UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 29, 2002
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
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TUMBLEWEED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-1327945
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(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____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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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 3, 2003, was approximately $2,333,000. 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 3, 2003 ($1.12) as reported on The Nasdaq Small Cap Market.
The number of shares of common stock, par value of $.01 per share, outstanding
on March 3, 2003, was 5,916,153.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are
Part of Form 10-K incorporated by reference
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Part III Proxy statement relating to the registrant's
Exhibit Index: Page 54-55 Annual Meeting of Shareholders to be held
June 25, 2003
TUMBLEWEED, INC.
PART I
ITEM 1. BUSINESS
At December 29, 2002, Tumbleweed, Inc. (the "Company") owned, franchised or
licensed 56 Tumbleweed Southwest Mesquite Grill & Bar ("Tumbleweed")
restaurants. We owned and operated 31 Tumbleweed restaurants in Kentucky,
Indiana and Ohio. There were 19 franchised Tumbleweed restaurants located in
Indiana, Illinois, Kentucky and Wisconsin, and six licensed restaurants located
outside the United States in Germany, Jordan, Egypt, England and Turkey.
Tumbleweed restaurants feature sophisticated Southwest 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 Company makes available through its internet website,
www.tumbleweedrestaurants.net , its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably practicable after electronically
filing such material with the Securities and Exchange Commission. The reference
to the Company's website address does not constitute incorporation by reference
of the information contained on the website and should not be considered part of
this document.
THE TUMBLEWEED CONCEPT
The Tumbleweed menu offers both distinctively seasoned, spicier versions of
popular Mexican 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 Mexican 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 Mexican
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 chili, as well as nachos,
quesadillas, buffalo chicken strips, Southwest eggrolls and turkey wings. The
Mexican menu offers burritos, enchiladas, tacos, chimichangas and other items
served both individually and in various combination dinners accompanied by rice
and refried or baked 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, smashed taters, corn on
the cob, grilled veggies, Santa Fe rice, and refried or baked beans. Mesquite
grilled items are available as sandwiches as well as entrees. A variety of
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. In an effort to increase the frequency of guest visits, the
Company introduces new items which complement present menu selections through
seasonal menus. The Company also has a lunch menu which is available during
lunch hours as a complement to the complete menu.
Tumbleweed restaurants typically contain full-service bars offering a wide
assortment of mixed drinks, wines, domestic and imported beers and featuring the
Tumbleweed margarita and Texas Tea. Alcoholic beverages accounted for
approximately 10.4% of restaurant sales during 2002.
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Tumbleweed's menu pricing is designed to create a strong perception of value by
consumers. Prices for Mexican dishes range from $4.39 for two tacos to $11.99
for the "Need the 'Weed" sampler dinner. Mesquite grilled items range from $6.29
for a hamburger to $19.99 for a 22 oz. USDA-choice ribeye steak dinner.
Tumbleweed also offers several daily lunch specials for less than $6.00.
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 2002, the average check at a full-service Tumbleweed
restaurant, including beverages, was $9.48 for lunch and $12.61 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 five 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 and teamwork.
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 Mexican 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
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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:
OPENING RESTAURANTS IN TARGET MARKETS. We target mid-sized metropolitan markets,
initially concentrating in the Midwest and Mid-Atlantic 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. On January 1, 2002, the Company
purchased from its joint venture partner the remaining 50% interest in a
restaurant location. During the first quarter of 2002, the Company closed four
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the
continued improvement of per-store average sales volumes. During the second
quarter of 2002, the Company sold one of its restaurant locations to a
franchisee in accordance with the Company's plan established in the fourth
quarter of 2001. In the next 12 months, the Company expects to construct one or
two additional restaurant facilities.
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. 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.
During 2002, there were no franchise restaurant openings, and two franchisees
elected to close their Tumbleweed restaurant locations (a total of 3 locations).
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, we generally use one of two prototype designs management believes is
best suited to a particular site. Our Buffalo Hunter and Gunslinger prototype
restaurants accommodate approximately 250 and 200 guests, respectively. Each
size restaurant offers full service casual dining and a menu containing a wide
assortment of Mexican and mesquite grilled selections. Management believes that
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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.
INTERNATIONAL. In 2002, the Company purchased Tumbleweed International, LLC. See
below for a detail discussion of this transaction. The acquisition gives the
Company direct control and benefit of the international licensing of the
Tumbleweed concept.
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 two
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.
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 weekly by store-level personnel
and at the end of each reporting period 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.
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SEASONALITY. We consider restaurant operations to be somewhat seasonal in nature
with late first quarter and second quarter 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 President, Vice President and Chief Financial
Officer, Vice President of Company Operations and the Director of Construction
oversee 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 2002 was approximately 3.3% of
restaurant sales.
RESTAURANT LOCATIONS
As of December 29, 2002, we owned and operated 31 Tumbleweed restaurants. The
following table sets forth the markets (including the number of restaurants in
each market) of these 31 restaurants:
NO. OF
STATE LOCATION RESTAURANTS
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Indiana Evansville 3
Indiana Ft. Wayne 2
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Louisville 9
Ohio Cincinnati 5
Ohio Columbus 5
Ohio Dayton 3
Ohio Cleveland 2
--
TOTAL 31
==
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FRANCHISED RESTAURANTS
As of December 29, 2002, we had six 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
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TW-Indiana, LLC Indiana Floyd Knobs 1
Indiana New Albany 2
Indiana Salem 1
Indiana Jeffersonville 1
Kentucky Shelbyville 1
Kentucky Frankfort 1
Kentucky Lexington 1
--
8
Diamondback
Management Corp. Illinois Rockford 1
Wisconsin Appleton 1
Wisconsin Franklin 1
Wisconsin Madison 1
Wisconsin Milwaukee 1
Wisconsin New Berlin 1
Wisconsin Park Place 1
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7
TW-Seymour, LLC Indiana Seymour 1
--
1
TW-Glasgow, Inc. Kentucky Glasgow 1
--
1
TW-Bullitt, Inc. Kentucky Hillview 1
--
1
TW-Somerset, LLC Kentucky Somerset 1
--
1
--
19
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LICENSED RESTAURANTS
As of December 29, 2002, we had six licensed restaurants located outside the
United States. The following table sets forth the location by country (including
the number of restaurants in each country) of these six restaurants:
No. of
Country Restaurants
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England 2
Turkey 1
Egypt 1
Germany 1
Jordan 1
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6
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INTERNATIONAL LICENSING AGREEMENT
Prior to January 1, 2002, the Company had 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. On January 1, 2002, the Company
purchased the ownership interest in International for $1.5 million from
TW-International Investors, Inc. and Chi-Chi's International Operations, Inc.
