Prospectus Supplement Dated March 19, 1999
to the Prospectus Dated September 9, 1998
[TUMBLEWEED LOGO]
This supplement amends our Prospectus dated September 9,
1998, to inform you about events relevant to our business that
have occurred since that date. We have also included the
financial information that we reported in our quarterly 10-Q
report for the fiscal quarter ended September 30, 1998.
Completion of Our Public Offering and Our Reorganization
On January 11, 1999, Tumbleweed, Inc. completed its initial
public offering of common stock. We sold 777,137 shares at the
offering price of $10 per share. We sold the shares in a direct
offering to the public, raising a total of $7,771,370.
On January 1, 1999, the merger of Tumbleweed, LLC into
Tumbleweed, Inc. became effective. The merger was the means by
which we converted Tumbleweed, LLC, which owned the assets used
in our business, into a corporation for purposes of the stock
offering. When the merger took effect, the membership interests
of the approximately 80 former members of Tumbleweed, LLC were
converted into a total of 5,105,000 shares of common stock of
Tumbleweed, Inc. Former Class B members of Tumbleweed, LLC also
paid additional cash contributions of $747,500 shortly before the
merger took effect, as required by the Tumbleweed, LLC operating
agreement. We describe the merger in greater detail in the
"History and Pending Reorganization" section of the Prospectus.
We used $7,043,366 of the proceeds from the stock offering
to repay a bank loan in full. The former Class A members of
Tumbleweed, LLC, including certain directors and officers of the
Company, incurred this indebtedness as part of the financing for
the January 1995 acquisition of the Tumbleweed business by
Tumbleweed, LLC. The indebtedness had been accounted for as
redeemable members' equity of Tumbleweed, LLC. We will use the
remaining offering proceeds, plus the additional cash
contributions received in the merger, to pay offering expenses.
Offering expenses incurred to date total approximately
$1,000,000. We did not pay commissions or other underwriting
expenses in connection with the offering.
Following the merger and the initial public offering, we now
have 5,881,543 shares of common stock issued and outstanding.
New Restaurants
Since September 9, 1998, seven Tumbleweed restaurants have
opened in the following locations:
* Company-owned restaurants in Columbus and Springfield,
Ohio.
* Franchised restaurants in Clarksville and Hermitage,
Tennessee and in Seymour, Indiana
* Licensed restaurants in Germany and Jordan.
As a result of these new restaurant openings, we now own,
franchise or license a total of 44 Tumbleweed Restaurants. We
own and operate 25 restaurants and franchise 14 restaurants in
Kentucky, Ohio, Illinois, Indiana, Wisconsin and Tennessee. We
license five restaurants outside of the United States, three in
Germany and one each in Saudi Arabia and Jordan.
Application for Listing on the Nasdaq Stock Market
We have applied for listing our common stock on the Nasdaq
National Market. Nasdaq has reserved the trading symbol TWED for
us. Although we believe we meet the quantitative requirements
for listing on the Nasdaq National Market and have no reason to
believe our listing application will not be accepted, we cannot
assure you that Nasdaq will accept our application for listing
our common stock on the National Market.
Pending approval of our Nasdaq listing application, bid and
asked quotations for Tumbleweed shares are reported on the OTC
Bulletin Board under the trading symbol TWED.
BENEFICIAL OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table presents the number of shares of Common
Stock beneficially owned as of March 12, 1999, by (i) each
person we know to beneficially own 5% or more of the outstanding
shares of Common Stock, (ii) each of our directors, (iii) each of
our executive officers named in the Summary Compensation Table on
page 49 of the Prospectus; and (iv) 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.
Amount and Nature
of Beneficial Ownership
Name and Address of Number Percentage
Beneficial Owner of Shares of Class
Non-Directors TW Funding, LLC 400,000(1) 6.8%
1900 Mellwood Avenue
Louisville, KY 40206
Gerald A. Mansbach(2) 498,002 8.5%
Mashback Metal Co.
