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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 333-57931
TUMBLEWEED, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-1327945
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Mellwood Avenue
Louisville, Kentucky 40206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 893-0323
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $.01 per share
Indicated by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. {X}
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 12, 1999, was approximately $20,326,020. For purposes of
this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock. The market value calculation was
determined using the $10.00 per share offering price of the Company's Common
Stock in the initial public offering which closed in January, 1999, since the
Company's Common Stock has not yet begun to trade on The Nasdaq Stock Market's
Over The Counter Bulletin Board.
The number of shares of common stock, par value of $.01 per share, outstanding
on March 12, 1999, was 5,881,543.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are
Part of Form 10-K incorporated by reference
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None None
Exhibit Index: Page 31 - 32
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TUMBLEWEED, INC
PART I
ITEM 1. BUSINESS
At December 31, 1998, the Company owned, franchised or licensed 43 Tumbleweed
Southwest Mesquite Grill & Bar ("Tumbleweed") restaurants. The Company owned and
operated 25 Tumbleweed restaurants in Kentucky, Indiana and Ohio. There were 13
franchised Tumbleweed restaurants located in Indiana, Illinois, Tennessee and
Wisconsin, and five restaurants located outside the United States in Germany,
Jordan and Saudi Arabia. Tumbleweed 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
open seven days a week (excluding certain holidays) for lunch and dinner and
generally offer a full service bar.
THE TUMBLEWEED CONCEPT
Tumbleweed restaurants feature sophisticated Tex-Mex and mesquite grilled food
served in a casual dining atmosphere evoking the American Southwest. The
Tumbleweed 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. 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 while, in management's view, providing a
consistent level of food quality and friendly and efficient service comparable
or superior to that of other casual dining restaurants. Use of a centralized
commissary system enhances Tumbleweed's ability to maintain consistently high
food quality, minimizes restaurant kitchen space and equipment, reduces the need
for skilled cooking personnel, and simplifies restaurant operations. 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.
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 wood grill and served with Texas Toast, salad,
and a choice of baked potato, southwest or ranch fries, Mexican rice, and
refried, baked or black beans. Mesquite grilled items are available as
sandwiches as well as entrees. A variety of specialty stuffed potatoes and
salads featuring refried beans, seasoned beef, shredded or fried strips of
chicken, mesquite grilled chicken or seafood, and other traditional ingredients
rounds out the menu. The Company periodically introduces new items that
complement its 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. Alcoholic beverages accounted for approximately 12.0% of
restaurant sales during 1998.
Tumbleweed's menu pricing is designed to create a strong perception of value by
consumers. Prices for Tex-Mex dishes range from $1.59 for a single corn-shell
taco to $11.79 for the Tumbleweed sampler dinner. Mesquite grilled items range
from $5.79 for a hamburger to $15.99 for an 18 oz. USDA-choice porterhouse steak
dinner. Tumbleweed also offers several daily lunch specials for less than $5.00.
Seasonal promotions are also used to increase business during otherwise
traditionally slow periods.
TARGETED 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 in larger stores are
used to evoke the feeling of the Great Southwest.
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MAINTAINING A FAVORABLE PRICE-TO-VALUE RELATIONSHIP. Tumbleweed's pricing
strategy is intended to appeal to value-driven customers as well as traditional
casual dining customers. Tumbleweed offers a wide selection of distinctive items
at a broad range of price points while, in management's view, providing a level
of food quality and service comparable or superior to that of other casual
dining restaurants. For 1998, the average check at a full-service Tumbleweed
restaurant, including beverages, was approximately $8.10 for lunch and $10.20
for dinner. Management believes that this pricing approach, together with
Tumbleweed's emphasis on variety and quality, creates a favorable price-to-value
perception that can increase customer volume and generate more frequent repeat
visits.
ACHIEVING TOTAL GUEST SATISFACTION. The Company is committed to providing
prompt, friendly and attentive service and consistent food quality to its
customers. Tumbleweed employs a quality control supervisor independent of its
Operations division who evaluates the operations of the Company-owned and
franchised restaurants on a regular basis to ensure that each restaurant is
following the specified operations procedures. The Company also uses a "mystery
shopper" program to compare actual performance of restaurants to Tumbleweed
standards and solicits comment cards from customers to monitor and modify
restaurant operations.
OPERATING STRATEGY
The Company uses the following key operating strategies to make certain that the
Company exceeds the expectations of its customers:
TARGET FOR TOTAL GUEST SATISFACTION. Tumbleweed's organizational and management
philosophy is based on seven core values and a commitment to Total Guest
Satisfaction ("TGS"). The Company's training procedures are intended to instill
in all managers and employees an appreciation of the core values and to
encourage a shared commitment to TGS.
COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing extensive
training and attractive compensation, and by emphasizing clearly defined
organizational values, the Company fosters a strong corporate culture and
encourages a sense of personal commitment from its employees. The Company has a
monthly cash bonus program based on attaining sales growth and related
performance goals on a restaurant-by-restaurant basis for each restaurant's
management team.
CONSISTENT HIGH QUALITY FOOD PREPARATION. The Company is committed to offering
distinctive Tex-Mex and mesquite grilled foods to customers at reasonable prices
through the use of a commissary-based system. Management believes that the use
of a central commissary provides a significant strategic and competitive
advantage to the Company by enhancing the Company's ability to maintain
consistently high food quality, minimizing restaurant kitchen space and
equipment, and reducing the number of skilled cooking positions. The system also
enables restaurant managers and kitchen staff to focus on the final preparation
of menu items to Tumbleweed standards.
Whenever feasible, the cooked ingredients used in Tumbleweed menu selections,
such as ground beef, chile con queso, and Mexican beans, are prepared in advance
at the commissary according to procedures designed to extend shelf life without
the addition of preservatives. The kitchen staff at each restaurant uses
commissary-supplied and other fresh ingredients for the final preparation of
individual orders. Management believes this system enhances the Company's
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. The Company maintains a contingency plan under
which centralized food preparation could be quickly resumed at another company's
facility should the commissary be rendered inoperative by weather or other
disaster.
GROWTH STRATEGY
The Company's strategy for growth will focus on the further development of new
and existing markets by both the Company and franchisees. Since acquiring the
Tumbleweed concept in 1995, the Company has added new Company-owned and
franchised restaurants, while developing the infrastructure necessary to support
its 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. The following are key elements of the Company's expansion strategy:
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OPENING RESTAURANTS IN TARGET MARKETS. The Company targets 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 the Company adds additional
restaurants in a target market, there may be short-term decreases in same store
sales. However, management believes this clustering strategy can enhance
long-term performance through economies of scale and shared advertising
expenses. Management also views smaller markets with fewer competing casual
dining restaurants as presenting growth opportunities for the Company.
Management believes that its 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 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 Company management and other employees, as
well as with the assistance of consultants when deemed advisable. The Company
believes that its site selection strategy and procedures, together with its menu
and pricing strategies, its commitment to quality food products and excellent
service, and its advertising, marketing and promotional efforts, will enhance
its ability to generate its anticipated customer volumes.
FRANCHISING. The Company expects that continued growth will come from the
further development of new and existing markets by both the Company and
franchisees. The Company intends to pursue an active franchising program with
current and new franchisees under controlled guidelines. The Company offers
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 the Company 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. The Company's current area development agreement also provides
for a franchise fee of $35,000 for each restaurant. The franchise fee is due
when the franchise agreement for a restaurant is signed. Each franchise
agreement generally provides for royalties of three to five percent of
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 the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. Under its criteria
for selecting new franchisees, Tumbleweed requires that potential franchisees
have adequate capital, experience in the restaurant industry, and access to
locations suitable for development. Except for locations managed directly by the
Company, the Company generally requires that a franchisee have a principal
operator with at least a ten percent ownership interest who must devote full
time to the restaurant operation. In addition, the Company may acquire
restaurants from its franchisees from time to time.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, the Company generally uses one of three prototype designs management
believes is best suited to a particular site. The Company's Mini, Midi and Maxi
prototype restaurants accommodate approximately 150, 225, and 265 guests,
respectively. Each size restaurant offers full service casual dining and a menu
containing a wide assortment of Tex-Mex and mesquite grilled selections.
Management believes that the use of multiple prototypes permits the Company to
more closely match the investment in a restaurant site with the site's estimated
sales potential. These factors allow for more efficient utilization of financial
resources by the Company and its franchisees.
During 1998, the Company opened 8 new Company-owned restaurants and 3 new
Franchised restaurants in the following areas:
COMPANY OWNED FRANCHISEE OWNED
Louisville, KY (2) Nashville, TN (2)
Columbus, OH (3) Clarksville, TN (1)
Dayton, OH (1)
Cleveland, OH (1)
Zanesville, OH (1)
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The Company's international licensee also opened four new licensed restaurants
during 1998 in Germany, Jordan and Saudi Arabia. During 1998 and subsequent to
December 31, 1998, a franchisee elected to close two restaurants in
Murfreesboro, Tennessee, and Cookeville, Tennessee, which had been converted
from the Barbwire Restaurant concept to the Tumbleweed concept. Management
believes that these two locations failed to overcome a negative public
perception of the Barbwire concept.
RESTAURANT DESIGN
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 the investment by the Company or its
franchisees 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.
Management believes the Company's prototype designs can be adapted for
developing Tumbleweed restaurants in existing structures. This capability may
give the Company access to quality sites not otherwise available and may reduce
the time or expense of development in certain circumstances.
RESTAURANT OPERATIONS
RESTAURANT MANAGEMENT. The Company employs 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 the Company's 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 the standards of
quality and performance established by the Company. In selecting managers, the
Company generally seeks 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. The Company
seeks 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.
COMPREHENSIVE TRAINING AND DEVELOPMENT. The Company has developed a
comprehensive training program for managers and hourly employees. Managers are
required to complete an eight-week initial training course and regular training
programs. The course emphasizes the Company's 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. The Company employs training
coordinators to assist with training and development of employees. Before the
opening of each new restaurant, one of the Company's training managers leads a
team of experienced employees to train and educate the new employees. The
training period for new employees includes 10 days 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.
