UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------
FORM 10-Q
----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
-------------
Commission file number 333-57931
TUMBLEWEED, INC
(Exact name of registrant as specified in its charter)
DELAWARE 61-1327945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Mellwood Avenue, Louisville, Kentucky 40206
(Address of principal executive offices)
(502) 893-0323
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practiciable date:
Class Outstanding at November 10, 1998
Common Stock 13
<PAGE>
TUMBLEWEED, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Tumbleweed, Inc.
a) Balance Sheets as of September 30, 1998 and June 30,
1998 1
b) Notes to Balance Sheets 1
Tumbleweed, LLC
a) Statements of Income for the nine months and
three months ended September 30, 1998 and 1997 2
b) Balance Sheets as of September 30, 1998, December 31,
1997 and as of September 30, 1998 (Pro forma) 3
c) Statement of Cash Flows for the nine months
ended September 30, 1998 and 1997 4
d) Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative disclosures about
market risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
TUMBLEWEED, INC
Balance Sheets
<CAPTION>
September 30 June 30
1998 1998
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
Assets
Cash $ 130 $ 130
============ ===========
Total assets $ 130 $ 130
============ ===========
Stockholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding $ - $ -
Common stock, $.01 par value,
30,000,000 shares authorized;
13 shares issued and outstanding 1 1
Paid-in capital 129 129
============ ===========
Total stockholders' equity $ 130 $ 130
============ ===========
</TABLE>
Note: The balance sheet as of June 30, 1998 has been derived from the
audited balance sheet as of that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
TUMBLEWEED, INC.
NOTES TO BALANCE SHEETS (Unaudited)
SEPTEMBER 30, 1998
1. DESCRIPTION OF BUSINESS
Tumbleweed, Inc. (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. The Company has entered into an agreement with Tumbleweed, LLC, a
Kentucky limited liability company (Tumbleweed), in which Tumbleweed will be
merged with and into the Company subject to the sale in an initial public
offering (IPO) of at least 700,000 shares of the Company's common stock.
Tumbleweed owns and operates 24 restaurants in Kentucky, Indiana and Ohio, and
franchises an additional 12 restaurants in Indiana, Illinois, Tennessee and
Wisconsin. Tumbleweed also licenses two restaurants in Germany and one in Saudi
Arabia. The Company and Tumbleweed are sometimes hereinafter referred to
collectively as the "Company".
2. BASIS OF PRESENTATION
The accompanying unaudited balance sheet has been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, it does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal accruals,
considered necessary for a fair presentation have been included. The September
30, 1998 balance sheet and footnote disclosures should be read in conjunction
with the Form S-1 Registration Statement (No. 333-37931) effective September 9,
1998.
1
<PAGE>
The Company's assets at September 30, 1998 consist solely of cash received in
connection with the capitalization of the Company. The Company has not conducted
any operations and all activities to date have related to the IPO and the
anticipated merger with Tumbleweed. All expenditures related to the IPO have
been funded and recorded by Tumbleweed. Accordingly, statements of operations,
changes in stockholders' equity and cash flows would not provide meaningful
information and have been omitted.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
TUMBLEWEED, LLC
Statements of Income (Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $29,064,352 $20,522,294 $10,516,721 $7,300,640
Commissary sales 752,644 785,428 249,303 189,437
Franchise fees and royalties 566,871 357,173 182,257 125,455
Other revenues 406,850 280,604 157,223 95,694
---------- ---------- ----------- -----------
Total revenues 30,790,717 21,945,499 11,105,504 7,711,226
Operating expenses:
Restaurant cost of sales 8,470,147 6,072,111 3,084,617 2,171,263
Commissary cost of sales 648,631 700,785 218,511 168,797
Restaurant operating expenses 14,963,287 10,266,531 5,362,538 3,548,319
Selling, general and
