Prospectus Supplement dated May 17, 2000, to Prospectus dated May 3, 2000
[TUMBLEWEED LOGO]
This supplement amends our Prospectus dated May 3, 2000, to inform you about
events relevant to our business that have occurred since that date. We have also
included the financial information that we reported in our quarterly Form 10-Q
report for our fiscal quarter which ended on March 31, 2000.
New Restaurants
Since May 3, 2000, two additional company-owned restaurants opened in
Cincinnati, Ohio and Maysville, Kentucky. As a result of these new restaurant
openings, we now own, franchise or license a total of 60 Tumbleweed Restaurants.
We own and operate 31 restaurants and franchise 22 restaurants in Kentucky,
Ohio, Indiana, Illinois, Tennessee, Wisconsin, Michigan and West Virginia. We
license seven restaurants outside of the United States in Germany, Jordan, Saudi
Arabia, Egypt and England.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 2000
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward-looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in the
forward-looking statements we make. Factors that realistically could cause
results to differ materially from those projected in the forward-looking
statements include the availability and cost of financing and other events that
affect our restaurant expansion program, changes in food and other costs,
changes in national, regional or local economic conditions, changes in consumer
tastes, competitive factors such as changes in the number and location of
competing restaurants, the availability of experienced management and hourly
employees, and other factors set forth below.
Of the 54 Tumbleweed restaurants as of March 31, 2000, we owned and operated 29
restaurants in Kentucky, Indiana and Ohio, franchised 18 restaurants in Indiana,
Illinois, Kentucky, Tennessee and Wisconsin, and licensed seven restaurants in
Germany, Jordan, Saudi Arabia, Egypt and England. Subsequent to March 31, 2000,
four franchised restaurants located in Wisconsin, West Virginia and Michigan
were opened.
The following section should be read in conjunction with our financial
statements and the related notes included elsewhere in this filing.
RESULTS OF OPERATIONS
The table, on the next page, sets forth the percentage relationship to total
revenues of certain income statement data, except where noted, for the periods
indicated.
<PAGE>
Three Months Ended
March 31
2000 1999
----- -----
Revenues:
Restaurant sales 94.1 % 94.8 %
Commissary sales 3.1 2.4
Franchise fees and royalties 1.7 2.1
Other revenues 1.1 0.7
----- -----
Total revenues 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 28.6 28.8
Commissary cost of sales (2) 88.8 90.9
Operating expenses (1) 52.6 51.5
Selling, general and administrative
expenses 9.4 9.9
Preopening expenses 0.6 1.1
Depreciation and amortization 3.8 3.5
----- -----
Total operating expenses 93.0 92.8
----- -----
Income from operations 7.0 7.2
Interest expense, net (2.3) (2.0)
----- -----
Income before income taxes and
cumulative effect of a change in
accounting principle 4.7 5.2
Provision for income taxes:
Current and deferred (1.6) (1.8)
Deferred taxes related to change in
tax status -- (5.4)
----- -----
Total provision for income taxes (1.6) (7.2)
----- -----
Income (loss) before cumulative effect
of a change in accounting principle 3.1 (2.0)
Cumulative effect of a change in
accounting principle, net of tax -- (2.8)
----- -----
Net income (loss) 3.1 % (4.8)%
===== =====
Pro forma income data:
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 5.2 %
Pro forma income taxes (3) (1.8)
-----
Pro forma income before cumulative
effect of a change in accounting principle 3.4
Cumulative effect of a change in
accounting principle, net of tax (2.8)
-----
Pro forma net income 0.6 %
=====
(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 since its inception with
an assumed combined federal and state effective tax rate of 35%.
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Total revenues increased by $1,672,999 or 14.0% for the three months ended March
31, 2000 compared to the same period in 1999 primarily as a result of the
following:
Restaurant sales increased by $1,488,952 or 13.1% for the three months ended
March 31, 2000 compared to the same period in 1999. The increase is due
primarily to four additional company-owned restaurants being opened the full
three months ended March 31, 2000 versus the same period in 1999 and an
increase in same store sales of 0.1% for the three month period.
