As filed with the Securities and Exchange Commission on April 27, 2000
Registration No. 333-57931
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
POST-EFFECTIVE AMENDMENT NO. 2
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)
------------
<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 10 IN DETERMINING
WHETHER TO PURCHASE THE COMMON STOCK.
-----------------------------------
The selling shareholders identified on pages 45-49 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 pages 49-50. 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 March 31, 2000, the last sale price of the common stock on the
Nasdaq National Market was $6.25 per share.
<TABLE>
<CAPTION>
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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 27, 2000
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................5
HISTORY AND REORGANIZATION.....................................................9
RISK FACTORS..................................................................10
FORWARD-LOOKING STATEMENTS....................................................15
USE OF PROCEEDS...............................................................15
DIVIDEND POLICY...............................................................15
CAPITALIZATION................................................................15
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........15
SELECTED FINANCIAL DATA.......................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................19
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE........25
BUSINESS......................................................................25
MANAGEMENT....................................................................35
EXECUTIVE COMPENSATION........................................................37
CERTAIN TRANSACTIONS..........................................................40
LEASES WITH RELATED PARTIES...................................................40
OTHER RELATED PARTY TRANSACTIONS..............................................41
PRINCIPAL STOCKHOLDERS........................................................43
SELLING SHAREHOLDERS..........................................................45
PLAN OF DISTRIBUTION..........................................................49
DESCRIPTION OF SECURITIES.....................................................50
SHARES ELIGIBLE FOR FUTURE SALE...............................................52
EXPERTS.......................................................................52
EXHIBITS......................................................................52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................54
<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 owned and conducted 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 776,630 shares of common stock in our initial public
offering.
1. What do we do?
We own, franchise or license 58 Tumbleweed(R) Southwest Mesquite Grill
& Bar restaurants.
o We own and operate 29 Tumbleweed restaurants in Kentucky,
Indiana and Ohio.
o Our franchisees own and operate 22 Tumbleweed restaurants in
Kentucky, Indiana, Illinois,Tennessee, Wisconsin, Michigan and
West Virginia.
o We license seven restaurants outside the United States in
Germany, Jordan, Saudi Arabia, Egypt and England.
o We and our franchisees expect to open a total of five
company-owned restaurants and ten franchised restaurants
during 2000.
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 1.3% in 1999 versus 1998.
o For 1999, the average check at a full-service Tumbleweed
restaurant, including beverages, was approximately $8.20 for
lunch and $10.33 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 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
<PAGE>
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 22 new company-owned and 15 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 $2,500,000, respectively, from these
prototypes. The average sales by restaurant size for the 24 company-owned
Tumbleweed restaurants opened for all of 1999 were:
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- ----------
Mini 128-194 5 $1,387,000
Midi 210-244 9 $1,776,000
Maxi 252-384 10 $2,122,000
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.
6
<PAGE>
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 776,630 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 $7,766,300.
Following the merger, the initial public offering and the repurchases of shares
which we have made, as of March 31, 2000, we had 5,856,930 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 $747,500 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?
We incurred $991,293 in offering expenses. 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.
7
<PAGE>
Summary Financial Data
(In thousands, except per share data)
Years Ended
December 31,
----------------------------
1997 1998 1999
---- ---- ----
Statement of Income Data:
Total revenues $29,826 $42,808 $51,345
Income from operations 2,143 2,823 4,499
Cumulative effect of a change in
accounting principle, net of tax (1) - - (341)
Net income 1,714 1,953 1,210
Pro forma Income Data:
Income before income taxes and cumulative
effect of a change in accounting principle 1,714 1,953 3,370
Pro forma income taxes (2) (600) (683) (1,179)
Pro forma income before cumulative
effect of a change in accounting principle 1,114 1,270 2,191
Pro forma net income 1,114 1,270 1,850
Basic and Diluted Earnings per Share:
Income before cumulative effect of a change
in accounting principle $ - $ - $ 0.27
Net income - - 0.21
Pro forma Basic and Diluted
Earnings per Share Data:
Pro forma income before cumulative effect of
a change in accounting principle 0.22 0.25 0.37
Pro forma net income 0.22 0.25 0.31
Weighted average shares outstanding(3) 5,105 5,105 5,882
(1) 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 a change in accounting principle on January
1, 1999.
(2) Prior to Reorganization, the Company operated as a limited
liability company and was not subject to corporate income taxes through December
31, 1998. Pro forma adjustments have been made to net income to give effect to
federal and state income taxes as though the Company had been subject to
corporate income taxes for the years presented with an effective tax rate of
35%.
(3) Shares outstanding gives effect to the merger between the Company
and Tumbleweed, LLC as if it had occurred as of January 1, 1997.
December 31,1999
----------------
Balance Sheet Data:
Total assets................................ $36,579
Long-term debt and capital lease
obligations, including current
maturities............................... 15,145
Total liabilities........................... 19,016
Retained earnings........................... 1,210
Stockholders' equity........................ 17,563
8
<PAGE>
Summary Restaurant Data
For the years ended December 31,
--------------------------------
Company-owned Restaurants 1997 1998 1999
------------------------- ---- ---- ----
In operation, beginning of year 15 17 25
Newly opened 2 8 4
-- -- --
In operation, end of year 17 25 29
Franchised and
Licensed Restaurants
--------------------
In operation, beginning of year 9 12 18
Newly opened 3 7 8
Restaurants closed 0 (1) (4)
-- -- --
In operation, end of year 12 18 22
-- -- --
System total 29 43 51
== == ==
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 58 full-service
restaurants as of the date of this Prospectus:
o 29 company-owned in Ohio, Kentucky and Indiana;
o 22 franchised restaurants in Kentucky, Indiana, Illinois, Tennessee,
Wisconsin, Michigan and West
Virginia; and
o seven licensed restaurants located in Jordan, Saudi Arabia, Germany,
Egypt and England under a licensing agreement with a restaurant
operator based in Brussels, Belgium.
9
<PAGE>
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 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 CONDITION 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 a total of five company-owned, and ten franchised restaurants
during 2000.
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:
o selection and availability of suitable restaurant locations;
10
<PAGE>
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 29 Tumbleweed restaurants, three 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 Foodservice, 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.
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.
11
<PAGE>
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.
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 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 46 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 non-competition provisions.
12
<PAGE>
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.
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 our shares of common
stock. Our directors and executive officers beneficially own approximately 66.8%
of our 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.
13
<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. 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."
A SIGNIFICANT NUMBER OF SHARES WILL BE ELIGIBLE FOR FUTURE SALE
As of March 31, 2000, there were 5,856,930 shares of our common stock
outstanding. We have also granted options to purchase shares of common stock to
employees and non-employee directors, of which options for approximately 533,000
shares were outstanding as of March 31, 2000. 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
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 preferences, conversion rights, and voting
rights, without
14
<PAGE>
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 of
Financial Condition and Results of Operations," and "Business" sections and
elsewhere in this prospectus. Therefore, you should not place undue reliance
upon these forward-looking statements.
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. 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,
1999.
December 31, 1999
-----------------
Actual
------
(in thousands)
--------------
Long-term debt and capital lease obligations (including
current maturities)................................... $15,145
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; 5,881,630 shares issued and outstanding . 59
Paid-in capital......................................... 16,294
Retained earnings....................................... 1,210
-------
Total stockholders' equity................................ 17,563
-------
Total capitalization...................................... $32,708
=======
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 31, 2000, there were 5,856,930 shares of Common Stock issued and
outstanding. There were approximately 1,010 stockholders, including beneficial
owners of shares held in nominee name.
15
<PAGE>
On January 11, 1999, we completed our initial public offering of common stock.
We sold 776,630 shares at the offering price of $10 per share in a direct
offering of our common stock to the public, raising a total of $7,766,300.
On January 1, 1999, the merger of Tumbleweed, LLC into Tumbleweed, Inc. became
effective. The merger reorganized Tumbleweed, LLC, which had owned, franchised
or licensed 43 Tumbleweed Southwest Mesquite Grill & Bar restaurants, into a
corporation for purposes of the stock offering. In the reorganization, 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. As required
by the Tumbleweed, LLC operating agreement, the former Class B members made
additional cash contributions of $747,500 in connection with the reorganization.
We received net proceeds of approximately $6,800,000 from the stock offering. We
used the offering proceeds, plus the additional cash contributions of $747,500
we received in the reorganization, to repay bank indebtedness totaling
$7,043,366 and to pay offering expenses. The bank indebtedness was an obligation
of the former Class A members of Tumbleweed, LLC, including certain of our
directors and officers, and had been accounted for as redeemable members'
equity. Offering expenses totaled approximately $1,000,000, none of which were
commissions or other underwriting expenses.
The registration statement for the stock offering also included the 5,105,000
shares issued in the reorganization, which may be and may have been sold from
time to time in the future by the former members of Tumbleweed, LLC for their
own accounts.
Our common stock trades on the Nasdaq Stock Market's National Market under the
symbol "TWED." The following table shows quarterly high and low closing prices
for the Common Stock during 1999 for the periods indicated, as reported by the
Nasdaq National Market.
High Low
---- ---
First Quarter (1) $ 12.00 $ 8.50
Second Quarter 11.25 7.50
Third Quarter 9.87 7.00
Fourth Quarter 8.50 5.00
(1) Beginning in March 1999, bid and asked quotations for our shares were
reported on the OTC Bulletin Board under the trading symbol TWED. On March 29,
1999, our common stock began trading on the Nasdaq Stock Market's National
Market.
We have never paid a dividend on our Common Stock nor do we expect to pay a cash
dividend 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.
SELECTED FINANCIAL DATA
In the following table, the income statement and balance sheet data of
Tumbleweed, LLC for the years ended December 31, 1995, 1996, 1997 and 1998, and
of Tumbleweed, Inc. for the year ended December 31, 1999, have been derived from
the consolidated financial statements 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 consolidated 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."
16
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
Tumbleweed, LLC Tumbleweed, Inc.
