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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
{X} Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ______.
Commission file number 333-57931
TUMBLEWEED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-1327945
- ---------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2301 River Road
Louisville, Kentucky 40206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 893-0323
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
par value $.01 per share
Indicated by check mark whether the registrant: (1) has filed all reports
required to be filed 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____
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. {X}
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 20, 2001, was approximately $5,100,000. For purposes of this
calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock. The market value calculation was
determined using the closing sale price of the registrant's common stock on
March 20, 2001 ($2.56) as reported on The Nasdaq Stock Market's National Market.
The number of shares of common stock, par value of $.01 per share, outstanding
on March 20, 2001, was 5,839,230.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are
Part of Form 10-K incorporated by reference
- ---------------------- --------------------------------------------
Part III Proxy statement relating to the registrant's
Annual Meeting of Shareholders to be held
Exhibit Index: Page 49-50 May 24, 2001
TUMBLEWEED, INC.
PART I
ITEM 1. BUSINESS
At December 31, 2000, we owned, franchised or licensed 63 Tumbleweed Southwest
Mesquite Grill & Bar ("Tumbleweed") restaurants. We owned and operated 36
Tumbleweed restaurants in Kentucky, Indiana and Ohio including one restaurant
which is 50% owned through a joint venture. There were 19 franchised Tumbleweed
restaurants located in Indiana, Illinois, Kentucky, Michigan, Virginia, West
Virginia and Wisconsin, and eight licensed restaurants located outside the
United States in Germany, Jordan, Egypt, Saudi Arabia, England and Turkey.
Tumbleweed Southwest Mesquite Grill & Bar restaurants feature sophisticated
Tex-Mex and mesquite grilled food served in a casual dining atmosphere evoking
the American Southwest. Tumbleweed restaurants are open seven days a week
(excluding certain holidays) for lunch and dinner and generally offer a full
service bar.
THE TUMBLEWEED CONCEPT
The Tumbleweed menu offers both distinctively seasoned, spicier versions of
popular Tex-Mex dishes, as well as an assortment of grilled steaks, ribs, pork
chops, chicken and seafood selections. The Tumbleweed concept is designed to
appeal to a broad range of customers by offering a wide selection of distinctive
items at a broad range of price points while, in management's view, providing a
consistent level of food quality and friendly and efficient service comparable
or superior to that of other casual dining restaurants. Use of a centralized
commissary system enhances Tumbleweed's ability to maintain consistently high
food quality, minimizes restaurant kitchen space and equipment, reduces the need
for skilled cooking personnel, and simplifies restaurant operations. The key
elements of the Tumbleweed concept include the following:
ONE CONCEPT OFFERING AMERICAN SOUTHWEST GRILLED ITEMS AND MEXICAN FOOD. The
Tumbleweed menu is intended to distinguish Tumbleweed from competing Mexican and
casual dining concepts by offering both distinctively seasoned, spicier versions
of burritos, enchiladas, tacos, salads, and other popular Tex-Mex dishes, as
well as an assortment of grilled steaks, ribs, pork chops, chicken and seafood
selections. Management believes this approach appeals to a broader segment of
the population and encourages customers to visit the restaurants more often.
The Tumbleweed menu features distinctively seasoned versions of popular Tex-Mex
dishes and mesquite grilled selections. Customers receive complementary chips
and salsa, and can choose from a selection of appetizers including such
Tumbleweed specialties as chile con queso and white chili, as well as guacamole,
nachos, quesadillas, buffalo chicken strips and stuffed potato skins. The
Tex-Mex menu offers burritos, enchiladas, tacos, tamales, chimichangas and other
items served both individually and in various combination dinners accompanied by
rice and refried, baked or black beans. Customers may also choose from an
assortment of fajitas, ribs, chicken, steak, pork chops, and seafood prepared
over an open gas-fired mesquite wood grill and served with Texas Toast, salad,
and a choice of baked potato, baked sweet potato, southwest fries, rice, and
refried, baked or black beans. Mesquite grilled items are available as
sandwiches as well as entrees. A variety of specialty stuffed potatoes and
salads featuring refried beans, seasoned beef, shredded or fried strips of
chicken, mesquite grilled chicken or seafood, and other traditional ingredients
rounds out the menu. The Company periodically introduces new items that
complement its present menu selections, a lunch menu as well as seasonal menus
to increase the frequency of guest visits.
Tumbleweed restaurants typically contain full-service bars offering a wide
assortment of mixed drinks, wines, domestic and imported beers and featuring the
Tumbleweed margarita. Alcoholic beverages accounted for approximately 12.0% of
restaurant sales during 2000.
Tumbleweed's menu pricing is designed to create a strong perception of value by
consumers. Prices for Tex-Mex dishes range from $4.19 for two tacos to $11.99
for the "Need the 'Weed" sampler dinner. Mesquite grilled items range from $5.99
for a hamburger to $17.49 for an 18 oz. USDA-choice porterhouse steak dinner.
Tumbleweed also offers several daily lunch specials for less than $5.00.
Seasonal promotions are also used to increase business during otherwise
traditionally slow periods.
- 2 -
TARGETED ATMOSPHERE. Tumbleweed restaurants offer relaxed and comfortable
surroundings where guests can enjoy a quality dining experience. Decorative
features such as American Indian artifacts, cowboy memorabilia, wildlife
replicas, rough-hewn timber and a creek stone fireplace in larger stores are
used to evoke the feeling of the Great Southwest.
MAINTAINING A FAVORABLE PRICE-TO-VALUE RELATIONSHIP. Tumbleweed's pricing
strategy is intended to appeal to value- driven customers as well as traditional
casual dining customers. Tumbleweed offers a wide selection of distinctive items
at a broad range of price points while, in management's view, providing a level
of food quality and service comparable or superior to that of other casual
dining restaurants. For 2000, the average check at a full-service Tumbleweed
restaurant, including beverages, was approximately $8.81 for lunch and $10.76
for dinner. Management believes that this pricing approach, together with
Tumbleweed's emphasis on variety and quality, creates a favorable price-to-value
perception that can increase customer volume and generate more frequent repeat
visits.
ACHIEVING TOTAL GUEST SATISFACTION. We are committed to providing prompt,
friendly and attentive service and consistent food quality to our customers. We
use a "mystery shopper" program to compare actual performance of restaurants to
Tumbleweed standards and solicit comment cards from customers to monitor and
modify restaurant operations.
OPERATING STRATEGY
We use the following key operating strategies to make certain that we exceed the
expectations of our customers:
TARGET FOR TOTAL GUEST SATISFACTION. Tumbleweed's organizational and management
philosophy is based on seven core values and a commitment to Total Guest
Satisfaction ("TGS"). Our training procedures are intended to instill in all
managers and employees an appreciation of the core values and to encourage a
shared commitment to TGS.
COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing extensive
training and attractive compensation, and by emphasizing clearly defined
organizational values, we foster a strong corporate culture and encourage a
sense of personal commitment from our employees. We have a monthly cash bonus
program based on attaining sales growth and related performance goals on a
restaurant-by-restaurant basis for each restaurant's management team.
CONSISTENT HIGH QUALITY FOOD PREPARATION. We are committed to offering
distinctive Tex-Mex and mesquite grilled foods to customers at reasonable prices
through the use of a commissary-based system. Management believes that the use
of a central commissary provides a significant strategic and competitive
advantage by enhancing our ability to maintain consistently high food quality,
minimizing restaurant kitchen space and equipment, and reducing the number of
skilled cooking positions. The system also enables restaurant managers and
kitchen staff to focus on the final preparation of menu items to Tumbleweed
standards.
Whenever feasible, the cooked ingredients used in Tumbleweed menu selections,
such as ground beef, chile con queso, and Mexican beans, are prepared in advance
at the commissary according to procedures designed to extend shelf life without
the addition of preservatives. The kitchen staff at each restaurant uses
commissary-supplied and other fresh ingredients for the final preparation of
individual orders. Management believes this system enhances our ability to
maintain rigorous operational and food preparation procedures and stringent
product shelf life standards. The commissary operates according to stringent
quality control standards and is subject to a daily inspection by a USDA
inspector on the premises. We maintain a contingency plan under which
centralized food preparation could be quickly resumed at another company's
facility should the commissary be rendered inoperative by weather or other
disaster.