Commissary sales to franchised and licensed restaurants increased by $136,369
or 47.6% for the three months ended March 31, 2000 compared to the same
period in 1999. The increase is due primarily to the addition of seven
franchised or licensed restaurants since March 31, 1999.
Franchise fees and royalties decreased by $22,202 or 8.8% for the three
months ended March 31, 2000 compared to same period in 1999. The decrease was
due to a $35,000 decrease in franchise fees received upon the
opening of one new franchised restaurant during the three months ended March
31, 2000 compared to two during the same period in 1999. The decrease in
franchise fees for the three month period was partially offset by a $12,798
increase in royalty income as a result of an increase in franchised
restaurants.
Other revenues increased by $69,880 or 78.0% for the three months ended March
31, 2000 compared to the same period in 1999 primarily due to an increase in
volume related purchasing rebates.
Restaurant cost of sales increased by $408,244 or 12.5% for the three months
ended March 31, 2000 compared to the same period in 1999. The increase was
principally due to four additional Company-owned restaurants being opened the
full three months ended March 31, 2000 versus the same period in 1999.
Restaurant cost of sales decreased as a percentage of sales by 0.2% to 28.6% for
the three months ended March 31, 2000 compared to 28.8% during the same period
in 1999.
Commissary cost of sales increased $114,849 or 44.1% for the three months ended
March 31, 2000 compared to the same period in 1999. The increase in commissary
cost of sales is due primarily to the addition of seven franchised or licensed
restaurants since March 31, 2000 . As a percentage to sales, commissary cost of
sales decreased 2.1%.
Restaurant operating expenses increased by $912,645 or 15.6% for the three
months ended March 31, 2000 compared to the same period in 1999. The increase
reflects four additional Company-owned restaurants being opened the full three
months ended March 31, 2000 versus the same period in 1999. Operating expenses
increased as a percentage of restaurant sales to 52.6% for the three months
ended March 31, 2000 from 51.5% for the same period in 1999 primarily due to a
0.7% increase in promotional costs and a 0.5% increase in management payroll
costs.
Selling, general and administrative expenses increased by $91,279 or 7.7% for
the three months ended March 31, 2000 compared to the same period in 1999. The
increase was due in part to the addition of management and staff personnel
during 1999 and the three months ended March 31, 2000 to support the growing
restaurant base. Because of the Company's restaurant growth plans, management
expects selling, general and administrative expenses to continue to increase
during the remainder of 2000 in absolute dollars. As a percentage to total
revenues, selling, general and administrative expenses were 9.4% and 9.9% of
revenues for the three months ended March 31, 2000 and 1999, respectively.
Preopening expenses were $86,064 and $134,805 for the three months ended March
31, 2000 and 1999, respectively. Preopening expenses are start-up costs which
are incurred in connection with opening new restaurant locations. These costs
are expensed as incurred and will fluctuate based on the number of restaurant
locations which are in the process of being prepared for opening.
Depreciation and amortization expense increased $99,555 or 23.8% for the three
months ended March 31, 2000 compared to the same period in 1999 due primarily to
four additional Company-owned restaurants being opened the full three months
ended March 31, 2000 versus the same period in 1999.
<PAGE>
Net interest expense increased $70,856 or 28.8% for the three months ended March
31, 2000 compared to the same period in 1999. The increase resulted from
increased borrowing to fund the growth in Company-owned restaurants and
increases in the prime interest rate during 1999 and 2000.
The combined effective federal and state income tax rate was approximately 35%
for the three months ended March 31, 2000 and 1999 (excluding the charge related
to change in tax status, discussed below). 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.
The Company's income before cumulative effect of a change in accounting
principle increased $15,803 or 3.9% for the three months ended March 31,2000
compared to pro forma income before cumulative effect of a change in accounting
principle for the three months ended March 31, 1999. Earnings per share before
cumulative effect of a change in accounting principle was $0.07 for the three
months ended March 31, 2000 as compared to pro forma earnings per share before
cumulative effect of a change in accounting principle of $0.07 for the three
months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand the number of our restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance that we will be successful in
opening the number of restaurants anticipated in a timely manner. Furthermore,
there can be no assurance that our new restaurants will generate sales revenue
or profit margins consistent with those of our existing restaurants, or that
these new restaurants will be operated profitably.