----------------------------------------------------------------------- ----------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $ 17,254,058 $ 23,284,007 $ 27,891,128 $ 40,490,933 $ 48,578,123
Commissary sales 1,574,847 1,795,529 1,007,011 1,041,266 1,168,836
Franchise fees and royalties 540,157 474,870 563,056 770,806 1,064,952
Other revenues 177,960 177,317 365,054 504,639 532,976
------------- ------------- ------------- ------------- -------------
Total revenues 19,547,022 25,731,723 29,826,249 42,807,644 51,344,887
Operating expenses:
Restaurant cost of sales 5,132,549 7,103,357 8,191,928 11,788,578 14,232,564
Commissary cost of sales 1,424,077 1,649,502 887,793 905,814 1,053,083
Operating expenses 8,896,704 12,386,119 14,035,693 20,881,212 24,377,631
Selling, general and administrative 1,962,036 2,250,827 3,051,740 4,150,303 4,981,721
Pre-opening expenses 149,138 405,502 544,723 816,604 395,768
Depreciation and amortization 1,033,349 1,231,290 971,863 1,442,011 1,804,757
------------- ------------- ------------- ------------- -------------
Total operating expenses 18,597,853 25,026,597 27,683,740 39,984,522 46,845,524
------------- ------------- ------------- ------------- -------------
Income from operations 949,169 705,126 2,142,509 2,823,122 4,499,363
Interest expense, net (266,530) (203,810) (428,598) (869,712) (1,128,906)
------------- ------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect of a change in
accounting principle 682,639 501,316 1,713,911 1,953,410 3,370,457
Provision for income taxes:
Current and deferred - - - - (1,179,659)
Deferred taxes related to change in
tax status (3)
tax status (3) - - - - (639,623)
------------- ------------- ------------- ------------- --------------
Total provision for income taxes - - - - (1,819,282)
------------- ------------- ------------- ------------- --------------
Income before cumulative effect of a
change in accounting principle 682,639 501,316 1,713,911 1,953,410 1,551,175
Cumulative effect of a change in
accounting principle, net of tax - - - - (341,035)
------------- ------------- ------------- ------------- --------------
Net income $ 682,639 $ 501,316 $ 1,713,911 $ 1,953,410 $ 1,210,140
============= ============= ============= ============= ==============
Basic and diluted earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.27
Cumulative effect of a change in
accounting principle, net of tax (0.06)
--------------
Net income $ 0.21
==============
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Pro forma income data (unaudited):
Income before income taxes
and cumulative effect of a change
<S> <C> <C> <C> <C> <C>
in accounting principle as reported $ 682,639 $ 501,316 $ 1,713,911 $ 1,953,410 $ 3,370,457
Pro forma income taxes (1) (238,924) (175,461) (599,896) (683,693) (1,179,659)
----------- ------------ ----------- ------------ --------------
Pro forma income before cumulative
effect of a change in accounting
principle 443,715 325,855 1,114,015 1,269,717 2,190,798
Cumulative effect of a change in
accounting principle, net of tax - - - - (341,035)
----------- ------------ ----------- ------------ --------------
Pro forma net income $ 443,715 $ 325,855 $ 1,114,015 $ 1,269,717 $ 1,849,763
=========== ============ =========== ============ ==============
Pro forma basic and diluted earnings
per share:re (2)
per share (2)
Pro forma income before cumulative
effect of a change in accounting
principle $ 0.09 $ 0.06 $ 0.22 $ 0.25 $ 0.37
Cumulative effect of a change in
accounting principle, net of tax - - - - (0.06)
----------- ------------ ----------- ------------ --------------
Pro forma net income $ 0.09 $ 0.06 $ 0.22 $ 0.25 $ 0.31
=========== ============ =========== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------
Tumbleweed, LLC Tumbleweed, Inc.
------------------------------------------------------------ ----------------
Pro Forma
1995 1996 1997 1998 1998 (3) 1999
---- ---- ---- ---- -------- ----
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets........................... $17,831 $21,262 $26,068 $33,681 $33,681 $36,579
Long-term debt and capital lease
obligations, including current
maturities.......................... 3,077 5,776 8,542 13,363 13,363 15,145
Total liabilities...................... 4,132 7,108 10,725 24,103 24,743 19,016
Redeemable members' equity............. 16,413 20,233 23,420 18,925 -- --
Members' equity........................ 7 7 7 354 -- --
Members' retained earnings (deficit)... (2,721) (6,085) (8,083) (9,701) -- --
Stockholders' equity................... -- -- -- -- -- 17,563
Pro forma stockholders' equity......... -- -- -- -- 8,938 --
- -----------
<FN>
(1) Prior to the merger, we operated as a limited liability company and
were not subject to corporate income taxes through December 31, 1998.
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 35%. In 1999, pro forma income taxes excludes the amount
recorded related to establishment of a deferred tax liability discussed
in (3) below.
(2) Shares outstanding used in determining pro forma basic and diluted earnings
per share 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
related to the termination of Tumbleweed, LLC's limited liability
company status and the conversion of Tumbleweed, LLC's
18
<PAGE>
members' interests into 5,105,000 shares of our common stock effective
January 1, 1999. See "History and Reorganization."
</FN>
</TABLE>
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" 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 51 Tumbleweed restaurants as of December 31, 1999, we owned and
operated 29 restaurants in Kentucky, Indiana and Ohio, franchised 17 restaurants
in Indiana, Illinois, Tennessee and Wisconsin, and licensed five restaurants in
Germany, Jordan, Saudi Arabia, and Egypt. As of the date of this Prospectus,
there are 58 Tumbleweed restaurants of which we own and operate 29 restaurants
in Kentucky, Indiana and Ohio, and franchise 22 in Kentucky, Indiana, Illinois,
Tennessee, Wisconsin, Michigan and West Virginia. We also license seven
restaurants in Germany, Jordan, Saudi Arabia, Egypt and England. Since December
31, 1999, five franchised restaurants opened in Kentucky, Michigan, West
Virginia and Wisconsin. We anticipate opening a total of five company-owned
restaurants and ten franchised restaurants during 2000.
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 our initial public 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, there were 5,885,630 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 as 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 consolidated financial statements and the
related notes thereto included elsewhere in this Prospectus. See "Index to
Consolidated Financial Statements."
Results of Operations
The following table sets forth the percentage relationship to total
revenues of certain income statement data, except where noted, for the years
indicated.
Years ended December 31,
1997 1998 1999
-----------------------------
Revenues:
Restaurant sales 93.5% 94.6% 94.6%
Commissary sales 3.4 2.4 2.3
Franchisee fees and royalties 1.9 1.8 2.1
Other revenues 1.2 1.2 1.0
-------------------------
Total revenues 100.0 100.0 100.0
19
<PAGE>
Operating expenses:
Restaurant cost of sales (1) 29.4 29.1 29.3
Commissary cost of sales (2) 88.2 87.0 90.1
Operating expenses (1) 50.3 51.6 50.2
Selling, general and administrative 10.2 9.7 9.7
Pre-opening expenses 1.8 1.9 0.8
Depreciation and amortization 3.3 3.4 3.5
-----------------------------
Total operating expenses 92.8 93.4 91.2
-----------------------------
Income from operations 7.2 6.6 8.8
Interest expense, net (1.4) (2.0) (2.2)
-----------------------------
Income before income taxes and cumulative
effect of a change in accounting
principle 5.8 4.6 6.6
Provision for income taxes:
Current and deferred - - (2.3)
Deferred taxes related to a change in tax
status - - (1.3)
-----------------------------
Total provision for income taxes - - (3.6)
-----------------------------
Income before cumulative effect
of a change in accounting principle 5.8 4.6 3.0
Cumulative effect of a change in
accounting principle, net of tax - - (0.7)
-----------------------------
Net income 5.8% 4.6% 2.3%
=============================
Pro forma income data (unaudited):
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 5.8% 4.6% 6.6%
Pro forma income taxes (3) (2.1) (1.6) (2.3)
-----------------------------
Pro forma income before cumulative
effect of a change in accounting
principle 3.7 3.0 4.3
Cumulative effect of a change in
accounting principle, net of tax - - (0.7)
-----------------------------
Pro forma net income 3.7% 3.0% 3.6%
=============================
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The pro forma income taxes reflect the effect of the corporate
reorganization on the historical net income assuming the Company was
taxed as a C corporation for income tax purposes throughout the years
presented with an assumed combined federal and state effective tax rate
of 35%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 and 1998
Total revenues increased by $8,537,243 or 19.9% in 1999 compared to 1998
primarily as a result of the following:
Restaurant sales increased by $8,087,190 or 20.0% in 1999 compared to 1998.
The increase is due primarily to the addition of four company-owned
restaurants during 1999 and an increase in same store sales of 1.3%.
Commissary sales to franchised restaurants increased by $127,570 or 12.3% in
1999 compared to 1998. The increase is due primarily to the addition of four
additional franchised or licensed restaurants during 1999.
Franchise fees and royalties increased by $294,146 or 38.2% in 1999 compared
to 1998. The increase was due primarily to a $140,000 increase in franchise
fees received upon the opening of seven new franchised restaurants during 1999
compared to three during 1998. Additionally, royalty income increased
approximately $177,000 during 1999 compared to 1998 as a result of an increase
in franchised restaurants. The increase in franchise fees and royalties is
partially offset by an approximately $23,000 decrease in international
territory fees.
Other revenues increased by $28,337 or 5.6% in 1999 compared to 1998 primarily
due to an increase in volume related purchasing rebates.
20
<PAGE>
Restaurant cost of sales increased by $2,443,986 or 20.7% in 1999 compared to
1998. The increase was principally due to the opening of four additional
company-owned restaurants during 1999. Restaurant cost of sales increased as a
percentage of sales by 0.2% to 29.3% for 1999 compared to 29.1% for 1998.
Commissary cost of sales increased by $147,269 or 16.2% in 1999 compared to
1998. The increase in commissary cost of sales is due to increased commissary
sales in 1999 compared to 1998 and increased overhead costs. As a percentage to
sales, commissary cost of sales increased 3.1%.
Restaurant operating expenses increased by $3,496,419 or 16.7% in 1999 compared
to 1998. The increase reflects the addition of four company-owned restaurants
during 1999. Operating expenses decreased as a percentage of restaurant sales to
50.2% for 1999 from 51.6% for 1998 primarily due to a 1.1% decrease in labor
costs and a 0.3% decrease in restaurant level promotional costs.
Selling, general and administrative expenses increased by $831,418 or 20.0% in
1999 compared to 1998. The increase was due in part to the addition of
management and staff personnel during 1999 to support the growing restaurant
base and additional advertising costs. Because of our restaurant growth plans,
we expect selling, general and administrative expenses to continue to increase
during 2000 in absolute dollars. As a percentage to total revenues, selling,
general and administrative expenses were 9.7% of revenues in 1999 and 1998.
Pre-opening expenses were $395,768 in 1999 versus pre-opening amortization of
$816,604 in 1998. See Note 2 of the consolidated 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 by $362,746 or 25.1% in 1999
compared to 1998 due primarily to the addition of four company-owned restaurants
during 1999.
Net interest expense increased by $259,194 or 29.8% in 1999 compared to 1998.
The increase resulted from increased borrowings to fund the growth in
company-owned restaurants and increases in the prime interest rate during 1999.
The combined effective federal and state income tax rate was approximately 35%
for 1999 (excluding the charge related to change in tax status, discussed
below). The pro forma adjustments presented for 1998 provide for income taxes as
though we had been subject to corporate income taxes throughout the years
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 $921,081 or 72.5% in 1999 compared to 1998. Pro forma basic
and diluted earnings per share before cumulative effect of a change in
accounting principle increased to $0.37 in 1999 compared to $0.25 in 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 and 1997
Total revenues increased by $12,981,395 or 43.5% in 1998 compared to 1997
primarily as a result of the following:
Restaurant sales increased by $12,599,805 or 45.2% in 1998 compared to 1997.