1900 Front Street
Ashland, KY 41101
Directors John A. Butorac, Jr. 1,716,439(1)(3) 29.2%
and 1900 Mellwood Avenue
Executive Louisville, KY 40206
Officers
James M. Mulrooney 1,285,574(1) 21.9%
1900 Mellwood Avenue
Louisville, KY 40206
George Keller 618,501(4) 10.5%
4201 Paoli Pike
Floyd Knobs, IN 47119
David M. Roth 778,427(1)(5) 13.2%
1230 Liberty Bank Lane
Suite 200
Louisville, KY 40222-5763
Minx M. Auerbach 151,420(6) 2.6%
Lewis Bass 70,001(7) 1.2%
W. Roger Drury 23,868 *
Terrance Smith 3,001 *
John Brewer 4,010(8) *
All current directors and 3,848,941(9) 65.4%
executive officers as a
group (13 persons)
________________
* Indicates less than 1%.
(1) Messrs. Butorac, Mulrooney, Roth and Mansbach share voting
power with respect to the shares held by TW Funding. Each
of their individual totals include all 400,000 of these
shares.
(2) Mr. Mansbach is the brother of Ms. Auerbach, who is a director.
(3) Mr. Butorac and his wife jointly own 934,721 shares. Mr.
Butorac's wife also owns 400,595 of the listed shares as trustee
for their children.
(4) Mr. Keller owns 1,000 shares as trustee for a personal trust. His
wife owns 3,000 as trustee under trusts for Mr. Keller and their
children.
(5) Mr. Roth's wife owns 147,673 of the listed shares. Mr. Roth's
total also includes 157,736 shares owned by entities controlled by
members of his family.
(6) Ms. Auerbach owns 151,419 of these shares as trustee for a family
trust.
(7) Includes 7,000 shares owned by a family trust.
(8) Includes 4,000 shares held by TW Funding and allocated to Mr.
Brewer based on his relative ownership interest in TW Funding.
(9) Shares held by TW Funding have been included once in the shares
beneficially owned by the group.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
Preliminary Note Regarding Forward-Looking Statements
We make various forward-looking statements about our
business in the following discussion. When making these forward-
looking statements, we use words such as expects, believes,
estimates, anticipates, plans and similar expressions to identify
them. We also identify important cautionary factors that could
cause our actual results to differ materially from those
projected in forward-looking statements made by us. Factors that
realistically could cause results to differ materially from those
projected in the forward-looking statements include the
availability and cost of financing and other events that affect
our restaurant expansion program, changes in food and other
costs, changes in national, regional or local economic
conditions, changes in consumer tastes, competitive factors such
as changes in the number and location of competing restaurants,
the availability of experienced management and hourly employees,
and other factors set forth below and in "Risk Factors" beginning
on page 11 of the Prospectus.
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
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
Restaurant sales 94.5% 93.5% 94.8% 94.7%
Commissary sales 2.4 3.6 2.2 2.5
Franchise fees and royalties 1.8 1.6 1.6 1.6
Other revenues 1.3 1.3 1.4 1.2
_____ _____ _____ _____
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales(1) 29.1 29.6 29.3 29.7
Commissary cost of sales(2) 86.2 89.2 87.6 89.1
Restaurant operating expenses (1) 51.5 50.0 51.0 48.6
Selling, general and administrative 9.7 9.9 9.0 10.6
Depreciation and amortization 3.3 3.2 3.3 3.1
Preopening amortization 1.7 2.0 2.1 1.7
____ ____ ____ ____
Total operating expenses 93.0 92.7 92.4 91.8
____ ____ ____ ____
Income from operations 7.0 7.3 7.6 8.2
Interest expense, net -2.0 -1.5 -2.1 -1.3
____ ____ ____ ____
Net Income 5.0% 5.8% 5.5% 6.9%
Historical net income 5.0% 5.8% 5.5% 6.9%
Unaudited pro forma income taxes (3) -1.8 -2.1 -2.0 -2.5
____ ____ ____ ____
Unaudited pro forma net income 3.2% 3.7% 3.5% 4.4%
____________________
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The unaudited pro forma income taxes reflect the effect of
Reorganization on the historical net income assuming the
Company was taxed as a C corporation for income tax purposes
with an assumed combined federal and state effective tax
rate of 36%.
Comparison of the Nine Month Periods Ended September 30,1998 and 1997
Total revenues increased by $8,845,218 or 40.3% for the nine
months ended September 30, 1998 compared to the same period in
1997. The increase in total revenues reflects the opening of
eight additional Company-owned restaurants since September 30,
1997. Restaurant sales at Company-owned restaurants increased
$8,542,058 or 41.6% for the nine months ended September 30, 1998
compared to the same period in 1997. Company-owned same store
sales decreased by 0.3% for the nine months ended September 30,
1998.