Our principal capital needs arise from the development of new restaurants, and
to a lesser extent, maintenance and improvement of existing facilities. The
principal sources of capital to fund these expenditures were internally
generated cash flow, bank borrowings, lease financing and an equity offering.
The table below provides certain information regarding our sources and uses of
cash for the periods presented.
Three Months Ended
March 31
2000 1999
------------- -----------
Net cash provided by operations $ 1,145,612 $ 578,142
Purchases of property and equipment 899,961 1,520,927
Proceeds from common stock offering - 7,765,347
Net payments on long-term
debt and capital lease obligations 279,724 616,007
Payment on short-term borrowings - 6,990,348
Our single largest use of funds has been for capital expenditures consisting of
land, building and equipment associated with our restaurant expansion program.
The substantial growth of the Company over the period has not required
significant additional working capital. Sales are predominantly for cash and the
business does not require the maintenance of significant receivables or
inventories. In addition, it is common within the restaurant industry to receive
trade credit on the purchase of food, beverage and supplies, thereby reducing
the need for incremental working capital to support sales increases.
We both own and lease our restaurant facilities. Management determines whether
to acquire or lease a restaurant facility based on its evaluation of the
financing alternatives available for a particular site.
<PAGE>
We plan to open five additional 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
March 31, 2000, we had three restaurants under construction which currently are
planned to open during the second quarter of 2000.
We have used and will continue to utilize mortgage, sale/leaseback and landlord
financing, as well as equipment leasing and financing, for a portion of the
development costs of restaurants which will open during 2000. The remaining
costs have been and will be funded by available cash reserves, cash provided
from operations and borrowing capacity. Management believes such sources will be
sufficient to fund our expansion plans through 2000. Should our actual results
of operations fall short of, or our rate of expansion significantly exceed our
plans, or should our costs or capital expenditures exceed expectations, we may
need to seek additional financing in the future. In negotiating such financing,
there can be no assurance that we will be able to raise additional capital on
terms satisfactory to us.
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, our equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. There is no assurance that such additional financing will be
available on terms acceptable to us.
We have a $6,500,000 mortgage revolving line of credit note with National City
Bank (the "Credit Facility"). At March 31, 2000 we had outstanding borrowings
under the Credit Facility of $5,207,148. The note bears interest at the Prime
Rate plus .25% (9.25% at March 31, 2000) and is due December 31, 2003. The
Credit Facility imposes restrictions on us with respect to the maintenance of
certain financial ratios, the incurrence of indebtedness, the sale of assets,
mergers, capital expenditures and the payment of dividends.
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 preopening
costs incurred in connection with opening new restaurant locations. The
unamortized balance of the Company's deferred preopening costs ($524,669 as of
December 31, 1998) were written-off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. We pay a majority of our employees
hourly rates related to federal and state minimum wage laws. As a result of
increased competition and the low unemployment rates in the markets in which our
restaurants are located, we have continued to increase wages and benefits in
order to attract and retain management personnel and hourly 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 provide for increases in rent based on increases
in the consumer price index when the leases are renewed. We may attempt to
offset the effect of inflation through periodic menu price increases, economies
of scale in purchasing and cost controls and efficiencies at existing
restaurants.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative transactions or speculate on the future
direction of interest rates. We are exposed to interest rate changes primarily
as a result of our variable rate debt instruments. As of March 31, 2000
approximately $10,600,000 of our debt bore interest at variable rates. We
believe that the effect, if any, of reasonably possible near-term changes in
interest rates on our financial position, results of operations or cash flows
would not be significant.
