As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 333-57931
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
POST-EFFECTIVE 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 or Industrial Classification Identification Number)
Organization) Code 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 AND GENERAL COUNSEL
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
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<PAGE>
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
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. / /
------------
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>
PROSPECTUS
[TUMBLEWEED LOGO]
5,105,000 SHARES OF COMMON STOCK
THE SHARES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 13 IN DETERMINING
WHETHER TO PURCHASE THE COMMON STOCK.
-----------------------------------
The selling shareholders identified on pages 57 of this Prospectus are
offering these shares of common stock. For additional information on the methods
of sale, you should refer to the section entitled "Plan of Distribution" on page
57. We will not receive any portion of the proceeds from the sale of these
shares.
Tumbleweed, Inc.'s common stock is quoted on the Nasdaq National Market
under the symbol TWED.
On April 28, 1999, the last sale price of the common stock on the
Nasdaq National Market was $11.25 per share.
<TABLE>
<CAPTION>
===============================================================================================
Underwriting Discounts Proceeds to
Price to Public and Agent's Commissions Tumbleweed, Inc.
- ------------------------ ------------------------ ------------------------ --------------------
<S> <C> <C> <C>
- ------------------------ ------------------------ ------------------------ --------------------
Total See text above See text above See text above
- ------------------------ ------------------------ ------------------------ --------------------
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is April 30, 1999
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY..........................................................5
HISTORY AND REORGANIZATION.................................................10
RISK FACTORS...............................................................11
FORWARD-LOOKING STATEMENTS.................................................17
USE OF PROCEEDS............................................................18
DIVIDEND POLICY............................................................18
CAPITALIZATION.............................................................18
SELECTED FINANCIAL DATA....................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................21
BUSINESS...................................................................29
MANAGEMENT.................................................................41
EXECUTIVE COMPENSATION.....................................................44
CERTAIN TRANSACTIONS.......................................................47
LEASES WITH RELATED PARTIES................................................48
OTHER RELATED PARTY TRANSACTIONS...........................................49
PRINCIPAL STOCKHOLDERS.....................................................50
SELLING SHAREHOLDERS.......................................................52
PLAN OF DISTRIBUTION.......................................................57
DESCRIPTION OF SECURITIES..................................................58
SHARES ELIGIBLE FOR FUTURE SALE............................................60
EXPERTS....................................................................61
INDEX TO FINANCIAL STATEMENTS..............................................62
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. BECAUSE THIS IS A SUMMARY, IT MAY NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY.
TUMBLEWEED, LLC, WHICH USED TO OWN AND CONDUCT THE TUMBLEWEED BUSINESS,
WAS MERGED INTO TUMBLEWEED, INC. ON JANUARY 1, 1999. IF WE REFER TO A TIME
BEFORE THE MERGER, THIS INCLUDES TUMBLEWEED, LLC. OTHERWISE, THIS PROSPECTUS
WILL REFLECT:
O THAT THE MERGER WAS COMPLETED;
O THAT THE MEMBERS' INTERESTS IN TUMBLEWEED, LLC WERE CONVERTED INTO A
TOTAL 5,105,000 SHARES OF OUR COMMON STOCK; AND
O THAT WE SOLD 776,543 SHARES OF COMMON STOCK IN OUR INITIAL PUBLIC
OFFERING.
1. What do we do?
We own, franchise or license 45 Tumbleweed(R) Southwest Mesquite Grill
& Bar restaurants.
o We own and operate 26 Tumbleweed restaurants in Kentucky,
Indiana and Ohio.
o Our franchisees own and operate 14 Tumbleweed restaurants in
Kentucky, Indiana, Illinois, Tennessee and Wisconsin.
o We license five restaurants outside the United States in
Germany, Jordan and Saudi Arabia.
o We and our franchisees expect to open two more company-owned
restaurants and seven more franchised restaurants by the end
of 1999.
o Our restaurants are usually open seven days a week for lunch
and dinner (except for certain holidays) and generally offer a
full service bar.
o Our same store sales increased 5.2% in 1997 versus 1996, 1.5%
in 1998 versus 1997 and 2.4% for the first quarter of 1999
versus the first quarter of 1998.
o For 1998, the average check at a full-service Tumbleweed
restaurant, including beverages, was approximately $8.10 for
lunch and $10.20 for dinner.
2. What do we feature?
Tumbleweed restaurants feature sophisticated Tex-Mex and mesquite
grilled food served in a casual dining atmosphere evoking the American
Southwest. Our 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.
3. What customers do we target?
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. We do this while, in our
5
<PAGE>
view, providing a consistent level of food quality and friendly and efficient
service comparable or superior to that of other casual dining restaurants.
4. How do we supply our restaurants?
We use a centralized commissary system which enhances our ability to
maintain consistently high food quality and minimizes restaurant kitchen space
and equipment. This also reduces the need for skilled cooking personnel, and
simplifies restaurant operations.
5. What is our growth strategy?
For the next several years we will continue to focus on the development
of new and existing markets. Since we acquired the Tumbleweed concept in 1995,
we have added 19 new company-owned and 11 new franchised and licensed
restaurants. We have continued to develop the infrastructure necessary to
support a more aggressive growth strategy. During this time we have had the
opportunity:
o to validate the Tumbleweed concept;
o to refine our operating systems;
o to design and develop prototype restaurant buildings of different
sizes; and
o to build a team of experienced corporate managers.
All of these things are needed to support our future growth and our franchisees'
growth.
6. Where are our target markets?
We target mid-sized metropolitan markets for development. We have
initially concentrated our efforts in the Midwest, Mid-Atlantic and Southeast
regions, where income levels and other factors show us that there is a
significant base of potential customers. When we select potential restaurant
sites in our target markets, we analyze, among other things:
o local market demographics;
o site visibility;
o competition in the vicinity; and
o accessibility and proximity of major retail centers, hotels,
universities, and sports and entertainment facilities, as well as other
factors.
Whenever possible, we also consider the feasibility of opening multiple
restaurants in a target market. This allows us to achieve greater operating and
advertising efficiencies.
7. What are our prototype stores?
When we develop a new Tumbleweed restaurant we will generally use one
of three prototype designs, the Mini, the Midi and the Maxi. These prototype
designs will accommodate approximately 150, 225, and 265 guests. We target
annual sales of $1,250,000, $2,000,000 and
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<PAGE>
$2,500,000, respectively, from these prototypes. The average sales by restaurant
size for the 17 company-owned Tumbleweed restaurants opened for all of 1998
were:
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- ----------
Mini 128-194 4 $1,193,000
Midi 210-244 5 $1,769,000
Maxi 252-384 8 $2,022,000
We believe that by using the multiple prototypes, we can more closely match the
investment in a restaurant site with the site's targeted revenue. This allows us
and our franchisees to more efficiently use our financial resources.
8. Who are we?
We were incorporated on December 17, 1997 and capitalized by our first
shareholders in June 1998. On January 1, 1999, we merged with Tumbleweed, LLC.
This allowed us to convert that company, which owned the assets used in our
business, into a corporation for purposes of the stock offering.
9. What happened to the original investors in Tumbleweed, LLC?
In the merger, the membership interests of the approximately 80 former
members of Tumbleweed, LLC were converted into a total of 5,105,000 shares of
our common stock. It is these shares which are being offered under this
Prospectus.
10. When did we complete our initial public offering?
On January 11, 1999, we completed our initial public offering of common
stock. We sold 776,543 shares at the offering price of $10.00 per share. We sold
the shares in a direct offering to the public, raising a total of $7,765,430.
Following the merger and the initial public offering, we now have 5,881,543
shares of common stock issued and outstanding.
11. How did we use the initial public offering proceeds?
We used $6,990,348 of the offering proceeds to repay bank indebtedness.
The former Class A members of Tumbleweed, LLC, including certain of our
directors and officers, incurred this indebtedness as part of the financing for
the January 1995 acquisition of the Tumbleweed business by Tumbleweed, LLC. We
have used the remaining offering proceeds, plus the additional cash
contributions of $747,000 received from the former Class B members of Tumbleweed
LLC shortly before the merger, to pay offering expenses and to reduce a line of
credit.
12. What were our initial public offering expenses?
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<PAGE>
The offering expenses we have incurred to date are approximately
$1,000,000.00. We did not pay commissions or other underwriting expenses in
connection with our offering. The only expense we will incur in connection with
the offering by our selling shareholders is the cost of preparing and updating
this Prospectus and related costs. See "Plan of Distribution".
13. What other payments or expenses did we incur in our initial public offering?
We established a deferred tax liability of $639,623 in connection with
Tumbleweed, LLC's conversion from a limited liability company to a C corporation
in our merger.
14. Where are our offices?
Our executive offices are located at 1900 Mellwood Avenue, Louisville,
Kentucky 40206, and our telephone number is (502) 893-0323.
Summary Financial Data
(In thousands, except per share data)
Years Ended
December 31,
------------------------------------
1996 1997 1998
---- ---- ----
Statement of Operations Data(1):
Total revenues $25,732 $29,826 $42,808
Income from operations 705 2,143 2,823
Net income as reported 501 1,714 1,953
Pro Forma Data
Net income as reported $501 $1,714 $1,953
Pro forma income tax expense(2) (180) (617) (703)
---- ----- ------
Pro forma net income $321 $1,097 $1,250
==== ====== ======
Pro forma net income per
share- basic and diluted $0.06 $0.21 $ 0.24
Weighted average shares outstanding 5,105 5,105 5,105
(3)
December 31, 1998
-----------------
Pro Pro Forma
Actual Forma(4) As Adjusted(5)
------ -------- --------------
Balance Sheet Data:
Total assets................................ $33,681 $33,681 $33,456
8
<PAGE>
Long-term debt and capital lease
obligations, including current
maturities............................... 13,363 13,363 6,373
Total liabilities........................... 24,103 24,743 17,753
Redeemable members' equity.................. 18,925 -- --
Members' equity............................. 354 -- --
Retained earnings (deficit)................. (9,701) -- --
Pro forma stockholders' equity.............. -- 8,938 15,703
- -----------
(1) Historical data of Tumbleweed, LLC before our merger.
(2) Before the merger between Tumbleweed, Inc. and Tumbleweed, LLC, we
operated as a limited liability company and were not subject to
corporate income taxes. We have made pro forma adjustments to net
income to give effect to federal and state income taxes as though we
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 merger between Tumbleweed, Inc.
and Tumbleweed, LLC as if it had occurred as of January 1, 1996.
(4) Reflects the establishment of a deferred tax liability of $639,623
assuming the termination of Tumbleweed, LLC's limited liability company
status on December 31, 1998, and the conversion of members' interests
into 5,105,000 shares of Common Stock.
(5) Adjusted to reflect the proceeds of our sale of 776,543 shares of
common stock at the initial public offering price of $10.00 per share,
net of offering expenses of approximately $1,000,000 and the use of
these proceeds and cash on hand of $225,000 to repay bank indebtedness
of $6,990,348 recorded as short-term borrowings as of December 31,1998.
Summary Restaurant Data
For the years ended December 31,
Company-owned 1996 1997 1998
------------- ---- ---- ----
Restaurants
-----------
In operation, beginning of 10 15 17
period
Newly opened 5 2 8
Purchased from Franchisee 0 0 0
-- -- --
In operation, end of period 15 17 25
-- -- --
Franchised and
Licensed Restaurants
--------------------
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<PAGE>
In operation, beginning of 9 9 12
period
Newly opened 0 3 7
Restaurants closed 0 0 (1)
-- -- --
In operation, end of period 9 12 18
-- -- --
System total 24 29 43
== == ==
HISTORY AND REORGANIZATION
The first Tumbleweed Southwest Mesquite Grill & Bar 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 our current management, acquired the rights to the
Tumbleweed business and the other assets and liabilities of two corporations
controlled by Tumbleweed's founders. The acquired assets included:
o seven full-service Tumbleweed restaurants;
o two limited service "food court" units; and
o an interest in a third food court unit.
In 1996 our 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 of our directors. We initially held
an interest in this new venture, and we describe the transaction in greater
detail in the "Certain Transactions" section of this Prospectus.
Since January 1995, the Tumbleweed system has grown to 45 full-service
restaurants:
o 26 company-owned in Ohio, Kentucky and Indiana;
o 14 franchised restaurants in Kentucky, Indiana, Illinois,
Tennessee and Wisconsin; and
o five licensed restaurants located in Jordan, Saudi Arabia and Germany
under a licensing agreement with a restaurant operator based in
Brussels, Belgium.
We describe the international license agreement in greater detail in the
"Business -- International Licensing Agreement" and "Certain Transactions"
sections of this Prospectus.
We were incorporated on December 17, 1997 and capitalized by our first
shareholders in June 1998. On January 1, 1999, we merged with Tumbleweed, LLC.
This allowed us to convert that company, which owned the assets used in our
business, into a corporation for purposes of the stock offering.
In our merger with Tumbleweed, LLC, the membership interests of the
approximately 80 former members of Tumbleweed, LLC were converted into a total
of 5,105,000 shares of our common stock. The former Class B members of
Tumbleweed, LLC also paid additional cash
10
<PAGE>
contributions of $747,500 shortly before the merger, as required under
Tumbleweed, LLC's operating agreement.
The initial equity contribution by the Tumbleweed, LLC Class A Members
was $7,034,375, the Class B Members $152,500, the Class C Member $500, and the
Common Members $6,000. The Tumbleweed, LLC 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. In the merger, the interests of the Tumbleweed, LLC Class A, Class B,
Class C and Common Members were converted into a total of 5,105,000 shares of
Common Stock.
We established a deferred tax liability of $639,623 in connection with
Tumbleweed, LLC's conversion from a limited liability company to a C corporation
in our merger.
RISK FACTORS
THERE IS A HIGH DEGREE OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
SHARES. YOU SHOULD NOT INVEST ANY FUNDS IN SHARES UNLESS YOU CAN AFFORD TO LOSE
YOUR ENTIRE INVESTMENT. YOU SHOULD VIEW ANY PURCHASE OF SHARES AS A LONG-TERM
INVESTMENT. OUR BUSINESS, FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS COULD BE
MATERIALLY AND ADVERSELY AFFECTED BY ANY OF THE FOLLOWING RISKS. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT IN THE SHARES.
THIS PROSPECTUS ALSO CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR FUTURE PLANS AND
EXPECTATIONS. YOU CAN IDENTIFY THESE STATEMENTS BY THE USE OF WORDS SUCH AS
"EXPECTS", "ANTICIPATES", "INTENDS", "PLANS" AND SIMILAR WORDS. OUR ACTUAL
RESULTS COULD DIFFER IN A MATERIAL WAY FROM THE RESULTS DISCUSSED IN THESE
STATEMENTS. WE DISCUSS BELOW SOME OF THE FACTORS WHICH COULD CAUSE OUR ACTUAL
RESULTS TO DIFFER FROM THE RESULTS WE EXPECT.
WE FACE UNCERTAINTIES AS WE EXPAND OPERATIONS
Since 1995, we have grown while developing the operational systems, the
internal controls and the management personnel that we believe are necessary to
support our plans for continued expansion. We and our franchisees currently
expect to open an additional two company-owned, and seven franchised restaurants
by the end of 1999.
In the course of expanding our business, we will enter into new
geographic regions in which we have not operated before. We cannot be certain
that our Tumbleweed concept will be successful in new geographic regions or
particular local markets.
