ITEM 1. BUSINESS
At December 31, 2000, we owned, franchised or licensed 63 Tumbleweed Southwest Mesquite Grill & Bar ("Tumbleweed") restaurants. We owned and operated 36 Tumbleweed restaurants in Kentucky, Indiana and Ohio including one restaurant which is 50% owned through a joint venture. There were 19 franchised Tumbleweed restaurants located in Indiana, Illinois, Kentucky, Michigan, Virginia, West Virginia and Wisconsin, and eight licensed restaurants located outside the United States in Germany, Jordan, Egypt, Saudi Arabia, England and Turkey. Tumbleweed Southwest Mesquite Grill & Bar restaurants feature sophisticated Tex-Mex and mesquite grilled food served in a casual dining atmosphere evoking the American Southwest. Tumbleweed restaurants are open seven days a week (excluding certain holidays) for lunch and dinner and generally offer a full service bar.
THE TUMBLEWEED CONCEPT
The Tumbleweed menu offers both distinctively seasoned, spicier versions of popular Tex-Mex dishes, as well as an assortment of grilled steaks, ribs, pork chops, chicken and seafood selections. The Tumbleweed concept is designed to appeal to a broad range of customers by offering a wide selection of distinctive items at a broad range of price points while, in management's view, providing a consistent level of food quality and friendly and efficient service comparable or superior to that of other casual dining restaurants. Use of a centralized commissary system enhances Tumbleweed's ability to maintain consistently high food quality, minimizes restaurant kitchen space and equipment, reduces the need for skilled cooking personnel, and simplifies restaurant operations. The key elements of the Tumbleweed concept include the following:
ONE CONCEPT OFFERING AMERICAN SOUTHWEST GRILLED ITEMS AND MEXICAN FOOD. The Tumbleweed menu is intended to distinguish Tumbleweed from competing Mexican and casual dining concepts by offering both distinctively seasoned, spicier versions of burritos, enchiladas, tacos, salads, and other popular Tex-Mex dishes, as well as an assortment of grilled steaks, ribs, pork chops, chicken and seafood selections. Management believes this approach appeals to a broader segment of the population and encourages customers to visit the restaurants more often.
The Tumbleweed menu features distinctively seasoned versions of popular Tex-Mex dishes and mesquite grilled selections. Customers receive complementary chips and salsa, and can choose from a selection of appetizers including such Tumbleweed specialties as chile con queso and white chili, as well as guacamole, nachos, quesadillas, buffalo chicken strips and stuffed potato skins. The Tex-Mex menu offers burritos, enchiladas, tacos, tamales, chimichangas and other items served both individually and in various combination dinners accompanied by rice and refried, baked or black beans. Customers may also choose from an assortment of fajitas, ribs, chicken, steak, pork chops, and seafood prepared over an open gas-fired mesquite wood grill and served with Texas Toast, salad, and a choice of baked potato, baked sweet potato, southwest fries, rice, and refried, baked or black beans. Mesquite grilled items are available as sandwiches as well as entrees. A variety of specialty stuffed potatoes and salads featuring refried beans, seasoned beef, shredded or fried strips of chicken, mesquite grilled chicken or seafood, and other traditional ingredients rounds out the menu. The Company periodically introduces new items that complement its present menu selections, a lunch menu as well as seasonal menus to increase the frequency of guest visits.
Tumbleweed restaurants typically contain full-service bars offering a wide assortment of mixed drinks, wines, domestic and imported beers and featuring the Tumbleweed margarita. Alcoholic beverages accounted for approximately 12.0% of restaurant sales during 2000.
Tumbleweed's menu pricing is designed to create a strong perception of value by consumers. Prices for Tex-Mex dishes range from $4.19 for two tacos to $11.99 for the "Need the 'Weed" sampler dinner. Mesquite grilled items range from $5.99 for a hamburger to $17.49 for an 18 oz. USDA-choice porterhouse steak dinner. Tumbleweed also offers several daily lunch specials for less than $5.00. Seasonal promotions are also used to increase business during otherwise traditionally slow periods.
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TARGETED ATMOSPHERE. Tumbleweed restaurants offer relaxed and comfortable surroundings where guests can enjoy a quality dining experience. Decorative features such as American Indian artifacts, cowboy memorabilia, wildlife replicas, rough-hewn timber and a creek stone fireplace in larger stores are used to evoke the feeling of the Great Southwest.
MAINTAINING A FAVORABLE PRICE-TO-VALUE RELATIONSHIP. Tumbleweed's pricing strategy is intended to appeal to value- driven customers as well as traditional casual dining customers. Tumbleweed offers a wide selection of distinctive items at a broad range of price points while, in management's view, providing a level of food quality and service comparable or superior to that of other casual dining restaurants. For 2000, the average check at a full-service Tumbleweed restaurant, including beverages, was approximately $8.81 for lunch and $10.76 for dinner. Management believes that this pricing approach, together with Tumbleweed's emphasis on variety and quality, creates a favorable price-to-value perception that can increase customer volume and generate more frequent repeat visits.
ACHIEVING TOTAL GUEST SATISFACTION. We are committed to providing prompt, friendly and attentive service and consistent food quality to our customers. We use a "mystery shopper" program to compare actual performance of restaurants to Tumbleweed standards and solicit comment cards from customers to monitor and modify restaurant operations.
OPERATING STRATEGY
We use the following key operating strategies to make certain that we exceed the expectations of our customers:
TARGET FOR TOTAL GUEST SATISFACTION. Tumbleweed's organizational and management philosophy is based on seven core values and a commitment to Total Guest Satisfaction ("TGS"). Our training procedures are intended to instill in all managers and employees an appreciation of the core values and to encourage a shared commitment to TGS.
COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing extensive training and attractive compensation, and by emphasizing clearly defined organizational values, we foster a strong corporate culture and encourage a sense of personal commitment from our employees. We have a monthly cash bonus program based on attaining sales growth and related performance goals on a restaurant-by-restaurant basis for each restaurant's management team.
CONSISTENT HIGH QUALITY FOOD PREPARATION. We are committed to offering distinctive Tex-Mex and mesquite grilled foods to customers at reasonable prices through the use of a commissary-based system. Management believes that the use of a central commissary provides a significant strategic and competitive advantage by enhancing our ability to maintain consistently high food quality, minimizing restaurant kitchen space and equipment, and reducing the number of skilled cooking positions. The system also enables restaurant managers and kitchen staff to focus on the final preparation of menu items to Tumbleweed standards.
Whenever feasible, the cooked ingredients used in Tumbleweed menu selections, such as ground beef, chile con queso, and Mexican beans, are prepared in advance at the commissary according to procedures designed to extend shelf life without the addition of preservatives. The kitchen staff at each restaurant uses commissary-supplied and other fresh ingredients for the final preparation of individual orders. Management believes this system enhances our ability to maintain rigorous operational and food preparation procedures and stringent product shelf life standards. The commissary operates according to stringent quality control standards and is subject to a daily inspection by a USDA inspector on the premises. We maintain a contingency plan under which centralized food preparation could be quickly resumed at another company's facility should the commissary be rendered inoperative by weather or other disaster.
GROWTH STRATEGY
Our strategy for growth will focus on the further development of new and existing markets by both the Company and franchisees. Since acquiring the Tumbleweed concept in 1995, we have added new Company-owned and franchised restaurants, while developing the infrastructure necessary to support our growth strategy. This approach has given management an opportunity to validate the Tumbleweed concept, refine operating systems, design and develop prototype restaurant buildings of different sizes and build a team of experienced corporate managers needed to support future internal and franchise growth. The following are key elements of our expansion strategy:
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OPENING RESTAURANTS IN TARGET MARKETS. We target mid-sized metropolitan markets, initially concentrating in the Midwest, Mid-Atlantic and Southeast regions, where income levels and the presence of shopping and entertainment centers, offices and/or colleges and universities indicate that a significant base of potential customers exists. Management considers the feasibility of opening multiple restaurants in a target market, which offers greater operating and advertising efficiency. As we add additional restaurants in a target market, there may be short-term decreases in same store sales. However, management believes this clustering strategy can enhance long-term performance through economies of scale and shared advertising expenses. Management also views smaller markets with fewer competing casual dining restaurants as presenting growth opportunities for the Company. Management believes that its target markets are less competitive than major metropolitan markets in terms of both site acquisition costs and number of casual dining restaurant options.
SELECTING AND DEVELOPING QUALITY RESTAURANT SITES. In selecting potential restaurant sites, management analyzes a variety of factors, including, but not limited to, local market demographics, site visibility, competition in the vicinity, and accessibility and proximity of significant generators of potential customers such as major retail centers, hotels, universities, and sports and entertainment facilities. The acquisition of sites may involve leases, purchases, and joint venture arrangements, and will require either the construction of new buildings or the conversion of existing buildings. The site selection process is conducted by our management and other employees, as well as with the assistance of consultants when deemed advisable. We believe that our site selection strategy and procedures, together with our menu and pricing strategies, our commitment to quality food products and excellent service, and our advertising, marketing and promotional efforts, will enhance our ability to generate our anticipated customer volumes.
FRANCHISING. We expect that continued growth will come from the further development of new and existing markets by us and by franchisees. We intend to pursue an active franchising program with current and new franchisees under controlled guidelines. We offer franchisees both rights to develop individual restaurants as well as area development rights for the establishment of more than one new restaurant over a defined period of time and in a defined geographic area. The specific locations of the restaurants are subsequently designated by us and the franchisee in separate franchise agreements. Under the standard area development agreement currently in use, a franchisee is required to pay at the time the agreement is signed a non-refundable fee of $5,000 per potential restaurant in the defined geographic area, to be applied against the initial franchise fee payable for each restaurant. Our current area development agreement also provides for a franchise fee of $40,000 for each restaurant. The franchise fee is due when the franchise agreement for a restaurant is signed. Each franchise agreement generally provides for royalties of three to five percent of restaurant sales, minimum marketing expenditures of 2.0% of gross sales, and a twenty-year term. All franchisees are required to operate their Tumbleweed restaurants in compliance with our policies, standards and specifications, including matters such as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs. Under our criteria for selecting new franchisees, Tumbleweed requires that potential franchisees have adequate capital, experience in the restaurant industry, and access to locations suitable for development. Except for locations managed directly by us, we generally require that a franchisee have a principal operator with at least a ten percent ownership interest who must devote full time to the restaurant operation. In addition, we may acquire restaurants from our franchisees from time to time.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed restaurant, we generally use one of three prototype designs management believes is best suited to a particular site. Our Mini, Midi and Maxi prototype restaurants accommodate approximately 150, 225, and 265 guests, respectively. Each size restaurant offers full service casual dining and a menu containing a wide assortment of Tex-Mex and mesquite grilled selections. Management believes that the use of multiple prototypes permits us to more closely match the investment in a restaurant site with the site's estimated sales potential. These factors allow for more efficient utilization of financial resources by us and our franchisees.
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During 2000, we opened 4 new Company-owned restaurants, 1 restaurant which is 50% owned through a joint venture, 7 new franchised restaurants and our international licensee opened 3 new restaurants in the following areas:
COMPANY OWNED FRANCHISEE OWNED INTERNATIONAL LICENSEE ------------- ---------------- ---------------------- Cincinnati, OH Shelbyville, KY Essex, England Maysville, KY Franklin, WI London, England Kettering, OH Charleston, WV Istanbul, Turkey Ft. Wayne, IN Grandville, MI Beckley, WV JOINT VENTURE Mechanicsville, VA ------------- Somerset, KY Louisville, KY
During 2000, a franchisee elected to close its final two Tennessee Tumbleweed restaurants (Clarksville and Hermitage) and another franchisee closed its Beckley, West Virginia restaurant.
