<PAGE>
Prospectus Supplement dated May 27, 1999, to Prospectus dated May 3, 1999.
[TUMBLEWEED LOGO]
This supplement amends our Prospectus dated May 3, 1999, 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 our fiscal quarter which ended on March 31, 1999.
New Restaurants
Since May 3, 1999, one additional Company-owned restaurant opened in
Ft. Wayne, Indiana, and one additional franchised restaurant opened in New
Berlin, Wisconsin.
As a result of these new restaurant openings, we now own, franchise or
license a total of 47 Tumbleweed Restaurants. We own and operate 27 restaurants
and franchise 15 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward-looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in forward-looking
statements made by us. Factors that realistically could cause results to differ
materially from those projected in the forward-looking statements include the
availability and cost of financing and other events that affect our restaurant
expansion program, changes in food and other costs, changes in national,
regional or local economic conditions, changes in consumer tastes, competitive
factors such as changes in the number and location of competing restaurants, the
availability of experienced management and hourly employees, and other factors
set forth below.
<PAGE>
Of the 44 Tumbleweed restaurants as of March 31, 1999, we owned and operated 26
restaurants in Kentucky, Indiana and Ohio, franchised 13 restaurants in Indiana,
Illinois, Tennessee and Wisconsin, and licensed five restaurants in Germany,
Jordan and Saudi Arabia. One additional company-owned restaurant opened in Ft.
Wayne, Indiana in May 1999, and one additional franchised restaurant opened in
Glasgow, Kentucky in April 1999.
Effective January 1, 1999, Tumbleweed, LLC (Tumbleweed) converted to a C
corporation from a limited liability company by merging with the Company. As a
limited liability company, Tumbleweed had been treated as a partnership for
income tax purposes and, accordingly, had not been subject to federal or state
income taxes. 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 the periods
if Tumbleweed had been subject to corporate income taxes throughout the periods
presented.
The following section should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing.
RESULTS OF OPERATIONS
The table, on the next page, sets forth the percentage relationship to total
revenues of certain income statement data, except where noted, for the periods
indicated.
<PAGE>
<TABLE>
<CAPTION>
Three-Months Ended
March 31,
1999 1998
---------- ----------
Revenues:
<S> <C> <C>
Restaurant sales 94.8 % 94.4 %
Commissary sales 2.4 2.8
Franchise fees and royalties 2.1 2.1
Other revenues 0.7 0.7
---------- ----------
Total revenues 100.0 100.0
Operating expenses:
Restaurant cost of sales(1) 28.8 28.4
Commissary cost of sales(2) 90.9 84.1
Operating expenses(1) 51.5 53.4
Selling, general and administrative expenses 9.9 10.6
Preopening expenses 1.1 1.1
Depreciation and amortization 3.5 3.4
---------- ----------
Total operating expenses 92.8 94.6
---------- ----------
Income from operations 7.2 5.4
Interest expense, net (2.0) (1.6)
---------- ----------
Income before income taxes and cumulative
effect of a change in accounting
principle 5.2 3.8
Provision for income taxes:
Current (1.8) -
Deferred (5.4) -
---------- ----------
Total provision for income taxes (7.2)
---------- ----------
Income (loss) before cumulative effect
of a change in accounting principle (2.0) 3.8
Cumulative effect of a change in
Accounting principle, net of tax (2.8) -
---------- ----------
Net income (loss) (4.8) % 3.8 %
========== ==========
Pro forma income data:
Income before income taxes and
cumulative effect of a change in
accounting principle 5.2 % 3.8 %
Pro forma income taxes (1.8) (1.3)
---------- ----------
Pro forma income before cumulative
effect of a change in accounting
principle 3.4 2.5
Cumulative effect of a change in
accounting principle, net of tax (2.8) -
---------- ----------
Pro forma net income 0.6 % 2.5 %
========== ==========
</TABLE>
(1)As percentage of restaurant sales.
(2) As percentage of commissary sales.
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Total revenues increased by $3,051,493 or 34.3% for the first three months of
1999 compared to the same period in 1998 primarily as a result of the following:
Restaurant sales increased by $2,923,196 or 34.8% for the first three months of
1999 compared to the same period in 1998. The increase is due primarily to the
addition of five additional company-owned restaurants and an increase in same
store sales of 2.4%
Commissary sales to franchised restaurants increased by $35,371 or 14.1% for the
first three months of 1999 compared to the same period in 1998. The increase is
due primarily to the addition of five franchised or licensed restaurants.