When we believe that it is feasible, we intend to open multiple
restaurants in a target market. This will allow us to achieve operating and
advertising efficiencies. This "clustering" of restaurants in a target market
can have an adverse affect on our same store sales in the short term, but we
believe that clustering our restaurants can better our long-term results.
Our growth depends on opening and operating additional profitable
restaurants. Our ability to do this successfully will depend on a number of
things, many of which are beyond our control, including:
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o selection and availability of suitable restaurant locations;
o competition for restaurant sites;
o negotiation of acceptable leases, purchase and/or financing terms;
o timely construction of restaurants and the management of construction
costs;
o securing required governmental permits and approvals;
o employment and training of qualified personnel;
o competition in new markets;
o general economic and business conditions; and
o expansion of our existing commissary facilities or the opening and
successful operation of additional commissaries, as necessary to
support additional restaurants.
Although we have been developing our organizational capabilities and
management team to support increased growth, we may need to continue to improve
our operational and financial systems and to acquire additional managerial and
financial resources. If we fail to enhance these systems and add these resources
in a logical and timely way, it could harm our results. We cannot be certain
that we will be successful in achieving our growth plans or managing our
expanding operations. Also, we cannot be certain that we can operate our new
restaurants profitably.
WE FACE RISKS BECAUSE OF OUR SMALL RESTAURANT BASE
We currently operate 26 Tumbleweed restaurants, four of which have been
open for less than one year. As a result, the sales and earnings of these
Tumbleweed restaurants may not be indicative of future operating results.
Because of the small number of restaurants we currently operate, poor operating
results at a small number of restaurants could harm our profitability. An
unsuccessful new restaurant or unexpected difficulties encountered during
expansion could have a greater adverse effect on our results of operations than
would be the case in a restaurant company with more restaurants.
WE FACE RISKS BECAUSE OF THE NUMBER OF RESTAURANTS WHICH WE LEASE
We lease 13 of our restaurants. Each lease agreement provides that the
lessor may terminate the lease for a number of reasons, including if we default
in our payment of any rent or taxes or if we breach any covenants or agreements
contained in the lease. Termination of any of our leases could harm our results
of operations.
CHANGES IN FOOD AND OTHER COSTS, AND RISKS IN OBTAINING SUPPLIES COULD HARM OUR
RESULTS
Our profitability depends significantly on our ability to anticipate
and react to changes in food, labor, employee benefits and similar costs. We do
not have control over these types of costs. We depend on frequent deliveries of
produce and fresh beef, pork, chicken and seafood. We rely on US Foods, a
national food distributor, as the primary distributor of our food. As a result,
we run the risk of possible shortages or interruptions in supply caused by
adverse weather or other conditions. In the past we have anticipated and reacted
to changing costs through our purchasing practices or menu price adjustments. We
may not be able to continue to avoid these adverse effects to our profits in the
future.
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<PAGE>
CHANGES IN CONSUMER PREFERENCES AND ECONOMIC CONDITIONS COULD HARM OUR RESULTS
Our continued success depends, in part, upon the continuing popularity
of Southwestern Mesquite grilled and Tex-Mex foods. Changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants can all
affect our operating results. Also, 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 harm the restaurant
industry in general and our restaurants in particular. Adverse changes in any of
these factors could reduce guest traffic or impose practical limits on pricing,
which could harm our earnings, financial condition, operating results or cash
flows.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY
The restaurant industry is intensely competitive. Many of our
competitors have been in existence longer, have a more established market
presence, and have substantially greater resources than we do. Restaurants
compete with respect to price, service, location and food quality. We compete
directly 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.
Our competitors include national and regional chains, franchisees of other
restaurant chains, and local owner-operated restaurants. A significant change in
pricing or other business strategies by a competitor, such as an increase in the
number of restaurants in our territories, could harm our sales, earnings and
growth. We will likely face direct competition in each of the markets we enter.
OUR PROFITABILITY MAY SUFFER BECAUSE OF YEAR 2000 PROBLEMS
We could experience interruptions in our business and significant
losses if we or a significant supplier or vendor rely on computer information
systems that are unable to accurately process dates beginning on January 1,
2000. We have initiated discussions with our significant suppliers and vendors
regarding their plans to solve Year 2000 issues where their systems interface
with our systems or otherwise impact our operations. We cannot predict whether
year 2000 difficulties encountered by our suppliers and vendors and other third
parties with whom we do business will have harm our business. See "Management's
Discussion and Analysis--Impact of Year 2000."
WE FACE THE RISK OF LITIGATION
We are from time to time the subject of complaints or litigation from
guests alleging illness, injury or other food quality, health or operational
concerns. Adverse publicity resulting from these allegations may materially
adversely affect us and our restaurants, regardless of whether the allegations
are valid or whether we are liable. In addition, employee claims against us
based on, among other things, discrimination, harassment or wrongful termination
may divert our financial and management resources that would otherwise be used
to benefit the future performance of our operations. We have been subject to
these employee claims from time to time, and a significant increase in the
number of these claims or any increase in the number of
13
<PAGE>
successful claims could materially adversely affect our business, financial
condition, operating results or cash flows.
WE DEPEND ON OUR KEY PERSONNEL
Our future success significantly depends on the continued services of
our senior management. We are particularly dependent on the services of John A.
Butorac, Jr., our President and Chief Executive Officer, and James M. Mulrooney,
our Executive Vice President and Chief Financial Officer, who have been
responsible for our growth strategy and for developing the current Tumbleweed
restaurant concept. They together have more than 44 years of restaurant industry
experience. We have employment agreements with both Mr. Butorac and Mr.
Mulrooney for an initial term of five years. We maintain 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 our business, operating results and financial
condition. Our performance also depends on our ability to motivate and retain
our other executive officers and key employees. Competition for these employees
in the restaurant industry is intense. The loss of the services of members of
our senior management or the inability to attract additional personnel as needed
could harm our business, financial condition, operating results or cash flows.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
The restaurant business is subject to extensive national, state, and
local laws and regulations, including regulations:
o relating to the development and operation of restaurants such as land
use and zoning regulations;
o on the sale of alcoholic beverages;
o imposing building and zoning requirements;
o relating to the preparation and sale of food; and
o governing our employer-employee relationships, including minimum wage
requirements, overtime, working and safety requirements, and
citizenship requirements.
In addition, the Federal Trade Commission and certain states regulate
the offer, sale, and termination of franchises, the refusal to renew franchises,
and the scope of noncompetition provisions.
Our inability 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 harm our business,
financial condition, operating results or cash flows.
Difficulties or failure in obtaining required licenses and approvals
could result in delaying or canceling the opening of new restaurants. Local
authorities may suspend or deny renewal of our food and liquor licenses if they
determine that our conduct does not meet the standards for the grant or renewal
of the license. Although we have satisfied restaurant and liquor licensing
requirements for our existing restaurants, we cannot predict whether we will be
able to maintain these approvals or obtain these approvals at future locations.
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<PAGE>
We are subject to certain states' "dram shop" statutes. These statutes
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that served alcoholic beverages to the intoxicated
person. We carry liquor liability insurance coverage as part of our existing
comprehensive general liability insurance. However, an adverse judgment
substantially in excess of our insurance coverage, or our failure to maintain
insurance coverage, could harm our business, financial condition, operating
results or cash flows could be adversely affected.
OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS RETAIN SIGNIFICANT CONTROL.
The shares of common stock owned beneficially by John A. Butorac, Jr.
and James M. Mulrooney represent approximately 51.1% of the outstanding shares
of common stock. Our directors and executive officers beneficially own
approximately 65.4% of the outstanding common stock. As a result, they may be
able to control us and direct our affairs, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may also delay or prevent a change in control of Tumbleweed and make
some transactions more difficult without the support of these shareholders.
These transactions might include proxy contests, mergers, tender offers, open
market purchase programs or other purchases of common stock that could give our
shareholders the opportunity to realize a premium over the then prevailing
market price for shares of our common stock.
RELATED PARTY TRANSACTIONS.
We have entered into transactions with entities in which members of our
board of directors have significant interests. We may choose to enter into
similar transactions with related parties in the future. Although all of the
past transactions with related parties necessarily involve conflicts of
interest, we believe that all of the transactions were entered into on terms
comparable to those we could obtain from unrelated third parties. We have based
our conclusion on a comparison of terms and conditions available from third
parties.
Our board of directors has adopted a policy that its audit committee
must approve all future transactions between us and any parties related to our
officers, directors, principal shareholders and affiliates . A majority of the
independent members of the Board of Directors who do not have an interest in the
transaction must also approve it, and the transaction must generally be on terms
no less favorable to us than the terms which we could obtain from unrelated
third parties. See "Certain Transactions."
SHARE PRICES WILL BE DETERMINED BY THE MARKET
Prices for the shares of common stock under this Prospectus will
generally be determined in the market. Many factors can influence the market
price for our stock including the number of shares available for trade. Investor
perception of our operations, of the restaurant industry as a whole, and of
general economic and market conditions will affect the price for the shares of
common stock. Although our shares have been listed on the Nasdaq National
Market, and were traded briefly on the NASD OTC Bulletin Board before that time,
we cannot be certain that an active trading market for the common stock will be
developed or sustained.
15
<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE
The trading price of our common stock could fluctuate significantly in
response to factors such as variations in our anticipated or actual results of
operations, and by our or our competitor's announcements of new products. We
will have no control over many of the factors which may affect the price of our
common stock. 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
harm the market price of the common stock, and may harm your ability to trade
your shares. These fluctuations could also harm our ability to raise capital
through future equity financings.
YOUR ABILITY TO TRADE YOUR SHARES MAY BE HARMED IF WE FAIL TO MAINTAIN OUR
LISTING ON THE NASDAQ NATIONAL MARKET.
As of the date of this Prospectus, our common stock is listed on the
Nasdaq National Market. The requirements for listing on the Nasdaq National
Market include, among other things, that:
o generally, we must have pre-tax income of at least $1 million;
o 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;
o the bid price for the common stock must be at least $5 per share;
o we must have tangible net assets of at least $6 million;
o generally, common stock must be held by at least 400 shareholders who
hold 100 shares or more; and
o 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:
o 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;
o we must maintain tangible net assets of at least $4 million
o generally, the common stock must be held by at least 400 shareholders
who hold 100 or more shares;
o the minimum bid price of the common stock must be $1 per share; and
o there must be at least two authorized Nasdaq market makers for the
common stock.
We cannot be certain that we will be able to maintain the listing of
the common stock on the Nasdaq National Market. If we are unable to maintain the
listing of the common stock on the Nasdaq National Market, the common stock may
not trade on any 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 your 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, the inability to sell shares of common
stock in some states, reductions in security analysts' and the news media's
coverage, if any, of our operations, and lower prices for the common stock than
might otherwise prevail. See "Plan of Distribution."
16
<PAGE>
A SIGNIFICANT NUMBER OF SHARES WILL BE ELIGIBLE FOR FUTURE SALE
There are 5,881,543 shares of our common stock outstanding. We have
also granted options to purchase approximately 400,000 shares of common stock to
employees and nonemployee directors. All of the outstanding shares will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, except for any shares purchased by our executive
officers, directors and certain principal shareholders ("affiliates"), as that
term is defined in Rule 144 under the Securities Act. Shares owned by affiliates
may generally be sold only in compliance with the limitations of Rule 144. The
former members of Tumbleweed, LLC who received shares of our common stock when
we merged have agreed not to sell 1,786,750 shares of the common stock (or 35%
of the shares they received) until after September 30, 1999, without our
consent. We can in our sole discretion and at any time release these shares and
permit them to be sold. The possibility that substantial amounts of common stock
may be sold in the public market could reduce the prevailing market price of the
common stock and could impair our ability to raise capital through the sale of
equity securities. See "Shares Eligible for Future Sale" and "Selling
Shareholders."
WE MAY ISSUE PREFERRED STOCK WHICH COULD ADVERSELY AFFECT POSSIBLE DISTRIBUTIONS
TO COMMON SHAREHOLDERS
Our board of directors has the authority to issue the authorized shares
of preferred stock in one or more series. The Board can also fix the
designations, powers, privileges and relative, participating, optional or other
special rights of the shares of each series of preferred stock. Our board may
also specify the qualifications, limitations and restrictions, including 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 our stockholders. The board
of directors has no present plans to issue any shares of preferred stock. If
preferred stock is issued in the future, it could decrease the amount of
earnings and assets available for distribution to holders of our 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 Tumbleweed without
further action by the stockholders.
We Have No Plans to Pay Cash Dividends
We expect to pay no cash dividends on the common stock in the
foreseeable future. We currently intend to retain any future earnings to finance
the development of additional restaurants and the growth of our business
generally. You should not purchase shares if you are depending upon dividend
income from this investment. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that reflect our
views about future events and financial performance. Our actual results,
performance or achievements could differ materially from those expressed or
implied in these forward-looking statements for various reasons, including those
set out in the "Risk Factors," "Management's Discussion and Analysis," and
"Business" sections and elsewhere in this prospectus. Therefore, you should not
place undue reliance upon these forward-looking statements.
17
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by
the selling stockholders.
DIVIDEND POLICY
We do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain any future earnings to finance the
development of additional restaurants and the growth of our business generally.
We are also prohibited from paying dividends under the terms of our credit
facility with National City Bank. Our ability to pay dividends in the future
will depend upon earnings levels, capital needs, applicable covenants in our
loan agreements, general business conditions, and other factors deemed relevant
from time to time by our board of directors.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1998. The table has been prepared:
o on a pro forma basis as if our merger with Tumbleweed, LLC had occurred
on that date;
o as adjusted to reflect our sale of 776,543 shares at a price of $10.00
per share; and
o as adjusted to reflect application of the net proceeds from the offering
after deduction for the approximately $1,000,000 in offering expenses we
have incurred and to repay $6,990,348 of bank indebtedness. The former
Class A members of Tumbleweed, LLC, including certain of our directors
and officers, incurred this indebtedness as part of the financing for
the January 1995 acquisition of the Tumbleweed business by Tumbleweed,
LLC. See "History and Reoranization" and "Use of Proceeds."
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Pro Pro Forma
Actual Forma(1) As Adjusted(2)
------ -------- --------------
Long-term debt and capital lease obligations
<S> <C> <C> <C>
(including current maturities).......................$13,363 $13,363 $6,373
Redeemable members' equity 18,925 - -
Members' equity 354 - -
Retained earnings (deficit) (9,701) - -
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding....... - - -
Common stock, $0.01 par value, 16,500,000 shares
authorized; 5,105,000 shares outstanding, pro
forma; 5,881,543 shares outstanding, as
adjusted (3)....................................... - 51 58
Paid-in capital...................................... - 8,887 15,645
------- ------ ------
Total stockholders' equity..................... - 8,938 15,703
------- ------ ------
Total capitalization...................................$22,941 $22,301 $22,076
======= ======= =======
</TABLE>
- -----------------------
(1) Gives effect to (i) the conversion of redeemable members' equity and
members' equity to stockholders' equity, including the elimination of
$14,513,811 of accretion in redeemable members' equity related to Class
A Member put options, upon the conversion of our members' interests
into 5,105,000 shares of Common stock, and (ii) establishment of a
deferred tax liability of $639,623 in connection with the termination
of Tumbleweed, LLC's limited liability company status.
18
<PAGE>
(2) Reflects the proceeds of the sale of 776,543 sharesof common stock at
$10.00 per share net of offering expenses of approximately $1,000,000,
and the use of these proceeds and cash on hand of $225,000 to repay
bank indebtedness currently recorded as short-term borowings as of
December 31, 1998. See "Use of Proceeds."
