<PAGE>
As filed with the Securities and Exchange Commission on August 14, 1998
Registration No. 333-57931
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TUMBLEWEED, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 5812 61-1327945
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification
or Organization) Code Number) Number)
1900 MELLWOOD AVENUE
LOUISVILLE, KENTUCKY 40206
(502) 893-0323
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
GREGORY A. COMPTON
VICE PRESIDENT, SECRETARY & GENERAL COUNSEL
TUMBLEWEED, INC.
1900 MELLWOOD AVENUE
LOUISVILLE, KENTUCKY 40206
(502) 893-0323
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
______________
Copies To:
William G. Strench, Esq.
Alan K. MacDonald, Esq.
Brown, Todd & Heyburn PLLC
400 West Market Street, 32nd Floor
Louisville, Kentucky 40202
(502) 589-5400
______________
<PAGE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective. On a delayed
basis after the Registration Statement becomes effective with respect to the
Common Stock offered by the Selling Stockholders.
_______________
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
_______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01
par value(2)................ 1,200,000 $10.00 $12,000,000 $ 3,540
- -----------------------------------------------------------------------------------------------
Common Stock, $.01
par value(3)................ 5,145,000 $10.00 $51,450,000 $15,178
- -----------------------------------------------------------------------------------------------
Total 6,345,000 $10.00 $63,450,000 $18,718
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee.
(2) Represents Common Stock to be sold by the Company.
(3) Represents Common Stock to be sold by existing stockholders.
_______________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST ___, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
[TUMBLEWEED LOGO]
PROSPECTUS
1,200,000 SHARES
Common Stock
The 1,200,000 shares of Common Stock offered hereby are being sold by
Tumbleweed, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock. It is anticipated that the initial public
offering price will be $10.00 per share. See "Plan of Distribution."
There are no underwriters involved in this offering. The Common Stock will
be sold by the Company on a "best efforts" basis through one or more officers
and directors of the Company who will not receive compensation in connection
with any offers or sales of the Common Stock. The Company may also retain
agents ("Agents") to sell the Common Stock on a "best efforts" basis. See"Plan
of Distribution."
THE COMPANY IS PRESENTLY SOLICITING NON-BINDING INDICATIONS OF INTEREST TO
PURCHASE SHARES OF COMMON STOCK, BUT WILL NOT ACCEPT BINDING SUBSCRIPTIONS OR
ACCEPT PAYMENT FOR ANY SHARES UNTIL AFTER THE REGISTRATION STATEMENT OF WHICH
THIS PROSPECTUS IS A PART HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION. After such Registration Statement has been declared
effective, the Company will provide a Subscription Agreement and a copy of the
final Prospectus relating to this offering to each prospective investor.
Subject to availability and the Company's right to reject subscriptions, in
whole or in part, for any reason, shares of Common Stock may then be subscribed
for by completing and returning the Subscription Agreement, together with
payment for all shares subscribed for, to an independent escrow agent in the
manner described under "Plan of Distribution" herein. See "Plan of
Distribution" for additional information regarding the offering and the
procedures for subscribing for shares of Common Stock offered hereby.
This offering will continue until the earlier of the date that all of the
1,200,000 shares offered hereby have been sold or December 31, 1998, unless
terminated sooner. The offering may be extended at the discretion of the
Company for up to an additional 90 days to no later than March 31, 1999.
Subscription payments will be deposited with an independent escrow agent until
such time the Company has accepted subscriptions for at least 700,000 shares.
If the Company does not accept subscriptions for at least 700,000 shares on or
before December 31, 1998 (or March 31, 1999, if the offering is extended), or
the offering is terminated for any other reason other than the sale of at least
700,000 shares, all subscription proceeds will be promptly returned to
subscribers, with interest. See "Risk Factors" and "Plan of Distribution."
This Prospectus will also be used in connection with any sales of any of
the 5,145,000 shares of Common Stock to be issued to the members of Tumbleweed,
LLC when the merger of Tumbleweed, LLC into Tumbleweed, Inc. (the
"Reorganization") becomes effective upon the completion of this offering by the
Company. See "History and Pending Reorganization." The members of Tumbleweed,
LLC have agreed not to sell 4,373,250 shares of Common Stock (or 85% of the
shares they will receive in the Reorganization) for a period of nine months
following the effectiveness of the Reorganization without the prior consent of
the Company. See "Selling Stockholders" and "Shares Eligible for Future
Resale."
<PAGE>
SEE "RISK FACTORS" ON PAGES 11 THROUGH 16 FOR A DISCUSSION OF CERTAIN
FACTORS THAT PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK, AND THERE CAN
BE NO ASSURANCE THAT AN ACTIVE PUBLIC MARKET FOR THE COMMON STOCK WILL DEVELOP
FOLLOWING COMPLETION OF THE OFFERING.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AGENT'S PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share $10.00 $.80 $9.20
- ------------------------------------------------------------------------------
Minimum Total $7,000,000 $120,000 $6,880,000
- ------------------------------------------------------------------------------
Maximum Total $12,000,000 $200,000 $11,800,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(SEE ACCOMPANYING FOOTNOTES ON NEXT PAGE)
-------------------
The date of this Prospectus is __________, 1998
<PAGE>
[INSIDE FRONT COVER]
[photograph]
Tumbleweed restaurant located at Springdale, Ohio
[photograph]
Bar of a typical Tumbleweed restaurant
[TUMBLEWEED LOGO]
<PAGE>
[FRONT COVER FOLD OUT PANEL 1]
[photograph]
Sirloin Strip Steak on Mesquite Grill
<PAGE>
[FRONT COVER FOLD OUT PANEL 2]
[photograph of restaurant interior, without caption]
[photograph]
Beef and chicken fajita dinner
[photograph of tortilla chips, salsa, Chile con Queso
and mug of beer, without caption]
<PAGE>
(FOOTNOTES FROM FRONT COVER PAGE)
(1) Assumes that approximately 20% of the Minimum Total and the Maximum Total
is sold by Agents at a selling commission of 8% of the gross offering
proceeds attributable to Common Stock sold by such Agents. The Agent's
Commissions will vary according to the number of shares sold by Agents and
the actual rates of commissions paid, which will not exceed 8%. See "Plan
of Distribution".
(2) Before deducting offering expenses payable by the Company estimated at
$800,000.
The shares of Common Stock offered hereby are being offered by the Company
on a "best efforts" basis, on the terms and subject to the conditions described
herein. The Company reserves the right to withdraw, cancel or modify the
offering made hereby and to reject subscriptions, in whole or in part, for any
reason. See "Plan of Distribution."
This Prospectus includes service marks and registered trademarks of the
Company.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Shares offered hereby, of which this Prospectus forms a
part. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, please refer to
the Registration Statement and such exhibits and schedules. Statements contained
in this Prospectus as to the contents of any contract or other documents
referred to are not necessarily complete and, in each instance, if such contract
or document is filed as an exhibit to the Registration Statement, reference is
made to the copy of such contract or document filed as an exhibit, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, upon payment of certain fees prescribed by
the Commission. Copies may also be obtained through the Internet from the
Commission's site on the World Wide Web at the following address:
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports, which
will include consolidated financial statements audited by its independent
certified public accountants, and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
-3-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. TUMBLEWEED, LLC, WHICH
CURRENTLY OWNS AND CONDUCTS THE TUMBLEWEED BUSINESS, WILL BE MERGED INTO
TUMBLEWEED, INC. (THE "REORGANIZATION") AS DESCRIBED UNDER THE CAPTION "HISTORY
AND PENDING REORGANIZATION," EFFECTIVE AT THE TIME THAT SUBSCRIPTION PROCEEDS
FOR AT LEAST 700,000 SHARES HAVE BEEN RECEIVED IN ESCROW AND AN INITIAL CLOSING
ON THE ESCROWED PROCEEDS OCCURS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL
REFERENCES TO THE COMPANY AT TIMES BEFORE THE TIME THE REORGANIZATION TAKES
EFFECT INCLUDE TUMBLEWEED, LLC , AND ALL INFORMATION IN THIS PROSPECTUS ASSUMES
CONSUMMATION OF THE REORGANIZATION; THE CONVERSION OF THE OWNERSHIP INTERESTS OF
THE MEMBERS OF TUMBLEWEED, LLC INTO A TOTAL 5,145,000 SHARES OF COMMON STOCK AND
PAYMENT OF AN ADDITIONAL $747,500 AS OF THE EFFECTIVE TIME OF THE REORGANIZATION
BY THE CLASS B MEMBERS OF TUMBLEWEED, LLC TO EXERCISE THEIR RIGHT UNDER THE
TUMBLEWEED, LLC OPERATING AGREEMENT TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS,
WHICH ENTITLES THE CLASS B MEMBERS TO RECEIVE 297,235 SHARES OF THE COMMON STOCK
OUTSTANDING UPON CONSUMMATION OF THE REORGANIZATION, PRIOR TO THE SALE OF COMMON
STOCK IN THIS OFFERING.
THE COMPANY
Tumbleweed, Inc. (the "Company") owns, franchises or licenses 37
Tumbleweed-Registered Trademark- Southwest Mesquite Grill & Bar ("Tumbleweed")
restaurants. The Company owns and operates 22 Tumbleweed restaurants in
Kentucky, Indiana and Ohio. The Company also franchises 13 Tumbleweed
restaurants in Indiana, Illinois, Tennessee and Wisconsin and licenses two
restaurants outside the United States. The Company and its franchisees
currently expect to open an additional 5 Company-owned, 3 franchised, and 2
licensed restaurants by the end of 1998. The 37 Tumbleweed restaurants are
all open seven days a week for lunch and dinner and generally offer a full
service bar. Same store sales of the Company increased 6.4% in 1996 versus
1995, 5.2% in 1997 versus 1996 and 0.4% in the first six months of 1998 versus
the same period in 1997. See "Business."
Tumbleweed restaurants feature sophisticated Tex-Mex and mesquite
grilled food served in a casual dining atmosphere evoking the American
Southwest. 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. For 1997 and the first six
months of 1998, the average check at a full-service Tumbleweed restaurant,
including beverages, was approximately $9.10. See "Business--Concept and
Strategy."
The Company's strategy for growth during the next several years will
focus on the further development of new and existing markets by both the Company
and franchisees. Since acquiring the Tumbleweed concept in 1995, the Company has
added 15 new Company-owned and 8 new franchised and licensed restaurants, while
developing the infrastructure necessary to support a more aggressive 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
-4-
<PAGE>
experienced corporate managers needed to support future internal and
franchise growth. See "Business--Expansion Strategy."
The Company targets mid-sized metropolitan markets for development,
initially concentrating in the Midwest, Mid-Atlantic and Southeast regions,
where income levels and other factors indicate a significant base of potential
customers exists. In selecting potential restaurant sites within target
markets, management analyzes such factors as local market demographics, site
visibility, competition in the vicinity, and accessibility and proximity of
major retail centers, hotels, universities, and sports and entertainment
facilities. Whenever possible, management considers the feasibility of opening
multiple restaurants in a target market to achieve greater operating and
advertising efficiencies. See "Business--Expansion Strategy."
When developing a new Tumbleweed restaurant, the Company generally uses
one of three prototype designs, which accommodate approximately 130, 225, and
265 guests, and target annual sales of $1,250,000, $2,000,000 and $2,500,000,
respectively. The following table sets forth by restaurant size certain sales
and other information for the 15 Company-owned Tumbleweed restaurants opened for
all of 1997:
<TABLE>
<CAPTION>
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- -------------
<S> <C> <C> <C>
Mini 128-194 4 $1,317,000
Midi 210-244 3 $1,850,000
Maxi 252-384 8 $2,062,000
</TABLE>
The use of multiple prototypes, in management's view, permits the Company to
more closely match the investment in a restaurant site with the site's targeted
revenue, thereby allowing for more efficient utilization of financial resources
by the Company and its franchisees. See "Business--Properties."
Tumbleweed, Inc. was incorporated by the Company on December 17, 1997 and
capitalized in June 1998. Tumbleweed, LLC will merge into Tumbleweed, Inc.(the
"Reorganization"), subject to the sale of at least 700,000 shares of Common
Stock in this offering. The Reorganization will take effect as of the time the
Company has accepted subscriptions for at least 700,000 shares of Common Stock
offered hereby and elects to consummate the sale of those shares at an initial
closing. Offering proceeds of approximately $6,080,000 will be available for
use by the Company if the minimum number of shares are sold in the offering.
Such proceeds will be used to repay bank indebtedness which is an obligation of
the Class A Members of Tumbleweed, LLC. When the Reorganization takes effect,
the interests of the current Class A, Class B, Class C and Common Members of
Tumbleweed, LLC will be converted into a total of 5,145,000 shares of Common
Stock. The interests of the Class B Members, which were issued in connection
with the
-5-
<PAGE>
initial organization of Tumbleweed, LLC in September 1994, are convertible
into 297,235 shares of Common Stock to be issued in the Reorganization only
if the Class B Members make additional capital contributions totaling
$747,500 no later than the time the Reorganization takes effect. The Class B
Members have deposited the capital contributions into escrow, subject to the
effectiveness of the Reorganization. In connection with the Reorganization,
Tumbleweed, LLC expects to distribute approximately $440,000 to its members,
which amount equals the estimated income taxes payable on Tumbleweed, LLC's
earnings, plus interest owed by Class A members on bank indebtedness recorded
as redeemable members' equity for which the Class A members are liable,
through the date the Reorganization takes effect. The Company also expects
to establish a deferred tax liability of approximately $444,000 in connection
with the Company's conversion from a limited liability company to a C
corporation in the Reorganization. See "History and Pending Reorganization,"
"Capitalization" and "Certain Transactions."
The Company's executive offices are located at 1900 Mellwood Avenue,
Louisville, Kentucky 40206, and its telephone number is (502) 893-0323.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered Common Stock of Tumbleweed, Inc.
Offering Price $10.00 per share
Number of Shares Offered Maximum of 1,200,000 shares
Minimum of 700,000 shares (1)
Common Stock to be Outstanding
after the Offering 6,345,000 shares if 1,200,000 shares are sold
in this offering
5,845,000 shares if 700,000 shares are sold in
this offering(2)
-6-
<PAGE>
Use of Proceeds If the minimum number of shares are sold in
this offering, the offering proceeds of
approximately $6,080,000, together with
$747,500 in capital contributions from the
Class B members and additional advances from
the Company's line of credit and working
capital, will be used to repay approximately
$7 million of bank indebtedness which is an
obligation of the Class A Members of
Tumbleweed, LLC as of the date of this
Prospectus, and is accounted for as redeemable
members' equity. The redeemable members'
equity was contributed to fund a portion of the
initial capitalization of the Company and was
used to purchase the Tumbleweed business and
assets in January 1995.
If the maximum number of shares are sold in
this offering, the offering proceeds of
approximately $11,000,000, together with
$747,500 in capital contributions from the
Class B members, will be used first to repay
approximately $7 million of bank indebtedness.
Approximately $4,668,000 in net proceeds will
then be used to repay the outstanding balance
of the Company's line of credit, which totaled
approximately $3,182,000 at June 30, 1998. The
remaining net proceeds, cash from operations
and other borrowings, are expected to be used
to finance the development of additional
restaurants, to fund working capital needs, and
for general corporate purposes. The Company
may also use offering proceeds to expand its
commissary operations to support additional
growth and to buy out certain restaurant
leases, if cost-effective. See "Use of
Proceeds" and "Certain Transactions -- Leases
With Affiliates."
-7-
<PAGE>
<S> <C>
The Offering Period The offering will terminate on the earlier of
the date that all of the 1,200,000 shares
offered hereby are sold or 5:00 p.m. Eastern
Time, on December 31, 1998, unless terminated
sooner (the "Termination Date"). The
Termination Date may be extended at the
discretion of the Company for up to an
additional 90 days to no later than March 31,
1999. The offering will be terminated, and no
Shares will be issued and no subscription
proceeds will be released from escrow to the
Company, unless on or before the Termination
Date the Company has received and accepted
subscriptions for an aggregate of at least
700,000 Shares ($7,000,000) and good funds
therefor have been deposited in escrow. If the
Company receives and accepts subscriptions for
fewer than 700,000 shares on or before the
Termination Date, or the offering is terminated
for any other reason other than the sale of at
least 700,000 shares, all subscription proceeds
will be promptly returned to subscribers, with
interest and without deduction.
</TABLE>
- --------------
(1) The offering is contingent upon the receipt and acceptance of subscriptions
for a minimum of 700,000 shares ($7,000,000) before the Termination Date. See
"Risk Factors" and "Plan of Distribution."
(2) Assumes 5,145,000 shares will be received by current members of Tumbleweed,
LLC in the Reorganization. See "History and Pending Reorganization." Excludes
approximately 400,000 shares of Common Stock issuable to employees and
nonemployee directors upon the exercise of stock options to be granted under the
Company's stock incentive plan concurrently with the closing of the offering.
See "Management -- Stock Incentive Plan" and " -- Director Compensation."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------------- ---------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total revenues $19,547 $25,732 $29,826 $14,234 $19,685
-8-
<PAGE>
Income from operations 949 705 2,143 967 1,313
Net income as reported 683 501 1,714 750 933
PRO FORMA DATA
Net income as reported $ 1,714 $ 750 $ 933
Pro forma income tax expense(2) (617) (270) (336)
Pro forma net income $ 1,097 $ 480 $ 597
Pro forma net income per
share - basic and diluted $ 0.21 $ 0.09 $ 0.12
Weighted average shares outstanding (3) 5,145 5,145 5,145
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
PRO FORMA PRO FORMA
PRO AS ADJUSTED AS ADJUSTED
ACTUAL FORMA(4) (MINIMUM)(5) (MAXIMUM)(6)
------ -------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $29,374 $29,374 $29,374 $34,042
Long-term debt and capital lease
obligations, including current
maturities......................... 11,356 11,356 11,608 11,356
Total liabilities..................... 13,649 14,093 14,345 14,093
Redeemable members' equity............ 24,669 7,080 -- --
Members' equity....................... 7 -- -- --
Retained earnings (deficit)........... (8,951) -- -- --
-9-
<PAGE>
Pro forma stockholders' equity........ -- 8,201 15,029 19,949
</TABLE>
- --------------------
(1) Historical data of the Company prior to the Reorganization.
(2) Prior to the Reorganization, the Company operated as a limited liability
company and was not subject to corporate income taxes. 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 36%.
(3) Shares outstanding gives effect to the Reorganization as if it had occurred
as of January 1, 1997. See "History and Pending Reorganization."
(4) Reflects the establishment of a deferred tax liability of $444,000 assuming
the termination of Tumbleweed, LLC's limited liability company status on
June 30, 1998, and the conversion of members' interests into 5,145,000
shares of Common Stock. See "History and Pending Reorganization."
(5) Adjusted to reflect the capital contribution of $747,500 by certain Class B
Members as of the effective time of the Reorganization, the net proceeds of
the sale by the Company of 700,000 shares of Common Stock at an assumed
initial public offering price of $10.00 per share, and the use of the net
proceeds plus borrowing of $252,000 to repay indebtedness recorded as
redeemable members' equity as of the date of this Prospectus. See "Use of
Proceeds" and "History and Pending Reorganization."
(6) Adjusted to reflect the capital contribution of $747,500 by certain Class B
Members as of the effective time of the Reorganization, the net proceeds of
the sale by the Company of 1,200,000 shares of Common Stock at an assumed
initial public offering price of $10.00 per share, and the use of the net
proceeds to repay indebtedness recorded as redeemable members' equity as of
the date of this Prospectus and for other corporate purposes. See "Use of
Proceeds" and "History and Pending Reorganization."
-10-
<PAGE>
SUMMARY RESTAURANT DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------- JUNE 30,
COMPANY RESTAURANTS 1995 1996 1997 1998
------------------- ---- ---- ---- ----------------
<S> <C> <C> <C> <C>
In operation, beginning of period 7 10 15 17
Newly opened 2 5 2 5
Purchased from Franchisee 1 0 0 0
In operation, end of period 10 15 17 22
FRANCHISED AND
LICENSED RESTAURANTS
--------------------
In operation, beginning of period 7 9 9 12
Newly opened 3 0 3 3
Restaurants sold to Company (1) 0 0 0
In operation, end of period 9 9 12 15
SYSTEM TOTAL 19 24 29 37
</TABLE>
-11-
<PAGE>
HISTORY AND PENDING REORGANIZATION
The first Tumbleweed Southwest Mesquite Grill & Bar ("Tumbleweed")
restaurant opened in 1975 in New Albany, Indiana. By January 1995, the
Tumbleweed system included 14 full-service restaurants in Kentucky, Indiana,
Ohio and Wisconsin, seven of which were franchised.
In January 1995, Tumbleweed, LLC, a limited liability company owned by an
investor group led by the Company's current management, acquired the rights to
the Tumbleweed business and the other assets and liabilities of two corporations
("Predecessor") controlled by Tumbleweed's founders. The acquired assets
included seven full-service Tumbleweed restaurants, two limited service, "food
court" units and an interest in a third food court unit. In 1996 management
elected to focus on the development of full-service restaurants, and Tumbleweed,
LLC sold its interests in food court units to a new venture controlled by
certain directors of the Company, in which the Company also holds an interest.
See "Certain Transactions."
Since January 1995, the Tumbleweed system has grown to 37 full-service
restaurants consisting of 22 Company-owned and 13 franchised restaurants in five
states, and one restaurant each in Saudi Arabia and Germany under a licensing
agreement with a restaurant operator based in Brussels, Belgium. See "Business
- -- International Licensing Agreement" and "Certain Transactions."
Tumbleweed, Inc. was incorporated on December 17, 1997 and capitalized in
June 1998. In the Reorganization, which is subject to the sale of at least
700,000 shares of Common Stock in this offering, Tumbleweed, LLC will merge into
Tumbleweed, Inc. The Reorganization will take effect as of the time the Company
has accepted subscriptions for at least 700,000 shares of Common Stock offered
hereby and elects to consummate the sale of those shares at an initial closing.
The initial equity contribution by the Class A Members was $7,034,375, the Class
B Members $2,500, the Class C Member $500, and the Common Members $6,000. The
Class C Member received his interest in Tumbleweed, LLC as part of the
consideration paid in the January 1995 transaction in which Tumbleweed, LLC
acquired the rights to the Tumbleweed business from Predecessor. When the
Reorganization takes effect, the interests of the current Class A, Class B,
Class C and Common Members of Tumbleweed, LLC will be converted into a total of
5,145,000 shares of Common Stock, of which 1,503,009 shares will be distributed
to Class A Members, 297,235 shares to Class B Members, 514,500 shares to the
Class C Member and 2,830,256 shares to Common Members. The interests of the
Class B Members, which were issued in connection with the initial organization
of Tumbleweed, LLC in September 1994, are convertible into 297,235 shares of
Common Stock to be issued in the Reorganization only if the Class B Members make
additional capital contributions totaling $747,500 no later than the time the
Reorganization takes effect. The Class B Members have indicated that they
intend to deposit the capital contributions into escrow, subject to the
effectiveness of the Reorganization. Class B interests are owned by nine record
members, and beneficial owners of those interests include Minx M. Auerbach and
David M. Roth, who are directors of the Company. In connection with the
Reorganization, Tumbleweed, LLC expects to distribute approximately $440,000 to
its members, which amount equals the estimated income taxes payable on
Tumbleweed, LLC's earnings, plus interest owed by Class A members on bank
indebtedness constituting redeemable members' equity, through the date the
Reorganization takes effect. The Company also expects to establish a deferred
tax liability of approximately $444,000 in connection with the Company's
conversion from a limited liability company to a C corporation in the
Reorganization.
-12-
<PAGE>
RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY. 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. IN PARTICULAR, THE COMPANY'S FORWARD-LOOKING
STATEMENTS, INCLUDING THOSE REGARDING THE OPENING OF ADDITIONAL RESTAURANTS, THE
ADEQUACY OF THE COMPANY'S CAPITAL RESOURCES, THE SUPPLY AND COST OF PRODUCE AND
BEEF AND OTHER STATEMENTS REGARDING TRENDS RELATING TO VARIOUS REVENUE AND
EXPENSE ITEMS, COULD BE AFFECTED BY A NUMBER OF RISKS AND UNCERTAINTIES
INCLUDING THOSE DESCRIBED BELOW. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - PRELIMINARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
EXPANSION RISKS; NEED FOR ADDITIONAL FINANCING. Since 1995, the Company
has grown while developing the operational systems, internal controls, and
management personnel that management believed was necessary to support its plans
for continued expansion. The Company and its franchisees currently expect to
open an additional five Company-owned and five franchised and licensed
restaurants by the end of 1998, including two restaurants outside the United
States. In the course of expanding its business, the Company will enter new
geographic regions in which it has had 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, the Company
intends 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 the Company's business will depend upon its ability
to open and operate additional restaurants profitably, which in turn will depend
upon several factors, many of which are beyond the control of the Company.
These factors include, among other things, the selection and availability of
suitable locations, negotiation 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. The Company's ability
to expand into new geographic regions is also dependent upon the Company's
ability to expand its existing commissary facilities or open and successfully
operate additional commissaries, as may be necessary to support additional
restaurants. Although the Company has been developing its organizational
capabilities and management team to support increased growth, its expansion
strategy could require further enhancement of operational and financial systems
and additional managerial and financial resources. Failure to enhance these
systems and add these resources in a logical and timely fashion could have a
material adverse effect on the Company's results of operations and financial
condition. There can be no assurance that the Company will be successful in
achieving its growth plans or managing its expanding operations effectively, nor
can there by any assurance that new restaurants opened by the Company will be
operated profitably.
USE OF PROCEEDS. The Company plans to use the net proceeds of the offering
first to repay approximately $7 million of bank indebtedness, which is an
obligation of its Class A Members as of the date of this Prospectus and is
accounted for as redeemable members' equity. The redeemable members' equity was
contributed to fund a portion of the initial capitalization of the Company and
was used to purchase the Tumbleweed business and assets and fund initial working
capital needs. The Company expects to use any remaining net proceeds, which
would total approximately $4,668,000 if all 1,200,000 shares of Common Stock
are sold in this offering, first to repay the outstanding balance of the
Company's
-13-
<PAGE>
line of credit, which totaled approximately $3,182,000 at June 30, 1998. Any
remaining proceeds, together with cash from operations and borrowings, are
expected to be used to finance the development of additional restaurants and
for general corporate purposes. The Company may also use a portion of the
net proceeds to expand its commissary operations to support additional growth
and to buy out certain restaurant leases, should management conclude that
such a buy-out would be an appropriate use of the Company's financial
resources. To the extent the Company sells fewer than 1,200,000 shares in the
offering, fewer net proceeds will be available to fund these intended uses.
The Company's management will have broad discretion to determine how the
offering proceeds will be used. See "Use of Proceeds," "The
Company--Properties" and "Certain Transactions."
BEST EFFORTS OFFERING; MINIMUM NUMBER OF SHARES TO BE SOLD. The Company is
offering its Common Stock on a "best efforts" basis. There can be no assurance
that all of the 1,200,000 shares of Common Stock offered hereby will be sold and
that the estimated net proceeds generated from such a sale of all such Common
Stock will actually be received by the Company. If the Company is unable to
sell at least 700,000 shares of the Common Stock offered hereby, the Company
will cancel this offering and return all monies collected from subscribers and
held in escrow. Furthermore, if all of the 1,200,000 shares of Common Stock
offered hereby are not sold, then the Company will be unable to fund all the
intended uses described herein for the net proceeds anticipated from this
offering without obtaining funds from alternative sources or using working
capital generated by the Company. Alternative sources of funds may not be
available to the Company at a reasonable cost, and the working capital generated
by the Company may not be sufficient to fund any uses not financed by offering
proceeds. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Plan of Distribution."
LIMITED RESTAURANT BASE. The Company currently operates 22 Tumbleweed
restaurants, seven 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. Same store sales
of the Company increased 6.4% in 1996 versus 1995, 5.2% in 1997 versus 1996 and
0.4% in the first six months of 1998 versus the same period in 1997. Moreover,
because of the small number of restaurants currently operated by the Company,
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 the Company's results of operations than would be the case in
a restaurant company with more restaurants. In addition, the Company leases 12
of its restaurants. Each lease agreement provides that the lessor may terminate
the lease for a number of reasons, including if the Company defaults in payment
of any rent or taxes or breaches any covenants or agreements contained in the
lease. Termination of any of the Company's leases pursuant to such terms could
adversely affect the Company's results of operations.
WORKING CAPITAL. The Company, on a pro forma basis as of June 30, 1998,
has a working capital deficit of $161,437. The Company intends, if needed, to
cover this deficit with its excess borrowing capacity under its existing lines
of credit and cash flow from Company operations. There can be no assurance that
borrowing capacity will be available or that cash flows from the Company
operations will be adequate to fund the deficit.
CHANGES IN FOOD AND OTHER COSTS; SUPPLY RISKS. The profitability of the
Company is significantly dependent on its ability to anticipate and react to
changes in food, labor, employee benefits and similar costs over which the
Company has no control. Specifically, the Company is dependent on frequent
deliveries of produce and fresh beef, pork, chicken and seafood. As a result,
the Company is subject to the risk of possible
-14-
<PAGE>
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 management has been able to anticipate and
react to changing costs through its purchasing practices or menu price
adjustments without a material adverse effect on profitability, there can be
no assurance that it will be able to do so in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 the Company's restaurants in particular.
COMPETITION. The restaurant industry is intensely competitive with respect
to price, service, location and food quality. The Company 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 the Company. A significant change in
pricing or other business strategies by one or more of the Company's
competitors, including an increase in the number of restaurants in the Company's
territories, could have a materially adverse impact on the Company's sales,
earnings and growth.
DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent to a
significant degree upon the service of John A. Butorac, Jr., President and Chief
Executive Officer of the Company, and James M. Mulrooney, Executive Vice
President and Chief Financial Officer of the Company. The Company has entered
into employment agreements with both Mr. Butorac and Mr. Mulrooney for an
initial term of five years. See "Management -- Employment Agreements." The
Company maintains key man life insurance on the life of both Mr. Butorac and Mr.
Mulrooney, each in the principal amount of $2 million. The loss of the service
of either of these persons could have a materially adverse effect upon the
Company's business, operating results and financial condition. See "Management
- - Directors and Executive Officers."
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, the Company is 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 the Company.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS. Assuming the sale of
700,000 and 1,200,000 shares of Common Stock in the offering, the shares of
Common Stock owned beneficially by Messrs. Butorac and Mulrooney would represent
approximately 38.1% and 35.1%, respectively, of the shares of Common Stock
outstanding upon completion of this offering. The shares of Common Stock owned
-15-
<PAGE>
beneficially by directors and executive officers of the Company would represent
approximately 57.5% and 52.8%, respectively, of the outstanding Common Stock,
based on the same assumptions. See "Principal Stockholders." Accordingly,
these persons will have substantial influence over the affairs of the Company,
including the ability collectively to elect directors and approve other matters
requiring stockholder approval.