GROWTH STRATEGY
Our strategy for growth will focus on the further development of new and
existing markets by both the Company and franchisees. Since acquiring the
Tumbleweed concept in 1995, we have added new Company-owned and franchised
restaurants, while developing the infrastructure necessary to support our growth
strategy. This approach has given management an opportunity to validate the
Tumbleweed concept, refine operating systems, design and develop prototype
restaurant buildings of different sizes and build a team of experienced
corporate managers needed to support future internal and franchise growth. The
following are key elements of our expansion strategy:
- 3 -
OPENING RESTAURANTS IN TARGET MARKETS. We target mid-sized metropolitan markets,
initially concentrating in the Midwest, Mid-Atlantic and Southeast regions,
where income levels and the presence of shopping and entertainment centers,
offices and/or colleges and universities indicate that a significant base of
potential customers exists. Management considers the feasibility of opening
multiple restaurants in a target market, which offers greater operating and
advertising efficiency. As we add additional restaurants in a target market,
there may be short-term decreases in same store sales. However, management
believes this clustering strategy can enhance long-term performance through
economies of scale and shared advertising expenses. Management also views
smaller markets with fewer competing casual dining restaurants as presenting
growth opportunities for the Company. Management believes that its target
markets are less competitive than major metropolitan markets in terms of both
site acquisition costs and number of casual dining restaurant options.
SELECTING AND DEVELOPING QUALITY RESTAURANT SITES. In selecting potential
restaurant sites, management analyzes a variety of factors, including, but not
limited to, local market demographics, site visibility, competition in the
vicinity, and accessibility and proximity of significant generators of potential
customers such as major retail centers, hotels, universities, and sports and
entertainment facilities. The acquisition of sites may involve leases,
purchases, and joint venture arrangements, and will require either the
construction of new buildings or the conversion of existing buildings. The site
selection process is conducted by our management and other employees, as well as
with the assistance of consultants when deemed advisable. We believe that our
site selection strategy and procedures, together with our menu and pricing
strategies, our commitment to quality food products and excellent service, and
our advertising, marketing and promotional efforts, will enhance our ability to
generate our anticipated customer volumes.
FRANCHISING. We expect that continued growth will come from the further
development of new and existing markets by us and by franchisees. We intend to
pursue an active franchising program with current and new franchisees under
controlled guidelines. We offer franchisees both rights to develop individual
restaurants as well as area development rights for the establishment of more
than one new restaurant over a defined period of time and in a defined
geographic area. The specific locations of the restaurants are subsequently
designated by us and the franchisee in separate franchise agreements. Under the
standard area development agreement currently in use, a franchisee is required
to pay at the time the agreement is signed a non-refundable fee of $5,000 per
potential restaurant in the defined geographic area, to be applied against the
initial franchise fee payable for each restaurant. Our current area development
agreement also provides for a franchise fee of $40,000 for each restaurant. The
franchise fee is due when the franchise agreement for a restaurant is signed.
Each franchise agreement generally provides for royalties of three to five
percent of restaurant sales, minimum marketing expenditures of 2.0% of gross
sales, and a twenty-year term. All franchisees are required to operate their
Tumbleweed restaurants in compliance with our policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. Under our criteria
for selecting new franchisees, Tumbleweed requires that potential franchisees
have adequate capital, experience in the restaurant industry, and access to
locations suitable for development. Except for locations managed directly by us,
we generally require that a franchisee have a principal operator with at least a
ten percent ownership interest who must devote full time to the restaurant
operation. In addition, we may acquire restaurants from our franchisees from
time to time.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, we generally use one of three prototype designs management believes
is best suited to a particular site. Our Mini, Midi and Maxi prototype
restaurants accommodate approximately 150, 225, and 265 guests, respectively.
Each size restaurant offers full service casual dining and a menu containing a
wide assortment of Tex-Mex and mesquite grilled selections. Management believes
that the use of multiple prototypes permits us to more closely match the
investment in a restaurant site with the site's estimated sales potential. These
factors allow for more efficient utilization of financial resources by us and
our franchisees.
- 4 -
During 2000, we opened 4 new Company-owned restaurants, 1 restaurant which is
50% owned through a joint venture, 7 new franchised restaurants and our
international licensee opened 3 new restaurants in the following areas:
COMPANY OWNED FRANCHISEE OWNED INTERNATIONAL LICENSEE
------------- ---------------- ----------------------
Cincinnati, OH Shelbyville, KY Essex, England
Maysville, KY Franklin, WI London, England
Kettering, OH Charleston, WV Istanbul, Turkey
Ft. Wayne, IN Grandville, MI
Beckley, WV
JOINT VENTURE Mechanicsville, VA
------------- Somerset, KY
Louisville, KY
During 2000, a franchisee elected to close its final two Tennessee Tumbleweed
restaurants (Clarksville and Hermitage) and another franchisee closed its
Beckley, West Virginia restaurant.
RESTAURANT DESIGN
USING PROTOTYPE RESTAURANT DESIGNS. Tumbleweed full service restaurants have
historically proven successful in several different formats and sizes. It is
anticipated that new units will be full service restaurants employing one of
three basic prototype designs. Management believes using multiple prototype
designs allows greater flexibility to match the investment by us or our
franchisees with the revenue potential of a particular restaurant site. Each
prototype generally contains a full-service bar and utilizes the distinctive
"Old West" logo and motif that has characterized Tumbleweed restaurants for
several years.
Management believes our prototype designs can be adapted for developing
Tumbleweed restaurants in existing structures. This capability may give us
access to quality sites not otherwise available and may reduce the time or
expense of development in certain circumstances.
RESTAURANT OPERATIONS
RESTAURANT MANAGEMENT. We employ area directors who are responsible for
supervising the operations of Tumbleweed restaurants within their geographic
region and the continuing development of each restaurant's managers and
employees. Through regular visits to the restaurants, the area directors ensure
that the Tumbleweed concept, strategies, core values and standards of quality
are being observed in all aspects of restaurant operations. Area directors are
chiefly responsible for the implementation of the TGS program.
Each of our restaurants has one general manager, one kitchen manager and from
one to three assistant managers, based on restaurant volume. The general manager
of each restaurant has primary responsibility for the day-to-day operations of
the entire restaurant, including sales, physical plant, financial controls and
training, and is responsible for maintaining the standards of quality and
performance established by us. In selecting managers, we generally seek persons
who have significant prior experience in the restaurant industry as well as
employees who have demonstrated managerial potential and a commitment to the
Tumbleweed concept and philosophy. We seek to attract and retain high caliber
managers and hourly employees by providing them with competitive salaries,
monthly bonuses and a casual, entertaining and challenging working environment.
COMPREHENSIVE TRAINING AND DEVELOPMENT. We have developed a comprehensive
training program for managers and hourly employees. Managers are required to
complete a ten-week initial training course and regular training programs. The
course emphasizes our culture, commitment to TGS, operating procedures and
standards, and internal controls.
The general managers and the area directors are responsible for selecting and
training hourly employees at each restaurant. We employ training coordinators to
assist with training and development of employees. Before the opening of each
new restaurant, one of our training managers leads a team of experienced
employees to train and educate the new employees. The training period for new
employees includes 10 days of general training prior to opening and one week of
on-the-job supervision at the new Tumbleweed restaurant. Ongoing employee
training remains the responsibility of the general manager and training
coordinator of each restaurant under the supervision of the area director.
- 5 -
RESTAURANT REPORTING. We closely monitor sales, costs of food and beverages, and
labor at each of our restaurants. Management analyzes daily and weekly
restaurant operating results to identify trends at each location, and acts
promptly to remedy negative trends where possible. We use an accounting and
management information system that operates at the restaurant level to ensure
the maintenance of financial controls and operations. Administrative staff
prepare daily reports of sales, labor and customer counts. Cost of sales and
condensed profit and loss statements compiled bi-monthly by store-level
personnel and monthly by our accounting department are provided to management
for analysis and comparison to past performance and budgets. We use a
specialized software system to measure theoretical food costs against actual
costs. To improve our performance analysis capabilities, we utilize a system
which schedules hourly labor based on projected sales per half-hour. The goal is
to ensure the proper number of employees to service our guests.
