma net income $ 740,180
===========
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.18
Cumulative effect of a change in accounting principle,
net of tax (0.06)
-----------
Pro forma net income $ 0.12
===========
</TABLE>
3
<PAGE>
Tumbleweed, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
(Unaudited)
------------- ------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 470,948 $ 640,189
Accounts receivable 884,561 606,283
Receivable from insurance company 1,219,532 -
Inventories 1,715,136 1,597,794
Prepaid expenses 395,831 389,271
------------ ------------
Total current assets 4,686,008 3,233,537
Property and equipment, net 30,296,657 30,147,559
Goodwill, net of accumulated amortization of
$607,314 in 2000 and $551,478 in 1999 2,681,429 2,737,265
Other assets 497,900 460,817
------------ ------------
Total assets $ 38,161,994 $ 36,579,178
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,858,843 $ 1,102,024
Accrued liabilities 2,119,540 1,832,736
Deferred income taxes 222,192 286,885
Current maturities on long-term
debt and capital leases 1,532,443 1,028,443
------------ ------------
Total current liabilities 5,733,018 4,250,088
Long-term liabilities:
Long-term debt, less current maturities 10,925,020 11,347,047
Capital lease obligations, less current maturities 2,522,656 2,769,339
Deferred income taxes 749,541 489,869
Other liabilities 155,000 160,000
------------ ------------
Total long-term liabilities 14,352,217 14,766,255
------------ ------------
Total liabilities 20,085,235 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 June 30, 2000 and December 31, 1999 58,818 58,818
Paid-in capital 16,294,006 16,294,006
Treasury stock, 39,400 shares at June 30, 2000 (241,999) -
Retained earnings 1,965,934 1,210,011
------------ ------------
Total stockholders' equity 18,076,759 17,562,835
------------ ------------
Total liabilities and stockholders' equity $ 38,161,994 $ 36,579,178
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
2000 1999
----------- -----------
Operating activities:
<S> <C> <C>
Net income $ 755,923 $ 100,557
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,034,477 862,735
Deferred income taxes 194,979 653,267
Loss on guarantees of indebtedness 475,000 -
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets (434,311) -
Loss on disposition of property and equipment 14,252 3,616
Changes in operating assets and liabilities:
Accounts receivable (337,714) (166,401)
Inventories (160,329) (193,508)
Deferred preopening expenses - 524,669
Prepaid expenses (9,504) (47,748)
Other assets (50,627) (52,103)
Accounts payable 756,820 44,787
Accrued liabilities (188,196) 31,779
Other liabilities (5,000) (1,498)
----------- -----------
Net cash provided by operating activities 2,045,770 1,760,152
Investing activities:
Purchases of property and equipment (1,808,302) (4,765,368)
------------ -----------
Net cash used in investing activities (1,808,302) (4,765,368)
Financing activities:
Proceeds from common stock offering - 7,765,397
Proceeds from issuance of long-term debt 1,704,000 6,243,435
Payments on long-term debt and capital lease obligations (1,868,710) (4,530,820)
Payment on short-term borrowings - (6,990,348)
Purchase of treasury stock (241,999) -
Payment of public offering costs - (492,571)
----------- -----------
Net cash provided by (used in) financing activities (406,709) 1,995,093
----------- -----------
Net decrease in cash and cash equivalents (169,241) (1,010,123)
Cash and cash equivalents at beginning of period 640,189 1,898,973
----------- -----------
Cash and cash equivalents at end of period $ 470,948 $ 888,850
=========== ===========
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 643,279 $ 544,570
=========== ===========
Cash paid for income taxes $ 292,492 $ 311,150
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 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 June 30, 2000, the Company owns and operates 32 restaurants in Kentucky,
Indiana and Ohio and franchises an additional 22 restaurants in Kentucky,
Indiana, Illinois, Tennessee, Wisconsin, West Virginia and Michigan. The Company
also licenses seven restaurants in Germany, Jordan, Saudi Arabia, Egypt and
England. Since June 30, 2000, the Company has opened one additional
Company-owned restaurant in Indiana and one franchise restaurant located in
Clarksville, Tennessee ceased operations.
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 six months and three months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
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 six
months ended June 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.