RELATED PARTY TRANSACTIONS. The Company has entered into transactions
with entities in which members of its board of directors have significant
interests, and may enter into similar transactions with such related parties
in the future. Although all of the past transactions with related parties
necessarily involve conflicts of interest, management of the Company believes
that all of the transactions were entered into on terms comparable to those
obtainable from unrelated third parties, based on a comparison of terms and
conditions available from third parties. The Company's Board of Directors has
adopted a policy that all future transactions between the Company and parties
related to its officers, directors, principal shareholders and affiliates
will be approved by the audit committee of the Board of Directors and
generally must be on terms no less favorable to the Company than those
obtainable from unrelated third parties. See "Certain Transactions."
DILUTION. The purchasers of the Common Stock will experience immediate and
dilution of between $7.31 and $7.92 in the net tangible book value of their
shares. See "Dilution."
RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE. The initial public offering
price of the Common Stock has been arbitrarily determined by the Company and may
not be indicative of the market price for shares of Common Stock after this
offering. In determining the offering price, the Board of Directors considered,
among other things, the Company's earnings, their view of the Company's
prospects, the earnings of comparable publicly traded casual dining restaurant
companies, and the trading price of the stock of those companies. SEE "Plan of
Distribution - Determination of Offering Price." Since the Company has not
retained an underwriter for purposes of this offering, the offering price has
not been subject to evaluation by any third party as would be the case in an
underwritten offering. Prices for the shares of Common Stock after this
offering will be determined in the market and may be influenced by many factors,
including the depth and liquidity of the market for the Common Stock, investor
perception of the Company, the restaurant industry as a whole, and general
economic and market conditions. There can be no assurance that an active
trading market for the Common Stock will develop or be sustained after this
Offering.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common
Stock could be subject to significant fluctuations in response to factors
such as, among others, variations in the Company's anticipated or actual
results of operations, and announcements of new products by the Company or
its competitors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and
small capitalization and emerging growth companies in particular, which are
often unrelated to their operating performance. These broad market
fluctuations may adversely affect the market price of the Common Stock.
NO PRIOR MARKET; VOLATILITY OF STOCK MARKET PRICING. Before this offering,
there has been no public market for the Company's Common Stock. The price to
the public has been arbitrarily determined by the Company and may not be
indicative of the market price for the Common Stock after this offering. In
determining the offering price, the Board of Directors considered, among other
things, the Company's earnings, their view of the Company's prospects, the
earnings of comparable publicly traded casual dining restaurant companies, and
the trading price of the stock of those companies. See "Plan of Distribution--
-16-
<PAGE>
Determination of Offering Price." The Company makes no representations as to
any objectively determinable value of the Common Stock. There can be no
assurance that an active trading market for the Common Stock will develop or
be sustained after this offering. The market price of the Common Stock could
be subject to significant fluctuations in response to variations in
anticipated or actual operating results and other events or factors such as
food and labor costs and weather conditions. In addition, the market prices
of the stock of small capitalization companies have experienced significant
price fluctuations in recent years. These fluctuations often have been
unrelated to the operating performance of the specific companies whose stocks
are traded. Broad market fluctuations, as well as general economic
conditions, in the United States or internationally, may adversely affect the
market price of the Company's Common Stock. There can be no assurance that
the market price of the Common Stock will not decline below the initial
public offering price. See "Plan of Distribution" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
EFFECTS OF FAILURE TO OBTAIN OR MAINTAIN LISTING ON THE NASDAQ NATIONAL
MARKET. As of the date of this Prospectus, the Company's Common Stock does not
qualify for listing on either the Nasdaq National Market or the Nasdaq SmallCap
Market. The Company earned pre-tax income of more than $1 million in 1997, and
its ability to meet the remaining requirements necessary to qualify the Common
Stock for listing on the Nasdaq National Market will depend on the outcome of
this offering. The requirements for listing on the Nasdaq National Market
include, among other things, that (i) generally, the Company must have pre-tax
income of at least $1 million, (ii) at least 1.1 million shares of Common Stock
must be in the public market float and must have a value of at least $8 million,
(iii) the bid price must be at least $5 per share, (iv) the Company must have
tangible net assets of at least $6 million, (v) generally, Common Stock must be
held by at least 400 shareholders who hold 100 shares or more, and (vi) there
must be at least three authorized Nasdaq market makers for the Common Stock.
Continued inclusion on the Nasdaq National Market requires, among other things,
that (i) at least 750,000 shares of Common Stock must be in the public market
float and must have a value of at least $5 million, (ii) the Company must
maintain tangible net assets of at least $4 million, (iii) generally, the Common
Stock must be held by at least 400 shareholders who hold 100 or more shares,
(iv) the minimum bid price of the Common Stock must be $1 per share, and (v)
there must be at least two authorized Nasdaq market makers for the Common Stock.
The requirements for listing on the Nasdaq SmallCap Market are less
stringent than the requirements for listing on the Nasdaq National Market. The
Nasdaq SmallCap Market listing requirements include, among other things, that
(i) the Company have net tangible assets of at least $4 million or net income of
$750,000, (ii) at least 1 million shares of Common Stock must be in the public
market float and must have a value of at least $5 million, (iii) the bid price
must be at least $4 per share, (iv) the Common Stock must be held by at least
300 shareholders holding 100 shares or more, and (v) there must be at least
three authorized Nasdaq market makers for the Common Stock. Continued inclusion
on the Nasdaq SmallCap Market requires, among other things, that (i) the Company
must maintain net tangible assets of at least $2 million or net income of
$500,000, (ii) at least 500,000 shares of the Company's Common Stock must be in
the public float and must have a value of at least $1 million, (iii) generally,
the bid price must be at least $1 per share, (iv) the Common Stock must be held
by at least 300 shareholders holding 100 shares or more, and (v) there must be
at least two authorized Nasdaq market makers for the Common Stock.
There can be no assurance that the Company will be able to satisfy all of
the requirements to obtain a listing of the Common Stock on the Nasdaq National
Market or the Nasdaq SmallCap Market, or once the Common Stock is listed on the
Nasdaq National Market or the Nasdaq SmallCap Market that the Company will be
able to maintain such a listing. If the Company is unable to maintain the
listing of the Common Stock on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Common Stock may not trade on any
-17-
<PAGE>
exchange and trading, if any, may be conducted in the over-the-counter
markets on the National Association of Securities Dealers, Inc.'s electronic
bulletin board or on the "pink sheets." In such an event, the liquidity of
the Common Stock could be impaired, not only in the number of shares of
Common Stock which could be bought and sold, but also through possible delays
in the timing of the transactions, inability to sell shares of Common Stock
in some states, reductions in security analysts' and the news media's
coverage, if any, of the Company, and lower prices for the Common Stock than
might otherwise prevail. See "Plan of Distribution."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, there is
expected to be a minimum of 5,845,000 shares and a maximum of 6,345,000 shares
of Common Stock outstanding, depending upon the number of shares of Common Stock
sold in this offering. The Company also intends to grant options to purchase
approximately 400,000 shares of Common Stock to employees and nonemployee
directors, effective upon the completion of this offering. All of the
outstanding shares will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144"), may generally be sold only in compliance with the
limitations of Rule 144. The current members of Tumbleweed, LLC, who will
receive a total of 5,145,000 shares of Common Stock upon consummation of the
Reorganization simultaneously with the Initial Closing, have agreed to
contractual restrictions on the resale of 4,373,250 or 85% of their shares
during the nine-month period following the initial closing of the offering. The
possibility that substantial amounts of Common Stock may be sold in the public
market would likely have a material adverse effect on the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "Shares Eligible for
Future Sale" and "Selling Stockholders."
PREFERRED STOCK. The Board of Directors has the authority to issue the
authorized shares of Preferred Stock in one or more series and to fix the
designations, powers, privileges and relative, participating, optional or other
special rights of the shares of each such series, and the qualifications,
limitations and restrictions, including, without limitation, the number of
shares constituting each such series, dividend rates, redemption and sinking
fund provisions, liquidation and preferences, conversion rights, and voting
rights, without any further vote or action by the stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock or adversely affect the rights and
powers, including voting rights, of the holders of Common Stock. The issuance
of Preferred Stock also could have the effect of delaying, deterring or
preventing a change in control of the Company without further action by the
stockholders. See "Description of Securities."
-18-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,200,000 and 700,000
shares of Common Stock offered by the Company at an initial public offering
price of $10.00 per share are estimated to be $11,747,500 and $6,827,500,
respectively, after deducting the estimated offering expenses payable by the
Company and payment of estimated commissions to Agents and including the
additional capital contribution of $747,500 by the Class B Members.
The Company plans to use the offering proceeds first to repay
approximately $7 million of bank indebtedness, which is an obligation of its
Class A Members as of the date of this Prospectus and is accounted for as
redeemable members' equity. The redeemable members' equity was contributed
to fund a portion of the initial capitalization of the Company and was used
to purchase the Tumbleweed business and assets in January 1995. The
indebtedness bears interest at an annual rate equal to 0.25% above the
lender's "index rate." The current interest rate is 8.75% per year, and the
indebtedness matures on December 31, 1998, which the Company expects will be
extended by several months. The Company expects to use the remaining net
proceeds, estimated to be approximately $4,668,000 if 1,200,000 shares are
sold to repay the outstanding balance of the Company's revolving credit
balance, which totaled approximately $3,182,000 at June 30, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The remaining net proceeds
are expected to be used, together with cash from operations and borrowings,
to finance the development of additional restaurants and for working capital
and general corporate purposes. The Company may also use a portion of the
net proceeds to expand its commissary operations to support additional growth
and to buy out certain restaurant leases, should management conclude that
such a buy-out would be a cost-effective use of the Company's financial
resources. See "Certain Transactions -- Leases With Affiliates." Pending
such uses, the proceeds will be invested in short-term, investment-grade,
interest-bearing securities.
The Common Stock offered hereby is being sold on a "best efforts" basis.
Therefore, there can be no assurance that the Company will receive the estimated
$11,747,500 in net proceeds anticipated from this offering. If more than
700,000 but fewer than 1,200,000 shares of Common Stock offered hereby are sold,
the Company will be unable to fund all the intended uses described herein from
the net proceeds anticipated from this offering without obtaining funds from
alternative sources or by using working capital generated by the Company.
Alternative sources of funds may not be available to the Company at a cost
management believes is reasonable, and the amount of working capital generated
internally by the Company may not be sufficient to finance any intended uses not
funded by offering proceeds. To the extent that the Company receives less than
the $11,747,500 in net proceeds after the payment of all expenses related to the
offering hereby, the Company will first use any net proceeds to repay the bank
indebtedness currently recorded as redeemable members' equity of its Class A
Members. The remaining portion of the net offering proceeds, if any, will be
used for such of the other purposes described above as the Company's management,
in its discretion, deems appropriate.
-19-
<PAGE>
The following table sets forth the Company's anticipated use of the net
offering proceeds, assuming the sale of 700,000 and 1,200,000 shares of Common
Stock, respectively.
<TABLE>
<CAPTION>
Minimum Maximum
700,000 1,200,000
Shares Sold Shares Sold
----------- -----------
<S> <C> <C>
Sources of Funds:
Offering proceeds $7,000,000 $12,000,000
Offering expenses (800,000) (800,000)
Commissions (1) (120,000) (200,000)
---------- -----------
Net offering proceeds 6,080,000 11,000,000
Class B capital contribution 747,500 747,500
Revolving credit facility 252,000 -----
---------- -----------
TOTAL FUNDS $7,079,500 $11,747,500
Uses of Funds:
Redemption of redeemable members'
equity $7,079,500 $ 7,079,500
Repay revolving credit facility --- 3,182,000
Working capital --- 1,486,000
---------- -----------
TOTAL USES $7,079,500 $11,747,500
- --------------------
</TABLE>
(1) Assumes 8% commission is paid on the sale of 20% of the Shares sold in the
offering.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain any future earnings
to finance the development of additional restaurants and the growth of its
business generally. The Company is also prohibited from paying dividends under
the terms of its credit facility with National City Bank. The ability of the
Company to pay dividends in the future will depend upon earnings levels, capital
needs, applicable covenants in the Company's loan agreements, general business
conditions, and other factors deemed relevant from time to time by the Company's
Board of Directors.
Before this offering, Tumbleweed, LLC has made periodic distributions to
its members in accordance with their respective ownership interests in
Tumbleweed, LLC under its operating agreement in amounts sufficient to pay
income taxes payable on earnings of Tumbleweed, LLC and interest payable by
Class A members on bank debt constituting redeemable members' equity. In 1997,
Tumbleweed, LLC distributed
-20-
<PAGE>
approximately $576,000 to its members. During the first six months of 1998,
Tumbleweed, LLC distributed approximately $606,500 to its members.
Tumbleweed, LLC expects to distribute approximately $440,000 to its members
for taxes and interest payable through the date the Reorganization takes
effect. All distributions to members have been and will be funded by cash
provided from operations.
DILUTION
The net tangible book value of the Company at June 30, 1998, was $6,060,000
or $1.18 per share of Common Stock, on a pro forma basis as if the
Reorganization had occurred on that date, including payment of capital
contributions totaling $747,500 by certain Class B Members as of the time the
Reorganization becomes effective. Net tangible book value per share is equal to
the Company's total tangible assets (total assets less intangible assets) less
total liabilities and redeemable members' equity, divided by the number of
shares of Common Stock outstanding.
After giving effect to the sale by the Company of the minimum of 700,000
shares offered hereby at an assumed initial offering price of $10.00 per share,
and after deducting the estimated offering expenses payable by the Company, the
net tangible book value of the Company at June 30, 1998 would have been
$12,140,000, or $2.08 per share of Common Stock. This represents an immediate
increase in net tangible book value of $0.90 per share to the existing
stockholders, and an immediate dilution of $7.92 per share to new investors.
The following table illustrates this dilution:
MINIMUM OF 700,000 SHARES SOLD:
<TABLE>
<S> <C> <C>
Public offering price per share............................... $10.00
Net tangible book value per share before the offering.... $1.18
Increase per share attributable to new investors......... 0.90
-----
Net tangible book value per share after the offering.......... 2.08
-----
Dilution per share............................................ $7.92
-----
-----
</TABLE>
After giving effect to the sale by the Company of all of the 1,200,000
shares offered hereby at an assumed initial offering price of $10.00 per share,
and after deducting the estimated offering expenses payable by the Company, the
net tangible book value of the Company at June 30, 1998 would have been
$17,060,000, or $2.69 per share of Common Stock. This represents an immediate
increase in net tangible book value of $1.51 per share to the existing
stockholders, and an immediate dilution of $7.31 per share to new investors.
The following table illustrates this dilution:
MAXIMUM OF 1,200,000 SHARES SOLD:
<TABLE>
<S> <C> <C>
Public offering price per share.............................. $10.00
Net tangible book value per share before the offering... $1.18
Increase per share attributable to new investors........ 1.51
-----
Net tangible book value per share after the offering......... 2.69
------
-21-
<PAGE>
Dilution per share........................................... $7.31
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price per share paid by
existing stockholders and to be paid by investors in this offering based on an
assumed initial offering price of $10.00 per share and before offering expenses
payable by the Company. The first table reflects the sale by the Company of the
minimum of 700,000 shares of the 1,200,000 shares of Common Stock offered hereby
and the second table reflects the sale by the Company of all of the 1,200,000
shares of Common Stock offered hereby.
MINIMUM OF 700,000 SHARES SOLD:
<TABLE>
<CAPTION>
Shares Owned Total Consideration
------------------------- ---------------------------- Average
Price
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Current stockholders.................... 5,145,000 88% $7,790,000(1) 53% $ 1.51
New investors........................... 700,000 12 7,000,000 47 $ 10.00
--------- --- ----------- --- -------
Total.............................. 5,845,000 100% $14,790,000 100% $ 2.53
--------- --- ----------- --- -------
--------- --- ----------- --- -------
</TABLE>
MAXIMUM OF 1,200,000 SHARES SOLD:
<TABLE>
<CAPTION>
Shares Owned Total Consideration
------------------------- ---------------------------- Average
Price
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C>
Current stockholders................... 5,145,000 81% $ 7,790,000(1) 39% $ 1.51
New investors.......................... 1,200,000 19 12,000,000 61 $ 10.00
--------- --- ----------- --- -------
Total............................. 6,345,000 100% $19,790,000 100% $ 3.12
--------- --- ----------- --- -------
--------- --- ----------- --- -------
</TABLE>
- ----------------------
(1) Represents the initial capital contributions by Class A, Class B, Class C
and Common Members, plus the capital contribution of $747,500 by the Class
B Members as of the time the Reorganization becomes effective.
-22-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on a pro forma basis as if the Reorganization had occurred on that
date, (ii) as adjusted to reflect the sale by the Company of a minimum of
700,000 and a maximum of 1,200,000 shares at an assumed initial offering price
of $10.00 per share, and the application of the estimated net proceeds therefrom
after deducting estimated commissions payable to agents of $120,000 and
$200,000, respectively, and estimated offering expenses payable by the Company,
and the capital contribution of $747,500 by certain Class B Members as of the
time the Reorganization takes effect. See "History and Pending Reorganization,"
and "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
AS AS
PRO ADJUSTED ADJUSTED
ACTUAL FORMA(1) (MINIMUM) (2) (MAXIMUM)(3)
------ -------- ------------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Long-term debt and capital lease obligations (including
current maturities)......................................... $11,356 $11,356 $11,608 $11,356
Redeemable members' equity...................................... 24,669 7,080 - -
Members' equity................................................. 7 - - -
Retained earnings (deficit)..................................... (8,951) - - -
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding................ - - - -
Common Stock, $0.01 par value, 30,000,000 shares
authorized; 5,145,000 shares outstanding, pro forma;
5,845,000 shares outstanding, as adjusted (minimum);and
6,345,000 shares outstanding, as adjusted (maximum)(4)...... - 51 58 63
Paid-in capital............................................... - 8,150 14,971 19,886
------- -------- -------- -------
Total stockholders' equity................................. - 8,201 15,029 19,949
------- -------- -------- -------
Total capitalization............................................ $27,081 $26,637 $26,637 $31,305
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
- ----------------------
(1) Gives effect to (i) the conversion of redeemable members' equity and
members' equity to stockholders' equity, including the elimination of
$12,743,000 of accretion in redeemable members' equity related to Class A
Member put options, upon the conversion of the Company's members' interests
into 5,145,000 shares of Common Stock, and (ii) establishment of a
deferred tax liability of $444,000 in connection with the termination of
Tumbleweed, LLC's limited liability company status.
-23-
<PAGE>
(2) Reflects the net proceeds of the sale of 700,000 shares of Common Stock
($6,080,000), the capital contribution of $747,500 by certain Class B
Members and borrowings of $252,000, all used to repay indebtedness
currently recorded as redeemable members' equity. See "Use of Proceeds."
(3) Reflects the net proceeds of the sale of 1,200,000 shares of Common Stock
($11,000,000) and the capital contribution of $747,500 by certain Class B
Members, used principally to repay indebtedness currently recorded as
redeemable members' equity. See "Use of Proceeds."
(4) Excludes approximately 400,000 shares of Common Stock issuable to employees
and nonemployee directors upon the exercise of stock options to be granted
under the Company's stock incentive plan effective upon completion of this
offering. See "Management -- Stock Incentive Plan" and " -- Directors
Compensation."
-24-
<PAGE>
SELECTED FINANCIAL DATA
In the following table, the income statement and balance sheet data of: (i)
the Predecessor for the years ended December 31, 1993 and 1994 have been derived
from the financial statements of the Predecessor which were audited by
Predecessor's independent auditors; (ii) Tumbleweed, LLC for the years ended
December 31, 1995, 1996 and 1997 have been derived from the financial statements
of Tumbleweed, LLC which have been audited by Ernst & Young LLP, independent
auditors, whose report thereon is included elsewhere in this Prospectus; and
(iii) Tumbleweed, LLC for the six months ended June 30, 1997 and 1998, which are
unaudited but in the opinion of management were prepared on the same basis as
the audited financial statements included herein and reflect all adjustments
(consisting of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial information set
forth therein. The information set forth below 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
Prospectus and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
Predecessor Tumbleweed, LLC
-------------------- -----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (1)
Revenues:
Restaurant sales $ 12,381,146 $ 14,147,124 $ 17,254,058 $ 23,284,007 $ 27,891,128
Commissary sales 1,195,829 1,500,732 1,574,847 1,795,529 1,007,011
Franchise fees and royalties 373,088 442,122 540,157 474,870 563,056
Other revenues 81,422 108,000 177,960 177,317 365,054
------------ ------------ ------------ ------------ ------------
Total revenues 14,031,485 16,197,978 19,547,022 25,731,723 29,826,249
Operating expenses:
Restaurant cost of sales 3,927,955 4,280,691 5,132,549 7,103,357 8,191,928
Commissary cost of sales 939,950 1,297,045 1,424,077 1,649,502 887,793
Operating expenses 6,095,002 7,133,174 8,896,704 12,386,119 14,035,693
Six Months Ended June 30,
-------------------------
1997 1998
---- ----
<S> <C> <C>
STATEMENT OF INCOME DATA: (1)
Revenues:
Restaurant sales $ 13,221,654 $ 18,547,631
Commissary sales 595,991 503,340
Franchise fees and royalties 231,718 384,614
Other revenues 184,910 249,627
------------ ------------
Total revenues 14,234,273 19,685,212
Operating expenses:
Restaurant cost of sales 3,900,847 5,385,530
Commissary cost of sales 531,989 430,119
Operating expenses 6,718,212 9,600,749
-25-
<PAGE>
Selling, general and
administrative 1,391,500 1,682,395 1,962,036 2,250,827 3,051,740
Depreciation and amortization 450,943 563,195 1,033,349 1,231,290 971,863
Preopening amortization 225,569 175,405 149,138 405,502 544,723
------------ ------------ ------------ ------------ ------------
Total operating expenses 13,030,919 15,131,905 18,597,853 25,026,597 27,683,740
------------ ------------ ------------ ------------ ------------
Income from operations 1,000,566 1,066,073 949,169 705,126 2,142,509
Interest expense, net (177,237) (270,258) (266,530) (203,810) (428,598)
------------ ------------ ------------ ------------ ------------
Net income $ 823,329 $ 795,815 $ 682,639 $ 501,316 $ 1,713,911
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Selling, general and
administrative 1,354,081 1,993,873
Depreciation and amortization 453,095 655,364
Preopening amortization 309,258 306,908
------------ ------------
Total operating expenses 13,267,482 18,372,543
------------ ------------
Income from operations 966,791 1,312,669
Interest expense, net (217,272) (379,229)
------------ ------------
Net income $ 749,519 $ 933,400
------------ ------------
------------ ------------
-26-
<PAGE>
Historical net income $ 1,713,911
Pro forma income taxes(2) (617,008)
------------
Pro forma net income $ 1,096,903
------------
------------
Pro forma net income per
share - basic and diluted $ 0.21
Weighted average shares
outstanding(3) 5,145,000
Historical net income $ 749,519 $ 933,440
Pro forma income taxes(2) (269,827) (336,038)
------------ ------------
Pro forma net income $ 479,692 $ 597,402
------------ ------------
------------ ------------
Pro forma net income per
share - basic and diluted $ 0.09 $ 0.12
Weighted average shares
outstanding(3) 5,145,000 5,145,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
ACTUAL PRO FORMA(4) (MINIMUM)(5) (MAXIMUM)(6)
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets............................... $29,374 $29,374 $29,374 $34,042
------- ------- ------- -------
------- ------- ------- -------
Long-term debt and capital lease
obligations, including current
maturities.............................. 11,356 11,356 11,608 11,356
------- ------- ------- -------
------- ------- ------- -------
Total liabilities.......................... 13,649 14,093 14,345 14,093
------- ------- ------- -------
------- ------- ------- -------
Redeemable members' equity................. 24,669 7,080 -- --
Members' equity............................ 7 -- -- --
Retained earnings (deficit)................ (8,951) -- -- --
Pro forma stockholders' equity............. -- 8,201 15,029 19,949
</TABLE>
- --------------------
(1) Historical data of the Company prior to the Reorganization.
(2) Prior to the Reorganization, the Company operated as a limited liability
company and was not subject to corporate income taxes. 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 36%.
(3) Shares outstanding gives effect to the Reorganization as if it had occurred
as of January 1, 1997. See "History and Pending Reorganization."
(4) Reflects the establishment of a deferred tax liability of $444,000 assuming
the termination of Tumbleweed, LLC's limited liability company status on
June 30, 1998 and the conversion of Tumbleweed, LLC's members' interests
into 5,145,000 shares of Company Common Stock. See "History and Pending
Reorganization."
-27-
<PAGE>
(5) Adjusted to reflect the capital contribution of $747,500 by certain Class B
Members as of the effective time of the Reorganization, the net proceeds of
the sale by the Company of 700,000 shares of Common Stock at an assumed
initial public offering price of $10.00 per share, and the use of the net
proceeds and the borrowing of $252,000 to repay indebtedness currently
recorded as redeemable members' equity. See "Use of Proceeds" and
"History and Pending Reorganization."
(6) Adjusted to reflect the capital contribution of $747,500 by certain Class B
Members and the net proceeds of the sale by the Company of 1,200,000 shares
of Common Stock at an assumed initial public offering price of $10.00 per
share, and the use of the net proceeds to repay indebtedness currently
recorded as redeemable members' equity and for other corporate purposes.
See "Use of Proceeds" and "History and Pending Reorganization."
-28-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and in "Risk Factors," "Use
of Proceeds" and "Business" includes forward-looking statements about the
Company and its business. Factors that realistically could cause results to
differ materially from those projected in the forward-looking statements are set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below and in "Risk Factors."
GENERAL
Of the 37 Tumbleweed restaurants as of June 30, 1998, the Company currently
owns and operates 22 restaurants in Kentucky, Indiana and Ohio, franchises 13
restaurants in Indiana, Illinois, Tennessee and Wisconsin, and licenses one
restaurant in each of Germany and Saudi Arabia. The Company anticipates opening
five additional Company-owned restaurants and three 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. See "History
and Pending Reorganization."
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. See "History and Pending
Reorganization." 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 "Summary Financial
Data," "Summary Restaurant Data" and "Selected Financial Data" included
elsewhere herein and the Company's financial statements and the related notes
thereto included elsewhere in this Prospectus. See "Index to Financial
Statements."
-29-
<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>
Six Months Ended
Year Ended December 31, June 30,
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales 88.2% 90.5% 93.5% 92.9% 94.1%
Commissary sales 8.1 7.0 3.4 4.2 2.6
Franchise fees and royalties 2.8 1.8 1.9 1.6 2.0
Other revenues 0.9 0.7 1.2 1.3 1.3
----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales(1) 29.7 30.5 29.4 29.5 29.0
Commissary cost of sales(2) 90.4 91.9 88.2 89.3 85.5
Operating expenses(1) 51.6 53.2 50.3 50.8 51.8
Selling, general and
administrative 10.0 8.7 10.2 9.5 10.1
Depreciation and amortization 5.3 4.8 3.3 3.2 3.3
Preopening amortization 0.8 1.6 1.8 2.2 1.6
----- ----- ----- ----- -----
Total operating expenses 95.1 97.3 92.8 93.2 93.4
----- ----- ----- ----- -----
Income from operations 4.9 2.7 7.2 6.8 6.6
Interest expense, net (1.4) (0.8) (1.4) (1.5) (1.9)
----- ----- ----- ----- -----
Net income 3.5% 1.9% 5.8% 5.3% 4.7%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Historical net income 5.8% 5.3% 4.7%
Unaudited pro forma income taxes(3) (2.1) (1.9) (1.7)
----- ----- ----- ----- -----
Unaudited pro forma net income 3.7% 3.4% 3.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</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%.
-30-
<PAGE>
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Total revenues increased by $5,450,939 to $19,685,212 or 38.3% for the six
months ended June 30, 1998 compared to $14,234,273 in the six months ended June
30, 1997. The increase in total revenues reflects the opening of seven
additional Company-owned restaurants since June 30, 1997. Restaurant sales at
Company-owned restaurants increased $5,325,977 to $18,547,631 or 40.3% for the
six months ended June 30, 1998 compared to $13,221,654 for the same period in
1997. Company-owned same store sales increased by 0.4% for the six months ended
June 30, 1998 compared to the same period in 1997.
Commissary sales to franchised restaurants decreased by $92,651 to $503,340
or 15.5% for the six months ended June 30, 1998, compared to $595,991 for the
six months ended June 30, 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 $152,896 to $384,614 or 66.0% for
the six months ended June 30, 1998, compared to $231,715 for the six months
ended June 30, 1997. The increase was due primarily to $75,250 in franchise fees
received upon the opening of two new franchised restaurants and additional
royalties from five franchised restaurants opened since June 30, 1997.
Other revenue increased by $64,717 to $249,627 or 35.0% for the six months
ended June 30, 1998 compared to $184,910 for the six months ended June 30, 1997,
primarily due to an increase in vendor rebates during the first six months of
$116,275. The increase in vendor rebates was offset in part by $70,917 in
losses on the Company's equity investment in TW-Tennessee, LLC.
Cost of restaurant sales at Company-owned restaurants increased by
$1,484,683 to $5,385,530 or 38.1% for the six months ended June 30, 1998,
compared to $3,900,847 for the six months ended June 30, 1997. The increase was
principally due to the opening of seven additional Company-owned restaurants and
the increase in Company-owned same store sales. Cost of restaurant sales
decreased as a percentage of restaurant sales by 0.5% to 29.0% for Company-owned
restaurants for the six months ended June 30, 1998 compared to 29.5% for the
same period in 1997. This decrease primarily resulted from improved operating
efficiencies in the commissary and increased rebates, which effectively lowered
costs at store level.
Commissary cost of sales decreased $101,870 to $430,119 or 19.1% for the
six months ended June 30, 1998 compared to $531,989 for the six months ended
June 30, 1997. The decrease was primarily due to the decision to discontinue
commissary sales of products not manufactured by the commissary.
Operating expenses at Company-owned restaurants increased by $2,882,537 to
$9,600,749 or 42.9% in the six months ended June 30, 1998 compared
-31-
<PAGE>
to $6,718,212 for the same period in 1997. The increase reflects the
addition of seven Company-owned restaurants and the increase in Company-owned
same store sales. Operating expenses increased as a percentage of restaurant
sales to 51.8% for the six months ended June 30, 1998 compared to 50.8% for
same period in 1997 primarily due to a 1.3% increase in freight and a 0.5%
increase in store-level promotional costs. These costs were offset in part by
a 0.8% decrease in labor costs.
Selling, general and administrative expenses increased by $639,792 to
$1,993,873 or 47.2% for the six months ended June 30, 1998 compared to
$1,354,081 for the six months ended June 30, 1997. The increase was due in part
to the addition of management and staff personnel in accounting, training,
information systems and operations during the first quarter of 1998 to support
the growing restaurant base. Because of the Company's expansion plans and the
increase in restaurant sales expected to result therefrom, management expects
selling, general and administrative expenses to continue to increase during 1998
in absolute dollars. For a discussion of factors affecting the Company's plans
to open additional restaurants, see "Liquidity and Capital Resources."
Preopening amortization decreased $2,350 to $306,908 or 0.8% for the six
months ended June 30, 1998 compared to $309,258 for the six months ended June
30, 1997.