("CCIO"). CCIO owned 40% of International. The President and Chief Executive
Officer of the Company is the sole shareholder of CCIO. Members of
TW-International Investors, Inc. include three current directors of the Company.
The acquisition gives the Company direct control and benefit of the
international licensing of the Tumbleweed concept. In connection with the
acquisition, the Company assumed an existing $1.4 million bank loan of
TW-International Investors, Inc. and issued 76,923 shares of its common stock to
CCIO. The Company has entered into a commission agreement with CCIO in
connection with the sale of international regional licenses by International.
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 10.4% of our restaurant sales were attributable to the sale of
alcoholic beverages for the fiscal year ended December 29, 2002. 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.
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The development and construction of additional restaurants are subject to
compliance with applicable zoning, land use and environmental laws and
regulations.
EMPLOYEES
As of December 29, 2002, we had approximately 1,800 employees, of whom 35 are
executive and administrative personnel, 117 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 may 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. As of December 29, 2002, we operated 31 Tumbleweed restaurants.
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.
- 9 -
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
29, 2002, 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. ... 57 President, Chief Executive Officer, and Director
Glennon F. Mattingly . 51 Vice President and Chief Financial Officer
Gary T. Snyder........ 48 Vice President of Company Operations
Lynda J. Wilbourn..... 40 Vice President and 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. From 1997 to 2002, Mr.
Smith 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.
Glennon F. Mattingly joined Tumbleweed, LLC, the Company's predecessor, as
Controller in March 1995 and was named Vice President-Controller in April 1998
and Chief Financial Officer in August 2001. 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.
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.
Lynda J. Wilbourn joined Tumbleweed, Inc. in March 1999 as Director of
Accounting and was named Vice President and Controller in November 2001. Ms.
Wilbourn continues to serve the Company in that capacity. From 1987 to 1999,
- 10 -
Ms. Wilbourn held various positions with NTS Corporation, a regional real estate
development firm headquartered in Louisville, Kentucky, including five years as
Vice President of Accounting.
SEGMENT INFORMATION
Segment information for the fiscal years ended December 29, 2002 and December
31, 2001 and 2000 are presented in Note 19 to our Consolidated Financial
Statements contained in Item 8.
ITEM 2. PROPERTIES
Of the 31 Company-owned restaurants in operation at December 29, 2002, 15 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 2007 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
are located in Louisville, Kentucky in leased space. The lease expires in 2007
and has two 5-year renewal options. We own the commissary and warehouse space in
fee simple.
ITEM 3. LEGAL PROCEEDINGS
The Company guaranteed certain equipment leases with a bank for TW-Tennessee,
LLC, a former franchisee (TW- Tennessee) of the Company in which the Company and
David M. Roth, a Director of the Company, were formerly members. The Company has
agreed to assume and pay one of the equipment leases totaling approximately
$125,000 and remains contingently liable on two other equipment leases that
currently have a remaining balance of approximately $36,000 which the Company
believes will be assumed and paid by other guarantors. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it assumed. As of December 29, 2002, the reserve balance is approximately
$74,000 which management believes is sufficient to satisfy the remaining lease
obligation. The Company's management believes it will not incur significant
additional losses in connection with this matter.
On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company had no contractual obligation to pay a
$270,000 commission to AFI, in connection with a Conditional Commitment entered
into between AFI and the Company and seeking damages for fraud and
misrepresentation. In response, AFI filed suit in the United States District
Court for the Eastern District of Missouri seeking payment of a $405,000
commitment fee plus additional charges, fees and costs all in the excess of
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discover stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of December 29,
2002, the Company has not made an accrual for a potential liability in
connection with this matter.
We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
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 29, 2002.
- 11 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 3, 2003, 5,916,153 shares of Common Stock were issued and
outstanding. There were approximately 1,400 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 Small Cap Market under the symbol "TWED."
The following table shows quarterly high and low closing prices for the Common
Stock during 2002 and 2001 for the periods indicated, as reported by the Nasdaq
Small Cap Market.
2002 2001
---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 1.65 $ 1.10 $ 3.13 $ 1.81
Second Quarter 1.75 0.81 2.99 2.17
Third Quarter 1.60 1.22 2.30 1.30
Fourth Quarter 1.38 0.50 1.50 0.92
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.
- 12 -
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
fiscal years ended December 29, 2002 and December 31, 2001, 2000 and 1999 and
Tumbleweed, LLC for the year ended December 31, 1998 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."