The increase is due primarily to the addition of eight company-owned
restaurants during 1998 and an increase in same stores sales of 1.5%.
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 sales of
products not manufactured by the commissary. As a result, commissary sales did
not increase proportionately 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 franchised restaurants in 1998
21
<PAGE>
compared to two in 1997, $23,250 in territory fees received from international
operations and additional royalties from franchised restaurants opened in 1998
and 1997.
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. The increase in other revenues from 1997 to 1998 is
also a result of approximately $140,000 received from the Ohio Bureau of
Worker's Compensation which represented a return of invested premiums by the
State of Ohio. The increases in other revenues were partially offset by the
fact that 1997 other revenues includes approximately $178,000 of insurance
proceeds. There was no similar income in 1998.
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.
Pre-opening expenses 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 income taxes 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 was 35% for 1998 and 1997.
Our pro forma income before cumulative effect of a change in accounting
principle increased $155,702 or 14.0% in 1998 compared to 1997. Pro forma basic
and diluted earnings per share before cumulative effect of a change in
accounting principle increased to $0.25 in 1998 compared to $0.22 in 1997.
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.
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<PAGE>
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 December 31, 1999,
approximately $10.8 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
See Note 14 of the consolidated financial statements for a summary of
certain unaudited quarterly results of operations for the years ended December
31, 1998 and 1999.
Year 2000
We experienced no disruptions to our business as a result of the
conversion to the Year 2000. The total Year 2000 project cost was approximately
$400,000, which includes the purchase of new hardware and software that was
capitalized. The project was funded by cash flow from operations. We do not
anticipate any significant additional expenditures for Year 2000 compliance. We
will continue to monitor our mission critical computer applications and those of
our suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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, we capitalized our
pre-opening costs incurred in connection with opening new restaurant locations.
The unamortized balance of our deferred pre-opening 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.
Segment 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 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 company-owned and franchised restaurants. The
corporate segment derives its 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 consolidated financial statements attached to this prospectus.
Generally, we evaluate performance and allocate resources based on
pre-tax 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 consolidated 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;
o the hiring, training and retaining of skilled management and other personnel;
o the availability of adequate financing; and o other factors, many of
which are beyond our control.
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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 (prior to January 1, 1999), internally generated cash
flow, bank borrowings, lease financing and an equity offering. The following
table provides certain information regarding our sources and uses of cash for
the years presented:
<TABLE>
<CAPTION>
Years
Ended December 31,
--------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operations $ 3,040,836 $ 3,447,666 $ 3,592,419
Purchases of property and equipment 4,105,089 5,313,575 6,915,544
Proceeds from common stock offering - - 7,766,300
Net distributions of members' equity (525,002) (328,788) -
Net borrowings on long-term debt
and capital lease obligations 1,797,898 3,251,135 1,781,865
Payment on short-term borrowings - (6,990,348)
</TABLE>
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 years 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 a total of five company-owned Tumbleweed restaurants
during 2000, 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, 1999, we had one additional restaurant under
construction which is expected to open in the second quarter of 2000. 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 2000. The remaining costs will be funded by available cash
reserves, cash provided from operations and borrowing capacity. We believe such
sources will be sufficient to fund our expansion plans through 2000. 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.
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.
We have a $6,500,000 revolving credit facility with National City Bank
(the "Credit Facility"). As of December 31, 1999, we had outstanding borrowings
under the Credit Facility of $5,242,148. The note bears
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<PAGE>
interest at the prime rate plus .25% and is due December 31, 2002. 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
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 58 full-service restaurants in the Tumbleweed
system. We own and operate 29 restaurants in Kentucky, Indiana and Ohio, and
franchise an additional 22 restaurants in Kentucky, Indiana, Illinois,
Tennessee, Wisconsin, Michigan and West Virginia. We also license seven
restaurants outside the United States. We and our franchisees currently expect
to open a total of five company-owned and ten franchised restaurants during
2000.
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
24 company-owned Tumbleweed restaurants open for all of 1999:
Number Average Sales
Size Seating of Stores per Store
---- ------- --------- ----------
Mini 128-194 5 $1,387,000
Midi 210-244 9 $1,776,000
Maxi 252-384 10 $2,122,000
Our same store sales increased 5.2% in 1997 versus 1996, 1.5% in 1998
versus 1997, and 1.3% in 1999 versus 1998.
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 1999, the average check at a full-service
Tumbleweed restaurant, including beverages, was approximately $8.20 for lunch
and $10.33 for dinner. Management believes that this pricing approach, together
with Tumbleweed's emphasis on
25
<PAGE>
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 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 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 open a total of
five company-owned and ten franchised restaurants during 2000.
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
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<PAGE>
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.
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
27
<PAGE>
chicken, mesquite grilled chicken or seafood, and other traditional ingredients
rounds out the menu. We periodically introduce new items that complement present
menu selections.
Tumbleweed restaurants typically contain full-service bars offering a
wide assortment of mixed drinks, wines, domestic and imported beers and
featuring the Tumbleweed margarita. Margaritas are served in a variety of sizes
from a Shot'arita, served in a shot glass for $.30 to a Tex'arita, a 45-ounce
margarita sold for $8.50 and designed to be shared. Alcoholic beverages
accounted for approximately 12.2% of net restaurant sales during 1999.
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 $11.99 for the Tumbleweed sampler dinner. Mesquite grilled
items range from $5.99 for a hamburger to $16.99 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 1999, the average check for
full service restaurants, including beverages, was approximately $8.20 for lunch
and $10.33 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 a
ten-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 usually includes two weeks of general training prior to
opening and one week of on-the-job supervision at the new Tumbleweed restaurant.
Ongoing employee training remains the responsibility of the general manager and
training coordinator of each restaurant under the supervision of the area
director.
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.
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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 1999 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.
Properties
We currently own and operate 29 restaurants. We currently anticipate
opening a total of five company-owned and ten franchised restaurants during
2000. 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
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Approximate Approximate Owned
Opening Seating Restaurant or
Date Location Capacity* Size (sq.ft.) Leased
---- -------- --------- ------------- ------
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 Owned
Bowling Green, Kentucky
11/95 11305 Princeton Pike 264 7,200 Owned
Springdale, Ohio
02/96 4600 University Drive/ 254 7,500 Owned
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
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
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Approximate Approximate Owned
Opening Seating Restaurant or
Date Location Capacity* Size (sq.ft.) Leased
---- -------- --------- ------------- ------
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 226 5,400 Leased
Ft. Wayne, Indiana
7/99 1868 U. S. Highway 41 North 144 3,700 Leased
Henderson, Kentucky
12/99 2241 South Main Street 144 3,700 Owned
Bellefontaine, Ohio
**5/00 511 Marketsquare Drive 144 3,700 Owned
Maysville, Kentucky
**5/00 5230 Beechmont Ave. 226 5,400 Leased
Cincinnati, Ohio
**5/00 2030 East Dorothy Lane 226 5,400 Leased
Kettering, Ohio
**7/00 8606 U.S. Hwy 42 226 5,400 Leased
Ft. Wayne, Indiana
- --------------------------
* Includes seats in bar but not seasonal patio seating.
** Anticipated date of opening.
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 plan 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 pre-opening costs for each company-owned restaurant estimated at $125,000
for the Maxi and Midi prototypes and $101,000 for the Mini prototype.
Pre-opening 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 Consolidated Financial Statements.
Pre-opening training is generally included in the services provided to
franchisees and covered by the franchise fee.
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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 on a month to month basis.
We have executed a lease for approximately 10,660 square feet of office space in
a new building presently under construction by an unrelated third party, and
anticipate that the new space will be available for occupancy during the summer
of 2000. The initial term of the new office lease is seven years, with two
additional renewal terms of five years each available. We anticipate
consolidating our executive offices in this new space during 2000, and the month
to month lease will be terminated at that time. We will retain the existing
office space we own for use by our operations and commissary personnel.
Management believes our restaurant facilities and offices are adequately covered
by insurance.
Franchising Program
We continue 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 $40,000 for each restaurant, due when the franchise agreement with
respect to a restaurant is executed.
Each franchise agreement generally provides for royalties of three to
five percent of sales based upon restaurant sales, minimum marketing
expenditures of 2.0% of gross sales, and a twenty-year term. All franchisees are
required to operate their Tumbleweed restaurants in compliance with 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, 1999, International was operating
two restaurants in Germany and one each in Saudi Arabia, Jordan, Egypt and
England 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." An affiliate of International is constructing a franchise
Tumbleweed restaurant in Charleston, West Virginia which opened April 2000.
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
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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 sub-licensing and franchise rights thereunder, but the
International Agreement would continue in effect with respect to restaurants
open or under construction or conversion by International or its franchisees at
the time of termination.
The International Agreement also contains certain provisions relating
to quality control, restrictions on ownership of and participation in competing
businesses by International and its principals. The 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.
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Employees
As of December 31, 1999, we had approximately 2,200 employees, of whom
45 are executive and administrative personnel, 117 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.
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 12.2% of our net restaurant sales were attributable to
the sale of alcoholic beverages for the year ended December 31, 1999. 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.
The Federal Americans With Disabilities Act (The "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January 1992
and as to employment in July 1992. We currently design our new restaurants to be
accessible to the disabled, and believe that we are in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. We intend to comply with future regulations relating to
accommodating the needs of the disabled, and we do not currently anticipate that
such compliance will require us to expend substantial funds.
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.
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Litigation
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. .... 51 President, Chief Executive Officer, and Director
James M. Mulrooney ...... 48 Executive Vice President, Chief Financial
Officer, and Director
John L. Brewer .......... 47 Vice President of Operations
Wayne P. Jones .......... 57 Vice President of Marketing and Development
Gary T. Snyder........... 45 Vice President - Company Operations
Glennon F. Mattingly..... 48 Vice President - Controller
Gregory A. Compton....... 39 Vice President, Secretary and General Counsel
David M. Roth ........... 49 Director
Minx Auerbach(1) ........ 77 Director
Lewis Bass (2)........... 78 Director
W. Roger Drury(1)(2) .... 53 Director
George R. Keller(1)(2)... 50 Director
Terrance A. Smith........ 54 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. Mr. Butorac is also a
member of TW Evansville, LLC, a Tumbleweed franchisee. 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 KFC, Zapata/Zantigo Mexican
Restaurants, Fuddrucker, Inc., Chi-Chi's, Inc., Rib Tavern, Inc. and Two Peso
Mexican Cafes. Mr. Butorac has 29 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. Mr. Mulrooney
is also a member of TW Evansville, LLC, a Tumbleweed franchisee. 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
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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 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 17 years of restaurant
management experience.