(3) Excludes approximately 400,000 shares of common stock issuable to
employees and nonemployee directors upon the exercise of stock options
granted under our stock incentive plan. See "Executive Compensation--
Stock Incentive Plan."
SELECTED FINANCIAL DATA
In the following table, the income statement and balance sheet data of:
o Tumbleweed Mexican Food, Inc. and its affiliates from which Tumbleweed,
LLC acquired the Tumbleweed concept in 1995 (the "Predecessor") for the
year ended December 31, 1994 have been derived from the financial
statements of the Predecessor which were audited by the Predecessor's
independent auditors; and
o Tumbleweed, LLC for the years ended December 31, 1995, 1996, 1997 and
1998 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 filing.
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 filing and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
Predecessor Tumbleweed, LLC
----------- -------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $14,147,124 $17,254,058 $23,284,007 $27,891,128 $40,490,933
Commissary sales 1,500,732 1,574,847 1,795,529 1,007,011 1,041,266
Franchise fees and royalties 442,122 540,157 474,870 563,056 770,806
Other revenues 108,000 177,960 177,317 365,054 504,639
----------- ----------- ----------- ----------- -----------
Total revenues 16,197,978 19,547,022 25,731,723 29,826,249 42,807,644
Operating expenses:
Restaurant cost of sales 4,280,691 5,132,549 7,103,357 8,191,928 11,788,578
Commissary cost of sales 1,297,045 1,424,077 1,649,502 887,793 905,814
Operating expenses 7,133,174 8,896,704 12,386,119 14,035,693 20,881,212
Selling, general and administrative 1,682,395 1,962,036 2,250,827 3,051,740 4,150,303
Depreciation and amortization 563,195 1,033,349 1,231,290 971,863 1,442,011
Preopening amortization 175,405 149,138 405,502 544,723 816,604
----------- ----------- ----------- ----------- -----------
Total operating expenses 15,131,905 18,597,853 25,026,597 27,683,740 39,984,522
----------- ----------- ----------- ----------- -----------
19
<PAGE>
Income from operations 1,066,073 949,169 705,126 2,142,509 2,823,122
Interest expense, net (270,258) (266,530) (203,810) (428,598) (869,712)
----------- ------------ ------------ ------------ -----------
Net income $ 795,815 $ 682,639 $ 501,316 $ 1,713,911 $ 1,953,410
=========== ============ ============ ============ ===========
Historical net income $ 682,639 $ 501,316 $ 1,713,911 $ 1,953,410
Pro forma income taxes(1) (245,750) (180,474) (617,008) (703,228)
------------ ------------ ------------ -----------
Pro forma net income $ 436,889 $ 320,842 $ 1,096,903 $ 1,250,182
============ ============ ============ ===========
Pro forma net income per share
- basic and diluted $ 0.09 $ 0.06 $ 0.21 $0.24
Weighted average shares outstanding(2) 5,105,000 5,105,000 5,105,000 5,105,000
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------
Predecessor Tumbleweed, LLC
----------- ---------------
Pro
Forma
1994 1995 1996 1997 1998 1998 (3)
---- ---- ---- ---- ---- --------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets........................... $8,492 $17,831 $21,262 $26,068 $33,681 $33,681
Long-term debt and capital lease
obligations, including current
maturities.......................... 3,947 3,077 5,776 8,542 13,363 13,363
Total liabilities...................... 4,975 4,132 7,108 10,725 24,103 24,743
Redeemable members' equity............. -- 16,413 20,233 23,420 18,925 --
Members' equity........................ -- 7 7 7 354 --
Retained earnings (deficit)............ -- (2,721) (6,085) (8,083) (9,701) --
Stockholders' equity................... 3,517 -- -- -- -- --
Pro forma stockholders' equity......... -- -- -- -- -- 8,938
</TABLE>
- -----------
(1) Prior to the merger, we operated as a limited liability company and
were 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 we had been subject to corporate income taxes for the
periods presented with an effective tax rate of 36%.
(2) Shares outstanding gives effect to the merger as if it had occurred as
of January 1, 1995. See "History and Reorganization."
(3) Reflects the establishment of a deferred tax liability of $639,623
assuming the termination of Tumbleweed, LLC's limited liability company
status on December 31, 1998 and the conversion of Tumbleweed, LLC's
members' interests into 5,105,000 shares of our common stock. See
"History and Reorganization."
20
<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 us and our
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 43 Tumbleweed restaurants as of December 31, 1998, we owned and
operated 25 restaurants in Kentucky, Indiana and Ohio, franchised 13 restaurants
in Indiana, Illinois, Tennessee and Wisconsin, and licensed three restaurants in
Germany and one restaurant each in Jordan and Saudi Arabia. As of the date of
this Prospectus, there are 45 Tumbleweed restaurants of which we own and operate
26 restaurants in Kentucky, Indiana and Ohio, and franchise 14 in Kentucky,
Indiana, Illinois, Tennessee and Wisconsin and licensed five. We also license
five restaurants in Germany, Jordan and Saudi Arabia. Since December 31, 1998,
an additional company-owned restaurant opened in Ohio, three franchised
restaurants opened in Indiana, Kentucky, and Tennessee, and two franchised
restaurants closed in Tennessee. We anticipate opening two additional
company-owned restaurants and seven additional franchised restaurants by the end
of 1999. We acquired the Tumbleweed business and other assets effective on
January 1, 1995. See "History and Reorganization."
On January 1, 1999, we merged with Tumbleweed, LLC. This allowed us to
convert that company, which was the owner of the assets used in our business,
into a corporation for purposes of the stock offering. In the merger, the
membership interests of the approximately 80 former members of Tumbleweed, LLC
were converted into a total of 5,105,000 shares of our common stock. The former
Class B members of Tumbleweed, LLC also paid additional cash contributions of
$747,500 shortly before the merger, as required under Tumbleweed, LLC's
operating agreement. Following the merger and the initial public offering, we
now have 5,881,543 shares of common stock issued and outstanding. We describe
the merger in greater detail in the "History and Reorganization" section of this
Prospectus.
As a limited liability company, Tumbleweed, LLC had been treated as a
partnership for income tax purposes and, accordingly, had incurred no federal or
state income tax liability. The discussion of financial condition and results of
operations included in the paragraphs that follow reflect a pro forma adjustment
for federal and state income taxes that would have been recorded during these
periods if Tumbleweed, LLC 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 our financial statements and the related notes
thereto included elsewhere in this Prospectus. See "Index to Financial
Statements."
21
<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.
Year Ended December 31,
--------------------------------
1996 1997 1998
----- ------ -----
Revenues:
Restaurant sales 90.5% 93.5% 94.6%
Commissary sales 7.0 3.4 2.4
Franchise fees and royalties 1.8 1.9 1.8
Other revenues 0.7 1.2 1.2
----- ----- -----
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales(1) 30.5 29.4 29.1
Commissary cost of sales(2) 91.9 88.2 87.0
Operating expenses(1) 53.2 50.3 51.6
Selling, general and
administrative 8.7 10.2 9.7
Depreciation and amortization 4.8 3.3 3.4
Preopening amortization 1.6 1.8 1.9
----- ----- -----
Total operating expenses 97.3 92.8 93.4
----- ----- -----
Income from operations 2.7 7.2 6.6
Interest expense, net -0.8 -1.4 -2.0
Net income 1.9% 5.8% 4.6%
===== ===== =====
Historic net income 1.9% 5.8% 4.6%
Unaudited pro forma income taxes (3) -0.7 -2.1 -1.6
-------------------------------
Unaudited pro forma net income 1.2% 3.7% 3.0%
===============================
(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 we were taxed as a C corporation
for income tax purposes with an assumed combined federal and state
effective tax rate of 36%.
Comparison of the Years Ended December 31, 1998 and 1997
Total revenues increased by $12,981,395 or 43.5% for 1998 compared to 1997. The
increase in total revenues reflects the opening of eight additional
company-owned restaurants in 1998. Restaurant sales at company-owned restaurants
increased $12,599,805 or 45.2% for 1998 compared to 1997. Company-owned same
store sales increased by 1.5% in 1998.
Commissary sales to franchised restaurants increased by $34,255 or 3.4% in 1998
compared to 1997. In May, 1997, we made a decision to discontinue commissary
sales of products not manufactured by the commissary. As a result, commissary
sales did not increase proportionally to the increase in the number of
franchised stores.
Franchise fees and royalties increased by $207,750 or 36.9% in 1998 compared to
1997. The increase was due primarily to $105,000 in franchise fees received upon
the opening of three new franchised restaurants in 1998 compared to two in 1997,
$23,250 in territory fees received from international operations and additional
royalties from three franchised restaurants opened in 1998.
22
<PAGE>
Other revenues increased by $139,585 or 38.2% in 1998 compared to 1997,
primarily due to an increase in volume related purchasing rebates of
approximately $141,000 and monies from the Ohio Bureau of Workers' Comp
representing a return of invested premiums by the State of Ohio totaling
approximately $143,000 in 1998. The increases were offset in part by $178,000 in
insurance proceeds received in 1997.
Restaurant cost of sales increased by $3,596,650 or 43.9% for 1998 compared to
1997. The increase was principally due to the opening of eight additional
company-owned restaurants. Restaurant cost of sales decreased as a percentage of
sales by 0.3% to 29.1% for 1998 compared to 29.4% in 1997. The decrease resulted
primarily from improved operating efficiencies in the commissary and lower
product costs at the restaurant level.
Commissary cost of sales increased $18,021 or 2.0% in 1998 compared to 1997.
Commissary cost of sales did not increase proportionally to the increase in the
number of franchised stores due to the discontinuance of sales of products not
manufactured by the commissary. As a percentage to sales commissary cost of
sales decreased 1.2%. This was due to lower ingredient costs for products sold
by the commissary.
Restaurant operating expenses increased by $6,845,519 or 48.8% in 1998 compared
to 1997. The increase reflects the addition of eight company-owned restaurants.
Operating expenses increased as a percentage of restaurant sales to 51.6% in
1998 from 50.3% in 1997 primarily due to a 1.2% increase in freight and a 0.7%
increase in restaurant level promotional costs. These costs were offset in part
by a 0.7% decrease in labor costs.
Selling, general and administrative expenses increased by $1,098,563 or 36.0%
for 1998 compared to 1997. The increase was due in part to the addition of
management and staff personnel during 1998 to support the growing restaurant
base. Because of our restaurant growth plans management expects selling, general
and administrative expenses to continue to increase during 1999 in absolute
dollars.
Preopening amortization increased $271,881 or 49.9% for 1998 compared to 1997.
The increase is due to the opening of eight additional company-owned restaurants
in 1998 as compared to two restaurants in 1997.
Depreciation and amortization expense increased $470,148 or 48.4% for 1998
compared to 1997 due primarily to the addition of eight company-owned
restaurants.
Net interest expense increased $441,114 or 102.9% for 1998 compared to 1997. The
increase resulted from increased borrowings to fund the growth in company-owned
restaurants.
The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though we had been subject to corporate income taxes for 1998 and
1997. The combined effective tax rate is 36.0% for 1998 and 1997.
As a result of the factors discussed above, pro forma net income in 1998
increased $153,279 or 14.0% compared to 1997. Pro forma net income per share
increased to $0.24 in 1998 compared to $0.21 in 1997.
23
<PAGE>
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 in 1997 and three company-owned restaurants late in 1996. Same store
sales at company-owned restaurants 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, we received proceeds of $178,000 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 our 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
our 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
24
<PAGE>
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.
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.
The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though we had been subject to corporate income taxes for 1997 and
1996. The combined effective tax rate is 36.0% for 1997 and 1996.
As a result of the factors discussed above, pro forma net income in 1997
increased $776,061 or 241.9% compared to 1996. Pro forma net income per share
increased to $0.21 in 1997 compared to $0.06 in 1996.
Impact of Inflation
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could affect our operations. A majority of our employees are
paid hourly rates related to federal and state minimum wage laws. As a result of
increased competition and the low unemployment rates in the markets in which our
restaurants are located, we have continued to increase wages and benefits in
order to attract and retain management personnel and hourly workers. In
addition, most of our leases require us to pay taxes, insurance, maintenance,
repairs and utility costs, and these costs are subject to inflationary
pressures. Most of the leases also provide for increases in rent based on
increases in the consumer price index when the leases are renewed. We may
attempt to offset the effect of inflation through periodic menu price increases,
economies of scale in purchasing and cost controls and efficiencies at existing
restaurants.
Quantitative and Qualitative Disclosures About Market Risk
Tumbleweed does not enter into derivative transactions or speculate on the
future direction of interest rates. We are exposed to interest rate changes
primarily as a result of our variable rate debt instruments. As of December 31,
1998, approximately $8.0 million of our debt bore interest at variable rates. We
believe that the effect, if any, of reasonably possible near-term changes in
interest rates on our consolidated financial position, results of operations or
cash flows would not be significant.
Quarterly Financial and Restaurant Operating Data
The following is a summary of certain unaudited quarterly results of
operations for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Total
Calendar Year
1997
<S> <C> <C> <C> <C> <C>
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 1,713,991
Pro forma net
income 146,894 332,798 340,483 276,728 1,096,903
Pro forma net
income per share -
basic and diluted .03 .07 .07 .05 .21
25
<PAGE>
Shares used in
computing pro
forma net income
per share 5,105,000 5,105,000 5,105,000 5,105,000 5,105,000
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 $ 10,516,721 $ 11,426,581 $ 40,490,933
Total revenues 8,907,877 10,777,335 11,105,504 12,016,928 42,807,644
Income before taxes 342,147 591,293 613,050 406,920 1,953,410
Pro forma net
income 218,974 378,428 392,352 260,428 1,250,182
Pro forma net
income per share -
basic and diluted .04 .07 .08 .05 .24
Shares used in
computing pro
forma net income
per share 5,105,000 5,105,000 5,105,000 5,105,000 5,105,000
Company-owned
restaurants in
operation at end of
quarter 21 22 23 25 25
</TABLE>
Impact of Year 2000
We have scheduled the replacement of certain of our older computer
systems with hardware and software that has been certified to be Year 2000
compliant. We have also completed an assessment of other computer systems and
will modify or replace portions of our software so that our 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 $406,000, which
includes $370,000 for the purchase of new hardware and software that will be
capitalized and $36,000 that will be expensed as incurred. As of December 31,
1998, we had not incurred any expenses relating to the Year 2000 project.
The project is estimated to be completed during August 1999, which is
prior to any anticipated impact on our operating systems. We believe 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 our computer systems. However, if such
modifications and conversions are not made, or are not completed timely,
inability of our computer systems to function accurately could have a material
impact on our operations.
We are in the process of querying significant vendors with respect to
Year 2000 issues. Based on the responses received from vendors, we are not aware
of any vendors with a Year 2000 issue that would materially impact results of
operations, liquidity, or capital resources. However, the inability of vendors
to complete their Year 2000 resolution process in a timely fashion could
26
<PAGE>
materially impact our operations, although the actual impact of non-compliance
by vendors is not determinable.
We are in the process of developing a contingency plan in the event we
do not complete all phases of our Year 2000 program.
The costs of the project and the date on which we believe that we 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. Our initial application of the SOP
will require the write-off of deferred preopening costs ($524,669 at December
31, 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. We adopted
this new standard as of January 1, 1999. It is not practical to estimate what
the effect of the change will be on 1999 earnings.