RESTAURANT DESIGN
USING PROTOTYPE RESTAURANT DESIGNS. Tumbleweed full service restaurants have historically proven successful in several different formats and sizes. It is anticipated that new units will be full service restaurants employing one of three basic prototype designs. Management believes using multiple prototype designs allows greater flexibility to match the investment by us or our franchisees with the revenue potential of a particular restaurant site. Each prototype generally contains a full-service bar and utilizes the distinctive "Old West" logo and motif that has characterized Tumbleweed restaurants for several years.
Management believes our prototype designs can be adapted for developing Tumbleweed restaurants in existing structures. This capability may give us access to quality sites not otherwise available and may reduce the time or expense of development in certain circumstances.
RESTAURANT OPERATIONS
RESTAURANT MANAGEMENT. We employ area directors who are responsible for supervising the operations of Tumbleweed restaurants within their geographic region and the continuing development of each restaurant's managers and employees. Through regular visits to the restaurants, the area directors ensure that the Tumbleweed concept, strategies, core values and standards of quality are being observed in all aspects of restaurant operations. Area directors are chiefly responsible for the implementation of the TGS program.
Each of our restaurants has one general manager, one kitchen manager and from one to three assistant managers, based on restaurant volume. The general manager of each restaurant has primary responsibility for the day-to-day operations of the entire restaurant, including sales, physical plant, financial controls and training, and is responsible for maintaining the standards of quality and performance established by us. In selecting managers, we generally seek persons who have significant prior experience in the restaurant industry as well as employees who have demonstrated managerial potential and a commitment to the Tumbleweed concept and philosophy. We seek to attract and retain high caliber managers and hourly employees by providing them with competitive salaries, monthly bonuses and a casual, entertaining and challenging working environment.
COMPREHENSIVE TRAINING AND DEVELOPMENT. We have developed a comprehensive training program for managers and hourly employees. Managers are required to complete a ten-week initial training course and regular training programs. The course emphasizes our culture, commitment to TGS, operating procedures and standards, and internal controls.
The general managers and the area directors are responsible for selecting and training hourly employees at each restaurant. We employ training coordinators to assist with training and development of employees. Before the opening of each new restaurant, one of our training managers leads a team of experienced employees to train and educate the new employees. The training period for new employees includes 10 days of general training prior to opening and one week of on-the-job supervision at the new Tumbleweed restaurant. Ongoing employee training remains the responsibility of the general manager and training coordinator of each restaurant under the supervision of the area director.
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RESTAURANT REPORTING. We closely monitor sales, costs of food and beverages, and labor at each of our restaurants. Management analyzes daily and weekly restaurant operating results to identify trends at each location, and acts promptly to remedy negative trends where possible. We use an accounting and management information system that operates at the restaurant level to ensure the maintenance of financial controls and operations. Administrative staff prepare daily reports of sales, labor and customer counts. Cost of sales and condensed profit and loss statements compiled bi-monthly by store-level personnel and monthly by our accounting department are provided to management for analysis and comparison to past performance and budgets. We use a specialized software system to measure theoretical food costs against actual costs. To improve our performance analysis capabilities, we utilize a system which schedules hourly labor based on projected sales per half-hour. The goal is to ensure the proper number of employees to service our guests.
SEASONALITY. We consider restaurant operations to be somewhat seasonal in nature with the second and third quarters being the peak sales periods.
SUPPORT OPERATIONS
COMMISSARY OPERATIONS. Use of a centralized commissary system enhances Tumbleweed's ability to maintain consistently high food quality, minimizes the kitchen space and equipment needed at each restaurant, reduces the need for highly skilled cooking personnel, and simplifies restaurant operations. Managers and kitchen staff at each restaurant focus on the final preparation of menu items to Tumbleweed standards. We currently operate our commissary principally to enhance food quality and operational efficiency of Company-owned and franchised restaurants. Management believes this approach increases Tumbleweed's ability to offer its customers a consistently high level of food quality at a moderate price.
The commissary charges an amount approximately equal to its cost for the items it supplies to Company-owned and franchised restaurants. The Commissary sometimes contracts for the production of food products for other companies, and has granted the right to an outside food producer to produce and market in grocery stores a chili con queso product utilizing the "Tumbleweed" name and recipe for which we receive a royalty based upon production and sales.
DEVELOPMENT AND CONSTRUCTION. The Executive Vice President of the Company oversees the construction process utilizing outside architectural services and construction services. Individual site selection analysis is handled by Company management with final approval by the President of the Company.
ADVERTISING AND MARKETING. We use radio, print, billboard, and direct mail advertising in our various markets, as well as television advertising in certain larger markets. We also engage in a variety of other promotional activities, such as contributing goods, time and money to charitable, civic and cultural programs, in order to increase public awareness of our restaurants. The cost associated with these promotional activities in 2000 was approximately 3.1% of sales.
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RESTAURANT LOCATIONS
As of December 31, 2000, we owned and operated 36 Tumbleweed restaurants including one Louisville, Kentucky restaurant which is 50% owned through a joint venture. The following table sets forth the markets (including the number of restaurants in each market) of these 36 restaurants:
NO. OF STATE LOCATION RESTAURANTS - ----- -------- ----------- Indiana Evansville 2
Indiana Ft. Wayne 2
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Florence (Cincinnati market) 1
Kentucky Frankfort 1
Kentucky Henderson (Evansville market) 1
Kentucky Louisville 9
Kentucky Maysville (Cincinnati market) 1
Kentucky Owensboro (Evansville market) 1
Ohio Bellefontaine 1
Ohio Cincinnati 5
Ohio Columbus 6
Ohio Dayton 2
Ohio Medina 1
Ohio Wooster 1 ---- TOTAL 36 ====
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FRANCHISED RESTAURANTS
As of December 31, 2000, we had ten franchisees that owned and operated 19 Tumbleweed restaurants. The following table sets forth the franchisee and the location (including the number of restaurants at each location) of these 19 restaurants:
No. of Total By Franchisee State Location Restaurants Franchisee - ---------- ----- -------- ----------- ---------- TW-Indiana, LLC Indiana Floyd Knobs 1 Indiana New Albany 2 Indiana Salem 1 Kentucky Lexington 1 ---
Diamondback Management Corp. Illinois Rockford 1 Wisconsin Appleton 1 Wisconsin Franklin 1 Wisconsin Madison 1 Wisconsin Milwaukee 1 Wisconsin New Berlin 1 ---
TW-Seymour, LLC Indiana Seymour 1 ---
TW-Glasgow, Inc. Kentucky Glasgow 1 ---
TW-Shelbyville, Inc. Kentucky Shelbyville 1 ---
TW-Bullitt, Inc. Kentucky Hillview 1 ---
TWED-Charleston, Inc. West Virginia Charleston 1 ---
TW-Rivertown, LLC Michigan Grandville 1 ---
Tumble South, Inc. Virginia Mechanicsville 1 ---
TW-Somerset, LLC Kentucky Somerset 1 --- ---- ====
INTERNATIONAL LICENSING AGREEMENT
We have entered into a license agreement (the "International Agreement") with Tumbleweed International, LLC ("International"), a restaurant developer based in Hanau, Germany, to develop Tumbleweed restaurants outside of the Western Hemisphere. During 2000, International was operating its restaurants in Frankfurt and Vilseck, Germany, Essex and London, England, Amman, Jordan, Jeddah, Saudi Arabia, Istanbul, Turkey and Cairo, Egypt as Tumbleweed restaurants. See Item 13 "Certain Relationships and Related Transactions" for additional information regarding International.
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The International Agreement also contains certain provisions relating to quality control, restrictions on ownership of and participation in competing businesses by International and its principals. The International Agreement grants us a right of first refusal if International proposes to sell or assign its rights under the Agreement, or to sell equity interests in International.
SERVICE MARKS
A wholly-owned subsidiary of the Company owns and licenses to the Company various service marks and trademarks that are registered on the Principal Register of the United States Patent and Trademark Office. We regard our service marks and trademarks as having significant value and being an important factor in the development of the Tumbleweed concept. Our policy is to pursue and maintain registration of our service marks and trademarks whenever possible and to oppose vigorously any infringement or dilution of our service marks and trademarks.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local laws. Our commissary is licensed and subject to regulation by the USDA. Each of our restaurants is subject to permitting, licensing and regulation by a number of government authorities, including alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failure to obtain required licenses or approvals could delay or prevent the development of a new restaurant in a particular area.
Approximately 12.0 % of our restaurant sales were attributable to the sale of alcoholic beverages for the year ended December 31, 2000. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of restaurant operations, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.
The failure of a restaurant to obtain or retain liquor or food service licences would have a material adverse effect on the restaurant's operations. To reduce this risk, each of our restaurants are operated in accordance with procedures intended to assure compliance with applicable codes and regulations.
The Federal Americans With Disabilities Act (The "ADA") prohibits discrimination on the basis of disability in public accommodations and employment. The ADA became effective as to public accommodations in January 1992 and as to employment in July 1992. We currently design our new restaurants to be accessible to the disabled, and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled. We intend to comply with future regulations relating to accommodating the needs of the disabled, and we do not currently anticipate that such compliance will require us to expend substantial funds.
We are subject in certain states to "dram shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, as well as excess liability coverage. We have never been named as a defendant in a lawsuit involving "dram shop" liability.
Our restaurant operations are also subject to federal and state laws governing such matters as the minimum hourly wage, unemployment tax rates, sales tax and similar matters, over which we have no control. Significant numbers of our service, food preparation and other personnel are paid at rates related to the federal minimum wage, and increases in the minimum wage could increase our labor costs.
The development and construction of additional restaurants are subject to compliance with applicable zoning, land use and environmental laws and regulations.
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EMPLOYEES
As of December 31, 2000, we had approximately 2,000 employees, of whom 35 are executive and administrative personnel, 150 are restaurant management personnel, and the remainder are hourly restaurant and commissary personnel. Many of our hourly restaurant employees work part-time. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
We make various forward-looking statements about our business in this report. When making these forward-looking statements, we use words such as expects, believes, estimates, anticipates, plans and similar expressions to identify them. We also identify important cautionary factors that could cause our actual results to differ materially from those projected in forward-looking statements made by us. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements include the availability and cost of financing and other events that affect our restaurant expansion program, changes in food and other costs, changes in national, regional or local economic conditions, changes in consumer tastes, competitive factors such as changes in the number and location of competing restaurants, the availability of experienced management and hourly employees, and other factors set forth below. We do not have any obligation to revise any of these forward-looking statements for events occurring after the date of this report or for unanticipated events.
EXPANSION RISKs. Since 1995, we have grown while developing the operational systems, internal controls, and management personnel that management believed was necessary to support our plans for continued expansion. In the course of expanding our business, we will enter new geographic regions in which we have no previous operating experience. There can be no assurance that the Tumbleweed concept will be viable in new geographic regions or particular local markets. In addition, when feasible, we intend to open multiple restaurants in a target market to achieve operating and advertising efficiencies. Although such "clustering" of restaurants in a market may adversely affect same store sales in the short-term, management believes clustering can enhance long-term performance.
The continued growth of our business will depend upon our ability to open and operate additional restaurants profitably, which in turn will depend upon several factors, many of which are beyond our control. These factors include, among other things, the selection and availability of suitable locations, negotiations of acceptable lease, purchase and/or financing terms, the timely construction of restaurants, the securing of required governmental permits and approvals, the employment and training of qualified personnel, and general economic and business conditions. Our ability to expand into new geographic regions is also dependent upon our ability to expand our existing commissary facilities or open and successfully operate additional commissaries, as may be necessary to support additional restaurants. There can be no assurance that we will be successful in achieving our growth plans or managing our expanding operations effectively, nor can there be any assurance that new restaurants we open will be operated profitably.