administrative expenses 2,994,809 2,174,550 1,000,936 820,469
Preopening amortization 537,319 437,428 230,411 128,170
Depreciation and amortization 1,024,658 695,764 369,294 242,669
---------- ---------- ----------- -----------
Total operating expenses 28,638,851 20,347,169 10,266,307 7,079,687
---------- ---------- ----------- -----------
Income from operations 2,151,866 1,598,330 839,197 631,539
Other income (expense):
Interest income 45,827 46,827 14,799 15,185
Interest expense (651,203) (363,634) (240,946) (114,720)
---------- ---------- ----------- -----------
Total other expense (605,376) (316,807) (226,147) (99,535)
---------- ---------- ----------- -----------
Net income $1,546,490 $1,281,523 $613,050 $532,004
========== ========== =========== ===========
Pro forma income data:
Net income as reported $1,546,490 $1,281,523 $613,050 $532,004
Pro forma income taxes (556,736) (461,348) (220,698) (191,521)
---------- ---------- ----------- -----------
Pro forma net income $989,754 $820,175 $392,352 $340,483
========== ========== =========== ===========
Pro forma net income per
share-basic and diluted $0.19 $0.16 $0.08 $0.07
========== ========== =========== ===========
Shares used in computing pro
forma net income per share 5,145,000 5,145,000 5,145,000 5,145,000
========== ========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
TUMBLEWEED, LLC
Balance Sheets
<CAPTION> Pro Forma
September 30 December 31 September 30
1998 1997 1998
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $255,335 $1,228,867 $255,335
Accounts receivable 308,793 346,700 308,793
Note receivable from affiliate 100,000 100,000 100,000
Inventories 1,124,585 825,029 1,124,585
Deferred preopening expenses 678,596 267,100 678,596
Prepaid expenses 324,687 282,590 324,687
------------ ------------ ------------
Total current assets 2,791,996 3,050,286 2,791,996
------------ ------------ ------------
Property and equipment, net 24,764,661 19,330,132 24,764,661
Note receivable from affiliate 300,000 300,000 300,000
Goodwill, net of accumulated amortization
of $412,542 as of September 30, 1998
and $329,442 in 1997 2,861,404 2,944,504 2,861,404
Other assets 798,080 443,559 798,080
============ ============ ============
Total assets $31,516,141 $26,068,481 $31,516,141
============ ============ ============
Liabilities, Redeemable Member's Equity,
Members' Equity, and Retained Earnings
(Deficit)and Pro Forma Stockholders' Equity
Current liabilities:
Accounts payable $1,192,897 $1,174,645 $1,192,897
Accrued liabilities 1,349,444 890,255 1,349,444
Deferred income taxes - - 506,928
Current maturities on long-term
debt and capital leases 772,349 509,779 772,349
------------ ------------ ------------
Total current liabilities 3,314,690 2,574,679 3,821,618
------------ ------------ ------------
Long-term debt, less current maturities 9,171,945 5,750,841 9,171,945
Capital lease obligations, less current
maturities 2,692,960 2,280,964 2,692,960
Deferred income taxes - - 92,526
Other liabilities 98,087 118,584 98,087
------------ ------------ ------------
Total long-term liabilities 11,962,992 8,150,389 12,055,518
------------ ------------ ------------
Total liabilities 15,277,682 10,725,068 15,877,136
Redeemable members' equity 25,454,336 23,419,738 7,137,648
Members' equity 6,959 6,959 -
Retained earnings (deficit) (9,222,836) (8,083,284) -
Pro forma stockholders' equity
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares issued and
outstanding - - -
Common stock, $.01 par value, 30,000,000
shares authorized; 5,145,000 shares
issued and outstanding - - 51,450
Paid-in capital - - 8,449,907
------------ ------------ ------------
Total pro forma stockholders' equity - - 8,501,357
------------ ------------ ------------
$31,516,141 $26,068,481 $31,516,141
============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
TUMBLEWEED, LLC
Statements of Cash Flows (Unaudited)
<CAPTION>
Nine Months Ended
September 30
----------------------------
1998 1997
----------- ----------
<S> <C> <C>
Operating activities:
Net income $1,546,490 $1,281,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 910,447 590,753
Amortization 114,211 105,011
Preopening amortization 537,319 437,428
Loss on disposition of property
and equipment 9,981 13,291
Changes in operating assets and liabilities:
Accounts receivable 37,907 234,357
Inventories (299,556) (56,783)
Deferred preopening expenses (948,815) (148,003)
Prepaid expenses (44,992) 64,925
Other assets (100,976) (36,270)
Accounts payable 18,253 (25,363)
Accrued liabilities 459,189 259,918
Other liabilities (20,497) -
----------- -----------
Net cash provided by operating activities 2,218,961 2,720,787
Investing activities:
Purchases of property and equipment (5,619,749) (3,790,037)
----------- -----------
Net cash used in investing activities (5,619,749) (3,790,037)
Financing activities:
Proceeds from issuance of members' equity 1,162,929 1,776,357
Distribution of members' equity (1,814,374) (2,201,358)
Proceeds from issuance of long-term debt 5,380,463 1,828,080
Payments on long-term debt and capital
lease obligations (2,020,001) (480,061)
Payment of public offering costs (281,761) (35,860)
----------- -----------
Net cash provided by financing activities 2,427,256 887,158
----------- -----------
Net decrease in cash and cash
equivalents (973,532) (182,092)
Cash and cash equivalents at beginning of
period 1,228,867 1,031,709
=========== ===========
Cash and cash equivalents at end of period $255,335 $849,617
=========== ===========
Supplemental cash flow information:
Cash paid for interest, net of amount
capitalized $651,203 $363,634
=========== ===========
Noncash investing and financing activities:
Property and equipment acquired by seller
financing and capital lease obligation $735,208 -
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
TUMBLEWEED, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit, with the exception of the December 31, 1997 balance sheet which
was derived from the audited financial statements included in the Company's Form
S-1 Registration Statement. The financial statements include balance sheets,
statements of income and statements of cash flows which have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. These financial
statements, note disclosures and other information should be read in conjunction
with the Form S-1 registration statement number 333-57931 effective September 9,
1998.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals, which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
(2) SIGNIFICANT ACCOUNTING POLICIES
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position,
"Reporting on the Cost of Start-Up Activities" (the "SOP") which requires
adoption no later than the beginning of 1999. The Company's initial application
of the SOP will require the write-off of deferred preopening costs ($678,596 at
September 30, 1998) as of the date of adoption, and such write-off will be
reported, on a net of tax basis, as the cumulative effect of a change in
accounting principle. The Company is evaluating whether it will adopt this new
standard in 1998 or 1999. After adopting the SOP, the Company will be required
to expense preopening costs as incurred.
<TABLE>
(3) LONG-TERM DEBT
<CAPTION>
September 30 December 31
1998 1997
-------------- ------------
<S> <C> <C>
Long-tern debt consists of:
Secured $5,000,000 mortgage revolving line of credit note,
bearing interest at prime rate plus .25% (8.50% at
September 30, 1998), December 31, 2000 $ 4,192,147 $ 3,260,391
Secured mortgage note payable bearing interest
of 8.75% payable in monthly installments
through February 15, 2008 1,000,000 -
Secured mortgage note payable bearing interest
at prime rate plus 1.25% (9.50% at September
30, 1998), payable in monthly installments
through November 27, 2016 681,250 709,375
Secured mortgage note payable bearing interest
at prime rate plus 1.00% (9.25% at September
30, 1998), payable in monthly installments
through October 1, 2017 1,089,611 133,937
Secured mortgage note payable bearing interest
at commercial paper rate plus 3.00% (8.30%
at September 30, 1998), due January 1, 2005 1,133,333 1,200,000
Secured mortgage note payable, bearing interest
at commercial rate plus 3.10% (8.40% at
September 30, 1998), due May 1, 2005 707,778 -
Other installment notes payable 804,392 733,280
------------ ------------
9,608,511 6,036,983
Less current portion 436,566 286,142
------------ ------------
Long-term debt $ 9,171,945 $ 5,750,841
============ ============
</TABLE>
The Company's property and equipment collateralizes long-term debt.