Segement Information
We have three reportable segments: restaurants, commissary and corporate. The
restaurant segment includes the operations of all of our company-owned
restaurants and derives revenue from the sale of food products to the general
public. The commissary segment derives revenues from the sale of food products
to company-owned and franchised restaurants. The corporate segment derives
revenues from sale of franchise rights, franchise royalties and related services
used in restaurant operations, and includes our selling, general and
administrative activities. Segment information is disclosed in Note 10 to our
financial statements attached to this prospectus.
Generally, we evaluate performances and allocate resources based on net income.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies contained in Note 2 to our financial
statements attached to this prospectus.
Liquidity and Capital Resources
Our ability to expand the number of restaurants will depend on a number
of factors, including:
o the selection and availability of quality restaurant sites;
o the negotiation of acceptable lease or purchase terms;
o the securing of required governmental permits and approvals;
o the adequate supervision of construction, the hiring, training and
retaining of skilled management and other personnel;
o the availability of adequate financing; and
27
<PAGE>
o other factors, many of which are beyond our control.
The hiring and retention of management and other personnel may be
difficult given the low unemployment rates in the areas in which we intend to
operate. There can be no assurance that we will be successful in opening the
number of restaurants anticipated in a timely manner. Furthermore, there can be
no assurance that our new restaurants will generate sales revenue or profit
margins consistent with those of our existing restaurants, or that these new
restaurants will be operated profitably.
Our principal capital needs arise from the development of new
restaurants, and to a lesser extent, maintenance and improvement of existing
facilities. The principal sources of capital to fund these expenditures were
members' contributions, internally generated cash flow, bank borrowings and
lease financing. The following table provides certain information regarding our
sources and uses of capital for the periods presented:
Years
Ended December 31,
------------------
1996 1997 1998
---- ---- ----
Net cash provided by operations $ 1,069,979 $ 3,040,836 $ 3,447,666
Purchases of property and
equipment 4,712,962 4,105,089 5,313,575
Proceeds from sale of property and
equipment 1,635,815 - -
Net distributions of
members' equity (45,715) (525,002) (328,788)
Net borrowings on long-term debt
and capital lease obligations 905,201 1,797,898 3,251,135
Since the acquisition of the Tumbleweed business, our single largest
use of funds has been for capital expenditures consisting of land, building and
equipment associated with our restaurant expansion program. Our substantial
growth over the period has not required significant additional working capital.
Sales are predominantly for cash and the business does not require the
maintenance of significant receivables or inventories. In addition, it is common
within the restaurant industry to receive trade credit on the purchase of food,
beverage and supplies, thereby reducing the need for incremental working capital
to support sales increases.
We both own and lease restaurant facilities. Management determines
whether to acquire or lease a restaurant facility based on our evaluation of the
financing alternatives available for a particular site.
We plan to open two additional company-owned Tumbleweed restaurants
during 1999, depending on the availability of quality sites, the hiring and
training of sufficiently skilled management and other personnel, and other
factors. As of December 31, 1998, we had two additional restaurants under
construction, one of which was opened in the first quarter of 1999.
We 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 1999. The remaining costs will be financed through
the initial public offering together with available
28
<PAGE>
cash reserves, cash provided from operations and borrowing capacity. We believe
such sources will be sufficient to fund our expansion plans through 1999. Should
our actual results of operations fall short of, or the rate of expansion
significantly exceed our plans, or should costs or capital expenditures exceed
expectations, we may need to seek additional financing in the future. In
negotiating such financing, there can be no assurance that we will be able to
raise additional capital on satisfactory terms.
As of December 31, 1998, we had a $5,000,000 revolving credit facility
with National City Bank (the "Credit Facility"). Subsequent to December 31,
1998, the amount of the Credit Facility was increased to $6,500,000. As of
December 31, 1998, we had outstanding borrowings under the Credit Facility of
approximately $4,302,000. The Credit Facility imposes restrictions 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 our growth
strategy, we may incur, from time to time, additional short and long-term bank
indebtedness and may issue, in public or private transactions, 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 acceptable terms.
BUSINESS
General
Tumbleweed(R) 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 generally
open seven days a week for lunch and dinner (except certain holidays) and
generally offer a full service bar.
There are currently 45 full-service restaurants in the Tumbleweed
system. We own and operate 26 restaurants in Kentucky, Indiana and Ohio, and
franchise an additional 14 restaurants in Kentucky, Indiana, Illinois, Tennessee
and Wisconsin. We also license five restaurants outside the United States. We
and our franchisees currently expect to open an additional two company-owned and
seven franchised restaurants by the end of 1999.
We use three different size restaurant designs to better match the
investment 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
17 company-owned Tumbleweed restaurants open for all of 1998:
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- ----------
Mini 128-194 4 $1,193,000
Midi 210-244 5 $1,769,000
Maxi 252-384 8 $2,022,000
Our same store sales increased 5.2% in 1997 versus 1996, and 1.5% in
1998 versus 1997 and 2.4 % for the first quarter of 1999 versus the first
quarter of 1998.
29
<PAGE>
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.
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 1998, the average check at a full-service
Tumbleweed restaurant, including beverages, was approximately $8.10 for lunch
and $10.20 for dinner. Management believes that this pricing approach, together
with Tumbleweed's emphasis on variety and quality, creates a favorable
price-to-value perception that can increase customer volume and generate more
frequent repeat visits.
ACHIEVING TOTAL GUEST SATISFACTION. We are committed to providing
prompt, friendly and attentive service and consistent food quality to our
customers. Tumbleweed employs a quality control supervisor independent of our
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. We also use a "mystery shopper"
program to compare actual performance of restaurants to Tumbleweed standards and
solicit comment cards from customers to monitor and modify restaurant
operations.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new
Tumbleweed restaurant, we generally uses one of three prototype designs
management believes is best suited to a particular site. Our Mini, Midi and Maxi
prototype restaurants accommodate approximately 150, 225, and 265 guests,
respectively. Each size restaurant offers full service casual dining and the
same menu containing a wide assortment of Tex-Mex and mesquite grilled
selections. Management believes that the use of multiple prototypes permits us
to more closely match the investment in a restaurant site with the site's
estimated sales potential. These factors allow us and our franchisees to more
efficiently utilize financial resources.
COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing
extensive training and attractive compensation, and by emphasizing clearly
defined organizational values, we foster a strong corporate culture and
encourage a sense of personal commitment from our employees. We have a monthly
cash bonus program for each restaurant's management team based on attaining
sales growth and related performance goals on a restaurant-by-restaurant basis.
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
30
<PAGE>
needed at each restaurant, reduces the need for highly skilled cooking
personnel, and simplifies restaurant operations. Managers and kitchen staff at
each restaurant focus on the final preparation of menu items to Tumbleweed
standards. We currently operate our commissary principally to enhance food
quality and operational efficiency of company-owned and franchised restaurants
and not as a separate material source of profits for us. Management believes
this approach increases Tumbleweed's ability to offer our 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.
Expansion Strategy
Since acquiring the Tumbleweed concept in 1995, we have 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. We and our franchisees plan to add two
company-owned and seven franchised restaurants by the end of 1999.
The following are key elements of our expansion strategy:
Opening Restaurants in Target Markets. We target mid-sized metropolitan
markets, initially concentrating in the Midwest, Mid-Atlantic and Southeast
regions, where income levels and the presence of shopping and entertainment
centers, offices and/or colleges and universities indicate that a significant
base of potential customers exists. Management considers the feasibility of
opening multiple restaurants in a target market, which offers greater operating
and advertising efficiency. As we add additional restaurants in a target market,
there may be short-term decreases in same store sales. However, management
believes this clustering strategy can enhance long-term performance through
economies of scale and shared advertising expenses. Management also views
smaller markets with fewer competing casual dining restaurants as presenting
growth opportunities for us. Management believes that our 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 our management and other employees, as well as
with the assistance of consultants when deemed advisable. We believe that our
site selection strategy and procedures, together with our menu and pricing
strategies, our commitment to quality food products and excellent service, and
our advertising, marketing and promotional efforts, will enhance our ability to
generate our anticipated customer volumes.
31
<PAGE>
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 our or our franchisee's investment
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.
Our 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 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
150, and is capable of generating annual sales of $1,250,000. Management
anticipates that our expansion strategy will continue to focus on developing
sites best suited to use of the "Midi" and "Mini" prototypes.
We believe our prototype designs can be adapted for developing
Tumbleweed restaurants in existing structures. This capability may give us
access to quality sites not otherwise available and may reduce the time or
expense of development in certain circumstances.
FRANCHISING. We expect that growth during the next several years will
come from the further development of new and existing markets by us and our
franchisees. In addition, we may acquire restaurants from our franchisees from
time to time. With the development of prototype restaurant designs and additions
to our management team since 1995, we have increased our 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, we believe 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. We
periodically introduce new items that complement present menu selections.
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<PAGE>
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 12.0% of net restaurant sales during 1998.
Tumbleweed's menu pricing is designed to create a strong perception of
value by consumers. Prices for Tex-Mex dishes range from $1.59 for a single
corn-shell taco to $11.79 for the Tumbleweed sampler dinner. Mesquite grilled
items range from $5.79 for a hamburger to $15.99 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 1998, the average check for
full service restaurants, including beverages, was approximately $8.10 for lunch
and $10.20 for dinner.
Restaurant Operations
MANAGEMENT AND EMPLOYEES. Tumbleweed's organizational philosophy is
based on seven core values and a commitment to Total Guest Satisfaction ("TGS").
Our training procedures are intended to instill in all managers and employees an
appreciation of the core values and encourage a shared commitment to TGS.
We employ area directors who are responsible for supervising the
operations of Tumbleweed restaurants within their geographic region and the
continuing development of each restaurant's managers and employees. Through
regular visits to the restaurants, the area directors ensure that the Tumbleweed
concept, strategies, core values and standards of quality are being observed in
all aspects of restaurant operations. Area directors are chiefly responsible for
the implementation of the TGS program.
Each of our restaurants has one general manager, one kitchen manager
and from one to three assistant managers, based on restaurant volume. The
general manager of each restaurant has primary responsibility for the day-to-day
operations of the entire restaurant, including sales, physical plant, financial
controls and training, and is responsible for maintaining our standards of
quality and performance. In selecting managers, we generally seek persons who
have significant prior experience in the restaurant industry as well as
employees who have demonstrated managerial potential and a commitment to the
Tumbleweed concept and philosophy. We seek to attract and retain high caliber
managers and hourly employees by providing them with competitive salaries,
monthly bonuses and a casual, entertaining and challenging working environment.
TRAINING AND DEVELOPMENT. We have 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 our culture, commitment to TGS, operating procedures and standards,
and internal controls.
The general managers and the area directors are responsible for
selecting and training hourly employees at each restaurant. We employ training
coordinators to assist with training and development of employees. Before the
opening of each new restaurant, one of our training managers leads a team of
experienced employees to train and educate the new employees. The training
period for new employees includes two weeks of general training prior to opening
and one week of on-the-job supervision at the new Tumbleweed restaurant. Ongoing
employee
33
<PAGE>
training remains the responsibility of the general manager and training
coordinator of each restaurant under the supervision of the area director.
FOOD PREPARATION. We are committed to offering distinctive Tex-Mex and
mesquite grilled foods to customers at reasonable prices through the use of a
commissary-based system. 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 by enhancing our ability to maintain consistently high food quality,
minimizing restaurant kitchen space and equipment, and reducing the number of
skilled cooking positions. The system also enables restaurant managers and
kitchen staff to focus on the final preparation of menu items to Tumbleweed
standards.
Whenever feasible, the cooked ingredients used in Tumbleweed menu
selections, such as ground beef, chile con queso, and Mexican beans, are
prepared in advance at the commissary according to procedures designed to extend
shelf life without the addition of preservatives. The kitchen staff at each
restaurant uses commissary-supplied and other fresh ingredients for the final
preparation of individual orders. Management believes this system enhances our
ability to maintain rigorous operational and food preparation procedures and
stringent product shelf life standards. The commissary operates according to
stringent quality control standards and is subject to a daily inspection by a
USDA inspector on the premises. We maintain a contingency plan under which
centralized food preparation could be quickly resumed at another company's
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 us. The commissary charges an amount approximately equal to
our cost for the items it supplies to company-owned and franchised restaurants.
We currently plan to limit the commissary's profit to 5% per year.
ADVERTISING AND MARKETING. We use radio, print, billboard, and direct
mail advertising in our various markets, as well as television advertising in
certain larger markets. We plan to spend 2.0% of monthly sales to fund marketing
activities. We engage in a variety of other promotional activities, such as
contributing goods, time and money to charitable, civic and cultural programs,
in order to increase public awareness of our restaurants. The cost associated
with these promotional activities in 1998 was approximately 2.6% of sales.
RESTAURANT REPORTING. We closely monitor sales, costs of food and
beverages, and labor at each of our restaurants. Management analyzes daily and
weekly restaurant operating results to identify trends at each location, and
acts promptly to remedy negative trends where possible. We use an accounting and
management information system that operates at the restaurant level to ensure
the maintenance of financial controls and operations. Administrative staff
prepare daily reports of sales, labor and customer counts. Cost of sales and
condensed profit and loss statements compiled bi-monthly by store-level
personnel and monthly by our accounting department are provided to management
for analysis and comparison to past performance and budgets. We use a
specialized software system to measure theoretical food costs against actual
costs. To improve our performance analysis capabilities, we are upgrading the
system to measure theoretical labor cost against actual costs.
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<PAGE>
Properties
We currently own and operate 26 restaurants. We currently anticipate
opening two additional company-owned and seven additional franchised restaurants
by the end of 1999. The following table sets forth certain information with
respect to company-owned Tumbleweed restaurants now in operation or under
construction.
Approximate Approximate Owned
Opening Seating Restaurant or
Date Location Capacity* Size (sq.ft.) Leased
---- -------- --------- ------------- ------
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 Owned
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
11/96 1555 West Main Street 225 5,400 Leased
Hamilton, Ohio
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<PAGE>
Approximate Approximate Owned
Opening Seating Restaurant or
Date Location Capacity* Size (sq.ft.) Leased
---- -------- --------- ------------- ------
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 Owned
Columbus, Ohio
8/98 1150 North Bridge Street 225 5,400 Leased
Chillicothe, Ohio
10/98 6959 East Broad Street 225 5,400 Leased
Columbus, Ohio
9/98 1865 West First Street 268 6,700 Owned
Springfield, Ohio
3/99 9343 Colerain Avenue 226 5,400 Leased
Cincinnati, Ohio
**5/99 6040 Lima Road Owned
Ft. Wayne, Indiana
**7/99 1868 U. S. Highway 41 North Leased
Henderson, Kentucky
- --------------------------
* Includes seats in bar but not seasonal patio seating.
** Anticipated date of opening.
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The following table summarizes estimated development costs for each
prototype Tumbleweed restaurant:
Maxi Midi Mini
---- ---- ----
Land acquisition $ 650,000 $ 500,000 $ 300,000
Building 900,000 750,000 550,000
Equipment 300,000 275,000 225,000
Other 50,000 40,000 25,000
---------- ---------- -----------
Total $1,900,000 $1,565,000 $ 1,100,000
========== ========== ===========
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. We 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, we
incur 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.
Our executive offices occupy approximately 7,000 square feet of space
in three buildings we own in Louisville, Kentucky. We also lease 3,000 square
feet of office space in a nearby commercial building. Management believes our
restaurant facilities and offices are adequately covered by insurance.