RESTAURANT REPORTING. The Company closely monitors sales, costs of food and
beverages, and labor at each of its restaurants. Management analyzes daily and
weekly restaurant operating results to identify trends at each location, and
acts promptly to remedy negative trends where possible. The Company uses 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 the Company's accounting department are
provided to management for analysis and comparison to past performance and
budgets. The Company uses a specialized software system to measure theoretical
food costs against actual costs. To improve its performance analysis
capabilities, the Company is upgrading the system to schedule hourly labor based
on projected sales per half-hour. The goal is to ensure the proper number of
employees to service our guests.
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SUPPORT OPERATIONS
COMMISSARY OPERATIONS. 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. The Company operates its commissary principally
to enhance food quality and operational efficiency of Company-owned and
franchised restaurants. Management believes this approach increases Tumbleweed's
ability to offer its customers a consistently high level of food quality at a
moderate price.
The commissary system operates principally to enhance food quality and
operational efficiency of Tumbleweed restaurants. The commissary charges an
amount approximately equal to its cost for the items it supplies to
Company-owned and franchised restaurants. The Commissary sometimes contracts for
the production of food products for other companies, and has granted the right
to an outside food producer to produce and market in grocery stores a chili con
queso product utilizing the "Tumbleweed" name and recipe for which the Company
receives a royalty based upon production and sales.
DEVELOPMENT AND CONSTRUCTION. The Company maintains an in-house construction and
development department to assist in the site selection process, develop
architectural and engineering plans and oversee new construction. The Vice
President of Marketing and Development and the President of the Company,
together with Company management, analyze prospective sites and maintain a
database of possible sites. Once a site is selected, the Director of
Construction oversees the zoning process, obtains all required governmental
permits, develops detailed building plans and specifications and equips the
restaurants.
ADVERTISING AND MARKETING. The Company uses radio, print, billboard, and direct
mail advertising in its various markets, as well as television advertising in
certain larger markets. The Company also engages 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 the Company's restaurants. The cost associated with these promotional
activities in 1998 was approximately 2.6% of sales.
RESTAURANT LOCATIONS
At December 31, 1998, the Company owned and operated 25 Tumbleweed restaurants.
The following table sets forth the location (including the number of restaurants
at each location) of these 25 restaurants:
NO. OF
STATE LOCATION RESTAURANTS
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Indiana Evansville 1
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Elizabethtown 1
Kentucky Florence 1
Kentucky Frankfort 1
Kentucky Louisville 7
Kentucky Owensboro 1
Ohio Chillicothe 1
Ohio Columbus 3
Ohio Hamilton 1
Ohio Heath 1
Ohio Mason 1
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NO. OF
STATE LOCATION RESTAURANTS
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Ohio Springdale 1
Ohio Springfield 1
Ohio Wooster 1
Ohio Zanesville 1
--
TOTAL 25
==
FRANCHISED RESTAURANTS
As of December 31, 1998, the Company had three franchisees. TW-Indiana, LLC
owned and operated five franchised restaurants in New Albany, Floyd Knobs and
Salem, Indiana, and Lexington, Kentucky. Subsequent to December 31, 1998,
TW-Indiana opened a franchised Tumbleweed restaurant in Seymour, Indiana.
Diamondback Management Corp. owned and operated four franchised restaurants in
Appleton, Milwaukee and Madison, Wisconsin, and Rockford, Illinois. During 1998,
TW-Tennessee, LLC, owned and operated five restaurants in Hendersonville,
Nashville, Murfreesboro, Cookeville and Clarksville, Tennessee, although prior
to December 31, 1998, the franchisee elected to close the Murfreesboro,
Tennessee restaurant, and subsequent to December 31, 1998, elected to close the
Cookeville, Tennessee restaurant. Further, subsequent to December 31, 1998,
TW-Tennessee, LLC opened a franchised Tumbleweed restaurant in Hermitage,
Tennessee.
INTERNATIONAL LICENSING AGREEMENT
The Company has 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. As of December 31, 1998, International was operating its
restaurants in Erlanger, Frankfort and Vilsek, Germany, Amman, Jordan, and
Jeddah, Saudi Arabia as Tumbleweed restaurants. See "Certain Transactions --
Tumbleweed International LLC."
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 the
Company a right of first refusal if International proposes to sell or assign its
rights under the Agreement, or to sell equity interests in International.
SERVICE MARKS
The Company owns various service marks and trademarks that are registered on the
Principal Register of the United States Patent and Trademark Office. The Company
regards its service marks and trademarks as having significant value and being
an important factor in the development of the Tumbleweed concept. The Company's
policy is to pursue and maintain registration of its service marks and
trademarks whenever possible and to oppose vigorously any infringement or
dilution of its service marks and trademarks.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local laws. The
Company's commissary is licensed and subject to regulation by the USDA. Each of
the Company's 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.
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Approximately 12.0 % of the Company's restaurant sales were attributable to the
sale of alcoholic beverages for the year ended December 31, 1998. Alcoholic
beverage control regulations require each of the Company's 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 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. The Company currently designs its new restaurants to be
accessible to the disabled, and believes that it is in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. The Company intends to comply with future regulations relating
to accommodating the needs of the disabled, and the Company does not currently
anticipate that such compliance will require the Company to expend substantial
funds.
The Company is 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. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance, as well as excess liability
coverage. The Company has never been named as a defendant in a lawsuit involving
"dram shop" liability.
The Company's 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 the Company has no control. Significant
numbers of the Company's service, food preparation and other personnel are paid
at rates related to the federal minimum wage, and increases in the minimum wage
could increase the Company's labor costs.
The development and construction of additional restaurants are subject to
compliance with applicable zoning, land use and environmental laws and
regulations.
EMPLOYEES
As of December 31, 1998, the Company had approximately 2,200 employees, of whom
43 are executive and administrative personnel, 90 are restaurant management
personnel, and the remainder are hourly restaurant and commissary personnel.
Many of the Company's hourly restaurant employees work part-time. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
We make various forward-looking statements about our business in this report.
When making these forward-looking statements, we use words such as expects,
believes, estimates, anticipates, plans and similar expressions to identify
them. We also identify important cautionary factors that could cause our actual
results to differ materially from those projected in forward-looking statements
made by us. Factors that realistically could cause results to differ materially
from those projected in the forward-looking statements include the availability
and cost of financing and other events that affect our restaurant expansion
program, changes in food and other costs, changes in national, regional or local
economic conditions, changes in consumer tastes, competitive factors such as
changes in the number and location of competing restaurants, the availability of
experienced management and hourly employees, and other factors set forth below.
We do not have any obligation to revise any of these forward-looking statements
for events occurring after the date of this report or for unanticipated events.
EXPANSION RISKS. Since 1995, the Company has grown while developing the
operational systems, internal controls, and management personnel that management
believed was necessary to support its plans for continued expansion. In the
course of expanding its business, the Company will enter new geographic regions
in which it has no previous operating experience. There can be no assurance that
the Tumbleweed concept will be viable in new geographic regions or particular
local markets. In addition, when feasible, the Company intends to open multiple
restaurants in a target market to achieve operating and advertising
efficiencies. Although such "clustering" of restaurants in a market may
adversely affect same store sales in the short term, management believes
clustering can enhance long-term performance.
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The continued growth of the Company's business will depend upon its ability to
open and operate additional restaurants profitably, which in turn will depend
upon several factors, many of which are beyond the control of the Company. These
factors include, among other things, the selection and availability of suitable
locations, negotiations of acceptable lease, purchase and/or financing terms,
the timely construction of restaurants, the securing of required governmental
permits and approvals, the employment and training of qualified personnel, and
general economic and business conditions. The Company's ability to expand into
new geographic regions is also dependent upon the Company's ability to expand
its existing commissary facilities or open and successfully operate additional
commissaries, as may be necessary to support additional restaurants. There can
be no assurance that the Company will be successful in achieving its growth
plans or managing its expanding operations effectively, nor can there be any
assurance that new restaurants opened by the Company will be operated
profitably.
RESTAURANT BASE. The Company currently operates 25 Tumbleweed restaurants, some
of which have been open for less than one year. Consequently, the sales and
earnings achieved to date by these Tumbleweed restaurants may not be indicative
of future operating results. Moreover, because of the number of restaurants
currently operated by the Company, poor operating results at a small number of
restaurants could negatively affect the profitability of the entire Company. An
unsuccessful new restaurant or unexpected difficulties encountered during
expansion could have a greater adverse effect on the Company's results of
operations than would be the case in a restaurant company with more restaurants.
In addition, the Company leases certain of its restaurants. Each lease agreement
provides that the lessor may terminate the lease for a number of reasons,
including if the Company defaults in payment of any rent or taxes or breaches
any covenants or agreements contained in the lease. Termination of any of the
Company's leases pursuant to such terms could adversely affect the Company's
results of operations.
CHANGES IN FOOD AND OTHER COSTS; SUPPLY RISKS. The profitability of the Company
is significantly dependent on its ability to anticipate and react to changes in
food, labor, employee benefits and similar costs over which the Company has no
control. Specifically, the Company is dependent on frequent deliveries of
produce and fresh beef, pork, chicken and seafood. As a result, the Company is
subject to the risk of possible shortages or interruptions in supply caused by
adverse weather or other conditions which could adversely affect the
availability, quality and cost of such items. While in the past management has
been able to anticipate and react to changing costs through its purchasing
practices or menu price adjustments without a material adverse effect of
profitability, there can be no assurance that it will be able to do so in the
future.
INDUSTRY RISKS. The restaurant business is affected by changes in consumer
tastes, national, regional and local economic conditions, demographic trends,
traffic patterns and the type, number and location of competing restaurants. In
addition, factors such as 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 adversely affect the restaurant
industry in general and the Company's restaurants in particular.
COMPETITION. The restaurant industry is intensely competitive with respect to
price, service, location and food quality. The Company will compete 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, 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 the Company. A significant change in pricing
or other business strategies by one or more of the Company's competitors,
including an increase in the number of restaurants in the Company's territories,
could have a materially adverse impact on the Company's sales, earnings and
growth.
GOVERNMENT REGULATION. The restaurant business is subject to extensive national,
state, and local laws and regulations relating to the development and operation
of restaurants, including those regarding the sale of alcoholic beverages,
building and zoning requirements, the preparation and sale of food and
employer-employee relationships, such as minimum wage requirements, overtime,
working and safety requirements, and citizenship requirements. In addition, the
Company is subject to regulation by the Federal Trade Commission and must comply
with certain state laws that govern the offer, sale, and termination of
franchises, the refusal to renew franchises, and the scope of noncompetition
provisions. The failure 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 adversely affect the
Company.