Commissary sales decreased by $32,784 or 4.2% for the nine
months ended September 30, 1998, compared to the same period in
1997. This was primarily due to the decision to discontinue
commissary sales of products not manufactured by the commissary.
Franchise fees and royalties increased by $209,698 or 58.7%
for the nine months ended September 30, 1998, compared to the
same period in 1997. The increase was due primarily to $70,000
in franchise fees received upon the opening of two new franchised
restaurants, $23,250 in territory fees received from
international operations and additional royalties from three
franchised restaurants opened since September 30, 1997.
Other revenues increased by $126,246 or 45.0% for the nine
months ended September 30, 1998 compared to the same period in
1997, primarily due to an increase in volume related purchasing
rebates of approximately $141,000 and monies from the Ohio Bureau
of Workers' Comp representing a return of invested premiums by
the State of Ohio totaling approximately $143,000 in 1998. The
increases were offset in part by $178,000 in insurance proceeds
received in 1997.
Restaurant cost of sales increased by $2,398,036 or 39.5%
for the nine months ended September 30, 1998, compared to the
same period in 1997. The increase was principally due to the
opening of eight additional Company-owned restaurants.
Restaurant cost of sales decreased as a percentage of sales by
0.5% to 29.1% for the nine months ended September 30, 1998
compared to 29.6% for the same period in 1997. This decrease
resulted primarily from improved operating efficiencies in the
commissary and lower product costs at restaurant level.
Commissary cost of sales decreased $52,154 or 7.4% for the
nine months ended September 30, 1998 compared to the same period
in 1997. The decrease was primarily due to the decision to
discontinue commissary sales of products not manufactured by the
commissary. As a percentage to sales commissary cost of sales
decreased 3.0%. This was due to lower ingredient costs for
products sold by the commissary.
Restaurant operating expenses increased by $4,696,756 or
45.7% in the nine months ended September 30, 1998 compared to
the same period in 1997. The increase reflects the addition of
eight Company-owned restaurants. Operating expenses increased
as a percentage of restaurant sales to 51.5% for the nine months
ended September 30, 1998 compared to 50.0% for same period in
1997 primarily due to a 1.4% increase in freight and a 0.6%
increase in restaurant level promotional costs. These costs were
offset in part by a 0.6% decrease in labor costs.
Selling, general and administrative expenses increased by
$820,259 or 37.7% for the nine months ended September 30, 1998
compared to the same period in 1997. The increase was due in
part to the addition of management and staff personnel during the
nine months of 1998 to support the growing restaurant base.
Because of the Company's restaurant growth plans management
expects selling, general and administrative expenses to continue
to increase during 1998 in absolute dollars.
Preopening amortization increased $99,891 or 22.8% for the
nine months ended September 30, 1998 compared to the same period
in 1997. The increase is due to the opening of eight additional
Company-owned restaurants since September 30, 1997.
Depreciation and amortization expense increased $328,894 or
47.3% in the nine months ended September 30, 1998 compared to
the same period in 1997 due primarily to the addition of eight
Company-owned restaurants.
Net interest expense increased $288,569 or 91.1% for the
nine months ended September 30, 1998 compared to the same period
in 1997. The increase resulted from increased borrowings to fund
the growth in Company-owned restaurants.
The pro forma adjustment provides for statutory federal and
state tax rates then in effect as though the Company had been
subject to corporate income taxes for the periods presented. The
combined effective tax rate is 36% for the nine months ended
September 30, 1998 and 1997.
As a result of the factors discussed above, pro forma net
income in the nine months ended September 30, 1998 increased
$169,579 or 20.7% compared to the same period in 1997. Pro forma
net income per share increased to $0.19 or 20.7% in the first
nine months of 1998 from $.16 in the first nine months of 1997.
Comparison of the Three Month Periods Ended September 30, 1998 and 1997
Total revenues increased by $3,394,278 or 44.0% for the
three months ended September 30, 1998 compared to the same period
in 1997. The increase in total revenues reflects the opening of
eight additional Company-owned restaurants. Restaurant sales at
Company-owned restaurants increased $3,216,081 or 44.1% for the
three months ended September 30, 1998 compared to the same period
in 1997, and Company-owned same store sales decreased 1.5% for
the three months ended September 30, 1998.