6
<PAGE>
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
June 30 December 31
2000 1999
----------- ----------
Accrued payroll and related taxes $ 824,998 $ 611,566
Accrued insurance and fees 152,362 251,923
Accrued taxes, other than payroll 420,381 423,954
Gift certificate liability 162,487 396,747
Reserve for loss on guarantees of indebtedness 475,000 -
Other 84,312 148,546
---------- ----------
$2,119,540 $1,832,736
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of:
June 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 June 30, 2000), due
December 31, 2003 $ 5,072,148 $ 5,242,148
Secured mortgage note payable, bearing interest
at commercial paper rate plus 2.65% (9.25% at
June 30, 2000), due February 17, 2006 2,596,416 2,691,433
Secured mortgage note payable, bearing interest at
prime rate plus 1% (10.5% at June 30, 2000),
payable in monthly installments through October 1,
2017 1,050,261 1,061,614
Secured mortgage note payable, bearing interest at
8.75%, payable in monthly installments through
February 15, 2008 940,047 957,992
Secured mortgage note payable, bearing interest
at prime rate (9.5% at June 30, 2000), payable
in monthly installments through March 1, 2006 650,233 658,071
Secured mortgage note payable, bearing interest a
prime rate plus 1.25% (10.75% at June 30, 2000),
payable in monthly installments through
November 27, 2016 615,625 634,375
Secured mortgage note payable bearing interest at
commercial paper rate plus 2.65% (9.25% at
June 30, 2000), due December 31, 2000 508,395 4,395
Other installment notes payable 519,081 620,204
---------- ----------
11,952,206 11,870,232
Less current maturities 1,027,186 523,185
---------- ----------
Long-term debt $10,925,020 $11,347,047
========== ==========
Property and equipment with a net book value of approximately $19,800,000 at
June 30, 2000 collateralize the Company's long-term debt.
7
<PAGE>
5. RELATED PARTY TRANSACTIONS
As of June 30, 2000, accounts receivable includes $156,024 of management fees,
royalties, a franchise fee and reimbursement of store payroll costs due from
four related party limited liability companies who own four 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 four related party companies were
$153,699 during the six months ended June 30, 2000 and were $143,909 during the
three months ended June 30, 2000. Management fees related to these entities
totaled $32,466 during the six month period and were $25,939 during the three
month period. There were no revenues from these related companies during the
1999 six 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 June
30, 2000, the franchisee owes the supplier $157,442.
Certain directors and officers of the Company own substantial interests in these
limited liability companies.
6. COMMITMENTS
At June 30, 2000, the Company had commitments of approximately $500,000 for the
completion of the construction of four restaurants; three of which were open at
June 30. The commitments will be funded by cash reserves and proceeds from the
$6,500,000 mortgage revolving line of credit.
7. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
per share for the six months and three months ended June 30, 2000 and 1999 in
accordance with FAS 128, "Earnings per Share."
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
---------- ---------- ---------- ---------
Numerator:
<S> <C> <C> <C> <C>
Income before cumulative effect of a change
in accounting principle $ 755,923 $ 441,592 $ 337,793 $ 678,888
Cumulative effect of a change in accounting
principle, net of tax - (341,035) - -
---------- ---------- ---------- ---------
Net income $ 755,923 $ 100,557 $ 337,793 $ 678,888
========== ========== ========== =========
Pro forma income data :
Pro forma income before cumulative effect
of a change in accounting principle $ 1,081,215
Cumulative effect of a change in accounting
principle, net of tax (341,035)
----------
Pro forma net income $ 740,180
==========
Denominator :
Weighted average shares
outstanding 5,859,051 5,881,630 5,843,467 5,881,630
Effect of dilutive securities:
Employee stock options 943 - - -
---------- ---------- ---------- ---------
Denominator for diluted earnings
per share-adjusted weighted
average and assumed conversions 5,858,108 5,881,630 5,843,467 5,881,630
========== ========== ========== =========
</TABLE>
8. 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
8
<PAGE>
8. SEGMENT INFORMATION (CONTINUED)
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 six months ended June 30 is as follows:
<TABLE>
<CAPTION>
2000:
Restaurant Commissary Corporate Totals
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external
customers $25,707,386 $ 855,268 $ 1,461,367 $28,024,021
Intersegment revenues - 1,282,891 - 1,282,891
General and