Franchise fees and royalties increased by $65,982 or 35.6% for the first three
months of 1999 compared to the same period in 1998. The increase was due
primarily to a $35,000 increase in franchise fees received upon the opening of
two new franchised restaurants during the first three months of 1999 compared to
one during the same period in 1998. Additionally, royalty income increased
approximately $30,000 during the first three months of 1999 compared to the same
period in 1998.
Other revenues increased by $26,944 or 43.0% for the first three months of 1999
compared to the same period in 1998, primarily due to an increase in volume
related purchasing rebates of approximately $25,000.
Restaurant cost of sales increased by $874,983 or 36.6% for the first three
months of 1999 compared to the same period in 1998. The increase was principally
due to the opening of five additional company-owned restaurants. Restaurant cost
of sales increased as a percentage of sales by 0.4% to 28.8% for the first three
months of 1999 compared to 28.4% during the same period in 1998. The increase
was primarily due to an increase in sales of American food which contains a
higher cost to sales ratio compared to Mexican food sales. American food sales
increased to 39.2% of total sales in the first three months of 1999 compared to
34.8% during the same period of 1998.
Commissary cost of sales increased $49,363 or 23.4% for the first three months
of 1999 compared to the same period in 1998. The increase in commissary cost of
sales is due primarily to increased overhead costs in the first three months of
1999 compared to the same period in 1998. As a percentage to sales, commissary
cost of sales increased 6.8%.
Restaurant operating expenses increased by $1,345,235 or 30.0% for the first
three months of 1999 compared to the same period in 1998. The increase reflects
the addition of five company-owned restaurants. Operating expenses decreased as
a percentage of restaurant sales to 51.5% for the first three months of 1999
from 53.4% for the same period in 1998 primarily due to a 0.8% decrease in labor
costs and a 1.2% decrease in restaurant level promotional costs.
<PAGE>
Selling, general and administrative expenses increased by $256,856 or 27.3% for
the first three months of 1999 compared to the same period in 1998. The increase
was due in part to the addition of management and staff personnel during 1998
and the first three months of 1999 to support the growing restaurant base.
Because of our restaurant growth plans, management expects selling, general and
administrative expenses to continue to increase during the remainder of 1999 in
absolute dollars. As a percentage to total revenues, selling, general and
administrative expenses were 9.9% of revenues for the first three months of 1999
versus 10.6% for the same period in 1998.
Pre-opening expenses were $134,805 for the three months ended March 31, 1999
versus pre-opening amortization of $96,950 for the three months ended March 31,
1998. See Note 2 of the financial statements regarding the adoption of Statement
of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities." As a
result of the adoption of SOP 98-5 on January 1, 1999, we recorded a charge to
income, net of tax, of $341,035 representing the write-off of deferred
pre-opening costs as of December 31, 1998. The charge is reported net of taxes
as a cumulative effect of a change in accounting principle.
Depreciation and amortization expense increased $117,903 or 39.2% for the first
three months of 1999 compared to the same period in 1998 due primarily to the
addition of five company-owned restaurants.
Net interest expense increased $104,480 or 73.6% for the first three months of
1999 compared to the same period in 1998. The increase resulted from increased
borrowing to fund the growth in company-owned restaurants.
The combined estimated effective federal and state income tax rate was 35% for
the first three months of 1999. The pro forma adjustments provide for income
taxes as though we had been subject to corporate income taxes throughout the
periods presented. Additionally, as a result of a change in tax status from a
limited liability corporation to a C corporation effective January 1, 1999, we
recorded a net deferred income tax liability and income tax expense of $639,623
in 1999.
Our pro forma income before cumulative effect of a change in accounting
principle increased $179,931 or 80.1% for the first three months of 1999
compared to the same period in 1998. Pro forma income per share before
cumulative effect of a change in accounting principle increased to $0.07 in the
first three months of 1999 compared to $0.04 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand the number of our restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance
<PAGE>
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 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:
<TABLE>
<CAPTION>
Three-Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operations $ 578,142 $ 214,805
Purchases of property and equipment 1,520,927 2,176,037
Proceeds from common stock offering 7,765,347 -
Net distributions of members' equity - (251,447)
Net borrowings (payments) on long-term
debt and capital lease obligations (7,606,355) 1,443,169
</TABLE>
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 our restaurant facilities. Management determines whether
to acquire or lease a restaurant facility based on its evaluation of the
financing alternatives available for a particular site.
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
March 31, 1999, we had two restaurants under construction, which are expected to
open in the second 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 funded by
<PAGE>
available cash reserves, cash provided from operations and borrowing capacity.