Commissary sales increased by $59,866 or 31.6% for the three
months ended September 30, 1998 compared to the same period in
1997. The increase is primarily due to the opening of three
franchised and two international licensed restaurants since
September 1997.
Franchise fees and royalties increased by $56,802 or 45.3%
for the three months ended September 30, 1998 compared to the
same period in 1997. The increase was due primarily to $18,000
of territory fees received from the international franchise
operations and additional royalties of $38,800 from the opening
of three domestic franchise restaurants since September 30, 1997.
Other revenue increased by $61,529 or 64.3% for the three
months ended September 30, 1998 compared to the same period in
1997. The increase is partially due to an increase in volume
related purchasing rebates during the first three months of
approximately $25,000. There was also an increase in
miscellaneous income of approximately $27,000 from the health
insurance loss participation program and the school queso
program. The Company sold its investment in TW-Tennessee in
1998 which included a gain of approximately $58,200. The 1997
results include insurance proceeds received during the same
period of 1997 of approximately $41,400.
Restaurant cost of sales increased by $913,354 or 42.1% for
the three months ended September 30, 1998 compared to the same
period in 1997, principally due to having eight additional
Company-owned restaurants open during the quarter. Restaurant
cost of sales decreased as a percentage of sales by .4% to 29.3%
for the three months ended September 30, 1998 compared to the
same period in 1997. This decrease is primarily the result of
improved operating efficiencies in the commissary and lower
product costs at restaurant level.
Commissary cost of sales increased $49,714 or 29.5% for the
three months ended September 30, 1998 compared to the same period
in 1997, primarily due to the addition of three franchise
restaurants and two international licensed restaurants.
Commissary cost of sales as a percentage of commissary sales
decreased 1.5%. This decrease is primarily due to lower
ingredient costs for products sold.
Restaurant operating expenses increased by $1,814,219 or
51.1% in the three months ended September 30, 1998 compared to
the same period in 1997, principally due to having eight
additional Company-owned restaurants open. Operating expenses
increased as a percentage of restaurant sales to 51.0% from 48.6%
for the three months ended September 30, 1998 compared to the
same period in 1997, primarily due to a 1.6% increase in freight
and a .9% increase in restaurant level promotional costs.
Selling, general and administrative expenses increased by
$180,467 or 22.0% for the three months ended September 30, 1998
compared to the same period in 1997 due in part to the Company
expanding its management and staff throughout 1998 reflecting the
increased level of support necessary to support the growing
restaurant base. The Company also increased advertising expense
approximately $43,000 for the three months ended September 30,
1998 compared to the same period in 1997. Because of the
Company's restaurant growth plans management expects these
expenses to continue to increase during 1998 in absolute dollars.
Preopening amortization increased $102,241 or 79.8% for the
three months ended September 30, 1998 compared to the same period
in 1997, due primarily to the addition of eight Company-owned
restaurants since September 30, 1997.
Depreciation and amortization expense increased $126,625 or
52.2% in the three months ended September 30, 1998 compared to
the same period in 1997 due primarily to the addition of eight
Company-owned restaurants since September 30, 1997.
Net interest expense increased $126,612 or 127.2% for the
three months ended September 30, 1998 compared to the same
period in 1997. The increase resulted from increased borrowings
to fund the growth in Company-owned restaurants.
The pro forma adjustment provides for statutory federal and
state tax rates then in effect as though the Company had been
subject to corporate income taxes for the periods presented.
The effective tax rates are 36% for three months ended September
30, 1998 and 1997.
As a result of the factors discussed above, pro forma net
income in the three months ended September 30, 1998 increased
$51,869 or 15.2% compared to the same period in 1997. Pro forma
net income per share increased to $0.08 or 15.2% in the three
months ended September 30, 1998 from $0.07 during the same period
of 1997.
Liquidity and Capital Resources
The Company's principal capital needs arise from the
development of new restaurants, and to a lesser extent,
maintenance and improvement of its existing facilities. The
principal sources of capital to fund these expenditures were
internally generated cash flow, bank borrowings and lease
financing. The following table provides certain information
regarding the Company's sources and uses of capital for the Nine
Months Ended September 30, 1998 and 1997.