Depreciation and amortization expense increased $202,269 to $655,364 or
44.6% in the six months ended June 30, 1998 compared to $453,095 for the six
months ended June 30, 1997 due primarily to the addition of seven restaurants.
Net interest expense increased $161,957 to $379,229 or 74.5% for the six
months ended June 30, 1998 compared to $217,272 for the six months ended June
30, 1997. The increase primarily resulted from increased borrowing to fund
growth in the number of restaurants in operation and the incremental costs
associated with such growth.
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 six
months ended June 30, 1998 and 1997.
As a result of the factors discussed above, pro forma net income in the six
months ended June 30, 1998 increased $117,710 or 24.5% to $597,402 or 3.0% of
revenues from $497,692 or 3.4% of revenues in the six months ended June 30,
1997. Pro forma net income per share increased $.03 or 33.3% in the first six
months of 1998 to $.12 from $.09 in the first six months of 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Total revenues increased by $4,094,526 to $29,826,249 or 15.9% in 1997
compared to $25,731,723 in 1996, primarily due to an increase in the number of
Company-owned restaurants. Restaurant sales at Company-owned restaurants
increased $4,607,121 to $27,891,128 or 19.8% in 1997 compared to $23,284,007 in
1996. This increase was largely the result of the opening of two Company-owned
restaurants
-32-
<PAGE>
in 1997 and three Company-owned restaurants late in 1996. Company-owned same
store sales increased 5.2% in 1997 compared to 1996.
Commissary sales to franchised restaurants decreased by $788,518 to
$1,007,011 or 43.9% in 1997 compared to $1,795,529 in 1996. The decrease was
primarily due to the decision to discontinue selling products not manufactured
by the commissary.
Franchise fees and royalties increased $88,186 to $563,056 or 18.6% in 1997
compared to $474,870 in 1996. The increase was due to an approximate $70,000
increase in franchise fees for two additional franchised restaurants opened in
1997 and an additional $18,000 in royalties.
Other revenues increased $187,737 to $365,054 or 105.9% in 1997 compared to
$177,317 in 1996. In 1997, the Company received proceeds of $175,500 from
business interruption insurance as a result of flooding at a Company-owned
restaurant and an increase in rebate income from suppliers of approximately
$80,000 in 1997. These increases were offset in part by the gain on the sale of
the Company's food court operations of $71,300 in 1996.
Cost of restaurant sales at Company-owned restaurants increased by
$1,088,571 to $8,191,928 or 15.3% in 1997 compared to $7,103,357 in 1996. The
increase reflects the opening of two additional Company-owned restaurants in
1997 and three Company-owned restaurants late in 1996 and an increase in
Company-owned same store sales. Cost of restaurant sales decreased as a
percentage of restaurant sales by 1.1% to 29.4% in 1997 compared to 30.5% in
1996. This decrease was due primarily to lower cheese, beef and produce prices.
Commissary cost of sales decreased $761,709 to $887,793 or 46.2% in 1997
compared to $1,649,502 in 1996. The decrease reflects the decision to
discontinue commissary sales of products not manufactured by the commissary.
Operating expenses at Company-owned restaurants increased $1,649,574 to
$14,035,693 or 13.3% in 1997 compared to $12,386,119 in 1996, principally due to
the addition of Company-owned restaurants and an increase in Company-owned same
store sales. Operating expenses decreased as a percentage of restaurant sales to
50.3% in 1997 compared to 53.2% in 1996, primarily the result of a 1.2% decrease
in restaurant labor costs and a 1.5% decrease in restaurant-level promotional
expenses.
Selling, general and administrative expenses increased by $800,913 to
$3,051,740 or 35.6% in 1997 compared to $2,250,827 in 1996. The increase
reflects growth in the Company's management and staff personnel in accounting,
operations, training and purchasing during 1997 to support the growing
restaurant base. The percentage to revenue was 1.5% higher at 10.2% in 1997
compared to 8.7% in 1996. The increase was due to additional staffing required
for new restaurant openings planned for the first quarter of 1998.
Depreciation and amortization expense decreased $259,427 to $971,863 or
21.1% in 1997 compared to $1,231,290 in 1996. Amortization expense related to
noncompetition agreements decreased by $500,000 in 1997, but was offset in part
by increased depreciation resulting from additional Company-owned restaurants.
Preopening amortization increased $139,221 to $544,723 or 34.3% in 1997
compared to $405,502 in 1996. Preopening expenses for more Company-owned
restaurants were amortized in 1997 than in 1996.
-33-
<PAGE>
Net interest expense increased $224,788 to $428,598 or 110.3% in 1997
compared to $203,810 in 1996, primarily the result of growth in the number of
restaurants in operation and the incremental costs associated with such growth.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues increased by $6,184,701 to $25,731,723 or 31.6% in 1996
compared to $19,547,022 in 1995, primarily due to the increased number of
Company-owned restaurants. Restaurant sales at Company-owned restaurants
increased $6,029,949 to $23,284,007 or 34.9% in 1996 compared to $17,254,058 in
1995. This increase was largely the result of the opening of five additional
Company-owned restaurants. Company-owned same store sales increased 6.4% in 1996
compared to 1995.
Commissary sales to franchised restaurants increased by $220,682 to
$1,795,529 or 14.0% in 1996 compared to $1,574,847 in 1995, primarily due to the
addition of two franchised restaurants for the full year of 1996.
Franchise fees and royalties decreased $65,287 to $474,870 or 12.1% in 1996
compared to $540,157 in 1995. Franchise fees decreased by $105,000 in 1996, the
result of opening three franchise restaurants in 1995 compared to none in 1996,
offset in part by a $48,000 increase in royalties for 1996.
Other revenues decreased $643 to $177,317 or 0.4% in 1996 compared to
$177,960 in 1995. The gain on the sale of the food court operations in 1996
totaled $71,300, which offset the higher vendor rebates received in 1995.
Cost of restaurant sales at Company-owned restaurants increased by
$1,970,808 to $7,103,357 or 38.4% in 1996 compared to $5,132,549 in 1995. The
increase reflects the opening of five additional Company-owned restaurants and
an increase in Company-owned same store sales of 4.0%. Cost of restaurant sales
increased as a percentage of restaurant sales by 0.8% to 30.5% in 1996 compared
to 29.7% in 1995. A change in the American food sales mix (29.2% of food sales
in 1996 versus 20.8% in 1995) resulted in an 0.8% increase in food cost. This
increase in American food sales, with a higher food cost than Mexican food
sales, occurred primarily in the Company's newer markets.
Commissary cost of sales increased $225,425 to $1,649,502 or 15.8% in 1996
compared to $1,424,077 in 1995, reflecting the two additional franchised
restaurants open for the full year in 1996.
Operating expenses at Company-owned restaurants increased $3,489,415 to
$12,386,119 or 39.2% in 1996 compared to $8,896,704 in 1995. The increase
reflects the opening of five additional Company-owned restaurants in 1996 and an
increase in Company-owned same store sales. Operating expenses increased as a
percentage of restaurant sales to 53.2% in 1996 compared to 51.6% in 1995,
primarily the result of 1.1% higher occupancy costs (land and building leases
1.0%; real estate 0.1%) and 0.4% higher freight costs. Land and building leases
and real estate taxes are generally fixed and do not vary proportionately with
sales. With the addition of three lower-volume restaurants in late 1995 and
early 1996, the percentage of operating expenses to restaurant sales increased.
Selling, general and administrative expenses increased by $288,791 to
$2,250,827 or 14.7% in 1996 compared to $1,962,036 in 1995. The increase
reflects the addition of management and staff personnel in operations, training
and purchasing during 1996 to support the Company's growing restaurant base.
Although
-34-
<PAGE>
these expenses increased significantly in absolute dollars over 1995,
the percentage to revenue was 1.3% lower at 8.7% in 1996 compared to 10.0% in
1995.
Depreciation and amortization expense increased $197,941 to $1,231,290 or
19.2% in 1996 compared to $1,033,349 in 1995, due to the addition of five
restaurants in 1996.
Preopening amortization increased $256,364 to $405,502 or 171.9% in 1996
compared to $149,138 in 1995. The preopening costs of five additional
Company-owned restaurants were amortized in 1996.
Net interest expense decreased $62,720 to $203,810 or 23.5% in 1996
compared to $266,530 in 1995. This was due in part to higher capitalized
interest allocated to construction projects offset in part by additional expense
incurred due to increased borrowings resulting from more restaurants in
operation and the incremental cost associated with the increase.
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 purchasing and cost
controls and efficiencies at existing restaurants. Management believes that
inflation has had no significant impact on costs during the last two years,
primarily because the largest single item of expense, food costs, has remained
relatively stable during this period.
QUARTERLY FINANCIAL AND RESTAURANT OPERATING DATA
The following is a summary of certain unaudited quarterly results of
operations for each of the last two fiscal years and as of and for the six
months ended June 30, 1998:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
CALENDAR YEAR 1996
Restaurant sales $5,157,484 $ 5,676,354 $6,206,517 $6,243,652 $23,284,007
Total revenues 5,674,062 6,243,360 6,905,255 6,909,046 25,731,723
Net income 62,312 35,564 106,970 296,470 501,316
Company-owned restaurants in
operation at end of quarter 12 12 13 15 15
CALENDAR YEAR 1997
Restaurant sales $6,538,745 $ 6,682,908 $7,300,641 $7,368,834 $27,891,128
Total revenues 7,109,943 7,126,990 7,721,716 7,867,600 29,826,249
Income before taxes 229,522 519,997 532,005 432,387 1,713,911
Pro forma net income 146,894 332,798 340,483 276,728 1,096,903
-35-
<PAGE>
Company-owned restaurants in
operation at end of quarter 15 15 16 17 17
CALENDAR YEAR 1998
Restaurant sales $8,409,122 $10,138,509 $18,547,631
Total revenues 8,907,877 10,777,335 19,685,212
Income before taxes 342,147 591,293 933,440
Pro forma net income 218,974 378,428 597,402
Company-owned restaurants in
operation at end of six months 21 22
</TABLE>
-36-
<PAGE>
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 June 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.
CHANGE IN ACCOUNTING PRINCIPLE
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position,
"REPORTING ON THE COSTS 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 ($267,100 at
January 1, 1998) as of the date of adoption, which 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 adoption, the Company will be required to expense preopening costs as
incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to expand the number of its 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 the control of the Company. The hiring and
retention of management and other personnel may be difficult given the low
unemployment rates in the areas in which the Company intends to operate. There
can be no assurance that the Company will be successful in opening the number of
restaurants anticipated in a timely manner. Furthermore, there can be no
assurance that the Company's new restaurants will generate sales revenue or
profit margins consistent with those of the Company's existing restaurants, or
that these new restaurants will be operated profitably.
-37-
<PAGE>
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. Prior to this offering, the principal sources of capital to fund
these expenditures were members' contributions, 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 periods
presented:
<TABLE>
<CAPTION>
Years Six Months
Ended December 31, Ended June 30,
--------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by operations $1,408,259 $1,069,979 $3,034,342 $1,248,930 $1,329,243
Purchase of business, net of cash
acquired 9,963,544 - - - -
Purchases of property and equipment 2,915,957 4,712,962 4,098,595 1,558,942 2,505,742
Proceeds from sale of property and
equipment 1,526,000 1,635,815 - - -
Net proceeds (distributions) of
members' equity 12,896,188 (45,715) (525,002) (275,000) (551,445)
Net borrowings (repayments) on long-
term debt and capital lease (869,829) 905,201 1,797,898 453,229 1,529,657
obligations
</TABLE>
Since the acquisition of the Tumbleweed business, 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.
The Company both owns and leases its restaurant facilities. Management
determines whether to acquire or lease a restaurant facility based on its
evaluation of the financing alternatives available for a particular site. The
following table summarizes the estimated development costs for each prototype
Tumbleweed restaurant:
-38-
<PAGE>
<TABLE>
<CAPTION>
MAXI MIDI MINI
---- ---- ----
<S> <C> <C> <C>
Land acquisition $ 650,000 $ 500,000 $ 250,000
Construction 900,000 750,000 450,000
Equipment 300,000 275,000 200,000
Other 50,000 40,000 25,000
---------- ---------- ----------
Subtotal 1,900,000 1,565,000 925,000
Preopening 140,000 140,000 84,000
---------- ---------- ----------
Total $2,040,000 $1,705,000 $1,009,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Land acquisition costs, excluding site preparation, are the most variable
development costs and average approximately $500,000. The cost of development
for a new restaurant will not include land acquisition costs if the property is
leased rather than purchased. The Company plans to open five Company-owned
Tumbleweed restaurants during the remainder of 1998, depending on the
availability of quality sites, the hiring and training of sufficiently skilled
management and other personnel, and other factors.
Capital expenditures and preopening costs for the remainder of 1998 are
estimated to range from $7 million to $8 million for the development of five new
restaurants. In addition, the Company plans to spend approximately $200,000
during the remainder of 1998 to renovate and replace equipment in existing
restaurants.
The Company will utilize mortgage, sale/leaseback and landlord
financing, as well as equipment leasing and financing, for a portion of the
development costs of restaurants opened during the remainder of 1998. The
remaining costs will be financed though the net proceeds of this offering
together with available cash reserves, cash provided from operations and
borrowing capacity. Management believes such sources will be sufficient to
fund the Company's expansion plans through 1998 even if only the minimum
number of shares are sold. Should the Company's actual results of operations
fall short of, or its rate of expansion significantly exceed its plans, or
should its costs or capital expenditures exceed expectations, the Company may
need to seek additional financing in the future. In negotiating such
financing, there can be no assurance that the Company will be able to raise
additional capital on terms satisfactory to the Company.
The Company has a $5.0 million revolving credit facility with National City
Bank (the "Credit Facility"). As of June 30, 1998, the Company had outstanding
borrowings under the Credit Facility of approximately $3,182,000. 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
-39-
<PAGE>
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.
-40-
<PAGE>
BUSINESS
GENERAL
Tumbleweed-Registered Trademark- 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 for lunch and dinner and generally offer a full service
bar.
The Tumbleweed system currently consists of 37 full-service restaurants.
The Company owns and operates 22 of the restaurants in Kentucky, Indiana and
Ohio, and franchises an additional 13 restaurants in Indiana, Illinois,
Tennessee and Wisconsin. The Company also licenses one restaurant in each of
Germany and Saudi Arabia. The Company and its franchisees and licensee
currently expect to open an additional five Company-owned, three franchised, and
two licensed restaurants by the end of 1998. The Company-owned and franchised
restaurants are planned for the United States, and the licensed restaurants are
planned for two locations in Germany.
The Company uses three different sized restaurant designs to better match
the investment by the Company or a franchisee in a restaurant site to the site's
revenue potential. The following table sets forth by restaurant size certain
sales and other information for the 15 Company-owned Tumbleweed restaurants
opened for all of 1997:
<TABLE>
<CAPTION>
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- -------------
<S> <C> <C> <C>
Mini 128-194 4 $1,317,000
Midi 210-244 3 $1,850,000
Maxi 252-384 8 $2,062,000
</TABLE>
Same store sales of the Company increased 6.4% in 1996 versus 1995, 5.2% in
1997 versus 1996 and 0.4% in the first six months of 1998 versus the same period
in 1997.
CONCEPT AND STRATEGY
The Tumbleweed concept is designed to appeal to a broad range of customers
by offering a variety of sophisticated Tex-Mex and mesquite grilled selections,
emphasizing consistent, high quality food and drinks at moderate prices, and
providing efficient and friendly service in a casual dining setting. The key
elements of the Tumbleweed concept include the following:
ONE CONCEPT OFFERING TWO DISTINCTIVE MENUS. 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.
-41-
<PAGE>
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 1997 and the first six months of 1998, the average check
at a full-service Tumbleweed restaurant, including beverages, was approximately
$9.10. 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.
CUSTOMER SATISFACTION. The Company is committed to providing prompt,
friendly and attentive service and consistent food quality to its customers.
Tumbleweed employs a quality control supervisor independent of its Operations
division who evaluates the operations of the Company-owned and franchised
restaurants on a regular basis to ensure that each restaurant is following the
specified operations procedures. The Company also uses a "mystery shopper"
program to compare actual performance of restaurants to Tumbleweed standards and
solicits comment cards from customers to monitor and modify restaurant
operations.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, the Company generally uses one of three prototype designs management
believes is best suited to a particular site. The Company's Mini, Midi and Maxi
prototype restaurants accommodate approximately 130, 225, and 265 guests,
respectively. Each size restaurant offers full service casual dining and the
same menu containing a wide assortment of Mexican and mesquite grilled
selections. Management believes that the Tumbleweed prototype restaurants
generally have a lower building cost per square foot than the prototype designs
of other casual dining restaurant companies, and that the use of multiple
prototypes permits the Company 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 the Company and its
franchisees.
COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing
extensive training and attractive compensation, and by emphasizing clearly
defined organizational values, the Company fosters a strong corporate culture
and encourages a sense of personal commitment from its employees. The Company
has 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. Management believes Tumbleweed restaurant managers typically
earn bonuses ranging from 20% to 30% of their base cash compensation.
CENTRALIZED COMMISSARY. 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. The Company operates its commissary
principally to enhance food quality and operational efficiency of Company-owned
and franchised restaurants and not as a separate material source of profits for
the Company. Management believes this approach increases Tumbleweed's ability
to offer its customers a consistently high level of food quality at a moderate
price.
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 evoke the feeling of the
Great Southwest.
-42-
<PAGE>
EXPANSION STRATEGY
Since acquiring the Tumbleweed concept in 1995, the Company has added new
Company-owned and franchised restaurants, while developing the infrastructure
necessary to support a more aggressive 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 Company plans to add five Company-owned and
five franchised and licensed restaurants by the end of 1998 and expects to use a
portion of the proceeds of the offering as a source of funding for those new
restaurants. Management also anticipates that a portion of the offering
proceeds could be used to expand the Company's commissary operations to support
the growth of the restaurant base.
The following are key elements of the Company's expansion strategy:
OPENING RESTAURANTS IN TARGET MARKETS. The Company targets 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 the Company adds 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 HIGH 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 Company management and other employees, as
well as with the assistance of consultants when deemed advisable. The Company
believes that its site selection strategy and procedures, together with its menu
and pricing strategies, its commitment to quality food products and excellent
service, and its advertising, marketing and promotional efforts, will enhance
its ability to generate its anticipated customer volumes.
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 the Company or its
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.
The Company's prototype Maxi restaurant is intended for use primarily on
sites that management believes have a customer base capable of generating annual
sales of $2,500,000. The Maxi contains approximately 7,000 square feet and
seats approximately 265. The prototype Midi restaurant contains
-43-
<PAGE>
approximately 5,400 square feet, seats approximately 225, and is intended for
sites with a customer base capable of generating annual sales of $2,000,000.
The prototype Mini restaurant is suited for sites with a smaller customer
base, such as in smaller markets or in "filler" locations that enhance market
penetration in metropolitan areas. The Mini contains approximately 3,500
square feet, seats approximately 130, and is capable of generating annual
sales of $1,250,000. Management anticipates that the Company's expansion
strategy will continue to focus on developing sites best suited to use of the
"Midi" and "Mini" prototypes.
Management believes the Company's prototype designs can be adapted for
developing Tumbleweed restaurants in existing structures. This capability may
give the Company access to quality sites not otherwise available and may reduce
the time or expense of development in certain circumstances.
FRANCHISING. The Company expects that growth during the next several
years will come from the further development of new and existing markets by
both the Company and franchisees. In addition, the Company may acquire
restaurants from its franchisees from time to time. The Company has been
able to attract franchisees with significant experience in the restaurant
industry due, in management's view, to the attractiveness of the Tumbleweed
concept and the favorable potential return on investment resulting from a
relatively low investment compared to some other casual dining concepts.
With the development of prototype restaurant designs and additions to the
Company's management team since 1995, the Company has increased its efforts
to identify and attract qualified individuals and organizations as Tumbleweed
franchisees. See "Business--Franchising Program."
MENU
After the proliferation of restaurant chains featuring fast food tacos
and "Americanized" Mexican food, the Company believes that consumer tastes
have evolved and that a growing market for a more sophisticated Mexican
cuisine has developed. The Tumbleweed restaurant menu is designed to satisfy
this growing consumer preference.
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 Mexican 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 grill and served with Texas Toast, salad, and a choice of baked
potato, southwest or ranch fries, Mexican 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.
Tumbleweed restaurants typically contain full-service bars offering a
wide assortment of mixed drinks, wines, domestic and imported beers and
featuring the Tumbleweed margarita. Margaritas are served in a variety of
sizes from a Shot'arita, served in a shot glass for $.25 to a Tex'arita, a
45-ounce margarita sold for $7.95 and designed to be shared. Alcoholic
beverages accounted for approximately 13.1% of net
- 44 -
<PAGE>
restaurant sales during 1997 and for approximately 12.5% of net restaurant
sales during the three months ended March 31, 1998.
Tumbleweed's menu pricing is designed to create a strong perception of
value by consumers. Prices for Tex-Mex dishes range from $1.55 for a single
corn-shell taco to $10.95 for the Tumbleweed sampler dinner. Mesquite grilled
items range from $5.50 for a hamburger to $15.95 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. During 1997 and the first six
months of 1998, the average check for full service restaurants, including
beverages, was approximately $9.10. The average lunch check was approximately
$7.75 and the average dinner check was approximately $9.90 during this period.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. Tumbleweed's organizational philosophy is based
on seven core values and a commitment to Total Guest Satisfaction ("TGS"). The
Company's training procedures are intended to instill in all managers and
employees an appreciation of the core values and encourage a shared commitment
to TGS.
The Company employs 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 the Company's 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 the Company. In
selecting managers, the Company generally seeks 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. The Company seeks 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.
TRAINING AND DEVELOPMENT. The Company has developed a comprehensive
training program for managers and hourly employees. Managers are required to
complete an eight-week initial training course and regular training programs.
The course emphasizes the Company's 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. The Company
employs training coordinators to assist with training and development of
employees. Before the opening of each new restaurant, one of the Company's
training managers leads a team of experienced employees to train and educate
the new employees. The training period for new employees includes two weeks
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.
- 45 -
<PAGE>
FOOD PREPARATION. The Company is committed to offering distinctive
Tex-Mex and mesquite grilled foods to customers at reasonable prices through
the use of a commissary-based system. Although some restaurant concepts use
in-store food preparation as a marketing tool with some success, management
believes that the use of a central commissary provides a significant
strategic and competitive advantage to the Company by enhancing the Company's
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 the Company's 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. The
Company maintains a contingency plan under which centralized food preparation
could be quickly resumed at another company's installation should the
commissary be rendered inoperative by weather or other disaster.
The commissary system operates principally to enhance food quality and
operational efficiency of Tumbleweed restaurants and not as an independent
profit center for the Company. The commissary charges an amount approximately
equal to its cost for the items it supplies to Company-owned and franchised
restaurants. The Company plans to limit the commissary's profit to 5% per year.
ADVERTISING AND MARKETING. The Company uses radio, print, billboard,
and direct mail advertising in its various markets, as well as television
advertising in certain larger markets. The Company plans to spend 2.0% of
its monthly sales to fund marketing activities. The Company also engages 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 the Company's restaurants. The cost associated with
these promotional activities equals approximately 1.9% of sales.
RESTAURANT REPORTING. The Company closely monitors sales, costs of food
and beverages, and labor at each of its restaurants. Management analyzes
daily and weekly restaurant operating results to identify trends at each
location, and acts promptly to remedy negative trends where possible. The
Company uses 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 the Company's
accounting department are provided to management for analysis and comparison
to past performance and budgets. The Company uses a specialized software
system to measure theoretical food costs against actual costs. To improve
its performance analysis capabilities, the Company is upgrading the system to
measure theoretical labor cost against actual costs.
- 46 -
<PAGE>
PROPERTIES
The Company currently owns and operates 22 restaurants. The Company
currently anticipates opening five additional Company-owned and five additional
franchised and licensed restaurants by the end of 1998. The following table
sets forth certain information with respect to Company-owned Tumbleweed
restaurants now in operation or under construction.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE OWNED
OPENING SEATING RESTAURANT or
DATE LOCATION CAPACITY* SIZE (SQ.FT.) Leased
- -------- -------- ----------- ------------- ------
<S> <C> <C> <C> <C>
03/78 1900 Mellwood Avenue 384 10,000 Owned
Louisville, Kentucky
05/81 3985 Dutchmans Lane 128 3,500 Owned
Louisville, Kentucky
08/84 4255 Outer Loop 240 6,800 Owned
Louisville, Kentucky
07/86 5109 Dixie Highway 318 9,800 Leased
Louisville, Kentucky
04/90 105 Brighton Park 156 4,500 Leased
Frankfort, Kentucky
04/93 10000 Linn Station Road 316 8,500 Owned
Louisville, Kentucky
07/93 7484 Turfway Road 252 6,800 Owned
Saratoga Square
Florence, Kentucky
01/95 9956 Escort Drive 256 7,200 Leased
Mason, Ohio
07/95 1780 Scottsville Road 194 4,800 Leased
Bowling Green, Kentucky
11/95 11305 Princeton Pike 264 7,200 Leased
Springdale, Ohio
02/96 4600 University Drive/ 254 7,500 Leased
University Shopping Center
Evansville, Indiana
03/96 3625 Fishinger Boulevard 176 5,200 Owned
Columbus, Ohio
09/96 2433 South Third Street 225 5,400 Owned
Terre Haute, Indiana
- 47 -
<PAGE>
<CAPTION>
APPROXIMATE APPROXIMATE OWNED
OPENING SEATING RESTAURANT or
DATE LOCATION CAPACITY* SIZE (SQ.FT.) Leased
- -------- -------- ----------- ------------- ------
<S> <C> <C> <C> <C>
11/96 1555 West Main Street 225 5,400 Leased
Hamilton, Ohio
11/96 899 Hebron Road 225 5,400 Leased
Heath, Ohio
9/97 5257 Frederica Street 225 5,400 Owned
Owensboro, Kentucky
11/97 3602 Bardstown Road 225 5,400 Leased
Louisville, Kentucky
1/98 9701 Dixie Highway 122 3,400 Leased
Louisville, Kentucky
2/98 4147 Burbank Road 144 3,700 Owned
Wooster, Ohio
3/98 1707 North Dixie Avenue 225 5,400 Leased
Elizabethtown, Kentucky
3/98 746 Monroe Street 268 6,700 Owned
Zanesville, Ohio
4/98 3780 W. Broad Street 204 5,300 Leased
Columbus, Ohio
**8/98 1150 North Bridge Street 225 5,400 Leased
Chillicothe, Ohio
**9/98 6959 East Broad Street 225 5,400 Leased
Columbus, Ohio
**9/98 1865 West First Street 268 6,700 Owned
Springfield, Ohio
__________________________
</TABLE>
* Includes seats in bar but not seasonal patio seating.
** Anticipated date of opening.
- 48 -
<PAGE>
The following table summarizes the Company's estimated development costs
for each prototype Tumbleweed restaurant:
<TABLE>
<CAPTION>
Maxi Midi Mini
---- ---- ----
<S> <C> <C> <C>
Land acquisition $ 650,000 $ 500,000 $250,000
Building 900,000 750,000 450,000
Equipment 300,000 275,000 200,000
Other 50,000 40,000 25,000
---------- ---------- --------
Total $1,900,000 $1,565,000 $925,000
---------- ---------- --------
---------- ---------- --------
</TABLE>
Land acquisition costs, excluding site preparation, are the most variable
development costs and in the case of a particular property may be greater or
less than the estimates in the tables. The cost of development for a new
restaurant will not include land acquisition costs if the property is leased
rather than purchased. The Company plans to develop Tumbleweed restaurants on
both purchased and leased properties that management believes have significant
potential to generate revenue.
In addition to the development costs set forth in the table above, the
Company incurs preopening costs for each Company-owned restaurant estimated at
$140,000 for the Maxi and Midi prototypes and $84,000 for the Mini prototype.
Preopening costs consist of expenses for travel, lodging, salary, benefits and
other costs associated with selecting and training the management staff and
employees for a new restaurant. See "Business--Restaurant Operations--Training
and Development" and Note 2 of Notes to Financial Statements. Preopening
training is generally included in the services provided to franchisees and
covered by the franchise fee.
The Company's executive offices occupy approximately 7,000 square feet of
space in three buildings owned by the Company in Louisville, Kentucky. The
Company also leases 3,000 square feet of office space in a nearby commercial
building. Management believes the Company's restaurant facilities and offices
are adequately covered by insurance.
FRANCHISING PROGRAM
The Company intends to pursue an active franchising program with current
and new franchisees under strictly controlled guidelines. The Company offers
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 the Company 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. The Company's current area development agreement also provides
for a franchise fee of $35,000 for each restaurant, due when the franchise
agreement with respect to a restaurant is executed. Each franchise agreement
generally provides for royalties of three to five percent of sales based upon
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 the Company's policies, standards and
specifications, including matters
-49-
<PAGE>
such as menu items, ingredients, materials, supplies, services, fixtures,
furnishings, decor and signs. Under its criteria for selecting new
franchisees, Tumbleweed requires that potential franchisees have adequate
capital, extensive experience in the restaurant industry, and access to
locations suitable for development. Except for locations managed directly by
the Company, the Company generally requires that a franchisee have a
principal operator with at least a ten percent ownership interest who must
devote full time to the supervision and conduct of the franchise.
INTERNATIONAL LICENSING AGREEMENT
The Company has entered into a license agreement (the "International
Agreement") with Tumbleweed International, LLC ("International"), a restaurant
developer based in Brussels, Belgium, to develop Tumbleweed restaurants outside
of the Western Hemisphere. International currently operates 19 restaurants in
Europe, Asia and Africa. As of June 30, 1998, International was operating its
restaurants in Erlanger, Germany and Jeddah, Saudi Arabia as Tumbleweed
restaurants. International expects to open one restaurant in each of Frankfurt,
Germany and Feurth, Germany as Tumbleweed restaurants by the end of 1998. It is
anticipated that most of 17 other restaurants operated by International will be
converted to Tumbleweed restaurants on the terms of the International Agreement.
Certain directors of the Company hold interests in three corporations that own
all of the membership interests of International. See "Certain Transactions --
Tumbleweed International LLC."
The International Agreement grants to International the exclusive right and
license to use the Tumbleweed system and service and trademarks outside the
Western Hemisphere, including the right to grant sublicenses and franchises. In
consideration for the grant of those rights, the Company will receive 15% of any
initial license or territory fee plus 15% of the continuing royalty fees payable
to International, provided that the initial license or territory fee payable to
International will not be less than $25,000 per restaurant and the continuing
royalty will not be less than 3% of gross receipts from the sale of licensed or
franchised products. If the amount payable to the Company in any contract year
is $300,000 or more, then the license fee percentage payable to the Company will
be reduced by 2% per year for the next five years, subject to a minimum payment
of $300,000 in fees to the Company per contract year. International is entitled
to a credit against royalties payable to the Company equal to the actual cost of
converting International's 17 existing restaurants to Tumbleweed restaurants, up
to a maximum credit of $60,000 per restaurant, subject to certain exceptions.