<PAGE>
FINANCIAL STATEMENTS
Tumbleweed, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
------------ ------------
Revenues:
<S> <C> <C>
Restaurant sales $ 12,821,270 $ 11,332,318
Commissary sales 422,606 286,237
Franchise fees and royalties 228,967 251,169
Other revenues 159,525 89,645
------------ ------------
Total revenues 13,632,368 11,959,369
Operating expenses:
Restaurant cost of sales 3,671,644 3,263,400
Commissary cost of sales 375,103 260,254
Operating expenses 6,745,055 5,832,410
Selling, general and administrative expenses 1,276,007 1,184,728
Preopening expenses 86,064 134,805
Depreciation and amortization 518,020 418,465
------------ ------------
Total operating expenses 12,671,893 11,094,062
------------ ------------
Income from operations 960,475 865,307
Other income (expense):
Interest income 4,272 17,023
Interest expense (321,470) (263,365)
------------ ------------
Total other expense (317,198) (246,342)
------------ ------------
Income before income taxes and cumulative effect of a
change in accounting principle 643,277 618,965
Provision for income taxes:
Current and deferred (225,147) (216,638)
Deferred taxes related to change in tax status -- (639,623)
------------ ------------
Total provision for income taxes (225,147) (856,261)
------------ ------------
Income (loss) before cumulative effect of a change
in accounting principle 418,130 (237,296)
Cumulative effect of a change in accounting principle, net
of tax -- (341,035)
------------ ------------
Net income (loss) $ 418,130 $ (578,331)
============ ============
Basic and diluted earnings per share:
Income (loss) before cumulative effect of a change in accounting
principle $ 0.07 $ (0.04)
Cumulative effect of a change in accounting principle, net of tax -- (0.06)
------------ ------------
Net income (loss) $ 0.07 $ (0.10)
============ ============
Pro forma income data :
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 618,965
Pro forma income taxes (216,638)
------------
Pro forma income before cumulative effect of a change
in accounting principle 402,327
Cumulative effect of a change in accounting principle,
net of tax (341,035)
------------
Pro forma net income $ 61,292
============
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.07
Cumulative effect of a change in accounting principle,
net of tax (0.06)
------------
Pro forma net income $ 0.01
============
</TABLE>
See accompanying notes.
<PAGE>
Tumbleweed, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
(Unaudited)
------------ ------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 456,425 $ 640,189
Accounts receivable 825,909 606,283
Inventories 1,674,282 1,597,794
Prepaid expenses 407,381 389,271
------------ ------------
Total current assets 3,363,997 3,233,537
Property and equipment, net 30,559,997 30,147,559
Goodwill, net of accumulated amortization of
$579,396 in 2000 and $551,478 in 1999 2,709,347 2,737,265
Other assets 511,447 460,817
------------ ------------
Total assets $ 37,144,788 $ 36,579,178
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,596,094 $ 1,102,024
Accrued liabilities 1,739,134 1,832,736
Deferred income taxes 382,552 286,885
Current maturities on long-term
debt and capital leases 1,028,443 1,028,443
------------ ------------
Total current liabilities 4,746,223 4,250,088
Long-term liabilities:
Long-term debt, less current maturities 11,189,576 11,347,047
Capital lease obligations, less current maturities 2,647,086 2,769,339
Deferred income taxes 540,629 489,869
Other liabilities 190,000 160,000
------------ ------------
Total long-term liabilities 14,567,291 14,766,255
------------ ------------
Total liabilities 19,313,514 19,016,343
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
at March 31, 2000 and December 31, 1999 58,818 58,818
Paid-in capital 16,294,006 16,294,006
Treasury stock, 24,700 shares at March 31, 2000 (149,691) -
Retained earnings ,628,141 1,210,011
------------ ------------
Total stockholders' equity 17,831,274 17,562,835
------------ ------------
Total liabilities and stockholders' equity $ 37,144,788 $ 36,579,178
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
------------ ------------
Operating activities:
<S> <C> <C>
Net income (loss) $ 418,130 $ (578,331)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 518,020 418,463
Deferred income taxes 146,427 563,976
Loss on disposition of property and equipment 2,474 1,114
Changes in operating assets and liabilities:
Accounts receivable (219,626) (2,729)
Inventories (76,488) (3,233)
Deferred preopening expenses -- 524,669
Prepaid expenses (19,581) (60,812)
Other assets (54,212) (23,838)
Accounts payable 494,070 (270,970)
Accrued liabilities (93,602) (1,917)
Other liabilities 30,000 11,750
----------- -----------
Net cash provided by operating activities 1,145,612 578,142
Investing activities:
Purchases of property and equipment (899,961) (1,520,927)
----------- -----------
Net cash used in investing activities (899,961) (1,520,927)
Financing activities:
Proceeds from common stock offering -- 7,765,347
Proceeds from issuance of long-term debt 404,000 3,529,914
Payments on long-term debt and capital lease obligations (683,724) (4,145,921)
Payment on short-term borrowings -- (6,990,348)
Purchase of treasury stock (149,691) --
Payment of public offering costs -- (403,150)
----------- -----------
Net cash used in by financing activities (429,415) (244,158)
----------- -----------
Net decrease in cash and cash equivalents (183,764) (1,186,943)
Cash and cash equivalents at beginning of period 640,189 1,898,973
----------- -----------
Cash and cash equivalents at end of period $ 456,425 $ 712,030
=========== ===========
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 314,688 $ 260,502
=========== ===========
Cash paid for income taxes $ 45,260 $ --
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
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.