5
<PAGE>
<TABLE>
(4) ACCRUED LIABILITIES
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
Accrued liabilities consist of:
Accrued payroll and related taxes $ 821,968 $ 416,066
Accrued insurance and fees 46,569 120,800
Accrued taxes, other than income and payroll 325,906 157,693
Gift certificate liability 35,908 127,922
Other 119,093 67,774
------------ ------------
$ 1,349,444 $ 890,255
============ ============
</TABLE>
(5) RELATED PARTY TRANSACTIONS
As of December 31, 1997, the Company had a capital investment in TW-
Tennessee, LLC (TW-Tennessee) of $14,000. During the year the Company made an
additional capital contribution of $23,700 bringing the total capital
contribution to $37,700. Additionally, as of June 30, 1998, the Company had
recorded minority share losses on its investment of $70,900. On September 30,
1998, the Company sold its 9.5% common member interest in TW-Tennessee for
$25,000 to other members of TW-Tennessee, which resulted in a gain of $58,200 in
the third quarter and a $12,700 loss on the Company's equity investment for the
year.
On September 30, 1998, the company entered into an agreement to purchase
the land and building, including improvements, located at 3780 West Broad Street
in Columbus, Ohio from West Broad Development, LLC, the lessor of the property.
The purchase was made at fair market value supported by an independant
appraisal. The Company, at the time of purchase, entered into a modification
agreement with a local bank to modify an existing promissory note on the land
and building. In modifying the promissory note the principal amount was
increased to $1,000,000. At the time of the purchase, the Company terminated its
capital lease obligation to West Broad Development, LLC.
(6) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying pro forma balance sheet as of September 30, 1998
reflects the change in capitalization attributable to the conversion of the
Company's members' interests into 5,145,000 shares of Tumbleweed, Inc. Common
stock as if the IPO had closed on September 30, 1998 (excluding the effects of
the offering proceeds). The pro forma balance sheet also reflects the deferred
tax effects of the Company changing from a nontaxable to a taxable status. Such
deferred tax effects will be included in income at the date the change in tax
status occurs.
Additionally, pro forma net income in the accompanying pro forma income
data for the nine months and three months ended September 30, 1998 and 1997
reflects a pro forma adjustment to historical net income for federal and state
income taxes at an assumed effective rate of 36%. Pro forma net income per share
is computed based upon pro forma net income and the weighted average number of
shares of common stock outstanding during the period assuming the conversion of
the Company's members' interests into common stock as of the beginning of the
period.
6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
The following discussion includes forward-looking statements about the
Company and its business. For this purpose, words such as expects, believes,
estimates, anticipates, plans and similar expressions are intended to identify
forward-looking statements. This discussion also identifies important cautionary
factors that could cause the Company's actual results to differ materially from
those projected in forward-looking statements of the Company made by, or on
behalf of, the Company. 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 the Company's
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.
General
Of the 39 Tumbleweed restaurants as of September 30, 1998, the Company
currently owns and operates 24 restaurants in Kentucky, Indiana and Ohio,
franchises 12 restaurants in Indiana, Illinois, Tennessee and Wisconsin, and
licenses two restaurants in Germany and one in Saudi Arabia. The Company
anticipates opening two additional franchised restaurants in the United States,
and two additional licensed restaurants outside of the United States by the end
of 1998. The Company acquired the Tumbleweed business and other assets effective
on January 1, 1995.
Immediately before the offering, Tumbleweed, LLC will convert 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, the Company has been treated as a partnership for income tax purposes
and, accordingly, has 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 periods if the Company
had been subject to corporate income taxes for the periods presented. The
following section should be read in conjunction with the Form S-1 Registration
Statement number 333-57931 effective September 9, 1998.
7
<PAGE>
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
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 94.5 % 93.5 % 94.8 % 94.7 %
Commissary sales 2.4 3.6 2.2 2.5
Franchise fees and royalties 1.8 1.6 1.6 1.6
Other revenues 1.3 1.3 1.4 1.2
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.1 29.6 29.3 29.7
Commissary cost of sales (2) 86.2 89.2 87.6 89.1
Restaurant operating expenses (1) 51.5 50.0 51.0 48.6
Selling, general and
administrative 9.7 9.9 9.0 10.6
Depreciation and amortization 3.3 3.2 3.3 3.1
Preopening amortization 1.7 2.0 2.1 1.7
------- ------- ------- -------
Total operating expenses 93.0 92.7 92.4 91.8
------- ------- ------- -------
Income from operations 7.0 7.3 7.6 8.2
Interest expense, net -2.0 -1.5 -2.1 -1.3
------- ------- ------- -------
Net income 5.0 % 5.8 % 5.5 % 6.9 %
======= ======= ======= =======
Historical net income 5.0 % 5.8 % 5.5 % 6.9 %
Unaudited pro forma income taxes (3) -1.8 -2.1 -2.0 -2.5
------- ------- ------- -------
Unaudited pro forma net income 3.2 % 3.7 % 3.5 % 4.4 %
======= ======= ======= =======
</TABLE>
- ------------------------
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The unaudited pro forma income taxes reflect the effect of
Reorganization on the historical net income assuming the Company was
taxed as a C corporation for income tax purposes with an assumed
combined federal and state effective tax rate of 36%.