The International Agreement provides that International must construct
and open or convert a minimum of four Tumbleweed restaurants per contract
year, beginning with the contract year commencing August 29, 1998. If six
months after the end of a contract year, International has opened fewer
Tumbleweed restaurants than the cumulative number of restaurants required to
be open by the end of that contract year, the Company will have the right to
terminate the International Agreement, and International will have the right
to preclude such termination by paying to the Company an amount approximating
the balance of the fees to which the Company would have been entitled if the
required number of restaurants had been open at the end of the contract year.
Termination of the International Agreement would terminate International's
sublicensing and franchise rights thereunder, but the International Agreement
would continue in effect with respect to restaurants open or under
construction or conversion by International or its franchisees at the time of
termination.
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
- 50 -
<PAGE>
International Agreement grants the Company a right of first refusal if
International proposes to sell or assign its rights under the Agreement, or
to sell equity interests in International.
COMPETITION
Casual dining in general, and value-oriented casual dining in particular,
are currently among the fastest growing segments of the food service industry.
Management believes that the Tumbleweed concept is well-established in its
current markets and that the Company's organization can support expansion into
markets with limited competition from other casual dining concepts and good
potential for market development.
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. The Company and its franchisees compete
with a variety of other casual full-service restaurants, fast food and take-out
restaurants, delicatessens, cafeteria-style buffets, and other food service
establishments. The number of casual dining and grilled food 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 the Company and its franchisees. A significant change in
pricing or other business strategies by one or more of the Company's
competitors, including an increase in the number of restaurants in the Company's
territories, could have a materially adverse impact on the Company's sales,
earnings and growth. The Company's market research indicates that customers
perceive Tumbleweed's principal competitors as value-oriented casual dining
restaurant chains such as Applebee's, O' Charley's, T.G.I. Friday's and Chili's.
The Company and the restaurant industry are significantly affected by
factors such as changes in local, regional or national economic conditions,
demographic trends, traffic patterns, changes in consumer tastes, consumer
concerns about the nutritional quality of food, and the type, number, and
location of competing restaurants. Multi-unit food service chains such as the
Company can also be substantially adversely affected by publicity resulting from
food quality, illness, injury, or other health concerns or operating issues
stemming from one store or a limited number of stores. Furthermore, factors
such as inflation, increased food, labor, energy, and employee benefits costs,
fluctuating insurance rates, national, regional and local regulations, regional
weather conditions, and the unavailability of experienced management and hourly
employees may also adversely affect the restaurant industry in general and the
Company in particular. In addition, dependence on frequent deliveries of fresh
produce also subjects food service businesses such as the Company to the risk
that shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients.
EMPLOYEES
As of June 30, 1998, the Company had approximately 2,100 employees, of whom
35 are executive and administrative personnel, 86 are restaurant management
personnel, and the remainder are hourly restaurant and commissary personnel.
Many of the Company's hourly restaurant employees work part-time. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
SERVICE MARKS AND TRADEMARKS
- 51 -
<PAGE>
The Company owns various service marks and trademarks that are registered
on the Principal Register of the United States Patent and Trademark Office. The
Company regards its service marks and trademarks as having significant value and
being an important factor in the development of the Tumbleweed concept. The
Company's policy is to pursue and maintain registration of its service marks and
trademarks whenever possible and to oppose vigorously any infringement or
dilution of its service marks and trademarks.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local laws. Each
of the Company's 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 12.1% of the Company's net restaurant sales were
attributable to the sale of alcoholic beverages for the six months ended June
30, 1998. Alcoholic beverage control regulations require each of the
Company's 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 Company restaurant is operated in accordance with
procedures intended to assure compliance with applicable codes and regulations.
The Company will be required to make filings with certain liquor licensing
authorities in connection with the Reorganization, which it expects to make
promptly following the Reorganization.
The Company is 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. The Company carries liquor liability coverage as part of
its existing $1,000,000 comprehensive general liability insurance, as well as
excess liability coverage of $5,000,000 per occurrence, with no deductible. The
Company has never been named as a defendant in a lawsuit involving "dram shop"
liability.
The Company's 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 the Company has no control.
Significant numbers of the Company's service, food preparation and other
personnel are paid at rates related to the federal minimum wage, and increases
in the minimum wage could increase the Company's labor costs.
The development and construction of additional restaurants are also subject
to compliance with applicable zoning, land use and environmental laws and
regulations.
LITIGATION
-52-
<PAGE>
The Company is not currently involved in any litigation nor, to
management's knowledge, is any litigation threatened against the Company, except
for routine litigation arising in the ordinary course of business. In the
judgment of the executive officers of the Company, no material adverse effect on
the Company's financial position or results of operations would result if any
such litigation were not resolved in the Company's favor.
MANAGEMENT
The following table lists the executive officers, key employees, and
directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <S>
John A. Butorac, Jr...... 50 President, Chief Executive Officer, and
Director
James M. Mulrooney....... 46 Executive Vice President, Chief Financial
Officer, and Director
John Brewer.............. 45 Vice President of Operations
Wayne P. Jones........... 55 Vice President of Marketing and
Development
Gary Snyder.............. 43 Vice President - Company Operations
Glennon F. Mattingly..... 46 Vice President - Controller
Gregory A. Compton....... 37 Vice President, Secretary and General
Counsel
David M. Roth............ 47 Director
Minx Auerbach(1)......... 75 Director
Lewis Bass (2)........... 76 Director
Roger Drury(1)(2)........ 51 Director
George Keller(1)(2)...... 47 Director
Terrance A. Smith........ 52 Director
</TABLE>
- ----------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John A. Butorac, Jr. is a founding member and has served as President,
Chief Executive Officer, and one of the two Managers of Tumbleweed, LLC since it
was formed in November 1994. From October 1991 to January 1995, Mr. Butorac
served in various capacities with Tumbleweed Mexican Restaurants Group,
including as Director of Operations and Director of Corporate Development.
During his association with Tumbleweed, Mr. Butorac has been responsible for
developing Tumbleweed's business and expansion
-53-
<PAGE>
plan and for implementing various operational systems needed to support
growth. Since beginning his career in the restaurant industry in 1971, Mr.
Butorac has served at various times as a senior operations executive,
consultant, and restaurant owner and operator for such restaurants as KFC,
Zapata/Zantigo Mexican Restaurants, Fuddrucker, Inc., Chi-Chi's, Inc., Rib
Tavern, Inc. and Two Peso Mexican Cafes. Mr. Butorac has 27 years of
restaurant management experience.
James M. Mulrooney is a founding member and has served as Executive Vice
President, Chief Financial Officer and one of the two Managers of Tumbleweed,
LLC since it was formed in November 1994. From November 1988 to August 1994,
Mr. Mulrooney was Senior Vice President of Finance, Vice President and Treasurer
of NTS Corporation, a regional real estate development firm headquartered in
Louisville, Kentucky. From May 1982 to June 1988, Mr. Mulrooney held various
positions with Chi-Chi's, Inc., including four years as Vice President and
Treasurer, where he was responsible for developing the company's accounting
systems, public financings, and acquisitions. Before beginning his career in the
restaurant industry in 1978, Mr. Mulrooney served for four years with the public
accounting firm of Alexander Grant & Company. Mr. Mulrooney has 16 years of
restaurant management experience.
John Brewer has served as Vice President of Operations for Tumbleweed, LLC
since April 1996. From 1993 to 1996, Mr. Brewer was the President and Chief
Executive Officer of East Side Restaurants, LLC, which operates nine restaurants
in Phoenix, Arizona. Mr. Brewer previously served for 15 years with Bob Evans
Farms, Inc., where he served as Vice President and Regional Director of
Restaurant Operations with responsibility for developing new markets and
increasing sales and profit in existing markets in a six-state region, as well
as in other capacities. Mr. Brewer has 22 years of restaurant management
experience.
Wayne P. Jones joined Tumbleweed, LLC as Vice President of Marketing and
Development in August 1997 after concluding four years as Executive Director
and Chief Executive Officer of the Pizza Hut Franchise Association, comprising
3,300 Pizza Hut restaurants. Mr. Jones began his career in the restaurant
industry in 1969. At various times, he has served as President of Marcus
Restaurants, Senior Vice President of Marketing and Development at Chi-Chi's,
Inc., President of General Mills' Casa Gallardo Mexican Restaurant division, and
Vice President of Marketing for Kentucky Fried Chicken. Mr. Jones has also held
positions as Adjunct Professor of Marketing and Entrepreneurship at Indiana
University-Southeast and the Barton School of Business at Wichita State
University. Mr. Jones has 29 years of restaurant management experience.
Gary Snyder joined Tumbleweed, LLC as Director of Training and Human
Resources in June 1996 and was appointed Vice President of Company Operations in
April 1998. Mr. Snyder previously served for 17 years with Bob Evans Farms,
Inc. where he was responsible for restaurant operations and human resources.
Mr. Snyder has 19 years of restaurant management experience.
Glennon F. Mattingly joined Tumbleweed, LLC as Controller in March 1995 and
was named Vice President-Controller in April 1998. Before coming to Tumbleweed,
Mr. Mattingly held various positions with Chi-Chi's, Inc. including six years as
Director of Budgeting and Financial Analysis. Before beginning his career in
the restaurant industry in 1984, Mr. Mattingly served with the public accounting
firm Deloitte, Haskins and Sells for two years and taught accounting at Trinity
High School in Louisville, Kentucky for seven years. Mr. Mattingly has 14 years
of restaurant management experience.
Gregory A. Compton joined Tumbleweed, LLC in June 1998 as Vice President,
Secretary and General Counsel. From March 1992 to June 1998, Mr. Compton served
as Senior Vice President, Secretary and General Counsel of NTS Corporation, a
regional real estate development firm headquartered in
-54-
<PAGE>
Louisville, Kentucky. Prior to his employment with NTS Corporation, Mr.
Compton practiced as an attorney in the Real Estate and Corporate Finance
department of Greenebaum, Doll & McDonald, a Louisville, Kentucky law firm,
which represents a number of restaurant companies. Mr. Compton has
represented and been a principal of a restaurant franchisee unrelated to the
Company for the last four years.
David M. Roth is a founding member of Tumbleweed, LLC and has served on its
Board of Advisors since its inception in 1994. Mr. Roth is also an investor and
member of the governing boards of two Tumbleweed franchisees and one Tumbleweed
licensee--TW-Tennessee, LLC, TW-Indiana, LLC, an Tumbleweed International, LLC.
In addition, Mr. Roth is a founding member or shareholder of several companies
involved in other restaurant concepts, including (i) the company which created
The Oldenberg Grill (which recently merged into the Oldenberg Brewing Company, a
publicly held company of which Mr. Roth is a director), (ii) several companies
which are Texas Roadhouse franchisees, (iii) two companies which are Dooley's
Bagelcatessen franchisees, (iv) T.M. Riders, LLC, which owns and operates a
Mexican and grilled food delivery concept as well as several Tumbleweed food
court units, (v) a company which is a developer of Joe's "Older Than Dirt"
restaurants, and (vi) two companies involved in the development and franchising
of the Boston-based Pizzaria Regina concept or a casual dining Italian
restaurant incorporating such pizza concept. Mr. Roth is currently a principal
in the Louisville, Kentucky law firm of Roth Foley Bryant & Cooper, PLLC, the
successor-in-interest to a law firm established by him in January 1993. From
March 1992 to December 1993, Mr. Roth served as the General Counsel, Vice
President and Secretary of Analytical Risk Management, Ltd., a company of which
he was a founding partner, and its successor-in-interest, ARM Financial Group,
Inc., a Louisville-based life insurance holding company which recently became
listed on the New York Stock Exchange. From September 1979 to January 1993, Mr.
Roth was engaged in the private practice of law with the firm of Greenebaum Doll
& McDonald in Louisville, and prior to that time, from 1975 to 1979, Mr. Roth
was an attorney with the Chief Counsel's Office of the Internal Revenue Service,
Interpretative Division, in Washington, D.C.
Minx Auerbach has served as a member of the Board of Advisors of
Tumbleweed, LLC since January 1995. From 1975 to 1979, Ms. Auerbach was the
Director of Consumer Affairs for the City of Louisville, Kentucky. From 1979 to
1984, she served the Executive Assistant to the County Judge Executive of
Jefferson County, Kentucky. Ms. Auerbach has been a member of the Board of
Trustees of the University of Louisville since 1991, serving as Chair from 1996
to 1997. She has also served as Chair and a member of the Louisville and
Jefferson County Planning Commission and as Chair of the Louisville Science
Center.
Lewis Bass has served as a member of the Board of Advisors of
Tumbleweed, LLC since January 1995. Mr. Bass is currently retired. From
1952 to 1980, Mr. Bass was President of Bass and Weisberg Realtors where his
specialties were commercial real estate, property management and marketing.
Prior to that, he was Marketing Director and partner for Associated Theatres
from 1983 until 1987. Mr. Bass was an original stockholder of Humana Inc.
Roger Drury has served as a member of the Board of Advisors of
Tumbleweed, LLC since January 1995. Mr. Drury was Chief Financial Officer of
Humana Inc. from 1992 until 1996 and Senior Vice President of Finance from
1988 to 1992. He joined Humana, Inc. in 1979 and became Vice
President-Comptroller in 1983. Mr. Drury served as a certified public
accountant with Coopers & Lybrand in New York and Louisville from 1971 until
1979. He currently serves on the boards of directors of Bellarmine College,
Management Technology Services, The DentalCo, and PM Squared, Inc.
-55-
<PAGE>
George Keller was founder of Tumbleweed and has served on the Board of
Advisors of Tumbleweed, LLC since 1995. From 1975 to January 1995, Mr. Keller
served as Chief Executive Officer of Tumbleweed Mexican Food, Inc. and
Tumbleweed Concepts, Inc. Mr. Keller currently serves as the Managing Member of
First Blue Rock Grill LLC in New Albany, Indiana and serves on the Board of
Stockyards Bank, Inc. Mr. Keller has 22 years of restaurant management
experience.
Terrance A. Smith was elected as a director of the Company in June 1998.
Mr. Smith is currently the President of Tumbleweed International LLC. See
"Business -- International Licensing Agreement." From 1988 to 1997, Mr. Smith
was the President and CEO of Chi-Chi's International Operations, Inc. Mr. Smith
currently serves on the Board of Boston Restaurant Associates, Inc., a publicly
traded company which owns and operates Italian dinner houses and limited service
pizzerias. Mr. Smith has 28 years of restaurant management experience.
CLASSIFICATION OF DIRECTORS
Each director of the Company will serve until the first annual meeting of
the Company's stockholders, which is expected to be held in 1998, or until his
successor is elected and qualified. The Board of Directors is divided into
three classes. Directors in each class must be as nearly equal as possible.
The term of the first class of directors expires at the 1999 annual meeting of
stockholders, the term of the second class of directors expires in 2000 and the
term of the third class of directors expires in 2001, provided that the
directors in each class will hold office until their successors are duly elected
and qualified. At each annual meeting of stockholders, one class of directors
will be elected to a three-year term.
COMMITTEES OF THE BOARD
The Audit Committee and Compensation Committee of the Board of Directors
each consists of three directors, none of whom can be an officer or employee of
the Company. The duties of the Audit Committee are to recommend to the whole
Board of Directors the selection of independent auditors to audit annually the
books and records of the Company, to review the activities and report of the
independent auditors, and to report the results of such review to the whole
Board of Directors. The Audit Committee also monitors the internal audit
controls of the Company. The duties of the Compensation Committee are to review
the performance of the executive officers of the Company and to recommend annual
salary and bonus amounts for executive officers of the Company. In addition, the
Compensation Committee reviews the Company's compensation policies and practices
and benefit plans to ensure that they meet corporate objectives.
-56-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation earned for the last
fiscal year by the Company's chief executive officer and its executive officers
whose total salary and bonus exceeded $100,000 during 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND PRINCIPAL OTHER ANNUAL STOCK
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS#
------------------ ---- ------ ----- ------------ ---------
<S> <C> <C> <C> <C> <C>
John A. Butorac, Jr. 1997 $159,134 $41,116 $11,231(1) 0
President and Chief
Executive Officer
James M. Mulrooney 1997 132,611 34,264 11,148(1) 0
Executive Vice
President and Chief
Financial Officer
John Brewer 1997 105,940 28,504 (1) 0
Vice President of
Operations
</TABLE>
- ----------------
(1) Does not include perquisites and other personal benefits paid to the named
executive officer, which totaled less than 10% of the total of salary and
bonus reported for the year.
INCENTIVE COMPENSATION PLAN
To ensure that an important portion of compensation is based on
performance, the annual bonus payable to the executive officers of the Company
is based upon the attainment of targeted performance measurements by the
Company. All other salaried employees of the Company other than store-level
managers participate in the same bonus plan. Each executive earns incentive
compensation if the Company achieves a stated quarterly net income goal. At the
beginning of each fiscal year, the Compensation Committee establishes a bonus
amount expressed as a percentage of salary for each participant. For 1998, the
Compensation Committee approved a bonus percentage of salary of up to 55% for
both Mr. Butorac and Mr. Mulrooney. The Compensation Committee also establishes
a net income goal for each quarter. The amount of the bonus earned by a
participating executive is based upon the extent to which the Company attains or
exceeds attainment of a specified percentage of the net income goal. The stated
net income goals per quarter will be revised to account for the impact of
selling stock. The Company reserves the right to change or modify the program
at any time.
For executive officers other than Mr. Butorac and Mr. Mulrooney, payments
are determined and made to participants on a quarterly basis. Mr. Butorac's and
Mr. Mulrooney's bonus compensation will be
-57-
<PAGE>
calculated and accrued on a quarterly basis in a similar manner, however, the
incentive compensation payments will not be made for the year until after the
fourth quarter is determined. In addition, the Company must reach at least
70% of the net income goal for the entire year in order for Mr. Butorac and
Mr. Mulrooney to automatically receive any accrued bonus payment. Therefore,
even if the Company achieves its goal in any individual quarter or quarters
but fails to achieve the 70% net income goal for the entire year, Mr. Butorac
and Mr. Mulrooney will receive no bonus for the year unless otherwise
approved by the Compensation Committee. Amounts accrued for executive
bonuses earned for Tumbleweed, LLC's 1998 fiscal year will be paid upon the
earlier of the date the Reorganization takes effect or December 31, 1998.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with John A. Butorac, Jr.
and James M. Mulrooney on June 23, 1998 (effective upon consummation of the
Reorganization), which entitle Mr. Butorac and Mr. Mulrooney to receive a base
salary of $200,000 and $175,000, respectively, and bonus compensation based upon
the Incentive Compensation Plan formula. See "Management--Incentive
Compensation Plan." The agreements have an initial term of five years and
extend automatically each year for one additional year unless both parties agree
to termination prior to the end of any term. If the Company terminates the
employment agreement without cause, the executive would be entitled to receive
continued salary and benefits for a twelve month period. If the employment
agreement is terminated by the Company for cause, the executive is not entitled
to any compensation following the date of such termination other than the pro
rata amount of his then current base salary and bonuses earned through such
date. Upon any termination of employment, the terminated executive is
prohibited from competing with the Company for two years. Under the terms of
the employment agreements, both Mr. Butorac and Mr. Mulrooney report directly to
the Board of Directors with Mr. Butorac having primary responsibility for
operational, marketing, training, franchising, purchasing and commissary matters
and Mr. Mulrooney having primary responsibility for financial, banking,
accounting, legal and construction matters.
STOCK INCENTIVE PLAN
The Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation 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 will be administered by the Compensation Committee. The
Committee is comprised of two or more independent directors, who cannot be
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 Committee may also construe,
interpret and correct defects, omissions and inconsistencies in the Plan.
The Committee has no discretion with respect to the terms and conditions of
the options granted automatically to nonemployee directors under the Plan.
See "Management--Director Compensation."
-58-
<PAGE>
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 635,000
shares, or 10% of the number of shares of Common Stock outstanding from time
to time, including 100,000 shares reserved for options automatically granted
to nonemployee directors under the Plan.
As of the date of this Prospectus, the Company intends to grant options
for a total of approximately 340,000 shares to eligible employees and 60,000
shares to nonemployee directors, effective upon completion of this offering.
None of the initial grants of options will be awarded to Mr. Butorac or Mr.
Mulrooney. The exercise price of the options will be equal to the initial
public offering price. The exercise price of future and subsequent grants
will be equal to the market price as of the date of such grant. 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 that will
become effective upon completion of the offering will become 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.
DIRECTOR COMPENSATION
Nonemployee directors receive a fee of $1,000 for each Board of
Directors meeting attended and receive $1,000 per committee meeting attended
unless such committee meeting is on the same day as the Board of Directors
meeting. Committee chairmen receive an additional $1,000 for each committee
meeting. In addition, nonemployee directors will receive annual grants of
options to purchase shares of Common Stock under the Plan. Each nonemployee
director will receive options to purchase 10,000 shares on the date of the
closing of this offering. Thereafter, each new nonemployee director will be
granted options to purchase 10,000 shares of Common Stock on the date of his
or her first election. Beginning on the first day of the calendar year
following the closing of this offering, each of the Company's nonemployee
directors will automatically be granted options to purchase 1,000 shares of
Common Stock each year the director continues to serve on the Board. Initial
grants of options to purchase Common Stock will have an exercise price of
$10.00 per share. Thereafter, all options will be granted at the fair market
value of the Common Stock on the date of grant. A total of 100,000 shares
are reserved for issuance to directors under the Plan. All options granted
to directors will become exercisable in three equal annual installments,
beginning on the first anniversary of the date of grant.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or
alleged breach of their fiduciary duties as directors, subject to certain
exceptions. In addition, the Certificate of Incorporation provides that the
Company is required to indemnify its officers and directors under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses
to its officers and directors as incurred in connection with proceedings
against them for which they may be indemnified. At present, the Company is
not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that its charter
provisions are necessary to attract and retain qualified persons as directors
and officers.
-59-
<PAGE>
CERTAIN TRANSACTIONS
Although all of the transactions described below necessarily involve
conflicts of interest, management believes that all of the transactions were
entered into on terms comparable to those obtainable from unrelated third
parties, based on a comparison of terms and conditions available from third
parties. The Company's Board of Directors has adopted a policy that all
future transactions between the Company and its officers, directors,
principal shareholders and affiliates must be approved by the audit committee
of the Board of Directors, and generally must be on terms no less favorable
to the Company than those obtainable from unrelated third parties.
LEASES WITH RELATED PARTIES
WEST BROAD DEVELOPMENT, LLC. The Company leases the facilities and related
real property for its Columbus, Ohio restaurant from West Broad Development,
LLC, a limited liability company in which David M. Roth, a director of the
Company, owns a substantial interest. The restaurant opened in April1998.
Under the terms of the lease, the Company was obligated to renovate restaurant
facilities as specified in approved plans, and the lessor was obligated to
reimburse the Company for construction expenses not to exceed $400,000. The
lease provides for annual base rent equal to the interest on funds borrowed by
the lessor to fund construction costs from a bank or commercial lending
institution plus 1% until the restaurant commences operations and $10,000 per
month thereafter plus 5% of gross sales to the extent such percentage rent
exceeds the base rent. The lease is for a twenty-year term with options to
renew for two additional five-year terms. The Company was reimbursed for
construction expenses totaling $400,000 under the lease and paid rent totaling
$27,553 for the first six months of 1998. David H. Cooper and Gary L. McCartin,
stockholders of the Company, are also members of West Broad Development, LLC.
KELLER LLC. The Company leases the facilities and related real property
for its Springdale, Ohio restaurant from Keller LLC, a limited liability company
in which George Keller, a director of the Company, owns a substantial interest.
In April 1995, Tumbleweed, LLC assigned all of its rights and obligations with
respect to the site for the Springdale restaurant, to Keller LLC in exchange for
Keller LLC agreeing to construct a restaurant facility to be leased to the
Company. The restaurant opened in November 1995. The lease required Keller LLC
to invest $1,625,000, and the Company to pay annual base rent of $186,689 for an
initial term of eleven years through 2006. In addition, the Company pays an
amount equal to 5% of the excess, if any, of the Company's gross sales during
such year, over $2,100,000. The lease is for an eleven-year term with options
to renew for four additional five-year terms. The Company paid rent totaling
$186,689 during 1997 and $93,345 for the first six months of 1998.
DOUGLASS VENTURES. The Company subleases the facilities and related
real property for its Bowling Green, Kentucky restaurant from Blue Door -
Bowling Green Joint Venture ("Blue Door") on terms substantially similar to
the terms on which Blue Door leases the facilities and related real property
from two co-lessors. The co-lessors are Douglass Ventures, a Kentucky
general partnership and stockholder of the Company in which David M. Roth, a
director of the Company, is a general partner, and an unrelated third party.
The lease was in effect at the time the Company acquired the Tumbleweed
assets in January 1995 and the restaurant opened in July 1995. Under the
terms of the lease, the Company pays annual base rent of $104,000 for ten
years which will be adjusted in years eleven and sixteen for cost of living
increases. The lease also provides for additional rent equal to the amount,
if any, by which 6% of the Company's gross sales exceeds the annual base rent
payable. The lease is for a twenty-year term with options to renew by
written agreement. The Company paid rent totaling $52,000 during 1997 and
$26,000 for the first six
-60-
<PAGE>
months of 1998. Blue Door and Roth-Tumbleweed Trust, a stockholder of the
Company, are held under common control.
TW-DIXIEBASH, LLC. The Company leases the facilities and related real
property for its Bardstown Road and Valley Station restaurants from
TW-DixieBash, LLC, a limited liability company in which David M. Roth and
James M. Mulrooney, directors of the Company, own substantial interests. The
Bardstown Road and Valley Station restaurants opened in November 1997 and
January 1998, respectively. Under the terms of the Bardstown Road and Valley
Station subleases, the Company has built the restaurant facilities as
specified in approved plans, and the Lessor was obligated to reimburse the
Company for construction expenses not to exceed $700,000 and $500,000,
respectively. The Bardstown Road sublease provides for the assumption of all
rent under the ground lease agreement with Bashford Manor Mall, Joint
Venture. The sublease also provides for interest to be paid during the
construction period based on TW-DixieBash's investment until the restaurant
commences operations and $7,000 per month thereafter plus 30% of the
restaurant's positive net cash flow. The lease is for a 20-year term with no
option to renew. The Company was reimbursed for construction expenses
totaling $700,000 under the Bardstown Road lease and paid interest and rent
totaling $15,053 during 1997 and $104,786 for the first six months of 1998.
The Valley Station sublease provides for the assumption of all rent under the
Holiday Station Associates Limited Lease. The sublease also provides for
interest to be paid during the construction period based on TW-DixieBash's
investment until the restaurant commences operations and $5,000 per month
thereafter , plus 30% of the restaurant's positive net cash flow. The
sublease is for a 20 year term with options to renew for three additional
five-year terms. The Company was reimbursed for construction expenses
totaling $354,973 in 1997 and $145,027 for the first six months of 1998 under
the Valley Station sublease. The Company paid no interest in 1997; rent and
interest payments totaled $37,856 for the first six months of 1998. David H.
Cooper, a stockholder of the Company, is also a member of TW-DixieBash, LLC.
TUMBLEWEED INTERNATIONAL, LLC
In August 1997, the Company entered into the International Agreement
with Tumbleweed International LLC, a restaurant developer based in Brussels,
Belgium. The International Agreement grants certain licensing and franchising
rights to International for the development of Tumbleweed restaurants outside
of the Western Hemisphere. See "Business--International Licensing Agreement."
International is a limited liability company owned by three corporations
controlled by a group of stockholders including Terrance A. Smith, David M.
Roth, Minx Auerbach and George Keller, who are directors of the Company, and
David H. Cooper and Douglas H. Morris II, who are stockholders of the
Company. In 1997, International paid $15,750 in fees to the Company under the
International Agreement. In the first six months of 1998, International paid
$7,500 in fees. See "Business - International Licensing Agreement."
T.M. RIDERS, LLC
In February 1997, the Company acquired a 9.5% interest of the common
membership units of T.M. Riders, LLC ("TM Riders"), which operates 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. The Company paid a nominal
purchase price for the interest. The Managing Directors of TM Riders include
John A. Butorac, Jr., James M. Mulrooney, David M. Roth and George R. Keller,
all of whom are directors of the Company, and David H. Cooper, a stockholder of
the Company. Minx Auerbach, a director of the Company, and Messrs Roth, Keller
and Cooper also own membership interests in TM Riders. The following
stockholders of the Company also
-61-
<PAGE>
own membership interests in TM Riders: Donald W. Bennett, James Lavelle,
Jr., Sharon Levine, Gerald Mansbach, Charles A. Osborn, Jr., Alan I. Roth,
CSJ Ventures, LLC and KORY's Investment Group.
In October 1996, the Company sold to TM Riders all of the Company's
interest in six Tumbleweed food court units in the Louisville, Lexington and
Cincinnati metropolitan areas, including one unit operated by a franchisee. The
purchase price was $600,000, comprised of an initial cash payment of $100,000
and a promissory note providing for annual payments of $100,000 of principal
plus interest at the rate of 8% per year. As of June 30, 1998, the principal
balance of the note was $400,000. Tumbleweed, LLC is currently evaluating the
possibility of distributing the note to one or more of its members. At the same
time, the Company entered into a licensing and distribution agreement with TM
Riders granting TM Riders the right to operate food court units in the
Louisville and Lexington markets under the Tumbleweed name and certain rights to
use intellectual property of Tumbleweed for the development of the TM Riders
food court and delivery operations. The Company receives a nominal monthly
royalty on sales by the food court restaurants acquired by TM Riders. The
Company is also entitled to receive a $5,000 fee upon the opening of each
delivery unit and a 1.5% royalty based on system-wide sales by TM Riders, both
beginning when TM Riders has ten delivery units open. If TM Riders conducts an
underwritten initial public offering of its securities, TM Riders has the option
to terminate its fee and royalty obligations by issuing the Company an
additional equity interest representing 20% of the total equity interests in TM
Riders then outstanding.
In 1997, the Company received payment of principal and interest from TM
Riders totaling $139,334 in royalties and $28,934 in fees for accounting and
administrative services. For the first six months of 1998, the Company
received interest totaling $16,000 and $16,995 in royalties and fees for
accounting and administrative services. As of the date of this Prospectus,
TM Riders had not opened the minimum number of delivery units required to
initiate the Company's right to fee payments upon the opening of delivery
units or royalties on system-wide sales of TM Riders.
TW-TENNESSEE, LLC
In February 1997, the Company invested a nominal amount to acquire a 9.5%
common member interest in TW-Tennessee, LLC ("TW-Tennessee"), which was
organized to develop and operate Tumbleweed full service restaurants as a
franchisee of the Company. David M. Roth, a director of the Company, also owns
a membership interest in TW-Tennessee. Douglas H. Morris II, Gary McCartin and
David H. Cooper, all of whom are stockholders of the Company, also own
membership interests in TW-Tennessee.
The TW-Tennessee operating agreement provides that, upon unanimous
agreement of all common members, the common members can be required to make
additional capital contributions in the form of cash or assumption of
liabilities of TW-Tennessee in proportion to their ownership interests.