Franchising Program
We intend to pursue an active franchising program with current and new
franchisees under strictly controlled guidelines. We offer franchisees both
rights to develop individual restaurants as well as area development rights for
the establishment of more than one new restaurant over a defined period of time
and in a defined geographic area. The specific locations of the restaurants are
subsequently designated by us and the franchisee in separate franchise
agreements.
Under the standard area development agreement currently in use, a
franchisee is required to pay at the time the agreement is signed a
non-refundable fee of $5,000 per potential restaurant in the defined geographic
area, to be applied against the initial franchise fee payable for each
restaurant. Our current area development agreement also provides for a franchise
fee of $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
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compliance with our policies, standards and specifications, including matters
such as menu items, ingredients, materials, supplies, services, fixtures,
furnishings, decor and signs.
Under our criteria for selecting new franchisees, Tumbleweed requires
that potential franchisees have adequate capital, extensive experience in the
restaurant industry, and access to locations suitable for development. Except
for locations we manage directly, we generally require that a franchisee have a
principal operator with at least a ten percent ownership interest who must
devote full time to the supervision and conduct of the franchise.
International Licensing Agreement
We have 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 restaurants in
Europe, Asia and Africa. As of December 31, 1998, International was operating
three restaurants in Germany and one each in Saudi Arabia and Jordan as
Tumbleweed restaurants. It is anticipated that most of the other restaurants
operated by International will be converted to Tumbleweed restaurants on the
terms of the International Agreement. Certain of our directors 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, we 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 us in any contract year is
$300,000 or more, then the license fee percentage payable to us will be reduced
by 2% per year for the next five years, subject to a minimum payment of $300,000
in fees to us per contract year. International is entitled to a credit against
royalties payable to us equal to the actual cost of converting International's
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, we will have the right to terminate the International
Agreement, and International will have the right to preclude such termination by
paying to us an amount approximating the balance of the fees to which we 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
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principals. The International Agreement grants us a right of first refusal if
International proposes to sell or assign its rights under the Agreement, or to
sell equity interests in International.
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
our current markets and that our 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. We and our 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 we or our franchisees have. A significant change in pricing
or other business strategies by one or more of our competitors, including an
increase in the number of restaurants in our territories, could have a
materially adverse impact on our sales, earnings and growth. Our 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.
We 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 us 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 us in particular. In addition,
dependence on frequent deliveries of fresh produce also subjects food service
businesses such as ours 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 December 31, 1998, we had approximately 2,200 employees, of whom
43 are executive and administrative personnel, 90 are restaurant management
personnel, and the remainder are hourly restaurant and commissary personnel.
Many of our hourly restaurant employees work part-time. None of our employees
are covered by a collective bargaining agreement. We consider our employee
relations to be good.
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Service Marks and Trademarks
We or our subsidiary own various service marks and trademarks that are
registered on the Principal Register of the United States Patent and Trademark
Office. We regard our service marks and trademarks as having significant value
and being an important factor in the development of the Tumbleweed concept. Our
policy is to pursue and maintain registration of our service marks and
trademarks whenever possible and to oppose vigorously any infringement or
dilution of our service marks and trademarks.
Government Regulation
We are subject to a variety of federal, state and local laws. Each of
our restaurants is subject to permitting, licensing and regulation by a number
of government authorities, including alcoholic beverage control, health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failure to obtain required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area.
Approximately 12.0% of our net restaurant sales were attributable to
the sale of alcoholic beverages for the year ended December 31, 1998. Alcoholic
beverage control regulations require each of our restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
restaurant operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages.
The failure of a restaurant to obtain or retain liquor or food service
licences would have a material adverse effect on the restaurant's operations. To
reduce this risk, each company-owned restaurant is operated in accordance with
procedures intended to assure compliance with applicable codes and regulations.
We are subject in certain states to "dram shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our existing
$1,000,000 comprehensive general liability insurance, as well as excess
liability coverage of $5,000,000 per occurrence, with no deductible. We have
never been named as a defendant in a lawsuit involving "dram shop" liability.
Our restaurant operations are also subject to federal and state laws
governing such matters as the minimum hourly wage, unemployment tax rates, sales
tax and similar matters, over which we have no control. Significant numbers of
our service, food preparation and other personnel are paid at rates related to
the federal minimum wage, and increases in the minimum wage could increase our
labor costs.
The development and construction of additional restaurants are also
subject to compliance with applicable zoning, land use and environmental laws
and regulations.
Litigation
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We are not currently involved in any litigation nor, to management's
knowledge, is any litigation threatened against us, except for routine
litigation arising in the ordinary course of business. In the judgment of our
executive officers, no material adverse effect on our financial position or
results of operations would result if any such litigation were not resolved in
our favor.
MANAGEMENT
The following table lists our executive officers, key employees, and
directors.
Name Age Position
- ---- --- --------
John A. Butorac, Jr. ........ 50 President, Chief Executive Officer, and
Director
James M. Mulrooney .......... 47 Executive Vice President, Chief Financial
Officer, and Director
John Brewer ................. 46 Vice President of Operations
Wayne P. Jones .............. 56 Vice President of Marketing and
Development
Gary Snyder.................. 44 Vice President - Company Operations
Glennon F. Mattingly......... 47 Vice President - Controller
Gregory A. Compton........... 38 Vice President, Secretary and General
Counsel
David M. Roth ............... 48 Director
Minx Auerbach(1) ............ 75 Director
Lewis Bass (2)............... 76 Director
Roger Drury(1)(2) ........... 52 Director
George Keller(1)(2) ......... 47 Director
Terrance A. Smith............ 52 Director
- -------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John A. Butorac, Jr. has served as our President and Chief Executive Officer
since we were formed in November 1994, and is a Director. From October 1991 to
January 1995, Mr. Butorac served in various capacities with Tumbleweed Mexican
Food Inc., 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 plans 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
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KFC, Zapata/Zantigo Mexican Restaurants, Fuddrucker, Inc., Chi-Chi's, Inc., Rib
Tavern, Inc. and Two Peso Mexican Cafes. Mr. Butorac has 28 years of restaurant
management experience.
James M. Mulrooney has served as Executive Vice President and Chief Financial
Officer since we were formed in November 1994, and is a Director. 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 our
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 us 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 us 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 us 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 us 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 us 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 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 &
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McDonald, a Louisville, Kentucky law firm. Mr. Compton has represented and been
a principal of a restaurant franchisee unrelated to us for the last four years
David M. Roth was a founding member of Tumbleweed, LLC, served on its Board of
Advisors since its inception in 1994, and is a Director. 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, and 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 served as a member of the Board of Advisors of Tumbleweed, LLC
since January 1995, and is a Director. From 1975 to 1979, Ms. Auerbach was the
Director of Consumer Affairs for the City of Louisville, Kentucky. From 1979 to
1984, she served as 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 served as a member of the Board of Advisors of Tumbleweed, LLC since
January 1995, and is a Director. 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.
W. Roger Drury served as a member of the Board of Advisors of Tumbleweed, LLC
since January 1995, and is a Director. 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 Health Staffing Solutions.
George Keller is the founder of Tumbleweed and served on the Board of Advisors
of Tumbleweed, LLC since 1995, and is a Director. From 1975 to January 1995, Mr.
Keller served
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as Chief Executive Officer of Tumbleweed Mexican Food, Inc. and Tumbleweed
Concepts, Inc. Mr. Keller currently 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 in June 1998. Mr. Smith is currently
the President of Tumbleweed International LLC. 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 will serve a term expiring at our first annual meeting of
stockholders, which is expected to be held in 2000, and until his or her
successor is elected and qualified. At that time, it is anticipated that the
directors will be divided into three classes, with the number of directors in
each class 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. The
duties of the Audit Committee are to recommend to the whole board of directors
the selection of independent auditors to audit annually our books and records,
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 our internal audit controls. The duties of the Compensation
Committee are to review the performance of our executive officers and to
recommend annual salary and bonus amounts for executive officers. In addition,
the Compensation Committee reviews our compensation policies and practices and
benefit plans to ensure that they meet corporate objectives.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation earned for the last three
years by our chief executive officer and our executive officers whose total
salary and bonus exceeded $100,000 during 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------------------------- ------------
Name and Principal Other Annual Stock All Other
Position Year Salary Bonus Compensation Options# Compensation
-------- ---- ------ ----- ------------ ---------- ------------
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<S> <C> <C> <C> <C> <C> <C>
John A. Butorac, Jr. 1998 $200,000 $ 70,000 $ 23,777 0 $ 0
President and Chief
Executive Officer 1997 21,099 0
159,134 50,872 0
1996 20,111 0
154,050 0 0
James M. 1998 175,000 61,250 23,122 0 0
Mulrooney
Executive Vice 1997 132,611 42,394 21,016 0 0
President and Chief
Financial Officer 1996 129,461 0 19,463 0 0
John Brewer 1998 115,500 14,020 3,600 60,000 (1) 7,846 (2)
Vice President of
Operations 1997 109,273 30,946 3,600 0 0
1996 82,500 0 2,100 0 5,787 (2)
Wayne P. Jones 1998 112,291 14,026 3,600 50,000 (1) 0
Vice President of
Marketing and 1997 29,167 5,775 1,500 0 18,978 (2)
Development
1996 0 0 0 0 0
</TABLE>
(1) Granted subsequent to December 31, 1998, under the Tumbleweed, Inc. 1998
Stock Option and Incentive Compensation Plan.
(2) Represents relocation expenses.
INCENTIVE COMPENSATION PLAN. To ensure that an important portion of compensation
is based on performance, the annual bonus payable to our executive officers is
based upon our attainment of targeted performance measurements. All other
salaried employees other than store-level managers participate in the bonus
plan. Each executive earns incentive compensation if we achieve stated
performance goals. At the beginning of each fiscal year, the Compensation
Committee establishes a bonus amount expressed as a percentage of salary for
each participant. The amount of the bonus earned by a participating executive is
based upon the extent to which we attain or exceed attainment of specified
performance goals. The compensation committee has the right to make adjustments
to the plan as deemed necessary.
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 is calculated and accrued on a
quarterly basis in a similar manner, however, the incentive compensation
payments is not made for the year until after the fourth quarter is determined
and approved by the compensation committee. In addition, we 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 bonus payment.
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EMPLOYMENT AGREEMENTS. We 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 "Incentive
Compensation Plan" above. 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 we terminate 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 us 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 us 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 our
eligible employees or directors and those of our subsidiaries:
o 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;
o automatic grants of options to nonemployee directors;
o stock appreciation rights; and
o restricted stock and performance stock awards.
The Plan is intended to provide incentives and rewards for employees and
directors to support the implementation of our business plan and to align the
interests of employees and directors with those of our 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 and who do not receive any remuneration from us 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 "Director Compensation" below.
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.
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As of February 15, 1999, we granted options for a total of
approximately 340,000 shares to eligible employees and 60,000 shares to
nonemployee directors. None of the initial grants of options were awarded to Mr.
Butorac or Mr. Mulrooney. The exercise price of the options is equal to the
initial public offering price. The exercise price of future 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 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.
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. Subsequent to
December 31, 1998, each nonemployee director received options to purchase 10,000
shares of common stock at an exercise price of $10 per share (the IPO price).
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. Our 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. All options
granted to directors are to be granted at the fair market value of the Common
Stock at the grant date and will become exercisable in three equal annual
installments, beginning on the first anniversary of the date of grant. As of
December 31, 1998, there were no options issued or outstanding to any Directors.
Limitations of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, we have included
in our Certificate of Incorporation a provision to eliminate the personal
liability of our 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 we are required to indemnify our
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and we
are required to advance expenses to our officers and directors as incurred in
connection with proceedings against them for which they may be indemnified. At
present, we are not aware of any pending or threatened litigation or proceeding
involving any of our directors, officers, employees or agents in which
indemnification would be required or permitted. We believe that our charter
provisions are necessary to attract and retain qualified persons as directors
and officers.
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. In August, 1998, our Board of directors adopted a policy that all
future transactions between us and our officers, directors, principal
shareholders and affiliates must be approved by the Audit Committee and by a
majority of the independent members of the Board of directors who do not have an
interest in the transaction, and generally must be on terms no less favorable to
us than those obtainable from unrelated third parties.
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LEASES WITH RELATED PARTIES
WEST BROAD DEVELOPMENT, LLC. Prior to September 30, 1998, we leased the
facilities and related real property for the West Broad Street restaurant in
Columbus, Ohio from West Broad Development, LLC, a limited liability company in
which David M. Roth, one of our directors, owns a substantial interest. The
restaurant opened in April 1998. Under the terms of the lease, we were obligated
to renovate restaurant facilities as specified in approved plans, and the lessor
was obligated to reimburse us for construction expenses not to exceed $400,000.
The lease provided 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 was for a twenty-year term with options to
renew for two additional five-year terms. We were reimbursed for construction
expenses totaling $400,000 under the lease and paid rent totaling $57,200 during
1998.
On September 30, 1998, we entered into an agreement to purchase the land and
building, including improvements from West Broad Development, LLC. The purchase
was made at fair market value as determined by an independent appraisal. We, at
the time of purchase, entered into a modification agreement with a local bank to
modify an existing promissory note on the land and building. In modifying the
promissory note the principal amount was increased to $1,000,000. At the time of
the purchase, we terminated our capital lease obligation to West Broad
Development, LLC.
KELLER LLC. We originally leased the facilities and related real property for
our Springdale, Ohio restaurant from Keller LLC, a limited liability company in
which George Keller, one of our directors, 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 us. The restaurant
opened in November 1995. The lease required Keller LLC to invest $1,625,000, and
us to pay annual base rent of $186,689 for an initial term of eleven years
through 2006. In addition, we were obligated to pay an amount equal to 5% of the
excess, if any, of our gross sales during such year, over $2,100,000. The lease
was for an eleven-year term with options to renew for four additional five-year
terms. We paid rent totaling $186,689 during 1998.
On April 1, 1999, we purchased the land and building, including improvements
from Keller, LLC. The purchase was made for an amount substantially equal to the
costs originally expended by Keller, LLC in the purchase of the land and
construction of the improvements which approximated the fair market value as
determined by an independent appraisal. We, at the time of purchase, entered
into a modification agreement with a local bank to increase our line of credit
and to place a mortgage on the land and building to secure the increased line of
credit. At the time of the purchase, we terminated our capital lease obligation
to Keller, LLC.
DOUGLASS VENTURES. We sublease the facilities and related real property for our
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 one of our
stockholders in which David M. Roth, one of our directors, is a general partner,
and an unrelated third party. The lease was in effect at the time we acquired
the Tumbleweed assets in January 1995 and the restaurant opened in July 1995.
Under the terms of the lease, we pay annual base rent of $104,000 for ten years
which will be adjusted in years eleven and sixteen for
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cost of living increases. The lease also provides for additional rent equal to
the amount, if any, by which 6% of our gross sales exceeds the annual base rent
payable. The lease is for a twenty-year term with options to renew by written
agreement. We paid rent totaling $52,000 during 1998.