8
<PAGE>
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues increased by $8,845,218 or 40.3% for the nine months ended
September 30, 1998 compared to the same period in 1997. The increase in total
revenues reflects the opening of eight additional Company-owned restaurants
since September 30, 1997. Restaurant sales at Company-owned restaurants
increased $8,542,058 or 41.6% for the nine months ended September 30, 1998
compared to the same period in 1997. Company-owned same store sales decreased by
0.3% for the nine months ended September 30, 1998.
Commissary sales decreased by $32,784 or 4.2% for the nine months ended
September 30, 1998, compared to the same period in 1997. This was primarily due
to the decision to discontinue commissary sales of products not manufactured by
the commissary.
Franchise fees and royalties increased by $209,698 or 58.7% for the nine
months ended September 30, 1998, compared to the same period in 1997. The
increase was due primarily to $70,000 in franchise fees received upon the
opening of two new franchised restaurants, $23,250 in territory fees received
from international operations and additional royalties from three franchised
restaurants opened since September 30, 1997.
Other revenues increased by $126,246 or 45.0% for the nine months ended
September 30, 1998 compared to the same period in 1997, primarily due to an
increase in volume related purchasing rebates of approximately $141,000 and
monies from the Ohio Bureau of Workers' Comp representing a return of invested
premiums by the State of Ohio totaling approximately $143,000 in 1998. The
increases were offset in part by $178,000 in insurance proceeds received in
1997.
Restaurant cost of sales increased by $2,398,036 or 39.5% for the nine
months ended September 30, 1998, compared to the same period in 1997. The
increase was principally due to the opening of eight additional Company-owned
restaurants. Restaurant cost of sales decreased as a percentage of sales by 0.5%
to 29.1% for the nine months ended September 30, 1998 compared to 29.6% for the
same period in 1997. This decrease resulted primarily from improved operating
efficiencies in the commissary and lower product costs at restaurant level.
Commissary cost of sales decreased $52,154 or 7.4% for the nine months
ended September 30, 1998 compared to the same period in 1997. The decrease was
primarily due to the decision to discontinue commissary sales of products not
manufactured by the commissary. As a percentage to sales commissary cost of
sales decreased 3.0%. This was due to lower ingredient costs for products sold
by the commissary.
Restaurant operating expenses increased by $4,696,756 or 45.7% in the nine
months ended September 30, 1998 compared to the same period in 1997. The
increase reflects the addition of eight Company-owned restaurants. Operating
expenses increased as a percentage of restaurant sales to 51.5% for the nine
months ended September 30, 1998 compared to 50.0% for same period in 1997
primarily due to a 1.4% increase in freight and a 0.6% increase in restaurant
level promotional costs. These costs were offset in part by a 0.6% decrease in
labor costs.
9
<PAGE>
Selling, general and administrative expenses increased by $820,259 or
37.7% for the nine months ended September 30, 1998 compared to the same period
in 1997. The increase was due in part to the addition of management and staff
personnel during the nine months of 1998 to support the growing restaurant base.
Because of the Company's restaurant growth plans management expects selling,
general and administrative expenses to continue to increase during 1998 in
absolute dollars.
Preopening amortization increased $99,891 or 22.8% for the nine months
ended September 30, 1998 compared to the same period in 1997. The increase is
due to the opening of eight additional Company-owned restaurants since September
30, 1997.
Depreciation and amortization expense increased $328,894 or 47.3% in the
nine months ended September 30, 1998 compared to the same period in 1997 due
primarily to the addition of eight Company-owned restaurants.