RESTAURANT BASE. We currently operate 36 Tumbleweed restaurants including one restaurant which is 50% owned through a joint venture, some of which have been open for less than one year. Consequently, the sales and earnings achieved to date by these Tumbleweed restaurants may not be indicative of future operating results. Moreover, because of the number of restaurants we currently operate, poor operating results at a small number of restaurants could negatively affect the profitability of the entire Company. An unsuccessful new restaurant or unexpected difficulties encountered during expansion could have a greater adverse effect on our results of operations than would be the case in a restaurant company with more restaurants. In addition, we lease certain of our restaurants. Each lease agreement provides that the lessor may terminate the lease for a number of reasons, including if we default in payment of any rent or taxes or breach any covenants or agreements contained in the lease. Termination of any of our leases pursuant to such terms could adversely affect our results of operations.
CHANGES IN FOOD AND OTHER COSTS; SUPPLY RISKS. Our profitability is significantly dependent on our ability to anticipate and react to changes in food, labor, employee benefits and similar costs over which we have no control. Specifically, we are dependent on frequent deliveries of produce and fresh beef, pork, chicken and seafood. As a result, we are subject to the risk of possible shortages or interruptions in supply caused by adverse weather or other conditions which could adversely affect the availability, quality and cost of such items. While in the past we have been able to anticipate and react to changing costs through our purchasing practices or menu price adjustments without a material adverse effect on profitability, there can be no assurance that we will be able to do so in the future.
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INDUSTRY RISKS. The restaurant business is affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor, energy and employee benefit costs, fluctuating insurance rates, national, regional and local regulations, regional weather conditions, and the availability of experienced management and hourly employees also may adversely affect the restaurant industry in general and our restaurants in particular.
COMPETITION. The restaurant industry is intensely competitive with respect to price, service, location and food quality. We will compete with a variety of other casual full-service dine-in restaurants, fast food restaurants, take-out food service companies, delicatessens, cafeteria-style buffets, and other food service establishments. The number of value- oriented, casual dining restaurants has increased in the past few years, and competitors include national and regional chains, franchisees of other restaurant chains, and local owner-operated restaurants. Many competitors have been in existence longer, have a more established market presence, and substantially greater financial, marketing, and other resources than us. A significant change in pricing or other business strategies by one or more of our competitors, including an increase in the number of restaurants in our territories, could have a materially adverse impact on our sales, earnings and growth.
GOVERNMENT REGULATION. The restaurant business is subject to extensive national, state, and local laws and regulations relating to the development and operation of restaurants, including those regarding the sale of alcoholic beverages, building and zoning requirements, the preparation and sale of food and employer-employee relationships, such as minimum wage requirements, overtime, working and safety requirements, and citizenship requirements. In addition, we are subject to regulation by the Federal Trade Commission and must comply with certain state laws that govern the offer, sale, and termination of franchises, the refusal to renew franchises, and the scope of noncompetition provisions. The failure to obtain or retain food or beverage licenses or approvals to sell franchises, or an increase in the minimum wage rate, employee benefits costs (including costs associated with mandated health insurance coverage), or other costs associated with employees, could adversely affect us.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company as of December 31, 2000, who serve at the pleasure of the Board of Directors. There are no family relationships among any officers of the Company.
Name Age Position - ---- --- -------- Terrance A. Smith. .... 55 President, Chief Executive Officer, and Director
James M. Mulrooney .... 49 Executive Vice President, Chief Financial Officer, and Director
Gary T. Snyder......... 46 Vice President - Company Operations
Glennon F. Mattingly... 49 Vice President - Controller
Terrance A. Smith has served as President and Chief Executive Officer of the Company since August 2000, and is a Director of the Company. Mr. Smith was elected as a director of the Company in September 1997. Since 1997, Mr. Smith has also served as the President of Tumbleweed International, LLC. From 1987 to 1997, Mr. Smith was the President and CEO of Chi-Chi's International Operations, Inc.
James M. Mulrooney has served as Executive Vice President and Chief Financial Officer of the Company since it was formed in 1997, and is a Director of the Company. Mr. Mulrooney also served as Executive Vice President and Chief Financial Officer of Tumbleweed, LLC from January 1995 to its merger with the Company in January 1999.
Gary T. Snyder joined Tumbleweed, LLC, the Company's predecessor, as Director of Training and Human Resources in June 1996 and was appointed Vice President of Company Operations in April 1998. Mr. Snyder continues to serve the Company in that capacity. He previously served for 17 years with Bob Evans Farms, Inc.
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Glennon F. Mattingly joined Tumbleweed, LLC, the Company's predecessor, as Controller in March 1995 and was named Vice President-Controller in April 1998. Mr. Mattingly continues to serve the Company in that capacity. Before coming to Tumbleweed, Mr. Mattingly held various positions with Chi-Chi's, Inc. including six years as Director of Budgeting and Financial Analysis.
SEGMENT INFORMATION
Segment information for the years ended December 31, 2000, 1999 and 1998 are presented in Note 16 to our Consolidated Financial Statements contained in Item 8.
ITEM 2.
ITEM 2. PROPERTIES
Of the 36 Company-owned restaurants in operation at December 31, 2000, including one restaurant which is 50% owned through a joint venture, 18 are owned by us in fee simple while the remainder are leased. Two of the leased locations are owned by entities whose principals are affiliated with us. Restaurant lease expirations range from 2004 to 2018, with the majority of the leases providing for an option to renew for additional terms ranging from five to twenty years. All of our leases provide for a specified annual rental, and some leases call for additional rental based on sales volume at the particular location over specified minimum levels. Generally, the leases are net leases which require us to pay the cost of insurance and taxes. Our executive offices and our commissary are located in Louisville, Kentucky. Our commissary and warehouse space are owned in fee simple by us. Our executive offices are located in leased space. The lease expires in 2007 and has two 5-year renewal options.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has guaranteed renewals of certain guaranteed indebtedness and any replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee), to the extent and in amounts not to exceed the amounts guaranteed as of September 30, 1998. The Company had guaranteed certain TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee common members: a) up to $1,200,000 under a bank line of credit, b) approximately $2,800,000 of a lease financing agreement, and c) equipment leases with a bank.
In March 2001, the bank which holds the line of credit filed suit in the Circuit Court of Jefferson County, Kentucky against TW-Tennessee and against the guarantors of the line of credit, including the Company and a Director of the Company. Prior to the suit being filed, the Company along with certain guarantors made a partial payment to the bank. If the bank is unsuccessful in collecting the remaining payments from the other guarantors, the Company would have exposure totaling approximately $1,000,000. While the Company believes it has fulfilled its obligation to the bank and intends to vigorously defend its position, it is too early in the process to predict with certainty the ultimate outcome of this matter since the suit is in the early pleading stages and no discovery has taken place.
During 1999, the Landlord under the lease financing agreement declared TW-Tennessee to be in default, and accelerated the rent obligations under the leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for Davidson County, Tennessee, against TW-Tennessee and against certain guarantors of the lease obligations, including the Company and a Director of the Company. The Company and certain guarantors of the lease obligations reached an agreement with the Landlord, under which the Company and such guarantors paid certain sums to the Landlord as a final settlement of all claims of the Landlord, and the Landlord dismissed its legal action against and released the Company from further liability under its guarantees.
The lessor under the equipment leases with TW-Tennessee has declared TW-Tennessee to be in default thereunder and demanded payment in full from all guarantors of the leases, including the Company. The Company has made a partial payment to the lessor and is working with the lessor in pursuing the other guarantors of the equipment leases that have not made any payment. If the lessor is unsuccessful in collecting the remaining sums due from the other guarantors, the Company would have additional exposure totaling approximately $312,000.
As a result of the settlement with the Landlord under the TW-Tennessee lease financing agreement, and given the demand for payment by the lessor under the TW-Tennessee equipment leases and by the bank that holds the line of credit, the Company has incurred a loss related to the Company's guarantees of TW-Tennessee's obligations. The Company established a reserve in the amount of $725,000 during 2000 of which approximately $716,000 had been paid
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out as of December 31, 2000. The reserve amount was based on the Company's payment to the Landlord under the TW- Tennessee lease financing agreement, the Company's share of the various remaining guarantees of TW Tennessee obligations and an estimated amount for legal costs which will likely be incurred in connection with the resolution of this matter. The Company's management believes that it will not incur any significant additional losses in connection with this matter.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth quarter ended December 31, 2000.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 20, 2001, 5,839,230 shares of Common Stock were issued and outstanding. There were approximately 950 stockholders, including beneficial owners of shares held in nominee name.
On January 11, 1999, Tumbleweed, Inc. completed its initial public offering of common stock. We sold 776,630 shares at the offering price of $10 per share in a direct offering of our common stock to the public, raising a total of $7,766,300.
On January 1, 1999, the merger of Tumbleweed, LLC into Tumbleweed, Inc. became effective. The merger reorganized Tumbleweed, LLC, which had owned, franchised or licensed 43 Tumbleweed Southwest Mesquite Grill & Bar restaurants, into a corporation for purposes of the stock offering. In the reorganization, the membership interests of the approximately 80 former members of Tumbleweed, LLC were converted into a total of 5,105,000 shares of Company common stock. As required by the Tumbleweed, LLC operating agreement, the former Class B members made additional cash contributions of $747,500 in connection with the reorganization.
The Company received net proceeds of approximately $6,800,000 from the stock offering. The Company used the offering proceeds, plus the additional cash contributions of $747,500 we received in the reorganization, to repay bank indebtedness totaling $7,043,366 and to pay offering expenses. The bank indebtedness was an obligation of the former Class A members of Tumbleweed, LLC, including certain directors and officers of the Company, and had been accounted for as redeemable members' equity. Offering expenses totaled approximately $1,000,000, none of which were commissions or other underwriting expenses.
The registration statement for the stock offering also included the 5,105,000 shares issued in the reorganization, which may be sold from time to time in the future by the former members of Tumbleweed, LLC for their own accounts.
Our common stock trades on the Nasdaq Stock Market's National Market under the symbol "TWED." The following table shows quarterly high and low closing prices for the Common Stock during 2000 and 1999 for the periods indicated, as reported by the Nasdaq National Market.
2000 1999 ---- ---- High Low High Low ---- --- ---- --- First Quarter (1) $ 6.94 $ 4.75 $ 12.00 $ 8.50 Second Quarter 6.37 2.62 11.25 7.50 Third Quarter 4.09 2.62 9.87 7.00 Fourth Quarter 3.37 2.00 8.50 5.00
(1) Beginning in March 1999, bid and asked quotations for Tumbleweed shares were reported on the OTC Bulletin Board under the trading symbol TWED. On March 29, 1999, our common stock began trading on the Nasdaq Stock Market's National Market.
We have never paid a dividend on our Common Stock nor do we expect to pay a cash dividend in the foreseeable future. We currently intend to retain any future earnings to finance the development of additional restaurants and the growth of our business generally. We are also prohibited from paying dividends under the terms of our two mortgage revolving lines of credit.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Effective January 1, 1999, Tumbleweed, LLC was merged into Tumbleweed, Inc. as a result of the sale of common stock in an initial public offering. Tumbleweed, Inc. had not conducted any operations prior to the merger. In the following table, the income statement and balance sheet data of Tumbleweed, Inc. for the years ended December 31, 2000 and 1999 and Tumbleweed, LLC for the years ended December 31, 1998, 1997 and 1996 have been derived from financial statements which have been audited by Ernst & Young LLP, independent auditors, whose report thereon is included elsewhere in this filing. The information set forth on the following page should be read in conjunction with, and are qualified in their entirety by the financial statements (and the notes thereto) and other financial information appearing elsewhere in this filing and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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(1) Prior to Reorganization, the Company operated as a limited liability company and was not subject to corporate income taxes through December 31, 1998. Pro forma adjustment has been made to net income to give effect to federal and state income taxes as though the Company had been subject to corporate income taxes for the periods presented with an effective tax rate of 35%. (2) Shares outstanding gives effect to the Reorganization as if it had occurred as of January 1, 1996. (3) Reflects the establishment of a deferred tax liability of $639,623 related to the termination of Tumbleweed, LLC's limited liability company status and the conversion of Tumbleweed, LLC's members' interests into 5,105,000 shares of Company common stock effective January 1,1999.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We make various forward-looking statements about our business in the following discussion. When making these forward-looking statements, we use words such as expects, believes, estimates, anticipates, plans and similar expressions to identify them. We also identify important cautionary factors that could cause our actual results to differ materially from those projected in forward-looking statements made by us. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements include the availability and cost of financing and other events that affect our restaurant expansion program, changes in food and other costs, changes in national, regional or local economic conditions, changes in consumer tastes, competitive factors such as changes in the number and location of competing restaurants, the availability of experienced management and hourly employees, and other factors set forth below and in "Forward-Looking Statements/Risk Factors" in Item 1. Business.