SEASONALITY. We consider restaurant operations to be somewhat seasonal in
nature with the second and third quarters being the peak sales periods.
SUPPORT OPERATIONS
COMMISSARY OPERATIONS. Use of a centralized commissary system enhances
Tumbleweed's ability to maintain consistently high food quality, minimizes the
kitchen space and equipment needed at each restaurant, reduces the need for
highly skilled cooking personnel, and simplifies restaurant operations. Managers
and kitchen staff at each restaurant focus on the final preparation of menu
items to Tumbleweed standards. We currently operate our commissary principally
to enhance food quality and operational efficiency of Company-owned and
franchised restaurants. Management believes this approach increases Tumbleweed's
ability to offer its customers a consistently high level of food quality at a
moderate price.
The commissary charges an amount approximately equal to its cost for the items
it supplies to Company-owned and franchised restaurants. The Commissary
sometimes contracts for the production of food products for other companies, and
has granted the right to an outside food producer to produce and market in
grocery stores a chili con queso product utilizing the "Tumbleweed" name and
recipe for which we receive a royalty based upon production and sales.
DEVELOPMENT AND CONSTRUCTION. The Executive Vice President of the Company
oversees the construction process utilizing outside architectural services and
construction services. Individual site selection analysis is handled by Company
management with final approval by the President of the Company.
ADVERTISING AND MARKETING. We use radio, print, billboard, and direct mail
advertising in our various markets, as well as television advertising in certain
larger markets. We also engage in a variety of other promotional activities,
such as contributing goods, time and money to charitable, civic and cultural
programs, in order to increase public awareness of our restaurants. The cost
associated with these promotional activities in 2000 was approximately 3.1% of
sales.
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RESTAURANT LOCATIONS
As of December 31, 2000, we owned and operated 36 Tumbleweed restaurants
including one Louisville, Kentucky restaurant which is 50% owned through a joint
venture. The following table sets forth the markets (including the number of
restaurants in each market) of these 36 restaurants:
NO. OF
STATE LOCATION RESTAURANTS
- ----- -------- -----------
Indiana Evansville 2
Indiana Ft. Wayne 2
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Florence (Cincinnati market) 1
Kentucky Frankfort 1
Kentucky Henderson (Evansville market) 1
Kentucky Louisville 9
Kentucky Maysville (Cincinnati market) 1
Kentucky Owensboro (Evansville market) 1
Ohio Bellefontaine 1
Ohio Cincinnati 5
Ohio Columbus 6
Ohio Dayton 2
Ohio Medina 1
Ohio Wooster 1
----
TOTAL 36
====
- 7 -
FRANCHISED RESTAURANTS
As of December 31, 2000, we had ten franchisees that owned and operated 19
Tumbleweed restaurants. The following table sets forth the franchisee and the
location (including the number of restaurants at each location) of these 19
restaurants:
No. of Total By
Franchisee State Location Restaurants Franchisee
- ---------- ----- -------- ----------- ----------
TW-Indiana, LLC Indiana Floyd Knobs 1
Indiana New Albany 2
Indiana Salem 1
Kentucky Lexington 1
---
5
Diamondback
Management Corp. Illinois Rockford 1
Wisconsin Appleton 1
Wisconsin Franklin 1
Wisconsin Madison 1
Wisconsin Milwaukee 1
Wisconsin New Berlin 1
---
6
TW-Seymour, LLC Indiana Seymour 1
---
1
TW-Glasgow, Inc. Kentucky Glasgow 1
---
1
TW-Shelbyville, Inc. Kentucky Shelbyville 1
---
1
TW-Bullitt, Inc. Kentucky Hillview 1
---
1
TWED-Charleston, Inc. West Virginia Charleston 1
---
1
TW-Rivertown, LLC Michigan Grandville 1
---
1
Tumble South, Inc. Virginia Mechanicsville 1
---
1
TW-Somerset, LLC Kentucky Somerset 1
---
1
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19
====
INTERNATIONAL LICENSING AGREEMENT
We have entered into a license agreement (the "International Agreement") with
Tumbleweed International, LLC ("International"), a restaurant developer based in
Hanau, Germany, to develop Tumbleweed restaurants outside of the Western
Hemisphere. During 2000, International was operating its restaurants in
Frankfurt and Vilseck, Germany, Essex and London, England, Amman, Jordan,
Jeddah, Saudi Arabia, Istanbul, Turkey and Cairo, Egypt as Tumbleweed
restaurants. See Item 13 "Certain Relationships and Related Transactions" for
additional information regarding International.
- 8 -
The International Agreement also contains certain provisions relating to quality
control, restrictions on ownership of and participation in competing businesses
by International and its principals. The International Agreement grants us a
right of first refusal if International proposes to sell or assign its rights
under the Agreement, or to sell equity interests in International.
SERVICE MARKS
A wholly-owned subsidiary of the Company owns and licenses to the Company
various service marks and trademarks that are registered on the Principal
Register of the United States Patent and Trademark Office. We regard our service
marks and trademarks as having significant value and being an important factor
in the development of the Tumbleweed concept. Our policy is to pursue and
maintain registration of our service marks and trademarks whenever possible and
to oppose vigorously any infringement or dilution of our service marks and
trademarks.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local laws. Our commissary is
licensed and subject to regulation by the USDA. Each of our restaurants is
subject to permitting, licensing and regulation by a number of government
authorities, including alcoholic beverage control, health, safety, sanitation,
building and fire agencies in the state or municipality in which the restaurant
is located. Difficulties in obtaining or failure to obtain required licenses or
approvals could delay or prevent the development of a new restaurant in a
particular area.
Approximately 12.0 % of our restaurant sales were attributable to the sale of
alcoholic beverages for the year ended December 31, 2000. Alcoholic beverage
control regulations require each of our restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
restaurant operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages.
The failure of a restaurant to obtain or retain liquor or food service licences
would have a material adverse effect on the restaurant's operations. To reduce
this risk, each of our restaurants are operated in accordance with procedures
intended to assure compliance with applicable codes and regulations.
The Federal Americans With Disabilities Act (The "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. The ADA
became effective as to public accommodations in January 1992 and as to
employment in July 1992. We currently design our new restaurants to be
accessible to the disabled, and believe that we are in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. We intend to comply with future regulations relating to
accommodating the needs of the disabled, and we do not currently anticipate that
such compliance will require us to expend substantial funds.
We are subject in certain states to "dram shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance, as well as excess liability coverage.
We have never been named as a defendant in a lawsuit involving "dram shop"
liability.
Our restaurant operations are also subject to federal and state laws governing
such matters as the minimum hourly wage, unemployment tax rates, sales tax and
similar matters, over which we have no control. Significant numbers of our
service, food preparation and other personnel are paid at rates related to the
federal minimum wage, and increases in the minimum wage could increase our labor
costs.
The development and construction of additional restaurants are subject to
compliance with applicable zoning, land use and environmental laws and
regulations.
- 9 -
EMPLOYEES
As of December 31, 2000, we had approximately 2,000 employees, of whom 35 are
executive and administrative personnel, 150 are restaurant management personnel,
and the remainder are hourly restaurant and commissary personnel. Many of our
hourly restaurant employees work part-time. None of our employees are covered by
a collective bargaining agreement. We consider our employee relations to be
good.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
We make various forward-looking statements about our business in this report.
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 forward-looking statements
made by us. 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.
We do not have any obligation to revise any of these forward-looking statements
for events occurring after the date of this report or for unanticipated events.
EXPANSION RISKs. Since 1995, we have grown while developing the operational
systems, internal controls, and management personnel that management believed
was necessary to support our plans for continued expansion. In the course of
expanding our business, we will enter new geographic regions in which we have no
previous operating experience. There can be no assurance that the Tumbleweed
concept will be viable in new geographic regions or particular local markets. In
addition, when feasible, we intend to open multiple restaurants in a target
market to achieve operating and advertising efficiencies. Although such
"clustering" of restaurants in a market may adversely affect same store sales in
the short-term, management believes clustering can enhance long-term
performance.