During 1997, TW-Tennessee established a $1,000,000 line of credit with a
commercial bank at the bank's prime rate (8.5% at December 31, 1997), which
expires on October 31, 1998, but may be extended by mutual agreement. At
December 31, 1997, TW-Tennessee had drawn down $1,000,000 under this line of
credit. In March 1998, the principal amount of the line of credit was
increased to $2,000,000. The Company has agreed to guarantee up to
$1,250,000 of the principal balance of the line of credit, and other members
have agreed each to guarantee up to $750,000 of the principal balance. As of
June 30, 1998, TW-Tennessee had drawn down $1,539,400 under the line of
credit.
During 1997, TW-Tennessee entered into a $14,800,000 lease financing
arrangement with an unrelated third party for the acquisition, conversion,
remodeling and equipping of up to twelve existing
-62-
<PAGE>
restaurants as Tumbleweed restaurants, and the acquisition, construction and
equipping of two prototype Tumbleweed restaurants. The Company and certain
members of TW-Tennessee have jointly and severally guaranteed 50% of
TW-Tennessee's obligations under the arrangement to the extent of 100% of any
amounts due under the building lease for each restaurant until the restaurant
opens and to the extent of 25% of such amounts thereafter. At December 31,
1997 and June 30, 1998, the amounts expended by TW-Tennessee under the
financing arrangement totaled $6.4 million and $7.8 million, respectively.
As of those dates, TW-Tennessee also had equipment leases with a bank
totaling approximately $100,000 and $560,000, respectively, which are jointly
and severally guaranteed by the common members of TW-Tennessee.
In 1997 and the six months of 1998, TW-Tennessee paid royalties and franchise
fees of $77,186 and $123,977, respectively, and other fees of $30,445 and
$41,457, respectively, to the Company under the franchise agreement.
TW-INDIANA, LLC
David M. Roth, a director of the Company, is a member 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. David H.
Cooper, a stockholder of the Company, is also a member of TW-Indiana, LLC.
OTHER TRANSACTIONS
At the time the Reorganization takes effect, the interests of the current
Class A, Class B, Class C and Common Members of Tumbleweed, LLC will be
converted into a total of 5,145,000 shares of Common Stock. The interests of
the Class B Members, which were issued in connection with the initial
organization of Tumbleweed, LLC in September 1994, are convertible into 297,235
shares, only if the Class B Members make additional capital contributions
totaling $747,500 no later than the time the Reorganization takes effect. The
Class B Members have deposited the capital contributions into escrow, subject to
the effectiveness of the Reorganization. Class B interests are owned by nine
record members, and beneficial owners of those interests include Minx M.
Auerbach and David M. Roth, who are directors of the Corporation.
David M. Roth and David H. Cooper are principals in the law firm Roth Foley
Bryant & Cooper, PLLC, which provided legal services to the Company during 1997
and may be expected to render such services to the Company in the future. The
Company paid $71,859 in fees for legal services rendered by Roth Foley Bryant &
Cooper, PLLC in 1997 and $21,734 for the first six months of 1998.
-63-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock upon consummation of the
Reorganization by (i) each person known by the Company to be the beneficial
owner of 5% or more of the outstanding shares of Common Stock, (ii) each of
the Company's directors, (iii) each of the executive officers named in the
Summary Compensation Table above and (iv) all executive officers and
directors of the Company as a group. The table assumes the sale of (a)
700,000 shares of Common Stock and (b) 1,200,000 shares of Common Stock,
respectively, in this offering, and that none of the listed persons or the
members of the group purchases shares of Common Stock in the offering.
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner Amount and Nature of Beneficial Ownership
---------------- -----------------------------------------
Percentage of Class
-------------------
Number 700,000 1,200,000
of Shares(1) shares sold shares sold
--------- ----------- -----------
<S> <C> <C> <C>
John A. Butorac, Jr.(2) 1,335,316 22.8% 21.0%
1900 Mellwood Avenue
Louisville, KY 40206
James M. Mulrooney 895,458 15.3 14.1
1900 Mellwood Avenue
Louisville, KY 40206
George Keller 514,500 8.9 8.1
4201 Paoli Pike
Floyd Knobs, IN 47119
David M. Roth(3) 384,431 6.6 6.1
1230 Liberty Bank Lane
Suite 200
Louisville, KY 40222-5763
Minx M. Auerbach(4) 151,419 2.6 2.4
Lewis Bass 53,417 0.9 0.8
W. Roger Drury 21,367 0.4 0.3
Terrance Smith -- -- --
John Brewer -- -- --
- 64 -
<PAGE>
All current directors and 3,355,908 57.5% 52.8%
executive officers as a group
(9 persons)
</TABLE>
- -----------------------
* Indicates less than 1%.
(1) Under the rules of the Commission, a person is deemed to beneficially own
shares over which the person has or shares voting or investment power or
has the right to acquire beneficial ownership within 60 days. Except as
otherwise noted, each person or entity named in the table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned.
(2) Includes 934,721 shares held jointly by Mr. Butorac and his wife and
400,595 shares held by Mr. Butorac's wife as trustee for their children.
(3) Includes 89,085 shares held by Douglass Ventures, for which Mr. Roth is
general partner, and 134,319 shares held by Valley Vista Ventures, LLC, for
which Mr. Roth is manager.
(4) Ms. Auerbach holds all of these shares as trustee for a family trust.
-65-
<PAGE>
SELLING STOCKHOLDERS
An aggregate of 5,145,000 shares of Common Stock will be issued to the
members of Tumbleweed, LLC in the Reorganization, which will take effect as
of the time the Company has accepted subscriptions for at least 700,000
shares of Common Stock offered hereby and elects to consummate the sale of
those shares at an initial closing. The 5,145,000 shares to be issued in the
Reorganization would represent from 81.1% to 88% of the shares of Common
Stock outstanding upon completion of this offering, depending on the number
of shares sold in this offering, which could range from a maximum of
1,200,000 shares to a minimum of 700,000 shares.
The 5,145,000 shares of Common Stock to be issued in the Reorganization
have been registered under the Securities Act and may be offered by the
members of Tumbleweed, LLC (the "Selling Stockholders"). Selling
Stockholders may not sell their Common Stock until the earlier of (i) the
sale of all 1,200,000 shares of Common Stock offered by the Company in this
offering, or (ii) the termination of this offering by the Company after the
sale of a minimum of 700,000 shares of Common Stock and the effective time of
the Reorganization. Of the 5,145,000 shares eligible for sale by Selling
Stockholders, 771,750 shares (15%) may be sold by Selling Stockholders
beginning upon the completion of this offering by the Company, and 4,373,250
shares (85%) will be subject to agreements by the Selling Stockholders not to
sell or otherwise transfer 85% of the shares issued in the Reorganization
without the prior written consent of the Company for a period of nine months
following the date of the completion of this offering by the Company.
The following table sets forth certain information with respect to the
Selling Stockholders. The Company will not receive any of the proceeds from
the sale of such shares. There are no material relationships between any of
the Selling Stockholders and the Company or any of its predecessors, nor have
any such material relationships existed within the past three years, except
for the transactions relating to the issuance of such shares and except as
set forth under "Certain Transactions." Because the Selling Stockholders may
sell a portion of their shares of Common Stock at any time and from time to
time after the date of completion of this offering by the Company, no
estimate can be made of the number of shares of Common Stock that each
Selling Stockholder may retain upon completion of the offering by Selling
Stockholders.
<TABLE>
<CAPTION>
Selling Shareholder Beneficial Ownership(1)(2)
1,200,000
No. of 700,000 Shares Sold
Shares(1)(2) Shares Sold Sold
------------ ------------ ------------
<S> <C> <C> <C>
Dr. & Mrs. Edward Adler 13,354 * *
R. Lee Armbruster 20,031 * *
Robert Auerbach 13,354 * *
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholder Beneficial Ownership(1)(2)
1,200,000
No. of 700,000 Shares Sold
Shares(1)(2) Shares Sold Sold
------------ ------------ ------------
<S> <C> <C> <C>
Minx M. Auerbach, Trustee -
Auerbach Gift Trust #2 151,419 2.6% 2.4%
Mitchel F. Bass 5,342 * *
Ned M. Bass 5,342 * *
Richard Bass 5,342 * *
Mary T. Bass 2,671 * *
Steven A. Bass and Mary T. Bass,
Trustees -
Anna Logan Bass Trust 2,671 * *
Steven A. Bass and Mary T. Bass,
Trustees -
Elle Leah Bass Trust 2,671 * *
Lewis Bass 53,417 * *
Steven A. Bass 16,025 * *
Donald W. Bennett 13,354 * *
Kevin L. Bergman 3,339 * *
Sandra Berman 13,354 * *
Mr. and Mrs. Randall L. Bloch 26,708 * *
James D. Bohanon 26,708 * *
David S. Bowen 3,339 * *
Jay Brodsky 13,354 * *
Mona Brodsky 13,354 * *
Randy Brodsky 3,339 * *
John A. Butorac, Jr., Group 1,335,316 22.8% 21.0%
Robert Camighan, M.D. 13,354 * *
Ballard W. Cassady, Jr. 13,354 * *
Chase Family Trust 13,354 * *
Dr. and Mrs. Angelo A. Ciliberti 13,354 * *
</TABLE>
-67-
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholder Beneficial Ownership(1)(2)
1,200,000
No. of 700,000 Shares Sold
Shares(1)(2) Shares Sold Sold
------------ ------------ ------------
<S> <C> <C> <C>
Bruce M. Cohen 6,677 * *
Burton Cohen, M.D. 6,677 * *
Helane P. Cooper 93,868 1.6% 1.5%
Tamara Todd Cotton 13,354 * *
CSJ Ventures 13,354 * *
D & D Investments 6,677 * *
Douglass Ventures 89,085 1.5% 1.4%
W. Roger Drury 21,367 * *
Lisa M. Eisen 3,339 * *
Jeffrey A. Evans 1,335 * *
Stephen J. Evans, C.P.A. 1,335 * *
Ronald J. Fadel, M.D. 13,354 * *
Donald Farris 26,708 * *
Michael M. Fleishman 6,677 * *
Dr. and Mrs. Larry D. Florman 28,216 * *
W. Sterrett Foster, M.D. 6,677 * *
Mr. and Mrs. John Franco 26,708 * *
Gary L. Fuchs, M.D. 6,677 * *
Cyrus Ghazi, M.D. 13,354 * *
Ronald Greenberg 28,216 * *
Timothy Haas 13,354 * *
Sandra Barr Hammond 13,354 * *
Arthur P. Hipwell 21,367 * *
William S. Hitron 5,342 * *
David L. Hyman 26,708 * *
Robert A. Jones 13,354 * *
</TABLE>
-68-
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholder Beneficial Ownership(1)(2)
1,200,000
No. of 700,000 Shares Sold
Shares(1)(2) Shares Sold Sold
------------ ------------ ------------
<S> <C> <C> <C>
George Keller 514,500 8.8% 8.1%
Jay Klempner 13,354 * *
Robert A. Kohn 28,216 * *
Kory's Investment Group 16,025 * *
James R. Lavelle, Jr. 10,683 * *
Sharon Levine 6,677 * *
Alan N. Linker 6,677 * *
Gerald Mansbach 98,002 1.7% 1.5%
John M. Mayer, Jr. 6,677 * *
Gary and Donna McCartin 6,677 * *
Frank B. Miller, M.D. 13,354 * *
Steven L. Morguelan 13,354 * *
Mr. and Mrs. Stuart Morguelan 13,354 * *
Douglas H. Morris, II 57,939 * *
Morris-Adams Partnership 112,864 1.9% 1.8%
William and Toni Mullins 13,354 * *
James M. Mulrooney 895,458 15.3% 14.1%
Michael Needleman, M.D. 6,677 * *
Julie L. Nusbaum 3,339 * *
Thomas G. O'Daniel, M.D. 6,677 * *
Ann B. Oldfather 13,354 * *
Charles A. Osborn, Jr. 26,708 * *
Edwin H. Perry 6,677 * *
David Pullem 1,335 * *
Michelle Pullem 1,335 * *
Donald Putnam 26,708 * *
</TABLE>
-69-
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholder Beneficial Ownership(1)(2)
1,200,000
No. of 700,000 Shares Sold
Shares(1)(2) Shares Sold Sold
------------ ------------ ------------
<S> <C> <C> <C>
William C. Ramsey, M.D. 6,677 * *
R. Michael Ricketts 3,339 * *
Alan I. Roth, M.D. 63,842 1.1% 1.0%
David M. Roth 13,354 * *
Marsha B. Roth 147,673 2.5% 2.3%
Elliot Roth 18,696 * *
Richard J. Reeves, Trustee -
Roth-Tumbleweed Trust 302,412 5.2% 4.8%
Maxine R. Rouben 13,354 * *
Dr. and Mrs. William S. Rubin 26,708 * *
Mr. and Mrs. Martin S. Ruby 13,354 * *
Charles Schnatter, Trustee -
John Schnatter Trust 53,417 * *
Stephen J. Evans, Trustee -
Wayne T. Smith Trust 53,417 * *
Mr. and Mrs. Greg Solomas 3,339 * *
Susan P. Spickard 13,354 * *
David Steinbrecher 13,354 * *
Gerald D. Temes, M.D. 6,677 * *
Valley Vista Ventures, LLC 134,319 2.3% 2.1%
Charles L. Weisberg 26,708 * *
Rochelle Zegart, Trustee -
Kenneth Zegart Gift Trust 6,677 * *
</TABLE>
- -------------------
* Indicates less than 1%.
(1) Assumes the listed person buys none of the 1,200,000 shares offered by the
Company in this offering.
-70-
<PAGE>
(2) Of these shares, 85% may not be sold for a period of nine months from the
date the Company completes this offering of 1,200,000 shares without the
prior written consent of the Company.
Selling Stockholders may sell their shares from time to time in
transactions in the over-the-counter market or in negotiated transactions, a
combination of such methods of sale, or otherwise. The shares may be sold by
one or more of the following: (a) a block trade in which the broker or dealer so
engaged will attempt to sell the shares as agent; and (b) ordinary brokerage
transactions in which the broker solicits purchasers. In addition, any
securities covered by the Prospectus which qualify for sale pursuant to Rule 144
may be sold under Rule 144 rather than pursuant to this Prospectus. Sales may be
made at fixed prices which may be changed, at market prices prevailing at the
time of sale, or at negotiated prices.
Selling Stockholders may sell their shares directly to purchasers, through
broker-dealers, or to broker-dealers who may purchase shares as principals and
thereafter sell the shares from time to time in the over-the-counter market, in
negotiated transactions, or otherwise. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions, or commissions from Selling
Stockholders and/or the purchasers for whom such broker-dealers may act as
agents or to whom they may sell as principals or both (which compensation as to
a particular broker-dealer may be in excess of customary commissions.
Selling Shareholders and broker-dealers, if any, acting in connection with
such sale might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act and any commission received by them and any profit
on the resale of such shares might be deemed to be underwriting discounts and
commissions under the Securities Act. At the time a particular offer of the
shares is made by or on behalf of Selling Shareholders, to the extent required,
a supplement to this Prospectus will be distributed, which will set forth the
number of shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers, or agents, the purchase price paid by any
underwriter and any discounts, commissions, or concessions allowed or reallowed
or paid to dealers, and the proposed selling price to the public.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to the Common Stock for a period of nine
business days prior to the commencement of such distribution. In addition and
without limiting the foregoing, each Selling Stockholder' will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which may limit the
timing of purchases and sales of shares of Common Stock by the Selling
Stockholders.
The Company will pay all reasonable and necessary expenses in connection
with the preparation of the Registration Statement and this Prospectus,
including, without limitation, any and all legal, accounting and filing fees,
but not including fees and disbursements of experts and counsel retained by the
Selling Stockholders or underwriting discounts and commission to be paid by the
Selling Stockholders.
The Company has agreed to indemnify the Selling Stockholders against
certain liabilities in connection with the Registration Statement, of which this
Prospectus is a part, including certain liabilities under the Securities Act.
DESCRIPTION OF SECURITIES
GENERAL
-71-
<PAGE>
The Company's Certificate of Incorporation provides that the authorized
capital stock of the Company consists of 30,000,000 shares of Common Stock,
par value $0.01 per share, and 5,000,000 shares of preferred stock
("Preferred Stock"), par value $0.01 per share. Upon completion of this
offering, it is anticipated that a minimum of 5,845,000 shares and a maximum
of 6,345,000 shares of Common Stock will be issued and outstanding and no
shares of Preferred Stock will be issued or outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share owned of
record on all matters voted upon by stockholders. Subject to requirements,
if any, regarding the setting aside of sums as sinking funds or redemption or
purchase accounts, and subject further to the requirements (including any
preferential rights) of the Preferred Stock outstanding, holders of Common
Stock are entitled to receive dividends if, as and when declared by the Board
of Directors out of funds legally available therefor. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in the
assets of the Company, if any, remaining after the payment of all liabilities
of the Company and the liquidation preferences of any outstanding Preferred
Stock.
National City Bank, Cleveland, Ohio, will act as the transfer agent and
registrar for the Common Stock.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized shares of
Preferred Stock in one or more series and to fix the designations, powers,
privileges and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations and
restrictions, including, without limitation, the number of shares constituting
each such series, dividend rates, redemption and sinking fund provisions,
liquidation and preferences, conversion rights, and voting rights, without any
further vote or action by the stockholders. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of Common Stock. The issuance of Preferred Stock
also could have the effect of delaying, deterring or preventing a change in
control of the Company without further action by the stockholders.
CERTAIN CORPORATE GOVERNANCE MATTERS
The Company's Board of Directors currently consists of eight directors.
The Company's Certificate of Incorporation and the By-laws provide that: (i)
the number of directors of the Company will be fixed by resolution of the Board
of Directors, but in no event will be less than five nor more than 11 directors;
(ii) the directors of the Company in office from time to time will fill any
vacancy or newly created directorship on the Board of Directors; (iii) directors
of the Company may be removed only for cause by the holders of at least a
majority of the Company's voting stock; (iv) stockholder action can be taken
only at an annual or special meeting of stockholders and not by written consent
in lieu of a meeting; and (v) except as described below, special meetings of
stockholders may be called only by the Chairman of the Board, the President of
the Company or by a majority of the total number of directors of the Company,
and the business permitted to be conducted at any such meeting is limited to
that stated in the notice of the special meeting. The By-laws also require that
stockholders desiring to bring any business before an annual meeting of
stockholders deliver written notice thereof to the Secretary of the Company not
fewer than 60 days nor more than 90 days in advance of the annual meeting of
stockholders; provided, however, if the date of the meeting is not furnished to
stockholders in a notice, or is not publicly disclosed by the Company, more than
70 days prior to the meeting, notice by the stockholder, to be timely, must be
delivered to the President or Secretary of the
-72-
<PAGE>
Company not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made.
The By-laws also provide that stockholders desiring to nominate persons for
election as directors must make their nominations in writing to the President of
the Company not fewer than 60 days nor more than 90 days prior to the scheduled
date for the annual meeting; provided, however, if fewer than 70 days notice or
prior public disclosure of the scheduled date for the annual meeting is given or
made, notice to the stockholders, to be timely, must be delivered to the
President or Secretary of the Company not later than the close of business on
the tenth day following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made.
Under applicable provisions of the Delaware General Corporation Law, the
approval of a Delaware corporation's board of directors, in addition to
stockholder approval, is required to adopt any amendment to the corporation's
certificate of incorporation, but a corporation's by-laws may be amended either
by action of its stockholders or, if the corporation's certificate of
incorporation so provides, its board of directors. The Certificate of
Incorporation and By-laws provide that the provisions summarized above may not
be amended by the stockholders, nor may any provision inconsistent herewith be
adopted by the stockholders, without the affirmative vote of the holders of at
least 85% of the Company's voting stock, voting together as a single class.
The foregoing provisions of the Certificate of Incorporation and By-laws
may discourage or make more difficult the acquisition of control of the Company
by means of a tender offer, open market purchase, proxy contest or otherwise.
These provisions may have the effect of discouraging certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company first to negotiate with the Company. The
Company's management believes that the foregoing measures provide benefits to
the Company and its stockholders by enhancing the Company's ability to negotiate
with the proponent of any unfriendly or unsolicited proposal to take over or
restructure the Company and that these benefits outweigh the disadvantages of
discouraging such proposals because, among other things, negotiations relating
to takeover or restructuring proposals could result in an improvement of their
terms.
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a Delaware corporation for
three years following the date the person became an interested stockholder
unless: (i) before the person became an interested stockholder, the board of
directors of the corporation approved either the transaction in which the
interested stockholder became an interested person or the business
combination; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time such transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans that do not
provide employees with the rights to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) following the transaction in which the person became an interested
stockholder, the business combination is approved by the board of directors
of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the public announcement or notification (as required by Section 203) of a
transaction that is one of certain extraordinary transactions involving the
corporation, is with or by a person who either has not been an interested
stockholder during the previous three years or who became an interested
stockholder with the
-73-
<PAGE>
approval of a majority of the corporation's directors, and is approved or not
opposed by a majority of the board of directors then in office. Mr. Butorac
and Mr. Mulrooney, each of whom may own more than 15% of the Common Stock
upon completion of this offering, are excluded from status as an "interested
person" for purposes of Section 203.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance given as to the effect, if any, that the
sale or availability for sale of shares of Common Stock will have on the market
price. Sales of substantial amounts of Common Stock in the public market, or
the perception that sales in substantial amounts might occur, could adversely
effect the market price of the Common Stock and impair the Company's ability to
raise equity capital in the future.
Upon completion of this offering, there will be a minimum of 5,845,000
shares and a maximum of 6,345,000 shares of Common Stock outstanding, depending
on the number of shares sold in this offering. All of the outstanding stores
will be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act ("Affiliates"), may
generally be sold only in compliance with the limitations of Rule 144 described
below.
In connection with this offering, the current members of Tumbleweed, LLC
(who will own a total of approximately 5,145,000 shares of Common Stock) have
entered into agreements (the "Lock-Up Agreements") with the Company that,
subject to certain exceptions, they will not sell or otherwise transfer
4,373,250 or 85% of their shares of Common Stock for a period of nine months
from the effective time of the Reorganization without the prior written consent
of the Company. Upon the expiration of the Lock-Up Agreements all of these
shares will become immediately available for resale.
In general, under Rule 144, as currently in effect, any Affiliate of the
Company who has beneficially owned restricted securities for at least one year,
is entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) 1% of the then outstanding shares of the Company's
Common Stock (a minimum of 58,450 and a maximum of 63,450 shares immediately
after the offering) or (ii) the average weekly trading volume of the Company's
Common Stock on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association such as the
Nasdaq National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission. Sales pursuant
to Rule 144 are also subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company.
OPTIONS
Options to purchase approximately 400,000 shares of Common Stock will be
granted to employees and nonemployee directors under the Plan, effective upon
the completion of this offering. Approximately 235,000 additional shares of
Common Stock are available for future option grants under the Plan. See
"Management -- Incentive Stock Plan."
-74-
<PAGE>
PLAN OF DISTRIBUTION
GENERAL
The Company is offering to sell up to 1,200,000 shares of its Common
Stock. The Common Stock will be sold by the Company on a "best efforts"
basis. None of the officers and directors of the Company will receive any
compensation in connection with any offers or sales of Common Stock in this
offering. The Company may also retain Agents to sell the Common Stock on a
"best efforts" basis. There are no underwriters involved in this offering.
If the Company retains Agents to sell the Common Stock offered hereby, the
Company will pay such Agents a selling commission of up to 8% of the gross
offering proceeds attributable to Common Stock sold by such Agents. The
Company and the Agents, if any, will, in all likelihood, agree to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933.
The Common Stock will be sold at the price of $10.00 per share. The
minimum number of shares a subscriber is required to purchase in order to
subscribe to the offering hereby will be 100 shares and shares must be purchased
in increments of 100 shares. Employees of the Company will not be subject to
any minimum share purchase requirement. The Company reserves the right to
withdraw, cancel or modify the offering hereby and to reject subscriptions, in
whole or in part, for any reason.
DETERMINATION OF OFFERING PRICE
Prior to the offering hereby, there has been no public market for the
Company's Common Stock. The price to the public has been arbitrarily determined
by the Company and may not be indicative of the market price for the Common
Stock after this offering. In determining the offering price, the Board of
Directors considered, among other things, the Company's earnings, their view of
its prospects, the earnings of comparable publicly traded casual dining
restaurant companies, and the trading price of the stock of those companies.
The Company makes no representations as to any objectively determinable value of
the Common Stock.
SUBSCRIPTION PROCEDURES
The Company is presently soliciting non-binding indications of interest to
purchase shares of Common Stock, and will not accept binding subscriptions or
accept payment for any shares until after the Registration Statement of which
this Prospectus in a part has been declared effective by Securities and Exchange
Commission. After such Registration Statement has been declared effective, the
Company will provide to each prospective investor an agreement to purchase
shares of the Common Stock (the "Subscription Agreement") and a copy of the
final Prospectus relating to this offering. The Company's acceptance of a
subscription shall be evidenced solely by the delivery to the subscriber of a
written confirmation of sale. Receipt by the Company of a Subscription
Agreement and/or deposit by the Escrow Agent of payment for the subscribed
shares as described below shall not constitute acceptance of a subscription.
All subscription payments and executed Subscription Agreements will be delivered
to the National City Bank (the "Escrow Agent"), Louisville, Kentucky. The
subscription payments will be deposited into an escrow account at National City
Bank, subject to a closing (the "Initial Closing") on such escrowed funds once
the Company has accepted subscriptions for at least 700,000 shares and, if all
shares of Common Stock offered hereby are not sold as of the date of the Initial
Closing, to subsequent closings on such escrowed funds from time to time as
determined by the Company.
Stock certificates will not be issued to subscribers until such time as the
funds related to the purchase of Common Stock by such subscribers are released
from the escrow account to the Company by the Escrow
-75-
<PAGE>
Agent. Until such time as stock certificates are issued to the subscribers,
the subscribers will not be considered shareholders of the Company.
Subscribers will have no right to a return of their subscription payment
held in the escrow account and all interest earned on the escrowed proceeds will
belong to the Company. However, if the Company cancels this offering of the
Common Stock, interest earned on an escrowed subscription payment will be paid
to the subscriber.
TERMINATION OF OFFERING
This offering begins on the date of this Prospectus and will continue until
the earlier of (i) the date upon which the Escrow Agent receives the proceeds
for all 1,200,000 shares of Common Stock offered hereby in the specified escrow
account; (ii) December 31, 1998 (subject to the right of the Company to extend
the offering for an additional 90 days to March 31, 1999); or (iii) the date
upon which the Company terminates this offering for any reason other than the
sale of at least 700,000 shares of Common Stock. The Company has the right to
terminate the offering and purchase the shares held in escrow at any time after
the Escrow Agent has received the subscription proceeds for 700,000 shares. The
Company may terminate this offering at any time until all 1,200,000 shares of
Common Stock offered hereby have been sold. If the Company terminates this
offering before the subscription proceeds for 700,000 shares have been received
by the Escrow Agent, all subscription proceeds will be promptly returned to
subscribers, with interest.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Brown, Todd & Heyburn PLLC, Louisville, Kentucky.
EXPERTS
The financial statements of Tumbleweed, Inc. as of June 30, 1998, and of
Tumbleweed, LLC as of December 31, 1996 and 1997 and for each of the three years
in the period ended December 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
-76-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Tumbleweed, Inc.
Report of Independent Auditors...............................................................F-1
Financial Statements
Balance Sheet as of June 30, 1998........................................................F-2
Notes to Balance Sheet...................................................................F-3
Tumbleweed, LLC
Report of Independent Auditors...............................................................F-4
Financial Statements
Statements of Income for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and
1998 (unaudited).....................................................................F-5
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited)..............................................................................F-6
Statements of Redeemable Members' Equity, Members' Equity and Retained
Earnings (Deficit) for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1998 (unaudited)......................F-8
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and 1998
(unaudited)..........................................................................F-9
Notes to Financial Statements...........................................................F-10
</TABLE>
-77-
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying balance sheet of Tumbleweed, Inc. as of June
30, 1998. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Tumbleweed, Inc. as of June 30,
1998, in conformity with generally accepted accounting principles.
Louisville, Kentucky
August 7, 1998
F-1
<PAGE>
Tumbleweed, Inc.
Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 130
-----
Total Assets $ 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
Paid-in capital 129
-----
Total stockholders' equity $ 130
-----
-----
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Tumbleweed, Inc.
Notes to Balance Sheet
June 30, 1998
1. DESCRIPTION OF BUSINESS
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. The Company has entered into an agreement with
Tumbleweed, LLC (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 22 restaurants in Kentucky, Indiana and Ohio, and franchises an
additional 13 restaurants in Indiana, Illinois, Tennessee and Wisconsin.
Tumbleweed also licenses one restaurant in each of Germany and Saudi Arabia.
2. BASIS OF PRESENTATION
The Company's assets at June 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.