John L. 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 23 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 is a member of TW-Glasgow, Inc., TW Evansville, LLC, and
TW of Shelbyville, LLC, all Tumbleweed franchisees, and has 30 years of
restaurant management experience.
Gary T. 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 20
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 15 years of restaurant
management experience.
Gregory A. Compton joined us in June 1998 as Vice President, Secretary and
General Counsel. Mr. Compton is a member of TW Evansville, LLC, a Tumbleweed
franchisee. 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 & McDonald, a
Louisville, Kentucky law firm. Mr. Compton has five years restaurant management
experience.
David M. Roth was a founding member of Tumbleweed, LLC, served on its Board of
Advisors from its inception in 1994, and is a Director. Mr. Roth is also an
investor and/or member of the governing boards of a number of Tumbleweed
franchisees and one Tumbleweed licensee--TW-Tennessee, LLC, TW-Indiana, LLC,
TW-Seymour, LLC, TW-Medina, LLC, TW Evansville, LLC, TWED-Beckley, Inc.,
TWED-Charleston, Inc., TW-Rivertown, LLC and Tumbleweed International, LLC. Mr.
Roth is currently of counsel in the Louisville, Kentucky law firm of Goldberg &
Simpson, P.S.C., and from December 1993 to August 1999 was 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., and its
successor-in-interest, ARM Financial Group, Inc. 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.
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Minx Auerbach served as a member of the Board of Advisors of Tumbleweed, LLC
from January 1995 until the merger with Tumbleweed, Inc., 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 from
January 1995 until the merger with Tumbleweed, Inc., 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
from January 1995 until the merger with Tumbleweed, Inc., 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.
George R. Keller is the founder of Tumbleweed and served on the Board of
Advisors of Tumbleweed, LLC from 1995 until the merger with Tumbleweed, Inc.,
and is a Director. From 1975 to January 1995, Mr. Keller served as Chief
Executive Officer of Tumbleweed Mexican Food, Inc.and Tumbleweed Concepts, Inc.
Mr.Keller currently serves on the Board of Stockyards Bank, Inc. Mr.Keller has
23 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 has
29 years of restaurant management experience.
Classification of Directors
Our by-laws provided that each director would serve a term expiring at
our annual meeting of stockholders in 2000, which is scheduled for May 11, 2000,
and until his or her successor is elected and qualified. At its February 16,
2000 meeting, our board of directors approved a division of its members into
three classes. The term of the Class I directors will expire at the 2003 annual
meeting of stockholders, the term of the Class II directors expires in 2002 and
the term of the Class III 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 beginning in 2001, 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 1999.
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<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term All Other
Annual Compensation Compensation Compensation
------------------- ------------ ------------
Name and Principal Other Annual Stock
Position Year Salary Bonus Compensation Options#
-------- ---- ------ ----- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
John A. Butorac, Jr. 1999 $203,400 $71,190 $ 6,000 0 $ 0
President and Chief
Executive Officer 1998 200,000 70,000 23,777 0 0
1997 159,134 50,872 21,099 0 0
James M. Mulrooney 1999 177,975 62,292 6,000 0 0
Executive Vice President
and Chief Financial 1998 175,000 61,250 23,122 0 0
Officer
1997 132,611 42,394 21,016 0 0
John L. Brewer 1999 121,321 22,300 3,600 80,000(1)(2) 0
Vice President of
Operations 1998 115,500 14,020 3,600 0 7,846 (5)
1997 105,940 30,946 3,600 0 0
Wayne P. Jones 1999 115,526 22,090 3,600 55,000(1)(2) 0
Vice President of
Marketing and 1998 112,291 14,026 3,600 0 0
Development (3)
1997 29,167 5,775 3,600 0 18,978 (5)
Gregory A. Compton 1999 103,963 16,335 3,600 55,000(1)(2) 0
Vice President, Secretary
& General Counsel (4) 1998 54,549 0 1,800 0 0
<FN>
(1) 60,000 options were granted to Mr. Brewer, and 50,000 options were granted
to each of Messrs. Jones and Compton, on February 15, 1999, under the
Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation Plan.
(2) 20,000options were granted to Mr. Brewer, and 5,000 options were granted
to each of Messrs. Jones and Compton, on December 17, 1999, under the
Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation Plan.
(3) Mr. Jones joined Tumbleweed,LLC, our predecessor, in August 1997.
(4) Mr. Compton joined Tumbleweed, LLC, our predecessor, in June 1998.
(5) 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.
</FN>
</TABLE>
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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 payment
is not made for the year until after the fourth quarter is determined and
approved by the Compensation Committee. The Compensation Committee has the
option of approving discretionary payments under the plan to Messrs. Butorac and
Mulrooney, and other participants in the plan, in consideration of special
circumstances which may interfere with the attainment of the annual net income
goal.
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 entitled Mr. Butorac and Mr.
Mulrooney to receive a first year 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 non-employee 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 is 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
non-employee directors under the Plan.
As of December 31, 1999, we had granted options for a total of
approximately 493,000 shares to eligible employees and 72,000 shares to
non-employee directors. None of the grants of options were awarded to Mr.
Butorac or Mr. Mulrooney. The exercise price of the options granted prior to
December 17, 1999, was set at $10.00 per share, equal to the initial public
offering price. The exercise price of grants subsequent to December 17, 1999,
will be equal to the closing market price as of the day before 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
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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.
Prior to February 16, 2000, the non-employee directors received a fee
of $1,000 for each board of directors meeting attended and received $1,000 per
committee meeting attended unless the committee meeting was on the same day as
the board of directors meeting. Committee chairmen received an additional $1,000
for each committee meeting. Effective as of the meeting of the board held on
February 16, 2000, in order to help ensure the ability of the board to continue
to attract and retain qualified and desirable members, the board agreed that the
non-employee directors will receive a fee of $2,000 for each meeting of the
board, and a fee of $500 for each committee meeting attended. Committee chairmen
will receive an additional $1,500 for each committee meeting. In addition,
non-employee directors will receive annual grants of options to purchase shares
of Common Stock under the Plan. During 1999, each non-employee director received
a grant of options to purchase 10,000 shares, and a separate grant of 2,000
shares, of Common Stock. Each new non-employee director will be granted options
to purchase 10,000 shares of Common Stock on the date of his or her first
election. All options granted to directors will become exercisable in three
equal annual installments, beginning on the first anniversary of the date of
grant. As of December 31, 1999, there were 72,000 options issued and outstanding
to our 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.
LEASES WITH RELATED PARTIES
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, John A. Butorac, Jr. and James M. Mulrooney, all
of whom are members of our board of 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 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 requires us to also pay all rent due to the
landowner 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-
40
<PAGE>
year term with no option to renew. We paid rent totaling $203,326 to
TW-DixieBash ,LLC for the Bashford Manor restaurant during 1999.
The Valley Station sublease requires us to pay all rent due to the
landowner 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 paid rent totaling $131,916 during 1999 under the Valley
Station sublease.
OTHER RELATED PARTY TRANSACTIONS
KELLER, LLC. On April 1, 1999, we purchased the land and building,
including improvements, of the Springdale, Ohio restaurant from Keller, LLC (a
limited liability company in which George R. Keller, a member of our board of
directors owns a substantial interest), 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 we purchased the restaurant, we 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, our capital lease obligation to Keller, LLC
was terminated. Prior to the purchase, we leased the Springdale, Ohio restaurant
from Keller, LLC and during 1999 paid rent totaling $46,700 to Keller, LLC.
DOUGLASS VENTURES. On July 1, 1999, we purchased the land and building,
including improvements, of the Bowling Green, Kentucky restaurant from Douglass
Ventures (a Kentucky general partnership and one of our stockholders, and of
which David M. Roth, a member of our board of directors, is a general partner)
and an unrelated third party, the co-lessors of the property, for $884,640. The
purchase price was calculated in accordance with the lease agreement which
approximated the fair market value as determined by an independent appraisal. At
the time of the purchase, our lease obligation was terminated. The purchase
price was funded by cash reserves and funds drawn on our line of credit. Prior
to the purchase,we leased the Bowling Green, Kentucky restaurant from Douglass
Ventures and during 1999 paid rent totaling $26,000 to Douglass Ventures.
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 R. Keller, who are members of our board of directors. In 1999,
International paid $18,700 in fees to us under the International Agreement. The
members of International are also shareholders in TWED-Charleston, Inc., which
is constructing a Tumbleweed restaurant in Charleston, West Virginia. We will
manage this restaurant under a Management Agreement which provides for the
reimbursement of costs incurred and for an incremental management fee intended
to recover the costs of accounting and corporate services supplied to the
franchisee. TWED-Charleston did not pay any sums to us during 1999.
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 included John A. Butorac, Jr., James M.
Mulrooney, David M. Roth and George R. Keller, all of whom are members of our
board of directors. Minx Auerbach, a member of our board of directors, and
Messrs. Roth and Keller also owned membership interests in T.M. Riders. In
September 1998, we relinquished our interest in T.M. Riders.
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<PAGE>
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 included
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 1999, T.M. Riders ceased operations, closed its delivery locations
and sold its interests in the Tumbleweed food court operations to TW-Indiana,
LLC, one of our existing franchisees in which David M. Roth, a director, is a
member. In 1999, we received payment of $14,520 in royalties and fees from T.M.
Riders for accounting and administrative services. During 1999, we purchased
certain computer equipment from T.M.
Riders for use in our stores for $60,000.
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 renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, to the extent and in amounts not to
exceed the amounts guaranteed as of September 30, 1998. As of December 31, 1999,
we have guaranteed certain TW-Tennessee obligations as follows: a) up to
$1,200,000 under a bank line of credit, b) approximately $2,800,000 of the
principal advanced under a lease financing agreement, and c) equipment leases
with a bank totaling $831,476 jointly and severally with TW-Tennessee common
members. During 1999, the landlord under the lease financing agreement declared
TW-Tennessee to be in default, and accelerated the rent obligations under the
leases. Negotiations are continuing between the landlord and the principals of
TW-Tennessee regarding the restructuring of the lease obligations, and we
believe that TW-Tennessee's default under the leases will not ultimately have a
material adverse impact on our financial position, results of operations or cash
flows.
In 1999, TW-Tennessee paid royalties and franchise fees of $159,395,
and other fees of $27,346 to us under the franchise agreement.
TW-INDIANA, LLC. David M. Roth, a director, is a member of 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. During 1999,
TW-Indiana signed a Development Agreement with us for the development of up to
ten additional Tumbleweed restaurants in certain specified territories in
Indiana and Kentucky. Mr. Roth and TW- Indiana, LLC are also members of
TW-Seymour, LLC, a franchisee which is operating a full-service Tumbleweed
restaurant in Seymour, Indiana. During 1999, we received royalties and franchise
fees and other fees of $361,382 and $76,198 from TW-Indiana and TW-Seymour,
respectively.