As of December 31, 2000, we owned, franchised or licensed 63 Tumbleweed restaurants. We owned and operated 36 restaurants in Kentucky, Indiana and Ohio, including one restaurant which is 50% owned through a joint venture. There were 19 franchised restaurants located in Indiana, Illinois, Kentucky, Michigan, Virginia, West Virginia and Wisconsin and eight licensed restaurants located outside the United States in Germany, Jordan, Egypt, Saudi Arabia, England and Turkey. The following table reflects changes in the number of Company-owned restaurants for the years presented.
Company-owned Restaurants 2000 1999 1998 ------------------------- ---- ---- ----
In operation, beginning of year 29 25 17 Restaurants opened 4 4 8 Joint venture restaurant opened 1 - - Restaurants purchased from franchisee 2 - - ---- ---- ---- In operation, end of year 36 29 25 ---- ---- ----
Franchise and Licensed Restaurants ----------------------------------
In operation, beginning of year 22 18 12 Restaurants opened 10 8 7 Restaurants closed (3) (4) (1) Restaurants sold to Tumbleweed, Inc. (2) - - ---- ---- ---- In operation, end of year 27 22 18 ---- ---- ---- System total 63 51 43 ==== ==== ====
Effective January 1, 1999, Tumbleweed, LLC converted from a limited liability company into a C corporation by merging with Tumbleweed, Inc., a Delaware corporation formed on December 17, 1997. As a limited liability company, we had been treated as a partnership for income tax purposes and, accordingly, had incurred no federal or state income tax liability. The discussion of financial condition and results of operations included in the paragraphs that follow reflect a pro forma adjustment for federal and state income taxes that would have been recorded during these years if we had been subject to corporate income taxes for the years presented.
The following section should be read in conjunction with "Selected Financial Data" included above in Item 6 and our financial statements and the related notes included below in Item 8.
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RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues of certain income statement data, except where noted, for the periods indicated.
(1) As percentage of restaurant sales. (2) As percentage of commissary sales.
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(3) The pro forma income taxes reflect the effect of the corporate reorganization on the historical net income assuming the Company was taxed as a C corporation for income tax purposes throughout the years presented with an assumed combined federal and state effective tax rate of 35%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Total revenues increased by $4,955,879 or 9.6% in 2000 compared to 1999 primarily as a result of the following:
Restaurant sales increased by $3,242,477 or 6.7% in 2000 compared to 1999. The increase is due primarily to the addition of six Company-owned restaurants during 2000. The increase is partially offset by a 3.3% decrease in same store sales.
Commissary sales to franchised and licensed restaurants increased by $494,372 or 42.3% in 2000 compared to 1999. The increase is due primarily to five additional franchised or licensed restaurants during 2000.
Franchise fees and royalties increased by $206,299 or 19.4% in 2000 compared to 1999 as a result of an increase in royalty income due primarily to five additional franchise restaurants. Franchise fees were approximately the same in both periods.
The gain from insurance proceeds was due to the involuntary conversion of non-monetary assets from a fire at a Company-owned restaurant. See Note 12 of the accompanying financial statements for a detail discussion.
Other revenues increased by $457,867 or 85.9% in 2000 compared to 1999 primarily due to $280,000 of insurance proceeds as it relates to a business interruption as a result of a fire at a Company-owned restaurant. See Note 12 of the accompanying financial statements for a detail discussion. There was no similar income in 1999. In addition, other revenues increased in 2000 compared to 1999 as a result of an increase in volume related purchasing rebates.
Restaurant cost of sales increased by $1,043,253 or 7.3% in 2000 compared to 1999. The increase was principally due to the addition of six Company-owned restaurants during 2000. Restaurant cost of sales increased as a percentage of sales by 0.2% to 29.5% for 2000 compared to 29.3% for 1999.
Commissary cost of sales increased $407,621 or 38.7% in 2000 compared to 1999. The increase in commissary cost of sales is due primarily to five additional franchised or licensed restaurants during 2000. As a percentage to commissary sales, commissary cost of sales decreased by 2.3% in 2000 compared to 1999 due to lower manufactured food costs in 2000.
Restaurant operating expenses increased by $3,079,160 or 12.6% in 2000 compared to 1999. The increase reflects the addition of six Company-owned restaurants during 2000. Operating expenses increased as a percentage of restaurant sales to 53.0% during 2000 from 50.2% in 1999 primarily due to a 0.3% increase in promotional costs and a 1.7% increase in total restaurant payroll costs.
Selling, general and administrative expenses increased by $1,548,114 or 31.1% in 2000 compared to 1999. The increase was due in part to additional payroll costs of approximately $280,000 which were incurred as a result of the retirement of the former President and CEO of the Company and the restructuring of the corporate staff. The increase in selling, general and administrative expenses in 2000 as compared to 1999 is also due in part to the addition of management personnel to support the growing restaurant base and increased advertising and outside professional service costs. As a percentage to total revenues, selling, general and administrative expenses were 11.6% and 9.7% of revenues for the years ended December 31, 2000 and 1999, respectively.
Preopening expenses were $490,394 and $395,768 for the years ended December 31, 2000 and 1999, respectively. Preopening expenses are start-up costs which are incurred in connection with opening new restaurant locations. These costs are expensed as incurred and will fluctuate based on the size of the restaurant and the number of restaurant locations which are in the process of being prepared for opening.
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Depreciation and amortization expense increased $342,651 or 19.0% in 2000 compared to 1999 due primarily to the addition of six Company-owned restaurants during 2000.
A $68,464 provision for doubtful accounts was recorded during 2000. The provision relates to a receivable from a related party franchisee for accounting fees, royalties and a franchise fee. As of December 31, 2000, management considers it probable that this receivable will not be collected.
Net interest expense increased $333,458 or 29.5% in 2000 compared to 1999. The increase resulted from increased borrowings to fund the growth in Company-owned restaurants and increases in the prime interest rate during 2000.
The equity in losses of TW-Springhurst was $58,903 for the year ended December 31, 2000. See Note 10 of the accompanying financial statements for a detail discussion.
The combined effective federal and state income tax rate was approximately 10% and 35% for the years ended December 31, 2000 and 1999, respectively, excluding the charge related to change in tax status. The effective tax rate is lower in 2000 as a result of lower profitability and the resulting impact of employment tax credits and state income taxes on the effective rate. As a result of a change in tax status from a limited liability corporation to a C corporation effective January 1, 1999, we recorded a net deferred income tax liability and income tax expense of $639,623 in 1999.
The Company's income before cumulative effect of a change in accounting principle decreased $1,627,437 or 74.3% for the year ended December 31, 2000 compared to pro forma income before cumulative effect of a change in accounting principle for the year ended December 31, 1999. Earnings per share before cumulative effect of a change in accounting principle was $0.10 for the year ended December 31, 2000 as compared to pro forma earnings per share before cumulative effect of a change in accounting principle of $0.37 for the year ended December 31, 1999.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 and 1998
Total revenues increased by $8,537,243 or 19.9% in 1999 compared to 1998 primarily as a result of the following:
Restaurant sales increased by $8,087,190 or 20.0% in 1999 compared to 1998. The increase is due primarily to the addition of four Company-owned restaurants during 1999 and an increase in same store sales of 1.3%.
Commissary sales to franchised restaurants increased by $127,570 or 12.3% in 1999 compared to 1998. The increase is due primarily to the addition of four additional franchised or licensed restaurants during 1999.
Franchise fees and royalties increased by $294,146 or 38.2% in 1999 compared to 1998. The increase was due primarily to a $140,000 increase in franchise fees received upon the opening of seven new franchised restaurants during 1999 compared to three during 1998. Additionally, royalty income increased approximately $177,000 during 1999 compared to 1998 as a result of an increase in franchised restaurants. The increase in franchise fees and royalties is partially offset by an approximately $23,000 decrease in international territory fees.
Other revenues increased by $28,337 or 5.6% in 1999 compared to 1998 primarily due to an increase in volume related purchasing rebates.
Restaurant cost of sales increased by $2,443,986 or 20.7% in 1999 compared to 1998. The increase was principally due to the opening of four additional Company-owned restaurants during 1999. Restaurant cost of sales increased as a percentage of sales by 0.2% to 29.3% for 1999 compared to 29.1% for 1998.
Commissary cost of sales increased by $147,269 or 16.2% in 1999 compared to 1998. The increase in commissary cost of sales is due to increased commissary sales in 1999 compared to 1998 and increased overhead costs. As a percentage to sales, commissary cost of sales increased 3.1%.
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Restaurant operating expenses increased by $3,496,419 or 16.7% in 1999 compared to 1998. The increase reflects the addition of four Company-owned restaurants during 1999. Operating expenses decreased as a percentage of restaurant sales to 50.2% for 1999 from 51.6% for 1998 primarily due to a 1.1% decrease in labor costs and a 0.3% decrease in restaurant level promotional costs.
Selling, general and administrative expenses increased by $831,418 or 20.0% in 1999 compared to 1998. The increase was due in part to the addition of management and staff personnel during 1999 to support the growing restaurant base and additional advertising costs. Because of the Company's restaurant growth plans, management expects selling, general and administrative expenses to continue to increase during 2000 in absolute dollars. As a percentage to total revenues, selling, general and administrative expenses were 9.7% of revenues in 1999 and 1998.
Preopening expenses were $395,768 in 1999 versus preopening amortization of $816,604 in 1998. See Note 2 of the consolidated financial statements regarding the adoption of Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities." As a result of the adoption of SOP 98-5 on January 1, 1999, the Company recorded a charge to income, net of tax, of $341,035 representing the write-off of deferred preopening costs as of December 31, 1998. The charge is reported net of taxes as a cumulative effect of a change in accounting principle.
Depreciation and amortization expense increased by $362,746 or 25.1% in 1999 compared to 1998 due primarily to the addition of four Company-owned restaurants during 1999.
Net interest expense increased by $259,194 or 29.8% in 1999 compared to 1998. The increase resulted from increased borrowings to fund the growth in Company-owned restaurants and increases in the prime interest rate during 1999.
The combined effective federal and state income tax rate was approximately 35% for 1999 (excluding the charge related to change in tax status, discussed below). The pro forma adjustments presented for 1999 and 1998 provide for income taxes as though we had been subject to corporate income taxes throughout the years presented. Additionally, as a result of a change in tax status from a limited liability corporation to a C corporation effective January 1, 1999, we recorded a net deferred income tax liability and income tax expense of $639,623 in 1999.