RESTAURANT FACILITIES
As of March 31, 2000, the Company owns and operates 29 restaurants in Kentucky,
Indiana and Ohio and franchises an additional 18 restaurants in Kentucky,
Indiana, Illinois, Tennessee and Wisconsin. The Company also licenses seven
restaurants in Germany, Jordan, Saudi Arabia, Egypt and England.
INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements have been prepared by the
Company without audit, with the exception of the December 31, 1999 consolidated
balance sheet which was derived from the audited consolidated financial
statements included in the Company's Form 10-K. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and in
accordance with Rule 10-01 of Regulation S-X. These consolidated financial
statements, note disclosures and other information should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999.
In the opinion of management, the unaudited interim consolidated financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals, which are necessary for a fair presentation. The
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
PRO FORMA FINANCIAL INFORMATION
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the pro forma net income in the accompanying pro forma income data for the three
months ended March 31, 1999 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 since its inception. 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 on
January 1, 1999. Pro forma income taxes for 1999 are at an estimated effective
rate of 35%.
2. CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1, 1999 and requires that start-up costs
capitalized prior to January 1, 1999 be written-off and any future start-up
costs be expensed as incurred. Prior to 1999, the Company capitalized its
preopening costs incurred in connection with opening new restaurant locations.
The unamortized balance of the Company's deferred preopening costs ($524,669 as
of December 31, 1998) was written-off (net of income taxes of $183,634) as a
cumulative effect of an accounting change on January 1, 1999.
<PAGE>
3. ACCRUED LIABILITIES
Accrued liabilities consist of:
March 31 December 31
2000 1999
---------- ----------
Accrued payroll and related taxes $ 812,546 $ 611,566
Accrued insurance and fees 141,260 251,923
Accrued taxes, other than payroll 503,662 423,954
Gift certificate liability 168,187 396,747
Other 113,479 148,546
---------- ----------
$1,739,134 $1,832,736
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of:
March 31 December 31
2000 1999
----------- ------------
Secured $6,500,000 mortgage revolving
line of credit note, bearing interest at prime
rate plus .25% (9.25% at March 31, 2000), due
December 31, 2003 $ 5,207,148 $ 5,242,148
Secured mortgage note payable, bearing interest
at commercial paper rate plus 2.65% (8.73% at
March 31, 2000), due February 17, 2006 2,643,925 2,691,433
Secured mortgage note payable, bearing interest
at prime rate plus 1% (10.0% at March 31, 2000),
payable in monthly installments through
October 1, 2017 1,055,789 1,061,614
Secured mortgage note payable, bearing interest at
8.75%, payable in monthly installments through
February 15, 2008 948,890 957,992
Secured mortgage note payable, bearing interest at
prime rate (9.0% at March 31, 2000), payable
in monthly installments through March 1, 2006 653,688 658,071
Secured mortgage note payable, bearing interest at
prime rate plus 1.25% (10.25% at March 31, 2000),
payable in monthly installments through
November 27, 2016 625,000 634,375
Other installment notes payable 578,321 624,599
----------- -----------
11,712,761 11,870,232
Less current maturities 523,185 523,185
----------- -----------
Long-term debt $11,189,576 $11,347,047
=========== ===========
Property and equipment with a net book value of approximately $20,700,000 at
March 31, 2000 collateralize the Company's long-term debt.