Nine Months
Ended September 30,
1998 1997
Net cash provided by operations $2,218,961 $2,720,787
Purchases or property and equipment 5,619,749 3,790,037
Net distributions of Members' equity 651,445 425,001
Net borrowings on long-term debt and
capital lease obligations 3,360,462 1,348,019
The Company's single largest use of funds has been
for capital expenditures consisting of land, building and
equipment associated with its restaurant expansion program.
The substantial growth of the Company over the period has not
required significant additional working capital. Sales are
predominantly cash and the business does not require the
maintenance of significant receivables or inventories. In
addition, it is common within the restaurant industry to
receive trade credit on the purchase of food, beverage and
supplies, thereby reducing the need for incremental working
capital to support sales increases.
Capital expenditures and preopening cost for the
remainder of 1998 are estimated to range from $300,000 to
$400,000 for the initial development costs of restaurants
expected to open in early 1999. In addition, the Company plans to
spend approximately $60,000 during the remainder of 1998 to
renovate and replace equipment in existing restaurants.
The Company will utilize mortgage, sale/leaseback and
landlord financing, as well as equipment leasing and
financing, for a portion of the initial development costs of
restaurants to be opened in early 1999. The remaining costs will
be financed though available cash reserves, cash provided from
operations and borrowing capacity. Management believes such
sources will be sufficient to fund the Company's expansion plans
for the remainder of 1998.
The Company has a $5.0 million revolving credit facility
with National City Bank (the "Credit Facility"). As of
September 30, 1998, the Company had outstanding borrowings
under the Credit Facility of approximately $4.2 million. The
Credit Facility imposes restrictions on the Company with
respect to the maintenance of certain financial ratios, the
incurrence of indebtedness, the sale of assets, mergers, capital
expenditures and the payment of dividends.
In order to provide any additional funds necessary to pursue
the Company's growth strategy, the Company may incur, from time
to time, additional short and long-term bank indebtedness and
may issue, in public or private transactions, its equity and
debt securities, the availability and terms of which will depend
upon market and other conditions. There can be no assurance that
such additional financing will be available on terms acceptable
to the Company.
Impact of Inflation
The impact of inflation on the cost of food, labor,
equipment, land and construction costs could affect the
Company's operations. A majority of the Company's employees
are paid hourly rates related to federal and state minimum wage
laws. In addition, most of the Company's leases require the
Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflationary
pressures. Most of the leases also provide for increases in rent
based on increases in the consumer price index when the
leases are renewed. The Company may attempt to offset the
effect of inflation through periodic menu price increases,
economies of scale in processing and cost controls and
efficiencies at existing restaurants. Management believes
that inflation had no significant impact on cost last year,
primarily because the largest single item of expense, food
costs, has remained relatively stable during this period.
Impact of Year 2000
The Company has scheduled the replacement of certain of its
older computer systems with hardware and software that has
been certified to be Year 2000 compliant. The Company has also
completed an assessment of its other computer systems and will
modify or replace portions of its software so that its computer
systems will function properly with respect to dates in or after
the year 2000. The total Year 2000 project cost is estimated at
approximately $270,000, which includes $255,000 for the
purchase of new hardware and software that will be capitalized
and $30,000 that will be expensed as incurred. As of September
30, 1998, the Company had not incurred any expense relating to
the Year 2000 project.
The project is estimated to be completed during August
1999, which is prior to any anticipated impact on its
operating systems. The Company believes that as a result of
the installation of new hardware, the modifications to existing
software and conversions to new software, the Year 2000 issue
will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are
not made, or are not completed timely, inability of its computer
systems to function accurately could have a material impact on
the operations of the Company.
The costs of the project and the date on which the
Company believes it will complete the Year 2000
modifications are based on management's best estimates,
which were based on numerous assumptions of future events,
including the continued availability of certain resources and
other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
FINANCIAL STATEMENTS
TUMBLEWEED, INC
Balance Sheets
September 30, 1998 June 30, 1998
(Unaudited) (Note)
Assets
Cash $130 $130
_________ __________
Total assets $130 $130
Stockholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding $--- $---
Common stock, $.01 par value,
30,000,000 shares authorized;
13 shares issued and outstanding 1 1
Paid-in capital 129 129
__________ __________
Total stockholders' equity $130 $130
__________ __________
Note: The balance sheet as of June 30, 1998 has been derived
from the audited balance sheet as of that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
See accompanying notes.