- 9 -
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company, who serve at
the pleasure of the Board of Directors. There are no family relationships among
any officers of the Company.
Name Age Position
- ----------- --- -------------
John A. Butorac, Jr. ........ 50 President, Chief Executive Officer,
and Director
James M. Mulrooney .......... 47 Executive Vice President, Chief
Financial Officer, and Director
John Brewer ................. 46 Vice President of Operations
Wayne P. Jones .............. 56 Vice President of Marketing and
Development
Gary Snyder.................. 44 Vice President - Company Operations
Glennon F. Mattingly......... 47 Vice President - Controller
Gregory A. Compton........... 38 Vice President, Secretary and General
Counsel
John A. Butorac, Jr. has served as President and Chief Executive Officer of the
Company since it was formed in November 1994, and is a Director of the Company.
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 28 years of restaurant management experience.
James M. Mulrooney has served as Executive Vice President and Chief Financial
Officer of the Company since it was formed in November 1994, and is a Director
of the Company. From November 1988 to August 1994, Mr. Mulrooney was Senior Vice
President of Finance, Vice President and Treasurer of NTS Corporation, a
regional real estate development firm headquartered in Louisville, Kentucky.
From May 1982 to June 1988, Mr. Mulrooney held various positions with Chi-Chi's,
Inc., including four years as Vice President and Treasurer, where he was
responsible for developing the company's accounting systems, public financings,
and acquisitions. Before beginning his career in the restaurant industry in
1978, Mr. Mulrooney served for four years with the public accounting firm of
Alexander Grant & Company. Mr. Mulrooney has 16 years of restaurant management
experience.
John Brewer has served as Vice President of Operations for the Company since
April 1996. From 1993 to 1996, Mr. Brewer was the President and Chief Executive
Officer of East Side Restaurants, LLC, which operates nine restaurants in
Phoenix, Arizona. Mr. Brewer previously served for 15 years with Bob Evans
Farms, Inc., where he served as Vice President and Regional Director of
Restaurant Operations with responsibility for developing new markets and
increasing sales and profit in existing markets in a six-state region, as well
as in other capacities. Mr. Brewer has 22 years of restaurant management
experience.
Wayne P. Jones joined the Company as Vice President of Marketing and Development
in August 1997 after concluding four years as Executive Director and Chief
Executive Officer of the Pizza Hut Franchise Association, comprising 3,300 Pizza
Hut restaurants. Mr. Jones began his career in the restaurant industry in 1969.
At various times, he has served as President of Marcus Restaurants, Senior Vice
President of Marketing and Development at Chi-Chi's, Inc., President of General
Mills' Casa Gallardo Mexican Restaurant division, and Vice President of
Marketing for Kentucky Fried Chicken. Mr. Jones has also held positions as
Adjunct Professor of Marketing and Entrepreneurship at Indiana
University-Southeast and the Barton School of Business at Wichita State
University. Mr. Jones has 29 years of restaurant management experience.
Gary Snyder joined the Company as Director of Training and Human Resources in
June 1996 and was appointed Vice President of Company Operations in April 1998.
Mr. Snyder previously served for 17 years with Bob Evans Farms, Inc. where he
was responsible for restaurant operations and human resources. Mr. Snyder has 19
years of restaurant management experience.
- 10 -
Glennon F. Mattingly joined the Company as Controller in March 1995 and was
named Vice President-Controller in April 1998. Before coming to Tumbleweed, Mr.
Mattingly held various positions with Chi-Chi's, Inc. including six years as
Director of Budgeting and Financial Analysis. Before beginning his career in the
restaurant industry in 1984, Mr. Mattingly served with the public accounting
firm Deloitte, Haskins and Sells for two years and taught accounting at Trinity
High School in Louisville, Kentucky for seven years. Mr. Mattingly has 14 years
of restaurant management experience.
Gregory A. Compton joined the Company in June 1998 as Vice President, Secretary
and General Counsel. From March 1992 to June 1998, Mr. Compton served as Senior
Vice President, Secretary and General Counsel of NTS Corporation, a regional
real estate development firm headquartered in Louisville, Kentucky. Prior to his
employment with NTS Corporation, Mr. Compton practiced as an attorney in the
Real Estate and Corporate Finance department of Greenebaum, Doll & McDonald, a
Louisville, Kentucky law firm. Mr. Compton has represented and been a principal
of a restaurant franchisee unrelated to the Company for the last four years.
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
net income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies contained in Note 2
to the Company's Financial Statements contained elsewhere herein.
Segment information for the years ended December 31 is as follows:
1996:
Restaurant Commissary Corporate Totals
Revenues from external customers $23,284,007 $ 1,795,529 $ 652,187 $25,731,723
Intersegment revenues -- 2,929,546 -- 2,929,546
General and administrative expenses -- -- 1,787,190 1,787,190
Advertising expenses -- -- 463,637 463,637
Depreciation and amortization 486,799 102,864 641,627 1,231,290
Net interest expense -- 85,817 117,993 203,810
Segment net income (loss) 2,993,979 195,601 (2,688,264) 501,316
Segment fixed assets 13,223,329 1,025,949 368,580 14,617,858
Expenditures for long-lived assets 6,216,821 1,325 288,807 6,506,953
1997:
Restaurant Commissary Corporate Totals
Revenues from external customers $27,891,128 $ 1,007,011 $ 928,110 $29,826,249
Intersegment revenues -- 2,349,693 -- 2,349,693
General and administrative expenses -- -- 2,420,319 2,420,319
Advertising expenses -- -- 631,421 631,421
Depreciation and amortization 683,266 108,004 180,593 971,863
Net interest expense -- 85,957 342,641 428,598
Segment net income (loss) 4,351,013 203,458 (2,840,560) 1,713,911
Segment fixed assets 17,851,495 1,069,434 409,203 19,330,132
Expenditures for long-lived assets 4,847,429 126,493 98,696 5,072,618
- 11 -
1998:
Restaurant Commissary Corporate Totals
Revenues from external customers $40,490,933 $ 1,041,266 $ 1,275,445 $42,807,644
Intersegment revenues -- 2,429,620 -- 2,429,620
General and administrative expenses -- -- 3,098,228 3,098,228
Advertising expenses -- -- 1,052,075 1,052,075
Depreciation and amortization 1,107,301 116,446 218,264 1,442,011
Net interest expense -- 161,700 708,012 869,712
Segment net income (loss) 5,853,334 173,361 (4,073,285) 1,953,410
Segment fixed assets 23,341,248 1,004,373 575,176 24,920,797
Expenditures for long-lived assets 6,733,972 26,388 123,461 6,883,821
ITEM 2. PROPERTIES
Of the 25 Company-operated restaurants in operation at December 31, 1998, 12 are
owned by the Company in fee simple while the remainder are leased. Four of the
leased locations are owned by entities whose principals are affiliated with the
Company. Restaurant lease expirations range from 1999 to 2017, with the majority
of the leases providing for an option to renew for additional terms ranging from
five to twenty years. All of the Company's leases provide for a specified annual
rental, and some leases call for additional rental based on sales volume at the
particular location over specified minimum levels. Generally, the leases are net
leases which require the Company to pay the cost of insurance and taxes. The
Company's executive offices and its commissary are located in Louisville,
Kentucky, in office, commissary and warehouse space owned in fee simple by the
Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and proceedings in the ordinary course of
its business. The Company does not believe the outcome of any such litigation
will have a material adverse effect upon the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 12, 1999, 5,881,543 shares of Common Stock were issued and
outstanding. There were approximately 1,010 stockholders, including beneficial
owners of shares held in nominee name.
On January 11, 1999, Tumbleweed, Inc. completed its initial public offering of
common stock. The Company sold 776,543 shares at the offering price of $10 per
share in a direct offering of its common stock to the public, raising a total of
$7,765,430.
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 the 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 Company 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.
- 12 -
The Company received net proceeds of approximately $6,800,000 from the stock
offering. The Company used the offering proceeds, plus the additional cash
contributions of $747,500 it 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 directors and officers of the Company, 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 sold from time to time in the
future by the former members of Tumbleweed, LLC for their own accounts.
The Company has applied to list its common stock on the Nasdaq National Market.
Nasdaq has reserved the trading symbol TWED for the Company. Although the
Company meets the quantitative requirements for listing on the Nasdaq National
Market and has no reason to believe the listing application will not be
accepted, the Company cannot assure that Nasdaq will accept the application for
listing the common stock on the National Market.
Beginning in March 1999, and pending approval of the Nasdaq listing application,
bid and asked quotations for Tumbleweed shares will be reported on the OTC
Bulletin Board under the trading symbol TWED.