The continued growth of our business will depend upon our ability to open and
operate additional restaurants profitably, which in turn will depend upon
several factors, many of which are beyond our control. These factors include,
among other things, the selection and availability of suitable locations,
negotiations of acceptable lease, purchase and/or financing terms, the timely
construction of restaurants, the securing of required governmental permits and
approvals, the employment and training of qualified personnel, and general
economic and business conditions. Our ability to expand into new geographic
regions is also dependent upon our ability to expand our existing commissary
facilities or open and successfully operate additional commissaries, as may be
necessary to support additional restaurants. There can be no assurance that we
will be successful in achieving our growth plans or managing our expanding
operations effectively, nor can there be any assurance that new restaurants we
open will be operated profitably.
RESTAURANT BASE. We currently operate 36 Tumbleweed restaurants including one
restaurant which is 50% owned through a joint venture, some of which have been
open for less than one year. Consequently, the sales and earnings achieved to
date by these Tumbleweed restaurants may not be indicative of future operating
results. Moreover, because of the number of restaurants we currently operate,
poor operating results at a small number of restaurants could negatively affect
the profitability of the entire Company. An unsuccessful new restaurant or
unexpected difficulties encountered during expansion could have a greater
adverse effect on our results of operations than would be the case in a
restaurant company with more restaurants. In addition, we lease certain of our
restaurants. Each lease agreement provides that the lessor may terminate the
lease for a number of reasons, including if we default in payment of any rent or
taxes or breach any covenants or agreements contained in the lease. Termination
of any of our leases pursuant to such terms could adversely affect our results
of operations.
CHANGES IN FOOD AND OTHER COSTS; SUPPLY RISKS. Our profitability is
significantly dependent on our ability to anticipate and react to changes in
food, labor, employee benefits and similar costs over which we have no control.
Specifically, we are dependent on frequent deliveries of produce and fresh beef,
pork, chicken and seafood. As a result, we are subject to the risk of possible
shortages or interruptions in supply caused by adverse weather or other
conditions which could adversely affect the availability, quality and cost of
such items. While in the past we have been able to anticipate and react to
changing costs through our purchasing practices or menu price adjustments
without a material adverse effect on profitability, there can be no assurance
that we will be able to do so in the future.
- 10 -
INDUSTRY RISKS. The restaurant business is affected by changes in consumer
tastes, national, regional and local economic conditions, demographic trends,
traffic patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor, energy and employee
benefit costs, fluctuating insurance rates, national, regional and local
regulations, regional weather conditions, and the availability of experienced
management and hourly employees also may adversely affect the restaurant
industry in general and our restaurants in particular.
COMPETITION. The restaurant industry is intensely competitive with respect to
price, service, location and food quality. We will compete with a variety of
other casual full-service dine-in restaurants, fast food restaurants, take-out
food service companies, delicatessens, cafeteria-style buffets, and other food
service establishments. The number of value- oriented, casual dining restaurants
has increased in the past few years, and competitors include national and
regional chains, franchisees of other restaurant chains, and local
owner-operated restaurants. Many competitors have been in existence longer, have
a more established market presence, and substantially greater financial,
marketing, and other resources than us. A significant change in pricing or other
business strategies by one or more of our competitors, including an increase in
the number of restaurants in our territories, could have a materially adverse
impact on our sales, earnings and growth.
GOVERNMENT REGULATION. The restaurant business is subject to extensive national,
state, and local laws and regulations relating to the development and operation
of restaurants, including those regarding the sale of alcoholic beverages,
building and zoning requirements, the preparation and sale of food and
employer-employee relationships, such as minimum wage requirements, overtime,
working and safety requirements, and citizenship requirements. In addition, we
are subject to regulation by the Federal Trade Commission and must comply with
certain state laws that govern the offer, sale, and termination of franchises,
the refusal to renew franchises, and the scope of noncompetition provisions. The
failure to obtain or retain food or beverage licenses or approvals to sell
franchises, or an increase in the minimum wage rate, employee benefits costs
(including costs associated with mandated health insurance coverage), or other
costs associated with employees, could adversely affect us.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company as of December
31, 2000, who serve at the pleasure of the Board of Directors. There are no
family relationships among any officers of the Company.
Name Age Position
- ---- --- --------
Terrance A. Smith. .... 55 President, Chief Executive Officer, and Director
James M. Mulrooney .... 49 Executive Vice President, Chief Financial Officer,
and Director
Gary T. Snyder......... 46 Vice President - Company Operations
Glennon F. Mattingly... 49 Vice President - Controller
Terrance A. Smith has served as President and Chief Executive Officer of the
Company since August 2000, and is a Director of the Company. Mr. Smith was
elected as a director of the Company in September 1997. Since 1997, Mr. Smith
has also served as the President of Tumbleweed International, LLC. From 1987 to
1997, Mr. Smith was the President and CEO of Chi-Chi's International Operations,
Inc.
James M. Mulrooney has served as Executive Vice President and Chief Financial
Officer of the Company since it was formed in 1997, and is a Director of the
Company. Mr. Mulrooney also served as Executive Vice President and Chief
Financial Officer of Tumbleweed, LLC from January 1995 to its merger with the
Company in January 1999.
Gary T. Snyder joined Tumbleweed, LLC, the Company's predecessor, as Director of
Training and Human Resources in June 1996 and was appointed Vice President of
Company Operations in April 1998. Mr. Snyder continues to serve the Company in
that capacity. He previously served for 17 years with Bob Evans Farms, Inc.
- 11 -
Glennon F. Mattingly joined Tumbleweed, LLC, the Company's predecessor, as
Controller in March 1995 and was named Vice President-Controller in April 1998.
Mr. Mattingly continues to serve the Company in that capacity. Before coming to
Tumbleweed, Mr. Mattingly held various positions with Chi-Chi's, Inc. including
six years as Director of Budgeting and Financial Analysis.
SEGMENT INFORMATION
Segment information for the years ended December 31, 2000, 1999 and 1998 are
presented in Note 16 to our Consolidated Financial Statements contained in Item
8.
ITEM 2. PROPERTIES
Of the 36 Company-owned restaurants in operation at December 31, 2000, including
one restaurant which is 50% owned through a joint venture, 18 are owned by us in
fee simple while the remainder are leased. Two of the leased locations are owned
by entities whose principals are affiliated with us. Restaurant lease
expirations range from 2004 to 2018, with the majority of the leases providing
for an option to renew for additional terms ranging from five to twenty years.
All of our leases provide for a specified annual rental, and some leases call
for additional rental based on sales volume at the particular location over
specified minimum levels. Generally, the leases are net leases which require us
to pay the cost of insurance and taxes. Our executive offices and our commissary
are located in Louisville, Kentucky. Our commissary and warehouse space are
owned in fee simple by us. Our executive offices are located in leased space.
The lease expires in 2007 and has two 5-year renewal options.
ITEM 3. 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. 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.
In March 2001, the bank which holds the line of credit filed suit in the Circuit
Court of Jefferson County, Kentucky against TW-Tennessee and against the
guarantors of the line of credit, including the Company and a Director of the
Company. Prior to the suit being filed, the Company along with certain
guarantors made a partial payment to the bank. If the bank is unsuccessful in
collecting the remaining payments from the other guarantors, the Company would
have exposure totaling approximately $1,000,000. While the Company believes it
has fulfilled its obligation to the bank and intends to vigorously defend its
position, it is too early in the process to predict with certainty the ultimate
outcome of this matter since the suit is in the early pleading stages and no
discovery has taken place.
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.
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.
The lessor under the equipment leases with TW-Tennessee has declared
TW-Tennessee to be in default thereunder and demanded payment in full from all
guarantors of the leases, including the Company. The Company has made a partial
payment to the lessor and is working with the lessor in pursuing the other
guarantors of the equipment leases that have not made any payment. If the lessor
is unsuccessful in collecting the remaining sums due from the other guarantors,
the Company would have additional exposure totaling approximately $312,000.
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 and by the bank that holds the line of credit, the
Company has incurred a loss related to the Company's guarantees of
TW-Tennessee's obligations. The Company established a reserve in the amount of
$725,000 during 2000 of which approximately $716,000 had been paid
- 12 -
out as of December 31, 2000. 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. The Company's management believes
that it will not incur any significant additional losses in connection with this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter ended December 31, 2000.
- 13 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 20, 2001, 5,839,230 shares of Common Stock were issued and
outstanding. There were approximately 950 stockholders, including beneficial
owners of shares held in nominee name.