<PAGE>
5. COMMITMENTS
At March 31, 2000, the Company had commitments of approximately $950,000 for the
completion of the construction of three restaurants. The commitments will be
funded by cash reserves, proceeds from the $6,500,000 mortgage revolving line of
credit and landlord financing.
6. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
per share for the three months ended March 31, 2000 and 1999 in accordance with
FAS 128, "Earnings per Share."
2000 1999
----------- -----------
Numerator:
Income (loss) before cumulative effect of
a change in accounting principle $ 418,130 $ (237,296)
Cumulative effect of a change in accounting
principle, net of tax -- (341,035)
----------- -----------
Net income (loss) $ 418,130 $ (578,331)
=========== ===========
Pro forma income data :
Pro forma income before cumulative effect
of a change in accounting principle $ 402,327
Cumulative effect of a change in accounting
principle, net of tax (341,035)
-----------
Pro forma net income $ 61,292
===========
Denominator :
Weighted average shares
outstanding 5,874,634 5,881,630
Effect of dilutive securities:
Director and employee stock options 4,766 --
----------- -----------
Denominator for diluted earnings per
share - adjusted weighted
average and assumed conversions 5,879,400 5,881,630
=========== ===========
7. SEGMENT INFORMATION
The Company has three reportable segments: restaurants, commissary and
corporate. The restaurant segment consists of the operations of all
company-owned restaurants and derives its revenues from the sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to company- owned and franchised restaurants. The
corporate segment derives revenues from sale of franchise rights, franchise
royalties and related services used in restaurant operations, and 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 in the Company's
Annual Report on Form 10-K.
<PAGE>
7. SEGMENT INFORMATION (continued)
Segment information for the three months ended March 31 is as follows:
2000:
<TABLE>
<CAPTION>
Restaurant Commissary Corporate Totals
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external
customers $12,821,270 $ 422,606 $ 388,492 $13,632,368
Intersegment revenues -- 633,909 -- 633,909
General and
administrative expenses -- -- 1,014,478 1,014,478
Advertising expenses -- -- 261,529 261,529
Depreciation and
amortization 408,421 29,688 79,911 518,020
Net interest expense -- 44,025 273,173 317,198
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1,743,541 18,000 (1,118,264) 643,277
1999:
Restaurant Commissary Corporate Totals
----------- ----------- ----------- -----------
Revenues from external
customers $11,332,318 $ 286,237 $ 340,814 $11,959,369
Intersegment revenues -- 667,885 -- 667,885
General and
administrative expenses -- -- 889,766 899,766
Advertising expenses -- -- 284,962 284,962
Depreciation and
amortization 332,639 29,688 56,138 418,465
Net interest expense -- 41,825 204,517 246,342
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 1,736,628 15,098 (1,132,761) 618,965
</TABLE>
8. INCOME TAXES
Concurrent with the merger of the Company as described in Note 1, Tumbleweed
converted from a limited liability company into a C corporation and is now
subject to federal and state income taxes. As of the date of the merger, the
Company recorded a net deferred tax liability and corresponding income tax
expense for cumulative temporary differences between the tax basis and the
reported amounts of the Company's assets and liabilities. At the date of the
merger, the net differences equaled approximately $1,780,000 resulting in a net
deferred tax liability and corresponding income tax expense of $639,623 which is
included in the deferred income tax provision in the accompanying statement of
operations for the three months ended March 31, 1999.
Income taxes on the Company's income for the three months ended March 31, 2000
and 1999 have been provided for at an estimated effective tax rate of 35%.
<PAGE>
9. TREASURY STOCK
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. Through March 31, 2000, the Company
has repurchased 24,700 shares at a total cost of $149,691.
10. CONTINGENCIES
The Company has guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW-Tennessee, LLC, a franchisee, (TW-Tennessee), to
the extent and in amounts not to exceed the amounts guaranteed as of September
30, 1998. As of March 31, 2000, 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 approximately $793,000 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 the 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.