- 13 -
Tumbleweed,
Tumbleweed, Inc. LLC
--------------------------------------------------------- ------------------
Fiscal Year
Ended Fiscal Year Ended December 31
December 29, -----------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -----------------------------------------------------------
Statement of Operations Data:
Revenues:
Restaurant sales $ 54,076,024 $ 56,025,886 $ 51,820,600 $ 48,578,123 $ 40,490,933
Commissary sales 1,664,591 1,781,252 1,663,208 1,168,836 1,041,266
Franchise fees and royalties 1,223,664 1,227,300 1,271,251 1,064,952 770,806
Other revenues 661,990 418,744 990,843 532,976 504,639
--------------- ------------- ------------ ------------ -------------
Total revenues 57,626,269 59,453,182 55,745,902 51,344,887 42,807,644
Operating expenses:
Restaurant cost of sales 16,231,146 17,426,315 15,275,817 14,232,564 11,788,578
Commissary cost of sales 1,496,587 1,562,049 1,460,704 1,053,083 905,814
Operating expenses 29,940,255 30,567,705 27,456,791 24,377,631 20,881,212
Selling, general and administrative
expenses 5,983,857 6,107,159 6,598,299 4,981,721 4,150,303
Preopening expenses - - 490,394 395,768 816,604
Depreciation and amortization 1,947,610 2,285,452 2,147,408 1,804,757 1,442,011
Special charges 103,773 4,294,539 - - -
Loss on guarantees of indebtedness - 565,000 725,000 - -
--------------- ------------- ------------ ------------ --------------
Total operating expenses 55,703,228 62,808,219 54,154,413 46,845,524 39,984,522
--------------- ------------- ------------ ------------ --------------
Income (loss) from operations 1,923,041 (3,355,037) 1,591,489 4,499,363 2,823,122
Interest expense, net (1,007,126) (1,276,903) (1,458,650) (1,128,906) (869,712)
Gain on sale of property 338,482 - - - -
Gain from insurance proceeds due to
involuntary conversion of non-
monetary assets 91,693 - 554,864 - -
Equity in income (loss) of TW-
Springhurst - 81,318 (58,903) - -
--------------- ------------- ------------ ------------ --------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of a change in
accounting principle 1,346,090 (4,550,622) 628,800 3,370,457 1,953,410
Provision (benefit) for income taxes:
Current and deferred 730,234 (1,178,144) 65,439 1,179,659 -
Deferred taxes related to change in
tax status (3) - - - 639,623 -
--------------- ------------- ------------ ------------ --------------
Total provision (benefit) for income
taxes 730,234 (1,178,144) 65,439 1,819,282 -
--------------- ------------- ------------ ------------ --------------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle 615,856 (3,372,478) 563,361 1,551,175 1,953,410
Extraordinary item - write-off of
unamortized loan costs, net of tax (76,743) - - - -
Cumulative effect of a change in
accounting principle, net of tax (1,503,776) - - (341,035) -
--------------- ------------- ------------ ------------ --------------
Net income (loss) $ (964,663)$ (3,372,478)$ 563,361 $ 1,210,140 $ 1,953,410
=============== ============= ============ ============ ==============
Basic and diluted earnings (loss)
per share:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle $ 0.10 $ (0.58)$ 0.10 $ 0.27
Extraordinary item - write-off of
unamortized loan costs (0.01) - - -
Cumulative effect of a change in
accounting principle, net of tax (0.25) - - (0.06)
--------------- ------------- ------------ ------------
Net income (loss) $ (0.16 )$ (0.58)$ 0.10 $ 0.21
=============== ============= ============ ============
- 14 -
Tumbleweed,
Tumbleweed, Inc. LLC
--------------------------------------------------------- ---------------
Fiscal Year
Ended Fiscal Year Ended December 31
December 29, ---------------------------------------------------------
2002 2001 2000 1999 1998
------------ ---------------------------------------------------------
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) 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 (2):
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
============ ==============
Tumbleweed, Inc. Tumbleweed, LLC
------------------------------------------------------ ---------------------
As of December 31
----------------------------------------------------------
As of Pro
---
December 29, Forma
-----
2002 2001 2000 1999 1998 (3) 1998
---- ---- ---- ---- -------- ----
(unaudited)
(In thousands)
Balance Sheet Data:
Total assets $ 33,97 $ 34,897 $ 39,453 $ 36,597 $ 33,681 $ 33,681
Long-term debt and capital lease
obligations, including current
maturities 15,881 15,435 16,998 15,145 13,363 13,363
Total liabilities 20,343 20,398 21,581 19,035 24,743 24,103
Redeemable members' equity - - - - - 18,925
Members' equity - - - - - 354
Members' retained earnings (deficit) - - - - - (9,701)
Stockholders' equity 13,634 14,499 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, 1997.
(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.
- 15 -
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 29, 2002, we owned, franchised or licensed 56 Tumbleweed
restaurants. We owned and operated 31 restaurants in Kentucky, Indiana and Ohio.
There were 19 franchised restaurants located in Indiana, Illinois, Kentucky, and
Wisconsin and six licensed restaurants located outside the United States in
Germany, Jordan, Egypt, England and Turkey. The following table reflects changes
in the number of Company-owned, franchised and licensed restaurants for the
years presented.
Company-owned Restaurants 2002 2001 2000
------------------------- ---- ---- ----
In operation, beginning of fiscal year 36 36 29
Restaurants opened - - 4
Restaurant sold to franchisee (1) - -
Restaurants closed (4) - -
Joint venture restaurant opened - - 1
Restaurants purchased from franchisee - - 2
-- -- --
In operation, end of fiscal year 31 36 36
-- -- --
Franchise and Licensed Restaurants
----------------------------------
In operation, beginning of fiscal year 29 27 22
Restaurants opened - 3 10
Restaurants closed (5) (1) (3)
Restaurant purchased from Tumbleweed,
Inc. 1 - -
Restaurants sold to Tumbleweed, Inc. - - (2)
-- -- ---
In operation, end of fiscal year 25 29 27
-- -- --
System total 56 65 63
== == ==
On January 1, 2002, the Company purchased from its joint venture partner the
remaining 50% interest in a restaurant location. See Note 10 to the accompanying
consolidated financial statements for a further discussion of this transaction.