The Company's pro forma income before cumulative effect of a change in accounting principle increased $921,081 or 72.5% in 1999 compared to 1998. Pro forma basic and diluted earnings per share before cumulative effect of a change in accounting principle increased to $0.37 in 1999 compared to $0.25 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand our number of restaurants will depend on a number of factors, including the selection and availability of quality restaurant sites, the negotiation of acceptable lease or purchase terms, the securing of required governmental permits and approvals, the adequate supervision of construction, the hiring, training and retaining of skilled management and other personnel, the availability of adequate financing and other factors, many of which are beyond our control. The hiring and retention of management and other personnel may be difficult given the low unemployment rates in the areas in which we intend to operate. There can be no assurance that we will be successful in opening the number of restaurants anticipated in a timely manner. Furthermore, there can be no assurance that our new restaurants will generate sales revenue or profit margins consistent with those of our existing restaurants, or that these new restaurants will be operated profitably.
Our principal capital needs arise from the development of new restaurants, and to a lesser extent, maintenance and improvement of existing facilities. The principal sources of capital to fund these expenditures were members' contributions (prior to January 1, 1999), internally generated cash flow, bank borrowings, lease financing and an equity offering. The table below provides certain information regarding our sources and uses of capital for the years presented:
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Our single largest use of funds has been for capital expenditures consisting of land, building and equipment associated with our restaurant expansion program. The substantial growth of the Company over the years has not required significant additional working capital. Sales are predominantly for cash and the business does not require the maintenance of significant receivables or inventories. In addition, it is common within the restaurant industry to receive trade credit on the purchase of food, beverage and supplies, thereby reducing the need for incremental working capital to support sales increases.
The Company has guaranteed renewals of certain guaranteed indebtedness and any replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee), to the extent and in amounts not to exceed the amounts guaranteed as of September 30, 1998. The Company had guaranteed certain TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee common members: a) up to $1,200,000 under a bank line of credit, b) approximately $2,800,000 of a lease financing agreement, and c) equipment leases with a bank.
In March 2001, the bank which holds the line of credit filed suit in the Circuit Court of Jefferson County, Kentucky against TW-Tennessee and against the guarantors of the line of credit, including the Company and a Director of the Company. Prior to the suit being filed, the Company along with certain guarantors made a partial payment to the bank. If the bank is unsuccessful in collecting the remaining payments from the other guarantors, the Company would have exposure totaling approximately $1,000,000. While the Company believes it has fulfilled its obligation to the bank and intends to vigorously defend its position, it is too early in the process to predict with certainty the ultimate outcome of this matter since the suit is in the early pleading stages and no discovery has taken place.
During 1999, the Landlord under the lease financing agreement declared TW-Tennessee to be in default, and accelerated the rent obligations under the leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for Davidson County, Tennessee, against TW-Tennessee and against certain guarantors of the lease obligations, including the Company and a Director of the Company. The Company and certain guarantors of the lease obligations reached an agreement with the Landlord, under which the Company and such guarantors paid certain sums to the Landlord as a final settlement of all claims of the Landlord, and the Landlord dismissed its legal action against and released the Company from further liability under its guarantees.
The lessor under the equipment leases with TW-Tennessee has declared TW-Tennessee to be in default thereunder and demanded payment in full from all guarantors of the leases, including the Company. The Company has made a partial payment to the lessor and is working with the lessor in pursuing the other guarantors of the equipment leases that have not made any payment. If the lessor is unsuccessful in collecting the remaining sums due from the other guarantors, the Company would have additional exposure totaling approximately $312,000.
As a result of the settlement with the Landlord under the TW-Tennessee lease financing agreement, and given the demand for payment by the lessor under the TW-Tennessee equipment leases and by the bank that holds the line of credit, the Company has incurred a loss related to the Company's guarantees of TW-Tennessee's obligations. The Company established a reserve in the amount of $725,000 during 2000 of which approximately $716,000 had been paid out as of December 31, 2000. The reserve amount was based on the Company's payment to the Landlord under the TW- Tennessee lease financing agreement, the Company's share of the various remaining guarantees of TW-Tennessee
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obligations and an estimated amount for legal costs which will likely be incurred in connection with the resolution of this matter. The Company's management believes that it will not incur any significant additional losses in connection with this matter.
We both own and lease our restaurant facilities. Management determines whether to acquire or lease a restaurant facility based on our evaluation of the financing alternatives available for a particular site.
In the next 12 months, the Company expects the demand on future liquidity to be from the ongoing maintenance of current restaurant facilities. As of December 31, 2000, the Company had no material commitments for maintenance. In order to provide any additional funds necessary to pursue our future growth strategy, which includes both building new restaurants or purchasing an established restaurant from a franchisee, we may incur, from time to time, additional short and long-term bank indebtedness and may issue, in public or private transactions, our equity and debt securities, the availability and terms of which will depend upon market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us.
We have a $6,500,000 mortgage revolving line of credit with a bank. As of December 31, 2000, we had outstanding borrowings under the line of credit of $5,496,148. The note bears interest at the prime rate plus .25% (9.75% at December 31, 2000) and is due December 31, 2003. The Credit Facility imposes restrictions on us with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, the sale of assets, mergers, capital expenditures and the payment of dividends.
We also have an additional $6,500,000 mortgage revolving line of credit with a bank. As of December 31, 2000, we had outstanding borrowings under the line of credit of $915,868. The note bears interest at the prime rate plus .25% (9.75% at December 31, 2000) and is due October 3, 2001. Upon the maturity date, the Loan Agreement provides for extensions of the maturity date until the line of credit has been repaid or for the conversion of the current outstanding principal balance to a Term Loan with a maturity of 5-years from the date of conversion. The current maximum amount available on the revolving line of credit is $1,440,000 which can be increased up to $6,500,000 as additional collateral is provided by the Company. The note imposes restrictions on the Company with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, the sale of assets, mergers, capital expenditures and the payment of dividends.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and construction costs could harm our operations. We pay a majority of our employees hourly rates related to federal and state minimum wage laws. As a result of increased competition and the low unemployment rates in the markets in which our restaurants are located, we have continued to increase wages and benefits in order to attract and retain management personnel and hourly workers. In addition, most of our leases require us to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. Most of the leases provide for increases in rent based on increases in the Consumer Price Index when the leases are renewed. We may attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at existing restaurants.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative transactions or speculate on the future direction of interest rates. We are exposed to interest rate changes primarily as a result of our variable rate debt instruments. As of December 31, 2000, approximately $12,295,000 of our debt bore interest at variable rates. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations or cash flows would not be significant.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Auditors 26
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 27
Consolidated Balance Sheets as of December 31, 2000 and 1999 28
Statements of Redeemable Members' Equity, Members' Equity, Members' Retained Earnings (Deficit) and Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 29
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 30
Notes to Consolidated Financial Statements 31
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Tumbleweed, Inc.
We have audited the accompanying consolidated balance sheets of Tumbleweed, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, redeemable members' equity, members' equity, members' retained earnings (deficit) and stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tumbleweed, Inc. at December 31, 2000 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999 the Company changed its method of accounting for pre-opening and other start-up costs by adopting the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".
/s/ Ernst & Young LLP Louisville, Kentucky March 2, 2001
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See accompanying notes.
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See accompanying notes.
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See accompanying notes.
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See accompanying notes.
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Merger of Tumbleweed, LLC and Tumbleweed, Inc.
Tumbleweed, Inc. (the Company) was legally formed in December 1997 and capitalized on June 23, 1998 with the issuance of 13 shares of Company common stock at $10 per share. Effective January 1, 1999, and as a result of the sale of 776,630 shares of common stock in an initial public offering (IPO), Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of Tumbleweed members at the time of the merger were converted into a total of 5,105,000 shares of Company common stock. As of December 31, 1998, the Company had not conducted any operations and all expenditures through December 31, 1998 related to the IPO were funded and recorded by Tumbleweed. The accompanying consolidated statement of income and cash flows for the year ended December 31, 1998 is that of Tumbleweed and are included for comparative purposes since it was the predecessor company.
Prior to the merger, Tumbleweed and its owners (Members) operated pursuant to an Operating Agreement dated September 19, 1994. Members of Tumbleweed consisted of Common Members, Class A Members, Class B Members and a Class C Member. Certain Common Members acted as the Managers of Tumbleweed and, acting unanimously, generally had voting control of Tumbleweed.
Class A Members had, in addition to their cash contributions, provided financing which was accounted for as redeemable members' equity prior to Tumbleweed's assumption of the debt on December 31, 1998 (see Note 7). The capital accounts of the Common, Class B and Class C Members were $6,000, $459 and $500, respectively, as of December 31, 1997. During 1998, the Common Members received a distribution of $400,000 and the Class B Members made a capital contribution of $747,500. The capital accounts of the Common, Class B and Class C Members were $(394,000), $747,959 and $500, respectively, as of December 31, 1998.
Restaurant Facilities
As of December 31, 2000, the Company owned, franchised or licensed 63 Tumbleweed restaurants. The Company owned and operated 36 restaurants in Kentucky, Indiana and Ohio, including one restaurant which is 50% owned through a joint venture. There were 19 franchised restaurants located in Indiana, Illinois, Kentucky, Michigan, Virginia, West Virginia and Wisconsin and eight licensed restaurants located outside the United States in Germany, Jordan, Egypt, Saudi Arabia, England and Turkey. The following table reflects changes in the number of Company-owned, franchise and licensed restaurants during the years presented.
2000 1999 1998 ---- ---- ---- Company-owned restaurants: In operation, beginning of year 29 25 17 Restaurants opened 4 4 8 Joint venture restaurant opened 1 - - Restaurants purchased from franchisee 2 - - ---- ---- ---- In operation, end of year 36 29 25 ---- ---- ---- Franchise and licensed restaurants: In operation, beginning of year 22 18 12 Restaurants opened 10 8 7 Restaurants closed (3) (4) (1) Restaurants sold to Tumbleweed, Inc. (2) - -
In operation, end of year 27 22 18 ---- ---- ---- System Total 63 51 43 ==== ==== ====
1. Basis of Presentation (continued)
Pro forma Financial Information (unaudited)
Pursuant to the rules and regulations of the Securities and Exchange Commission, the pro forma net income in the accompanying pro forma income data for the years ended December 31, 1999 and 1998 reflects a pro forma adjustment to income before income taxes and cumulative effect of a change in accounting principle for federal and state income taxes as if the Company had been a regular corporate taxpayer throughout the years presented. Pro forma income taxes for 1999 excludes the deferred tax effects of Tumbleweed changing from a limited liability company (which is taxed as a partnership) to a regular corporate taxable status. Pro forma income taxes for 1998 are at an estimated effective rate of 35%. Pro forma basic and diluted earnings per share is computed based upon the weighted average number of shares of common stock outstanding for 1999. For 1998, the weighted average number of shares outstanding assumes the conversion of Tumbleweed's members' interests into 5,105,000 shares of common stock as of the beginning of the period.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated in consolidation. The Company's investment in TW- Springhurst (see Note 10) is accounted for using the equity method, under which the Company's share of earnings or losses are reflected in income as earned.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and deposits at financial institutions with maturities of less than three months when purchased.
Inventories
Inventories, which consist of smallwares, food, beverages and supplies, are stated at the lower of average cost or market.
Deferred Preopening Expenses
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities." The SOP was effective beginning January 1, 1999 and requires that start- up costs capitalized prior to January 1, 1999 be written-off and any future start-up costs be expensed as incurred. Prior to 1999, the Company capitalized its preopening costs incurred in connection with opening new restaurant locations. The unamortized balance of the Company's deferred preopening costs ($524,669 as of December 31, 1998) was written- off (net of income taxes of $183,634) as a cumulative effect of a change in accounting principle on January 1, 1999.
Deferred preopening expenses included the direct costs typically associated with opening a new restaurant. These costs consisted primarily of costs incurred to develop the new restaurant management team, marketing and training. During 1998, these expenses were amortized on a straight-line method over twelve months from the restaurant opening date.