administrative expenses - - 2,181,323 2,181,323
Advertising expenses - - 617,087 617,087
Depreciation and
amortization 814,258 59,576 160,643 1,034,477
Net interest expense - 88,050 562,509 650,559
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 3,603,945 47,696 (2,488,683) 1,162,958
1999:
Restaurant Commissary Corporate Totals
----------- ----------- ----------- -----------
Revenues from external
customers $23,927,217 $ 562,647 $ 739,059 $25,228,923
Intersegment revenues - 1,312,843 - 1,312,843
General and
administrative expenses - - 1,881,146 1,881,146
Advertising expenses - - 610,384 610,384
Depreciation and
amortization 688,693 59,376 114,666 862,735
Net interest expense - 84,850 437,674 522,524
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 3,948,071 14,993 (2,299,656) 1,663,408
</TABLE>
9
<PAGE>
8. SEGMENT INFORMATION (CONTINUED)
Segment information for the three months ended June 30 is as follows:
<TABLE>
<CAPTION>
2000:
Restaurant Commissary Corporate Totals
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues from external
customers $12,886,116 $ 432,662 $ 1,072,877 $14,391,655
Intersegment revenues - 648,982 - 648,982
General and
administrative expenses - - 1,166,845 1,166,845
Advertising expenses - - 355,558 355,558
Depreciation and
amortization 405,837 29,888 80,733 516,458
Net interest expense - 44,025 289,336 333,361
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1,860,404 29,696 (1,370,418) 519,682
1999:
Restaurant Commissary Corporate Totals
----------- ----------- ----------- -----------
Revenues from external
customers $12,594,899 $ 276,411 $ 398,244 $13,269,554
Intersegment revenues - 644,958 - 664,958
General and
administrative expenses - - 981,380 981,380
Advertising expenses - - 325,422 325,422
Depreciation and
amortization 356,054 29,688 58,528 444,270
Net interest expense - 43,025 233,157 276,182
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 2,211,443 (105) (1,166,895) 1,044,443
</TABLE>
9. 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 as a receivable $59,436 from the insurance company in
relation to business interruption. This amount is recorded in other revenues.
10. 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 six months ended June 30, 1999.
Income taxes on the Company's income for the six months and three months ended
June 30, 2000 and 1999 have been provided for at an estimated effective tax rate
of 35%.
10
<PAGE>
11. 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 June 30, 2000, the Company
has repurchased 39,400 shares at a total cost of $241,999.
12. 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 June 30, 2000, the Company has 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 $803,000. During 1999, the Landlord under the lease financing
agreement declared TW- Tennessee to be in default, and accelerated the rent
obligations under the leases. Negotiations ensued between the Landlord and the
principals of TW-Tennessee regarding the restructuring of the lease obligations.
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. The
Landlord has demanded a judgment against TW-Tennessee in excess of $21.8
million, and a judgment jointly and severally against the guarantors named,
including the Company and the Director, in the amount of $6,647,582.77
representing a portion of the amounts claimed against TW-Tennessee.
Subsequent to June 30, 2000, the Landlord terminated settlement negotiations and
refused to grant a further extension of time to restructure the lease
obligations and to answer the suit filed against TW-Tennessee, the Company and
the other defendants. As a result, certain defendants including the Company have
filed an answer to the suit described above, as well as counterclaims against
the Landlord. The Company's management believes that it is probable that it will
incur a loss related to the Company's guarantees of TW-Tennessee's obligations
and has therefore, established a reserve of $475,000 as of June 30, 2000. The
reserve amount was based on the Company's share of the various guarantees and an
estimated amount for legal costs which will likely be incurred in connection
with the resolution of this matter.
11
<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 61 Tumbleweed restaurants as of June 30, 2000, we owned and operated 32
restaurants in Kentucky, Indiana and Ohio, franchised 22 restaurants in Indiana,
Illinois, Kentucky, Tennessee, Wisconsin, West Virginia and Michigan, and
licensed seven restaurants in Germany, Jordan, Saudi Arabia, Egypt and England.
Since June 30, 2000, the Company has opened one additional company-owned
restaurant in Indiana and one franchise restaurant located in Clarksville,
Tennessee ceased operations.
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.