On January 11, 1999, Tumbleweed, Inc. completed its initial public offering of
common stock. We sold 776,630 shares at the offering price of $10 per share in a
direct offering of our common stock to the public, raising a total of
$7,766,300.
On January 1, 1999, the merger of Tumbleweed, LLC into Tumbleweed, Inc. became
effective. The merger reorganized Tumbleweed, LLC, which had owned, franchised
or licensed 43 Tumbleweed Southwest Mesquite Grill & Bar restaurants, into a
corporation for purposes of the stock offering. In the reorganization, the
membership interests of the approximately 80 former members of Tumbleweed, LLC
were converted into a total of 5,105,000 shares of Company common stock. As
required by the Tumbleweed, LLC operating agreement, the former Class B members
made additional cash contributions of $747,500 in connection with the
reorganization.
The Company received net proceeds of approximately $6,800,000 from the stock
offering. The Company used the offering proceeds, plus the additional cash
contributions of $747,500 we received in the reorganization, to repay bank
indebtedness totaling $7,043,366 and to pay offering expenses. The bank
indebtedness was an obligation of the former Class A members of Tumbleweed, LLC,
including certain directors and officers of the Company, and had been accounted
for as redeemable members' equity. Offering expenses totaled approximately
$1,000,000, none of which were commissions or other underwriting expenses.
The registration statement for the stock offering also included the 5,105,000
shares issued in the reorganization, which may be sold from time to time in the
future by the former members of Tumbleweed, LLC for their own accounts.
Our common stock trades on the Nasdaq Stock Market's National Market under the
symbol "TWED." The following table shows quarterly high and low closing prices
for the Common Stock during 2000 and 1999 for the periods indicated, as reported
by the Nasdaq National Market.
2000 1999
---- ----
High Low High Low
---- --- ---- ---
First Quarter (1) $ 6.94 $ 4.75 $ 12.00 $ 8.50
Second Quarter 6.37 2.62 11.25 7.50
Third Quarter 4.09 2.62 9.87 7.00
Fourth Quarter 3.37 2.00 8.50 5.00
(1) Beginning in March 1999, bid and asked quotations for Tumbleweed shares were
reported on the OTC Bulletin Board under the trading symbol TWED. On March 29,
1999, our common stock began trading on the Nasdaq Stock Market's National
Market.
We have never paid a dividend on our Common Stock nor do we expect to pay a cash
dividend in the foreseeable future. We currently intend to retain any future
earnings to finance the development of additional restaurants and the growth of
our business generally. We are also prohibited from paying dividends under the
terms of our two mortgage revolving lines of credit.
- 14 -
ITEM 6. SELECTED FINANCIAL DATA
Effective January 1, 1999, Tumbleweed, LLC was merged into Tumbleweed, Inc. as a
result of the sale of common stock in an initial public offering. Tumbleweed,
Inc. had not conducted any operations prior to the merger. In the following
table, the income statement and balance sheet data of Tumbleweed, Inc. for the
years ended December 31, 2000 and 1999 and Tumbleweed, LLC for the years ended
December 31, 1998, 1997 and 1996 have been derived from financial statements
which have been audited by Ernst & Young LLP, independent auditors, whose report
thereon is included elsewhere in this filing. The information set forth on the
following page should be read in conjunction with, and are qualified in their
entirety by the financial statements (and the notes thereto) and other financial
information appearing elsewhere in this filing and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
- 15 -
Years Ended December 31
-----------------------------------------------------------------------
Tumbleweed, Tumbleweed,
Inc. LLC
---------------------------- ------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
Restaurant sales $ 51,820,600 $ 48,578,123 $ 40,490,933 $ 27,891,128 $ 23,284,007
Commissary sales 1,663,208 1,168,836 1,041,266 1,007,011 1,795,529
Franchise fees and royalties 1,271,251 1,064,952 770,806 563,056 474,870
Gain from insurance proceeds due to
involuntary conversion of non-
monetary assets 554,864 - - - -
Other revenues 990,843 532,976 504,639 365,054 177,317
------------ ------------ ------------ ------------ --------------
Total revenues 56,300,766 51,344,887 42,807,644 29,826,249 25,731,723
Operating expenses:
Restaurant cost of sales 15,275,817 14,232,564 11,788,578 8,191,928 7,103,357
Commissary cost of sales 1,460,704 1,053,083 905,814 887,793 1,649,502
Operating expenses 27,456,791 24,377,631 20,881,212 14,035,693 12,386,119
Selling, general and administrative
expenses 6,529,835 4,981,721 4,150,303 3,051,740 2,250,827
Preopening expenses 490,394 395,768 816,604 544,723 405,502
Depreciation and amortization 2,147,408 1,804,757 1,442,011 971,863 1,231,290
Provision for doubtful accounts 68,464 - - - -
Loss on guarantees of indebtedness 725,000 - - - -
------------ ------------ ------------ ------------ --------------
Total operating expenses 54,154,413 46,845,524 39,984,522 27,683,740 25,026,597
------------ ------------ ------------ ------------ --------------
Income from operations 2,146,353 4,499,363 2,823,122 2,142,509 705,126
Interest expense, net (1,458,650) (1,128,906) (869,712) (428,598) (203,810)
Equity in losses of TW-Springhurst (58,903) - - - -
------------ ------------ ------------ ------------ --------------
Income before income taxes and
cumulative effect of a change in
accounting principle 628,800 3,370,457 1,953,410 1,713,911 501,316
Provision for income taxes:
Current and deferred 65,439 1,179,659 - - -
Deferred taxes related to change in
tax status (3) - 639,623 - - -
------------ ------------ ------------ ------------ --------------
Total provision for income taxes 65,439 1,819,282 - - -
------------ ------------ ------------ ------------ --------------
Income before cumulative effect of a
change in accounting principle 563,361 1,551,175 1,953,410 1,713,911 501,316
Cumulative effect of a change in
accounting principle, net of tax - (341,035) - - -
------------ ------------ ------------ ------------ --------------
Net income $ 563,361 $ 1,210,140 $ 1,953,410 $ 1,713,911 $ 501,316
============ ============ ============ ============ ==============
Basic and diluted earnings per share:
Income before cumulative effect of
a change in accounting principle $ 0.10 $ 0.27
Cumulative effect of a change in
accounting principle, net of tax - (0.06)
------------ ------------
Net income $ 0.10 $ 0.21
============ ============
- 16 -
Years Ended December 31
-----------------------------------------------------------------------
Tumbleweed, Tumbleweed,
Inc. LLC
--------------------------- -------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Pro forma income data (unaudited):
Income before income taxes
and cumulative effect of a change
in accounting principle as reported $ 3,370,457 $ 1,953,410 $ 1,713,911 $ 501,316
Pro forma income taxes (1) 1,179,659 683,693 599,896 175,461
------------ ------------ ------------ --------------
Pro forma income before cumulative
effect of a change in accounting
principle 2,190,798 1,269,717 1,114,015 325,855
Cumulative effect of a change in
accounting principle, net of tax (341,035) - - -
------------ ------------ ------------ --------------
Pro forma net income $ 1,849,763 $ 1,269,717 $ 1,114,015 $ 325,855
============ ============ ============ ==============
Pro forma basic and diluted earnings
per share (2):
Pro forma income before cumulative
effect of a change in accounting
principle $ 0.37 $ 0.25 $ 0.22 $ 0.06
Cumulative effect of a change in
accounting principle, net of tax (0.06) - - -
------------ ------------ ------------ --------------
Pro forma net income $ 0.31 $ 0.25 $ 0.22 $ 0.06
============ ============ ============ ==============
As of December 31
------------------------------------------------------------------------
Tumbleweed, Tumbleweed,
Inc. LLC
------------------------ ----------------------------------------------
Pro
Forma
2000 1999 1998 (3) 1998 1997 1996
---- ---- -------- ---- ---- ----
(In thousand)
Balance Sheet Data:
Total assets $ 39,453 $ 36,597 $ 33,681 $ 33,681 $ 26,068 $ 21,262
Long-term debt and capital lease
obligations, including current
maturities 16,998 15,145 13,363 13,363 8,542 5,776
Total liabilities 21,581 19,035 24,743 24,103 10,725 7,108
Redeemable members' equity - - - 18,925 23,420 20,233
Members' equity - - - 354 7 7
Members' retained earnings (deficit) - - - (9,701) (8,083) (6,085)
Stockholders' equity 17,872 17,563 - - - -
Pro forma stockholders' equity - - 8,938 - - -
(1) Prior to Reorganization, the Company operated as a limited liability
company and was not subject to corporate income taxes through December
31, 1998. Pro forma adjustment has been made to net income to give effect
to federal and state income taxes as though the Company had been subject
to corporate income taxes for the periods presented with an effective tax
rate of 35%.