Management believes such sources will be sufficient to fund our expansion plans
through 1999. Should our actual results of operations fall short of, or its rate
of expansion significantly exceed its plans, or should its costs or capital
expenditures exceed expectations, 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 terms satisfactory to us.
We had a $5,000,000 mortgage revolving line of credit note with National City
Bank (the "Credit Facility"). At March 31, 1999, we had outstanding borrowings
under the Credit Facility of approximately $2,172,000. The Credit Facility
imposes restrictions on us with respect to the maintenance of certain financial
ratios, the incurrence of indebtedness, the sale of assets, mergers, capital
expenditures and the payment of dividends. Subsequent to March 31, 1999, we
increased the Credit Facility to $6,500,000.
In order to provide any additional funds necessary to pursue the Company's
growth strategy, we 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.
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs be expensed as incurred. Prior to 1999, the Company capitalized its
preopening costs incurred in connection with opening new restaurant locations.
The unamortized balance of the Company's deferred preopening costs ($524,669 as
of December 31, 1998) were written-off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
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 our 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 March 31, 1999, 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
<PAGE>
modifications and conversions are not made, or are not completed timely, the
inability of our computer systems to function accurately could have a material
impact on the operations of the Company.
We are in the process of querying our 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
materially impact the Company, 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 that we do
not complete all phases of our Year 2000 program.
The costs of the project and the date on which we believe 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.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. We pay a majority of our employees
hourly rates related to federal and state minimum wage laws. As a result of
increased competition and the low unemployment rates in the markets in which our
restaurants are located, we have continued to increase wages and benefits in
order to attract and retain management personnel and hourly coworkers. In
addition, most of our leases require us to pay taxes, insurance, maintenance,
repairs and utility costs, and these costs are subject to inflationary
pressures. Most of the leases provide for increases in rent based on increases
in the consumer price index when the leases are renewed. We may attempt to
offset the effect of inflation through periodic menu price increases, economies
of scale in purchasing and cost controls and efficiencies at existing
restaurants.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative transactions or speculate on the future
direction of interest rates. We are exposed to interest rate changes primarily
as a result of our variable rate debt instruments. As of March 31, 1999,
approximately $7,000,000 of our debt bore interest at variable rates. We believe
that the effect, if any, of reasonably possible near-term changes in interest
rates on our consolidated financial position, results of operations or cash
flows would not be significant.
<PAGE>
FINANCIAL STATEMENTS
Tumbleweed, Inc.
Statements of Operaions
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-----------------------------
Revenues:
<S> <C> <C>
Restaurant sales $ 11,332,318 $ 8,409,122
Commissary sales 286,237 250,866
Franchise fees and royalties 251,169 185,187
Other revenues 89,645 62,701
---------- ---------
Total revenues 11,959,369 8,907,876
Operating expenses:
Restaurant cost of sales 3,263,400 2,388,417
Commissary cost of sales 260,254 210,891
Operating expenses 5,832,410 4,487,175
Selling, general and administrative expenses 1,184,728 939,872
Preopening expenses 134,805 96,950
Depreciation and amortization 418,465 300,562
---------- ---------
Total operating expenses 11,094,062 8,423,867
---------- ---------
Income from operations 865,307 484,009
Other income (expense):
Interest income 17,023 12,843
Interest expense (263,365) (154,705)
---------- ---------
Total other expense (246,342) (141,862)
---------- ---------
Income before income taxes and cumulative effect of a change
in accounting principle 618,965 342,147
Provision for income taxes:
Current (216,638) --
Deferred (639,623) --
---------- ---------
Total provision for income taxes (856,261) --
---------- ---------
Income (loss) before cumulative effect of a change
in accounting principle (237,296) 342,147
Cumulative effect of a change in accounting principle, net of tax - see Note 2 (341,035) --
---------- ---------
Net income (loss) $ (578,331) $ 342,147
========== ==========
Pro forma income data:
Income before income taxes and cumulative effect of a change in
in accounting principle $ 618,965 $ 342,147
Pro forma income taxes (216,638) (119,751)
---------- ---------
Pro forma income before cumulative effect of a change
in accounting principle 402,327 222,396
Cumulative effect of a change in accounting principle, net of tax (341,035) --
---------- ---------
Pro forma net income $ 61,292 $ 222,396
========== ==========
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.07 $ 0.04
Cumulative effect of a change in accounting principle, net of tax (0.06) --
---------- ---------
Pro forma net income $ 0.01 $ 0.04
========== ==========
Weighted average number of outstanding shares (pro forma shares in 1998) 5,881,543 5,105,000
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Tumbleweed, Inc.