During the first quarter of 2002, the Company closed four Company-owned
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the on
the continued improvement of per-store average sales volumes. During the second
quarter of 2002, the Company sold one of its restaurant locations to a
franchisee in accordance with the Company's plan established in the fourth
quarter of 2001. See below for a discussion regarding a special charge, which
was recorded in 2001 as a result of the store closings and sale.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
- 16 -
in the United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates these estimates.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.
The Company believes the following critical accounting policies affect its more
significant assumptions and estimates used in the preparation of its
consolidated financial statements.
Valuation of Long-Lived Assets
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of net book
value or fair market value less cost to sell, whether reported in continuing
operations or discontinued operations. SFAS No. 144 also broadens the
presentation of discontinued operations to include components of an entity that
have been or will be disposed of rather than limiting such reporting to
discontinued segments of a business.
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important that could trigger an impairment review include the
following:
o a significant underperforming store relative to expected historical or
projected future operating results;
o a significant change in the manner of our use of the acquired asset or
the strategy for our overall business;
o a significant negative industry or economic trend;
Through December 29, 2002, we determined whether the carrying value of
long-lived assets may not be recoverable based upon the existence of one or more
indicators of impairment. We determined that there was no impairment based on
the estimated undiscounted future cash flows of assets. If long-lived assets are
not recoverable based upon estimated undiscounted cash flows, we write assets
down to fair value. This fair value is generally determined on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model for
assets held for use or at the lower of net book value less cost to sell for
assets held for sale.
In the fourth quarter of 2001, the Company recorded special charges of
approximately $4,295,000. The special charges include a $3,683,353 charge to
earnings in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Impairment of Long-Lived Assets." This charge reflects the write-down
of assets associated with six restaurants, four of which were closed in the
first quarter of 2002. The Company sold one of the remaining two restaurants to
a current franchisee and continues to operate the other restaurant for the
present. The restaurant closings were part of a strategic management decision to
eliminate lower sales volume restaurants that were unprofitable in 2001 and to
focus its energies on the continued improvement of per-store average sales
volumes. The special charges also included approximate amounts totaling $611,200
for lease obligations and other costs related to the decision to close these
restaurants of which approximately $295,000 remains accrued at December 29,
2002. Although we do not anticipate significant changes, the actual net proceeds
from anticipated sales of assets and store closing costs may differ from the
estimated amounts.
Impairment of Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS). SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment annually, or more
frequently if certain indicators arise. The provisions of SFAS No. 142 also
require the completion of a transitional impairment test within six months of
adoption, with any impairments identified treated as a cumulative effect of a
change in accounting principle.
During the first quarter of 2002, the Company determined that all goodwill as of
January 1, 2002 related to two reporting units was impaired. The fair value of
each unit was determined using accepted valuation techniques. As a result of the
- 17 -
transitional impairment test, an impairment loss in the amount of approximately
$1,504,000, net of tax, was recorded as a cumulative effect of a change in
accounting principle during the first quarter of 2002.
As of December 29, 2002, the Company completed the annual test of impairment and
determined that there is no further impairment of goodwill.
The following section should be read in conjunction with "Selected Financial
Data" included above in Item 6 and our consolidated 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 operating statement data, except where noted, for the periods indicated.
Fiscal Years Ended
------------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
------------------------------------------------------
Revenues:
Restaurant sales 93.8% 94.2% 93.0%
Commissary sales 2.9 3.0 3.0
Franchisee fees and royalties 2.1 2.1 2.2
Other revenues 1.2 0.7 1.8
------------------------------------------------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 30.0 31.1 29.5
Commissary cost of sales (2) 89.9 87.7 87.8
Operating expenses (1) 55.4 54.6 53.0
Selling, general and administrative 10.4 10.3 11.8
Preopening expenses - - 0.9
Depreciation and amortization 3.4 3.8 3.9
Special charges 0.2 7.2 -
Loss on guarantees of indebtedness - 1.0 1.3
------------------------------------------------------
Total operating expenses 96.7 105.6 96.2
------------------------------------------------------
Income (loss) from operations 3.3 (5.6) 2.8
Other expense, net (1.0) (2.1) (1.7)
------------------------------------------------------
Income (loss) before income taxes, extraordinary item
and cumulative effect of a change in accounting
principle 2.3 (7.7) 1.1
Provision (benefit)for income taxes 1.3 (2.0) 0.1
------------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle 1.0 (5.7) 1.0
Extraordinary item - write-off of unamortized loan
costs (0.1) - -
Cumulative effect of a change in
accounting principle, net of tax (2.6) - -
------------------------------------------------------
Net income (loss) (1.7)% (5.7)% 1.0%
======================================================
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. As a result of this change,
the 2002 fiscal year has two fewer days than the 2001 fiscal year.
COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 31, 2001
Total revenues decreased by $1,826,913 or 3.1% in 2002 compared to 2001
primarily as a result of the following:
Restaurant sales decreased by $1,949,862 or 3.5% in 2002 compared to
2001. The decrease in restaurant sales is primarily a result of the closing
of four Company-owned restaurants during the first quarter of 2002, the sale
of one Company-owned restaurant to a franchisee during the second quarter of
2002 and the Company's change in its fiscal year. The decrease in restaurant
sales is partially offset by a 1.4% increase in same store sales for the
fiscal year ended December 29, 2002.
Commissary sales to franchised and licensed restaurants decreased by
$116,661 or 6.5% in 2002 compared to 2001. The decrease in commissary sales
is primarily a result of the decreased number of franchised and licensed
restaurants during 2002.
- 19 -
Franchise fees and royalties decreased by $3,636 or 0.3% in 2002 compared
to 2001. Franchise fees decreased by $105,000 in 2002 compared to 2001. The
decrease in franchise fee income is a result of having three franchise
restaurant openings in 2001 compared to no franchise restaurant openings in
2002. The decrease in franchise fees is partially offset by $101,364 increase
in royalty income from 2001 to 2002. Royalty income increased primarily as a
result of the Company's acquisition of the ownership interest in Tumbleweed
International, LLC on January 1, 2002.