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2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-line method. Buildings and leasehold improvements are amortized over the lesser of the life of the leases, including renewal options, or the estimated useful lives of the assets, which range from ten to thirty years. Equipment is depreciated over the estimated useful lives of the assets, which range from five to ten years. Maintenance and repairs which do not enhance the value of or increase the life of the assets are charged to costs and expenses as incurred.
Construction in Progress
The Company capitalizes all direct costs incurred in the construction of new restaurants. Upon opening, these costs are depreciated or amortized and charged to expense based upon their property classification.
Goodwill
Goodwill is amortized on the straight-line method over thirty years.
Long-Lived Assets
The carrying amount of long-lived assets, including goodwill, is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that long-lived assets will not be recoverable, as determined based on the estimated undiscounted cash flows of the asset over the remaining amortization period, the carrying amount of long-lived assets would be written down to current fair value, which is generally determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).
Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate their fair value.
Revenue Recognition
Franchise fees are recognized when all material services, primarily site approval and management and staff training, have been substantially performed by the Company and the restaurant has opened for business. Fees received pursuant to development agreements, which grant the right to develop franchised restaurants in future periods in specific geographic areas, are deferred and recognized on a pro rata basis as the franchised restaurants subject to the development agreements begin operations. Franchise royalties, which are based on a percentage of monthly sales, are recognized as income when earned. Costs associated with franchise operations are expensed as incurred.
Advertising Costs
Advertising costs include Company-owned restaurant contributions to the Tumbleweed Marketing Fund, Inc. ("the Marketing Fund") and developing and conducting advertising activities, including the placement of electronic and print materials developed by the Marketing Fund. All advertising and related costs are expensed as incurred. Contributions by Company-owned and franchised restaurants to the Marketing Fund are based on an established percentage of monthly restaurant revenues. The Marketing Fund is responsible for the development of marketing and advertising materials for use throughout the Company's system. The Marketing Fund is accounted for separately and is not included in the financial statements of the Company. Company contributions to the Marketing Fund for the years ended December 31, 2000, 1999 and 1998 were $123,435, $117,362 and $95,674, respectively. Advertising expense, which includes the Company's contributions to the Marketing Fund, for the years ended December 31, 2000, 1999 and 1998 were $1,570,179, $1,253,392 and $1,052,075, respectively.
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2. Significant Accounting Policies (continued)
Income Taxes
Through December 31, 1998, Tumbleweed was a limited liability company which was taxed as a partnership for federal and state income tax purposes. Accordingly, any tax liability related to income was reported by the Members of Tumbleweed.
Concurrent with the merger as described in Note 1, Tumbleweed converted from a limited liability company into a C corporation and is now subject to federal and state income taxes. As of the date of the merger, the Company recorded a net deferred tax liability and corresponding income tax expense for cumulative temporary differences between the tax basis and the reported amounts of the Company's assets and liabilities. At the date of the merger, the net differences equaled approximately $1,780,000 resulting in a net deferred tax liability and corresponding income tax expense of $639,623 which is included in the deferred income tax provision in the accompanying consolidated statement of income for the year ended December 31, 1999.
Reclassifications of Financial Statements
Certain reclassifications have been made to the December 31, 1999 consolidated balance sheet to conform with December 31, 2000 classifications. These reclassifications have no effect on previously reported operations.
3. Property and Equipment
Property and equipment as of December 31 consist of:
2000 1999 --------------------------- Land and land improvements $ 9,135,805 $ 8,698,101 Building and improvements 13,929,153 13,312,798 Leasehold improvements 2,294,324 2,062,449 Equipment 7,662,479 5,926,655 Building and equipment under capital leases 4,496,593 4,274,559 Construction in progress 659,511 556,549 --------------------------- 38,177,865 34,831,111 Less accumulated depreciation and amortization (6,382,411) (4,683,552) --------------------------- $ 31,795,454 $ 30,147,559 ===========================
4. Accrued Liabilities
Accrued liabilities as of December 31 consist of:
2000 1999 --------------------------- Accrued payroll, severance and related taxes $ 897,841 $ 611,566 Accrued insurance and fees 282,281 270,174 Accrued taxes, other than payroll 548,703 423,954 Gift certificate liability 470,652 396,747 Deferred income related to involuntary conversion ofn-monetary assets 204,893 - Other 85,357 148,546 --------------------------- $ 2,489,727 $ 1,850,987 ===========================
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5. Long-Term Debt
Long-term debt as of December 31 consists of:
2000 1999 ------------------------- Secured $6,500,000 mortgage revolving line of credit note, bearing interest at prime rate plus .25% (9.75% at December 31, 2000), due December 31, 2003 $ 5,496,148 $ 5,242,148
Secured mortgage note payable, bearing interest at commercial paper rate plus 2.65% (9.20% at December 31, 2000), due February 17, 2006 2,501,399 2,691,433
Secured mortgage note payable, bearing interest at prime rate plus 1% (10.5% at December 31, 2000), payable in monthly installments through October 1, 2017 1,039,068 1,061,614
Secured mortgage note payable, bearing interest at 8.75% , payable in monthly installments through February 15, 2008 921,756 957,992
Secured $6,500,000 mortgage revolving line of credit note, bearing interest at prime rate plus .25% (9.75% at December 31, 2000), due October 3, 2001 915,868 -
Secured mortgage note payable bearing interest at commercial paper rate plus 2.65% (9.20% at December 31, 2000), due December 31, 2001 800,000 4,395
Secured mortgage note payable, bearing interest at prime rate (9.5% at December 31, 2000), payable in monthly installments through March 1, 2006 644,185 658,071
Secured mortgage note payable, bearing interest at prime rate plus 1.25% (10.75% at December 31, 2000), payable in monthly installments through November 27, 2016 596,875 634,375
Secured mortgage note payable, bearing interest at 10.52%, payable in monthly installments through August 18, 2005 506,700 -
Other installment notes payable 415,633 620,204 ------------------------ 13,837,632 11,870,232 Less current maturities 1,414,728 523,185 ------------------------ Long-term debt $12,422,904 $11,347,047 ========================
Property and equipment with a net book value of approximately $22,000,000 at December 31, 2000 collateralize the Company's long-term debt.
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5. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt for the years subsequent to December 31, 2000 are as follows:
2001 $ 1,414,728 2002 659,387 2003 5,912,527 2004 504,416 2005 486,555 Thereafter 4,860,019 ----------- Total $ 13,837,632 ===========
The Loan Agreement of the $6,500,000 line of credit which matures October 3, 2001 provides for extensions of the maturity date until the line of credit has been repaid or for the conversion of the current outstanding principal balance ($915,868 at December 31, 2000) to a Term Loan with a maturity of 5-years from the date of conversion. The current maximum amount available on the revolving line of credit is $1,440,000 which can be increased up to $6,500,000 as additional collateral is provided by the Company.
The terms of certain loan agreements include various provisions which require the Company to (i) maintain defined net worth and coverage ratios, (ii) limit the incurrence of certain liens or encumbrances in excess of defined amounts, (iii) maintain defined leverage ratios and (iv) prohibit the payment of dividends. Management does not believe that compliance with the credit terms will adversely impact the Company's future operations.
Interest costs capitalized during the construction period of restaurants were approximately $32,000 in 2000, $50,900 in 1999 and $104,200 in 1998.
6. Leases
The Company leases certain buildings and equipment under capital lease agreements with related and third parties. The equipment leases have five to seven year terms. The building leases expire in 2016 and 2017. Future minimum lease payments under the capital leases and the net present value of the future minimum lease payments at December 31, 2000 were as follows:
Related Other Party Lease Leases Total ----------- ------ -----
2001 $ 84,000 $ 804,707 $ 888,707 2002 84,000 689,510 773,510 2003 84,000 622,040 706,040 2004 84,000 314,338 398,338 2005 84,000 118,279 202,279 Thereafter 1,008,000 966,223 1,974,223 -------------------------------------- Total minimum lease payments $ 1,428,000 $ 3,515,097 4,943,097 ========================== Less amount representing interest at 6.25% to 11.78% (1,782,282) ----------- Net present value of lease payments 3,160,815 Less current maturities (625,938) ----------- Long-term portion of capital leases $ 2,534,877 ===========
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6. Leases (continued)
The Company leases certain restaurants and equipment under operating leases having terms expiring between 2002 and 2017. Most of the restaurant facility leases have renewal clauses of five to twenty years exercisable at the option of the Company and one of the leases is with a related party. Certain leases require the payment of contingent rentals based on a percentage of gross revenues. Future minimum lease payments on operating leases at December 31, 2000 were as follows:
Related Party Other Lease Leases Total ------------------------------------------
2001 $ 60,000 $ 1,992,260 $ 2,052,260 2002 60,000 1,990,706 2,050,706 2003 60,000 2,001,106 2,061,106 2004 60,000 1,986,506 2,046,506 2005 60,000 1,753,689 1,813,689 Thereafter 725,000 13,967,295 14,692,295 ------------------------------------------ $ 1,025,000 $ 23,691,562 $ 24,716,562 ==========================================
Total rental expense was approximately $1,975,700 in 2000, $1,654,700 in 1999 and $1,455,500 in 1998 and included contingent rent of approximately $244,000 in 2000, $207,000 in 1999 and $178,700 in 1998. Rental expense for related party leases was approximately $388,000 in 2000, $407,900 in 1999 and $436,200 in 1998.
7. Redeemable Class A Member Units and Bank Line of Credit
As of December 31, 1998, Tumbleweed had a $7,500,000 line of credit with a bank for borrowing at the bank's prime rate plus 1/4%. Under a related assumption agreement, the Class A Members directly assumed the total liability on a pro rata basis until December 31, 1998 at which time Tumbleweed assumed the total liability of $6,990,348. Prior to Tumbleweed assuming this line of credit, the amounts borrowed under the line of credit were, in the first instance, obligations of the Class A Members and, accordingly, were accounted for as redeemable members' equity, and any interest and other related costs on the debt funded by Tumbleweed were accounted for as distributions to the Class A Members.
The $6,990,348 borrowed under the line of credit as of December 31, 1998 was repaid on January 5, 1999 out of the gross proceeds of $7,766,300 from the IPO (see Note 1). If an IPO had not occurred, any Class A Member had the right to sell to Tumbleweed their interest in Tumbleweed at any time after the fifth anniversary of the date that a Class A Member was admitted to Tumbleweed (generally 2000). The selling price was to be the sum of cash contributed by the Class A Member and an amount equal to an annual 30% internal rate of return on the Class A Member's cash contributions and pro rata assumed principal portion of the line of credit, taking into account all prior distributions to such Class A Member. The total Class A Members' interests which would have been required to be purchased by Tumbleweed in any one year was limited and would have been payable in equal installments over a five-year term, with interest. Redeemable members' equity in the accompanying Consolidated Statement of Redeemable Members' Equity, Members' Equity, Members' Retained Earnings (Deficit) and Stockholders' Equity for the year ended December 31, 1998 includes the accretion of the annual 30% internal rate of return.
Through December 31, 1998, capital contributions by the Class A Members were limited to their initial cash contributions in 1995 which amounted to $7,034,375 and borrowings under the line of credit assumed by the Class A Members.