Net interest expense increased $288,569 or 91.1% for the nine months ended
September 30, 1998 compared to the same period in 1997. The increase resulted
from increased borrowings to fund the growth in Company-owned restaurants.
The pro forma adjustment provides for statutory federal and state tax
rates then in effect as though the Company had been subject to corporate income
taxes for the periods presented. The combined effective tax rate is 36% for the
nine months ended September 30, 1998 and 1997.
As a result of the factors discussed above, pro forma net income in the
nine months ended September 30, 1998 increased $169,579 or 20.7% compared to the
same period in 1997. Pro forma net income per share increased to $0.19 or 20.7%
in the first nine months of 1998 from $.16 in the first nine months of 1997.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Total revenues increased by $3,394,278 or 44.0% for the three months ended
September 30, 1998 compared to the same period in 1997. The increase in total
revenues reflects the opening of eight additional Company-owned restaurants.
Restaurant sales at Company-owned restaurants increased $3,216,081 or 44.1% for
the three months ended September 30, 1998 compared to the same period in 1997,
and Company-owned same store sales decreased 1.5% for the three months ended
September 30, 1998.
10
<PAGE>
Commissary sales increased by $59,866 or 31.6% for the three months ended
September 30, 1998 compared to the same period in 1997. The increase is
primarily due to the opening of three franchised and two international licensed
restaurants since September 1997.
Franchise fees and royalties increased by $56,802 or 45.3% for the three
months ended September 30, 1998 compared to the same period in 1997. The
increase was due primarily to $18,000 of territory fees received from the
international franchise operations and additional royalties of $38,800 from the
opening of three domestic franchise restaurants since September 30, 1997.
Other revenue increased by $61,529 or 64.3% for the three months ended
September 30, 1998 compared to the same period in 1997. The increase is
partially due to an increase in volume related purchasing rebates during the
first three months of approximately $25,000. There was also an increase in
miscellaneous income of approximately $27,000 from the health insurance loss
participation program and the school queso program. The Company sold its
investment in TW-Tennessee in 1998 which included a gain of approximately
$58,200. The 1997 results include insurance proceeds received during the same
period of 1997 of approximately $41,400.
Restaurant cost of sales increased by $913,354 or 42.1% for the three
months ended September 30, 1998 compared to the same period in 1997, principally
due to having eight additional Company-owned restaurants open during the
quarter. Restaurant cost of sales decreased as a percentage of sales by .4% to
29.3% for the three months ended September 30, 1998 compared to the same period
in 1997. This decrease is primarily the result of improved operating
efficiencies in the commissary and lower product costs at restaurant level.
Commissary cost of sales increased $49,714 or 29.5% for the three months
ended September 30, 1998 compared to the same period in 1997, primarily due to
the addition of three franchise restaurants and two international licensed
restaurants. Commissary cost of sales as a percentage of commissary sales
decreased 1.5%. This decrease is primarily due to lower ingredient costs for
products sold.
Restaurant operating expenses increased by $1,814,219 or 51.1% in the
three months ended September 30, 1998 compared to the same period in 1997,
principally due to having eight additional Company-owned restaurants open.
Operating expenses increased as a percentage of restaurant sales to 51.0% from
48.6% for the three months ended September 30, 1998 compared to the same period
in 1997, primarily due to a 1.6% increase in freight and a .9% increase in
restaurant level promotional costs.
Selling, general and administrative expenses increased by $180,467 or
22.0% for the three months ended September 30, 1998 compared to the same period
in 1997 due in part to the Company expanding its management and staff throughout
1998 reflecting the increased level of support necessary to support the growing
restaurant base. The Company also increased advertising expense approximately
$43,000 for the three months ended September 30, 1998 compared to the same
period in 1997. Because of the Company's restaurant growth plans management
expects these expenses to continue to increase during 1998 in absolute dollars.
11
<PAGE>
Preopening amortization increased $102,241 or 79.8% for the three months
ended September 30, 1998 compared to the same period in 1997, due primarily to
the addition of eight Company-owned restaurants since September 30, 1997.
Depreciation and amortization expense increased $126,625 or 52.2% in the
three months ended September 30, 1998 compared to the same period in 1997 due
primarily to the addition of eight Company-owned restaurants since September 30,
1997.