TW-MEDINA, LLC. David M. Roth, a director, is a member of TW-Medina,
LLC, a franchisee which is operating a full-service Tumbleweed restaurant in
Medina, Ohio. We manage this restaurant under a Management Agreement which
provides for the reimbursement of costs incurred and for an incremental
management fee intended to recover the costs of accounting and corporate
services supplied to the franchisee. In 1999, TW-Medina paid royalties and
franchise fees of $51,771, and other fees of $10,870 to us under the franchise
agreement.
TW EVANSVILLE, LLC. David M. Roth, John A. Butorac, Jr., and James M.
Mulrooney, directors, and Gregory A. Compton, an officer, are members of
TW-Evansville, LLC, a franchisee which is operating a full-service Tumbleweed
restaurant located in Evansville, Indiana. We manage this restaurant under a
Management Agreement which provides for the reimbursement of costs incurred and
for an incremental management fee intended to recover the costs of accounting
and corporate services supplied to the franchisee. In 1999, TW- Evansville paid
royalties and franchise fees of $38,257, and other fees of $2,172 to us under
the franchise agreement.
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<PAGE>
TWED-BECKLEY, INC. David M. Roth, a director, is a principal of
TWED-Beckley, Inc., which is constructing a full-service Tumbleweed restaurant
in Beckley, West Virginia. TWED-Beckley did not pay any sums to us during 1999.
TW-RIVERTOWN, LLC. David M. Roth, a director of the Company, is a
member of TW-Rivertown, LLC, which is constructing a full-service Tumbleweed
restaurant in Grandville, Michigan. TW-Rivertown did not pay any sums to us
during 1999.
GOLDBERG & SIMPSON, P.S.C. During 1999, David M. Roth, a director, was
a principal in the law firm of Roth Foley Bryant & Cooper, PLLC, which provided
legal services to us during 1999 and was paid $158,040 in fees for legal
services. During 1999, the principals of Roth, Foley Bryant & Cooper ended their
affiliation and Mr. Roth became Of Counsel with the law firm of Goldberg &
Simpson, P.S.C. which provided legal services to us during 1999 and which we
expect to render services to us in the future. We paid $3,913 in fees for legal
services rendered by Goldberg & Simpson, P.S.C. during 1999.
PRINCIPAL STOCKHOLDERS
The following table presents the number of shares of Common Stock
beneficially owned as of March 17, 2000, 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.
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 (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 1,286,802 (1)(10) 21.9
1900 Mellwood Avenue
Louisville, KY 40206
George R. Keller 617,719 (9)(15) 10.5
4201 Paoli Pike
Floyd Knobs, IN 47119
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David M. Roth 781,761 (1)(4)(15) 13.3
200 South Fifth Street
Suite 300S
Louisville, KY 40202
Minx M. Auerbach 154,753 (5)(15) 2.6
Lewis Bass 73,334 (8)(15) 1.3
W. Roger Drury 27,201 (15) '*
Terrance A. Smith 6,334 (15) '*
John L. Brewer 24,010 (6)(12) '*
Wayne P. Jones 37,166 (11)(13) '*
Gregory A. Compton 37,166 (11)(13) '*
All current directors and
executive officers 3,919,283 (7)(14)(16) 66.8
as a group (13 persons)
- ----------------
'* Indicates less than 1%.
(1) Messrs. Butorac, Mulrooney, Roth and Mansbach share voting power with
respect to these shares, which have been included in their respective
totals.
(2) Mr. Mansbach is the brother of Ms. Auerbach, who is a director.
(3) Mr. Butorac and his wife hold 915,844 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) Ms.Auerbach holds 151,419 of these shares as trustee for a family
trust.
(6) Includes 4,000 shares held by TW Funding, LLC allocated to Mr. Brewer
based on his relative ownership interest in TW Funding, LLC.
(7) Shares held by TW Funding, LLC have been included for purposes of
calculating the beneficial ownership of the group.
(8) Includes 70,000 shares held in a family trust.
(9) 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.
(10) Mr. Mulrooney holds 806,200 of the listed shares. Mr. Mulrooney's wife
and children hold 80,602 of the listed shares.
(11) Includes 20,000 shares held by TW Funding, LLC allocated to each
individual based on his relative ownership interest in TW Funding, LLC.
(12) Includes 20,000 shares representing one-third of the options granted to
Mr. Brewer on February 15, 1999, which he had the right to acquire as
of February 15, 2000.
(13) Includes 16,666 shares representing one-third of the options granted to
the named officer on February 15, 1999, which the officer had the right
to acquire as of February 15, 2000.
(14) Includes 53,332 shares, representing one-third of the options granted
to Messrs. Brewer, Compton and Jones, which they had the right to
acquire as of February 15, 2000.
(15) Includes 3,333 shares, representing one-third of the options granted to
the named Director on February 15, 1999, which the Director had the
right to acquire as of February 15, 2000.
(16) Includes 19,998 shares, representing one-third of the options granted
to the named Directors on February 15, 1999, which they had the right
to acquire as of February 15, 2000.
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<PAGE>
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 represented 86.8% of the shares of
Common stock outstanding at that time.
The 5,105,000 shares of common stock issued in our merger with
Tumbleweed, LLC have been registered under the Securities Act and have been
eligible for sale by the selling shareholders listed below since issued to them,
subject to a restriction on trading which expired September 30, 1999.
The following table sets forth certain information with respect to the
original selling shareholders. We will not receive and have not received 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 have sold and 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 Shares Percentage
------------- ----------
Selling Shareholder of Total
- ------------------- --------
Shares (1)
----------
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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Shares Percentage
------------ ----------
Selling Shareholder of Total
- ------------------- --------
Shares (1)
----------
Mary T. Bass 2,671 *
Steven A. Bass and Mary T. Bass, Trustees -
Anna Logan Bass Trust 2,671 *
Steven A. Bass and Mary T. Bass, Trustees -
Elle Leah Bass Trust 2,671 *
Lewis Bass 53,417 *
Steven A. Bass 16,025 *
Donald W. Bennett 13,354 *
Kevin L. Bergman 3,339 *
Sandra Berman 13,354 *
Mr. and Mrs. Randall L. Bloch 26,708 *
James D. Bohanon 26,708 *
David S. Bowen 3,339 *
Jay Brodsky 13,354 *
Mona Brodsky 13,354 *
Randy Brodsky 3,339 *
John A. Butorac, Jr., Group 1,316,438 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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Shares Percentage
------------- ----------
Selling Shareholder of Total
- ------------------- --------
Shares (1)
----------
Lisa M. Eisen 3,339 *
Jeffrey A. Evans 1,335 *
Stephen J. Evans, C.P.A. 1,335 *
Ronald J. Fadel, M.D. 13,354 *
Donald Farris 26,708 *
Michael M. Fleishman 6,677 *
Dr. and Mrs. Larry D. Florman 28,216 *
W. Sterrett Foster, M.D. 6,677 *
Mr. and Mrs. John Franco 26,708 *
Gary L. Fuchs, M.D. 6,677 *
Cyrus Ghazi, M.D. 13,354 *
Ronald Greenberg 28,216 *
Timothy Haas 13,354 *
Sandra Barr Hammond 13,354 *
Arthur P. Hipwell 21,367 *
William S. Hitron 5,342 *
David L. Hyman 26,708 *
Robert A. Jones 13,354 *
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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Shares Percentage
------------- ----------
Selling Shareholder of Total
- ------------------- --------
Shares (1)
----------
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%
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 *
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<PAGE>
Beneficial Ownership
--------------------
No. of Shares Percentage
------------- ----------
Selling Shareholder of Total
- ------------------- --------
Shares (1)
----------
Charles Schnatter, Trustee - *
John Schnatter Trust 53,417
Stephen J. Evans, Trustee - *
Wayne T. Smith Trust 53,417
Mr. and Mrs. Greg Solomas 3,339 *
Susan P. Spickard 13,354 *
David Steinbrecher 13,354 *
Gerald D. Temes, M.D. 6,677 *
Valley Vista Ventures, LLC 134,319 2.3%
Charles L. Weisberg 26,708 *
Rochelle Zegart, Trustee -
Kenneth Zegart Gift Trust 6,677 *
* Indicates less than 1%.
(1) Determined at the time of the merger of original issuance of shares
to the selling shareholders.
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, 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
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<PAGE>
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 Shareholders.
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. As of March 31,
2000, there were 5,856,930 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, acts as the transfer agent and
registrar for the common stock.
Preferred Stock
The board of directors has the authority to issue the authorized shares
of Preferred Stock in one or more series and to fix the designations, powers,
privileges and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations and
restrictions, including, without limitation, the number of shares constituting
each such series, dividend rates, redemption and sinking fund provisions,
liquidation and preferences, conversion rights, and voting rights, without any
further vote or action by the stockholders. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
holders of common stock or adversely affect the rights and powers, including
voting rights, of the holders of common stock. The issuance of Preferred Stock
also could have the effect of delaying, deterring or preventing a change in
control 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 Bylaws 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 of
directors, 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
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<PAGE>
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 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 are 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.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 2000, there were 5,849,930 shares of our 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.
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 565,000 shares of common stock have
been granted to employees and nonemployee directors under the Plan.
Approximately 70,000 additional shares of common stock are available for future
option grants under the Plan. See "Management -- Incentive Stock Plan."
EXPERTS
The consolidated financial statements of Tumbleweed, Inc. as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1 Agreement and Plan of Merger, dated as of June 23, 1998, between
Tumbleweed, LLC and Registrant**
3.1 Certificate of Incorporation of Tumbleweed, Inc., as amended**
3.2 Bylaws of Registrant*
10.1 Master International License Agreement, dated August 29, 1997,
between Tumbleweed International LLC and Tumbleweed, LLC*
10.2 Employment Agreement between John A.Butorac, Jr.and Tumbleweed, Inc.*
10.3 Employment Agreement between James M. Mulrooney and Tumbleweed, Inc.*
10.4 Sublease Agreement, dated February 5, 1997, between TW-Dixie Bash,
LLC and Tumbleweed, LLC (for Bardstown Road restaurant)*
52
<PAGE>
10.5 Sublease Agreement, dated February 5, 1997, between TW-Dixie Bash,
LLC and Tumbleweed, LLC (for Valley Station restaurant)*
10.6 Commitment Letter, dated June 12, 1997, between CNL Fund Advisors,
Inc. and TW Tennessee, LLC*
10.7 Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation Plan*
10.8 Form of Standard Franchise Agreement for Tumbleweed, LLC*
10.9 Articles of Incorporation of Tumbleweed Marketing Fund, Inc.*
10.10 By-laws of Tumbleweed Marketing Fund, Inc.*
10.11 Bonus Compensation Plan for Senior Executives*
10.12 Revolving Line of Credit Note, dated April 21, 1999, between
Tumbleweed, Inc. and National City Bank of Kentucky and related Loan
Agreement***
23 Consent of Ernst & Young LLP
99 Registration Rights Agreement between Tumbleweed, Inc. and
Tumbleweed, LLC*
----------------------
* Incorporated by reference to exhibits filed with the Commission on
September 29, 1998, in Form S-1 Registration No. 333-57931.