Balance Sheets
<CAPTION>
Pro forma
March 31 December 31 December 31
1999 1998 1998
-------------------------- ------------
(Unaudited) (Unaudited)
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 712,030 $ 1,898,973 $ 1,898,973
Accounts receivable 436,601 433,872 433,872
Inventories 1,336,824 1,333,591 1,333,591
Prepaid expenses 390,279 330,439 330,439
Deferred preopening expenses -- 524,669 524,669
-------------------------- ------------
Total current assets 2,875,734 4,521,544 4,521,544
Property and equipment, net 26,057,113 24,920,797 24,920,797
Goodwill, net of accumulated amortization of
$467,972 in 1999 and $440,242 in 1998 2,806,005 2,833,704 2,833,704
Other assets 422,406 1,404,861 1,404,861
-------------------------- ------------
Total assets $32,161,258 $33,680,906 $33,680,906
========================== ============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro forma
March 31 December 31 December 31
1999 1998 1998
----------------------------- -------------
(Unaudited) (Unaudited)
Liabilities, Redeemable Members' Equity, Members' Equity,
Retained Earnings (Deficit) and Stockholders' Equity
Current liabilities:
<S> <C> <C> <C>
Short-term borrowings $ -- $ 6,990,348 $ 6,990,348
Accounts payable 1,107,299 1,781,418 1,781,418
Accrued liabilities 1,871,734 1,873,651 1,873,651
Deferred income taxes 346,309 -- 467,420
Current maturities on long-term
debt and capital leases 967,824 895,310 895,310
----------------------------- -------------
Total current liabilities 4,293,166 11,540,727 12,008,147
Long-term liabilities:
Long-term debt, less current maturities 8,605,510 9,180,358 9,180,358
Capital lease obligations, less current maturities 3,173,624 3,287,296 3,287,296
Deferred income taxes 217,667 -- 172,203
Other liabilities 106,588 94,838 94,838
----------------------------- -------------
Total long-term liabilities 12,103,389 12,562,492 12,734,695
----------------------------- -------------
Total liabilities 16,396,555 24,103,219 24,742,842
Redeemable members' equity -- 18,924,688 --
Members' equity -- 354,459 --
Retained earnings (deficit) -- (9,701,460) --
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; 5,881,543 shares issued
and outstanding in 1999 (5,105,000 shares on a
pro forma basis in 1998) 58,815 -- 51,050
Paid-in capital 16,284,219 -- 8,887,014
Retained earnings (deficit) (578,331) -- --
----------------------------- -------------
Total stockholders' equity 15,764,703 -- 8,938,064
----------------------------- -------------
Total liabilities and stockholders' equity $ 32,161,258 $ 33,680,906 $ 33,680,906
============================= =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Tumbleweed, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
March 31
1999 1998
----------------------------
Operating activities:
<S> <C> <C>
Net income (loss) $ (578,331) $ 342,147
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 383,498 262,717
Amortization 34,965 37,845
Preopening amortization -- 96,950
Deferred income taxes 563,976 --
Loss on disposition of property and equipment 1,114 839
Changes in operating assets and liabilities:
Accounts receivable (2,729) 77,613
Inventories (3,233) (102,211)
Deferred preopening expenses 524,669 (412,166)
Prepaid expenses (60,812) 1,007
Other assets (23,838) (58,200)
Accounts payable (270,970) (276,420)
Accrued liabilities (1,917) 242,933
Other liabilities 11,750 1,751
------------ ----------- -
Net cash provided by operating activities 578,142 214,805
Investing activities:
Purchases of property and equipment (1,520,927) (2,176,037)
------------ -----------
Net cash used in investing activities (1,520,927) (2,176,037)
Financing activities:
Proceeds from issuance of members' equity -- 842,037
Distribution of members' equity -- (1,093,484)
Proceeds from common stock offering 7,765,347 --
Proceeds from issuance of long-term debt 3,529,914 1,671,069
Payments on long-term debt and capital lease obligations (11,136,269) (227,900)
Payment of public offering costs (403,150) (16,218)
------------ -----------
Net cash provided by (used in) financing activities (244,158) 1,175,504
------------ -----------
Net decrease in cash and cash equivalents (1,186,943) (785,728)
Cash and cash equivalents at beginning of period 1,898,973 1,228,867
------------ -----------
Cash and cash equivalents at end of period $ 712,030 $ 443,139
============ ===========
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 260,502 $ 154,705
============ ===========
Noncash investing and financing activities:
Equipment acquired by capital lease obligations $ -- $ 209,981
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
TUMBLEWEED, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
1. BASIS OF PRESENTATION
Merger of Tumbleweed, LLC and Tumbleweed, Inc.