TW-DIXIEBASH, LLC. We lease the facilities and related real property for our
Bardstown Road and Valley Station restaurants from TW-DixieBash, LLC, a limited
liability company in which David M. Roth and James M. Mulrooney, two of our
directors, 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, we have built the
restaurant facilities as specified in approved plans, and the Lessor was
obligated to reimburse us 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 provided for interest to be paid during the
construction period based on TW-DixieBash's investment until the restaurant
commenced operations and $7,000 per month thereafter plus 30% of the
restaurant's positive net cash flow. The lease is for a twenty-year term with no
option to renew. We were reimbursed for construction expenses totaling $700,000
under the Bardstown Road lease and paid rent totaling $197,500 during 1998. The
Valley Station sublease provides for the assumption of all rent under the
Holiday Station Associates Limited Lease. The sublease also provided for
interest to be paid during the construction period based on TW-DixieBash's
investment until the restaurant commenced operations and $5,000 per month
thereafter, plus 30% of the restaurant's positive net cash flow. The sublease is
for a twenty-year term with options to renew for three additional five-year
terms. We were reimbursed for construction expenses totaling $145,000 in 1998
under the Valley Station sublease. We paid rent payments totaling $97,500 during
1998.
OTHER RELATED PARTY TRANSACTIONS
TUMBLEWEED INTERNATIONAL, LLC. In August 1997, we 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 members of our
board of directors. In 1998, International paid $7,500 in fees to us under the
International Agreement.
T.M. RIDERS, LLC. During 1996, we sold certain assets of our four food court
restaurants and our 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 our interest in the joint venture, we 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, we invested a nominal amount in T.M. Riders in exchange for a
9.5% interest of the common membership units of T.M. Riders. The Managing
Directors of T.M. Riders include John A. Butorac, Jr., James M. Mulrooney, David
M. Roth and George R. Keller, all of whom are members of our board of directors.
After ten stores have opened, we will receive fees from T.M. Riders based on
store openings and royalty fees base on T.M. Riders' system-wide sales. In
September 1998, we relinquished our interest in T.M. Riders.
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In December 1998, we assigned the T.M. Riders' promissory note receivable, which
had an outstanding principal balance of $400,000 as of the date of assignment,
to the Common Members of Tumbleweed, LLC, which includes Messrs. Butorac,
Mulrooney and Roth, who are members of our board of directors. In consideration
for the assignment, each Common Member assigned to Tumbleweed, LLC a
proportionate amount of their respective Common Member interests. This
transaction was accounted for as a distribution to the Common Members of
Tumbleweed, LLC and the number of shares of common stock these members received
in our merger was reduced by 40,000 shares.
In 1998, we recorded interest payments from T.M. Riders totaling $32,000. We
also provide accounting services for this entity for which fees are charged.
Such accounting fees and royalties totaled $31,300 in 1998.
TW-TENNESSEE, LLC. In February 1997, we 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 our
franchisee. David M. Roth, one of our directors, also owns a membership interest
in TW-Tennessee. On September 30, 1998, we sold our interest in TW-Tennessee to
certain members of Tumbleweed, LLC for $25,000.
We guaranteed, on a pro-rata basis, renewals of certain guaranteed indebtedness
and any replacement indebtedness of TW-Tennessee, to the extent and in the
amounts not to exceed the amounts guaranteed as of September 30, 1998. As of
December 31, 1998, we had guaranteed certain TW-Tennessee obligations as
follows: a) up to $1,200,000 under a bank line of credit, b) approximately
$1,700,000 of a lease financing agreement and c) equipment leases with a bank
totaling approximately $983,400 jointly and severally with TW-Tennessee common
members. In 1998, TW-Tennessee paid royalties and franchise fees of $223,300 and
other fees of $75,000 to us under the franchise agreement.
TW-INDIANA, LLC. David M. Roth, one of our directors, 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. Franchise
royalties we recorded in relation to this entity were approximately $242,500 in
1998.
PRINCIPAL STOCKHOLDERS
The following table presents the number of shares of Common Stock
beneficially owned as of March 12, 1999, by:
o each person we know to beneficially own 5% or more of the outstanding
shares of our common stock;
o each of our directors;
o each of our executive officers named in the Summary Compensation
Table; and
o all of our officers and directors as a group.
A person beneficially owns shares if the person has or shares voting or
investment power with respect to the shares or has the right to acquire such
power within 60 days. Except as otherwise noted, each person named in the table
has sole voting and investment power with respect to the listed number of
shares.
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<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership
-----------------------
Name and Address of Number Percentage
Beneficial Owner of Shares of Class
---------------- --------- --------
<S> <C> <C>
Non-Directors TW Funding, LLC 400,000 (1) 6.8 %
1900 Mellwood Avenue
Louisville, KY 40206
Gerald A. Mansbach (2) 498,002 (1) 8.5
Mansbach Metal Co.
1900 Front Street
Ashland, KY 41101
Directors and John A. Butorac, Jr. 1,716,439 (1)(3) 29.2
Executive 1900 Mellwood Avenue
Officers Louisville, KY 40206
James M. Mulrooney 1,285,574 (1) 21.9
1900 Mellwood Avenue
Louisville, KY 40206
George Keller 618,501 (5) 10.5
4201 Paoli Pike
Floyd Knobs, IN 47119
David M. Roth 778,427 (1)(4) 13.2
200 South Fifth Street
Suite 300S
Louisville, KY 40202
Minx M. Auerbach 151,420 (6) 2.6
Lewis Bass 70,001 (8) 1.2
W. Roger Drury 23,868 *
Terrance Smith 3,001 *
John Brewer 4,010 (7) *
Wayne Jones 20,500 (10) *
All current directors and executive 3,848,941 (9) 65.4
officers as a group (13 persons)
</TABLE>
- ----------------
* Indicates less than 1%.
(1) As managers of TW Funding, LLC, Messrs. Butorac, Mulrooney, Roth and
Mansbach share voting power with respect to the shares held by TW
Funding, LLC. All of these shares have been included in each of their
respective totals.
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(2) Mr. Mansbach is the brother of Ms. Auerbach, who is a director.
(3) Mr. Butorac and his wife hold 934,721 shares jointly. Mr. Butorac's
wife also holds 400,595 of the listed shares as trustee for their
children.
(4) Mr. Roth's wife holds 147,673 of the listed shares. Mr. Roth's
shares also include 187,736 shares held or beneficially owned by
entities controlled by members of his family.
(5) Includes 3,000 shares held by Mr. Keller's wife as trustee under
trusts for Mr. Keller and his children, and 1,000 shares held by Mr.
Keller as trustee for a personal trust.
(6) Ms. Auerbach holds 151,419 of these shares as trustee for a family
trust.
(7) Includes 4,000 shares held by TW Funding, LLC allocated to Mr.
Brewer based on his relative ownership interest in TW Funding, LLC.
(8) Includes 70,000 shares held in a family trust.
(9) Shares held by TW Funding, LLC have been included once in the
shares beneficially owned by the group.
(10) Includes 20,000 shares held by TW Funding, LLC allocated to Mr.
Jones based on his relative ownership interest in TW funding, LLC.
TW FUNDING, LLC
The members of TW Funding, LLC have guaranteed a loan incurred by TW Funding to
finance its purchase of 400,000 shares of common stock in our initial public
offering in January 1999. The shares held by TW Funding, as well as 1,900,000
shares of common stock of which 1,800,000 shares are beneficially owned by the
individuals listed below who are our directors, have been pledged to secure the
loan and their guarantee. The loan is due on the earlier to occur of the date 30
days after the sale of any of the assets of TW Funding, which consist entirely
of 400,000 shares of Common Stock, or December 31, 2000. This pledge totals
2,300,000 shares of Common Stock.
Shareholder Shares Pledged
----------- --------------
John A. Butorac 800,000
James M. Mulrooney 800,000
David M. Roth 200,000
---------
Total 1,800,000
=========
SELLING SHAREHOLDERS
An aggregate of 5,105,000 shares of common stock was issued to the
members of Tumbleweed, LLC in our merger, and represents 86.8% of the shares of
Common stock outstanding.
The 5,105,000 shares of common stock issued in our merger with
Tumbleweed, LLC have
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<PAGE>
been registered under the Securities Act and may be offered by the selling
shareholders listed below. Of the 5,105,000 shares eligible for sale, 1,786,750
shares (35%) are subject to agreements by the selling shareholders not to sell
or otherwise transfer the shares without our prior written consent for a period
ending September 30, 1999.
The following table sets forth certain information with respect to the
selling shareholders. We will not receive any of the proceeds from the sale of
such shares. There are no material relationships between us and any of the
selling shareholders, 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 shareholders may sell a portion of their shares of common stock at any
time and from time to time, we cannot estimate the number of shares of common
stock that each selling shareholder may retain upon completion of the offering
by the selling shareholders.
Beneficial Ownership
--------------------
No. of Percentage
Selling Shareholder Shares of Total
shares
- ------------------------- ------ ----------
Dr. & Mrs. Edward Adler 13,354 *
R. Lee Armbruster 20,031 *
Robert Auerbach 13,354 *
Minx M. Auerbach, Trustee -
Auerbach Gift Trust #2 151,420 2.6%
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 - 2,671 *
Anna Logan Bass Trust
Steven A. Bass and Mary T. Bass,
Trustees - 2,671 *
Elle Leah Bass Trust
Lewis Bass 53,417 *
Steven A. Bass 16,025 *
Donald W. Bennett 13,354 *
Kevin L. Bergman 3,339 *
Sandra Berman 13,354 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Percentage
Selling Shareholder Shares of Total
shares
- ------------------------- ------ ----------
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 1,316,438 22.4%
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 *
Bruce M. Cohen 6,677 *
Burton Cohen, M.D. 6,677 *
Helane P. Cooper 93,015 1.6%
Tamara Todd Cotton 13,354 *
CSJ Ventures 13,354 *
D & D Investments 6,677 *
Douglass Ventures 89,085 1.5%
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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Percentage
Selling Shareholder Shares of Total
shares
- ------------------------- ------ ----------
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 *
George Keller 514,500 8.7%
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%
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%
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<PAGE>
Beneficial Ownership
--------------------
No. of Percentage
Selling Shareholder Shares of Total
shares
- ------------------------- ------ ----------
William and Toni Mullins 13,354 *
James M. Mulrooney 882,874 15.0%
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 *
William C. Ramsey, M.D. 6,677 *
R. Michael Ricketts 3,339 *
Alan I. Roth, M.D. 63,842 1.1%
David M. Roth 27,768 *
Marsha B. Roth 147,673 2.5%
Elliot Roth 18,696 *
Richard J. Reeves 100,000 1.7%
Richard J. Reeves, Trustee -
Roth-Tumbleweed Trust 198,139 3.4%
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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Percentage
Selling Shareholder Shares of Total
shares
- ------------------------- ------ ----------
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%
Charles L. Weisberg 26,708 *
Rochelle Zegart, Trustee -
Kenneth Zegart Gift Trust 6,677 *
* Indicates less than 1%.
PLAN OF DISTRIBUTION
Selling shareholders 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 shareholders 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 shareholders 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,
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<PAGE>
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.
We will pay all reasonable and necessary expenses in connection with
the preparation of 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 shareholders or underwriting
discounts and commission to be paid by the Selling shareholders.
We have agreed to indemnify the Selling shareholders against certain
liabilities in connection with this Prospectus, including certain liabilities
under the Securities Act.
DESCRIPTION OF SECURITIES
General
Our Certificate of Incorporation provides that our authorized capital
stock consists of 16,500,000 shares of Common stock, par value $0.01 per share,
and 1,000,000 shares of preferred stock ("Preferred Stock"), par value $0.01 per
share. No shares of Preferred Stock are issued or outstanding. The are currently
5,881,543 shares of common stock issued and 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, holders of common stock are
entitled to share equally and ratably in our assets, if any, remaining after the
payment of all of our liabilities 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
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<PAGE>
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 without further action by
the stockholders.
Certain Corporate Governance Matters
Our Board of directors currently consists of eight directors. Our
Certificate of Incorporation and the By-laws provide that: (i) the number of our
directors 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) our directors in office
from time to time will fill any vacancy or newly created directorship on the
Board of directors; (iii) our directors may be removed only for cause by the
holders of at least a majority of our 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, our
President or by a majority of the total number of our directors, 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 our Secretary 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 us, more than 70 days prior to the meeting, notice by the
stockholder, to be timely, must be delivered to the President or our Secretary
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 our
President 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 our
President or Secretary 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 our voting stock, voting together as a single class.
The foregoing provisions of our Certificate of Incorporation and
By-laws may discourage or make more difficult the acquisition of control 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 us first to negotiate with us. Our management believes
that the foregoing measures provide benefits to us and our stockholders by
enhancing our ability to
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negotiate with the proponent of any unfriendly or unsolicited proposal to take
over or restructure us 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.
We are 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:
o 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;
o 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
o 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 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 own more than 15% of the common stock, are excluded from
status as an "interested person" for purposes of Section 203.
SHARES ELIGIBLE FOR FUTURE SALE
There are 5,881,543 shares common stock outstanding. All of the
outstanding shares will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by our
"affiliates", 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.
The former members of Tumbleweed, LLC were required, as a condition to
our registration of their shares, to enter into agreements (the "Lock-Up
Agreements") with us that, subject to certain exceptions, they will not sell or
otherwise transfer 1,786,750 or 35% of their shares of common stock for a period
ending September 30, 1999, without our prior written consent. Upon the
expiration of the Lock-Up Agreements all of these shares will become immediately
available for resale.
60
<PAGE>
In general, under Rule 144, as currently in effect, any of our
Affiliates 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:
o 1% of the then outstanding shares of our common stock; or
o the average weekly trading volume of our 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 us.
Options
Options to purchase approximately 400,000 shares of common stock have
been granted to employees and nonemployee directors under the Plan.
Approximately 235,000 additional shares of common stock are available for future
option grants under the Plan. See "Management -- Incentive Stock Plan."
EXPERTS
The financial statements of Tumbleweed, Inc. as of December 31, 1998,
and of Tumbleweed, LLC as of December 31, 1997 and 1998 and for each of the
three years in the period ended December 31, 1998, 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.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Tumbleweed, Inc.
Report of Independent Auditors...................................- F-1 -
Financial Statements
Balance Sheet as of December 31, 1998.....................- F-2 -
Notes to the Balance Sheet................................- F-3 -
Tumbleweed, LLC
Report of Independent Auditors...................................- F-5 -
Financial Statements
Statements of Income for the years ended December 31,
1996, 1997 and 1998..................................- F-6 -
Balance Sheets as of December 31, 1997 and 1998...........- F-7 -
Statements of Redeemable Members' Equity, Members'
Equity and Retained Earnings (Deficit) for the
years ended December 31, 1996, 1997 and 1998.........- F-9 -
Statements of Cash Flows for the years ended December
31, 1996, 1997 and 1998.............................- F-10 -
Notes to the Financial Statements........................- F-11 -
62
<PAGE>
[This page intentionally left blank]
63
<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
December 31, 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 December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 1, 1999
F-1
<PAGE>
<TABLE>
Tumbleweed, Inc.
Balance Sheet
December 31, 1998
<CAPTION>
Assets
<S> <C>
Cash $ 1
------------------
Total assets $ 1
==================
Stockholders' equity
Preferred stock, $.01 par value,
1,000,000 shares authorized;
no shares issued and outstanding $ -
Common stock, $.01 par value,
16,500,000 shares authorized;
13 shares issued and outstanding 1
Paid-in capital 129
Retained earnings (deficit) (129)
-----------------
Total stockholders' equity $ 1
==================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Tumbleweed, Inc.