** Incorporated by reference to exhibits filed with the Commission in
Form 8-A filed by Tumbleweed, Inc. on February 25, 1999.
*** Incorporated by reference to exhibits filed with the Commission on
May 12, 1999 in Form 10-A, File No. 333-57931.
53
<PAGE>
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-1
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Redeemable Members' Equity, Members'
Equity, Members' Retained Earnings (Deficit) and Stockholders'
Equity for the years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
54
<PAGE>
[This page intentionally left blank]
55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying consolidated balance sheets of Tumbleweed, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
income, redeemable members' equity, members' equity, members' retained earnings
(deficit) and stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Tumbleweed, Inc.
at December 31, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for pre-opening and other start-up
costs by adopting the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 3, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
Tumbleweed, Inc.
Consolidated Statements of Income
Years Ended December 31
1999 1998 1997
------------------------------------------
Revenues:
<S> <C> <C> <C>
Restaurant sales $48,578,123 $ 40,490,933 $ 27,891,128
Commissary sales 1,168,836 1,041,266 1,007,011
Franchise fees and royalties 1,064,952 770,806 563,056
Other revenues 532,976 504,639 365,054
------------------------------------------
Total revenues 51,344,887 42,807,644 29,826,249
Operating expenses:
Restaurant cost of sales 14,232,564 11,788,578 8,191,928
Commissary cost of sales 1,053,083 905,814 887,793
Operating expenses 24,377,631 20,881,212 14,035,693
Selling, general and administrative expenses 4,981,721 4,150,303 3,051,740
Preopening expenses 395,768 816,604 544,723
Depreciation and amortization 1,804,757 1,442,011 971,863
------------------------------------------
Total operating expenses 46,845,524 39,984,522 27,683,740
------------------------------------------
Income from operations 4,499,363 2,823,122 2,142,509
Other income (expense):
Interest income 40,684 61,759 62,120
Interest expense (1,169,590) (931,471) (490,718)
------------------------------------------
Total other expense (1,128,906) (869,712) (428,598)
------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 3,370,457 1,953,410 1,713,911
Provision for income taxes:
Current and deferred (1,179,659) - -
Deferred taxes related to change in tax status (639,623) - -
------------------------------------------
Total provision for income taxes (1,819,282) - -
------------------------------------------
Income before cumulative effect of a change
in accounting principle 1,551,175 1,953,410 1,713,911
Cumulative effect of a change in accounting principle, net
of tax (341,035) - -
------------------------------------------
Net income $ 1,210,140 $ 1,953,410 $ 1,713,911
==========================================
Basic and diluted earnings per share:
Income before cumulative effect of a change in accounting principle $ 0.27 $ - $ -
Cumulative effect of a change in accounting principle, net of tax (0.06) - -
------------------------------------------
Net income $ 0.21 $ - $ -
==========================================
Pro forma income data (unaudited):
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 3,370,457 $ 1,953,410 $ 1,713,911
Pro forma income taxes 1,179,659) (683,693) (599,896)
-------------------------------------------
Pro forma income before cumulative effect of a change
in accounting principle 2,190,798 1,269,717 1,114,015
Cumulative effect of a change in accounting principle,
net of tax (341,035) - -
-------------------------------------------
Pro forma net income $ 1,849,763 $ 1,269,717 $ 1,114,015
===========================================
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.37 $ 0.25 $ 0.22
Cumulative effect of a change in accounting principle,
net of tax (0.06) - -
-------------------------------------------
Pro forma net income $ 0.31 $ 0.25 $ 0.22
===========================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
Tumbleweed, Inc.
Consolidated Balance Sheets
Pro forma
December 31 December 31
1999 1998 1998
---------------------------- --------------
(Unaudited)
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 640,189 $ 1,898,973 $ 1,898,973
Accounts receivable 606,283 433,872 433,872
Inventories 1,597,794 1,333,591 1,333,591
Prepaid expenses 389,271 330,439 330,439
Deferred preopening expenses - 524,669 524,669
--------------------------- -------------
Total current assets 3,233,537 4,521,544 4,521,544
Property and equipment, net 30,147,559 24,920,797 24,920,797
Goodwill, net of accumulated amortization of
$551,478 in 1999 and $440,242 in 1998 2,737,265 2,833,704 2,833,704
Other assets 460,817 1,404,861 1,404,861
--------------------------- -------------
Total assets $ 36,579,178 $ 33,680,906 $ 33,680,906
=========================== =============
Liabilities, Redeemable Members' Equity, Members' Equity,
Members' Retained Earnings (Deficit) and Stockholders' Equity
Current liabilities:
Short-term borrowings $ - $ 6,990,348 $ 6,990,348
Accounts payable 1,102,024 1,781,418 1,781,418
Accrued liabilities 1,771,360 1,873,651 1,873,651
Income taxes payable 61,376 - -
Deferred income taxes 286,885 - 467,420
Current maturities on long-term
debt and capital leases 1,028,443 895,310 895,310
--------------------------- -------------
Total current liabilities 4,250,088 11,540,727 12,008,147
Long-term liabilities:
Long-term debt, less current maturities 11,347,047 9,180,358 9,180,358
Capital lease obligations, less current maturities 2,769,339 3,287,296 3,287,296
Deferred income taxes 489,869 - 172,203
Other liabilities 160,000 94,838 94,838
--------------------------- -------------
Total long-term liabilities 14,766,255 12,562,492 12,734,695
--------------------------- -------------
Total liabilities 19,016,343 24,103,219 24,742,842
Redeemable members' equity - 18,924,688 -
Members' equity - 354,459 -
Members' 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; 5,881,630 shares issued
and outstanding in 1999 (5,105,000 shares on a
pro forma basis in 1998) 58,818 - 51,050
Paid-in capital 16,294,006 - 8,887,014
Retained earnings 1,210,011 - -
--------------------------- -------------
Total stockholders' equity 17,562,835 - 8,938,064
--------------------------- -------------
Total liabilities and stockholders' equity $ 36,579,178 $ 33,680,906 33,680,906
=========================== =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
Tumbleweed, Inc.
Consolidated Statements of Redeemable Members' Equity, Members' Equity,
Members' Retained Earnings (Deficit) and Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
Redeemable
Members' Retained
Common Paid-In Equity - Class A Members' Earnings
Stock Capital Members Equity (Deficit) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ - $ 20,232,519 $ 6,959 $ (6,084,974) $ 14,154,504
Proceeds from issuance of
members' equity - - 50,958 - - 50,958
Distributions of members' equity - - (575,960) - - (575,960)
Net income - - - - 1,713,911 1,713,911
Accretion of redeemable
members' equity - - 3,712,221 - (3,712,221) -
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 23,419,738 6,959 (8,083,284) 15,343,413
Captial contribution - - - 747,500 - 747,500
Distributions of members' equity - - (1,076,288) (400,000) - (1,476,288)
Assumption of members' line
of credit - - (6,990,348) - - (6,990,348)
Net income - - - 1,953,410 1,953,410
Accretion of redeemable
members' equity - - 3,571,586 - (3,571,586) -
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 18,924,688 354,459 (9,701,460) 9,577,687
Merger of Tumbleweed, LLC
into Tumbleweed, Inc. 51,050 9,526,637 (18,924,688) (354,459) 9,701,460 -
Tumbleweed, Inc. balances as of
January 1, 1999 1 129 - - (129) 1
Proceeds from common stock offering 7,767 7,758,533 - - - 7,766,300
Public offering costs - (991,293) - - - (991,293)
Net income - - - - 1,210,140 1,210,140
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 58,818 $ 16,294,006 $ - $ - $ 1,210,011 $ 17,562,835
=========================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31
1999 1998 1997
------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income $ 1,210,140 $ 1,953,410 $ 1,713,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,650,327 1,285,833 829,250
Amortization 154,430 156,178 142,613
Preopening cost amortization - 816,604 544,723
Deferred income taxes 776,754 - -
Loss on disposition of property and equipment 38,455 7,324 13,499
Changes in operating assets and liabilities:
Accounts receivable (172,411) (87,172) (50,091)
Inventories (264,203) (508,562) (126,573)
Deferred preopening expenses 524,669 (1,074,173) (316,822)
Prepaid expenses (79,021) (51,466) 19,062
Other assets (93,756) (114,550) (98,042)
Accounts payable (177,212) 104,590 31,938
Accrued liabilities (102,291) 983,396 258,784
Income taxes payable 61,376 - -
Other liabilities 65,162 (23,746) 78,584
------------------------------------------------
Net cash provided by operating activities 3,592,419 3,447,666 3,040,836
Investing activities:
Purchases of property and equipment (6,915,544) (5,313,575) (4,105,089)
Proceeds from sale of food courts, net of cash
relinquished - - 100,000
------------------------------------------------
Net cash used in investing activities (6,915,544) (5,313,575) (4,005,089)
Financing activities:
Capital contribution from Class B members - 747,500 -
Proceeds from issuance of members' equity - - 50,958
Distribution of members' equity - (1,076,288) (575,960)
Proceeds from common stock offering 7,766,300 - -
Proceeds from issuance of long-term debt 8,193,436 5,580,463 3,452,361
Payments on long-term debt and capital lease obligations (6,411,571) (2,329,328) (1,654,463)
Payment on short-term borrowings (6,990,348) - -
Payment of public offering costs (493,476) (386,332) (111,485)
------------------------------------------------
Net cash provided by financing activities 2,064,341 2,536,015 1,161,411
------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,258,784) 670,106 197,158
Cash and cash equivalents at beginning of year 1,898,973 1,228,867 1,031,709
------------------------------------------------
Cash and cash equivalents at end of year $ 640,189 $ 1,898,973 $ 1,228,867
================================================
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 1,166,934 $ 947,674 $ 473,055
================================================
Noncash investing and financing activities:
Equipment acquired by capital lease obligations $ - $ 1,570,246 $ 967,529
================================================
Public offering costs not paid at year-end $ - $ 502,183 $ -
================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 776,630 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. As of December 31, 1998, the Company
had not conducted any operations and all expenditures through December 31, 1998
related to the IPO were funded and recorded by Tumbleweed. The accompanying
consolidated statements of income and cash flows for the years ended December
31, 1998 and 1997 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.
Prior to the merger, Tumbleweed and its owners (Members) operated pursuant to an
Operating Agreement dated September 19, 1994. Members of Tumbleweed consisted of
Common Members, Class A Members, Class B Members and a Class C Member. Certain
Common Members acted as the Managers of Tumbleweed and, acting unanimously,
generally had voting control of Tumbleweed.