ITEM 6. SELECTED FINANCIAL DATA
In the following table, the income statement and balance sheet data of: (i)
Tumbleweed Mexican Food, Inc. and its affiliates from which Tumbleweed, LLC
acquired the Tumbleweed concept in 1995 (the "Predecessor") for the year ended
December 31, 1994 have been derived from the financial statements of the
Predecessor which were audited by the Predecessor's independent auditors; (ii)
Tumbleweed, LLC for the years ended December 31, 1995, 1996, 1997 and 1998 have
been derived from the financial statements of Tumbleweed, LLC which have been
audited by Ernst & Young LLP, independent auditors, whose report thereon is
included elsewhere in this filing. The information set forth below should be
read in conjunction with, and are qualified in their entirety by, the financial
statements (and the notes thereto), and other financial information appearing
elsewhere in this filing and the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31,
---------------------------------------------------------------
Predecessor Tumbleweed, LLC
----------- --------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
Restaurant sales $14,147,124 $17,254,058 $23,284,007 $27,891,128 $40,490,933
Commissary sales 1,500,732 1,574,847 1,795,529 1,007,011 1,041,266
Franchise fees and royaltie 442,122 540,157 474,870 563,056 770,806
Other revenues 108,000 177,960 177,317 365,054 504,639
---------- ---------- ---------- ---------- ----------
Total revenues 16,197,978 19,547,022 25,731,723 29,826,249 42,807,644
Operating expenses:
Restaurant cost of sales 4,280,691 5,132,549 7,103,357 8,191,928 11,788,578
Commissary cost of sales 1,297,045 1,424,077 1,649,502 887,793 905,814
Operating expenses 7,133,174 8,896,704 12,386,119 14,035,693 20,881,212
Selling, general and administr1,682,395 1,962,036 2,250,827 3,051,740 4,150,303
Depreciation and amortization 563,195 1,033,349 1,231,290 971,863 1,442,011
Preopening amortization 175,405 149,138 405,502 544,723 816,604
---------- ---------- ---------- ---------- ----------
Total operating expenses 15,131,905 18,597,853 25,026,597 27,683,740 39,984,522
---------- ---------- ---------- ---------- ----------
- 13 -
Income from operations 1,066,073 949,169 705,126 2,142,509 2,823,122
Interest expense, net (270,258) (266,530) (203,810) (428,598) (869,712)
---------- ---------- ---------- ---------- ----------
Net income $ 795,815 $ 682,639 $ 501,316 $ 1,713,911 $ 1,953,410
========== ========== ========== ========== ==========
Historical net income $ 682,639 $ 501,316 $ 1,713,911$ $ 1,953,410
Pro forma income taxes(1) (245,750) (180,474) (617,008) (703,228)
---------- ---------- ---------- ----------
Pro forma net income $ 436,889 $ 320,842 $ 1,096,903 $ 1,250,182
========== ========== ========== ==========
Pro forma net income per share
- basic and diluted $ 0.09 $ 0.06 $ 0.21 $ 0.24
Weighted average shares outstanding(2) 5,105,000 5,105,000 5,105,000 5,105,000
As of December 31,
---------------------------------------------------------------------
Predecessor Tumbleweed, LLC
----------- -------------------------------------------------------
Pro
Forma
1994 1995 1996 1997 1998 1998 (3)
---- ---- ---- ---- ---- --------
(In thousands)
Balance Sheet Data:
Total assets $ 8,492 $ 17,831 $ 21,262 $ 26,068 $ 33,681 $ 33,681
Long-term debt and capital lease
obligations, including current
maturities 3,947 3,077 5,776 8,542 13,458 13,630
Total liabilities 4,975 4,132 7,108 10,725 24,103 24,743
Redeemable members' equity -- 16,413 20,233 23,420 18,925 --
Members' equity -- 7 7 7 354 --
Retained earnings (deficit) -- (2,721) (6,085) (8,083) (9,701) --
Stockholders' equity 3,517 -- -- -- -- --
-- 8,938
Pro forma stockholders' equity . -- -- -- --
- -----------
(1) 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 adjustment has 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 periods presented with an effective tax rate
of 36%.
(2) Shares outstanding gives effect to the Reorganization as if it had occurred
as of January 1, 1995.
(3) Reflects the establishment of a deferred tax liability of $639,623 assuming
the termination of Tumbleweed, LLC's limited liability company status on
December 31, 1998 and the conversion of Tumbleweed, LLC's members' interests
into 5,105,000 shares of Company Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We make various forward-looking statements about our business in the following
discussion. When making these forward- looking statements, we use words such as
expects, believes, estimates, anticipates, plans and similar expressions to
identify them. We also identify important cautionary factors that could cause
our actual results to differ materially from those projected in forward-looking
statements made by us. Factors that realistically could cause results to differ
materially from those projected in the forward-looking statements include the
availability and cost of financing and other events that affect our restaurant
expansion program, changes in food and other costs, changes in national,
regional or local economic conditions, changes in consumer tastes, competitive
factors such as changes in the number and location of competing
- 14 -
restaurants, the availability of experienced management and hourly employees,
and other factors set forth below and in "Forward-Looking Statements/Risk
Factors" beginning on page 8.
Of the 43 Tumbleweed restaurants as of December 31, 1998, the Company owned and
operated 25 restaurants in Kentucky, Indiana and Ohio, franchised 13 restaurants
in Indiana, Illinois, Tennessee and Wisconsin, and licensed five restaurants in
Germany, Jordan and Saudi Arabia. Two additional franchised restaurants opened
in Tennessee and Indiana in January and February of 1999, respectively. The
following table reflects changes in the number of company-owned restaurants for
the years presented.
Company Restaurants 1996 1997 1998
------------------- ---- ---- ----
In operation, beginning of year 10 15 17
Restaurants opened 5 2 8
Restaurants closed 0 0 0
--- --- ---
In operation, end of year 15 17 25
--- --- ---
Franchise and Licensed Restaurants 1996 1997 1998
----------------------------------- ---- ---- ----
In operation, beginning of year 9 9 12
Restaurants opened 0 3 7
Restaurants closed 0 0 (1)
--- --- ---
In operation, end of 9 12 18
--- --- ---
System Total 24 29 43
=== === ===
Effective January 1, 1999, Tumbleweed, LLC converted from a limited liability
company into a C corporation by merging with Tumbleweed, Inc., a Delaware
corporation formed on December 17, 1997. As a limited liability company, the
Company has been treated as a partnership for income tax purposes and,
accordingly, has incurred no federal or state income tax liability. The
discussion of financial condition and results of operations included in the
paragraphs that follow reflect a pro forma adjustment for federal and state
income taxes that would have been recorded during these periods if the Company
had been subject to corporate income taxes for the periods presented.
The following section should be read in conjunction with "Selected Financial
Data" included elsewhere herein and the Company's financial statements and the
related notes thereto included elsewhere in this filing. See "Index to 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 periods indicated.
Year Ended December 31,
1996 1997 1998
---- ---- ----
Revenues:
Restaurant sales 90.5% 93.5% 94.6%
Commissary sales 7.0 3.4 2.4
Franchise fees and royalties 1.8 1.9 1.8
Other revenues 0.7 1.2 1.2
------- ------- -------
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales(1) 30.5 29.4 29.1
Commissary cost of sales(2) 91.9 88.2 87.0
Operating expenses(1) 53.2 50.3 51.6
Selling, general and
administrative 8.7 10.2 9.7
Depreciation and amortization 4.8 3.3 3.4
Preopening amortization 1.6 1.8 1.9
------- ------- -------
- 15 -
Total operating expenses 97.3 92.8 93.4
------ ------- -------
Income from operations 2.7 7.2 6.6
Interest expense, net -0.8 -1.4 -2.0
Net income 1.9% 5.8% 4.6%
====== ======= =======
Historic net income 1.9% 5.8% 4.6%
Unaudited pro forma income taxes (3) -0.7% -2.1% -1.6%
------ ------- -------
Unaudited pro forma net income 1.2% 3.7% 3.0%
====== ======= =======
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The unaudited pro forma income taxes reflect the effect of Reorganization
on the historical net income assuming the Company was taxed as a C
corporation for income tax purposes with an assumed combined federal and
state effective tax rate of 36%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 and 1997
Total revenues increased by $12,981,395 or 43.5% for 1998 compared to 1997. The
increase in total revenues reflects the opening of eight additional
Company-owned restaurants in 1998. Restaurant sales at Company-owned restaurants
increased $12,599,805 or 45.2% for 1998 compared to 1997. Company-owned same
store sales increased by 1.5% in 1998.
Commissary sales to franchised restaurants increased by $34,255 or 3.4% in 1998
compared to 1997. In May, 1997, the Company made a decision to discontinue
commissary sales of products not manufactured by the commissary. As of result,
commissary sales did not increase proportionally to the increase in the number
of franchised stores.
Franchise fees and royalties increased by $207,750 or 36.9% in 1998 compared to
1997. The increase was due primarily to $105,000 in franchise fees received upon
the opening of three new franchised restaurants in 1998 compared to two in 1997,
$23,250 in territory fees received from international operations and additional
royalties from three franchised restaurants opened in 1998.
Other revenues increased by $139,585 or 38.2% in 1998 compared to 1997,
primarily due to an increase in volume related purchasing rebates of
approximately $141,000 and monies from the Ohio Bureau of Workers' Comp
representing a return of invested premiums by the State of Ohio totaling
approximately $143,000 in 1998. The increases were offset in part by $178,000 in
insurance proceeds received in 1997.
Restaurant cost of sales increased by $3,596,650 or 43.9% for 1998 compared to
1997. The increase was principally due to the opening of eight additional
Company-owned restaurants. Restaurant cost of sales decreased as a percentage of
sales by 0.3% to 29.1% for 1998 compared to 29.4% in 1997. The decrease resulted
primarily from improved operating efficiencies in the commissary and lower
product costs at the restaurant level.
Commissary cost of sales increased $18,021 or 2.0% in 1998 compared to 1997.
Commissary cost of sales did not increase proportionally to the increase in the
number of franchised stores due to the discontinuance of sales of products not
manufactured by the commissary. As a percentage to sales commissary cost of
sales decreased 1.2%. This was due to lower ingredient costs for products sold
by the commissary.
Restaurant operating expenses increased by $6,845,519 or 48.8% in 1998 compared
to 1997. The increase reflects the addition of eight Company-owned restaurants.
Operating expenses increased as a percentage of restaurant sales to 51.6% in
1998 from 50.3% in 1997 primarily due to a 1.2% increase in freight and a 0.7%
increase in restaurant level promotional costs. These costs were offset in part
by a 0.7% decrease in labor costs.
Selling, general and administrative expenses increased by $1,098,563 or 36.0%
for 1998 compared to 1997. The increase was due in part to the addition of
management and staff personnel during 1998 to support the growing restaurant
base. Because of the Company's restaurant growth plans management expects
selling, general and administrative expenses to continue to increase during 1999
in absolute dollars.
Preopening amortization increased $271,881 or 49.9% for 1998 compared to 1997.
The increase is due to the opening of eight additional Company-owned restaurants
in 1998 as compared to two restaurants in 1997.
- 16 -
Depreciation and amortization expense increased $470,148 or 48.4% for 1998
compared to 1997 due primarily to the addition of eight Company-owned
restaurants.
Net interest expense increased $441,114 or 102.9% for 1998 compared to 1997. The
increase resulted from increased borrowings to fund the growth in Company-owned
restaurants.
The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though the Company had been subject to corporate income taxes for
1998 and 1997. The combined effective tax rate is 36.0% for 1998 and 1997.
As a result of the factors discussed above, pro forma net income in 1998
increased $153,279 or 14.0% compared to 1997. Pro forma net income per share
increased to $0.24 in 1998 compared to $0.21 in 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 and 1996
Total revenues increased by $4,094,526 or 15.9% in 1997 compared to 1996,
primarily due to an increase in the number of Company-owned restaurants.