(2) Shares outstanding gives effect to the Reorganization as if it had occurred
as of January 1, 1996.
(3) Reflects the establishment of a deferred tax liability of $639,623 related
to the termination of Tumbleweed, LLC's limited liability company status and
the conversion of Tumbleweed, LLC's members' interests into 5,105,000
shares of Company common stock effective January 1,1999.
- 17 -
ITEM 7. 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 forward-looking
statements made by us. 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 and in "Forward-Looking Statements/Risk Factors" in Item 1.
Business.
As of December 31, 2000, we owned, franchised or licensed 63 Tumbleweed
restaurants. We owned and operated 36 restaurants in Kentucky, Indiana and Ohio,
including one restaurant which is 50% owned through a joint venture. There were
19 franchised restaurants located in Indiana, Illinois, Kentucky, Michigan,
Virginia, West Virginia and Wisconsin and eight licensed restaurants located
outside the United States in Germany, Jordan, Egypt, Saudi Arabia, England and
Turkey. The following table reflects changes in the number of Company-owned
restaurants for the years presented.
Company-owned Restaurants 2000 1999 1998
------------------------- ---- ---- ----
In operation, beginning of year 29 25 17
Restaurants opened 4 4 8
Joint venture restaurant opened 1 - -
Restaurants purchased from franchisee 2 - -
---- ---- ----
In operation, end of year 36 29 25
---- ---- ----
Franchise and Licensed Restaurants
----------------------------------
In operation, beginning of year 22 18 12
Restaurants opened 10 8 7
Restaurants closed (3) (4) (1)
Restaurants sold to Tumbleweed, Inc. (2) - -
---- ---- ----
In operation, end of year 27 22 18
---- ---- ----
System total 63 51 43
==== ==== ====
Effective January 1, 1999, Tumbleweed, LLC converted from a limited liability
company into a C corporation by merging with Tumbleweed, Inc., a Delaware
corporation formed on December 17, 1997. As a limited liability company, we had
been treated as a partnership for income tax purposes and, accordingly, had
incurred no federal or state income tax liability. The discussion of financial
condition and results of operations included in the paragraphs that follow
reflect a pro forma adjustment for federal and state income taxes that would
have been recorded during these years if we had been subject to corporate income
taxes for the years presented.
The following section should be read in conjunction with "Selected Financial
Data" included above in Item 6 and our financial statements and the related
notes included below in Item 8.
- 18 -
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenues of
certain income statement data, except where noted, for the periods indicated.
Years Ended December 31
2000 1999 1998
--------------------------------
Revenues:
Restaurant sales 92.0% 94.6% 94.6%
Commissary sales 3.0 2.3 2.4
Franchisee fees and royalties 2.2 2.1 1.8
Gain from insurance proceeds due to involuntary
conversion of non-monetary assets 1.0 - -
Other revenues 1.8 1.0 1.2
--------------------------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.5 29.3 29.1
Commissary cost of sales (2) 87.8 90.1 87.0
Operating expenses (1) 53.0 50.2 51.6
Selling, general and administrative 11.6 9.7 9.7
Preopening expenses 0.9 0.8 1.9
Depreciation and amortization 3.8 3.5 3.4
Provision for doubtful accounts 0.1 - -
Loss on guarantees of indebtedness 1.3 - -
--------------------------------
Total operating expenses 96.2 91.2 93.4
--------------------------------
Income from operations 3.8 8.8 6.6
Other expense, net (2.7) (2.2) (2.0)
--------------------------------
Income before income taxes and cumulative
effect of a change in accounting
principle 1.1 6.6 4.6
Provision for income taxes:
Current and deferred 0.1 2.3 -
Deferred taxes related to a change in tax status - 1.3 -
--------------------------------
Total provision for income taxes 0.1 3.6 -
--------------------------------
Income before cumulative effect
of a change in accounting principle 1.0 3.0 4.6
Cumulative effect of a change in
accounting principle, net of tax - (0.7) -
--------------------------------
Net income 1.0% 2.3% 4.6%
================================
Pro forma income data (unaudited):
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 6.6% 4.6%
Pro forma income taxes (3) 2.3 1.6
--------------------
Pro forma income before cumulative
effect of a change in accounting
principle 4.3 3.0
Cumulative effect of a change in
accounting principle, net of tax (0.7) -
--------------------
Pro forma net income 3.6% 3.0%
====================
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
- 19 -
(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 throughout the years
presented with an assumed combined federal and state effective tax rate
of 35%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Total revenues increased by $4,955,879 or 9.6% in 2000 compared to 1999
primarily as a result of the following:
Restaurant sales increased by $3,242,477 or 6.7% in 2000 compared to 1999.
The increase is due primarily to the addition of six Company-owned
restaurants during 2000. The increase is partially offset by a 3.3% decrease
in same store sales.
Commissary sales to franchised and licensed restaurants increased by $494,372
or 42.3% in 2000 compared to 1999. The increase is due primarily to five
additional franchised or licensed restaurants during 2000.
Franchise fees and royalties increased by $206,299 or 19.4% in 2000 compared
to 1999 as a result of an increase in royalty income due primarily to five
additional franchise restaurants. Franchise fees were approximately 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 12
of the accompanying financial statements for a detail discussion.
Other revenues increased by $457,867 or 85.9% in 2000 compared to 1999
primarily due to $280,000 of insurance proceeds as it relates to a business
interruption as a result of a fire at a Company-owned restaurant. See Note 12
of the accompanying financial statements for a detail discussion. There was
no similar income in 1999. In addition, other revenues increased in 2000
compared to 1999 as a result of an increase in volume related purchasing
rebates.
Restaurant cost of sales increased by $1,043,253 or 7.3% in 2000 compared to
1999. The increase was principally due to the addition of six Company-owned
restaurants during 2000. Restaurant cost of sales increased as a percentage of
sales by 0.2% to 29.5% for 2000 compared to 29.3% for 1999.
Commissary cost of sales increased $407,621 or 38.7% in 2000 compared to 1999.
The increase in commissary cost of sales is due primarily to five additional
franchised or licensed restaurants during 2000. As a percentage to commissary
sales, commissary cost of sales decreased by 2.3% in 2000 compared to 1999 due
to lower manufactured food costs in 2000.
Restaurant operating expenses increased by $3,079,160 or 12.6% in 2000 compared
to 1999. The increase reflects the addition of six Company-owned restaurants
during 2000. Operating expenses increased as a percentage of restaurant sales to
53.0% during 2000 from 50.2% in 1999 primarily due to a 0.3% increase in
promotional costs and a 1.7% increase in total restaurant payroll costs.
Selling, general and administrative expenses increased by $1,548,114 or 31.1% in
2000 compared to 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 former President and CEO of the Company and the restructuring of the
corporate staff. The increase in selling, general and administrative expenses in
2000 as compared to 1999 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 11.6% and 9.7% of revenues for the
years ended December 31, 2000 and 1999, respectively.
Preopening expenses were $490,394 and $395,768 for the years ended December 31,
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 size of the restaurant and
the number of restaurant locations which are in the process of being prepared
for opening.
- 20 -
Depreciation and amortization expense increased $342,651 or 19.0% in 2000
compared to 1999 due primarily to the addition of six Company-owned restaurants
during 2000.
A $68,464 provision for doubtful accounts was recorded during 2000. The
provision relates to a receivable from a related party franchisee for accounting
fees, royalties and a franchise fee. As of December 31, 2000, management
considers it probable that this receivable will not be collected.
Net interest expense increased $333,458 or 29.5% in 2000 compared to 1999. The
increase resulted from increased borrowings to fund the growth in Company-owned
restaurants and increases in the prime interest rate during 2000.