Other revenues increased $243,246 or 58.1% in 2002 compared to
2001 primarily as a result of an increase in insurance proceeds which relate
to business interruption as a result of fires at two Company-owned
restaurants. Other revenues includes $200,000 of insurance proceeds in 2002,
as a result of a fire which occurred in July 2002, compared to $100,000 of
insurance proceeds in 2001, as a result of a fire which occurred in June
2000. In addition, other revenues increased as a result of recognizing, as
income in 2002, $55,000 of development fees which were forfeited by a
franchisee and an increase in volume related purchasing rebates in 2002
compared to 2001.
Restaurant cost of sales decreased by $1,195,169 or 6.9% in 2002 compared to
2001. The decrease in restaurant cost of sales is primarily a result of the
closing of four Company-owned restaurants during the first quarter of 2002, the
sale of one Company-owned restaurant to a franchisee during the second quarter
of 2002 and the Company's change in its fiscal year as discussed above.
Restaurant cost of sales decreased as a percentage of sales by 1.1% to 30.0% for
2002 compared to 31.1% during 2001. The 1.1% decrease in cost of sales is
primarily the result of a temporary increase in the cost of beef and pork
(primarily steaks and ribs, respectively) during the first part of 2001.
Commissary cost of sales decreased $65,462 or 4.2% in 2002 compared 2001
primarily as a result of decreased commissary sales. As a percentage to sales,
commissary cost of sales increased 2.2% from 87.7% in 2001 to 89.9% in 2002
primarily as a result of higher raw material product costs.
Restaurant operating expenses decreased by $627,450 or 2.1% in 2002 compared to
2001. The decrease in operating expenses is primarily a result of the closing of
four Company-owned restaurants during the first quarter of 2002, the sale of one
Company-owned restaurant to a franchisee during the second quarter of 2002 and
the change in the Company's fiscal year. The decrease in operating expenses from
2001 to 2002 is partially offset by increased local marketing costs and
increased repair and maintenance costs. Operating expenses as a percentage of
sales increased by 0.8% from 54.6% in 2001 to 55.4% in 2002 primarily due to a
0.4% increase in local marketing costs and a 0.3% increase in repair and
maintenance costs.
Selling, general and administrative expenses decreased by $123,302 or 2.0% in
2002 compared to 2001. The decrease in selling, general and administrative
expenses is primarily due to the fact that the 2001 period includes the cost of
implementing a new menu of approximately $95,000. There was no similar expense
in 2002. The decrease in selling, general and administrative expenses is also
attributable to decreased advertising costs. As a percentage to total revenues,
selling, general and administrative expenses was 10.4% and 10.3% for 2002 and
2001, respectively.
Depreciation and amortization expense decreased $337,842 or 14.8% in 2002
compared to 2001 as a result of goodwill no longer being amortized in accordance
with SFAS No. 142 and the write-down of assets in the fourth quarter of 2001.
The Company recorded special charges of $103,773 in the fourth quarter of 2002.
The special charges represent the write- off of various costs that were incurred
as a result of the proposal to acquire all outstanding shares in a going private
transaction which was originally announced in June 2002. See below for a
discussion regarding the 2001 special charges.
Net interest expense decreased $269,777 or 21.1% in 2002 compared to 2001. The
decrease in net interest expense is due primarily to the decreases in the prime
interest rate during 2002.
The $338,482 gain on sale of property is a result of the sale of one of the
Company-owned restaurants (land and building) which had been closed, as
discussed above, for $1,575,000. A portion of the proceeds from the sale were
used to pay off a $224,611 mortgage payable and other closing costs.
The gain of $91,693 from insurance proceeds during 2002 was due to the
involuntary conversion of non-monetary assets from a fire at a Company-owned
restaurant. See Note 12 of the accompanying consolidated financial statements
for a detail discussion. There was no similar income during 2001.
Income taxes on the Company's income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle for 2002 and 2001 have
been provided for at an estimated effective tax rate of 54% and 26%,
respectively. The effective tax rate differs from the statutory federal tax rate
of 34% as a result of the impact of
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employment tax credits, state income taxes and an increase in the valuation
allowance for the deferred tax asset. In 2003, the Company expects the effective
tax rate to moderate closer to the statutory rate.
The extraordinary item - write off of unamortized loans costs, net of tax, of
$76,743 relates to loan costs associated with the Company's long-term debt. The
unamortized loan costs were expensed due to the fact that a commitment letter
was signed prior to December 29, 2002 for financing which will repay all
long-term debt prior to its maturity. See below for a discussion regarding the
$18.0 million financing package that was obtained subsequent to fiscal year end
on December 31, 2002.
COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 2001 AND 2000
Total revenues increased by $3,707,280 or 6.7% in 2001 compared to 2000
primarily as a result of the following:
Restaurant sales increased by $4,205,286 or 8.1% in 2001 compared to
2000. The increase in restaurant sales is due primarily to 42 additional
Company-owned restaurant store months during 2001 compared to 2000. The
increase in restaurant sales is also attributable in part to a 0.7% increase
in same store sales.
Commissary sales to franchised and licensed restaurants increased by
$118,044 or 7.1% in 2001 compared to 2000. The increase is due primarily to
38 additional franchised or licensed restaurant store months in 2001 compared
to 2000.
Franchise fees and royalties decreased by $43,951 or 3.5% in 2001
compared to 2000. Franchise fees decreased by $145,000 in 2001 compared to
2000. The decrease in franchise fee income is a result of having seven
franchise restaurant openings in 2000 compared to three franchise restaurant
openings in 2001. The decrease in franchise fees is partially offset by a
$101,049 increase in royalty income from 2000 to 2001. Royalty income
increased primarily as a result of 38 additional franchised or licensed
restaurant store months in 2001 compared to 2000.