Tumbleweed, Inc. (the Company) was legally formed in December 1997 and
capitalized on June 23, 1998 with the issuance of 13 shares of Company common
stock at $10 per share. Effective January 1, 1999, and as a result of the sale
of 776,543 shares of common stock in an initial public offering (IPO),
Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of
Tumbleweed members at the time of the merger were converted into a total of
5,105,000 shares of Company common stock.
The Company's assets of $1 at December 31, 1998 consisted solely of cash
received in connection with the capitalization of the Company. As of December
31, 1998, the Company had not conducted any operations and all activities
through December 31, 1998 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 totaling $130 and, as a result of maintaining
the cash account, the Company incurred expenses totaling $129 during 1998. All
expenditures related to the IPO were funded and recorded by Tumbleweed.
Accordingly, the Company's balance sheet as of December 31, 1998 and the
statements of operations and cash flows for the period from inception through
December 31, 1998 would not provide meaningful information and, accordingly,
have been omitted. Also, the accompanying statements of operations and cash
flows for the three months ended March 31, 1998 and balance sheet and pro forma
balance sheet as of December 31, 1998 are those of Tumbleweed and are included
for comparative purposes since it was the predecessor company.
As of March 31, 1999, the Company owns and operates 26 restaurants in Kentucky,
Indiana and Ohio and franchises an additional 13 restaurants in Indiana,
Illinois, Tennessee and Wisconsin. The Company also licenses five restaurants in
Germany, Saudi Arabia and Jordan.
Interim Financial Reporting
The accompanying financial statements have been prepared by the Company without
audit, with the exception of the December 31, 1998 balance sheet which was
derived from the audited financial statements included in the Company's Form
10-K. The accompanying unaudited financial statements 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 Company's Annual Report on Form 10-K for the fiscal year ended December
31, 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. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
Pro forma Financial Information
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the accompanying pro forma balance sheet for Tumbleweed as of December 31, 1998
reflects the change in capitalization attributable to the conversion of
Tumbleweed'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 Tumbleweed changing from a limited liability company (which is
taxed as a partnership) to a regular corporate taxable status. Such deferred tax
effects are included in income on January 1, 1999, the date the change in tax
status occurred.
<PAGE>
1. BASIS OF PRESENTATION (continued)
Additionally, pro forma net income in the accompanying pro forma income data for
the three months ended March 31, 1999 and 1998 reflects a pro forma adjustment
to income before income taxes and cumulative effect of a change in accounting
principle for federal and state income taxes at an estimated effective rate of
35% as if the Company had been a regular corporate taxpayer throughout the
periods presented. Pro forma basic and diluted earnings per share is computed
based upon the weighted average number of shares of common stock outstanding for
1999. For 1998, the weighted average number of shares outstanding assumes the
conversion of Tumbleweed's members' interests into common stock as of the
beginning of the period.
2. CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs be expensed as incurred. Prior to 1999, the Company capitalized its
preopening costs incurred in connection with opening new restaurant locations.
The unamortized balance of the Company's deferred preopening costs ($524,669 as
of December 31, 1998) was written-off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
March 31 December 31
1999 1998
-----------------------
Accrued payroll and related taxes $ 965,264 $ 792,809
Accrued insurance and fees 118,750 284,270
Accrued taxes, other than income and payroll 463,279 393,593
Gift certificate liability 105,018 275,743
Other 219,423 127,236
---------- ----------
$1,871,734 $1,873,651
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of:
March 31 December 31
1999 1998
-------------------------
Secured $5,000,000 mortgage revolving line of
credit note, bearing interest at prime rate
plus .25% (8.0% at March 31, 1999), due December
31, 2000 $ 2,172,148 $ 4,302,148
Secured mortgage note payable, bearing interest
at commercial paper rate plus 2.65% (7.52% at
March 31, 1999), due February 17, 2006 2,834,683
-
Secured mortgage note payable, bearing interest at
prime rate plus 1% (8.75% at March 31, 1999),
payable in monthly installments through October
1, 2017 1,078,485 1,084,274
(Continued next page)
<PAGE>
4. LONG-TERM DEBT (continued)
March 31 December 31
1999 1998
-------------------------
Secured mortgage note payable, bearing interest
at 8.5%, payable in monthly installments through
February 15, 2008 $ 983,514 $ 991,396
Secured mortgage note payable, bearing interest
at 7.75%, payable in monthly installments through
March 1, 2006 673,110 -
Secured mortgage note payable, bearing interest at
prime rate plus 1.25% (9.0% at March 31, 1999),
payable in monthly installments through November
27, 2016 662,500 671,875
Secured mortgage note payable, bearing interest at
Commercial paper rate plus 3% - 1,111,928
Secured mortgage note payable, bearing interest
at commercial rate plus 3.1% - 695,230
Other installment notes payable 700,672 750,595
-------------------------
9,105,112 9,607,446
Less current maturities 499,602 427,088
-------------------------
Long-term debt $ 8,605,510 $ 9,180,358
=========================
Property and equipment with a net book value of approximately $17,200,000 at
March 31, 1999 collateralize the Company's long-term debt.