Notes to the Balance Sheet
December 31, 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. Effective January 1, 1999, and as a result of the sale
of 776,543 shares of common stock in an initial public offering (IPO),
Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of the
current members of Tumbleweed were converted into a total of 5,105,000 shares of
Company common stock. As of December 31, 1998, Tumbleweed owns and operates 25
restaurants in Kentucky, Indiana and Ohio, and franchises an additional 13
restaurants in Indiana, Illinois, Tennessee and Wisconsin. Tumbleweed also
licenses five restaurants in Germany, Saudi Arabia and Jordan.
2. BASIS OF PRESENTATION
The Company's assets at December 31, 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 been related to the IPO and the
merger with Tumbleweed. During 1998, the Company opened a bank account for the
cash received in connection with the capitalization and, as a result of
maintaining the cash account, the Company incurred expenses totaling $129 during
1998. 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.
3. STOCK INCENTIVE PLAN
In June 1998, the Company adopted a Stock Option and Incentive Compensation Plan
(the "Plan"). The Plan provides for the granting of any of the following awards
to eligible employees or directors of the Company and its subsidiaries: (i)
employee stock options, including both "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code ("ISOs") and options that do
not qualify as ISOs; (ii) automatic grants of options to nonemployee directors;
(iii) stock appreciation rights; and (iv) restricted stock and performance stock
awards. The Plan is intended to
F-3
<PAGE>
Tumbleweed, Inc.
Notes to the Balance Sheet (continued)
3. STOCK INCENTIVE PLAN (Continued)
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. There were no
awards issued or outstanding under the Plan as of December 31, 1998.
The Plan is administered by the Compensation Committee of the Company's Board of
Directors. The Committee is comprised of three independent directors, who are
not current employees of the Company and who do not receive any remuneration
from the Company in any capacity other than as a director. The Committee is
authorized, among other things, to determine employees to whom grants of awards
will be made and take such action as it deems necessary or advisable for the
administration of the Plan.
The Common Stock subject to the Plan will be authorized but unissued shares or
previously acquired shares. The number of shares of Common Stock available for
grant of awards under the Plan equals the greater of 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 February 15, 1999, the Company granted options for a total of
approximately 340,000 shares to eligible employees and 60,000 shares to
nonemployee directors. The exercise price of the options is equal to the initial
public offering price of $10 per share. The exercise price of future grants will
be equal to the market price as of the dates of such grants. 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 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 and expire ten years from
the date of grant.
4. SUBSEQUENT EVENTS
In February 1999, the Company entered into a secured mortgage arrangement for a
restaurant location in an amount totaling approximately $1,060,000.
F-4
<PAGE>
Report of Independent Auditors
The Members
Tumbleweed, LLC
We have audited the accompanying balance sheets of Tumbleweed, LLC as of
December 31, 1997 and 1998, 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, 1998. 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,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 1, 1999
- F5 -
<PAGE>
<TABLE>
Tumbleweed, LLC
Statements of Income
<CAPTION>
Years ended December 31
1996 1997 1998
--------------------------------------------
Revenues:
<S> <C> <C> <C>
Restaurant sales $ 23,284,007 $ 27,891,128 $ 40,490,933
Commissary sales 1,795,529 1,007,011 1,041,266
Franchise fees and royalties 474,870 563,056 770,806
Other revenues 177,317 365,054 504,639
------------- ------------ ------------
Total revenues 25,731,723 29,826,249 42,807,644
Operating expenses:
Restaurant cost of sales 7,103,357 8,191,928 11,788,578
Commissary cost of sales 1,649,502 887,793 905,814
Operating expenses 12,386,119 14,035,693 20,881,212
Selling, general and administrative expenses 2,250,827 3,051,740 4,150,303
Preopening amortization 405,502 544,723 816,604
Depreciation and amortization 1,231,290 971,863 1,442,011
------------- ------------ ------------
Total operating expenses 25,026,597 27,683,740 39,984,522
------------- ------------ ------------
Income from operations 705,126 2,142,509 2,823,122
Other income (expense):
Interest income 18,313 62,120 61,759
Interest expense (222,123) (490,718) (931,471)
------------- ------------ ------------
Total other expense (203,810) (428,598) (869,712)
------------- ------------ ------------
Net income $ 501,316 $ 1,713,911 $ 1,953,410
============ ============ ============
Pro forma income data (unaudited):
Net income as reported $ 501,316 $ 1,713,911 $ 1,953,410
Pro forma income taxes (180,474) (617,008) (703,228)
------------ ------------ ------------
Pro forma net income $ 320,842 $ 1,096,903 $ 1,250,182
============ ============ ============
Pro forma net income per share-basic and diluted $ 0.06 $ 0.21 $ 0.24
============ ============ ============
Shares used in computing pro forma net income per share 5,105,000 5,105,000 5,105,000
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
Tumbleweed, LLC
Balance Sheets
<CAPTION>
Pro forma
December 31 December 31
1997 1998 1998
------------------------------- ---------------
(Unaudited)
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,228,867 $ 1,898,973 $ 1,898,973
Accounts receivable 346,700 433,872 433,872
Note receivable from affiliate 100,000 - -
Inventories 825,029 1,333,591 1,333,591
Deferred preopening expenses 267,100 524,669 524,669
Prepaid expenses 282,590 330,439 330,439
---------------------------- ------------
Total current assets 3,050,286 4,521,544 4,521,544
Property and equipment, net 19,330,132 24,920,797 24,920,797
Note receivable from affiliate 300,000 - -
Goodwill, net of accumulated amortization of
$329,442 in 1997 and $440,242 in 1998 2,944,504 2,833,704 2,833,704
Other assets 443,559 1,404,861 1,404,861
---------------------------- -------------
Total assets $ 26,068,481 $ 33,680,906 $ 33,680,906
============================ =============
</TABLE>
See accompanying notes.
F-7
<PAGE>
<TABLE>
<CAPTION>
Pro forma
December 31 December 31
1997 1998 1998
------------------------------- ----------------
(Unaudited)
Liabilities, Redeemable Members' Equity,
Members' Equity and Retained Earnings (Deficit)
Current liabilities:
<S> <C> <C> <C>
Short-term borrowings $ - $ 6,990,348 $ 6,990,348
Accounts payable 1,174,645 1,781,418 1,781,418
Accrued liabilities 890,255 1,873,651 1,873,651
Deferred income taxes - - 467,420
Current maturities on long-term
debt and capital leases 509,779 895,310 895,310
------------------------------- ----------------
Total current liabilities 2,574,679 11,540,727 12,008,147
Long-term debt, less current maturities 5,750,841 9,180,358 9,180,358
Capital lease obligations, less current
maturities 2,280,964 3,287,296 3,287,296
Deferred income taxes - - 172,203
Other liabilities 118,584 94,838 94,838
------------------------------- ----------------
Total long-term liabilities 8,150,389 12,562,492 12,734,695
------------------------------- ----------------
Total liabilities 10,725,068 24,103,219 24,742,842
Redeemable members' equity 23,419,738 18,924,688 -
Members' equity 6,959 354,459 -
Retained earnings (deficit) (8,083,284) (9,701,460) -
Pro forma stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued
and outstanding
Common stock, $.01 par value,16,500,000
shares authorized; 5,105,000 shares
issued and outstanding 51,050
Paid-in capital 8,887,014
------------------------------- ----------------
Total pro forma stockholders' equity - - 8,938,064
------------------------------- ----------------
Total liabilities, redeemable members'
equity, members' equity and retained
earnings (deficit) $ 26,068,481 $33,680,906 $ 33,680,906
=============================== ================
</TABLE>
See accompanying notes.
F-8
<PAGE>
<TABLE>
Tumbleweed, LLC
Statements of Redeemable Members' Equity, Members' Equity and Retained Earnings (Deficit)
Years ended December 31, 1996, 1997 and 1998
<CAPTION>
Redeemable Members' Equity (Deficiency)
Members ------------------------------------------ Retained
Equity-Class A Common Class B Class C Earnings
Members Members Members Member Total (Deficit)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 16,413,197 $ 6,000 $ 459 $ 500 $ 6,959 $ (2,721,253)
Proceeds from issuance of members' equity 582,962 - - - - -
Distributions of members' equity (628,677) - - - - -
Net income - - - - - 501,316
Accretion of redeemable members' equity 3,865,037 - - - - (3,865,037)
---------------------------------------------------------------------------
20,232,519 6,000 459 500 6,959 (6,084,974)
Balance at December 31, 1996
Proceeds from issuance of members' equity 50,958 - - - - -
Distributions of members' equity (575,960) - - - - -
Net income - - - - - 1,713,911
Accretion of redeemable members' equity 3,712,221 - - - - (3,712,221)
---------------------------------------------------------------------------
Balance at December 31, 1997 23,419,738 6,000 459 500 6,959 (8,083,284)
Capital contribution - - 747,500 - 747,500 -
Distributions of members' equity (1,076,288) (400,000) - - (400,000) -
Assumption of members' line of credit (6,990,348) - - - - -
Net income - - - - - 1,953,410
Accretion of redeemable members' equity 3,571,586 - - - - (3,571,586)
---------------------------------------------------------------------------
Balance at December 31, 1998 $ 18,924,688 $ (394,000) $ 747,959 $ 500 $ 354,459 $ (9,701,460)
===========================================================================
</TABLE>
See accompanying notes.
F-9
<PAGE>
<TABLE>
Tumbleweed, LLC
Statements of Cash Flows
<CAPTION>
Years ended December 31
1996 1997 1998
----------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income $ 501,316 $ 1,713,911 $ 1,953,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 604,534 829,250 1,285,833
Amortization 626,756 142,613 156,178
Preopening amortization 405,502 544,723 816,604
Gain on sale of food courts (71,298) - -
Loss on disposition of property and equipment 2,732 13,499 7,324
Changes in operating assets and liabilities:
Accounts receivable 87,382 (50,091) (87,172)
Inventories (307,900) (126,573) (508,562)
Deferred preopening expenses (726,601) (316,822) (1,074,173)
Prepaid expenses (62,063) 19,062 (51,466)
Other assets (207,125) (98,042) (114,550)
Accounts payable 124,097 31,938 104,590
Accrued liabilities 92,647 258,784 983,396
Other liabilities - 78,584 (23,746)
----------------------------------------
Net cash provided by operating activities 1,069,979 3,040,836 3,447,666
Investing activities:
Purchases of property and equipment (4,712,962) (4,105,089) (5,313,575)
Proceeds from sale of property and equipment 1,635,815 - -
Proceeds from sale of food courts, net of
cash relinquished 96,100 100,000 -
----------------------------------------
Net cash used in investing activities (2,981,047) (4,005,089) (5,313,575)
Financing activities:
Capital contribution from Class B members - - 747,500
Proceeds from issuance of members' equity 582,962 50,958 -
Distribution of members' equity (628,677) (575,960) (1,076,288)
Proceeds from issuance of long-term debt 5,437,311 3,452,361 5,580,463
Payments on long-term debt and capital lease
obligations (4,532,110) (1,654,463) (2,329,328)
Payment of public offering costs - (111,485) (386,332)
----------------------------------------
Net cash provided by financing activities 859,486 1,161,411 2,536,015
----------------------------------------
Net increase (decrease) in cash and cash equivalents (1,051,582) 197,158 670,106
Cash and cash equivalents at beginning of year 2,083,291 1,031,709 1,228,867
----------------------------------------
Cash and cash equivalents at end of year $ 1,031,709 $ 1,228,867 $ 1,898,973
========================================
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 222,123 $ 473,055 $ 947,674
========================================
Noncash investing and financing activities:
Property and equipment acquired by seller
financing and capital lease obligations $ 1,793,991 $ 967,529 $ 1,570,246
========================================
Public offering costs not paid at year-end $ - $ - $ 502,183
========================================
</TABLE>
See accompanying notes.
F-10
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
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 year:
December 31
1996 1997 1998
------------------------------------------
Company owned 15 17 25
Franchised and licensed 9 12 18
--- -- --
Total 24 29 43
== == ==
The restaurant facilities are located in Kentucky, Indiana, Ohio, Illinois,
Wisconsin, Tennessee and five overseas restaurants are located in Germany, Saudi
Arabia and Jordan.
Effective January 1, 1999, the Company merged into Tumbleweed, Inc. as discussed
below. Prior to the merger, the Company and its owners (Members) operated
pursuant to an Operating Agreement dated September 19, 1994. Members of the
Company consisted of Common Members, Class A Members, Class B Members and a
Class C Member. Certain Common Members acted as the Managers of the Company and,
acting unanimously, generally had voting control of the Company.
Class A Members of the Company had, in addition to their cash contributions,
provided financing which was accounted for as redeemable members' equity prior
to the Company's assumption of the debt on December 31, 1998 (see Note 7). The
capital accounts of the Common, Class B and Class C Members, totaling
$(394,000), $747,959 and $500, respectively, at December 31, 1998 represent
these members' equity investment in the Company.
IPO REGISTRATION AND REORGANIZATION
Tumbleweed, Inc. was incorporated in December 1997 and capitalized in June 1998
in anticipation of an initial public offering in 1998. Effective January 1,
1999, and as a result of the sale of 776,543 shares of common stock at $10 per
share in the IPO, the Company was merged into Tumbleweed, Inc. The interests of
the current members of the Company were converted into a total of 5,105,000
shares of Tumbleweed, Inc. common stock.
F-11
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
1. ORGANIZATIONAL MATTERS (CONTINUED)
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 December 31, 1998 reflects the
change in capitalization attributable to the conversion of the Company's
members' interests into 5,105,000 shares of Tumbleweed, Inc. common stock as if
the IPO had closed on December 31, 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 limited liability company (which is taxed as a
partnership) to a regular corporate taxable status. Such deferred tax effects
will be included in income on January 1, 1999, the date the change in tax status
occurred.
Additionally, pro forma net income in the accompanying pro forma income data for
the year ended December 31, 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
year assuming the conversion of the Company's members' interests into common
stock as of the beginning of the year.
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.
F-12
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED PREOPENING EXPENSES
Deferred preopening expenses 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
expenses are amortized on a straight-line method over twelve months from the
restaurant opening date.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities.
The SOP is effective beginning on January 1, 1999, and requires that start-up
costs capitalized prior to January 1, 1999 be written-off and any future
start-up costs to be expensed as incurred. The unamortized balance of the
Company's deferred preopening costs ($524,669 as of December 31, 1998) will be
written-off (net of income taxes) as a cumulative effect of an accounting change
on January 1, 1999. It is not practical to estimate what the effect of the
change will be on 1999 earnings.
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 terms of the leases, including renewal options, or the estimated useful
lives of the assets, which range from ten to thirty years. Equipment is
depreciated over the estimated useful lives of the assets, which range from five
to ten years. Maintenance and repairs which do not enhance the value of or
increase the life of the assets are charged to costs and expenses as incurred.
CONSTRUCTION IN PROGRESS
The Company capitalizes all direct costs incurred in the construction of new
restaurants. Upon opening, these costs are depreciated or amortized and charged
to expense based upon their property classification.
GOODWILL
Goodwill is amortized on the straight-line method over thirty years.
F-13
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include costs incurred in connection with the Company's initial
public offering. These costs which total approximately $111,000 and $1,000,000
as of December 31 1997 and 1998, respectively, will be funded from the proceeds
of the offering when received in January 1999. Amortization expense in 1996
includes $500,000 related to a non-compete agreement which expired in 1996.
LONG-LIVED ASSETS
The carrying amount of long-lived assets, including goodwill, is reviewed if
facts and circumstances suggest that it may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined based on
the estimated undiscounted cash flows of the asset over the remaining
amortization period, the carrying amount of long-lived assets is reduced by the
estimated shortfall of cash flows. The Company assesses long-lived assets for
impairment under Financial Accounting Standards Board Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair value.