Other revenues decreased by $572,099 or 57.7% in 2001 compared to 2000
primarily due to a decrease in volume related purchasing rebates in 2001
compared to 2000. The decrease in other revenues is also due to a decrease in
insurance proceeds which relate to a business interruption as a result of a
fire which occurred in June 2000 at a Company-owned restaurant. Other
revenues includes $100,000 and $280,000 of insurance proceeds related to a
business interruption in 2001 and 2000, respectively.
Restaurant cost of sales increased by $2,150,498 or 14.1% in 2001 compared to
2000. The increase was principally due to 42 additional Company-owned restaurant
store months in 2001 compared to 2000. Restaurant cost of sales increased as a
percentage of sales by 1.6% to 31.1% in 2001 compared to 29.5% in 2000. The 1.6%
increase in cost of sales is primarily the result of a temporary increase in the
cost of beef and pork (primarily steaks and ribs, respectively) and as a result
of improving the quality of the beef product served in the restaurants.
Commissary cost of sales increased $101,345 or 6.9% in 2001 compared to 2000.
The increase in commissary cost of sales is due primarily to 38 additional
franchised and licensed restaurant store months in 2001 compared to 2000. As a
percentage of commissary sales, commissary cost of sales were 87.7% and 87.8% in
2001 and 2000, respectively.
Restaurant operating expenses increased by $3,110,914 or 11.3% in 2001 compared
to 2000. The increase in operating expenses reflects 42 additional Company-owned
restaurant store months in 2001 compared to 2000. Operating expenses increased
as a percentage of restaurant sales by 1.6% to 54.6% in 2001 from 53.0% in 2000
primarily due to a 0.6% increase in utilities and a 0.4% increase in payroll
costs.
Selling, general and administrative expenses decreased by $491,140 or 7.4% in
2001 compared to 2000. The decrease in selling, general and administrative
expenses is primarily due to decreased payroll costs for corporate personnel.
The decrease in payroll costs is partially offset by increased advertising
costs, the cost of implementing a new menu during the first quarter of 2001and
increased legal costs. As a percentage to total revenues, selling, general and
administrative expenses were 10.3% and 11.8% for 2001 and 2000, respectively.
Preopening expenses are start-up costs which are incurred in connection with
opening new restaurant locations. These costs are expensed as incurred and will
fluctuate based on the number of restaurant locations which are in the process
of being prepared for opening. There were no preopening expenses incurred during
2001. Preopening expenses were $490,394 in 2000.
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Depreciation and amortization expense increased $138,044 or 6.4% in 2001
compared to 2000 due primarily to 42 additional Company-owned restaurant store
months in 2001 compared to 2000.
The Company recorded special charges of $4,294,539 in the fourth quarter of
2001. The special charges include a $3,683,353 charge to earnings in accordance
with SFAS No. 121, "Impairment of Long-Lived Assets." This charge reflects the
write-down of assets associated with six restaurants, four of which closed in
the first quarter of 2002. The Company sold one of the remaining two restaurants
to a current franchisee and continues to operate the other restaurant for the
present. The restaurant closings were part of a strategic management decision to
eliminate lower sales volume restaurants that were unprofitable in 2001 and to
focus its energies on the continued improvement of per-store average sales
volumes. The special charges also included $611,186 for lease obligations and
other costs related to the decision to close these restaurants of which
approximately $295,000 remains accrued at December 29, 2002.
Net interest expense decreased $181,747 or 12.5% in 2001 compared to 2000. The
decrease in net interest expense is the result of decreases in the prime
interest rate during 2001 partially offset by higher borrowings incurred during
2000 to fund the growth in Company-owned restaurants.
The gain of $554,864 from insurance proceeds during 2000 was due to the
involuntary conversion of non-monetary assets from a fire at a Company-owned
restaurant. There was no similar income during 2001.
The equity in income of TW-Springhurst was $81,318 in 2001 compared to equity in
losses of $58,903 in 2000. TW- Springhurst experienced a loss in 2000 primarily
as a result of pre-opening costs.
The combined effective federal and state income tax rate was approximately 26%
and 10% for the years ended December 31, 2001 and 2000, respectively. The
effective tax rate is lower than the statutory federal tax rate of 34% as a
result of the impact of employment tax credits and state income taxes on the
effective rate, as well as the impact on the rate in 2001 of the valuation
allowance against deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to fiscal year end on December 31, 2002, the Company completed an
$18.0 million financing package with GE Capital Franchise Finance Corporation
(GE). The loan was divided into two real estate loans totaling $14.5 million
secured by fifteen fee simple properties, one loan ($7,122,000) bearing interest
at a fixed rate of 8.52% for 15 years and the other ($7,378,000) at a variable
rate of LIBOR plus 4.20% over 15 years. The Company also entered into two
equipment loan agreements totaling $3.5 million secured by substantially all the
equipment of the Company. One equipment loan ($1,750,000) bears interest at a
fixed rate of 8.32% over 10 years while the other equipment loan ($1,750,000)
has a variable rate of LIBOR plus 4.20% over 10 years. The financing package
consolidates all of the Company's outstanding debt and provides approximately
$1.7 million for the remodels, modernization and / or upgrades to the properties
described in renovation agreements signed with GE. The Company has until June
30, 2004 to complete the renovations, unless the Company obtains GE's written
consent for an extension of such date. Additionally, the financing package
provides for $1.2 million to be used for expansion of Company restaurants. The
loan imposes restrictions on the Company with respect to the maintenance of
certain financial ratios, the incurrence of indebtedness, the sale of assets and
capital expenditures. The Company is required to maintain two separate Fixed
Charge Coverage Ratios. One is a Corporate Fixed Charge Coverage Ratio of 1.25:1
based on results of the entire company and the second, an aggregate Fixed Charge
Coverage Ratio of at least 1.25:1 on the properties used as collateral on this
loan. Both ratios are determined as of the last day of each fiscal year with
respect to the twelve-month period of time immediately preceding the date of
determination. The Company must also maintain a Funded Debt to EBITDA ratio not
to exceed 5.5 to 1.0, determined as of the last day of each fiscal quarter for
the twelve-month period of time immediately preceding the date of determination.