Subsequent to March 31, 1999, the Company increased its mortgage revolving line
of credit note from $5,000,000 to $6,500,000 and the maturity date of the note
was extended to December 31, 2001.
5. RELATED PARTY TRANSACTIONS
On April 1, 1999, the Company purchased the land and building, including
improvements, of the Springdale, Ohio restaurant from Keller, LLC, the lessor of
the property, for $1,625,000. The purchase was made for an amount substantially
equal to the costs originally expended by Keller, LLC in the purchase of the
land and construction of the improvements which approximated the fair market
value as determined by an independent appraisal. At the time of purchase, the
Company entered into a modification agreement with a local bank to increase a
line of credit and to place a mortgage on the land and building to secure the
increased line of credit. At the time of the purchase, the Company's capital
lease obligation to Keller, LLC was terminated.
6. COMMITMENTS
At March 31, 1999, the Company had commitments of approximately $785,000 for the
completion of the construction of three restaurants, for which landlord
financing has been secured.
<PAGE>
7. 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 in the Company's
Annual Report on Form 10-K.
Segment information for the three months ended March 31 is as follows:
1999:
Restaurant Commissary Corporate Totals
--------------------------------------------------
Revenues from external
customers $11,332,318 $ 286,237 $ 340,814 $11,959,369
Intersegment revenues -- 667,885 -- 667,885
General and
administrative expenses -- -- 899,766 899,766
Advertising expenses -- -- 284,962 284,962
Depreciation
and amortization 332,639 29,688 56,138 418,465
Net interest expense -- 41,825 204,517 246,342
Income(loss)before income
taxes and cumulative effect
of a change in accounting
principle 1,736,628 15,098 (1,132,761) 618,965
1998:
Restaurant Commissary Corporate Totals
--------------------------------------------------
Revenues from external
customers $ 8,409,122 $ 250,866 $ 247,888 $ 8,907,876
Intersegment revenues -- 585,353 -- 585,353
General and
administrative expenses -- -- 741,679 741,679
Advertising expenses -- -- 198,193 198,193
Depreciation and
amortization 222,560 28,406 49,596 300,562
Net interest
expense -- 40,425 101,437 141,862
Income(loss) before income
taxes and cumulative effect
of a change in accounting
principle 1,144,006 64,416 (866,275) 342,147
<PAGE>
8. INCOME TAXES
Concurrent with the merger of the Company as described in Note 1, Tumbleweed
converted from a limited liability company into a C corporation and is now
subject to federal and state income taxes. As of the date of the merger, the
Company recorded a net deferred tax liability and corresponding income tax
expense for cumulative temporary differences between the tax basis and the
reported amounts of the Company's assets and liabilities. At the date of the
merger, the net differences equaled approximately $1,780,000 resulting in a net
deferred tax liability and corresponding income tax expense of $639,623 which is
included in the deferred income tax provision in the accompanying statement of
operations for the three months ended March 31, 1999.
Income taxes on the Company's income for the three months ended March 31, 1999
have been provided for at an estimated effective tax rate of 35%.
Significant components of the Company's deferred tax assets and liabilities as
of March 31, 1999 are as follows:
Deferred tax assets:
Book over tax amortization $ 92,412
Other 79,978
--------------
Total deferred tax assets 172,390
Deferred tax liabilities:
Deferred expenses (274,618)
Tax over book depreciation (329,314)
Other (132,434)
--------------
Total deferred tax liabilities (736,366)
--------------
Net deferred tax liability $ (563,976)
==============