The equity in losses of TW-Springhurst was $58,903 for the year ended December
31, 2000. See Note 10 of the accompanying financial statements for a detail
discussion.
The combined effective federal and state income tax rate was approximately 10%
and 35% for the years ended December 31, 2000 and 1999, respectively, excluding
the charge related to change in tax status. The effective tax rate is lower in
2000 as a result of lower profitability and the resulting impact of employment
tax credits and state income taxes on the effective rate. 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 $1,627,437 or 74.3% for the year ended December 31, 2000
compared to pro forma income before cumulative effect of a change in accounting
principle for the year ended December 31, 1999. Earnings per share before
cumulative effect of a change in accounting principle was $0.10 for the year
ended December 31, 2000 as compared to pro forma earnings per share before
cumulative effect of a change in accounting principle of $0.37 for the year
ended December 31, 1999.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 and 1998
Total revenues increased by $8,537,243 or 19.9% in 1999 compared to 1998
primarily as a result of the following:
Restaurant sales increased by $8,087,190 or 20.0% in 1999 compared to 1998.
The increase is due primarily to the addition of four Company-owned
restaurants during 1999 and an increase in same store sales of 1.3%.
Commissary sales to franchised restaurants increased by $127,570 or 12.3% in
1999 compared to 1998. The increase is due primarily to the addition of four
additional franchised or licensed restaurants during 1999.
Franchise fees and royalties increased by $294,146 or 38.2% in 1999 compared
to 1998. The increase was due primarily to a $140,000 increase in franchise
fees received upon the opening of seven new franchised restaurants during
1999 compared to three during 1998. Additionally, royalty income increased
approximately $177,000 during 1999 compared to 1998 as a result of an
increase in franchised restaurants. The increase in franchise fees and
royalties is partially offset by an approximately $23,000 decrease in
international territory fees.
Other revenues increased by $28,337 or 5.6% in 1999 compared to 1998
primarily due to an increase in volume related purchasing rebates.
Restaurant cost of sales increased by $2,443,986 or 20.7% in 1999 compared to
1998. The increase was principally due to the opening of four additional
Company-owned restaurants during 1999. Restaurant cost of sales increased as a
percentage of sales by 0.2% to 29.3% for 1999 compared to 29.1% for 1998.
Commissary cost of sales increased by $147,269 or 16.2% in 1999 compared to
1998. The increase in commissary cost of sales is due to increased commissary
sales in 1999 compared to 1998 and increased overhead costs. As a percentage to
sales, commissary cost of sales increased 3.1%.
- 21 -
Restaurant operating expenses increased by $3,496,419 or 16.7% in 1999 compared
to 1998. The increase reflects the addition of four Company-owned restaurants
during 1999. Operating expenses decreased as a percentage of restaurant sales to
50.2% for 1999 from 51.6% for 1998 primarily due to a 1.1% decrease in labor
costs and a 0.3% decrease in restaurant level promotional costs.
Selling, general and administrative expenses increased by $831,418 or 20.0% in
1999 compared to 1998. The increase was due in part to the addition of
management and staff personnel during 1999 to support the growing restaurant
base and additional advertising costs. Because of the Company's restaurant
growth plans, management expects selling, general and administrative expenses to
continue to increase during 2000 in absolute dollars. As a percentage to total
revenues, selling, general and administrative expenses were 9.7% of revenues in
1999 and 1998.
Preopening expenses were $395,768 in 1999 versus preopening amortization of
$816,604 in 1998. See Note 2 of the consolidated financial statements regarding
the adoption of Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activities." As a result of the adoption of SOP 98-5 on January 1,
1999, the Company recorded a charge to income, net of tax, of $341,035
representing the write-off of deferred preopening costs as of December 31, 1998.
The charge is reported net of taxes as a cumulative effect of a change in
accounting principle.
Depreciation and amortization expense increased by $362,746 or 25.1% in 1999
compared to 1998 due primarily to the addition of four Company-owned restaurants
during 1999.
Net interest expense increased by $259,194 or 29.8% in 1999 compared to 1998.
The increase resulted from increased borrowings to fund the growth in
Company-owned restaurants and increases in the prime interest rate during 1999.
The combined effective federal and state income tax rate was approximately 35%
for 1999 (excluding the charge related to change in tax status, discussed
below). The pro forma adjustments presented for 1999 and 1998 provide for income
taxes as though we had been subject to corporate income taxes throughout the
years presented. Additionally, 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 pro forma income before cumulative effect of a change in
accounting principle increased $921,081 or 72.5% in 1999 compared to 1998. Pro
forma basic and diluted earnings per share before cumulative effect of a change
in accounting principle increased to $0.37 in 1999 compared to $0.25 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand our number of restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance that we will be successful in
opening the number of restaurants anticipated in a timely manner. Furthermore,
there can be no assurance that our new restaurants will generate sales revenue
or profit margins consistent with those of our existing restaurants, or that
these new restaurants will be operated profitably.
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 members'
contributions (prior to January 1, 1999), internally generated cash flow, bank
borrowings, lease financing and an equity offering. The table below provides
certain information regarding our sources and uses of capital for the years
presented:
- 22 -
Years
Ended December 31
------------------------------------------------
2000 1999 1998
---- ---- ----
Net cash provided by operations $ 2,262,548 $ 3,592,419 $ 3,447,666
Purchases of property and equipment (3,090,936) (6,915,544) (5,313,575)
Business acquisitions (1,806,333) - -
Insurance proceeds for property and equipment 1,299,352 - -
Proceeds from common stock offering - 7,766,300 -
Net distributions of members' equity - - (328,788)
Net borrowings of long-term debt and capital lease
obligations 1,431,705 1,781,865 3,251,135
Payment on short-term borrowings - (6,990,34) -
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 years 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. 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.
In March 2001, the bank which holds the line of credit filed suit in the Circuit
Court of Jefferson County, Kentucky against TW-Tennessee and against the
guarantors of the line of credit, including the Company and a Director of the
Company. Prior to the suit being filed, the Company along with certain
guarantors made a partial payment to the bank. If the bank is unsuccessful in
collecting the remaining payments from the other guarantors, the Company would
have exposure totaling approximately $1,000,000. While the Company believes it
has fulfilled its obligation to the bank and intends to vigorously defend its
position, it is too early in the process to predict with certainty the ultimate
outcome of this matter since the suit is in the early pleading stages and no
discovery has taken place.
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.
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.
The lessor under the equipment leases with TW-Tennessee has declared
TW-Tennessee to be in default thereunder and demanded payment in full from all
guarantors of the leases, including the Company. The Company has made a partial
payment to the lessor and is working with the lessor in pursuing the other
guarantors of the equipment leases that have not made any payment. If the lessor
is unsuccessful in collecting the remaining sums due from the other guarantors,
the Company would have additional exposure totaling approximately $312,000.
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 and by the bank that holds the line of credit, the
Company has incurred a loss related to the Company's guarantees of
TW-Tennessee's obligations. The Company established a reserve in the amount of
$725,000 during 2000 of which approximately $716,000 had been paid out as of
December 31, 2000. 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
- 23 -
obligations and an estimated amount for legal costs which will likely be
incurred in connection with the resolution of this matter. The Company's
management believes that it will not incur any significant additional losses in
connection with this matter.
We both own and lease our restaurant facilities. Management determines whether
to acquire or lease a restaurant facility based on our evaluation of the
financing alternatives available for a particular site.
In the next 12 months, the Company expects the demand on future liquidity to be
from the ongoing maintenance of current restaurant facilities. As of December
31, 2000, the Company had no material commitments for maintenance. In order to
provide any additional funds necessary to pursue our future growth strategy,
which includes both building new restaurants or purchasing an established
restaurant from a franchisee, 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 can be 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 with a bank. As of
December 31, 2000, we had outstanding borrowings under the line of credit of
$5,496,148. The note bears interest at the prime rate plus .25% (9.75% at
December 31, 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.
We also have an additional $6,500,000 mortgage revolving line of credit with a
bank. As of December 31, 2000, we had outstanding borrowings under the line of
credit of $915,868. The note bears interest at the prime rate plus .25% (9.75%
at December 31, 2000) and is due October 3, 2001. Upon the maturity date, the
Loan Agreement provides for extensions of the maturity date until the line of
credit has been repaid or for the conversion of the current outstanding
principal balance to a Term Loan with a maturity of 5-years from the date of
conversion. 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.