F-3
<PAGE>
Report of Independent Auditors
The Members
Tumbleweed, LLC
We have audited the accompanying balance sheets of Tumbleweed, LLC as of
December 31, 1996 and 1997, and the related statements of income, redeemable
members' equity, members' equity and retained earnings (deficit) and cash
flows for each of three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Tumbleweed, LLC at December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Louisville, Kentucky
March 31, 1998
F-4
<PAGE>
Tumbleweed, LLC
Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1996 1997 1997 1998
-------------------------------------------- -----------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 17,254,058 $ 23,284,007 $ 27,891,128 $ 13,221,654 $ 18,547,631
Commissary sales 1,574,847 1,795,529 1,007,011 595,991 503,340
Franchise fees and royalties 540,157 474,870 563,056 231,718 384,614
Other revenues 177,960 177,317 365,054 184,910 249,627
-------------------------------------------- ----------------------------
Total revenues 19,547,022 25,731,723 29,826,249 14,234,273 19,685,212
Operating expenses:
Restaurant cost of sales 5,132,549 7,103,357 8,191,928 3,900,847 5,385,530
Commissary cost of sales 1,424,077 1,649,502 887,793 531,989 430,119
Operating expenses 8,896,704 12,386,119 14,035,693 6,718,212 9,600,749
Selling, general and administrative expenses 1,962,036 2,250,827 3,051,740 1,354,081 1,993,873
Preopening amortization 149,138 405,502 544,723 309,258 306,908
Depreciation and amortization 1,033,349 1,231,290 971,863 453,095 655,364
-------------------------------------------- ----------------------------
Total operating expenses 18,597,853 25,026,597 27,683,740 13,267,482 18,372,543
-------------------------------------------- ----------------------------
Income from operations 949,169 705,126 2,142,509 966,791 1,312,669
Other income (expense):
Interest income 23,911 18,313 62,120 31,642 31,028
Interest expense (290,441) (222,123) (490,718) (248,914) (410,257)
-------------------------------------------- ----------------------------
Total other expense (266,530) (203,810) (428,598) (217,272) (379,229)
-------------------------------------------- ----------------------------
Net income $ 682,639 $ 501,316 $ 1,713,911 $ 749,519 $ 933,440
-------------------------------------------- ----------------------------
-------------------------------------------- ----------------------------
Pro forma income data (unaudited):
Net income as reported $ 1,713,911 $ 749,519 $ 933,440
Pro forma income taxes (617,008) (269,827) (336,038)
------------ ---------------------------
Pro forma net income $ 1,096,903 $ 479,692 $ 597,402
------------ ---------------------------
------------ ---------------------------
Pro forma net income per share-basic and diluted $ 0.21 $ 0.09 $ 0.12
------------ ---------------------------
------------ ---------------------------
Shares used in computing pro forma net income
per share 5,145,000 5,145,000 5,145,000
------------ ---------------------------
------------ ---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Tumbleweed, LLC
Balance Sheets
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31 JUNE 30 JUNE 30
1996 1997 1998 1998
------------------------------------- --------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,031,709 $ 1,228,867 $ 978,469 $ 978,469
Accounts receivable 296,609 346,700 224,586 224,586
Note receivable from affiliate 100,000 100,000 100,000 100,000
Inventories 698,456 825,029 999,512 999,512
Deferred preopening expenses 495,002 267,100 571,515 571,515
Prepaid expenses 248,475 282,590 298,569 298,569
------------------------------------- --------------------------------------
Total current assets 2,870,251 3,050,286 3,172,651 3,172,651
Property and equipment, net 14,617,858 19,330,132 22,538,870 22,538,870
Note receivable from affiliate 400,000 300,000 300,000 300,000
Goodwill, net of accumulated amortization of
$218,642 in 1996, $329,442 in 1997 and
$384,842 as of June 30, 1998 3,055,304 2,944,504 2,889,104 2,889,104
Other assets 319,022 443,559 473,555 473,555
------------------------------------- --------------------------------------
$ 21,262,435 $ 26,068,481 $ 29,374,180 $ 29,374,180
------------------------------------- --------------------------------------
------------------------------------- --------------------------------------
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31 JUNE 30 JUNE 30
1996 1997 1998 1998
------------------------------- ------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES, REDEEMABLE MEMBERS' EQUITY,
MEMBERS' EQUITY, RETAINED EARNINGS (DEFICIT)
AND PRO FORMA STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 660,303 $ 1,174,645 $ 1,052,763 $ 1,052,763
Accrued liabilities 631,471 890,255 1,120,224 1,120,224
Deferred income taxes - - - 416,091
Current maturities on long-term
debt and capital leases 271,908 509,779 745,010 745,010
------------------------------- ------------------------------------
Total current liabilities 1,563,682 2,574,679 2,917,997 3,334,088
Long-term debt, less current maturities 3,955,235 5,750,841 7,295,214 7,295,214
Capital lease obligations, less current maturities 1,549,014 2,280,964 3,316,225 3,316,225
Deferred income taxes - - - 28,492
Other liabilities 40,000 118,584 119,336 119,336
------------------------------- ------------------------------------
Total long-term liabilities 5,544,249 8,150,389 10,730,775 10,759,267
------------------------------- ------------------------------------
Total liabilities 7,107,931 10,725,068 13,648,772 14,093,355
Redeemable members' equity 20,232,519 23,419,738 24,669,359 7,079,742
Members' equity 6,959 6,959 6,959 -
Retained earnings (deficit) (6,084,974) (8,083,284) (8,950,910) -
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 - - - 8,149,633
------------------------------- ------------------------------------
Total pro forma stockholders' equity - - - 8,201,083
------------------------------- ------------------------------------
$ 21,262,435 $ 26,068,481 $ 29,374,180 $29,374,180
------------------------------- ------------------------------------
------------------------------- ------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
<TABLE>
<CAPTION>
Tumbleweed, LLC
Statements of Redeemable Members' Equity, Members' Equity and Retained Earnings (Deficit)
REDEEMABLE
MEMBERS MEMBERS' EQUITY
----------------------------------
EQUITY-CLASS A COMMON MEMBERS CLASS B
MEMBERS MEMBERS
----------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 $ - $6,000 $ 152,500
Issuance of members' equity 13,425,172 - -
Distributions of members' equity (376,943) - (152,041)
Net income - - -
Accretion of redeemable members' equity 3,364,968 - -
----------------------------------------------------
Balance at December 31, 1995 16,413,197 6,000 459
Issuance of members' equity 582,962 - -
Distributions of members' equity (628,677) - -
Net income - - -
Accretion of redeemable members' equity 3,865,037 - -
----------------------------------------------------
Balance at December 31, 1996 20,232,519 6,000 459
Issuance of members' equity 50,958 - -
Distributions of members' equity (575,960) - -
Net income - - -
Accretion of redeemable members' equity 3,712,221 - -
----------------------------------------------------
Balance at December 31, 1997 23,419,738 6,000 459
Issuance of members' equity (unaudited) 55,023 - -
Distributions of members' equity (unaudited) (606,468) - -
Net income (unaudited) - - -
Accretion of redeemable members' equity (unaudited)
1,801,066 - -
----------------------------------------------------
Balance at June 30, 1998 (unaudited) $ 24,669,359 $6,000 $ 459
----------------------------------------------------
----------------------------------------------------
MEMBERS' EQUITY RETAINED
-------------------------------------
CLASS C EARNINGS
MEMBER TOTAL (DEFICIT)
-------------------------------------------------------
Balance at January 1, 1995 $500 $ 159,000 $ (38,924)
Issuance of members' equity - - -
Distributions of members' equity - (152,041) -
Net income - - 682,639
Accretion of redeemable members' equity - - (3,364,968)
-------------------------------------------------------
Balance at December 31, 1995 500 6,959 (2,721,253)
Issuance of members' equity - - -
Distributions of members' equity - - -
Net income - - 501,316
Accretion of redeemable members' equity - - (3,865,037)
-------------------------------------------------------
Balance at December 31, 1996 500 6,959 (6,084,974)
Issuance of members' equity - - -
Distributions of members' equity - - -
Net income - - 1,713,911
Accretion of redeemable members' equity - - (3,712,221)
-------------------------------------------------------
Balance at December 31, 1997 500 6,959 (8,083,284)
Issuance of members' equity (unaudited) - - -
Distributions of members' equity (unaudited) - - -
Net income (unaudited) - - 933,440
Accretion of redeemable members' equity (unaudited)
- - (1,801,066)
-------------------------------------------------------
Balance at June 30, 1998 (unaudited) $500 $ 6,959 $(8,950,910)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Tumbleweed, LLC
Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1996 1997 1997 1998
----------------------------------------- -------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 682,639 $ 501,316 $ 1,713,911 $ 749,519 $ 933,440
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 422,383 604,534 822,756 384,748 578,267
Amortization 610,966 626,756 142,613 68,347 77,097
Preopening amortization 149,138 405,502 544,724 309,258 306,908
Gain on sale of food courts - (71,298) - - -
Loss (gain) on disposition of property
and equipment (7,500) 2,732 13,498 2,408 3,945
Changes in operating assets and liabilities:
Accounts receivable (34,453) 87,382 (50,091) 116,740 122,114
Inventories (86,750) (307,900) (126,573) (14,410) (174,483)
Deferred preopening expenses (323,041) (726,601) (316,822) (58,358) (611,323)
Prepaid expenses (101,572) (62,063) 19,062 75,065 (18,152)
Other assets 167,857 (207,125) (98,042) (31,186) 2,591
Accounts payable (108,908) 124,097 31,938 (427,239) (121,882)
Accrued liabilities 37,500 92,647 258,784 74,038 229,969
Other liabilities - - 78,584 - 752
----------------------------------------- -------------------------
Net cash provided by operating activities 1,408,259 1,069,979 3,034,342 1,248,930 1,329,243
INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (9,963,544) - - - -
Purchases of property and equipment (2,915,957) (4,712,962) (4,098,595) (1,558,942) (2,505,742)
Proceeds from sale of property and equipment 1,526,000 1,635,815 - - -
Proceeds from sale of food courts, net of cash
relinquished - 96,100 100,000 - -
----------------------------------------- -------------------------
Net cash used in investing activities (11,353,501) (2,981,047) (3,998,595) (1,558,942) (2,505,742)
FINANCING ACTIVITIES:
Proceeds from issuance of members' equity 13,425,172 582,962 50,958 7,603 55,023
Distribution of members' equity (528,984) (628,677) (575,960) (282,603) (606,468)
Proceeds from issuance of long-term debt 876,000 5,437,311 3,452,361 768,080 3,280,463
Payments on long-term debt and capital
lease obligations (1,745,829) (4,532,110) (1,654,463) (314,851) (1,750,806)
Payment of public offering costs - - (111,485) - (52,111)
----------------------------------------- -------------------------
Net cash provided by financing activities 12,026,359 859,486 1,161,411 178,229 926,101
----------------------------------------- -------------------------
Net increase (decrease) in cash and cash equivalents 2,081,117 (1,051,582) 197,158 (131,783) (250,398)
Cash and cash equivalents at beginning of period 2,174 2,083,291 1,031,709 1,031,709 1,228,867
----------------------------------------- -------------------------
Cash and cash equivalents at end of period $ 2,083,291 $ 1,031,709 $ 1,228,867 $ 899,926 $ 978,469
----------------------------------------- -------------------------
----------------------------------------- -------------------------
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 290,441 $ 222,123 $ 473,055 $ 248,914 $ 410,257
----------------------------------------- -------------------------
----------------------------------------- -------------------------
Noncash investing and financing activities:
Property and equipment acquired by seller
financing and capital lease obligations $ - $ 1,793,991 $ 967,529 $ - $ 1,285,208
----------------------------------------- -------------------------
----------------------------------------- -------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
June 30, 1998 (Unaudited) and December 31, 1997
UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of June 30, 1998 and statements of income, cash flows
and related footnote information herein for the six-months ended June 30,
1997 and 1998, and statements of redeemable members' equity, members' equity
and retained earnings (deficit) for the six-months ended June 30, 1998 (the
"1997 and 1998 interim financial information") are unaudited and have been
prepared by Tumbleweed, LLC (the "Company") on the same basis as the audited
financial statements herein. In the opinion of the Company, the 1997 and 1998
interim financial information includes all adjustments, consisting of only
normal recurring adjustments, considered necessary for a fair presentation of
the information.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the 1997 and 1998 interim
financial information. The 1997 and 1998 interim financial information should
be read in conjunction with the Company's December 31, 1995, 1996 and 1997
audited financial statements appearing herein. Operating results for the
six-months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
1. ORGANIZATIONAL MATTERS
The Company operates and franchises Tumbleweed Southwest Mesquite Grill and
Bar full service restaurants. Following is a summary of the number of
restaurants open at the end of each period:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------
1995 1996 1997 1997 1998
------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Company owned 10 15 17 15 22
Franchised and licensed 9 9 12 9 15
</TABLE>
The restaurant facilities are located in Kentucky, Indiana, Ohio, Illinois,
Wisconsin, Tennessee and two overseas restaurants are located in Germany and
Saudi Arabia.
F-10
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
1. ORGANIZATIONAL MATTERS (CONTINUED)
The Company and its owners (Members) operate pursuant to an Operating
Agreement dated September 19, 1994. Members of the Company are comprised of
Common Members, Class A Members, Class B Members and a Class C Member.
Certain Common Members act as the Managers of the Company and, acting
unanimously, would generally have voting control of the Company. The Company
is to dissolve no later than December 13, 2044.
Class A Members of the Company have provided financing which has been
accounted for as redeemable members' equity (see Note 8). The capital
accounts of the Common, Class B and Class C Members, $6,000, $459 and $500,
respectively, at December31, 1997 represent these members equity investment
in the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 COSTS
Deferred preopening costs include the direct costs typically associated with
opening a new restaurant. These costs consist primarily of costs incurred to
develop the new restaurant management team, marketing and training. These
costs are amortized on a straight-line method over twelve months from the
restaurant opening date.
F-11
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position,
"REPORTING ON THE COSTS 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 ($267,100 at January 1, 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.
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 lease, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair value.
F-12
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 such 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, 1995,
1996 and 1997 were $0, $50,657and $66,488, respectively, and $31,391 and
$43,966 for the six-months ended June 30, 1997 and 1998, respectively.
Advertising expense, which includes local store promotions and contributions
to the Marketing Fund, for the years ended December 31, 1995, 1996 and 1997
was $991,291 $1,258,296 and $1,166,399, respectively, and $582,619 and
$976,410 for the six-months ended June 30, 1997 and 1998, respectively.
INCOME TAXES
The Company is currently a limited liability company which is taxed as a
partnership for federal and state income tax purposes. Accordingly, any tax
liability related to income would be reported by the Members of the Company. The
Company currently anticipates completing an initial public offering of its
common stock in 1998 (the "IPO"), which will result in the Company becoming a
taxable entity as a result of the reorganization (see Note 11).
F-13
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is required to be adopted for 1998
year-end financial reporting. This statement does not have any impact on the
financial results or financial condition of the Company, but may result in
certain changes in required disclosures of segment information.
3. ACQUISITION
Effective January 1, 1995, the Company acquired substantially all of the
assets of Tumbleweed Mexican Food, Inc. and Tumbleweed Concepts, Inc. The
funds necessary to complete the acquisition were raised by the Company
through an equity offering that generated $7,034,375 from Class A Members and
a line of credit assumed directly by the Class A Members on a pro rata basis
(see Note 8) which is reflected as the issuance of members' equity in the
1995 statement of redeemable members' equity, members' equity and retained
earnings (deficit). The purchase price was $9,630,000, plus a $1,000,000
non-compete payment. The acquisition was recorded under the purchase method
of accounting. The excess of the purchase price over the fair value of the
assets acquired and liabilities assumed is being amortized over thirty years
using the straight-line method. The non-compete agreement was amortized on a
straight-line method over a two-year period ($500,000 amortization expense in
1995 and 1996).
F-14
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------
1996 1997 1998
------------------------------------ ------------------
<S> <C> <C> <C>
Land and land improvements $ 4,370,852 $ 4,926,744 $ 4,912,207
Buildings and improvements 5,460,216 6,427,063 6,583,785
Leasehold improvements 1,590,346 1,831,734 2,047,955
Equipment 2,178,413 2,953,802 3,127,340
Building and equipment under capital leases 1,809,518 2,664,838 3,954,752
Construction in progress 157,135 2,297,135 4,260,902
---------------------------------------------------------
15,566,480 21,101,316 24,886,941
Less accumulated depreciation and amortization
(948,622) (1,771,184) (2,348,071)
---------------------------------------------------------
$ 14,617,858 $ 19,330,132 $ 22,538,870
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------
1996 1997 1998
------------------------------------ ------------------
<S> <C> <C> <C>
Accrued payroll and related taxes $ 295,472 $ 416,066 $ 683,814
Accrued insurance and fees 46,553 120,800 61,073
Accrued taxes, other than income and payroll 125,292 157,693 265,551
Gift certificate liability 95,356 127,922 44,953
Other 68,798 67,774 64,833
------------------------------------ -------------------
$ 631,471 $ 890,255 $ 1,120,224
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
F-15
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------
1996 1997 1998
------------------------------------ ------------------
<S> <C> <C> <C>
Secured $5,000,000 mortgage revolving line of
credit note, bearing interest at prime rate
plus .25% (8.75% at December 31, 1997 and
June 30, 1998), due December 31, 2000 $2,863,391 $3,260,391 $3,182,148
Secured mortgage note payable, bearing interest at
9.75%, payable in monthly installments through
November 27, 2016 746,875 709,375 690,625
Secured mortgage note payable, bearing interest at
commercial paper rate plus 3% (8.8% at
December 31, 1997 and 8.6% at June 30, 1998), due
January 1, 2005 - 1,200,000 1,153,333
Secured mortgage note payable, bearing interest at
prime rate plus 1% (9.5% at December 31, 1997 and
June 30, 1998), payable in monthly installments
through October 1, 2017 - 133,937 1,094,588
Secured mortgage note payable, bearing interest at
commercial paper rate plus 3.1% (8.7% at June 30,
1998), due May 1, 2005 - - 719,911
Other installment notes payable 461,848 733,280 857,436
------------------------------------ ------------------
4,072,114 6,036,983 7,698,041
Less current maturities 116,879 286,142 402,827
------------------------------------ ------------------
Long-term debt $ 3,955,235 $ 5,750,841 $7,295,214
------------------------------------ ------------------
------------------------------------ ------------------
</TABLE>
Property and equipment with a net book value of approximately $11,500,000 at
December 31, 1997 collateralize the Company's long-term debt.
F-16
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities of long-term debt for the years subsequent to
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 286,142
1999 280,130
2000 3,513,041
2001 260,136
2002 209,719
Thereafter 1,487,815
--------------------
Total $ 6,036,983
--------------------
--------------------
</TABLE>
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
$40,715 in 1995, $157,286 in 1996 and $103,488 in 1997. For the six-months
ended June 30, 1997 and 1998 these costs were $26,694 and $66,758,
respectively.
F-17
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
7. LEASES
The Company leases certain building 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, 1997 were as follows:
<TABLE>
<CAPTION>
RELATED PARTY OTHER
LEASE LEASES TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
1998 $ 84,000 $ 371,712 $ 455,712
1999 84,000 371,712 455,712
2000 84,000 371,712 455,712
2001 84,000 371,712 455,712
2002 84,000 256,256 340,256
Thereafter 1,245,932 1,281,352 2,527,284
-----------------------------------------------------
Total minimum lease payments $ 1,665,932 $ 3,024,456 4,690,388
---------------------------------
---------------------------------
Less amount representing interest at 7.9% to
12.0% (2,185,787)
------------------
Net present value of lease payments 2,504,601
Less current maturities 223,637
------------------
Long-term portion of capital leases $ 2,280,964
------------------
------------------
</TABLE>
Subsequent to December 31, 1997, the Company entered into a building capital
lease agreement with a related party for a restaurant which opened in April
1998. The lease expires in 2018. The future minimum lease payments under the
capital lease are $1,544,974 as of June 30, 1998.
F-18
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
7. LEASES (CONTINUED)
The Company leases certain restaurants and equipment under operating leases
having terms expiring between 1998 and 2017. Most of the restaurant facility
leases have renewal clauses of five to twenty years exercisable at the option
of the Company and some of the leases are with related parties. 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, 1997 were as follows:
<TABLE>
<CAPTION>
RELATED PARTY OTHER
LEASES LEASES TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
1998 $ 238,689 $ 736,464 $ 975,153
1999 238,689 685,150 923,839
2000 238,689 548,785 787,474
2001 238,689 547,865 786,554
2002 238,689 545,111 783,800
Thereafter 1,346,532 3,752,061 5,098,593
-----------------------------------------------------
$ 2,539,977 $ 6,815,436 $ 9,355,413
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Total rental expense was approximately $430,300 in 1995, $801,800 in 1996 and
$975,300 in 1997 and included contingent rent of approximately $3,000 in
1995, $16,800 in 1996 and $30,700 in 1997. For the six-months ended June 30,
1997 and 1998, rental expense was approximately $500,422 and $657,362,
respectively, and included contingent rent of approximately $3,538 and
$79,513, respectively. Rental expense for the related party leases was
approximately $52,300 in 1995, $237,700 in 1996 and $282,000 in 1997. For the
six months ended June 30, 1997 and 1998, rental expense for these leases was
approximately $119,345 and $286,458, respectively.
Subsequent to December 31, 1997, the Company entered into two ground
operating lease agreements, one of which is with a related party, and a
related party building operating lease agreement for restaurants which opened
in January and April 1998. Total future minimum lease payments as of June 30,
1998 relative to these leases are $855,096 for the related party ground
lease, $1,103,840 for the second ground operating lease and $1,200,000 for
the related party building operating lease. Annual rent expense will
approximate $43,000, $48,000 and $60,000, respectively.
F-19
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
8. REDEEMABLE CLASS A MEMBER UNITS AND LINE OF CREDIT
In January 1995, the Company drew down $7,034,375 under a $7,500,000 line of
credit with a local bank for borrowing at the bank's prime rate plus 1/4%
(8.75% at December 31, 1997). Under a related assumption agreement, the Class
A Members directly assumed the total liability on a pro rata basis through
January 2000. Until then, the Company is secondarily liable for amounts
borrowed. The Company had drawn down $6,390,797, $6,973,759, $7,024,717 and
$7,079,742 at December 31, 1995, December 31, 1996, December 31, 1997 and
June 30, 1998, respectively, under this line of credit which expires on
December 31, 1998. Since amounts borrowed under the line of credit are
primarily obligations of the Class A Members, such amounts are accounted for
as redeemable members' equity and any interest and other related costs on the
debt funded by the Company are accounted for as distributions to the Class A
Members.
Amounts borrowed under the line of credit must be repaid prior to or as a
result of an IPO by the Company. At any time after the fifth anniversary of
the date that a Class A Member is admitted to the Company (generally 2000),
if an IPO has not occurred, any Class A Member has the right to sell to the
Company their interest in the Company for 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. Redeemable members' equity in the accompanying balance
sheets includes the accretion of the annual 30% internal rate of return. The
total Class A Members' interests which would be required to be purchased by
the Company in any one year is limited and would be payable in equal
installments over a five-year term, with interest. However, the Managers of
the Company have the right to dissolve the Company at any time after a
certain number of "put options" of Class A Member Units have been exercised.
Through December 31, 1997, capital contributions by the Class A Members were
limited to their initial cash contribution in 1995 (see Note 3) and
borrowings under the line of credit assumed by the Class A Members.
F-20
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS
During 1996, the Company sold certain assets of its four food court
restaurants and it's 50% interest in a joint venture which operates a food
court to T.M. Riders, LLC (T.M. Riders). In exchange for essentially all the
assets of the food courts and its interest in the joint venture, the Company
received $100,000 in cash and a note receivable for $500,000, due in annual
installments of $100,000 plus interest at the rate of 8% per year beginning
December 1, 1997 over five years. The gain on the sale of the food courts and
interest in the joint venture of approximately $71,300 is included in other
revenues in 1996.
In February 1997, the Company invested a nominal amount in T.M. Riders in
exchange for a 9.5% common member interest. After ten stores have opened, the
Company will receive fees from T.M. Riders based on store openings and
royalty fees based on T.M. Riders' system-wide sales. In the event T.M.
Riders has an IPO, it has the option to increase the Company's ownership to
20.0% in exchange for the elimination of such fees.
In February 1997, the Company 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. TW-Tennessee was organized to
open and operate Tumbleweed full service restaurants as a franchisee of the
Company. TW-Tennessee operates pursuant to an operating agreement in which
common members are required, upon unanimous agreement of all common members,
to make certain additional capital contributions in the form of cash and/or
assumption of liabilities of TW-Tennessee in proportion to their common
member ownership interest. During 1997, TW-Tennessee established a $1,000,000
line of credit with a bank for borrowings at the bank's prime rate (8.5% at
December 31, 1997). At December 31, 1997, TW-Tennessee had drawn down
$1,000,000 under this line of credit which expires on October 31, 1998. In
March 1998, the principal amount of the line of credit was increased to
$2,000,000 and the Company has guaranteed up to $1,200,000 of the principal
balance of the line of credit. Other members of TW-Tennessee have
individually guaranteed $750,000 of the principal balance of the line of
credit. As of June 30, 1998, TW-Tennessee had drawn down $1,539,400 under the
line of credit.
F-21
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1997, TW-Tennessee entered into a $14,800,000 lease financing
arrangement whereby the Company and certain of its Common Members have
jointly and severally guaranteed 50% of TW-Tennessee's performance and
obligations under the terms of the arrangement to the extent of 100% of any
amounts due under the terms of building leases until the stores are
operational and thereafter to the extent of 25% of such amounts. At December
31, 1997, approximately $6.4 million ($7.8 million through June 30, 1998) had
been expended by TW-Tennessee under the financing arrangement. TW-Tennessee
also has equipment leases totaling approximately $560,000 with a bank which
are jointly and severally guaranteed by its Common Members.
TW-Tennessee and T.M. Riders are governed and managed by Boards, some members
of which are also members of the Company's Board and investors in the
Company. Certain of these individuals are also investors in TW-Tennessee and
T.M. Riders.
The Company accounts for its investments in TW-Tennessee and T.M. Riders on
the equity method. Amounts in the financial statements related to the
Company's investments in these entities as of and for the years ended
December 31, 1996 and 1997 and as of and for the six months ended June 30,
1998 were not significant, except for approximately $71,000 of equity losses
on the Company's investment in TW-Tennessee for the six months ended June 30,
1998 included in other revenues in the statement of income. Franchise fees
and royalties recorded by the Company in relation to these entities were
$25,000 in 1995, $17,000 in 1996 and $79,000 in 1997. For the six-months
ended June 30, 1997 and 1998, these amounts were approximately $1,637 and
$126,013, respectively. The Company also provides management and accounting
services for certain of these entities for which fees are charged. Such
management and accounting fees recorded in other income related to these
entities totaled approximately $10,600 in 1995, $15,500 in 1996 and $57,600
in 1997. For the six-months ended June 30, 1997 and 1998, these amounts were
approximately $11,400 and $56,400, respectively.
In August 1997, the Company entered into the International Agreement with
Tumbleweed International LLC (International), a restaurant developer based in
Brussels, Belgium. 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
Members of the Company. In 1997, International paid $15,750 in fees to the
Company under the International Agreement. During the six-months ended June 30,
1998, International paid $7,500 in fees to the Company under the International
Agreement.
F-22
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements (continued)
10. COMMITMENTS
At December 31, 1997 and June 30, 1998, the Company had commitments of
approximately $530,000 and $1,606,600, respectively, for the completion of
the construction of two and three restaurants, respectively.
11. SUBSEQUENT EVENTS
IPO REGISTRATION AND REORGANIZATION
Tumbleweed, Inc. was incorporated in December 1997 in anticipation of an IPO
in 1998. Concurrent with the closing of the planned IPO, the Company will
merge into Tumbleweed, Inc. and the interests of the current members of the
Company will be converted into a total of 5,145,000 shares of Tumbleweed,
Inc. common stock of which 1,503,009 shares shall be distributed to Class A
members, 297,235 shares to Class B members, 514,500 shares to the Class C
member and 2,830,256 shares to Common Members.
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 June 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 June 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 year ended December 31, 1997 and the six-months ended June 30, 1997
and 1998 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.
F-23
<PAGE>
[INSIDE BACK COVER]
TUMBLEWEED MAKES IT REWARDING
Kentucky Locations
Louisville (7)
Elizabethtown
Lexington [map of Eastern United States showing company-owned
Frankfort and franchised store locations]
Florence
Bowling Green
Owensboro
Indiana Locations
Floyds Knobs
New Albany (2)
Salem
Evansville
Terre Haute
Illinois Locations
Rockford
Ohio Locations
Cincinnati (4)
Mason
Columbus
Heath
Wooster
Zanesville
Springfield
Chillicothe
Reynoldsburg
Tennessee Locations
Murfreesboro
Cookeville
Henderson
Nashville
Hermitage
Clarksville
Wisconsin Locations International Locations
Appleton Jeddah, Saudi Arabia
Madison Erlangen, Germany
Milwaukee Frankfurt, Germany
Fuerth, Germany As of 6-15-98
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN, OR INCORPORATED
BY REFERENCE IN, THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDER OR ANY SELLING AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
INCORPORATED BY REFERENCE HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
UNTIL _____ __, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information ....................................................3
Prospectus Summary........................................................4
History and Pending Reorganization.......................................10
Risk Factors.............................................................11
Use of Proceeds..........................................................17
Dividend Policy..........................................................17
Dilution.................................................................18
Capitalization...........................................................20
Selected Financial Data..................................................21
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................23
Business.................................................................33
Management...............................................................45
Certain Transactions.....................................................52
Principal Stockholders...................................................56
Selling Stockholders ....................................................57
Description of Securities................................................59
Shares Eligible for Future Sale..........................................62
Plan of Distribution ....................................................63
Legal Matters ...........................................................65
Experts .................................................................65
Index to Financial Statements............................................66
</TABLE>
[TUMBLEWEED LOGO]
1,200,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
________ ___, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, all of which
are borne by the Registrant. All amounts are estimated except the Securities
and Exchange Commission registration fee and the National Association of
Securities Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
<S> <C>
AMOUNT
--------
Securities and Exchange Commission Registration Fee . . . . . $ 18,718
National Association of Securities Dealers, Inc.
Filing Fee . . . . . . . . . . . . . . . . . . . . . . . . . 6,845
Blue Sky Qualifications Fees and Expenses . . . . . . . . . . 10,000
Prospectus Distribution Expenses . . . . . . . . . . . . . . 75,000
Marketing and Solicitation . . . . . . . . . . . . . . . . . 175,000
Printing and Engraving Expenses . . . . . . . . . . . . . . . 40,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . 150,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . 250,000
Transfer Agent Fees and Expenses . . . . . . . . . . . . . . 5,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 69,437
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $800,000
--------
--------
</TABLE>
_________________
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware, as amended from time
to time (the "DGCL") authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of the directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
informed business judgment based on all material information reasonably
available to them. Absent the limitations now authorized by such legislation,
directors are accountable to corporations and their stockholders for monetary
damages for conduct constituting gross negligence in the exercise of their duty
of care. Although the DGCL does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as an
injunction or rescission. Article 10 of the Registrant's Certificate of
Incorporation limits the liability of the directors to the Registrant or its
stockholders (in their capacity as directors but not in their capacity as
officers). Specifically, a director of the Registrant will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit.
II-1
<PAGE>
Article 10 of the Registrant's Certificate of Incorporation provides for
indemnification to the fullest extent authorized by the DGCL, for each person
who was or is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director
or officer of the Registrant or is or was serving at the request of the
Registrant as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, against all expense, liability and loss
(including reasonable attorneys' fees, judgments, fines, excise taxes under
the Employee Retirement Income Security Act of 1974, as in effect from time
to time ("ERISA"), penalties and amounts to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith. The Registrant's
Certificate of Incorporation also provides that the Registrant's Board of
Directors may also provide indemnification to other employees or agents of
the Registrant with the same scope and effect as the indemnification of
directors and officers.
Article 10 of the Registrant's Certificate of Incorporation provides
that the Registrant may pay costs, charges and expenses (including attorneys'
fees) incurred by a director or officer of the Registrant, or such other
person acting on behalf of the registrant as determined in accordance with
Section 10.3 of Article 10, in defending a civil or criminal action, suit or
proceeding, in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer or other person to repay all amounts so advanced in the event that it
shall ultimately be determined that such director, officer or other person is
not entitled to be indemnified by the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 23, 1998, the Registrant issued a total of 13 shares of Common
Stock to John A. Butorac, Jr. and James M. Mulrooney for consideration of $10
per share in connection with the initial capitalization of the Registrant.
The Registrant relied upon the exemption from registration pursuant to
Section 4(2) under the Securities Act.
The Registrant has entered into an agreement providing for the merger of
Tumbleweed, LLC into the Registrant, which would become effective at the time of
the sale of a minimum of 700,000 shares of Registrant's Common Stock as
contemplated by this Registration Statement. In the merger, the membership
interests of members of Tumbleweed, LLC would be converted into approximately
5,145,000 shares of Registrant's Common Stock. The Registrant has relied upon
the exemption from registration pursuant to Section 4(2)under the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2 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*
5 Opinion of Brown, Todd & Heyburn PLLC
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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
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 Douglass Ventures,
Abfam, Inc. and Blue Door-Bowling Green Joint Venture*
10.10 Sublease Agreement, dated June 30, 1995, among Douglass 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)*
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
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Brown, Todd & Heyburn PLLC (included in Exhibit 5)
24.1 Power of Attorney (included in the signature pages to this
Registration Statement)*
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Form of Subscription Agreement*
99.2 Form of Indication of Interest*
99.3 Escrow Agreement between Tumbleweed, Inc. and National City Bank
of Kentucky, as
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
Escrow Agent
99.4 Form of Selling Agent Agreement
99.5 Registration Rights Agreement between Tumbleweed, Inc. and
Tumbleweed, LLC.