With the exception of new store development, the Company shall not incur debt in
excess of $500,000 per year without prior written consent of GE. With respect to
each of the required covenants the Company expects to be in compliance
throughout 2003.
Our capital needs during 2002 and 2001 arose from the reconstruction of
restaurant facilities which were damaged by fire during July 2002 and June 2000,
respectively, and the maintenance and improvement of existing restaurant
facilities. The source of capital to fund the reconstruction was insurance
proceeds received during 2002 and 2000. The maintenance and improvement
expenditures were funded by internally generated cash flow. Our capital needs
for 2000 arose from the development of new restaurants, and to a lesser extent,
maintenance and improvement of existing restaurant facilities. The principal
sources of capital to fund these expenditures were internally generated cash
flow, bank borrowings and lease financing. The table below provides certain
information regarding our sources and uses of capital for the years presented:
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Fiscal Years Ended
---------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
---------------- -------------- --------------
Net cash provided by operations $ 1,924,314 $ 3,294,158 $ 2,262,548
Purchases of property and equipment (1,063,911) (1,255,406) (3,090,936)
Business acquisitions (150,000) - (1,806,333)
Insurance proceeds for property and equipment - - 1,299,352
Proceeds from sale before debt payment 1,125,815 - -
Net borrowings (payments) on long-term debt and
capital lease obligations (1,258,853) (1,563,315) 1,431,704
The table below provides information regarding our contractual obligations and
commitments as of December 29, 2002, giving effect to the refinancing on
December 31, 2002.
Payments Due by Period
---------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
Total 1 Year Years Years 5 Years
------------ ------------ ------------ ------------- --------------
Long-term debt,
including current
maturities $ 13,995,623 $ 744,540 $ 1,794,274 $ 2,066,511 $ 9,390,298
Capital leases 3,101,424 644,642 482,559 345,018 1,629,205
Operating leases 20,087,012 1,941,106 3,725,195 3,540,064 10,880,647
------------ ------------ ------------ ------------- --------------
Total contractual
obligations $ 37,184,059 $ 3,330,288 $ 6,002,028 $ 5,951,593 $ 21,900,150
============ ============ ============ ============= ==============
Our largest use of funds during 2002 was for the reconstruction of a restaurant
facility which was damaged by fire during 2002, for payments of long-term debt
and capital lease obligations, maintenance and improvement of existing
restaurant facilities, and for the acquisition of the remaining 50% interest in
TW-Springhurst. Our largest source of funds in 2002 was cash flow from
operations, proceeds from the sale of property in the fourth quarter and
proceeds from the Comapny's two mortgage revolving lines of credit. Our largest
use of funds during 2001 was for the reconstruction of a restaurant facility,
which was damaged by fire during 2000, and for payments on long-term debt and
capital lease obligations. Our largest use of funds during 2000 was for capital
expenditures consisting of land, building and equipment, the acquisition of the
assets of two Tumbleweed restaurants from two related party franchisees and for
payments on long-term debt and capital lease obligations. Our largest source of
funds in 2000 was from insurance proceeds for property and equipment which were
damaged in June 2000 and proceeds from long-term debt. 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 guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a former franchisee
(TW-Tennessee) of the Company in which the Company and David M. Roth, a Director
of the Company, were formerly members, 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.
Beginning in 2001, the Company had settlement discussions with the bank holding
the TW-Tennessee line of credit, the other guarantors of that line of credit and
certain of the shareholders of TW International Investors, Inc. and TWI-B, Inc.
regarding the resolution of the suit which had been filed in March 2001 by the
bank which had held the line of credit extended to TW-Tennessee (the "Tennessee
Litigation") and related matters.
On February 28, 2002, the Company entered into a Confidential Settlement
Agreement and Mutual Release (the "Settlement Agreement") which resolved the
Tennessee Litigation and related matters. The Settlement Agreement provided for
a cash payment by the Company to the bank holding the TW-Tennessee line of
credit of $75,000 and the execution of a promissory note, payable to the bank,
in the face amount of $300,000. In addition, subject to certain conditions, the
Company will pay to the bank an additional amount of up to $200,000 in the event
Tumbleweed International, LLC successfully sells regional international licenses
and receives proceeds in excess of the $1,400,000 in indebtedness assumed by the
Company in connection with its acquisition of the interests of TW International
Investors,
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Inc. and TWI-B, Inc. in Tumbleweed International, LLC. The completion of the
acquisition of the interests of TW International Investors, Inc. and TWI-B, Inc.
in Tumbleweed International, LLC is included in the Settlement Agreement.
As a result of the Settlement Agreement, the Tennessee Litigation was dismissed.
In addition, the parties to the settlement, including certain Directors of the
Company (George Keller, David M. Roth and Minx M. Auerbach), granted mutual
releases to one another regarding all matters, other than those specifically
excluded. Among the matters excluded from the mutual release contained in the
Settlement Agreement are claims asserted by the holder of the equipment leases
granted to TW-Tennessee relative to guarantees by the Company and others,
including David M. Roth, a Director of the Company, relative to such equipment
leases. The Company agreed to assume and pay one of the equipment leases
totaling approximately $125,000 and remains contingently liable on two other
equipment leases that currently have a remaining balance of approximately
$36,000 which the Company believes will be assumed and paid by other guarantors.