Restaurant sales at Company-owned restaurants increased $4,607,121 or 19.8% in
1997 compared to 1996. This increase was largely the result of the opening of
two Company-owned restaurants in 1997 and three Company-owned restaurants late
in 1996. Company-owned same store sales increased 5.2% in 1997 compared to 1996.
Commissary sales to franchised restaurants decreased by $788,518 or 43.9% in
1997 compared to 1996. The decrease was primarily due to the decision in May,
1997, to discontinue selling products not manufactured by the commissary.
Franchise fees and royalties increased $88,186 or 18.6% in 1997 compared to
1996. The increase was due to an approximate $70,000 increase in franchise fees
for two additional franchised restaurants opened in 1997 and an additional
$18,000 in royalties.
Other revenues increased $187,737 or 105.9% in 1997 compared to 1996. In 1997,
the Company received proceeds of $178,000 from business interruption insurance
as a result of flooding at a Company-owned restaurant and an increase in rebate
income from suppliers of approximately $80,000 in 1997. These increases were
offset in part by the gain on the sale of the Company's food court operations of
$71,300 in 1996.
Cost of restaurant sales at Company-owned restaurants increased by $1,088,571 or
15.3% in 1997 compared to 1996. The increase reflects the opening of two
additional Company-owned restaurants in 1997 and three Company-owned restaurants
late in 1996 and an increase in Company-owned same store sales. Cost of
restaurant sales decreased as a percentage of restaurant sales by 1.1% to 29.4%
in 1997 compared to 30.5% in 1996. This decrease was due primarily to lower
cheese, beef and produce prices.
Commissary cost of sales decreased $761,709 or 46.2% in 1997 compared to 1996.
The decrease reflects the decision to discontinue commissary sales of products
not manufactured by the commissary.
Operating expenses at Company-owned restaurants increased $1,649,574 or 13.3% in
1997 compared to 1996, principally due to the addition of Company-owned
restaurants and an increase in Company-owned same store sales. Operating
expenses decreased as a percentage of restaurant sales to 50.3% in 1997 compared
to 53.2% in 1996, primarily the result of a 1.2% decrease in restaurant labor
costs and a 1.5% decrease in restaurant-level promotional expenses.
Selling, general and administrative expenses increased by $800,913 or 35.6% in
1997 compared to 1996. The increase reflects growth in the Company's management
and staff personnel in accounting, operations, training and purchasing during
1997 to support the growing restaurant base. The percentage to revenue was 1.5%
higher at 10.2% in 1997 compared to 8.7% in 1996. The increase was due to
additional staffing required for new restaurant openings planned for the first
quarter of 1998.
Depreciation and amortization expense decreased $259,427 or 21.1% in 1997
compared to 1996. Amortization expense related to noncompetition agreements
decreased by $500,000 in 1997, but was offset in part by increased depreciation
resulting from additional Company-owned restaurants.
Preopening amortization increased $139,221 or 34.3% in 1997 compared to 1996.
Preopening expenses for more Company-owned restaurants were amortized in 1997
than in 1996.
- 17 -
Net interest expense increased $224,788 or 110.3% in 1997 compared to 1996,
primarily the result of growth in the number of restaurants in operation and the
incremental costs associated with such growth.
The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though the Company had been subject to corporate income taxes for
1997 and 1996. The combined effective tax rate is 36.0% for 1997 and 1996.
As a result of the factors discussed above, pro forma net income in 1997
increased $776,061 or 241.9% compared to 1996. Pro forma net income per share
increased to $0.21 in 1997 compared to $0.06 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to expand the number of its 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 the control of the Company. The hiring and
retention of management and other personnel may be difficult given the low
unemployment rates in the areas in which the Company intends to operate. There
can be no assurance that the Company will be successful in opening the number of
restaurants anticipated in a timely manner. Furthermore, there can be no
assurance that the Company's new restaurants will generate sales revenue or
profit margins consistent with those of the Company's existing restaurants, or
that these new restaurants will be operated profitably.
The Company's principal capital needs arise from the development of new
restaurants, and to a lesser extent, maintenance and improvement of its existing
facilities. The principal sources of capital to fund these expenditures were
members' contributions, internally generated cash flow, bank borrowings and
lease financing. The following table provides certain information regarding the
Company's sources and uses of capital for the periods presented:
Years
Ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
Net cash provided by operations $ 1,069,979 $ 3,040,836 $ 3,447,666
Purchases of property and equipment 4,712,962 4,105,089 5,313,575
Proceeds from sale of property and
equipment 1,635,815 - -
Net distributions of
members' equity (45,715) (525,002) (328,788)
Net borrowings on long-term debt and
capital lease obligations 905,201 1,797,898 3,251,135
Since the acquisition of the Tumbleweed business, the Company's single largest
use of funds has been for capital expenditures consisting of land, building and
equipment associated with its restaurant expansion program. The substantial
growth of the Company over the period has not required significant additional
working capital. Sales are predominantly 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.
The Company both owns and leases its 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.
The Company plans to open three Company-owned Tumbleweed restaurants during
1999, depending on the availability of quality sites, the hiring and training of
sufficiently skilled management and other personnel, and other factors. As of
December 31, 1998, the company had two additional restaurants under
construction, one of which is expected to open in the first quarter of 1999.
- 18 -
The Company will utilize mortgage, sale/leaseback and landlord financing, as
well as equipment leasing and financing, for a portion of the development costs
of restaurants opened during 1999. The remaining costs will be financed through
the initial public offering together with available cash reserves, cash provided
from operations and borrowing capacity. Management believes such sources will be
sufficient to fund the Company's expansion plans through 1999. Should the
Company's actual results of operations fall short of, or its rate of expansion
significantly exceed its plans, or should its costs or capital expenditures
exceed expectations, the Company may need to seek additional financing in the
future. In negotiating such financing, there can be no assurance that the
Company will be able to raise additional capital on terms satisfactory to the
Company.
The Company has a $5.0 million revolving credit facility with National City Bank
(the "Credit Facility"). As of December 31, 1998, the Company had outstanding
borrowings under the Credit Facility of approximately $4,302,000. The Credit
Facility imposes restrictions on the Company with respect to the maintenance of
certain financial ratios, the incurrence of indebtedness, the sale of assets,
mergers, capital expenditures and the payment of dividends.
In order to provide any additional funds necessary to pursue the Company's
growth strategy, the Company may incur, from time to time, additional short and
long-term bank indebtedness and may issue, in public or private transactions,
its equity and debt securities, the availability and terms of which will depend
upon market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company.
CHANGE IN ACCOUNTING PRINCIPLE
In 1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position, "REPORTING ON THE
COSTS OF START-UP ACTIVITIES" (the "SOP"), which requires adoption no later than
the beginning of 1999. The Company's initial application of the SOP will require
the write-off of deferred preopening costs ($524,669 as of December 31, 1998) as
of the date of adoption, which will be reported, on a net of tax basis, as the
cumulative effect of a change in accounting principle. The Company has adopted
this new standard as of January 1, 1999. It is not practical to estimate what
the effect of the change will be on 1999 earnings.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION (Statement 131). Statement 131
superseded FASB Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and also requires that those enterprises report selected information
about operating segments in interim financial reports. The adoption of Statement
131 did not have an effect on the Company's results of operations or financial
position, but did effect the disclosure of segment information. (See Note 10 of
the Company's Financial Statements included elsewhere herein.)
IMPACT OF YEAR 2000
The Company has scheduled the replacement of certain of its older computer
systems with hardware and software that has been certified to be Year 2000
compliant. The Company has also completed an assessment of its other computer
systems and will modify or replace portions of its software so that its computer
systems will function properly with respect to dates in or after the year 2000.
The total Year 2000 project cost is estimated at approximately $406,000, which
includes $370,000 for the purchase of new hardware and software that will be
capitalized and $36,000 that will be expensed as incurred. As of December 31,
1998, the Company had not incurred any expenses relating to the Year 2000
Project.
The project is estimated to be completed during August 1999, which is prior to
any anticipated impact on its operating systems. The Company believes that as a
result of the installation of new hardware, the modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely,
inability of its computer systems to function accurately could have a material
impact on the operations of the Company.
The Company is in the process of querying its significant vendors with respect
to Year 2000 issues. Based on the responses received from vendors, the Company
is not aware of any vendors with a Year 2000 issue that would materially impact
results of operations, liquidity, or capital resources. However, the inability
of vendors to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company, although the actual impact of
non-compliance by vendors is not determinable.
- 19 -
The Company is in the process of developing a contingency plan in the event it
does not complete all phases of its Year 2000 program.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were based on numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect the Company's operations. A majority
of the Company's 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 the Company's restaurants are located, the Company
has continued to increase wages and benefits in order to attract and retain
management personnel and hourly coworkers. In addition, most of the Company's
leases require the Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflation through periodic menu
price increases, economies of scale in purchasing and cost controls and
efficiencies at existing restaurants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into derivative transactions or speculate on the
future direction of interest rates. The Company is exposed to interest rate
changes primarily as a result of its variable rate debt instruments. As of
December 31, 1998, approximately $8.0 million of the Company's debt bore
interest at variable rates. The Company believes that the effect, if any, of
reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations or cash flows would not
be significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Tumbleweed, Inc. and its predecessor,
Tumbleweed, LLC, are included after Item 14 of this report.
INDEX TO FINANCIAL STATEMENTS
PAGE
Tumbleweed, Inc.
Report of Independent Auditors...................................- F-1 -
Financial Statements
Balance Sheet as of December 31, 1998.....................- F-2 -
Notes to the Balance Sheet................................- F-3 -
Tumbleweed, LLC
Report of Independent Auditors...................................- F-5 -
Financial Statements
Statements of Income for the years ended December 31,
1996, 1997 and 1998................................- F-6 -
Balance Sheets as of December 31, 1997 and 1998...........- F-7 -
- 20 -
Statements of Redeemable Members' Equity, Members'
Equity and Retained Earnings (Deficit) for the
years ended December 31, 1996, 1997 and 1998.......- F-9 -
Statements of Cash Flows for the years ended December
31, 1996, 1997 and 1998...........................- F-10 -
Notes to the Financial Statements........................- F-11 -
SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of certain unaudited quarterly results of operations
for 1997 and 1998.