Class A Members had, in addition to their cash contributions, provided financing
which was accounted for as redeemable members' equity prior to Tumbleweed's
assumption of the debt on December 31, 1998 (see Note 7). The capital accounts
of the Common, Class B and Class C Members were $6,000, $459 and $500,
respectively, as of December 31, 1997 and 1996. During 1998, the Common Members
received a distribution of $400,000 and the Class B Members made a capital
contribution of $747,500. The capital accounts of the Common, Class B and Class
C Members were $(394,000), $747,959 and $500, respectively, as of December 31,
1998.
RESTAURANT FACILITIES
The Company operates and franchises Tumbleweed Southwest Mesquite Grill and Bar
full service restaurants. Following is a summary of the number of restaurants
open as of December 31:
1999 1998 1997
---- ---- ----
Company owned 29 25 17
Franchised and licensed 22 18 12
-- -- --
Total 51 43 29
== == ==
The restaurant facilities are located in Kentucky, Indiana, Ohio, Illinois,
Wisconsin, Tennessee and five overseas restaurants are located in Germany, Saudi
Arabia, Egypt and Jordan.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
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
F-6
<PAGE>
1. Basis of Presentation (continued)
PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
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.
Additionally, pro forma net income in the accompanying pro forma income data for
the years ended December 31, 1999, 1998 and 1997 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 as if the Company had been a
regular corporate taxpayer throughout the years presented. Pro forma income
taxes for 1999 excludes the deferred tax effects of Tumbleweed changing from a
limited liability company (which is taxed as a partnership) to a regular
corporate taxable status. Pro forma income taxes for 1998 and 1997 are at an
estimated effective rate of 35%. 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 and 1997, the weighted average number of shares
outstanding assumes the conversion of Tumbleweed's members' interests into
5,105,000 shares of common stock as of the beginning of the period.
2. Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and deposits at financial
institutions with maturities of less than three months when purchased.
INVENTORIES
Inventories, which consist of smallwares, food, beverages and supplies, are
stated at the lower of average cost or market.
DEFERRED PREOPENING 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. During 1998
and 1997, these expenses were 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 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 a change in accounting principle on January 1, 1999.
F-7
<PAGE>
2. Significant Accounting Policies (continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on the straight-line
method. Buildings and leasehold improvements are amortized over the lesser of
the life of the 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.
OTHER ASSETS
Other assets at December 31, 1998 included approximately $1,000,000 of costs
incurred in connection with the Company's initial public offering. These costs
were funded from the proceeds of the offering in January 1999.
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 would be written
down to current fair value, which is generally determined from estimated
discounted future net cash flows (assets held for use) or net realizable value
(assets held for sale).
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.
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. Company contributions to
the Marketing Fund for the years ended December 31, 1999, 1998 and 1997 were
$117,362, $95,674 and $66,488, respectively. Advertising expense, which includes
the
F-8
<PAGE>
2. Significant Accounting Policies (continued)
ADVERTISING COSTS (CONTINUED)
Company's contributions to the Marketing Fund, for the years ended December 31,
1999, 1998 and 1997 were $1,253,392, $1,052,075 and $631,421, respectively.
INCOME TAXES
Through December 31, 1998, Tumbleweed was a limited liability company which was
taxed as a partnership for federal and state income tax purposes. Accordingly,
any tax liability related to income was reported by the Members of Tumbleweed.
Concurrent with the merger 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 consolidated statement of income for
the year ended December 31, 1999.
3. Property and Equipment
Property and equipment as of December 31 consist of:
1999 1998
----------------------------
Land and land improvements $ 8,698,101 $ 6,869,638
Building and improvements 13,312,798 9,999,830
Leasehold improvements 2,062,449 2,318,396
Equipment 5,926,655 3,986,928
Building and equipment under capital leases 4,274,559 4,249,458
Construction in progress 556,549 536,324
----------------------------
34,831,111 27,960,574
Less accumulated depreciation and amortization (4,683,552) (3,039,777)
----------------------------
$ 30,147,559 $ 24,920,797
============================
4. Accrued Liabilities
Accrued liabilities as of December 31 consist of:
1999 1998
----------------------------
Accrued payroll and related taxes $ 611,566 $ 792,809
Accrued insurance and fees 251,923 284,270
Accrued taxes, other than income and payroll 362,578 393,593
Gift certificate liability 396,747 275,743
Other 148,546 127,236
----------------------------
$ 1,771,360 $ 1,873,651
============================
F-9
<PAGE>
5. Long-Term Debt
Long-term debt as of December 31 consists of:
1999 1998
---------------------------
Secured $6,500,000 mortgage revolving line of
credit note, bearing interest at prime rate
plus .25% (8.75% at December 31, 1999), due
December 31, 2002 $ 5,242,148 $ 4,302,148
Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (8.28% at
December 31, 1999), due February 17, 2006 2,691,433 -
Secured mortgage note payable, bearing interest at
prime rate plus 1% (9.5% at December 31, 1999),
payable in monthly installments through October 1,
2017 1,061,614 1,084,274
Secured mortgage note payable, bearing interest at
8.75% , payable in monthly installments through
February 15, 2008 957,992 991,396
Secured mortgage note payable, bearing interest
at prime rate (8.5% at December 31,1999), payable
in monthly installments through March 1, 2006 658,071 -
Secured mortgage note payable, bearing interest at
prime rate plus 1.25% (9.75% at December 31,
1999), payable in monthly installments through
November 27, 2016 634,375 671,875
Secured mortgage note payable, bearing interest at
commercial paper rate plus 3.0% - 1,111,928
Secured mortgage note payable, bearing interest
at commercial paper rate plus 3.1% - 695,230
Other installment notes payable 624,599 750,595
---------------------------
11,870,232 9,607,446
Less current maturities 523,185 427,088
---------------------------
Long-term debt $11,347,047 $ 9,180,358
===========================
Property and equipment with a net book value of approximately $20,800,000 at
December 31, 1999 collateralize the Company's long-term debt.
F-10
<PAGE>
5. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt for the years subsequent to
December 31, 1999 are as follows:
2000 $ 523,185
2001 738,509
2002 5,511,585
2003 367,712
2004 364,984
Thereafter 4,364,257
------------
Total $ 11,870,232
============
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
$50,907 in 1999, $104,231 in 1998 and $103,488 in 1997.
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, 1999 were as follows:
Related Other
Party Lease Leases Total
----------- ------ -----
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
2004 84,000 261,661 345,661
Thereafter 1,092,000 1,054,933 2,146,933
-----------------------------------------
Total minimum lease payments $ 1,512,000 $ 3,730,933 5,242,933
=============================
Less amount representing interest
at 6.25% to 11.3% (1,968,336)
-----------
Net present value of lease payments 3,274,597
Less current maturities 505,258
-----------
Long-term portion of capital leases $ 2,769,339
===========
F-11
<PAGE>
6. Leases (continued)
The Company leases certain restaurants and equipment under operating leases
having terms expiring between 2002 and 2017. Most of the restaurant facility
leases have renewal clauses of five to twenty years exercisable at the option of
the Company and one of the leases are with a related party. 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, 1999
were as follows:
Related
Party Other
Lease Leases Total
------------------------------------------
2000 $ 60,000 $ 1,344,772 $ 1,404,772
2001 60,000 1,343,853 1,403,853
2002 60,000 1,342,299 1,402,299
2003 60,000 1,357,699 1,417,699
2004 60,000 1,342,699 1,402,699
Thereafter 785,000 9,947,311 10,732,311
------------------------------------------
$ 1,085,000 $ 16,678,633 $ 17,763,633
==========================================
Total rental expense was approximately $1,654,735 in 1999, $1,455,500 in 1998
and $975,300 in 1997 and included contingent rent of approximately $207,000 in
1999, $178,700 in 1998 and $30,700 in 1997. Rental expense for the related party
leases was approximately $407,900 in 1999, $436,200 in 1998 and $282,000 in
1997.
7. Redeemable Class A Member Units and Bank Line of Credit
As of December 31, 1998, Tumbleweed 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 Tumbleweed assumed the total
liability of $6,990,348. Prior to Tumbleweed 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 Tumbleweed were accounted for as distributions to the Class A Members.
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 $7,766,300 from the IPO
(see Note 1). If an IPO had not occurred, any Class A Member had the right to
sell to Tumbleweed their interest in Tumbleweed at any time after the fifth
anniversary of the date that a Class A Member was admitted to Tumbleweed
(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 Tumbleweed 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 consolidated balance sheet for the year
ended December 31, 1998 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.
F-12
<PAGE>
8. Income Taxes
The components of the provision for income taxes for the year ended December 31,
1999 related to income before cumulative effect of a change in accounting
principle consists of the following:
Current - federal $ 798,303
Current - state 55,345
Deferred 326,011
Deferred taxes resulting from
a change in tax status 639,623
------------
$ 1,819,282
============
The provision for income taxes for the year ended December 31, 1999 on income
before income taxes and cumulative effect of a change in accounting principle
differs from the amount computed by applying the statutory federal income tax
rate due to the following:
U.S. federal income taxes at 34% $ 1,145,956
State income taxes, net of federal tax benefit 81,405
FICA tax credit (113,217)
Deferred taxes resulting from change
in tax status 639,623
Other items 65,515
-----------
Effective income taxes $ 1,819,282
===========
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1999 are as follows:
Deferred tax assets:
Book over tax amortization $ 45,767
Unearned revenue 200,429
-----------
Total deferred tax assets 246,196
Deferred tax liabilities:
Deferred expenses (424,632)
Tax over book depreciation (598,318)
-----------
Total deferred tax liabilities (1,022,950)
-----------
Net deferred tax liability $ 776,754
===========
Income tax payments amounted to approximately $800,000 in 1999.
9. Related Party Transactions
On April 1, 1999, the Company purchased the land and building, including
improvements, of the Springdale, Ohio restaurant from Keller, LLC (a limited
liability company in which a director of the Company owns a substantial
interest), 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. Prior to
the purchase, the Company leased the Springdale, Ohio restaurant from Keller,
LLC and during 1999 the Company paid rent totaling $46,700 to Keller, LLC.
On July 1, 1999, the Company purchased the land and building, including
improvements, of the Bowling Green, Kentucky restaurant from Douglass Ventures
(a Kentucky general partnership and stockholder of the Company in which a
director of the Company is a general partner) and an unrelated third party, the
co-lessors of the property, for $884,640. The purchase price was calculated in
accordance with the lease agreement which approximated the fair market value as
determined by an independent appraisal. At the time of the purchase, the
Company's lease obligation was terminated. The purchase price was funded by cash
reserves and funds drawn on the Company's line of credit. Prior to the purchase,
F-13
<PAGE>
9. Related Party Transactions (continued)
the Company leased the Bowling Green, Kentucky restaurant from Douglass Ventures
and during 1999 the Company paid rent totaling $26,000 to Douglass Ventures.
In February 1997, Tumbleweed acquired a 9.5% common member interest in T.M.