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 7A. 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 December 31, 2000,
approximately $12,295,000 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.
- 24 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 26
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 27
Consolidated Balance Sheets as of December 31, 2000 and 1999 28
Statements of Redeemable Members' Equity, Members' Equity, Members'
Retained Earnings (Deficit) and Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 29
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998 30
Notes to Consolidated Financial Statements 31
- 25 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying consolidated balance sheets of Tumbleweed, Inc.
as of December 31, 2000 and 1999, and the related consolidated statements of
income, redeemable members' equity, members' equity, members' retained earnings
(deficit) and stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tumbleweed, Inc.
at December 31, 2000 and 1999 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for pre-opening and other start-up
costs by adopting the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".
/s/ Ernst & Young LLP
Louisville, Kentucky
March 2, 2001
- 26 -
Tumbleweed, Inc.
Consolidated Statements of Income
Years Ended December 31
2000 1999 1998
--------------------------------------
Revenues:
Restaurant sales $ 51,820,600 $ 48,578,123 $ 40,490,933
Commissary sales 1,663,208 1,168,836 1,041,266
Franchise fees and royalties 1,271,251 1,064,952 770,806
Gain from insurance proceeds due to involuntary conversion
of non-monetary assets 554,864 - -
Other revenues 990,843 532,976 504,639
----------- ----------- -----------
Total revenues 56,300,766 51,344,887 42,807,644
Operating expenses:
Restaurant cost of sales 15,275,817 14,232,564 11,788,578
Commissary cost of sales 1,460,704 1,053,083 905,814
Operating expenses 27,456,791 24,377,631 20,881,212
Selling, general and administrative expenses 6,529,835 4,981,721 4,150,303
Preopening expenses 490,394 395,768 816,604
Depreciation and amortization 2,147,408 1,804,757 1,442,011
Provision for doubtful accounts 68,464 - -
Loss on guarantees of indebtedness 725,000 - -
----------- ----------- -----------
Total operating expenses 54,154,413 46,845,524 39,984,522
----------- ----------- -----------
Income from operations 2,146,353 4,499,363 2,823,122
Other income (expense):
Interest expense, net (1,458,650) (1,128,906) (869,712)
Equity in losses of TW-Springhurst (58,903) - -
----------- ----------- -----------
Total other expense (1,517,553) (1,128,906) (869,712)
----------- ----------- -----------
Income before income taxes and cumulative effect of a
change in accounting principle 628,800 3,370,457 1,953,410
Provision for income taxes:
Current and deferred 65,439 1,179,659 -
Deferred taxes related to change in tax status - 639,623 -
----------- ----------- -----------
Total provision for income taxes 65,439 1,819,282 -
----------- ----------- -----------
Income before cumulative effect of a change in accounting principle 563,361 1,551,175 1,953,410
Cumulative effect of a change in accounting principle, net of tax - (341,035) -
----------- ----------- -----------
Net income $ 563,361 $ 1,210,140 $ 1,953,410
=========== =========== ===========
Basic and diluted earnings per share:
Income before cumulative effect of a change in accounting principle $ 0.10 $ 0.27 $ -
Cumulative effect of a change in accounting principle, net of tax - (0.06) -
----------- ----------- -----------
Net income $ 0.10 $ 0.21 $ -
=========== =========== ===========
Pro forma income data (unaudited):
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 3,370,457 $ 1,953,410
Pro forma income taxes 1,179,659 683,693
----------- -----------
Pro forma income before cumulative effect of a change
in accounting principle 2,190,798 1,269,717
Cumulative effect of a change in accounting principle, net of tax (341,035) -
----------- -----------
Pro forma net income $ 1,849,763 $ 1,269,717
=========== ===========
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.37 $ 0.25
Cumulative effect of a change in accounting principle, net of tax (0.06) -
----------- -----------
Pro forma net income $ 0.31 $ 0.25
=========== ===========
See accompanying notes.
- 27 -
Tumbleweed, Inc.
Consolidated Balance Sheets
December 31
2000 1999
-------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 281,829 $ 640,189
Accounts receivable, net allowance of $68,464 in 2000 757,956 606,283
Inventories 1,780,577 1,597,794
Prepaid expenses and other assets 586,023 302,688
-------------- -------------
Total current assets 3,406,385 3,146,954
Property and equipment, net 31,795,454 30,147,559
Goodwill, net of accumulated amortization of
$669,395 in 2000 and $551,478 in 1999 3,476,617 2,737,265
Investment in TW-Springhurst 141,097 -
Other assets 633,335 565,651
-------------- -------------
Total assets $ 39,452,888 $ 36,597,429
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,113,443 $ 1,102,024
Accrued liabilities 2,489,727 1,850,987
Deferred income taxes 8,244 286,885
Current maturities on long-term
debt and capital leases 2,040,667 1,028,443
-------------- -------------
Total current liabilities 5,652,081 4,268,339
Long-term liabilities:
Long-term debt, less current maturities 12,422,904 11,347,047
Capital lease obligations, less current maturities 2,534,877 2,769,339
Deferred income taxes 831,525 489,869
Other liabilities 140,000 160,000
-------------- -------------
Total long-term liabilities 15,929,306 14,766,255
-------------- -------------
Total liabilities 21,581,387 19,034,594
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 December 31, 2000 and 1999 58,818 58,818
Paid-in capital 16,294,006 16,294,006
Treasury stock, 42,400 shares at December 31, 2000 (254,695) -
Retained earnings 1,773,372 1,210,011
-------------- -------------
Total stockholders' equity 17,871,501 17,562,835
-------------- -------------
Total liabilities and stockholders' equity $ 39,452,888 $ 36,597,429
============== =============
See accompanying notes.
- 28 -
Tumbleweed, Inc.
Consolidated Statements of Redeemable Members' Equity, Members' Equity,
Members' Retained Earnings (Deficit) and Stockholders' Equity
Years Ended December 31, 2000, 1999 and 1998
Redeemable
Members Retained
Common Paid-In Treasury Equity-Class A Members' Earnings
Stock Capital Stock Members Equity (Deficit) Total
----------------------------------------------------------------------------------
Balance at December 31, 1997 $ - $ - $ - $ 23,419,738 $ 6,959 $(8,083,284) $15,343,413
Capital contribution - - - - 747,500 - 747,500
Distributions of members' equity - - - (1,076,288) (400,000) - (1,476,288)
Assumption of members'
line of credit - - - (6,990,348) - - (6,990,348)
Net income - - - - - 1,953,410 1,953,410
Accretion of redeemable
members' equity - - - 3,571,586 - (3,571,586) -
----------------------------------------------------------------------------------
Balance at December 31, 1998 - - - 18,924,688 354,459 (9,701,460) 9,577,687
Merger of Tumbleweed, LLC
into Tumbleweed, Inc. 51,050 9,526,637 - (18,924,688) (354,459) 9,701,460 -
Tumbleweed, Inc. balances as of
January 1, 1999 1 129 - - - (129) 1
Proceeds from common stock offering 7,767 7,758,533 - - - - 7,766,300
Public offering costs - (991,293) - - - - (991,293)
Net income - - - - - 1,210,140 1,210,140
----------------------------------------------------------------------------------
Balance at December 31, 1999 58,818 16,294,006 - - - 1,210,011 17,562,835
Net income - - - - - 563,361 563,361
Purchase of treasury stock - - (254,695) - - - (254,695)
----------------------------------------------------------------------------------
Balance at December 31, 2000 $ 58,818 $16,294,006 $(254,695) $ - $ - $ 1,773,372 $17,871,501
==================================================================================
See accompanying notes.
- 29 -
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31
2000 1999 1998
-------------- --------------- --------------
Operating activities:
Net income $ 563,361 $ 1,210,140 $ 1,953,410
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,147,408 1,804,757 1,442,011
Preopening cost amortization - - 816,604
Provision for doubtful accounts 68,464 - -
Deferred income taxes 63,015 776,754 -
Loss on guarantees of indebtedness 725,000 - -
Loss from investment in TW-Springhurst 58,903 - -
Gain from insurance proceeds due