Net interest expense increased $126,612 or 127.2% for the three months
ended September 30, 1998 compared to the same period in 1997. The increase
resulted from increased borrowings to fund the growth in Company-owned
restaurants.
The pro forma adjustment provides for statutory federal and state tax
rates then in effect as though the Company had been subject to corporate income
taxes for the periods presented. The effective tax rates are 36% for three
months ended September 30, 1998 and 1997.
As a result of the factors discussed above, pro forma net income in the
three months ended September 30, 1998 increased $51,869 or 15.2% compared to the
same period in 1997. Pro forma net income per share increased to $0.08 or 15.2%
in the three months ended September 30, 1998 from $0.07 during the same period
of 1997.
Liquidity and Capital Resources
The Company's principal capital needs arise from the development of new
restaurants, and to a lesser extent, maintenance and improvement of its existing
facilities. The principal sources of capital to fund these expenditures were
internally generated cash flow, bank borrowings and lease financing. The
following table provides certain information regarding the Company's sources and
uses of capital for the Nine Months Ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Nine Months
Ended Sept 30,
--------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operations $2,218,961 $2,720,787
Purchases of property and equipment $5,619,749 $3,790,037
Net distributions of $ 651,445 $ 425,001
Members' equity
Net borrowings on long- $3,360,462 $1,348,019
term debt and capital
lease obligations
</TABLE>
The Company's single largest use of funds has been for capital
expenditures consisting of land, building and equipment associated with its
restaurant expansion program. The substantial growth of the Company over the
period has not required significant additional working capital. Sales are
predominantly 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.
Capital expenditures and preopening cost for the remainder of 1998 are
estimated to range from $300,000 to $400,000 for the initial development costs
of restaurants expected to open in early 1999. In addition, the Company plans to
spend approximately $60,000 during the remainder of 1998 to renovate and replace
equipment in existing restaurants.
12
<PAGE>
The Company will utilize mortgage, sale/leaseback and landlord financing,
as well as equipment leasing and financing, for a portion of the initial
development costs of restaurants to be opened in early 1999. The remaining costs
will be financed though available cash reserves, cash provided from operations
and borrowing capacity. Management believes such sources will be sufficient to
fund the Company's expansion plans for the remainder of 1998.
The Company has a $5.0 million revolving credit facility with National
City Bank (the "Credit Facility"). As of September 30, 1998, the Company had
outstanding borrowings under the Credit Facility of approximately $4.2 million.
The Credit Facility 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.
In order to provide any additional funds necessary to pursue the Company's
growth strategy, the Company may incur, from time to time, additional short and
long-term bank indebtedness and may issue, in public or private transactions,
its 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 the Company.
Impact of Inflation
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could affect the Company's operations. A majority of the
Company's employees are paid hourly rates related to federal and state minimum
wage laws. In addition, most of the Company's leases require the Company to pay
taxes, insurance, maintenance, repairs and utility costs, and these costs are
subject to inflationary pressures. Most of the leases also provide for increases
in rent based on increases in the consumer price index when the leases are
renewed. The Company may attempt to offset the effect of inflation through
periodic menu price increases, economies of scale in processing and cost
controls and efficiencies at existing restaurants. Management believes that
inflation had no significant impact on cost last year, primarily because the
largest single item of expense, food costs, has remained relatively stable
during this period.
Impact of Year 2000
The Company has scheduled the replacement of certain of its older computer
systems with hardware and software that has been certified to be Year 2000
compliant. The Company has also completed an assessment of its other computer
systems and will modify or replace portions of its software so that its computer
systems will function properly with respect to dates in or after the year 2000.
The total Year 2000 project cost is estimated at approximately $270,000, which
includes $255,000 for the purchase of new hardware and software that will be
capitalized and $30,000 that will be expensed as incurred. To date, the Company
has not incurred any expense relating to the Year 2000 project.
The project is estimated to be completed not later than July 1999, which
is prior to any anticipated impact on its operating systems. The Company
believes that as a result of the installation of new hardware, the modifications
to existing software and conversions to new software, the Year 2000 issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
inability of its computer systems to function accurately could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were based on numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
ITEM 3 Quantitative and Qualitative disclosures about market risk.