<TABLE>
FINANCIAL STATEMENTS
TUMBLEWEED, LLC
Statements of Income (Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Restaurant Sales $20,064,352 $10,522,294 $10,516,721 $7,300,640
Commissary Sales 752,644 785,428 249,303 189,437
Franchise fees and royalties 566,871 357,173 182,257 125,455
Other revenues 406,850 280,604 157,223 95,694
Total Revenues 30,790,717 21,945,499 11,105,504 7,711,226
Operating Expenses:
Restaurant cost of sales 8,470,147 6,072,111 3,084,617 2,171,263
Commissary cost of sales 648,631 700,785 218,511 168,797
Restaurant operating expenses 14,963,287 10,266,531 5,362,538 3,548,319
Selling, general and
administrative expenses 2,994,809 2,174,550 1,000,936 820,469
Preopening amortization 537,319 437,428 230,411 128,170
Depreciation and amortization 1,024,658 695,764 369,294 242,669
Total operating expenses 28,638,851 20,347,169 10,266,307 7,079,687
Income from operations 2,151,866 1,598,330 839,197 631,539
Other income (expense):
Interest income 45,827 46,827 14,799 15,185
Interest expense (651,203) (363,634) (240,946) (114,720)
Total other expense (605,376) (316,807) (226,147) (99,535)
Net Income $1,546,490 $1,281,523 $613,050 $532,004
Pro forma income data:
Net income as reported $1,546,490 $1,281,523 $613,050 $532,004
Pro forma income taxes (556,736) (461,348) (220,698) (191,521)
Pro forma net income $ 989,754 $ 820,175 $392,352 $340,483
Pro forma net income per
share-basic and diluted $ 0.19 $ 0.16 $ 0.08 $ 0.07
Shares used in computing pro
forma net income per share 5,145,000 5,145,000 5,145,000 5,145,000
See accompanying notes.
</TABLE>
<TABLE>
TUMBLEWEED, LLC
Balance Sheets
Pro Forma
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $255,335 $1,228,867 $255,335
Accounts receivable 308,793 346,700 308,793
Note receivable from affiliate 100,000 100,000 100,000
Inventories 1,124,585 825,029 1,124,585
Deferred preopening expenses 678,596 267,100 678,596
Prepaid expenses 324,687 282,590 324,687
Total current assets 2,791,996 282,590 2,791,996
Property and equipment, net 24,764,661 19,330,132 24,764,661
Note receivable from affiliate 300,000 300,000 300,000
Goodwill, net of accumulated
amortization of $412,542 as of
September 30, 1998 and
$329,442 in 1997 2,861,404 2,944,504 2,861,404
Other assets 798,080 443,559 298,080
Total assets $31,516,141 $26,068,481 $31,516,141
Liabilities, Redeemable
Member's Equity, Members'
Equity, and Retained Earnings
(Deficit) and Pro Forma
Stockholders' Equity
Current liabilities:
Accounts payable $1,192,897 $1,174,645 $1,192,897
Accrued liabilities 1,349,444 890,255 1,349,444
Deferred income taxes -- -- --
Current maturities on
long-term debt and
capital leases 772,349 509,779 772,349
Total current liabilities 3,314,690 2,574,679 3,821,618
Long-term debt, less
current maturities 9,171,945 5,750,841 9,171,945
Capital lease obligations,
less current maturities 2,692,960 2,280,964 2,692,960
Deferred income taxes -- -- 92,526
Other liabilities 98,087 118,584 98,087
Total long-term liabilities 11,962,992 8,150,389 12,055,518
Total liabilities 15,277,682 10,725,068 15,877,136
Redeemable members' equity 25,454,335 23,419,738 7,137,648
Members' equity 6,959 6,959 --
Retained earnings (deficit) (9,222,836) (8,083,284) --
Pro forma stockholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding -- -- --
Common stock, $.01 par value,
30,000,000 shares authorized;
5,145,000 shares issued and
outstanding -- -- --
Paid-in capital -- -- --
Total pro forma stockholder's
equity -- -- --
$31,516,141 $26,068,481 $31,516,141
See accompanying notes.