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- -----
Calendar Year 1997
Restaurant sales $ 6,538,745 $ 6,682,908 $ 7,300,641 $ 7,368,834 $ 27,891,128
Total revenues 7,109,943 7,126,990 7,721,716 7,867,600 29,826,249
Net income 229,522 519,997 532,005 432,387 1,713,911
Pro forma net income 146,894 332,798 340,483 276,728 1,096,903
Pro forma net income
per share
- basic and diluted .03 .07 .07 .05 .21
Shares used in
computing pro forma
net income per share 5,105,000 5,105,000 5,105,000 5,105,000 5,105,000
Company-owned
restaurants in
operation at end of
quarter 15 15 16 17 17
Calendar Year 1998
Restaurant sales $ 8,409,122 $ 10,138,509 $ 10,516,721 $ 11,426,581 $ 40,490,933
Total revenues 8,907,877 10,777,335 11,105,504 12,016,928 42,807,644
Net income 342,147 591,293 613,050 406,920 1,953,410
Pro forma net income 218,974 378,428 392,352 260,428 1,250,182
Pro forma net income
per share
- basic and diluted .04 .07 .08 .05 .24
Shares used in
computing pro forma
net income per share 5,105,000 5,105,000 5,105,000 5,105,000 5,105,000
Company-owned
restaurants in
operation at end of
quarter 21 22 23 25 25
- 21 -
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table lists the executive officers of the Company, who serve at
the pleasure of the Board of Directors, and the Directors of the Company. The
term of each Director continues until the Company's first annual meeting of
stockholders, which is expected to be held in 2000. There are no family
relationships among any officers or Directors of the Company.
Name Age Position
- ---- --- --------
John A. Butorac, Jr. ... 50 President, Chief Executive Officer, and Director
James M. Mulrooney ..... 47 Executive Vice President, Chief Financial Officer,
and Director
John Brewer ............ 46 Vice President of Operations
Wayne P. Jones ......... 56 Vice President of Marketing and Development
Gary Snyder............. 44 Vice President - Company Operations
Glennon F. Mattingly.... 47 Vice President - Controller
Gregory A. Compton...... 38 Vice President, Secretary and General Counsel
David M. Roth .......... 48 Director
Minx Auerbach(1) ....... 75 Director
Lewis Bass (2).......... 76 Director
Roger Drury(1)(2) ...... 52 Director
George Keller(1)(2) .... 47 Director
Terrance A. Smith....... 52 Director
- -------------------------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.
John A. Butorac, Jr. has served as President and Chief Executive Officer of
Tumbleweed, LLC since it was formed in November 1994, and is a Director of the
Company. 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 28 years of restaurant
management experience.
- 22 -
James M. Mulrooney has served as Executive Vice President and Chief Financial
Officer of Tumbleweed, LLC since it was formed in November 1994, and is a
Director of the Company. From November 1988 to August 1994, Mr. Mulrooney was
Senior Vice President of Finance, Vice President and Treasurer of NTS
Corporation, a regional real estate development firm headquartered in
Louisville, Kentucky. From May 1982 to June 1988, Mr. Mulrooney held various
positions with Chi-Chi's, Inc., including four years as Vice President and
Treasurer, where he was responsible for developing the company's accounting
systems, public financings, and acquisitions. Before beginning his career in the
restaurant industry in 1978, Mr. Mulrooney served for four years with the public
accounting firm of Alexander Grant & Company. Mr. Mulrooney has 16 years of
restaurant management experience.
John Brewer has served as Vice President of Operations for the Company since
April 1996. From 1993 to 1996, Mr. Brewer was the President and Chief Executive
Officer of East Side Restaurants, LLC, which operates nine restaurants in
Phoenix, Arizona. Mr. Brewer previously served for 15 years with Bob Evans
Farms, Inc., where he served as Vice President and Regional Director of
Restaurant Operations with responsibility for developing new markets and
increasing sales and profit in existing markets in a six-state region, as well
as in other capacities. Mr. Brewer has 22 years of restaurant management
experience.
Wayne P. Jones joined the Company as Vice President of Marketing and Development
in August 1997 after concluding four years as Executive Director and Chief
Executive Officer of the Pizza Hut Franchise Association, comprising 3,300 Pizza
Hut restaurants. Mr. Jones began his career in the restaurant industry in 1969.
At various times, he has served as President of Marcus Restaurants, Senior Vice
President of Marketing and Development at Chi-Chi's, Inc., President of General
Mills' Casa Gallardo Mexican Restaurant division, and Vice President of
Marketing for Kentucky Fried Chicken. Mr. Jones has also held positions as
Adjunct Professor of Marketing and Entrepreneurship at Indiana
University-Southeast and the Barton School of Business at Wichita State
University. Mr. Jones has 29 years of restaurant management experience.
Gary Snyder joined the Company as Director of Training and Human Resources in
June 1996 and was appointed Vice President of Company Operations in April 1998.
Mr. Snyder previously served for 17 years with Bob Evans Farms, Inc. where he
was responsible for restaurant operations and human resources. Mr. Snyder has 19
years of restaurant management experience.
Glennon F. Mattingly joined the Company as Controller in March 1995 and was
named Vice President-Controller in April 1998. Before coming to Tumbleweed, Mr.
Mattingly held various positions with Chi-Chi's, Inc. including six years as
Director of Budgeting and Financial Analysis. Before beginning his career in the
restaurant industry in 1984, Mr. Mattingly served with the public accounting
firm Deloitte, Haskins and Sells for two years and taught accounting at Trinity
High School in Louisville, Kentucky for seven years. Mr. Mattingly has 14 years
of restaurant management experience.
Gregory A. Compton joined the Company in June 1998 as Vice President, Secretary
and General Counsel. From March 1992 to June 1998, Mr. Compton served as Senior
Vice President, Secretary and General Counsel of NTS Corporation, a regional
real estate development firm headquartered in Louisville, Kentucky. Prior to his
employment with NTS Corporation, Mr. Compton practiced as an attorney in the
Real Estate and Corporate Finance department of Greenebaum, Doll & McDonald, a
Louisville, Kentucky law firm. Mr. Compton has represented and been a principal
of a restaurant franchisee unrelated to the Company for the last four years.
David M. Roth is a founding member of Tumbleweed, LLC, has served on its Board
of Advisors since its inception in 1994, and is a Director of the Company. Mr.
Roth is also an investor and member of the governing boards of two Tumbleweed
franchisees and one Tumbleweed licensee--TW-Tennessee, LLC, TW-Indiana, LLC, and
Tumbleweed International, LLC. In addition, Mr. Roth is a founding member or
shareholder of several companies involved in other restaurant concepts,
including (i) the company which created The Oldenberg Grill (which recently
merged into the Oldenberg Brewing Company, a publicly held company of which Mr.
Roth is a director), (ii) several companies which are Texas Roadhouse
franchisees, (iii) two companies which are Dooley's Bagelcatessen franchisees,
(iv) T.M. Riders, LLC, which owns and operates a Mexican and grilled food
delivery concept as well as several Tumbleweed food court units, (v) a company
which is a developer of Joe's "Older Than Dirt" restaurants, and (vi) two
companies involved in the development and franchising of the Boston-based
Pizzaria Regina concept or a casual dining Italian restaurant incorporating such
pizza concept. Mr. Roth is currently a principal in the Louisville, Kentucky law
firm of Roth Foley Bryant & Cooper, PLLC, the successor-in-interest to a law
firm established by him in January 1993. From March 1992 to December 1993, Mr.
Roth served as the General Counsel, Vice President and Secretary of Analytical
Risk Management, Ltd., a company of which he was a founding partner, and its
successor-in-interest, ARM Financial Group, Inc., a Louisville-based life
insurance holding company which recently became listed on the New York Stock
Exchange. From September 1979 to January 1993, Mr. Roth was engaged in the
private practice of law with the firm of Greenebaum Doll & McDonald in
Louisville, and prior to that time, from 1975 to
- 23 -
1979, Mr. Roth was an attorney with the Chief Counsel's Office of the Internal
Revenue Service, Interpretative Division, in Washington, D.C.
Minx Auerbach has served as a member of the Board of Advisors of Tumbleweed, LLC
since January 1995, and is a Director of the Company. 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 has served as a member of the Board of Advisors of Tumbleweed, LLC
since January 1995, and is a Director of the Company. 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.
Roger Drury has served as a member of the Board of Advisors of Tumbleweed, LLC
since January 1995, and is a Director of the Company. Mr. Drury was Chief
Financial Officer of Humana Inc. from 1992 until 1996 and Senior Vice President
of Finance from 1988 to 1992. He joined Humana, Inc. in 1979 and became Vice
President-Comptroller in 1983. Mr. Drury served as a certified public accountant
with Coopers & Lybrand in New York and Louisville from 1971 until 1979. He
currently serves on the boards of directors of Bellarmine College, Management
Technology Services, The DentalCo, and Health Staffing Solutions.
George Keller is the founder of Tumbleweed and has served on the Board of
Advisors of Tumbleweed, LLC since 1995, and is a Director of the Company. 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 as
the Managing Member of First Blue Rock Grill LLC in New Albany, Indiana and
serves on the Board of Stockyards Bank, Inc. Mr. Keller has 22 years of
restaurant management experience.
Terrance A. Smith was elected as a Director of the Company in June 1998. Mr.
Smith is currently the President of Tumbleweed International LLC. From 1988 to
1997, Mr. Smith was the President and CEO of Chi-Chi's International Operations,
Inc. Mr. Smith currently serves on the Board of Boston Restaurant Associates,
Inc., a publicly traded company which owns and operates Italian dinner houses
and limited service pizzerias. Mr. Smith has 28 years of restaurant management
experience.
Classification of Directors. Each director will serve a term expiring at the
Company's first annual meeting of stockholders, which is expected to be held in
2000, and until his or her successor is elected and qualified. At that time, it
is anticipated that the directors will be divided into three classes, with the
number of directors in each class as nearly equal as possible. The term of the
first class of directors expires at the 1999 annual meeting of stockholders, the
term of the second class of directors expires in 2000 and the term of the third
class of directors expires in 2001, provided that the directors in each class
will hold office until their successors are duly elected and qualified. At each
annual meeting of stockholders, one class of directors will be elected to a
three-year term.