12
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
2000 1999 2000 1999
----- ----- ----- -----
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales 91.8 % 94.9 % 89.5 % 94.9 %
Commissary sales 3.1 2.2 3.0 2.1
Franchise fees and royalties 2.3 2.1 3.0 2.1
Gain from insurance proceeds due to
involuntary conversion of
non-monetary assets 1.5 - 3.0 -
Other revenues 1.3 0.8 1.5 0.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 28.6 29.1 28.7 29.4
Commissary cost of sales (2) 87.5 91.5 86.3 92.1
Operating expenses (1) 52.2 50.0 51.7 48.6
Selling, general and administrative
expenses 10.0 9.9 10.6 9.8
Preopening expenses 1.3 1.0 2.0 0.9
Depreciation and amortization 3.7 3.4 3.6 3.3
Loss on guarantees of indebtedness 1.7 - 3.3 -
----- ----- ----- -----
Total operating expenses 93.5 91.3 94.1 90.0
----- ----- ----- -----
Income from operations 6.5 8.7 5.9 10.0
Interest expense, net (2.3) (2.1) (2.3) (2.1)
----- ----- ----- -----
Income before income taxes and
cumulative effect of a change in
accounting principle 4.2 6.6 3.6 7.9
Provision for income taxes:
Current and deferred (1.5) (2.3) (1.3) (2.8)
Deferred taxes related to change in
tax status - (2.5) - -
----- ----- ----- -----
Total provision for income taxes (1.5) (4.8) (1.3) (2.8)
----- ----- ----- -----
Income before cumulative effect
of a change in accounting principle 2.7 1.8 2.3 5.1
Cumulative effect of a change in
accounting principle, net of tax - (1.4) - -
----- ----- ----- -----
Net income 2.7 % 0.4 % 2.3 % 5.1%
===== ===== ===== =====
Pro forma income data:
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 6.6 %
Pro forma income taxes (3) (2.3)
-----
Pro forma income before cumulative
effect of a change in accounting
principle 4.3
Cumulative effect of a change in
accounting principle, net of tax (1.4)
-----
Pro forma net income 2.9 %
=====
<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>
13
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenues increased by $2,795,098 or 11.1% for the six months ended June
30, 2000 compared to the same period in 1999 primarily as a result of the
following:
Restaurant sales increased by $1,780,169 or 7.4% for the six months ended
June 30, 2000 compared to the same period in 1999. The increase is due
primarily to the addition of five company-owned restaurants since June 30,
1999. The increase is partially offset by a 3.0% decrease in same store sales
for the six month period.
Commissary sales to franchised and licensed restaurants increased by $292,621
or 52.0% for the six months ended June 30, 2000 compared to the same period
in 1999. The increase is due primarily to the addition of nine franchised or
licensed restaurants since June 30, 1999.
Franchise fees and royalties increased by $121,106 or 22.7% for the six
months ended June 30, 2000 compared to the same period in 1999. The increase
was due to a $35,000 increase in franchise fees received upon the opening of
five new franchised restaurants during the six months ended June 30, 2000
compared to four during
the same period in 1999. Additionally, royalty income increased $86,106
during the six months ended June 30, 2000 compared to the same period in
1999.
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 9 of
the accompanying financial statements for a detail discussion.
Other revenues increased by $166,891 or 80.9% for the six months ended June
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
six month period includes $59,436 of insurance proceeds as it relates to a
business interruption as a result of a fire at a Company-owned restaurant.
See Note 9 of the accompanying financial statements for a detail discussion.
There was no similar income in the 1999 six month period.
Restaurant cost of sales increased by $401,824 or 5.8% for the six months ended
June 30, 2000 compared to the same period in 1999. The increase was principally
due to the opening of five additional Company-owned restaurants since June 30,
1999. The increase in restaurant cost of sales was partially offset by
purchasing efficiencies. Restaurant cost of sales decreased as a percentage of
sales by 0.5% to 28.6% for the six months ended June 30, 2000 compared to 29.1%
during the same period in 1999.
Commissary cost of sales increased $233,615 or 45.4% for the six months ended
June 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 June 30, 2000. As a percentage to sales, commissary cost of
sales decreased 4.0% for the six months ended June 30, 2000 compared to the same
period in 1999 due to lower manufactured food costs in 2000.
Restaurant operating expenses increased by $1,457,734 or 12.2% for the six
months ended June 30, 2000 compared to the same period in 1999. The increase
reflects the addition of five Company-owned restaurants since June 30, 1999.
Operating expenses increased as a percentage of restaurant sales to 52.2% for
the six months ended June 30, 2000 from 50.0% for the same period in 1999
primarily due to a 0.7% increase in promotional costs and a 0.6% increase in
management payroll costs.