</TABLE>
<TABLE>
TUMBLEWEED, LLC
Statements of Cash Flows (Unaudited)
<CAPTION>
Nine Months Ended
September 30
1998 1997
<S> <C> <C>
Opening activities:
Net income $1,546,490 $1,281,523
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation 910,447 590,753
Amortization 114,211 105,011
Preopening amortization 537,319 437,428
Loss on disposition of property and equipment 9,981 13,291
Changes in operating assets and liabilities:
Accounts receivable 37,907 234,357
Inventories (299,556) (56,783)
Deferred preopening expenses (948,815) (148,003)
Prepaid expenses (44,992) 64,925
Other assets (100,976) (36,270)
Accounts payable 18,253 (25,363)
Accrued liabilities 459,189 259,918
Other liabilities (20,497) --
Net cash provided by operating activities 2,218,961 2,720,787
Investing activities:
Purchases of property and equipment (5,619,749) (3,790,037)
Net cash used in investing activities (5,619,749) (3,790,037)
Financing activities:
Proceeds from issuance of members' equity 1,162,929 1,776,357
Distribution of members' equity (1,814,374) (2,201,358)
Proceeds from issuance of long-term debt 5,380,463 1,828,080
Payments on long-term debt and capital
lease obligations (2,020,001) (480,061)
Payment of public offering costs (281,761) (35,860)
Net cash provided by financing activities 2,427,256 887,158
Net decrease in cash and cash equivalents (973,532) (182,092)
Cash and cash equivalents at beginning of period 1,228,867 1,031,709
Cash and cash equivalents at end of period $255,335 $849,617
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $651,203 $363,634
Noncash investing and financing activities:
Property and equipment acquired by seller
financing and capital lease obligation $735,208 --
See accompanying notes.
</TABLE>
TUMBLEWEED, INC.
NOTES TO BALANCE SHEETS (Unaudited)
SEPTEMBER 30, 1998
(1) DESCRIPTION OF BUSINESS
Tumbleweed, Inc. (Company) was legally formed in December 1997
and capitalized on June 23, 1998 with the issuance of 13 shares
of Company common stock at $10 per share. The Company has
entered into an agreement with Tumbleweed, LLC, a Kentucky
limited liability company (Tumbleweed), in which Tumbleweed
will be merged with and into the Company subject to the sale
in an initial public offering (IPO) of at least 700,000
shares of the Company's common stock. Tumbleweed owns and
operates 24 restaurants in Kentucky, Indiana and Ohio, and
franchises an additional 12 restaurants in Indiana, Illinois,
Tennessee and Wisconsin. Tumbleweed also licenses two
restaurants in Germany and one in Saudi Arabia. The Company
and Tumbleweed are sometimes hereinafter referred to
collectively as the "Company".
(2) BASIS OF PRESENTATION
The accompanying unaudited balance sheet has been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly,
it does not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments, consisting of normal accruals, considered
necessary for a fair presentation have been included. The
September 30, 1998 balance sheet and footnote disclosures
should be read in conjunction with the Form S-1 Registration
Statement (No. 333-37931) effective September 9, 1998.
The Company's assets at September 30, 1998 consist solely of
cash received in connection with the capitalization of the
Company. The Company has not conducted any operations and all
activities to date have related to the IPO and the
anticipated merger with Tumbleweed. All expenditures related
to the IPO have been funded and recorded by Tumbleweed.
Accordingly, statements of operations, changes in stockholders'
equity and cash flows would not provide meaningful information
and have been omitted.
TUMBLEWEED, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements have been prepared
by the Company without audit, with the exception of the
December 31, 1997 balance sheet which was derived from the
audited financial statements included in the Company's Form S-1
Registration Statement. The financial statements include
balance sheets, statements of income and statements of cash
flows which have been prepared in accordance with generally
accepted accounting principles for interim financial reporting
and in accordance with Rule 10-01 of Regulation S-X. These
financial statements, note disclosures and other information
should be read in conjunction with the Form S-1 Registration
Statement (No. 333-57931) effective September 9, 1998.