None
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*2.1 Agreement and Plan of Merger, dated as of June 23, 1998,
between Tumbleweed, LLC and Registrant
*3.1 Certificate of Incorporation of Registrant
*3.2 Bylaws of Registrant
*10.1 Revolving Credit Loan Agreement, dated January 24, 1995,
between Bank One, Kentucky, N.A. (f/k/a Liberty National
Bank & Trust Company of Kentucky) and Registrant
*10.2 Revolving Line of Credit Note, dated August 8, 1996,
between Tumbleweed, LLC and National City Bank of
Kentucky and related Loan Agreement
*10.3 Master International License Agreement, dated August 29,
1997, between Tumbleweed International LLC and Tumbleweed,
LLC
*10.4 Employment Agreement between John A. Butorac, Jr. and
Tumbleweed, Inc.
*10.5 Employment Agreement between James M. Mulrooney and
Tumbleweed, Inc.
*10.6 Lease Agreement, dated August 28, 1997 between West Broad
Development, LLC and Tumbleweed, LLC
*10.7 Lease Agreement between Keller LLC and Tumbleweed LLC
*10.8 Agreement and Assignment, dated April 20, 1995, between
Keller LLC and Tumbleweed, LLC
*10.9 Lease Agreement, dated April 1, 1995, between Douglas
Ventures, Abfam, Inc. and Blue Door Bowling Green Joint
Venture
*10.10 Sublease Agreement, dated June 30, 1995, among Douglas
Ventures, Abfam, Inc., Blue Door Bowling Green Joint
Venture and Tumbleweed, LLC
*10.11 Sublease Agreement, dated February 5, 1997, between
TW Dixie Bash, LLC and Tumbleweed, LLC (for
Bardstown Road restaurant)
*10.12 Sublease Agreement, dated February 5, 1997, between
TW Dixie Bash, LLC and Tumbleweed, LLC (for Valley
Station restaurant)
14
<PAGE>
*10.13 Asset Purchase Agreement, dated October 1, 1996, between
Tex Mex To You, LLC and Tumbleweed, LLC
*10.14 Commitment Letter, dated June 12, 1997, between CNL Fund
Advisors, Inc. and TW Tennessee, LLC
*10.15 Tumbleweed, Inc. 1998 Stock Option and Incentive
Compensation Plan
*10.16 Form of Standard Franchise Agreement for Tumbleweed, LLC
*10.17 Articles of Incorporation of Tumbleweed Marketing Fund,
Inc
*10.18 By laws of Tumbleweed Marketing Funds, Inc.
*10.19 Bonus Compensation Plan for Senior Executives
27.1 Financial Data Schedule
*99.1 Registration Rights Agreement between Tumbleweed, Inc. and
Tumbleweed, LLC
* Incorporated by reference to exhibits of the same number
files with Form S-1 Registration No. 333-57931
(b) Reports on Form 8-K
Tumbleweed, LLC filed no reports on Form 8-K during the
quarter ended September 30, 1998.
Items 1,2,3,4 and 5 are not applicable and have been omitted.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Dated: November 10, 1998 Tumbleweed, Inc.
By: /s/ James M. Mulrooney
----------------------
James M. Mulrooney
Executive Vice President
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF TUMBLEWEED, LLC FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS INCLUDED IN ITS FORM S-1 REGISTRATION STATEMENT DATED
SEPTEMBER 9, 1998.
</LEGEND>
<MULTIPLIER>1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 255,335
<SECURITIES> 0
<RECEIVABLES> 408,793
<ALLOWANCES> 0
<INVENTORY> 1,124,585
<CURRENT-ASSETS> 2,791,996
<PP&E> 27,429,286
<DEPRECIATION> 2,664,625
<TOTAL-ASSETS> 31,516,141
<CURRENT-LIABILITIES> 3,314,690
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,238,459
<TOTAL-LIABILITY-AND-EQUITY> 31,516,141
<SALES> 29,064,352
<TOTAL-REVENUES> 30,790,717
<CGS> 8,470,147
<TOTAL-COSTS> 28,638,851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 605,376
<INCOME-PRETAX> 1,546,490
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,546,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,546,490
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