Selling, general and administrative expenses increased by $306,880 or 12.3% for
the six months ended June 30, 2000 compared to the same period in 1999. The
increase was due in part to the addition of management and staff personnel
during 1999 and the six months ended June 30, 2000 to support the growing
restaurant base. Because of the Company's restaurant growth plans, management
expects selling, general and administrative expenses to continue to increase
during the remainder of 2000 in absolute dollars. As a percentage to total
revenues, selling, general and administrative expenses were 10.0% and 9.9% of
revenues for the six months ended June 30, 2000 and 1999, respectively.
Preopening expenses were $375,751 and $255,033 for the six months ended June 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.
14
<PAGE>
Depreciation and amortization expense increased $171,742 or 19.9% for the six
months ended June 30, 2000 compared to the same period in 1999 due primarily to
the addition of five Company-owned restaurants since June 30, 1999.
Net interest expense increased $128,035 or 24.5% for the six months ended June
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 six months ended June 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 $325,292 or 30.1% for the six months ended June 30, 2000
compared to pro forma income before cumulative effect of a change in accounting
principle for the six months ended June 30, 1999. Earnings per share before
cumulative effect of a change in accounting principle was $0.13 for the six
months ended June 30, 2000 as compared to pro forma earnings per share before
cumulative effect of a change in accounting principle of $0.18 for the six
months ended June 30, 1999.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenues increased by $1,122,101 or 8.5% for the three months ended June
30, 2000 compared to the same period in 1999 primarily as a result of the
following:
Restaurant sales increased by $291,217 or 2.3% for the three months ended
June 30, 2000 compared to the same period in 1999. The increase is due
primarily to the addition of five Company-owned restaurants since June 30,
1999. The increase is partially offset by a 5.8% decrease in same store sales
for the three month period.
Commissary sales to franchised and licensed restaurants increased by $156,251
or 56.5% for the three months ended June 30, 2000 compared to the same period
in 1999. The increase is due primarily to the addition of nine franchised or
licensed restaurants since June 30, 1999.
Franchise fees and royalties increased by $143,309 or 50.9% for the three
months ended June 30, 2000 compared to same period in 1999. The increase was
due to a $70,000 increase in franchise fees received upon the opening of four
new franchised restaurants during the three months ended June 30, 2000
compared to two during the same period in 1999. Additionally, royalty income
increased $73,309 during the three months ended June 30, 2000 compared to the
same period in 1999.
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 9 of
the accompanying financial statements for a detail discussion.
Other revenues increased by $97,013 or 83.1% for the three months ended June
30, 2000 compared to the same period in 1999 primarily due to an increase in
volume related purchasing rebates. In addition, other revenues in 2000 for
the three month period includes $59,436 of insurance proceeds as it relates
to a business interruption as a result of a fire at a Company-owned
restaurant. See Note 9 of the accompanying financial statements for a detail
discussion. There was no similar income in the 1999 three month period.
Restaurant cost of sales decreased by $6,419 or 0.2% for the three months ended
June 30, 2000 compared to the same period in 1999. The decrease was principally
due to purchasing efficiencies partially offset by the opening of five
additional Company-owned restaurants since June 30, 1999. Restaurant cost of
sales decreased as a percentage of sales by 0.7% to 28.7% for the three months
ended June 30, 2000 compared to 29.4% during the same period in 1999.
Commissary cost of sales increased $118,764 or 46.6% for the three months ended
June 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 June 30, 1999 . As a percentage to sales, commissary cost of
sales decreased 5.8% for the three months ended June 30, 2000 compared to the
same period in 1999 due to lower manufactured food cost in 2000.
Restaurant operating expenses increased by $545,089 or 8.9% for the three months
ended June 30, 2000 compared to the same period in 1999. The increase reflects
the addition of five Company-owned restaurants since June 30, 1999.
15
<PAGE>
Operating expenses increased as a percentage of restaurant sales to 51.7% for
the three months ended June 30, 2000 from 48.6% for the same period in 1999
primarily due to a 0.9% increase in promotional costs and a 0.7% increase in
management payroll costs.