REVENUE RECOGNITION
Franchise fees are recognized when all material services, primarily site
approval and management and staff training, have been substantially performed by
the Company and the restaurant has opened for business. Fees received pursuant
to development agreements which grant the right to develop franchised
restaurants in future periods in specific geographic areas are deferred and
recognized on a pro rata basis as the franchised restaurants subject to the
development agreements begin operations. Franchise royalties, which are based on
a percentage of monthly sales, are recognized as income when earned. Costs
associated with franchise operations are expensed as incurred.
F-14
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs include Company-owned restaurant contributions to the
Tumbleweed Marketing Fund, Inc. ("the Marketing Fund") and developing and
conducting advertising activities, including the placement of electronic and
print materials developed by the Marketing Fund. All advertising and related
costs are expensed as incurred. Contributions by Company-owned and franchised
restaurants to the Marketing Fund are based on an established percentage of
monthly restaurant revenues. The Marketing Fund is responsible for the
development of marketing and advertising materials for use throughout the
Company's system. The Marketing Fund is accounted for separately and is not
included in the financial statements of the Company. Contributions to the
Marketing Fund for the years ended December 31, 1996, 1997 and 1998 were
$50,657, $66,488 and $95,674, respectively. Advertising expense, which includes
contributions to the Marketing Fund, for the years ended December 31, 1996, 1997
and 1998 were $463,637, $631,421 and $1,052,075, respectively.
INCOME TAXES
Through December 31, 1998, the Company was 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. Subsequent to the merger discussed in Note 1, Tumbleweed, Inc. will be
taxed as a corporation.
RECENTLY ISSUED ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and also requires that those enterprises report
selected information about operating segments in interim financial reports. The
adoption of Statement 131 did not have an effect on the Company's results of
operations or financial position, but did effect the disclosure of segment
information (see Note 10).
F-15
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
December 31
1997 1998
----------------------------
Land and land improvements $ 4,926,744 $ 6,869,638
Buildings and improvements 6,427,063 9,999,830
Leasehold improvements 1,831,734 2,318,396
Equipment 2,953,802 3,986,928
Building and equipment under capital leases 2,664,838 4,249,458
Construction in progress 2,297,135 536,324
----------------------------
21,101,316 27,960,574
Less accumulated depreciation and amortization (1,771,184) (3,039,777)
----------------------------
$ 19,330,132 $ 24,920,797
============================
4. ACCRUED LIABILITIES
Accrued liabilities consist of:
December 31
1997 1998
----------------------------
Accrued payroll and related taxes $ 416,066 $ 792,809
Accrued insurance and fees 120,800 284,270
Accrued taxes, other than income and payroll 157,693 393,593
Gift certificate liability 127,922 275,743
Other 67,774 127,236
----------------------------
$ 890,255 $ 1,873,651
============================
F-16
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
5. LONG-TERM DEBT
Long-term debt consists of:
December 31
1997 1998
--------------------------------
Secured $5,000,000 mortgage revolving
line of credit note, bearing interest
at prime rate plus .25% (8.0% at December
31, 1998), due December 31, 2000 $ 3,260,391 $ 4,302,148
Secured mortgage note payable, bearing
interest at 8.5%, payable in monthly
installments through February 15, 2008 - 991,396
Secured mortgage note payable, bearing
interest at prime plus 1.25% (9.0% at
December 31, 1998), payable in monthly
installments, due November 27, 2016 709,375 671,875
Secured mortgage note payable, bearing
interest at commercial paper rate plus
3% (8.1% at December 31, 1998), due
January 1, 2005 1,200,000 1,111,928
Secured mortgage note payable, bearing
interest at prime rate plus 1% (8.75%
at December 31, 1998), payable in monthly
installments through October 1, 2017 133,937 1,084,274
Secured mortgage note payable, bearing
interest at commercial paper rate plus
3.1% (8.2% at December 31, 1998), due
May 1, 2005 - 695,230
Other installment notes payable 733,280 750,595
--------------------------------
6,036,983 9,607,446
Less current maturities 286,142 427,088
--------------------------------
Long-term debt $ 5,750,841 $ 9,180,358
================================
Property and equipment with a net book value of approximately $14,515,000 at
December 31, 1998 collateralize the Company's long-term debt.
F-17
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
5. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities of long-term debt for the years subsequent to
December 31, 1998 are as follows:
1999 $ 427,088
2000 4,708,098
2001 418,951
2002 369,778
2003 276,893
Thereafter 3,406,638
----------
Total $9,607,446
==========
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
$157,286 in 1996, $103,488 in 1997 and $104,231 in 1998.
F-18
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
6. LEASES
The Company leases certain buildings and equipment under capital lease
agreements with related and third parties. The equipment leases have five to
seven year terms. The building leases expire in 2016 and 2017. Future minimum
lease payments under the capital leases and the net present value of the future
minimum lease payments at December 31, 1998 were as follows:
Related Party Other
Lease Leases Total
-------------------------------------------------
1999 $ 84,000 $ 690,849 $ 774,849
2000 84,000 690,849 774,849
2001 84,000 690,849 774,849
2002 84,000 575,393 659,393
2003 84,000 457,248 541,248
Thereafter 1,176,000 1,316,394 2,492,394
-------------------------------------------------
Total minimum lease payments $ 1,596,000 $ 4,421,582 6,017,582
================================
Less amount representing
interest at 7.9% to 12.0% (2,262,064)
------------------
Net present value of lease payments 3,755,518
Less current maturities 468,222
------------------
Long-term portion of capital leases $ 3,287,296
==================
F-19
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
6. LEASES (CONTINUED)
The Company leases certain restaurants and equipment under operating leases
having terms expiring between 1999 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, 1998
were as follows:
Related Party Other
Leases Leases Total
-----------------------------------------------------
1999 $ 298,689 $ 1,117,331 $ 1,416,020
2000 298,689 1,017,331 1,316,020
2001 298,689 1,016,411 1,315,100
2002 298,689 1,014,857 1,313,546
2003 298,689 1,030,257 1,328,946
Thereafter 1,952,843 8,065,599 10,018,442
-----------------------------------------------------
$ 3,446,288 $ 13,261,786 $ 16,708,074
=====================================================
Total rental expense was approximately $801,800 in 1996, $975,300 in 1997 and
$1,455,500 in 1998 and included contingent rent of approximately $16,800 in
1996, $30,700 in 1997 and $178,700 in 1998. Rental expense for the related party
leases was approximately $237,700 in 1996, $282,000 in 1997 and $436,200 in
1998.
7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT
As of December 31, 1998, the Company had a $7,500,000 line of credit with a bank
for borrowing at the bank's prime rate plus 1/4%. Under a related assumption
agreement, the Class A Members directly assumed the total liability on a pro
rata basis until December 31, 1998 at which time the Company assumed the total
liability of $6,990,348. (The Company had drawn down $7,024,717 and $6,990,348
at December 31, 1997 and 1998, respectively, under this line of credit which was
to expire on January 11, 1999.) Prior to the Company assuming this line of
credit, the amounts borrowed under the line of credit were, in the first
instance, obligations of the Class A Members and, accordingly, were accounted
for as redeemable members' equity, and any interest and other related costs on
the debt funded by the Company were accounted for as distributions to the Class
A Members.
F-20
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT (CONTINUED)
The $6,990,348 borrowed under the line of credit as of December 31, 1998 was
repaid on January 5, 1999 out of the gross proceeds of $7,765,430 from the
Company's IPO (see Note 1). If an IPO had not occurred, any Class A Member had
the right to sell to the Company their interest in the Company at any time after
the fifth anniversary of the date that a Class A Member was admitted to the
Company (generally 2000). The selling price was to be the sum of cash
contributed by the Class A Member and an amount equal to an annual 30% internal
rate of return on the Class A Member's cash contributions and pro rata assumed
principal portion of the line of credit, taking into account all prior
distributions to such Class A Member. The total Class A Members' interests which
would have been required to be purchased by the Company in any one year was
limited and would have been payable in equal installments over a five-year term,
with interest. Redeemable members' equity in the accompanying balance sheets
includes the accretion of the annual 30% internal rate of return.
Through December 31, 1998, capital contributions by the Class A Members were
limited to their initial cash contributions in 1995 which amounted to $7,034,375
and borrowings under the line of credit assumed by the Class A Members.
8. 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 September 1998, the Company
relinquished its interest in T.M. Riders.
F-21
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In December 1998, the Company assigned the T. M. Riders' promissory note
receivable, which had an outstanding principal balance of $400,000 as of the
date of assignment, to the Common Members of the Company. In consideration for
the assignment, each Common Member assigned to the Company a proportionate
amount of their respective Common Member interests in the Company. This
transaction has been accounted for as a distribution to the Common Members and
the number of shares of common stock these members received was reduced by
40,000 shares in the merger of the Company into Tumbleweed, Inc.
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. On September 30, 1998, the Company sold its
interest in TW-Tennessee to certain members of the Company for $25,000.
TW-Tennessee was organized to open and operate Tumbleweed full service
restaurants as a franchisee of the Company.
The Company guaranteed, on a pro-rata basis, renewals of certain guaranteed
indebtedness and any replacement indebtedness of TW-Tennessee, to the extent and
in the amounts not to exceed the amounts guaranteed as of September 30, 1998. As
of December 31, 1998, the Company has guaranteed certain TW-Tennessee
obligations as follows: a) up to $1,200,000 under a bank line of credit, b)
approximately $1,700,000 of a lease financing agreement and c) equipment leases
with a bank totaling approximately $983,400 jointly and severally with
TW-Tennessee 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.
F-22
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company accounted for its investments in TW-Tennessee and T.M. Riders on the
equity method prior to their disposition. Amounts in the financial statements
related to the Company's investments in these entities for the years ended
December 31, 1997 and 1998 were not significant. Franchise fees and royalties
recorded by the Company in relation to these entities were $17,000, $79,000 and
$225,600 in 1996, 1997 and 1998, respectively. The Company also provides
management and accounting services for these entities for which fees are
charged. Such management and accounting fees recorded in other revenues related
to these entities totaled approximately $15,500, $57,600 and $104,000 in 1996,
1997 and 1998, 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 and 1998, International paid $15,750 and $7,500,
respectively, in fees to the Company under the International Agreement.
Two Common Members of the Company (both of which are now common stockholders,
and one of which is also a Director, of Tumbleweed, Inc.) are members in
TW-Indiana, LLC, which in April 1998 acquired the franchise rights to five
full-service Tumbleweed restaurants in Indiana and Kentucky from a third party.
Franchise royalties recorded by the Company in relation to this entity were
approximately $242,500 in 1998.
In September 1998, the Company entered into an agreement to purchase the land
and building, including improvements, located in Columbus, Ohio which was
formerly leased from West Broad Development LLC. Certain members of the Company
(all of which are now common stockholders, and one of which is also a Director,
of Tumbleweed, Inc.) are members in West Broad Development LLC. The purchase
price of $1,250,000 was at fair market value as determined by an independent
appraisal. The Company, at the time of purchase, entered into an agreement with
a bank modifying an existing promissory note on the land and building by
increasing the principal amount to $1,000,000.
F-23
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
9. COMMITMENTS
At December 31, 1998, the Company had commitments of approximately $1,016,000
for the completion of the construction of two restaurants, for which landlord
financing has been secured.
10. SEGMENT INFORMATION
The Company has three reportable segments: restaurants, commissary and
corporate. The restaurant segment consists of the operations of all
company-owned restaurants and derives its revenues from the sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to corporate-owned and franchised restaurants. The
corporate segment derives revenues from sale of franchise rights, franchise
royalties and related services used in restaurant operations, and contains the
selling, general and administrative activities of the Company.
Generally, the Company evaluates performance and allocates resources based on
net income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Segment information for the years ended December 31 is as follows:
1996:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 23,284,007 $ 1,795,529 $ 652,187 $ 25,731,723
Intersegment revenues - 2,929,546 - 2,929,546
General and administrative
expenses - - 1,787,190 1,787,190
Advertising expenses - - 463,637 463,637
Depreciation and
amoritzation 486,799 102,864 641,627 1,231,290
Net interest expense - 85,817 117,993 203,810
Segment net income (loss) 2,993,979 195,601 (2,688,264) 501,316
Segment fixed assets 13,223,329 1,025,949 368,580 14,617,858
Expenditures for long-lived
assets 6,216,821 1,325 288,807 6,506,953
F-24
<PAGE>
Tumbleweed, LLC
Notes to Financial Statements
10. SEGMENT INFORMATION (CONTINUED)
1997:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 27,891,128 $ 1,007,011 $ 928,110 $ 29,826,249
Intersegment revenues - 2,349,693 - 2,349,693
General and administrative
expenses - - 2,420,319 2,420,319
Advertising expenses - - 631,421 631,421
Depreciation and
amortization 683,266 108,004 180,593 971,863
Net interest expense - 85,957 342,641 428,598
Segment net income (loss) 4,351,013 203,458 (2,840,560) 1,713,911
Segment fixed assets 17,851,495 1,069,434 409,203 19,330,132
Expenditures for long-lived
assets 4,847,429 126,493 98,696 5,072,618
1998:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 40,490,933 $ 1,041,266 $1,275,445 $ 42,807,644
Intersegment revenues - 2,429,620 - 2,429,620
General and administrative
expenses - - 3,098,228 3,098,228
Advertising expenses - - 1,052,075 1,052,075
Depreciation and
amortization 1,107,301 116,446 218,264 1,442,011
Net interest expense - 161,700 708,012 869,712
Segment net income (loss) 5,853,334 173,361 (4,073,285) 1,953,410
Segment fixed assets 23,341,248 1,004,373 575,176 24,920,797
Expenditures for long-lived
assets 6,733,972 26,388 123,461 6,883,821
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this post-effective 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
29th day of April 1999.
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
post-effective amendment to the Registration Statement on Form S-1 has been
signed by the following persons in the capacities indicated on the 29th day of
April 1999.
Signature Title Date
--------- ----- ----
/s/ John A. Butorac, Jr. President, Chief Executive April 29, 1999
------------------------------ Officer and Director
John A. Butorac, Jr.
/s/ James M. Mulrooney Executive Vice President, April 29, 1999
- ------------------------------- Chief Financial Officer and
James M. Mulrooney Director (Principal Financial
and Accounting Officer)
* Director April 29, 1999
- --------------------------------
David M. Roth
* Director April 29, 1999
- --------------------------------
Minx Auerbach
* Director April 29, 1999
- --------------------------------
Lewis Bass
* Director April 29, 1999
- --------------------------------
Roger Drury
* Director April 29, 1999
- --------------------------------
George Keller
<PAGE>
* Director April 29, 1999
- --------------------------------
Terrance A. Smith
*/s/ John A. Butorac, Jr.
- -------------------------
John A. Butorac, Jr., as attorney-in-fact
for the above-named individuals pursuant to
the power of attorney previously filed as
Exhibit 24.1 to this Registration Statement.
<PAGE>
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 1, 1999, with
respect to the financial statements of Tumbleweed, LLC, and our report dated
March 1, 1999, with respect to the balance sheet of Tumbleweed, Inc., in
Post-Effective Amendment No. 1 to the Registration Statement (Form S-1 No.
333-57931) and related Prospectus of Tumbleweed, Inc. for the registration of
5,105,000 shares of its common stock.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 29, 1999