</TABLE>
________________
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining liability under the Securities Act of
1933, the information omitted
II-4
<PAGE>
from the form of prospectus filed as a part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this amendment to its Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Louisville, Commonwealth of Kentucky, on the 13th
day of August, 1998
TUMBLEWEED, INC.
By: /s/ John A. Butorac, Jr.
--------------------------
John A. Butorac, Jr.
President
In accordance with the requirements of the Securities Act of 1933,
this amendment to the Registration Statement on Form S-1 has been signed by
the following persons in the capacities indicated on the 13th day of August,
1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John A. Butorac, Jr.
---------------------------------- President, Chief August 13, 1998
John A. Butorac, Jr. Executive Officer and
Director
/s/ James M. Mulrooney
---------------------------------- Executive Vice August 13, 1998
James M. Mulrooney President, Chief
Financial Officer and
Director (Principal
Financial and Accounting
Officer)
*
---------------------------------- Director August 13, 1998
David M. Roth
*
---------------------------------- Director August 13, 1998
Minx Auerbach
*
---------------------------------- Director August 13, 1998
Lewis Bass
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
---------------------------------- Director August 13, 1998
Roger Drury
*
---------------------------------- Director August 13, 1998
George Keller
*
---------------------------------- Director August 13, 1998
Terrance A. Smith
*/s/ John A. Butorac, Jr.
-----------------------------------
John A. Butorac, Jr., as attorney-in-fact for
the above-named individual pursuant to the power
of attorney previously filed as Exhibit 24.1 to
this Registration Statement.
</TABLE>
II-7
<PAGE>
Exhibit 5
Opinion of Brown, Todd & Heyburn PLLC
Brown, Todd & Heyburn PLLC
400 West Market Street
32nd Floor
Louisville, Kentucky 40202
August 13, 1998
Tumbleweed, Inc.
1900 Mellwood Avenue
Louisville, Kentucky 40206
Gentlemen:
We have acted as counsel for Tumbleweed, Inc., a Delaware corporation (the
"Company"), in connection with the Form S-1 Registration Statement, Registration
No. 333-57931, filed on June 29, 1998, to be amended by Amendment No. 1 to be
filed contemporaneously with this letter (as so amended, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), covering 6,345,000 shares of the Company's common stock (the "Shares")
comprised of (i) up to 1,200,000 Shares to be issued by the Company for a
maximum aggregate offering price of $12,000,000, and (ii) 5,145,000 Shares that
may be offered for sale by certain stockholders ("Selling Stockholders"), as
more fully described in the Registration Statement .
In connection with this opinion, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of the Company's
Certificate of Incorporation, its By-laws, resolutions of its Board of
Directors, the Agreement and Plan of Merger dated as of June 23, 1998, between
Tumbleweed, LLC and the Company, and such other documents as we deemed necessary
for purposes of rendering this opinion.
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to originals of all copies of all documents submitted
to us. We have relied upon statements and certificates of public officials and
corporate officers with respect to the accuracy of all matters contained
therein.
Based upon the foregoing, and subject to the qualifications hereinafter set
forth, it is our opinion that the Shares have been duly authorized, and when
either (i) issued, delivered and paid for in accordance with the terms of the
offering by the Company, as set forth in the "Plan of Distribution" section of
the prospectus contained in the Registration Statement (the "Prospectus"), or
(ii) when issued in accordance with the terms of the Agreement and Plan of
Merger as described in the "History and Pending Reorganization" section of the
Prospectus and sold by a Selling
<PAGE>
Stockholder in accordance with the terms set forth in the "Selling
Stockholders" section of the Prospectus, the Shares will be validly issued,
fully paid and nonassessable.
This opinion is intended solely for use in connection with the transactions
described herein. We hereby consent to the use of our name in the Registration
Statement and in the Prospectus filed as a part thereof and to the filing of
this opinion as an exhibit to the Registration Statement. In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
BROWN, TODD & HEYBURN PLLC
By /s/ Alan K. MacDonald
Alan K. MacDonald, Member
<PAGE>
EXHIBIT 10.19
TUMBLEWEED, INC.
BONUS PLAN
FOR JOHN A. BUTORAC, JR.
AND JAMES M. MULROONEY
(a) ACCRUAL. In the event that Tumbleweed, LLC, a Kentucky limited
liability company merges (the "Merger") into Tumbleweed, Inc. (the
"Company"), the Company shall accrue a bonus (the "Accrued Bonus") for the
benefit of each of John A. Butorac, Jr. and James M. Mulrooney (collectively,
the "Executives") for
(i) each full calendar quarter occurring on or after the date of the
Merger (an "Applicable Quarter") and
(ii) each full calendar month (an "Applicable Month") occurring on or
after the date of the Merger and prior to the first Applicable
Quarter
in which the Company achieves 70% of the net income goal set forth in the
Tumbleweed LLC Bonus Plan (as adjusted by the Compensation Committee of the
Board of Directors of the Company to reflect the effects of the Merger and
the public offering by the Company) (the "Bonus Plan")) established for such
Applicable Quarter or Applicable Month (collectively, "Applicable Periods").
The amount of the Accrued Bonus shall be equal to 12.500% for each Applicable
Quarter, and 4.167% for each Applicable Month, of the Executive's Base Salary
as of January 1 of the calendar year in which such Applicable Period occurs,
multiplied by the Applicable Percentage set forth below that corresponds to
the percentage of the net income goal achieved:
Percentage of Net
Income Goal Achieved Applicable Percentage
-------------------- ---------------------
At least 70% but less than 85% 70%
At least 85% but less than 100% 85%
At least 100% but less than 110% 100%
110% or greater 110%
(b) PAYMENT. If the Company achieves at least 70% of the aggregate net
income goal set forth in the Bonus Plan for the Applicable Period, the
Executive shall be entitled to be paid all Accrued Bonuses for the Applicable
Period. If the Company does not achieve at least 70% of the aggregate net
income goal set forth in the Bonus Plan for the Applicable Period, no Accrued
Bonuses shall be paid unless the Board of Directors of the Company determines
that it is appropriate for the Accrued Bonus to be paid because of
non-recurring events or other circumstances deemed relevant by the Board of
Directors. All Accrued Bonuses that are payable for any Applicable Period
shall be paid within 30 days of the release of the audited financial
statements for the calendar year.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the references to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated March 31, 1998, with
respect to the financial statements of Tumbleweed, LLC, and our report dated
June 30, 1998, with respect to the balance sheet of Tumbleweed, Inc., in
Amendment No.1 to the Registration Statement (Form S-1 No. 333-57931) and
related Prospectus of Tumbleweed, Inc. for the registration of 1,200,000 shares
of its common stock.
/s/ Ernst & Young LLP
Louisville, Kentucky
August 7, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF TUMBLEWEED, LLC FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS INCLUDED IN THIS FORM S-1 REGISTRATION STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 978,469
<SECURITIES> 0
<RECEIVABLES> 334,586
<ALLOWANCES> 0
<INVENTORY> 999,512
<CURRENT-ASSETS> 3,172,651
<PP&E> 24,886,941
<DEPRECIATION> 2,348,071
<TOTAL-ASSETS> 29,374,180
<CURRENT-LIABILITIES> 2,917,997
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,725,408
<TOTAL-LIABILITY-AND-EQUITY> 29,374,180
<SALES> 18,547,631
<TOTAL-REVENUES> 19,685,212
<CGS> 5,385,530
<TOTAL-COSTS> 18,372,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379,229
<INCOME-PRETAX> 933,440
<INCOME-TAX> 0
<INCOME-CONTINUING> 933,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 933,440
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF TUMBLEWEED, LLC FOR THE YEAR ENDED DEC. 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN
THE FORM S-1 REGISTRATION STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,228,867
<SECURITIES> 0
<RECEIVABLES> 446,700
<ALLOWANCES> 0
<INVENTORY> 825,029
<CURRENT-ASSETS> 3,050,286
<PP&E> 21,101,316
<DEPRECIATION> 1,771,184
<TOTAL-ASSETS> 26,068,481
<CURRENT-LIABILITIES> 2,574,679
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,343,413
<TOTAL-LIABILITY-AND-EQUITY> 26,068,481
<SALES> 27,891,128
<TOTAL-REVENUES> 29,826,249
<CGS> 8,191,928
<TOTAL-COSTS> 27,683,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 428,598
<INCOME-PRETAX> 1,713,911
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,713,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,713,911
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.3
ESCROW AGREEMENT
THIS AGREEMENT ("Agreement") made this ____ day of _______________,
1998, is by and between TUMBLEWEED, INC., a Delaware corporation (the
"Issuer"), and NATIONAL CITY BANK OF KENTUCKY (the "Escrow Agent").
W I T N E S S E T H
WHEREAS, the Issuer has prepared a Registration Statement on Form S-1
(the "Registration Statement") in connection with the proposed direct public
offering (the "Offering") of its securities (the "Securities") to investors
on the terms described in the attached Information Sheet; and
WHEREAS, the Issuer proposes to establish an escrow account (the "Escrow
Account") to which subscription monies which are received by the Escrow Agent
from subscribers in the Offering ("Subscribers") are to be credited, and the
Escrow Agent is willing to establish the Escrow Account on the terms and
subject to the conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. INFORMATION SHEET. Each capitalized term not otherwise defined in
this Agreement shall have the meaning set forth for such term on the Information
Sheet.
2. ESTABLISHMENT OF THE BANK ACCOUNT.
2.1 The Escrow Agent shall establish a bank account (the "Bank
Account") for the purpose of (a) depositing all subscription monies (checks,
cash or wire transfers) which are received by the Escrow Agent from
Subscribers (directly, or indirectly from broker/dealers) who have submitted
Valid Subscriptions (as defined in Section 3.1), (b) holding subscription
monies which are collected through the banking system, and (c) for disbursing
collected funds, all as described herein. All broker/dealers must transmit
subscription monies directly to the Escrow Agent by noon of the next business
day after receipt.
2.2 The Escrow Agent shall invest all subscription monies
deposited in the Bank Account in the Investment Fund, which shall be invested
only in investments permitted for the subscription monies under Rule 15c2-4
promulgated by the Securities and Exchange Commission. Individual records of
the amount deposited by each Subscriber and interest earned thereon shall be
maintained by the Escrow Agent.
2.3 The offering period ("Offering Period") shall consist of the
period of time set forth on the Information Sheet. The Offering Period shall
be extended by an additional period of time (the "Extension Period") only if
the Escrow Agent shall have received written notice thereof at least two (2)
business days prior to the expiration of the Offering Period. The Extension
Period shall be deemed to commence on the next calendar day following the
expiration of the Offering Period and shall end on the date set forth on the
Information Sheet. The last day of the Offering Period, or the last day of
the Extension Period (if the Escrow Agent has received written notice thereof
as hereinabove provided), is referred to herein as the "Termination Date."
Except as provided in Section
<PAGE>
4.3 hereof, after the Termination Date, the Escrow Agent shall not accept any
additional amounts from Subscribers.
3. DEPOSITS TO THE BANK ACCOUNT.
3.1 Promptly after receiving subscription monies in the form of
check, cash or wire transfer ("Subscription Funds") from any Subscriber who
has submitted a subscription (a "Subscription"), the Escrow Agent shall
determine whether the Subscription is a Valid Subscription. The Escrow Agent
shall not be required to accept for credit to the Escrow Account or for
deposit into the Bank Account checks which are not accompanied by a Valid
Subscription. Wire transfers and cash representing Subscription Funds shall
not be deemed deposited in the Escrow Account until the Escrow Agent has
received Valid Subscriptions with respect to such payments. A Subscription
shall be deemed a "Valid Subscription" only if:
(a) the Subscription Funds are accompanied by a Subscription
Agreement in the form of Exhibit B hereto which contains
(i) the name, address and social security (or taxpayer
ID) number of the Subscriber,
(ii) the number of the Shares subscribed for by the
Subscriber,
(iii) the aggregate dollar amount of such Subscription
(which shall be $10.00 multiplied by the number of Shares subscribed for by
the Subscriber (the "Subscription Amount")), and
(iv) the Subscriber's signature,
(b) the Subscription Funds accompanying such Subscription are
in the exact amount of the Subscription Amount, and
(c) the state listed in the Subscription Agreement as part of the
Subscriber's address shall be one of the states listed on Exhibit C hereto
(which list may be modified from time to time by the Issuer through notice to
the Escrow Agent), and
(d) if the Subscription Funds are represented by a check, the
check is payable to "National City Bank of Kentucky, Escrow Agent for
Tumbleweed, Inc."
If the Escrow Agent is unable to determine whether the Subscription is a
Valid Subscription, the Escrow Agent shall forward the Subscription Agreement
to the Issuer who shall make such determination, which determination by the
Issuer shall be conclusive for purposes of this Agreement. If the
Subscription for any Subscriber is not a Valid Subscription, the Escrow Agent
shall deliver the Subscription Agreement to the Issuer. If the Escrow Agent
has not received a Valid Subscription for such Subscriber within 15 days of
such delivery (or such sooner date that is specified by the Issuer),
-2-
<PAGE>
then the Escrow Agent shall return to such Subscriber all Subscription Funds
(or if the Subscription Funds are represented by a check, such check)
received from such Subscriber.
3.2 With respect to each Valid Subscription, the Escrow Agent
shall deposit the related Subscription Funds into the Bank Account. Amounts
of monies so deposited are hereinafter referred to as "Escrow Amounts." The
Escrow Agent shall process all Escrow Amounts for collection through the
banking system. Promptly following the deposit of Subscription Funds in the
Bank Account, the Escrow Agent shall forward the original Subscription
Agreement relating thereto to the Issuer and retain a copy thereof.
3.3 The Escrow Agent shall not be required to accept in the Escrow
Account any Subscription Funds, whether by check, cash or wire, except during
the Escrow Agent's regular business hours.
3.4 Those Escrow Amounts received from Subscribers who have
submitted Valid Subscriptions ("Escrow Subscribers") which have been
deposited in the Bank Account and which have cleared the banking system and
have been collected by the Escrow Agent are herein referred to as the "Fund."
4. DISBURSEMENT FROM THE BANK ACCOUNT.
4.1 If so instructed by the Issuer, at any time, or subject to
Section 4.3 below, if by the close of regular banking hours on the
Termination Date, the Escrow Agent determines that the amount in the Fund is
less than the Minimum Dollar Amount, then the Escrow Agent shall promptly
refund to each Escrow Subscriber the amount of payment received from such
Escrow Subscriber or which thereafter clears the banking system, plus
interest earned and paid from investment of such payment in the Investment
Fund, by drawing checks on the Bank Account for the amounts of such payments
and transmitting them to the Escrow Subscribers. In such event, the Escrow
Agent shall promptly notify the Issuer in writing of these payments.
4.2 Subject to Section 4.3 below, if at any time up to the close
of regular banking hours on the Termination Date, the Escrow Agent determines
that the amount in the Fund is at least equal to the Minimum Dollar Amount,
the Escrow Agent shall promptly notify the Issuer of such fact in writing.
The Escrow Agent shall promptly disburse the Fund, by drawing checks on the
Bank Account in accordance with instructions in writing signed by the Issuer
as to the disbursement of the Fund, promptly after it receives such
instructions. Thereafter the Escrow Agent shall disburse such additional
amounts as may be deposited from time to time in the Fund, by drawing checks
on the Bank Account in accordance with instructions in writing signed by the
Issuer as to the disbursement of additional amounts deposited in the Fund,
promptly after it receives such instructions. Such instructions of the
Issuer may include from time to time directions to the Escrow Agent to refund
to a particular Escrow Subscriber the amount of payment received from such
Escrow Subscriber or which thereafter clears the banking system, plus
interest accumulated from investment of such payment in the Investment Fund,
by drawing checks on the Bank Account for the amounts of such payments and
transmitting them to the Escrow Subscribers.
-3-
<PAGE>
4.3 If the Escrow Agent has on hand at the close of business on
the Termination Date any uncollected amounts which when added to the Fund
would raise the amount in the Fund to the Minimum Dollar Amount, a collection
period ("Collection Period") consisting of the number of business days set
forth on the Information Sheet shall be utilized to allow such uncollected
amounts to clear the banking system. During the Collection Period, the
Escrow Agent shall not accept any additional Subscription Funds. If at the
close of business on the last day of the Collection Period an amount
sufficient to raise the amount in the Fund to the Minimum Dollar Amount shall
not have cleared the banking system, the Escrow Agent shall promptly notify
the Issuer in writing of such fact and shall promptly return all amounts then
in the Fund, and any amounts which thereafter clear the banking system, to
the Escrow Subscriber as provided in Section 4.1 hereof.
4.4 Upon disbursement of the Fund pursuant to the terms of this
Article 4, the Escrow Agent shall be relieved of all further obligations and
released from all liability under this Agreement. It is expressly agreed and
understood that in no event shall the aggregate amount of payments made by
the Escrow Agent exceed the amount of the Fund.
5. RIGHTS, DUTIES AND RESPONSIBILITIES OF ESCROW AGENT. It is
understood and agreed that the duties of the Escrow Agent are purely
ministerial in nature, and that:
5.1 The Escrow Agent shall notify the Issuer, when requested, of
the Escrow Amounts which have been deposited in the Bank Account and of the
amounts, constituting the Fund, which have cleared the banking system and
have been collected by the Escrow Agent.
5.2 The Escrow Agent shall be under no duty or responsibility to
enforce collection of any check delivered to it hereunder. The Escrow Agent,
within a reasonable time, shall return to the Issuer any check received which
is dishonored, together with the Subscription Agreement which accompanied
such check.
5.3 If the Escrow Agent is uncertain as to its duties or rights
hereunder or shall receive instructions with respect to the Bank Account, the
Escrow Amounts or the Fund which, in its sole determination, are in conflict
either with other instructions received by it or with any provision of this
Agreement, it shall be entitled to hold the Escrow Amounts, the Fund, or a
portion thereof, in the Bank Account pending the resolution of such
uncertainty to the Escrow Agent's sole satisfaction, by final judgment of a
court or courts of competent jurisdiction or otherwise; or the Escrow Agent,
at its sole option, may deposit the Fund (and any other Escrow Amounts that
thereafter become part of the Fund) with the clerk of a court of competent
jurisdiction in a proceeding to which all parties in interest are joined.
Upon the deposit by the Escrow Agent of the Fund with the clerk of any court,
the Escrow Agent shall be relieved of all further obligations and released
from all liability hereunder.
-4-
<PAGE>
5.4 The Escrow Agent shall not be liable for any action taken or
omitted hereunder, or for the misconduct of any employee, agent or attorney
appointed by it, except in the case of willful misconduct or gross
negligence. The Escrow Agent shall be entitled to consult with counsel of its
own choosing and shall not be liable for any action taken, suffered or
omitted by it in accordance with the advice of such counsel.
5.5 The Escrow Agent shall have no responsibility at any time to
ascertain whether or not any security interest exists in the Escrow Amounts,
the Fund or any part thereof or to file any financing statement under the
Uniform Commercial Code with respect to the Fund or any part thereof.
6. AMENDMENT; RESIGNATION. This Agreement may be altered or amended
only with the written consent of the Issuer and the Escrow Agent. The Escrow
Agent may resign for any reason three (3) business days after giving written
notice to the Issuer. Should the Escrow Agent resign as herein provided, it
shall not be required to accept any deposit, make any disbursement or
otherwise dispose of the Escrow Amounts or the Fund, but its only duty shall
be to hold the Escrow Amounts until they clear the banking system and the
Fund for a period of not more than five (5) business days following the
effective date of such resignation, at which time (a) if a successor escrow
agent shall have been appointed and written notice thereof (including the
name and address of such successor escrow agent) shall have been given to the
resigning Escrow Agent by the Issuer and such successor escrow agent, then
the resigning Escrow Agent shall pay over to the successor escrow agent the
Fund, less any portion thereof previously paid out in accordance with this
Agreement; or (b) if the resigning Escrow Agent shall not have received
written notice signed by the Issuer and a successor escrow agent, then the
resigning Escrow Agent shall promptly refund the amount in the Fund to the
Issuer, without interest thereon or deduction therefrom; whereupon, in either
case, the Escrow Agent shall be relieved of all further obligations and
released from all liability under this Agreement. Without limiting the
provisions of Section 8 hereof, the resigning Escrow Agent shall be entitled
to be reimbursed by the Issuer for any expenses incurred in connection with
its resignation, transfer of the Fund to a successor escrow agent or
distribution of the Fund pursuant to this Section 6.
7. REPRESENTATIONS AND WARRANTIES. The Issuer hereby represents and
warrants to the Escrow Agent that:
7.1 No party other than the parties hereto and the prospective
purchasers have, or shall have, any lien, claim or security interest in the
Escrow Amounts or the Fund or any part thereof.
7.2 No financing statement under the Uniform Commercial Code is on
file in any jurisdiction claiming a security interest in or describing
(whether specifically or generally) the Escrow Amounts or the Fund or any
part thereof.
7.3 The Subscription Agreement submitted with each deposit shall,
at the time of submission and at the time of the disbursement of the Fund, be
deemed a representation and warranty
-5-
<PAGE>
that such deposit represents a bona fide payment by the Subscriber described
therein for the amount of Securities set forth in such Subscription
Information.
7.4 All of the information contained in the Information Sheet is,
as of the date hereof, and will be, at the time of any disbursement of the
Fund, true and correct.
8. FEES AND EXPENSES. The Escrow Agent shall be entitled to the
escrow agent fees ("Escrow Agent Fees") set forth on the Information Sheet,
payable as and when stated therein. In addition, the Issuer agrees to
reimburse the Escrow Agent for any reasonable expenses incurred in connection
with this Agreement, including, but not limited to, reasonable counsel fees.
Upon receipt of the Minimum Dollar Amount, the Escrow Agent shall have a lien
upon the Fund to the extent of its fees for services as Escrow Agent.
9. INDEMNIFICATION AND CONTRIBUTION.
9.1 The Issuer agrees to indemnify the Escrow Agent and its
officers, directors, employees, agents and shareholders (collectively
referred to as the "Indemnitees") against, and hold them harmless of and
from, any and all loss, liability, cost, damage and expense, including
without limitation, reasonable counsel fees, which the Indemnitees may suffer
or incur by reason of any action, claim or proceeding brought against the
Indemnitees arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates, unless such action, claim or
proceeding is the result of the willful misconduct or gross negligence of the
Indemnitees.
9.2 If the indemnification provided for in Section 9.1 is
applicable, but for any reason is held to be unavailable, the Issuer shall
contribute such amounts as are just and equitable to pay, or to reimburse the
Indemnitees for, the aggregate of any and all losses, liabilities, costs,
damages and expenses, including counsel fees, actually incurred by the
Indemnitees as a result of or in connection with, and any amount paid in
settlement of, any action, claim or proceeding brought against the
Indemnitees arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates, unless such action, claim or
proceeding is the result of the willful misconduct or gross negligence of the
Indemnitees.
9.3 The provisions of this Article 9 shall survive any termination
of this Agreement, whether by disbursement of the Fund, resignation of the
Escrow Agent or otherwise.
10. GOVERNING LAW AND ASSIGNMENT. This Agreement shall be construed in
accordance with and governed by the laws of the Commonwealth of Kentucky and
shall be binding upon the parties hereto and their respective successors and
assigns; provided, however, that any assignment or transfer by any party of
its rights under this Agreement or with respect to the Escrow Amounts or the
Fund shall be void against the Escrow Agent unless (a) written notice thereof
shall be given to the Escrow Agent; and (b) the Escrow Agent shall have
consented in writing to such assignment or transfer.
-6-
<PAGE>
11. NOTICES. All notices required to be given in connection with this
Agreement shall be sent by registered or certified mail, return receipt
requested, or by hand delivery with receipt acknowledged, or by the Express
Mail service offered by the United States Post Office, and addressed, if to
the Issuer, at its address set forth on the Information Sheet, and if to the
Escrow Agent, to the attention of Stephanie Haysley, National City Bank of
Kentucky, P.O. Box 36010, Louisville, KY. 40233.
12. SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstance shall be determined to be
invalid or unenforceable, the remaining provisions of this Agreement or the
application of such provision to persons or circumstances other than those to
which it is held invalid or unenforceable shall not be affected thereby and
shall be valid and enforceable to the fullest extent permitted by law.
13. EXECUTION IN SEVERAL COUNTERPARTS. This Agreement may be executed
in several counterparts or by separate instruments, and all of such
counterparts and instruments shall constitute one agreement, binding on all
of the parties hereto.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings (written or oral) of the
parties in connection therewith.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
NATIONAL CITY BANK OF KENTUCKY
By: __________________________________
Name: __________________________________
Its: __________________________________
TUMBLEWEED, INC.
By: __________________________________
Name: __________________________________
Its: __________________________________
-7-
<PAGE>
ESCROW AGREEMENT INFORMATION SHEET
1. THE ISSUER
Name: TUMBLEWEED, INC.
Address: 1900 Mellwood Avenue, Louisville, Kentucky 40206
State of incorporation or organization: Delaware
2. THE SHARES
Description of the Securities to be offered: Common Stock
Par value, if any: $.01
Offering price per share: $10.00
3. MINIMUM AMOUNTS REQUIRED FOR DISBURSEMENT OF THE ESCROW ACCOUNT
Aggregate dollar amount which must be collected before the Escrow Account
may be disbursed to the Issuer, exclusive of any interest earned
thereon after deposit ("Minimum Dollar Amount"): $7,000,000.00
4. PLAN OF DISTRIBUTION OF THE SECURITIES
Offering Period:
End of Extension Period:
Collection Period: 7 business days
5. TITLE OF ESCROW ACCOUNT: National City Bank of Kentucky, Escrow Agent
for Tumbleweed, Inc.
6. INVESTMENT FUND: ARMADA GOVERNMENT SECURITIES FUND
7. ESCROW AGENT FEES
Amount due upon completion of the Escrow Account: $1,500.00
Fee for each Subscription: $20.00
For each check received by Escrow Agent and returned as uncollected (e.g.,
insufficient funds or stop payment): $10.00
For each check issued to Subscribers pursuant to Section 3.1, Section 4.1
or Section 4.2: $10.00
-8-
<PAGE>
EXHIBIT 99.4
TUMBLEWEED, INC.
COMMON STOCK
1,200,000 SHARES
_____________
SELLING AGENT AGREEMENT
_____________
, 1998
Selling Agent Name
Street
City, State
Gentlemen:
Tumbleweed, Inc., a Delaware corporation (the "Company"), hereby
appoints ____________________________________________________________ as
selling agent (the "Sales Agent"), on a nonexclusive, best efforts basis, to
sell up to ___________ shares of the Company as described below and hereby
confirms its agreement (this "Agreement") with the Sales Agent as follows:
1. DESCRIPTION OF THE SHARES AND THE OFFERING. The Company proposes
to issue and sell a minimum of 700,000 shares and a maximum of 1,200,000
shares (the "Shares") of its common stock, par value $0.01 per share ("Common
Stock"), for a purchase price of $10.00 per share. The Shares and the terms
of the offering are more fully described in the Company's Form S-1
Registration Statement (Reg. No. 333-57931) (the "Registration Statement")
filed with the United States Securities and Exchange Commission (the
"Commission").
(a) The Shares will be sold by the Company on a "best efforts"
basis, subject to availability. Each subscriber will be required to
purchase a minimum of 100 Shares and Shares must be purchased in
increments of 100 Shares. The Company reserves the right to withdraw,
cancel or modify the offering hereby and to reject subscriptions, in
whole or in part, for any reason. All subscription payments and
executed Subscription Agreements (as defined in Section 3(b)) will be
delivered into escrow for deposit in an interest-bearing escrow
account, subject to a closing at such time as the Company has accepted
subscriptions for at least 700,000 shares (the "Initial Closing") and,
if all of the Shares offered by the Company have not been sold as of
the date of the Initial Closing, to subsequent closings on such
escrowed funds from time to time as determined by the Company.
<PAGE>
(b) The offering will begin on the date the Registration
Statement is declared effective by the Commission and will continue
until the earlier of (i) the date proceeds for all of the 1,200,000
Shares offered by the Company have been deposited in the specified
escrow account; (ii) December 31, 1998 (subject to the right of the
Company to extend the offering for an additional 90 days to March 31,
1999); (iii) the date upon which the Company elects to terminate the
offering and purchase the shares held in escrow at any time after
subscription proceeds for no fewer than 700,000 Shares have been
deposited in the specified escrow account; or (iv) the date upon which
the Company terminates the offering for any reason other than the sale
of at least 700,000 Shares. If the Company terminates this offering
before subscriptions for 700,000 shares have been accepted by the
Company and the proceeds therefor have been deposited in the specified
escrow account, all subscription proceeds will be promptly returned to
subscribers, with interest.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company represents and warrants to, and agrees with, the Sales Agent that:
(a) The Company has prepared the Registration Statement in
conformity with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Rules and Regulations (the
"Rules and Regulations") of the Commission thereunder and has filed
the Registration Statement with the Commission. Copies of the
Registration Statement, including any amendments thereto, the
preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements,
and schedules, as finally amended and revised, have heretofore been
made available by the Company to the Sales Agent. The Registration
Statement, which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (i) the form of
prospectus first filed with the Commission pursuant to Rule 424(b) or
(ii) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed
pursuant to Rule 424(a) under the Act that is delivered by the Company
to the Sales Agent for delivery to purchasers of the Shares, together
with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act.
(b) The Company is offering the Shares to be sold, subject to
availability, through the best efforts of employees of the Company and
selling agents pursuant to the requirements of the Securities Act and
the Rules and Regulations of the Commission thereunder.
(c) No action, suit, or proceeding for the purpose of preventing
or suspending the use of the Prospectus has been initiated or, to the
knowledge of the management of the Company, threatened by any
governmental agency or body nor
2
<PAGE>
has any such agency or body notified the Company of any objections to
the use of the Prospectus.
(d) As of the date hereof and at all times thereafter during the
Offering Period (as hereinafter defined), neither the Prospectus nor
any amendment or supplement thereto will include any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
provided, however, that the foregoing representations and warranties
shall not apply to information, if any, contained in or omitted from
the Prospectus or any such amendment or supplement in reliance upon,
and in conformity with, written information furnished to the Company
by the Sales Agent specifically for use in the preparation thereof.
(e) The Company is duly organized and validly existing and in
good standing under the laws of the State of Delaware and has full
power and authority (corporate and other) to conduct its business as
described in the Prospectus. The Company has all such power,
authority, authorizations, approvals, orders, licenses, certificates,
and permits necessary to enter into this Agreement, to carry out the
provisions and conditions hereof, and to commence the offering. This
Agreement has been duly and validly authorized, executed and delivered
by the Company and is a valid and binding agreement and obligation of
the Company.