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8. Income Taxes
The components of the provision for income taxes for the years ended December 31, 2000 and 1999 related to income before cumulative effect of a change in accounting principle consists of the following:
2000 1999 ----------- ----------- Current - federal $ 2,424 $ 798,303 Current - state - 55,345 Deferred 63,015 326,011 Deferred taxes resulting from a change in tax status - 639,623 ----------- ----------- $ 65,439 $ 1,819,282 =========== ===========
The provision for income taxes for the years ended December 31, 2000 and 1999 on income before income taxes and cumulative effect of a change in accounting principle differs from the amount computed by applying the statutory federal income tax rate due to the following:
2000 1999 ----------- ----------- U.S. federal income taxes at 34% $ 213,792 $ 1,145,956 State income taxes, net of federal tax effect (138,034) 81,405 Employment tax credits (97,483) (74,723) Deferred taxes resulting from change in tax status - 639,623 Other items 87,164 27,021 ----------- ----------- Provision for income taxes $ 65,439 $ 1,819,282 =========== ===========
Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
2000 1999 ----------- ----------- Deferred tax assets: Book over tax amortization $ - $ 45,767 Tax credits and carryforwards 339,763 - Unearned revenue 244,074 200,429 ----------- ----------- Total deferred tax assets 583,837 246,196
Deferred tax liabilities: Deferred expenses (747,419) (424,632) Tax over book depreciation (676,187) (598,318) ----------- ----------- Total deferred tax liabilities (1,423,606) (1,022,950) ----------- ----------- Net deferred tax liability $ 839,769 $ 776,754 =========== ===========
As of December 31, 2000, the Company has state net operating loss carryforwards of approximately $2,600,000 which expire partly in 2016 and partly in 2020. Also, as of December 31, 2000, the Company has a $54,000 alternative minimum tax credit carryforward which has no expiration date, as well as $148,000 of employment tax credit carryforwards expiring in 2021, available to offset future U.S. federal income taxes. Management believes the Company will generate sufficient future regular taxable income to ensure realization of these benefits.
9. Related Party Transactions
On April 1, 1999, the Company purchased the land and building, including improvements, of the Springdale, Ohio restaurant from Keller, LLC (a limited liability company in which a director of the Company owns a substantial interest), the lessor of the property, for $1,625,000. The purchase was made for an amount substantially equal to the costs originally expended by Keller, LLC in the purchase of the land and construction of the improvements, which approximated the fair market value as determined by an independent appraisal. At the time of purchase, the Company
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9. Related Party Transactions (continued)
entered into a modification agreement with a local bank to increase a line of credit and to place a mortgage on the land and building to secure the increased line of credit. At the time of the purchase, the Company's capital lease obligation to Keller, LLC was terminated. Prior to the purchase, the Company leased the Springdale, Ohio restaurant from Keller, LLC and during 1999 the Company paid rent totaling $46,700 to Keller, LLC.
On July 1, 1999, the Company purchased the land and building, including improvements, of the Bowling Green, Kentucky restaurant from Douglass Ventures (a Kentucky general partnership and stockholder of the Company in which a director of the Company is a general partner) and an unrelated third party, the co-lessors of the property, for $884,640. The purchase price was calculated in accordance with the lease agreement which approximated the fair market value as determined by an independent appraisal. At the time of the purchase, the Company's lease obligation was terminated. The purchase price was funded by cash reserves and funds drawn on the Company's line of credit. Prior to the purchase, the Company leased the Bowling Green, Kentucky restaurant from Douglass Ventures and during 1999 the Company paid rent totaling $26,000 to Douglass Ventures.
In February 1997, Tumbleweed acquired a 9.5% common member interest in T.M. Riders, LLC ("TM Riders") for a nominal amount. TM Riders operated limited service food court restaurants in shopping malls in the Louisville, Lexington and Cincinnati metropolitan areas and delivery units featuring takeout and home delivery of Mexican, Tex- Mex and grilled foods. In September 1998, the Company relinquished its interest in TM Riders. In 1999, TM Riders ceased operations, closed its delivery locations and sold its interests in the Tumbleweed food court operations to TW- Indiana, LLC, an existing franchisee of the Company in which a director of the Company is a member.
In February 1997, Tumbleweed invested a nominal amount in TW-Tennessee, LLC (TW-Tennessee), a newly formed Tennessee limited liability company, in exchange for a 9.5% common member interest. On September 30, 1998, Tumbleweed sold its interest in TW-Tennessee to certain members of TW-Tennessee for $25,000. TW-Tennessee was organized to open and operate Tumbleweed full service restaurants as a franchisee of Tumbleweed.
The Company has guaranteed renewals of certain guaranteed indebtedness and any replacement indebtedness of TW- Tennessee, to the extent and in amounts not to exceed the amounts guaranteed as of September 30, 1998. The Company had guaranteed certain TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee common members: a) up to $1,200,000 under a bank line of credit, b) approximately $2,800,000 of a lease financing agreement, and c) equipment leases with a bank. See Note 18 for additional information regarding this matter.
TW-Tennessee is governed and managed by a board, some members of which are also directors of the Company and investors in the Company. Certain of these individuals are also investors in TW-Tennessee.
Franchise fees and royalties recorded by the Company in relation to TM Riders and TW-Tennessee were approximately $36,800, $160,800 and $225,600 in 2000, 1999 and 1998, respectively. The Company also provides management and accounting services for these entities for which fees are charged. Such management and accounting fees recorded in other revenues related to these entities totaled approximately $12,200, $40,500 and $104,000 in 2000, 1999 and 1998, respectively.
During the year ended December 31, 2000, the Company assumed a TW-Tennessee, LLC equipment lease which it had previously guaranteed (see discussion above). The equipment will be utilized in the reconstruction of the Company- owned restaurant which was destroyed as result of a fire (see Note 12). The capital lease had a balance of approximately $225,000 on the date the lease was assumed.
In August 1997, Tumbleweed, LLC entered into the International Agreement with Tumbleweed International LLC (International), a restaurant developer based in Hanau, Germany. The International Agreement grants certain licensing and franchising rights to International for the development of Tumbleweed restaurants outside of the Western Hemisphere. International is a limited liability company owned by three corporations which are controlled by certain stockholders of the Company. In 2000, 1999 and 1998, International paid approximately $7,400, $18,700 and $7,500, respectively, in fees to the Company under the International Agreement.
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9. Related Party Transactions (continued)
Two common stockholders, one of which is also a director of the Company, are members in TW-Indiana, LLC, which in April 1998 acquired the franchise rights to five full-service Tumbleweed restaurants in Indiana and Kentucky from a third party. Franchise royalties recorded by the Company in relation to this entity were approximately $300,000, $311,000 and $242,500 in 2000, 1999 and 1998, respectively. As of December 31, 2000, the Company had an interest free note receivable of $50,000 from TW-Indiana, LLC with a maturity date of December 31, 2002.
TW-Indiana, LLC and a director of the Company also are members of TW-Seymour, LLC, a franchisee of the Company which opened a full-service Tumbleweed restaurant in Indiana during 1999. Franchise fees and royalties recorded by the Company in relation to this entity were approximately $45,000 and $76,000 in 2000 and 1999, respectively.
In September 1998, Tumbleweed entered into an agreement to purchase the land and building, including improvements, located in Columbus, Ohio from West Broad Development LLC (a limited liability company in which a director and certain other stockholders of the Company own a substantial interest), the lessor of the property, under a capital lease obligation. The purchase price of $1,250,000 was at fair market value as determined by an independent appraisal. Tumbleweed, at the time of purchase, entered into an agreement with a bank modifying an existing promissory note on the land and building by increasing the principal amount to $1,000,000.
During the years ended December 31, 2000 and 1999, the Company entered into management agreements with five companies who own Tumbleweed franchise restaurants with respect to five restaurant locations. The management agreements require the franchisees to pay certain fees to the Company in exchange for the Company providing operations management and accounting services to the franchisees. Certain directors and officers of the Company own substantial interests in these companies. Franchise fees and royalties recorded by the Company in 2000 and 1999 in relation to these entities were approximately $227,000 and $90,000, respectively. Management and accounting fees recorded in other revenues by the Company in 2000 and 1999 in relation to these entities were approximately $65,000 and $13,000, respectively. During the year ended December 31, 2000, the Company purchased the assets of two of these companies. See Note 11 for information regarding these transactions.
A provision for doubtful accounts of approximately $68,000 was recorded during 2000 which represents the balance due from a related party franchisee (discussed in the paragraph above) for accounting fees, royalties and a franchise fees. As of December 31, 2000, management considers it probable that this receivable will not be collected.
See Note 10 for additional related party transactions.
10. Investment in TW-Springhurst
During the year ended December 31, 2000, the Company made a $200,000 investment in TW-Springhurst, LLC ("TW- Springhurst"). The Company has a 50% member interest with the remaining 50% held by TW-Springhurst Investors, LLC. A director of the Company and an officer of the Company own TW-Springhurst Investors, LLC. The initial purpose of the limited liability company is to construct and operate a Tumbleweed restaurant in Louisville, Kentucky. On August 29, 2000, a Management Agreement was signed between TW-Springhurst and the Company which provides that the Company will manage the day-to-day operations of the restaurant. The Company's share of TW-Springhurst's net loss was $58,903 for the year ended December 31, 2000.
11. Business Acquisitions
On August 14, 2000, the Company purchased the assets of an Evansville, Indiana Tumbleweed restaurant from TW- Evansville, LLC (a limited liability company in which certain directors and officers of the Company own a substantial interest) for $929,400. The Company also assumed TW-Evansville, LLC's equipment capital lease which had a balance of approximately $197,000 on the date of purchase. The purchase price for the business and property was at fair market value as determined by an independent business valuation appraisal. The purchase price was funded by cash reserves and funds drawn on the Company's mortgage revolving lines of credit.
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11. Business Acquisitions (continued)
The purchase price has been allocated as follows based upon the fair values of the assets acquired and liabilities assumed:
Inventories $ 47,356 Building 585,000 Equipment 235,000 Deposits 3,000 Accrued property taxes (10,600) Capital lease obligation (197,008) ------------- 662,748 Goodwill 266,652 ------------- $ 929,400 =============
On October 1, 2000, the Company purchased the assets of the Medina, Ohio Tumbleweed restaurant from TW-Medina, LLC (a limited liability company in which certain directors of the Company own a substantial interest) for $876,933. The purchase price for the business and property was at fair market value as determined by an independent business valuation appraisal. The purchase price was funded by cash reserves and funds drawn on the Company's mortgage revolving lines of credit. The purchase price has been allocated as follows based upon the fair values of the assets acquired and liabilities assumed:
Inventories $ 57,010 Equipment 235,000 Accrued property taxes (5,694) ------------- 286,316 Goodwill 590,617 ------------- $ 876,933 =============
The acquisitions have been accounted for as purchases and, accordingly, the results of operations of the acquired businesses are included in the Company's results of operations since the date of acquisition.
12. Involuntary Conversion of Non-Monetary Assets
As a result of a fire which occurred June 7, 2000 at a Company-owned restaurant in Kentucky, an involuntary conversion of non-monetary assets occurred which resulted in a $554,864 gain. The gain represents the difference between the carrying amount of the restaurant's assets which were destroyed (building, equipment and inventories of $744,488, in total, at the time of the fire) and the amount to be collected from the insurance company ($1,299,352). In addition, the Company has received approximately $605,000 from the insurance company for business interruption ($280,000) and continuing expenses ($120,000) through December 31, 2000. The additional $205,000 received is for estimated business interruption and continuing expenses in 2001. Accordingly, the Company has recorded this as deferred income in the accompanying financial statements.
13. Treasury Stock
On January 14, 2000, the Board of Directors approved the repurchase from time to time of up to $500,000 of the Company's common stock. Purchases may be made in the open market as well as by private transaction at times and prices considered appropriate by the Company, subject to applicable rules and regulations. The purchases will be funded by cash reserves. Through December 31, 2000, the Company has repurchased 42,400 shares at a total cost of $254,695.
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14. Stock Incentive Plan
In June 1998, the Company adopted a Stock Option and Incentive Compensation Plan (the "Plan"). The Plan provides for the granting of any of the following awards to eligible employees or directors of the Company and its subsidiaries: (i) employee stock options, including both "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code ("ISOs") and options that do not qualify as ISOs; (ii) automatic grants of options to nonemployee directors; (iii) stock appreciation rights; and (iv) restricted stock and performance stock awards. The Plan is intended to provide incentives and rewards for employees and directors to support the implementation of the Company's business plan and to align the interests of employees and directors with those of the Company's stockholders.
The Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Committee"). The Committee is comprised of three independent directors, who are not current employees of the Company and who do not receive any remuneration from the Company in any capacity other than as a director. The Committee is authorized, among other things, to determine employees to whom grants of awards will be made and take such action as it deems necessary or advisable for the administration of the Plan.
The common stock subject to the Plan will be authorized but unissued shares or previously acquired shares. The number of shares of common stock available for grant of awards under the Plan equals the greater of 1,235,000 shares, or 10% of the number of shares of common stock outstanding from time to time, including 170,000 shares reserved for options automatically granted to nonemployee directors under the Plan.
As of December 31, 2000, cumulative total options to purchase 1,377,077 shares of the Company's common stock had been granted to employees and directors of the Company at prices ranging from $2.56 to $10.00 per share which expire at various dates during 2009 and 2010 with a contractual life of 10 years. Initial grants of approximately 492,000 options were made at a price equal to the initial public offering price of $10.00 per share . The exercise price of subsequent grants were equal to the market price at the time of the grant. There were no options issued or outstanding at December 31, 1998.
Stock options granted under the Plan will be exercisable for a term of not more than ten years, as determined by the Committee. The option grants, with the exception of those granted to the Company's President and Chief Executive Officer in August 2000, are exercisable for 33% of the number of shares subject to the option on each of the first, second and third anniversaries of the date of grant and expire ten years from the date of grant. In August 2000, 367,236 options were granted to the Company's President and Chief Executive Officer at prices ranging from $2.69 to $3.88 which become immediately vested and exercisable in the event of a change in control of the Company. Activity in the Plan during the years ended December 31, 2000 and 1999 was:
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14. Stock Incentive Plan (continued)
The following table summarizes information about employee stock options outstanding at December 31, 2000:
Range of Number Weighted Average Exercise Prices Outstanding Exercise Price --------------- ----------- -------------- $10.00 259,143 $10.00 $4.50 - $6.25 65,875 $5.41 $2.56 - $3.88 719,436 $3.59 ------------- 1,044,454 =============
The remaining contractual life of the outstanding stock options ranges from 8.1 years to 9.9 years.
The Company accounts for the Plan in accordance with APB 25, "Accounting for Stock Issued to Employees," as permitted by FAS 123, "Accounting and Disclosure of Stock-Based Compensation." The Company has not recognized compensation expense for stock options granted because the exercise price of the options equals the fair value of the underlying stock on the date of grant, which is the measurement date. If the alternative method of accounting for stock incentive plans prescribed by FAS 123 had been followed, the Company's net income and earnings per share for 2000 and 1999 would have been reduced to the pro forma amounts shown in the following table. For purposes of these pro forma disclosures, the estimated fair value of the options is recognized as compensation expense over the options' vesting period. The weighted average fair value of options granted was determined using the Black-Scholes option pricing model with the indicated assumptions.
2000 1999 ---- ---- Net income as reported $ 563,361 $ 1,210,140 Pro forma net income (loss) (21,368) 619,803 Pro forma basic and diluted earnings per common share (0.00) 0.11
The following assumptions were used: (1) risk-free interest rate of 6.50 %; (2) dividend yield of 0%; (3) expected life of 6.5 years; and (4) volatility of .885% in 2000 and .655% in 1999. Results may vary depending on the assumptions applied within the model. The weighted average fair value per share of options granted was $3.68 and $6.31 for 2000 and 1999, respectively.
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15. Earnings per Share
The following is a reconciliation of the Company's basic and diluted earnings per share for the years ended December 31, 2000, 1999 and 1998 in accordance with FAS 128, "Earnings per Share."
(1) Actual for 2000 and pro forma for 1999 and 1998.
16. Segment Information
The Company has three reportable segments: restaurants, commissary and corporate. The restaurant segment consists of the operations of all Company-owned restaurants and derives its revenues from the sale of food products to the general public. The commissary segment derives its revenues from the sale of food products to Company-owned and franchised restaurants. The corporate segment derives revenues from sales of franchise rights, franchise royalties and related services used in restaurant operations, and contains the selling, general and administrative activities of the Company. Generally, the Company evaluates performance and allocates resources based on pre-tax income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Segment information for the years ended December 31 is as follows:
2000:
16. Segment Information (continued)
17. Selected Quarterly Data
The following is a summary of certain unaudited quarterly results of operations for the years ended December 31, 2000 and 1999.
2000:
17. Selected Quarterly Data (continued)
(a) Includes gain from insurance proceeds due to involuntary conversion of non-monetary assets of approximately $434,000 and loss on guarantees of indebtedness of $475,000.
(b) Includes estimated additional loss on guarantees of indebtedness of $250,000.
(c) Includes additional gain from insurance proceeds due to involuntary conversion of non-monetary assets of approximately $121,000 and a provision for doubtful accounts of approximately $68,000.
(d) Includes a change in estimate of approximately $190,000 reducing the Company's provision for income taxes.
1999:
18. Contingencies
The Company has guaranteed renewals of certain guaranteed indebtedness and any replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee), to the extent and in amounts not to exceed the amounts guaranteed as of September 30, 1998. The Company had guaranteed certain TW-Tennessee obligations as follows, jointly and severally with TW-Tennessee common members: a) up to $1,200,000 under a bank line of credit, b) approximately $2,800,000 of a lease financing agreement, and c) equipment leases with a bank.
In March 2001, the bank which holds the line of credit filed suit in the Circuit Court of Jefferson County, Kentucky against TW-Tennessee and against the guarantors of the line of credit, including the Company and a Director of the Company. Prior to the suit being filed, the Company along with certain guarantors made a partial payment to the bank. If the bank is unsuccessful in collecting the remaining payments from the other guarantors, the Company would have exposure totaling approximately $1,000,000. While the Company believes it has fulfilled its obligation to the bank and
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18. Contingencies (continued)
intends to vigorously defend its position, it is too early in the process to predict with certainty the ultimate outcome of this matter since the suit is in the early pleading stages and no discovery has taken place.
During 1999, the Landlord under the lease financing agreement declared TW-Tennessee to be in default, and accelerated the rent obligations under the leases. On May 8, 2000, the Landlord filed suit in the Chancery Court for Davidson County, Tennessee, against TW-Tennessee and against certain guarantors of the lease obligations, including the Company and a Director of the Company. The Company and certain guarantors of the lease obligations reached an agreement with the Landlord, under which the Company and such guarantors paid certain sums to the Landlord as a final settlement of all claims of the Landlord, and the Landlord dismissed its legal action against and released the Company from further liability under its guarantees.
The lessor under the equipment leases with TW-Tennessee has declared TW-Tennessee to be in default thereunder and demanded payment in full from all guarantors of the leases, including the Company. The Company has made a partial payment to the lessor and is working with the lessor in pursuing the other guarantors of the equipment leases that have not made any payment. If the lessor is unsuccessful in collecting the remaining sums due from the other guarantors, the Company would have additional exposure totaling approximately $312,000.
As a result of the settlement with the Landlord under the TW-Tennessee lease financing agreement, and given the demand for payment by the lessor under the TW-Tennessee equipment leases and by the bank that holds the line of credit, the Company has incurred a loss related to the Company's guarantees of TW-Tennessee's obligations. The Company established a reserve in the amount of $725,000 during 2000 of which approximately $716,000 had been paid out as of December 31, 2000. The reserve amount was based on the Company's payment to the Landlord under the TW- Tennessee lease financing agreement, the Company's share of the various remaining guarantees of TW Tennessee obligations and an estimated amount for legal costs which will likely be incurred in connection with the resolution of this matter. The Company's management believes that it will not incur any significant additional losses in connection with this matter.
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Item 9.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the shareholders meeting to be held on May 24, 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6b, contains under the caption "Election of Directors" information required by Item 10 of Form 10-K as to directors of the Company and is incorporated herein by reference. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption "Executive Officers."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement issued in connection with the shareholders meeting to be held on May 24, 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption "Executive Compensation" information required by Item 11 of Form 10-K and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement issued in connection with the shareholders meeting to be held on May 24, 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under caption "Beneficial Ownership Of Common Stock"and "Election of Directors" information required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement issued in connection with the shareholders meeting to be held on May 24, 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b) contains under the caption "Certain Relationships and Related Transactions" information required by Item 13 of Form 10-K and is incorporated herein by reference.
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PART IV
item 14.
item 14. Exhibits, financial statement schedules, and reports on form 8-K
(a) (1) Financial Statements: See Item 8.
(2) Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts Page 51
(3) Listing of Exhibits:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 2.1 Agreement and Plan of Merger, dated as of June 23, 1998, between Tumbleweed, LLC and Registrant**
3.1 Certificate of Incorporation of Tumbleweed, Inc., as amended**
3.2 Bylaws of Registrant*
10.1 Master International License Agreement, dated August 29, 1997, between Tumbleweed International LLC and Tumbleweed, LLC*
10.2 Employment Agreement between John A. Butorac, Jr. and Tumbleweed, Inc.*
10.3 Employment Agreement between James M. Mulrooney and Tumbleweed, Inc.*
10.4 Sublease Agreement, dated February 5, 1997, between TW-Dixie Bash, LLC and Tumbleweed, LLC (for Bardstown Road restaurant)*
10.5 Sublease Agreement, dated February 5, 1997, between TW-Dixie Bash, LLC and Tumbleweed, LLC (for Valley Station restaurant)*
10.6 Commitment Letter, dated June 12, 1997, between CNL Fund Advisors, Inc. and TW Tennessee, LLC*
10.7 Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation Plan*
10.8 Form of Standard Franchise Agreement for Tumbleweed, LLC*
10.9 Articles of Incorporation of Tumbleweed Marketing Fund, Inc.*
10.10 By-laws of Tumbleweed Marketing Fund, Inc.*
10.11 Bonus Compensation Plan for Senior Executives*
10.12 Revolving Line of Credit Note, dated April 21, 1999, between Tumbleweed, Inc. and National City Bank of Kentucky and related Loan Agreement***
99 Registration Rights Agreement between Tumbleweed, Inc. and Tumbleweed, LLC* -----------------
* Incorporated by reference to exhibits filed with the Commission on September 29, 1998, in Form S-1 Registration No. 333-57931.
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** Incorporated by reference to exhibits filed with the Commission in Form 8-A filed by Tumbleweed, Inc. on February 25, 1999.
*** Incorporated by reference to exhibits filed with the Commission on May 12, 1999 in Form 10-A, File No. 333-57931.
(b) During the quarter ended December 31, 2000, the Company did not file any reports on Form 8-K
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Tumbleweed, Inc.
Schedule II - Valuation and Qualifying Accounts
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Louisville, State of Kentucky.
TUMBLEWEED, INC.
/s/ Terrance A. Smith By: Terrance A. Smith President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in capacities and on the dates indicated.
Title Date ----- ----
/s/ Terrance A. Smith Terrance A. Smith President and Chief Executive Officer March 30, 2001 and Director
/s/ James M. Mulrooney James M. Mulrooney Chief Financial Officer, Treasurer, March 30, 2001 Secretary and Executive Vice President and Director (Principal Accounting Officer)
/s/ David M. Roth David M. Roth Director March 30, 2001
/s/ Minx Auerbach Minx Auerbach Director March 30, 2001
/s/ Lewis Bass Lewis Bass Director March 30, 2001
/s/ John A. Butorac, Jr. John A. Butorac, Jr. Director March 30, 2001
/s/ George R. Keller George R. Keller Director March 30, 2001
/s/ James F. Koch James F. Koch Director March 30, 2001
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