Committees of the Board. The Audit Committee and Compensation Committee of the
Board of Directors each consists of three directors, none of whom can be an
officer or employee of the Company. The duties of the Audit Committee are to
recommend to the whole Board of Directors the selection of independent auditors
to audit annually the books and records of the Company, 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 the internal
audit controls of the Company. The duties of the Compensation Committee are to
review the performance of the executive officers of the Company and to recommend
annual salary and bonus amounts for executive officers of the Company. In
addition, the Compensation Committee reviews the Company's compensation policies
and practices and benefit plans to ensure that they meet corporate objectives.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation earned for the last three
years by the Company's chief executive officer and its executive officers whose
total salary and bonus exceeded $100,000 during 1998.
- 24 -
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Name and Principal Other Annual Stock All Other
Position Year Salary Bonus Compensation Options# Compensation
-------- ---- ------ ----- ------------ ---------- ------------
John A. Butorac, Jr. 1998 $ 200,000 $ 70,000 $ 23,777 0 $ 0
President and Chief
Executive Officer 1997 159,134 50,872 21,099 0 0
1996 154,050 0 20,111 0 0
James M. Mulrooney 1998 175,000 61,250 23,122 0 0
Executive Vice
President and Chief 1997 132,611 42,394 21,016 0 0
Financial Officer
1996 129,461 0 19,463 0 0
John Brewer 1998 115,500 14,020 3,600 60,000 (1) 7,846 (2)
Vice President of
Operations 1997 109,273 30,946 3,600 0 0
1996 82,500 0 2,100 0 5,787 (2)
Wayne P. Jones 1998 112,291 14,026 3,600 50,000 (1) 0
Vice President of
Marketing and 1997 29,167 5,775 1,500 0 18,978 (2)
Development
1996 0 0 0 0 0
(1) Granted subsequent to December 31, 1998, under the Tumbleweed, Inc. 1998
Stock Option and Incentive Compensation Plan.
(2) Represents relocation expenses.
INCENTIVE COMPENSATION PLAN. To ensure that an important portion of compensation
is based on performance, the annual bonus payable to the executive officers of
the Company is based upon the attainment of targeted performance measurements by
the Company. All other salaried employees of the Company other than store-level
managers participate in the bonus plan. Each executive earns incentive
compensation if the Company achieves its 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
the Company attains or exceeds attainment of its specified performance goals.
The compensation committee has the right to make adjustments to the plan as
deemed necessary.
For executive officers other than Mr. Butorac and Mr. Mulrooney, payments are
determined and made to participants on a quarterly basis. Mr. Butorac's and Mr.
Mulrooney's bonus compensation is calculated and accrued on a quarterly basis in
a similar manner, however, the incentive compensation payments is not made for
the year until after the fourth quarter is determined and approved by the
compensation committee. In addition, the Company must reach at least 70% of the
net income goal for the entire year in order for Mr. Butorac and Mr. Mulrooney
to automatically receive any bonus payment.
- 25 -
EMPLOYMENT AGREEMENTS. The Company entered into employment agreements with John
A. Butorac, Jr. and James M. Mulrooney on June 23, 1998 (effective upon
consummation of the Reorganization), which entitle Mr. Butorac and Mr. Mulrooney
to receive a base salary of $200,000 and $175,000, respectively, and bonus
compensation based upon the Incentive Compensation Plan formula. See "Incentive
Compensation Plan" above. The agreements have an initial term of five years and
extend automatically each year for one additional year unless both parties agree
to termination prior to the end of any term. If the Company terminates 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 the Company 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 the Company 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.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no options granted to any officers or employees of the Company during
the fiscal year ended December 31, 1998. No separate stock appreciation rights
have ever been granted by the Company.
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 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 will be administered by the Compensation Committee. The Committee is
comprised of two or more independent directors, who cannot be 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 Committee may also construe, interpret and correct defects, omissions
and inconsistencies in the Plan. The Committee has no discretion with respect to
the terms and conditions of the options granted automatically to nonemployee
directors under the Plan. See "Director Compensation" below.
The Common Stock subject to the Plan will be authorized but unissued shares or
previously acquired shares. The number of shares of Common Stock available for
grant of awards under the Plan equals the greater of 635,000 shares, or 10% of
the number of shares of Common Stock outstanding from time to time, including
100,000 shares reserved for options automatically granted to nonemployee
directors under the Plan.
As of February 15, 1999, the Company granted options for a total of
approximately 340,000 shares to eligible employees and 60,000 shares to
nonemployee directors. None of the initial grants of options were awarded to Mr.
Butorac or Mr. Mulrooney. The exercise price of the options is equal to the
initial public offering price. The exercise price of future grants will be equal
to the market price as of the date of such grant. Stock options granted under
the Plan will be exercisable for a term of not more than ten years, as
determined by the Committee. The option grants will become exercisable for 33%
of the number of shares subject to the option on each of the first, second and
third anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES AND YEAR-END VALUE TABLE.
There were no exercises during 1998 by any officers of the Company of any
options to purchase shares issued by the Company under the Plan, nor were any
options issued or outstanding as of December 31, 1998.
DIRECTOR COMPENSATION. Nonemployee directors receive a fee of $1,000 for each
Board of Directors meeting attended and receive $1,000 per committee meeting
attended unless such committee meeting is on the same day as the Board of
Directors meeting. Committee chairmen receive an additional $1,000 for each
committee meeting. In addition, nonemployee directors will receive annual grants
of options to purchase shares of Common Stock under the Plan. Subsequent to
December 31, 1998, each nonemployee director received options to purchase 10,000
shares of common stock at an exercise price of $10 per share (the IPO price).
Each new nonemployee director will be granted options to purchase 10,000 shares
of Common
- 26 -
Stock on the date of his or her first election. The Company's nonemployee
directors will automatically be granted options to purchase 1,000 shares of
Common Stock each year the director continues to serve on the Board. All options
granted to directors are to be granted at the fair market value of the Common
Stock at the grant date and will become exercisable in three equal annual
installments, beginning on the first anniversary of the date of grant. As of
December 31, 1998, there were no options issued or outstanding to any Directors.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the
Delaware General Corporation Law, the Company has included in its Certificate of
Incorporation a provision to eliminate the personal liability of its 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 the Company is required to indemnify its officers
and directors under certain circumstances, including those circumstances in
which indemnification would otherwise be discretionary, and the Company is
required to advance expenses to its officers and directors as incurred in
connection with proceedings against them for which they may be indemnified. At
present, the Company is not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of the Company in
which indemnification would be required or permitted. The Company believes that
its charter provisions are necessary to attract and retain qualified persons as
directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents the number of shares of Common Stock beneficially
owned as of March 12, 1999, by (i) each person we know to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each of our directors,
(iii) each of our executive officers named in the Summary Compensation Table and
(iv) all of our officers and directors as a group. A person beneficially owns
shares if the person has or shares voting or investment power with respect to
the shares or has the right to acquire such power within 60 days. Except as
otherwise noted, each person named in the table has sole voting and investment
power with respect to the listed number of shares.
Amount and Nature
of Beneficial Ownership
-----------------------
Name and Address of Number Percentage
Beneficial Owner of Shares of Class
---------------- --------- --------
Non-Directors TW Funding, LLC 400,000 (1) 6.8 %
1900 Mellwood Avenue
Louisville, KY 40206
Gerald A. Mansbach (2) 498,002 (1) 8.5
Mansbach Metal Co.
1900 Front Street
Ashland, KY 41101
Directors and John A. Butorac, Jr. 1,716,439 (1)(3) 29.2
Executive 1900 Mellwood Avenue
Officers Louisville, KY 40206
James M. Mulrooney 1,285,574 (1) 21.9
1900 Mellwood Avenue
Louisville, KY 40206
George Keller 618,501 (5) 10.5
4201 Paoli Pike
Floyd Knobs, IN 47119
David M. Roth 778,427 (1)(4) 13.2
200 South Fifth Street
Suite 300S
Louisville, KY 40202
Minx M. Auerbach 151,420 (6) 2.6
- 27 -
Lewis Bass 70,001 (8) 1.2
W. Roger Drury 23,868 *
Terrance Smith 3,001 *
John Brewer 4,010 (7) *
Wayne Jones 20,500 (10) *
All current directors and
executive officers as
a group (13 persons) 3,848,941 (9) 65.4
- ----------------
* Indicates less than 1%
(1) As managers of TW Funding, LLC, Messrs. Butorac, Mulrooney, Roth and
Mansbach share voting power with respect to the shares held by TW
Funding, LLC. All of these shares have been included in each of their
respective totals.
(2) Mr. Mansbach is the brother of Ms. Auerbach, who is a director.
(3) Mr. Butorac and his wife hold 934,721 shares jointly. Mr. Butorac's wife
also holds 400,595 of the listed shares as trustee for their children.
(4) Mr.Roth's wife holds 147,673 of the listed shares. Mr.Roth's shares also
include 187,736 shares held or beneficially owned by entities controlled
by members of his family.
(5) Includes 3,000 shares held by Mr. Keller's wife as trustee under trusts
for Mr. Keller and his children, and 1,000 shares held by Mr. Keller as
trustee for a personal trust.
(6) Ms.Auerbach holds 151,419 of these shares as trustee for a family trust.
(7) Includes 4,000 shares held by TW Funding, LLC allocated to Mr. Brewer
based on his relative ownership interest in TW Funding, LLC.
(8) Includes 70,000 shares held in a family trust.
(9) Shares held by TW Funding, LLC have been included once in the shares
beneficially owned by the group.
(10) Includes 20,000 shares held by TW Funding, LLC allocated to Mr. Jones
based on his relative ownership interest in TW funding, LLC.
TW FUNDING, LLC
The members of TW Funding, LLC have guaranteed a loan incurred by TW Funding to
finance its purchase of 400,000 shares of Common Stock in the 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 directors of the Company, 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
- 28 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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, the Company's Board of Directors adopted a policy that all future
transactions between the Company and its 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
the Company than those obtainable from unrelated third parties.