(f) Except as contemplated in the Prospectus, after the
respective dates as of which information is given in the Prospectus,
the Company has not incurred any liabilities or obligations, direct or
contingent, or entered into any transactions that are material to the
Company, and there has not been any material change in the capital
stock, short-term debt, or long-term debt of the Company, or any
material adverse change, or, to the knowledge of the management of the
Company, any development involving a prospective material adverse
change, in the condition (financial or other), net worth, or results
of operations of the Company.
(g) The Company has conducted its business so as to comply in
all material respects with applicable statutes, rules, regulations,
decisions, directives, and orders, and there is not pending or, to the
knowledge of the management of the Company, threatened, any action,
suit, or proceeding to which the Company is or may be a party, before
or by any court or governmental agency or body, which might result in
any material adverse change in the condition (financial or other),
business, prospects, net worth, or results of operations of the
Company or might materially and adversely affect the properties or
assets thereof.
(h) The Registration Statement contains a list of agreements,
instruments, or understandings to which the Company or its
subsidiaries is a party or by which they or their properties may be
bound and which may be material to the Company ("Material
Agreements"). The Company is not in default in the performance or
observance of any obligation, agreement, covenant, or condition
contained in any
3
<PAGE>
Material Agreement, nor is the Company in violation of any term or
provision of its Certificate of Incorporation or Bylaws. The execution
and delivery of this Agreement and the incurrence of the obligations
herein set forth will not conflict with, or constitute a breach of or
default under, the Certificate of Incorporation or the Bylaws of the
Company or any Material Agreement or any statute regulating the business
of the Company, or any rule, regulation, decision, directive, or order
of any court or governmental agency or body having jurisdiction over the
Company or any of its activities or properties; and, except as expressly
set forth herein and in the Prospectus, no consent, approval,
authorization, or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated hereby.
(i) The Company's authorized and issued capital stock is stated
in the Prospectus. The Shares being sold by the Company pursuant to
this Agreement, when issued and delivered in accordance with this
Agreement, will be duly and validly issued and outstanding and fully
paid, and the Company's Common Stock conforms to all statements in
relation thereto contained in the Prospectus.
3. ENGAGEMENT OF SALES AGENT; SALES AND DELIVERY OF THE SHARES. On
the basis of the representations and warranties herein contained, and subject
to the terms and conditions and covenants and agreements set forth herein,
the parties hereto agree as follows:
(a) The Sales Agent will act as selling agent for the Company on
a nonexclusive, "best efforts" basis to sell Shares for the account of
the Company, subject to availability, at a price of $10.00 per Share,
and the Sales Agent agrees to use its best efforts to effect such
sales. However, the Sales Agent makes no commitment to purchase any
of the Shares. The Sales Agent's engagement hereunder will terminate
on the earlier of (a) December 31, 1998, or such later date not beyond
March 31, 1999 (90 days), to which the Company may extend the
offering; (b) the sale of all 1,200,000 of the Shares; (c) termination
of the offering by the Company for any reason before the sale of all
of the Shares; or (d) termination of the Sales Agent's engagement by
the Company in accordance with the provisions of Section 10 hereof.
The period from the Effective Date (as defined in Section 10(a)) to
such termination of the Sales Agent's engagement shall be referred to
as the "Offering Period."
(b) The Sales Agent will deliver a copy of the Prospectus and a
subscription agreement in the form accompanying the Prospectus (the
"Subscription Agreement") to each prospective investor in accordance
with the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (together, the "Exchange Act"), including
Rule 15c2-8 thereunder.
(c) All subscribers will be instructed to execute a Subscription
Agreement and to make their remittances payable to National City Bank
of Kentucky ("Escrow Agent"), in accordance with the instructions
contained in the Prospectus, the Subscription Agreement, and this
Agreement. All subscribers will be instructed that remittances
represented by a check must be made payable to "National City Bank of
Kentucky, Escrow Agent for Tumbleweed, Inc." Upon receipt of a
Subscription
4
<PAGE>
Agreement and subscription proceeds, the Sales Agent shall review the
Subscription Agreement for completeness and then shall promptly transmit
the completed Subscription Agreement and subscription proceeds to the
Escrow Agent no later than noon, Eastern Time, of the next business day
after receipt.
(d) The Escrow Agent will determine if each Subscription
Agreement is complete promptly after submission. If the Escrow Agent
is unable to determine whether the Subscription Agreement is complete,
the Escrow Agent shall forward the Subscription Agreement to the
Issuer, which will determine as to whether the Subscription is
complete. If any Subscription Agreement is incomplete, the Escrow
Agent shall forward the Subscription Agreement to the Issuer. If the
Sales Agent is listed on the Subscription Agreement, the Issuer shall
forward the incomplete Subscription Agreement to the Sales Agent. If
an incomplete Subscription Agreement is not made complete within 15
days of delivery to the Issuer, then the Escrow Agent shall return the
incomplete Subscription Agreement and the subscription proceeds
submitted therewith to the Sales Agent, who shall promptly return them
to the Subscriber.
(e) The Company reserves the right to accept or reject, in
whole or in part, any subscription forwarded by the Sales Agent at
any time before the sale of Shares at a closing. If the Company
rejects all or a portion of any such subscription, the Company shall
deliver to the Escrow Agent written notice stating the amount of the
rejected portion of the subscription together with a copy of the
Subscription Agreement for the rejected subscription. Upon such
delivery, the Escrow Agent shall promptly return the Subscription
Agreement and the proceeds for the rejected portion of such
subscription to the Sales Agent, who shall promptly return them to the
Subscriber.
(f) Upon the sale of Shares by the Company at any closing, the
Company shall deliver a written confirmation of sale to the Subscriber
and shall authorize the issuance and delivery of stock certificates
for the Shares sold to the Subscriber.
(g) If the offering of the Shares is terminated for any reason
at any time when the Company has accepted subscriptions for fewer than
700,000 shares, and the amount of subscription proceeds held in
escrow totals less than $7,000,000 (as determined in accordance with
the escrow agreement between the Company and the Escrow Agent (the
"Escrow Agreement")), then, in accordance with the Escrow Agreement,
the Escrow Agent shall promptly deliver to the Sales Agent checks in
the amount of the subscription proceeds received from such Sales Agent
on behalf of each Subscriber, plus interest, for delivery to the
appropriate Subscribers.
(h) As compensation for its efforts, the Sales Agent shall be
paid by the Company a commission of eight percent (8%) of the proceeds
of the Shares sold through the efforts of the Sales Agent. The
commission shall be paid to the Sales Agent promptly upon the
Company's authorization of the issuance of stock certificates for
Shares sold through the Sales Agent's efforts.
5
<PAGE>
4. ADDITIONAL COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Sales Agent that:
(a) The Company will notify the Sales Agent promptly of any
request by the Commission or any other governmental body or agency
that the Prospectus be amended or supplemented.
(b) The Company will advise the Sales Agent, promptly after it
shall receive notice or obtain knowledge thereof, of the initiation or
threatening of any action, suit or proceeding for the purpose of
preventing or suspending the use of the Prospectus and that it will
use its best efforts to prevent the issuance of any order or ruling
preventing or suspending the offering or to obtain its withdrawal if
such an order or ruling should be issued.
(c) The Company will furnish to the Sales Agent, as soon as
available, copies of the Prospectus and all amendments and supplements
thereto in such quantities as the Sales Agent may from time to time
reasonably request.
(d) The Company will apply the net proceeds from the offering
received by it substantially in the manner set forth under "Use of
Proceeds" in the Prospectus.
(e) During the two-year period after the date of the last sale
of Shares by the Company, the Company or its successors or assigns
will comply with all registration, filing, and reporting requirements
of the Securities Act and the Exchange Act.
5. COVENANTS, REPRESENTATIONS, AND WARRANTIES OF THE SALES AGENT. The
Sales Agent covenants and agrees with the Company that:
(a) The Sales Agent will maintain an accurate record of all
orders to purchase Shares and funds received, including the name,
address, and social security or taxpayer identification number of each
prospective purchaser and the manner in which the stock certificate is
to be issued.
(b) The Sales Agent will instruct all subscribers to execute a
Subscription Agreement containing the following information: (i) the
name, address, and social security (or taxpayer ID) number of the
Subscriber; (ii) the number of Shares subscribed for by the
Subscriber; (iii) the current aggregate dollar amount of such
subscription (which shall be $10.00 multiplied by the number of Shares
subscribed for by the Subscriber; and (iv) the Subscriber's signature.
The Sales Agent will instruct each subscriber to make its remittance,
in the exact dollar amount of the total purchase price for the number
of Shares subscribed for, payable to the Escrow Agent, and if
remittance is represented by a check, the check must be payable to
"National City Bank of Kentucky, Escrow Agent for Tumbleweed, Inc."
The Sales Agent will
6
<PAGE>
promptly transmit all completed Subscription Agreements and subscription
proceeds received by the Sales Agent to the Escrow Agent at the
following address:
National City Bank of Kentucky, Escrow Agent for Tumbleweed, Inc.
P.O. Box 36010
Louisville, KY 40233
(c) The Sales Agent agrees, that if the Escrow Agent or the
Company determines any subscription forwarded to the Escrow Agent by
the Sales Agent is not complete, or if the Company rejects all or a
portion of any subscription, and therefore the Company returns all or
a portion of the subscription proceeds to the Sales Agent, the Sales
Agent will promptly notify the Subscriber in writing and promptly
return to the Subscriber the amount of subscription proceeds received
from the Company.
(d) The Sales Agent agrees, that if the offering of the Shares
is terminated for any reason at any time when the Company has accepted
subscriptions for fewer than 700,000 shares, and the amount of
subscription proceeds held in escrow totals less than $7,000,000 (as
determined in accordance with the escrow agreement between the Company
and the Escrow Agent), and as a result the Escrow Agent delivers to
the Sales Agent checks in the amount of the subscription proceeds
received from such Sales Agent on behalf of each Subscriber, plus
interest, the Sales Agent shall promptly deliver such checks to the
appropriate Subscribers.
(e) The Sales Agent is registered with the Commission as a
broker-dealer and is a member in good standing with the National
Association of Securities Dealers, Inc. (the "NASD"), and the Sales
Agent and all its agents and representatives have or will have all
required licenses and registrations to perform its obligations under
this Agreement; and such registrations, membership, and licenses will
remain in effect during the term of this Agreement. The Sales Agent
agrees that, in performing its obligations under this Agreement, the
Sales Agent will comply with all applicable statutes and the rules and
regulations of the NASD and any other federal or state governmental
agency that are applicable to it. This Agreement has been duly and
validly authorized, executed and delivered by the Sales Agent and is
its valid and binding agreement and obligation.
(f) The Sales Agent agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind which, in
the opinion of the Company, requires the amendment or supplementation
of the Prospectus, the Sales Agent will forthwith discontinue offering
Shares until the Sales Agent receives copies of the supplemented or
amended Prospectus, or until it is advised in writing by the Company
that the use of the Prospectus may be resumed, and, if so directed by
the Company, the Sales Agent will deliver to the Company all copies,
other than permanent file copies, then in the Sales Agent's
possession, of the Prospectus before such supplementation or
amendment.
(g) The Sales Agent represents and warrants to the Company that
(i) neither the Sales Agent nor any of its associated or affiliated
persons have acquired
7
<PAGE>
unregistered securities of the Company, and (ii) except for this
Agreement, no contractual or other relationship exists between the Sales
Agent and the Company.
(h) The Sales Agent will represent and warrant to the NASD, by
submitting a letter in the form attached as Appendix A to this
Agreement, that (i) neither the Sales Agent nor any of its associated
or affiliated persons have acquired unregistered securities of the
Company, and (ii) except for this Agreement, no contractual or other
relationship exists between the Sales Agent and the Company.
6. RESPONSIBILITY FOR PAYMENT OF EXPENSES. The Company covenants and
agrees to pay the costs and expenses typically borne by issuers of securities in
a public offering, including, without limitation (i) the costs and charges of
any transfer agent or registrar and the cost of preparing stock certificates;
(ii) the qualification of the Shares under state securities laws (if necessary),
including filing fees and the reasonable fees and disbursements of counsel in
connection therewith; (iii) the filing fee of the NASD; and (iv) the printing
and delivery to the Sales Agent of copies of the Prospectus and any amendments
or supplements thereto.
7. CONDITIONS TO OBLIGATIONS. The obligations of each of the parties as
provided herein shall be subject to the continuing accuracy, as of the date
hereof and as of the date of the Company's acceptance of any subscription for
Shares obtained through the efforts of the Sales Agent, of the representations
and warranties of the other party herein.
8. INDEMNIFICATION.
(a) The Company agrees to indemnity and hold harmless the Sales
Agent, each of its agents, attorneys, officers, directors, and
employees, and any person who controls the Sales Agent within the
meaning of the Securities Act against any and all losses, claims,
lawsuits, damages, or liabilities to which the Sales Agent or its
agents, attorneys, officers, directors, or control persons may become
subject insofar as such losses, claims, lawsuits, damages, or
liabilities (including awards and/or judgments) arise out of or are in
connection with the Prospectus or any amendment or supplement thereto,
or any representations, statements, or other acts by the Company, its
officers, directors, employees, agents, or control persons, and will
reimburse the Sales Agent, its officers, directors, employees, agents,
attorneys and any person who controls the Sales Agent for any and all
costs and expenses, including reasonable counsel fees incurred by them
in connection with the investigation or defense of any such loss,
claim, lawsuit, damage, or liability; provided, however, that the
Company will not be liable in any such case to the extent that any
such loss, claim, lawsuit, or liability arises out of or is based upon
an untrue statement or omission made in the Prospectus or any
amendment or supplement thereto or in reliance upon and in conformity
with written information furnished to the Company, if any, by or on
behalf of the Sales Agent specifically for use with reference to the
Sales Agent in preparation thereof.
(b) The Sales Agent will indemnity and hold harmless the
Company, each of its agents, attorneys, officers, directors, and
employees, and any person who controls the Company within the meaning
of the Securities Act against any and all
8
<PAGE>
losses, claims, lawsuits, damages, or liabilities to which the Company
or any such person may become subject insofar as such losses, claims,
lawsuits, damages or liabilities (including awards and/or judgments)
arise out of or in connection with or result from any statements
furnished to the Company in writing by the Sales Agent that are included
in the Prospectus or any amendment or supplement thereto and which are
furnished specifically for use with reference to the Sales Agent in
preparation thereof, and will reimburse any and all costs and expenses,
including reasonable counsel fees incurred by the Company or other
indemnified person in connection with investigating or defending any
such loss, claim, lawsuit, damage, or liability.
(c) If the indemnification of a person specified above is for
any reason held unenforceable, the indemnifying party agrees to
contribute to the losses, claims, damages and liabilities for which
such indemnification is held unenforceable, (i) in such proportion as
is appropriate to reflect the relative benefits to the Company, on the
one hand, and the Sales Agent, on the other hand, of the transaction
as contemplated (whether or not the transaction is consummated) or
(ii) if (but only if) the allocation provided for in clause (i) is for
any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) but
also the relative fault of the Company, on the one hand, and the Sales
Agent, on the other hand, as well as any other relevant equitable
considerations. The Company agrees that, for the purposes of this
paragraph, the relative benefits to the Company and the Sales Agent of
the transaction as contemplated hereby shall be deemed to be in the
same proportion that the total value paid or contemplated to be paid
to or by the Company, any affiliate of the Company, or any of its
shareholders, as the case may be, as a result of or in connection with
the transaction bears to the fees paid or to be paid to the Sales
Agent under this Agreement; provided, however, that, to the extent
permitted by applicable law, in no event shall the Sales Agent be
required to contribute an aggregate amount in excess of the aggregate
fees actually paid to it under this Agreement.
(d) If an indemnified party is requested or required to appear
as a witness in any action brought by or on behalf of or against the
indemnifying party or any affiliate of the indemnifying party in a
transaction contemplated by this Agreement in which such indemnified
party is not named as a defendant, the indemnifying party shall
reimburse the indemnified party for all expenses incurred by it in
connection with such indemnified party's appearing and preparing to
appear as such a witness, including, without limitation, reasonable
fees and disbursements of its legal counsel.
(e) Neither party shall, without the other party's prior written
consent, which consent shall not be unreasonably withheld, settle,
compromise, or consent to the entry of any judgment in any pending or
threatened claim, action, or proceeding in respect of which
indemnification could be sought against it under the indemnification
provisions of this Agreement, whether or not any indemnified party is
an actual or potential party to a claim, action, or proceeding, unless
such settlement,
9
<PAGE>
compromise, or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action,
or proceeding.
(f) The foregoing reimbursement, indemnity, and contribution
obligations shall be in addition to any liabilities which the
indemnifying party may otherwise have. The reimbursement and
indemnity obligations of the indemnifying party under such
subparagraphs shall extend upon the same terms and conditions to any
affiliate of the indemnified party, and the shareholders, directors,
officers, employees, attorneys, and control persons (if any), as the
case may be, of the indemnified party and any of its affiliates.
(g) Prior to any proposed sale, distribution, or liquidation of
all or a significant portion of a party's assets or any significant
recapitalization of its outstanding securities in a transaction
pursuant to which such party's ability to honor its obligations
hereunder might be adversely affected, such party will notify the
other party in writing thereof and, if requested by the other party,
shall arrange alternative means for providing for the obligations of
the parties set forth in this Section 8, including the assumption of
such obligations by a third party or the issuance or creation of an
escrow, in each case in an amount and upon terms and conditions
satisfactory to the indemnified part. The provisions of Section 8
shall survive any termination of the authorization provided by this
Agreement.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the Sales Agent
herein, and the indemnity agreements contained in Section 8 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Sales Agent or any controlling persons or the Company or any
of its officers, directors, or any controlling persons, and shall survive the
issuance of the Shares.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective (the "Effective Date")
upon the later to occur of (i) the time the Registration Statement
shall be declared effective by the Commission; and (ii) the execution
and delivery of this Agreement by the Company and the Sales Agent.
(b) Either the Company or the Sales Agent may terminate this
Agreement by giving notice to the other as provided in Section 11 at
any time. Any such termination shall not terminate the obligations of
the parties pursuant to Sections 3, 6, and 8 of this Agreement.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be hand delivered
or sent by U. S. certified mail, return receipt requested, or other form of
delivery requiring signature by the person receiving the delivery, or telecopied
and confirmed to the following addresses:
10
<PAGE>
To the Sales Agent: At the address set forth on the first page of this
agreement.
To the Company: Tumbleweed, Inc.
1900 Mellwood Avenue
Louisville, Kentucky 40206
With a copy to: Brown, Todd & Heyburn PLLC
400 West Market Street
32nd Floor
Louisville, Kentucky 40202-3363
Attn: Alan K. MacDonald
502/589-5400
All notices shall be deemed delivered upon the earlier of the date the
receiving party signs the return receipt or five days after the notice is
postmarked. Any party to this Agreement may change such address for notices
by sending to the parties to this Agreement written notice of a new address
for such purpose.
12. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Sales Agent, the Company, and their respective successors
and assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person or corporation, other than the parties
hereto and their successors and assigns and the persons referred to in
Section 8, any legal or equitable right, remedy, or claim under or in respect
of this Agreement or any provision herein contained; this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the parties hereto and their respective successors
and assigns and such indemnified persons and for the benefit of no other
person or corporation. No purchaser of any of the Shares from the Sales
Agent shall be construed a successor or assign merely by reason of such
purchase.
13. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Kentucky.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument. The validity of this Agreement
shall not be impaired if each party does not execute the same counterpart so
long as the execution of each party appears on the counterparts taken as a
whole.
If the foregoing correctly sets forth the understanding between the
Company and the Sales Agent, please so indicate by signing in the space
provided below for that purpose, whereupon this Agreement shall constitute a
binding agreement between the Company and the Sales Agent.
11
<PAGE>
TUMBLEWEED, INC.
By:____________________________________
Name: John A. Butorac, Jr.
Title: President
ACCEPTED as of the date below.
_______________________________________
By:____________________________________
Name:
Title:
Date:
12
<PAGE>
APPENDIX A
_____________________, 1998
National Association of Securities
Dealers, Inc.
Corporate Financing
9513 Key West Avenue
Rockville, MD 20850-3389
Attention:
Re: Tumbleweed, Inc. --
OFFERING OF UP TO 1,200,000 SHARES OF COMMON STOCK
--------------------------------------------------
Dear Sir or Madam:
In connection with its participation as a Selling Agent of Tumbleweed,
Inc. in the above-referenced offering of shares of common stock of Tumbleweed,
Inc., _______________________________________________________________________
("Member"), an NASD member, represents and warrants as follows:
1. Member is serving as a Selling Agent for a maximum of ________ shares
in the offering.
2. Neither Member nor any of its associated or affiliated persons have
acquired unregistered securities of Tumbleweed, Inc.
3. Except for this Agreement, no contractual or other relationship exists
between Member and Tumbleweed, Inc.
_______________________________________
By:____________________________________
Name:
Title:
13
<PAGE>
EXHIBIT 99.5
REGISTRATION RIGHTS AGREEMENT
THIS is a Registration Rights Agreement (the "Agreement") dated as of
August __, 1998, between TUMBLEWEED, INC., a Delaware corporation (the
"Company"), and TUMBLEWEED, LLC, a Kentucky limited liability company ("LLC").
RECITALS
A. The Company and LLC have entered into a merger agreement (the "Merger
Agreement") pursuant to which (i) LLC will merge with and into the Company (the
"Merger"), and (ii) the outstanding units of membership interest in LLC will be
converted into 5,145,000 Shares of the Company's Common Stock.
B. The Company and LLC wish to establish an orderly initial trading
market for the Common Stock following the currently planned initial public
offering, while providing a more liquid investment for LLC Members who receive
Shares in the Merger.
Therefore, in consideration of the mutual premises, representations,
warranties, covenants and conditions set forth in this Agreement, the Company
and LLC agree as follows:
AGREEMENT:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, $.01 par value per
share.
"IPO" shall mean an initial public offering in which the Company sells
shares of the Company's Common Stock for an aggregate offering price of not less
than $7,000,000.
"Member" shall mean an owner of Class A, Class B, Class C and/or Common
membership interests in LLC.
"Prospectus" shall mean the form of prospectus most recently filed with
the Commission pursuant to Rule 424(b).
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
<PAGE>
"Registration Expenses" shall mean all expenses incurred by the Company
in compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and the reasonable expenses of any
special audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company, and excluding all underwriting discounts
and selling commissions applicable to the sale of the Shares).
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect from time to time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Shares and all fees and disbursements of
counsel for the selling holders of Shares.
"Shares" shall mean the shares of Common Stock to be issued to Members in
the Merger and subject to registration pursuant to this Agreement; provided,
however, that shares of Common Stock will no longer be treated as Shares if (A)
the Member to whom the Shares are issued fails to enter into an agreement with
the Company as provided in paragraph 3 of this Agreement, (B) they have been
sold to or through a broker or dealer or underwriter in a public distribution or
a public securities transaction, (C) they have been sold in a transaction exempt
from the registration and prospectus delivery requirements of the Securities Act
so that all transfer restrictions and restrictive legends with respect thereto
are removed upon consummation of such sale, or (D) the shares are available for
sale under the Securities Act (including Rule 144 thereunder), in the opinion of
counsel to the Company, without compliance with the registration and prospectus
delivery requirements of the Securities Act so that all transfer restrictions
and restrictive legends with respect thereto may be removed upon the
consummation of such sale.
2. REGISTRATION.
(a) AGREEMENT TO REGISTER. Subject to the conditions of this
Agreement, the Company agrees to include the Shares in the Form S-1
Registration Statement to be filed with the Commission in connection with the
IPO, to use its good faith efforts to cause such registration statement to
become effective promptly thereafter and to sell the minimum number of shares
of Common Stock to consummate the IPO, and to do all other things reasonably
necessary to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky and other state securities laws in
such states where the Company or its franchisees currently operate Tumbleweed
restaurants to the extent feasible, and appropriate compliance with
applicable regulations issued under the Securities Act) and as would permit
or facilitate the sale and distribution of the Shares.
(b) SUSPENSION OF REGISTRATION. Notwithstanding anything to the
contrary contained herein, if (x) the Board determines in good faith that the
registration and distribution of Shares would interfere with any proposed or
pending material corporate transaction involving the Company or any of its
subsidiaries, including, without limitation, an underwritten public offering
of the Common Stock
-2-
<PAGE>
by the Company on a firm commitment basis, or would require premature
disclosure thereof or would require the Company to disclose information that
the Company has not otherwise made public and that the Company reasonably
determines is in the best interests of the Company not to disclose at such
time, and (y) the Company notifies the holders of the Shares included in the
registration statement in writing a reasonable time not to exceed five (5)
business days following such determination (such notice a "Blackout Notice"),
the Company may elect that such registration statement not be usable for a
reasonable period of time (a "Blackout Period").
(c) UNDERWRITING. If Members holding a minimum of 50% of the Shares
then outstanding agree to attempt to distribute the Shares by means of an
underwriting, such Members shall so advise the Company and shall select an
underwriter reasonably acceptable to the Company.
3. AGREEMENTS WITH MEMBERS. As a condition to the Company's obligation
to register the Shares to be issued in the Merger to a Member, that Member shall
have entered into an agreement with the Company (a "Registration Agreement") on
or before the date the Merger takes effect, which provides that Member may sell
not more than 15% of the Member's Shares during the period beginning on the date
on which the Company terminates its sale of shares of Common Stock in the IPO
and ending nine months thereafter (the "Restricted Period"). The Registration
Agreement shall also include such other terms and conditions as may be
appropriate for compliance with applicable securities laws or are otherwise
customary for secondary sales of securities, including the following:
(a) Without the prior written consent of the Company, Member shall
sell Shares only in accordance with the plan of distribution described under the
heading "Selling Stockholders" or "Plan of Distribution" (whichever shall be
applicable) in the Prospectus.
(b) Member will deliver a Prospectus to each buyer of Shares and
otherwise sell Shares in compliance with the Securities Act and the Rules and
Regulations of the Commission.
(c) Member agrees to the placement to a legend on the stock
certificates representing the Member's Shares that are subject to the
restriction on sales during the Restricted Period.
(d) The Company shall bear all Registration Expenses incurred in
connection with any registration, qualification or compliance of the Shares
pursuant to this Agreement. All Selling Expenses incurred by a Member shall be
borne by that Member. With respect to any underwritten offering of Shares, all
Selling Expenses shall be borne by the holders of the securities so registered
pro rata on the basis of the number of their shares so registered.
(e) Each Member shall furnish to the Company such information
regarding the distribution proposed by such Member as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration referred to in this Agreement.
(f) The Company will keep Members advised in writing as to the status
of the registration of their Shares and will use good faith efforts to keep such
registration effective for a period
-3-
<PAGE>
ending on the earlier of the second anniversary of the date on which the
Merger takes effect or until the Members have completed the distribution of
Shares described in the registration statement.
(g) The Company will prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of Shares, and will furnish such number of prospectuses and other
documents incidental thereto, including any amendment of or supplement to the
prospectus, as a Member may reasonably request from time to time.
4. INDEMNIFICATION. Each Registration Agreement shall provide for
indemnification in connection with the registration and distribution of
Shares substantially as follows:
(a) The Company will indemnify the holder of Shares, each of its
officers, directors and partners, and each person controlling such holder of
Shares, with respect to which registration has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter, and their respective counsel against all claims, losses, damages
and liabilities (or actions, proceedings or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any prospectus, or other document incident to
any such registration, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Company
of the Securities Act or any rule or regulation thereunder applicable to the
Company in connection with any such registration and will reimburse each such
holder of Shares, each of its officers, directors and partners, and each
person controlling such holder of Shares, each such underwriter and each
person who controls any such underwriter, for any legal and any other
expenses as they are reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action; provided,
however, that the indemnity contained in this Section 6(a) shall not apply to
amounts paid in settlement of any such claim, loss, damage, liability or
expense that arises out of or is based on any untrue statement or omission
based upon written information furnished to the Company by such holder of
Shares or underwriter. The foregoing indemnity agreement is further subject
to the condition that insofar as it relates to any untrue statement, alleged
untrue statement, omission or alleged omission made in a prospectus, such
indemnity agreement shall not inure to the benefit of the foregoing
indemnified parties if copies of a supplemental prospectus correcting the
misstatement, or alleged misstatement, omission or alleged omission upon
which such loss, liability, claim or damage is based is timely delivered to
such indemnified party and a copy thereof was not furnished to the person
asserting the loss, liability, claim or damage.
(b) The holder or any transferee of the Shares, severally and not
jointly, will indemnify the Company, each of its directors and officers, each
other holder of Shares and each person who controls the Company or holder of
Shares within the meaning of the Securities Act and the rules and regulations
thereunder, and each underwriter, if any, and each person who controls any
underwriter, and their respective counsel against all claims, losses, damages
and liabilities (or actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any prospectus or other document incident to any
such registration or based upon any omission (or alleged omission) to state
-4-
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation of the Securities Act or any
rule or regulation thereunder applicable to the Company and will reimburse the
Company, any other holder of Shares and their respective directors, officers,
partners, persons, underwriters or control persons for any legal or any other
expense reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, and
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) relating to such holder is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by LLC and stated to be specifically for use therein; provided, however,
that the obligations of LLC shall be limited to an amount equal to the proceeds
to LLC and provided further that such indemnification obligations shall not
apply if the Company modifies or changes to a material extent the written
information furnished by LLC.
(c) Each party entitled to indemnification under this Section 5 (an
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at such Indemnified Party's expense; and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(d) If for any reason the indemnification provided for in this
section is unavailable to an Indemnified Party or is insufficient to hold it
harmless as contemplated by this Agreement, then the Indemnifying Party shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such loss, claim, damage, liability or action in such proportion as is
appropriate to reflect not only the relative benefits received by the
Indemnified Party and the Indemnifying Party, but also the relative fault of the
Indemnified Party and the Indemnifying Party, as well as any other relevant
equitable considerations.
5. TERMINATION. This Agreement shall terminate at the earlier of (i) the
SECOND anniversary of the date on which the Merger takes effect, (ii) the date
the Members have completed the distribution of Shares described in the
registration statement, and (iii) the termination of the Merger Agreement;
provided, however, that the provisions of Section 4 shall survive the
termination of this Agreement.
6. MISCELLANEOUS.
-5-
<PAGE>
(a) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
conflict of laws principles.
(b) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
(c) ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement among the parties with regard to the subject matter
hereof.
(d) NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, or delivered by hand or by messenger or courier delivery
service, addressed (a) if to LLC, 1800 Mellwood Avenue, Louisville, Kentucky
40206, or at such address as LLC shall have furnished to the Company in writing,
or (b) if to the Company, at 1800 Mellwood Avenue, Louisville, Kentucky 40206,
or at such other address as the Company shall have furnished to LLC in writing.
This Registration Rights Agreement is hereby executed as of the date set
forth in the preamble hereto.
TUMBLEWEED, INC.
By:
----------------------------------------
John A. Butorac, Jr.
President and Chief Executive Officer
TUMBLEWEED, LLC
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
-6-