In the opinion of management, the unaudited interim
financial statements contained in this report reflect all
adjustments, consisting of only normal recurring accruals,
which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods
presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
(2) SIGNIFICANT ACCOUNTING POLICIES
In 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position, "Reporting on the Cost of Start-Up
Activities" (the "SOP") which requires adoption no later than the
beginning of 1999. The Company's initial application of the SOP
will require the write-off of deferred preopening costs ($678,596
at September 30, 1998) as of the date of adoption, and such
write-off will be reported, on a net of tax basis, as the
cumulative effect of a change in accounting principle. The
Company is evaluating whether it will adopt this new standard in
1998 or 1999. After adopting the SOP, the Company will be
required to expense preopening costs as incurred.
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
<S> <C> <C>
Long-term debt consists of:
Secured $5,000,000 mortgage revolving
line of credit note, bearing interest
at prime rate plus .25% (8.50% at
September 30, 1998), December 31, 2000 $4,192,147 $3,260,391
Secured mortgage note payable bearing
interest of 8.75% payable in monthly
installments through February 15, 2008 1,000,000 --
Secured mortgage note payable bearing
interest at prime rate plus 1.25%
(9.50% at September 30, 1998), payable
in monthly installments through
November 27, 2016 681,250 709,375
Secured mortgage note payable bearing
interest at prime rate plus 1.00%
(9.25% at September 30, 1998), payable
in monthly installments through October
1, 2017 1,089,611 133,937
Secured mortgage note payable bearing
interest at commercial paper rate plus
3.00% (8.30% at September 30, 1998),
due January 1, 2005 1,133,333 1,200,000
Secured mortgage note payable, bearing
interest at commercial rate plus 3.10%
(8.40% at September 30, 1998), due May 1,
2005 707,778 --
Other installment notes payable 804,392 733,280
9,608,511 6,036,983
Less current portion 436,566 286,142
Long-term debt $9,171,945 $5,750,841
The Company's property and equipment collateralizes long-term debt.
(4) ACCRUED LIABILITIES
September 30, 1998 December 31, 1997
Accrued liabilities consist of:
Accrued payroll and related taxes $821,968 $416,066
Accrued insurance and fees 46,569 120,800
Accrued taxes, other than income and payroll 325,906 157,693
Gift certificate liability 35,908 127,922
Other 119,093 67,774
$1,349,444 $890,255
</TABLE>
(5) RELATED PARTY TRANSACTIONS
As of December 31, 1997, the Company had a capital
investment in TW-Tennessee, LLC (TW-Tennessee) of $14,000.
During the year the Company made an additional capital
contribution of $23,700 bringing the total capital contribution
to $37,700. Additionally, as of June 30, 1998, the Company had
recorded minority share losses on its investment of $70,900. On
September 30, 1998, the Company sold its 9.5% common member
interest in TW-Tennessee for $25,000 to other members of
TW-Tennessee, which resulted in a gain of $58,200 in the third
quarter and a $12,700 loss on the Company's equity investment for
the year.
On September 30, 1998, the company entered into an agreement
to purchase the land and building, including improvements,
located at 3780 West Broad Street in Columbus, Ohio from West
Broad Development, LLC, the lessor of the property. The purchase
was made at fair market value supported by an independent
appraisal. The Company, at the time of purchase, entered into a
modification agreement with a local bank to modify an existing
promissory note on the land and building. In modifying the
promissory note the principal amount was increased to $1,000,000.
At the time of the purchase, the Company terminated its capital
lease obligation to West Broad Development, LLC.
(6) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pursuant to the rules and regulations of the Securities and
Exchange Commission, the accompanying pro forma balance sheet as
of September 30, 1998 reflects the change in capitalization
attributable to the conversion of the Company's members'
interests into 5,145,000 shares of Tumbleweed, Inc. Common stock
as if the IPO had closed on September 30, 1998 (excluding the
effects of the offering proceeds). The pro forma balance sheet
also reflects the deferred tax effects of the Company changing
from a nontaxable to a taxable status. Such deferred tax effects
will be included in income at the date the change in tax status
occurs.
Additionally, pro forma net income in the accompanying pro
forma income data for the nine months and three months ended
September 30, 1998 and 1997 reflects a pro forma adjustment to
historical net income for federal and state income taxes at an
assumed effective rate of 36%. Pro forma net income per share is
computed based upon pro forma net income and the weighted average
number of shares of common stock outstanding during the period
assuming the conversion of the Company's members' interests into
common stock as of the beginning of the period.