In the fourth quarter of 2001, as a result of the settlement discussions, the
Company increased a reserve established in 2000 by the additional amount of
$565,000, for a total of $1,290,000, of which $1,215,427 had been paid out as of
December 29, 2002. The Company increased this reserve in 2001 to cover its
portion of the settlement payments to the bank holding the TW-Tennessee line of
credit and pay related costs, including legal expenses. The reserve also
included an additional charge for the equipment lease which the Company assumed,
and for payments made by the Company in 2001 on other lease financing claims
related to TW-Tennessee. As of December 29, 2002, the reserve balance is
approximately $74,000 which management believes is sufficient to satisfy the
remaining lease obligation. The Company's management believes it will not incur
significant additional losses in connection with these matters.
On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company had no contractual obligation to pay a
$270,000 commission to AFI, in connection with a Conditional Commitment entered
into between AFI and the Company and seeking damages for fraud and
misrepresentation. In response, AFI filed suit in the United States District
Court for the Eastern District of Missouri seeking payment of a $405,000
commitment fee plus additional charges, fees and costs all in the excess of
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discover stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of December 29,
2002, the Company has not made an accrual for a potential liability in
connection with this matter.
We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
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 2003, the Company expects to construct one to two additional restaurant
facilities. Our ability to expand our number of restaurants will depend on a
number of factors, including the selection and availability of quality
restaurant sites, the negotiation of acceptable lease or purchase terms, the
securing of required governmental permits and approvals, the adequate
supervision of construction, the hiring, training and retaining of skilled
management and other personnel, the availability of adequate financing and other
factors, many of which are beyond our control. The hiring and retention of
management and other personnel may be difficult given the low unemployment rates
in the areas in which we intend to operate. There can be no assurance that we
will be successful in opening the number of restaurants anticipated in a timely
manner. Furthermore, there can be no assurance that our new restaurants will
generate sales revenue or profit margins consistent with those of our existing
restaurants, or that these new restaurants will be operated profitably.
In the next 12 months, the Company expects the demand on future liquidity to be
principally from the ongoing maintenance and improvement of existing restaurant
facilities and from the construction of one to two additional restaurant
facilities. As of December 29, 2002, the Company had no material commitments for
the construction of new restaurants, maintenance or improvement of existing
restaurant facilities. In addition to the $1.2 million reserve established as a
result of the GE financing package, we will utilize mortgage, sale/leaseback
and/or landlord financing, as well as equipment leasing and financing, for a
portion of the development costs of restaurants we plan to open in 2003. The
remaining costs will be funded by available cash reserves and cash provided from
operations. Management believes such sources will be sufficient to fund our
expansion plans through 2003. Should our actual results of operations fall short
of, or our rate of expansion significantly exceed plans, or should our costs of
capital expenditures exceed expectations, we may need to
- 24 -
seek additional financing in the future. In negotiating such financing, there
can be no assurance that we will be able to raise additional capital on terms
satisfactory to us.
OTHER EVENTS
Beginning January 1, 2002, the Company implemented a 401(k) plan. All employees
who are at least 21 years of age with one year of service in which they worked a
minimum of 1,000 hours are eligible. An employee can contribute up to 15% of
their gross salary. The Company matches 25% of the first 4% an employee
contributes. The employee becomes vested in the Company contribution based on a
five-year vesting schedule. The Company match was approximately $67,000 in 2002.
On June 3, 2002, a group consisting of Gerald Mansbach, the Company's largest
stockholder, Terrance A. Smith, the Company's Chairman, President and Chief
Executive Officer, and David M. Roth, a director of the Company, submitted a
proposal to the Company's Board of Directors to acquire of the Company's common
stock not currently owned by them or others they may invite to join their group.
The proposal contemplated a cash tender offer price of $1.75 per share. On June
5, 2002, three additional directors, Minx Auerbach, George Keller and Lewis Bass
joined Gerald Mansbach, Terrance A. Smith and David M. Roth in their proposal to
acquire all the Company's common stock not owned by their group at a price of
$1.75 per share. The group owns approximately 60% of the Company's outstanding
common stock.
The Board appointed a Special Committee of independent directors to evaluate the
proposal. The Special Committee engaged an investment banking firm and a law
firm to act as advisors in connection with its review of the tender offer
proposal.
On or about October 28, 2002, the proposal to acquire all outstanding shares in
the going private transaction was withdrawn. Mr. Gerald Mansbach, the largest
shareholder of Tumbleweed shares and the lead participant in the going private
proposal, notified Tumbleweed that he had decided, for personal reasons, to
withdraw the going private proposal and would explore options for disposition of
his existing shares.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. The Company pays a majority of its
employees hourly rates related to federal and state minimum wage laws. As a
result of increased competition and the low unemployment rates in the markets in
which the Company's restaurants are located, the Company has continued to
increase wages and benefits in order to attract and retain management personnel
and hourly workers. In addition, most of the Company's leases require the
Company to pay taxes, insurance, maintenance, repairs and utility costs, and
these costs are subject to inflationary pressures. Most of the leases provide
for increases in rent based on increases in the Consumer Price Index when the
leases are renewed. The Company may attempt to offset the effect of inflation
through periodic menu price increases, economies of scale in purchasing and cost
controls and efficiencies at existing restaurants.
- 25 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into derivative transactions or speculate on the
future direction of interest rates. The Company is exposed to interest rate
changes primarily as a result of our variable rate debt instruments. As of
December 29, 2002, approximately $10,900,000 of our debt bore interest at
variable rates. A 1% change in the variable interest rate on this debt equates
to an approximate $109,000 change in interest for a twelve month period.
- 26 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 28
Consolidated Statements of Operations for the fiscal years
ended December 29, 2002 and December 31, 2001 and 2000 29
Consolidated Balance Sheets as of December 29, 2002 and
December 31, 2001 30
Consolidated Statements of Stockholders' Equity for the fiscal
years ended December 29, 2002 and December 31, 2001 and 2000 31
Consolidated Statements of Cash Flows for the fiscal years ended
December 29, 2002 and December 31, 2001 and 2000 32
Notes to Consolidated Financial Statements 33
- 27 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying consolidated balance she