Selling, general and administrative expenses increased by $215,601 or 16.5% for
the three months ended June 30, 2000 compared to the same period in 1999. The
increase was due in part to the addition of management and staff personnel
during 1999 and the six months ended June 30, 2000 to support the growing
restaurant base. Because of the Company's restaurant growth plans, management
expects selling, general and administrative expenses to continue to increase
during the remainder of 2000 in absolute dollars. As a percentage to total
revenues, selling, general and administrative expenses were 10.6% and 9.8% of
revenues for the three months ended June 30, 2000 and 1999, respectively.
Preopening expenses were $289,688 and $120,228 for the three months ended June
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 $72,188 or 16.2% for the three
months ended June 30, 2000 compared to the same period in 1999 due primarily to
the addition of five Company-owned restaurants since June 30, 1999.
Net interest expense increased $57,179 or 20.7% for the three months ended June
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 June 31, 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.
Six Months Ended
June 30
2000 1999
------------- -----------
Net cash provided by operations $ 2,045,770 $ 1,760,152
Purchases of property and equipment 1,808,302 4,765,368
Proceeds from common stock offering - 7,765,397
Net borrowings (payments) on long-term
debt and capital lease obligations (164,710) 1,712,615
Payment on short-term borrowings - 6,990,348
16
<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 June 30, 2000, the Company has 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 $803,000. During 1999, the Landlord under the lease financing
agreement declared TW-Tennessee to be in default, and accelerated the rent
obligations under the leases. Negotiations ensued between the Landlord and the
principals of TW-Tennessee regarding the restructuring of the lease obligations.
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. The
Landlord has demanded a judgment against TW-Tennessee in excess of $21.8
million, and a judgment jointly and severally against the guarantors named,
including the Company and the Director, in the amount of $6,647,582.77
representing a portion of the amounts claimed against TW-Tennessee.
Subsequent to June 30, 2000, the Landlord terminated settlement negotiations and
refused to grant a further extension of time to restructure the lease
obligations and to answer the suit filed against TW-Tennessee, the Company and
the other defendants. As a result, certain defendants including the Company have
filed an answer to the suit described above, as well as counterclaims against
the Landlord. The Company's management believes that it is probable that it will
incur a loss related to the Company's guarantees of TW-Tennessee's obligations
and has therefore, established a reserve of $475,000 as of June 30, 2000. The
reserve amount was based on the Company's share of the various guarantees 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 two additional Company-owned Tumbleweed restaurants during the
remainder of 2000, depending on the availability of quality sites, the hiring
and training of sufficiently skilled management and other personnel, and other
factors. As of June 30, 2000, we had one restaurant under construction which
opened during July 2000.
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.
We have a $6,500,000 mortgage revolving line of credit note (the "Credit
Facility"). At June 30, 2000 we had outstanding borrowings under the Credit
Facility of $5,072,148. The note bears interest at the Prime Rate plus .25%
(9.75% at June 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.
17
<PAGE>
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 June 30, 2000
approximately $10,900,000 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.
18
<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 June 30, 2000, the Company has 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 $803,000. During 1999, the Landlord under the lease financing
agreement declared TW-Tennessee to be in default, and accelerated the rent
obligations under the leases. Negotiations ensued between the Landlord and the
principals of TW-Tennessee regarding the restructuring of the lease obligations.
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. The
Landlord has demanded a judgment against TW-Tennessee in excess of $21.8
million, and a judgment jointly and severally against the guarantors named,
including the Company and the Director, in the amount of $6,647,582.77
representing a portion of the amounts claimed against TW-Tennessee.
Subsequent to June 30, 2000, the Landlord terminated settlement negotiations and
refused to grant a further extension of time to restructure the lease
obligations and to answer the suit filed against TW-Tennessee, the Company and
the other defendants. As a result, certain defendants including the Company have
filed an answer to the suit described above, as well as counterclaims against
the Landlord. The Company's management believes that it is probable that it will
incur a loss related to the Company's guarantees of TW-Tennessee's obligations
and has therefore, established a reserve of $475,000 as of June 30, 2000. The
reserve amount was based on the Company's share of the various guarantees 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 May 17, 2000 to report under Item 5
that on May 8, 2000 a suit was filed against TW-Tennessee and against
certain guarantors of a lease obligation, including the Company and a
Director of the Company. See Note 12 to the financial statements for a
further discussion of this matter.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
19
<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: August 4, 2000 Tumbleweed, Inc.
By: /s/ James M. Mulrooney
-----------------------
James M. Mulrooney
Executive Vice President
Chief Financial Officer
20
<PAGE>