Riders, LLC ("TM Riders") for a nominal amount. TM Riders operated limited
service food court restaurants in shopping malls in the Louisville, Lexington
and Cincinnati metropolitan areas and delivery units featuring takeout and home
delivery of Mexican, Tex- Mex and grilled foods. In September 1998, the Company
relinquished its interest in TM Riders. In 1999, TM Riders ceased operations,
closed its delivery locations and sold its interests in the Tumbleweed food
court operations to TW- Indiana, LLC, an existing franchisee of the Company in
which a director of the Company is a member.
In February 1997, Tumbleweed 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, Tumbleweed sold its
interest in TW-Tennessee to certain members of TW-Tennessee for $25,000.
TW-Tennessee was organized to open and operate Tumbleweed full service
restaurants as a franchisee of Tumbleweed.
The Company has guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, to the extent and in amounts not to
exceed the amounts guaranteed as of September 30, 1998. As of December 31, 1999,
the Company has guaranteed certain TW-Tennessee obligations as follows: a) up to
$1,200,000 under a bank line of credit, b) approximately $2,800,000 of a lease
financing agreement, and c) equipment leases with a bank totaling $831,500
jointly and severally with TW-Tennessee common members. During 1999, the
landlord under the lease financing agreement declared TW-Tennessee to be in
default, and accelerated the rent obligations under the leases. Negotiations are
continuing between the landlord and the principals of TW-Tennessee regarding the
restructuring of the lease obligations, and management of the Company believes
that TW-Tennessee's default under the leases will not ultimately have a material
adverse impact on the Company's financial position, results of operations or
cash flows.
TW-Tennessee is governed and managed by a board, some members of which are also
directors of the Company and investors in the Company. Certain of these
individuals are also investors in TW-Tennessee.
Franchise fees and royalties recorded by the Company in relation to TM Riders
and TW-Tennessee were $160,800, $225,600 and $79,000 in 1999, 1998 and 1997,
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
$40,500, $104,000 and $57,600 in 1999, 1998 and 1997, respectively.
In August 1997, Tumbleweed, LLC 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
stockholders of the Company. In 1999, 1998 and 1997, International paid $18,700,
$7,500 and $15,750, respectively, in fees to the Company under the International
Agreement.
Two common stockholders, one of which is also a director of the Company, 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 $311,000 and $242,500 in 1999 and 1998, respectively.
In September 1998, Tumbleweed entered into an agreement to purchase the land and
building, including improvements, located in Columbus, Ohio from West Broad
Development LLC (a limited liability company in which a director and certain
other stockholders of the Company own a substantial interest), the lessor of the
property, under a capital lease obligation. The purchase price of $1,250,000 was
at fair market value as determined by an independent appraisal. Tumbleweed, 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.
During 1999, the Company entered into management agreements with three companies
who own Tumbleweed franchise restaurants with respect to three restaurant
locations. The management agreements require the franchisees to pay certain fees
to the Company in exchange for the Company providing operations management and
accounting services to the
F-14
<PAGE>
9. Related Party Transactions (continued)
franchisees. Certain directors and officers of the Company own substantial
interests in these limited liability companies. Franchise fees and royalties and
management and accounting fees recorded by the Company in 1999 in relation to
these entities were $90,000 and $13,000, respectively.
10. 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 provide incentives and rewards for employees and
directors to support the implementation of the Company's business plan and to
align the interests of employees and directors with those of the Company's
stockholders.
The Plan is administered by the Compensation Committee of the Company's Board of
Directors (the "Committee"). 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.
At December 31, 1999, cumulative total options to purchase 565,441 shares of the
Company's common stock had been granted to employees and directors of the
Company at prices ranging from $5.50 to $10.00 per share which expire at various
dates during 2009 with a contractual life of 10 years. Initial grants of options
were made at a price equal to the initial public offering price of $10.00 per
share . The exercise price of subsequent grants were equal to the market price
at the time of the grant. There were no options issued or outstanding at
December 31, 1998.
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 are
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.
Activity in the Plan during 1999 was:
Weighted
Average
Shares Exercise Price
------ --------------
Granted 565,441 $ 9.38
Exercised - -
Forfeited (32,775) 10.00
-------
Outstanding at December 31, 1999 532,666 9.34
=======
The Company accounts for the Plan in accordance with APB 25, "Accounting for
Stock Issued to Employees," as permitted by FAS 123, "Accounting and Disclosure
of Stock-Based Compensation." The Company has not recognized compensation
expense for stock options granted because the exercise price of the options
equals the fair value of the underlying stock on the date of grant, which is the
measurement date. If the alternative method of accounting for stock incentive
plans prescribed by FAS 123 had been followed, the Company's net income and
earnings per share for 1999 would have been reduced to the pro forma amounts
shown in the following table. For purposes of these pro forma disclosures, the
estimated fair value of the options is recognized as compensation expense over
the options' vesting
F-15
<PAGE>
10. Stock Incentive Plan (continued)
period. The weighted average fair value of options granted was determined using
the Black-Scholes option pricing model with the indicated assumptions.
1999
----
Net income as reported $ 1,210,140
Pro forma net income 619,803
Pro forma basic and diluted earnings per common share 0.11
The following assumptions were used: (1) risk-free interest rate of 6.50 %; (2)
dividend yield of 0%; (3) expected life of 6.5 years; and (4) volatility of
.655%. Results may vary depending on the assumptions applied within the model.
The weighted average fair value per share of options granted was $6.31.
11. Earnings per Share
The following is a reconciliation of the Company's basic and diluted earnings
per share in accordance with FAS 128, "Earnings per Share."
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------
Numerator:
Income before cumulative effect of a
<S> <C> <C> <C>
change in accounting principle $ 1,551,175
Cumulative effect of a change in accounting
principle, net of tax (341,035)
------------
Net income $ 1,210,140
============
Pro forma income data (unaudited):
Pro forma income before cumulative effect
of a change in accounting principle $ 2,190,798 $ 1,269,717 $ 1,114,015
Cumulative effect of a change in accounting
principle, net of tax (341,035) - -
-----------------------------------------
Pro forma net income $ 1,849,763 $ 1,269,717 $ 1,114,015
=========================================
Denominator (1):
Weighted average shares outstanding 5,881,630 5,105,000 5,105,000
Effect of dilutive securities:
Director and employee stock options 565 - -
-----------------------------------------
Denominator for diluted earnings per
share - adjusted weighted
average and assumed conversions 5,882,195 5,105,000 5,105,000
=========================================
<FN>
(1) Actual and pro forma for 1999 and pr forma for 1998 and 1997.
</FN>
</TABLE>
12. 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 Company-owned and franchised restaurants. The
corporate segment derives revenues from sales 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
pre-tax income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
F-16
<PAGE>
12. Segment Information (continued)
Segment information for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999:
Restaurant Commissary Corporate Totals
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 48,578,123 $ 1,168,836 $ 1,597,928 $ 51,344,887
Intersegment revenues - 2,727,283 - 2,727,283
General and administrative expenses - - 3,728,329 3,728,329
Advertising expenses - - 1,253,392 1,253,392
Depreciation and amortization 1,450,288 118,752 235,717 1,804,757
Net interest expense - 172,900 956,006 1,128,906
Income before income taxes
and cumulative effect of a change
in accounting principle 7,338,467 93,911 (4,061,921) 3,370,457
Fixed assets 28,160,697 1,147,975 838,887 30,147,559
Expenditures for long-lived assets 6,312,460 237,175 365,909 6,915,544
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
Income before income taxes 5,853,334 173,361 (4,073,285) 1,953,410
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
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
Income before income taxes 4,351,013 203,458 (2,840,560) 1,713,911
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
</TABLE>
13. Subsequent Event
On January 14, 2000, the Board of Directors approved the repurchase from time to
time of up to $500,000 of the Company's Common Stock. Purchases may be made in
the open market as well as by private transaction at times and prices considered
appropriate by the Company, subject to applicable rules and regulations. The
purchases will be funded by cash reserves. Subsequently, the Company has
repurchased 17,700 shares at a total cost of $101,851.
F-17
<PAGE>
14. Selected Quarterly Data
The following is a summary of certain unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 11,959,369 $ 13,269,554 $ 13,525,876 $ 12,590,088 $ 51,344,887
Income from operations 865,307 1,320,625 1,309,703 1,003,728 4,499,363
Income (loss) before cumulative effect of a
change in accounting principle (237,296) 678,888 660,533 449,050 1,551,175
Net income (loss) (578,331) 678,888 660,533 449,050 1,210,140
Basic and diluted earnings per share:
Income before cumulative effect of a
change in accounting principle (0.04) 0.12 0.11 0.08 0.27
Net income (0.10) 0.12 0.11 0.08 0.21
Pro forma income before cumulative
effect of a change in accounting
principle 402,327 678,888 660,533 449,050 2,190,798
Pro forma net income 61,292 678,888 660,533 449,050 1,849,763
Pro forma basic and diluted earnings
per share:
Pro forma income before cumulative
effect of a change in accounting
principle 0.07 0.12 0.11 0.08 0.37
Pro forma net income 0.01 0.12 0.11 0.08 0.31
1998:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Total revenues $ 8,907,876 $ 10,777,335 $ 11,105,504 $ 12,016,929 $ 42,807,644
Income from operations 484,009 828,660 839,197 671,256 2,823,122
Income before cumulative effect of a
change in accounting principle 342,147 591,293 613,050 406,920 1,953,410
Net income 342,147 591,293 613,050 406,920 1,953,410
Pro forma income before cumulative
effect of a change in accounting
principle 222,396 384,340 398,482 264,499 1,269,717
Pro forma net income 222,396 384,340 398,482 264,499 1,269,717
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative
effect of a change in accounting
principle 0.04 0.08 0.08 0.05 0.25
Pro forma net income 0.04 0.08 0.08 0.05 0.25
</TABLE>
15. Contingencies
See Note 9, Related Party Transactions, regarding certain guarantees the Company
has made in connection with TW- Tennessee.
F-18
<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
27th day of April 2000.
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 27th day of
April 2000.
Signature Title Date
--------- ----- ----
/s/ John A. Butorac, Jr. President, Chief Executive April 27, 2000
------------------------------ Officer and Director
John A. Butorac, Jr.
/s/ James M. Mulrooney Executive Vice President, April 27, 2000
- ------------------------------- Chief Financial Officer and
James M. Mulrooney Director (Principal Financial
and Accounting Officer)
* Director April 27, 2000
- --------------------------------
David M. Roth
* Director April 27, 2000
- --------------------------------
Minx Auerbach
* Director April 27, 2000
- --------------------------------
Lewis Bass
* Director April 27, 2000
- --------------------------------
Roger Drury
* Director April 27, 2000
- --------------------------------
George Keller
<PAGE>
* Director April 27, 2000
- --------------------------------
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 caption "Experts" and to the
use of our report dated March 3, 2000, in Post-Effective Amendment No. 2 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 26, 2000