LEASES WITH RELATED PARTIES
WEST BROAD DEVELOPMENT, LLC. Prior to September 30, 1998, the Company leased the
facilities and related real property for its West Broad Street restaurant in
Columbus, Ohio from West Broad Development, LLC, a limited liability company in
which David M. Roth, a director of the Company, owns a substantial interest. The
restaurant opened in April 1998. Under the terms of the lease, the Company was
obligated to renovate restaurant facilities as specified in approved plans, and
the lessor was obligated to reimburse the Company for construction expenses not
to exceed $400,000. The lease provided for annual base rent equal to the
interest on funds borrowed by the lessor to fund construction costs from a bank
or commercial lending institution plus 1% until the restaurant commences
operations and $10,000 per month thereafter plus 5% of gross sales to the extent
such percentage rent exceeds the base rent. The lease was for a twenty-year term
with options to renew for two additional five-year terms. The Company was
reimbursed for construction expenses totaling $400,000 under the lease and paid
rent totaling $57,200 during 1998.
On September 30, 1998, the Company entered into an agreement to purchase the
land and building, including improvements from West Broad Development, LLC. The
purchase was made at fair market value as determined by an independent
appraisal. The Company, at the time of purchase, entered into a modification
agreement with a local bank to modify an existing promissory note on the land
and building. In modifying the promissory note the principal amount was
increased to $1,000,000. At the time of the purchase, the Company terminated its
capital lease obligation to West Broad Development, LLC.
KELLER LLC. The Company leases the facilities and related real property for its
Springdale, Ohio restaurant from Keller LLC, a limited liability company in
which George Keller, a director of the Company, owns a substantial interest. In
April 1995, Tumbleweed, LLC assigned all of its rights and obligations with
respect to the site for the Springdale restaurant, to Keller LLC in exchange for
Keller LLC agreeing to construct a restaurant facility to be leased to the
Company. The restaurant opened in November 1995. The lease required Keller LLC
to invest $1,625,000, and the Company to pay annual base rent of $186,689 for an
initial term of eleven years through 2006. In addition, the Company pays an
amount equal to 5% of the excess, if any, of the Company's gross sales during
such year, over $2,100,000. The lease is for an eleven-year term with options to
renew for four additional five-year terms. The Company paid rent totaling
$186,689 during 1998.
DOUGLASS VENTURES. The Company subleases the facilities and related real
property for its Bowling Green, Kentucky restaurant from Blue Door - Bowling
Green Joint Venture ("Blue Door") on terms substantially similar to the terms on
which Blue Door leases the facilities and related real property from two
co-lessors. The co-lessors are Douglass Ventures, a Kentucky general partnership
and stockholder of the Company in which David M. Roth, a director of the
Company, is a general partner, and an unrelated third party. The lease was in
effect at the time the Company acquired the Tumbleweed assets in January 1995
and the restaurant opened in July 1995. Under the terms of the lease, the
Company pays annual base rent of $104,000 for ten years which will be adjusted
in years eleven and sixteen for cost of living increases. The lease also
provides for additional rent equal to the amount, if any, by which 6% of the
Company's gross sales exceeds the annual base rent payable. The lease is for a
twenty-year term with options to renew by written agreement. The Company paid
rent totaling $52,000 during 1998.
TW-DIXIEBASH, LLC. The Company leases the facilities and related real property
for its Bardstown Road and Valley Station restaurants from TW-DixieBash, LLC, a
limited liability company in which David M. Roth and James M. Mulrooney,
directors of the Company, 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, the Company has built the restaurant facilities as specified in
approved plans, and the Lessor was obligated to reimburse the Company for
construction expenses not to exceed $700,000 and $500,000, respectively. The
Bardstown Road sublease provides for the assumption of all rent under the ground
lease agreement with Bashford Manor Mall Joint Venture. The sublease also
provided for interest to be paid during the construction period based on
TW-DixieBash's investment until the restaurant commenced operations and $7,000
per month thereafter plus 30% of the restaurant's positive net cash flow. The
- 29 -
lease is for a twenty-year term with no option to renew. The Company was
reimbursed for construction expenses totaling $700,000 under the Bardstown Road
lease and paid rent totaling $197,500 during 1998. The Valley Station sublease
provides for the assumption of all rent under the Holiday Station Associates
Limited Lease. The sublease also provided for interest to be paid during the
construction period based on TW-DixieBash's investment until the restaurant
commenced operations and $5,000 per month thereafter, plus 30% of the
restaurant's positive net cash flow. The sublease is for a twenty-year term with
options to renew for three additional five-year terms. The Company was
reimbursed for construction expenses totaling $145,000 in 1998 under the Valley
Station sublease. The Company paid rent payments totaling $97,500 during 1998.
OTHER RELATED PARTY TRANSACTIONS
TUMBLEWEED INTERNATIONAL, LLC. In August 1997, the Company entered into the
International Agreement with Tumbleweed International LLC, a restaurant
developer based in Brussels, Belgium. The International Agreement grants certain
licensing and franchising rights to International for the development of
Tumbleweed restaurants outside of the Western Hemisphere. See
"Business--International Licensing Agreement." International is a limited
liability company owned by three corporations controlled by a group of
stockholders including Terrance A. Smith, David M. Roth, Minx Auerbach and
George Keller, who are directors of the Company. In 1998, International paid
$7,500 in fees to the Company under the International Agreement.
T.M. RIDERS, LLC. During 1996, the Company sold certain assets of its four food
court restaurants and it's 50% interest in a joint venture which operates a food
court to T.M. Riders, LLC (T.M. Riders). In exchange for essentially all the
assets of the food courts and its interest in the joint venture, the Company
received $100,000 in cash and a note receivable for $500,000, due in annual
installments of $100,000 plus interest at the rate of 8% per year beginning
December 1, 1997 over five years. The gain on the sale of the food courts and
interest in the joint venture of approximately $71,300 is included in other
revenues in 1996.
In February 1997, the Company invested a nominal amount in T.M. Riders in
exchange for a 9.5% interest of the common membership units of T.M. Riders. The
Managing Directors of TM Riders include John A. Butorac, Jr., James M.
Mulrooney, David M. Roth and George R. Keller, all of whom are directors of the
Company. After ten stores have opened, the Company will receive fees from T.M.
Riders based on store openings and royalty fees base on T.M. Riders' system-wide
sales. In September 1998, the Company relinquished its interest in T.M. Riders.
In December 1998, the Company assigned the T.M. Riders' promissory note
receivable, which had an outstanding principal balance of $400,000 as of the
date of assignment, to the Common Members of the Company, which include Messrs.
Butorac, Mulrooney and Roth, who are Directors of the Company. In consideration
for the assignment, each Common Member assigned to the Company a proportionate
amount of their respective Common Member interests in the Company. This
transaction has been accounted for as a distribution to the Common Members and
the number of shares of common stock these members received was reduced by
40,000 shares in the merger of the Company into Tumbleweed, Inc..
In 1998, the Company recorded interest payments from T.M. Riders totaling
$32,000. The Company also provides accounting services for this entity for which
fees are charged. Such accounting fees and royalties totaled $31,300 in 1998.
TW-TENNESSEE, LLC. In February 1997, the Company 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 a franchisee of the Company. David M. Roth, a director of the Company, also
owns a membership interest in TW-Tennessee. On September 30, 1998, the Company
sold its interest in TW-Tennessee to certain members of the Company for $25,000.
The Company guaranteed, on a pro-rata basis, renewals of certain guaranteed
indebtedness and any replacement indebtedness of TW-Tennessee, to the extent and
in the amounts not to exceed the amounts guaranteed as of September 30, 1998. As
of December 31, 1998, the Company has guaranteed certain TW-Tennessee
obligations as follows: a) up to $1,200,000 under a bank line of credit, b)
approximately $1,700,000 of a lease financing agreement and c) equipment leases
with a bank totaling approximately $983,400 jointly and severally with
TW-Tennessee common members. In 1998, TW- Tennessee paid royalties and franchise
fees of $223,300 and other fees of $75,000 to the Company under the franchise
agreeement.
TW-INDIANA, LLC. David M. Roth, a director of the Company, is a member in
TW-Indiana, LLC, which in April 1998 acquired the franchise rights to five
full-service Tumbleweed restaurants in Indiana and Kentucky from a third party.
Franchise royalties recorded by the Company in relation to this entity were
approximately $242,500 in 1998.
- 30 -
OTHER TRANSACTIONS. David M. Roth is a principal in the law firm Roth Foley
Bryant & Cooper, PLLC, which provided legal services to the Company during 1998
and may be expected to render such services to the Company in the future. The
Company paid $187,975 in fees for legal services rendered by Roth Foley Bryant &
Cooper, PLLC for 1998.
ITEM IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: The financial statements of Tumbleweed,
Inc. and the predecessor, Tumbleweed, LLC are included after this
Item 14.
(2) Financial Statement Schedules: Not Applicable
(3) Listing of Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2 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 Revolving Credit Loan Agreement, dated January 24, 1995, between
Bank One, Kentucky, N.A. (f/k/a Liberty National Bank & Trust
Company of Kentucky) and Registrant*
10.2 Revolving Line of Credit Note, dated August 8, 1996,
between Tumbleweed, LLC and National City Bank of Kentucky
and related Loan Agreement*
10.3 Master International License Agreement, dated August 29,
1997, between Tumbleweed International LLC and Tumbleweed, LLC*
10.4 Employment Agreement between John A. Butorac, Jr. and Tumbleweed,
Inc.*
10.5 Employment Agreement between James M. Mulrooney and Tumbleweed,
Inc.*
10.6 Lease Agreement, dated August 28, 1997, between West Broad
Development, LLC and Tumbleweed, LLC*
10.7 Lease Agreement between Keller LLC and Tumbleweed, LLC*
10.8 Agreement and Assignment, dated April 20, 1995, between Keller
LLC and Tumbleweed, LLC*
10.9 Lease Agreement, dated April 1, 1995, between Douglass Ventures,
Abfam, Inc. and Blue Door-Bowling Green Joint Venture*
10.10 Sublease Agreement, dated June 30, 1995, among Douglass Ventures,
Abfam, Inc., Blue Door-Bowling Green Joint Venture and
Tumbleweed, LLC*
10.11 Sublease Agreement, dated February 5, 1997, between
TW-Dixie Bash, LLC and Tumbleweed, LLC (for Bardstown Road
restaurant)*
- 31 -
10.12 Sublease Agreement, dated February 5, 1997, between
TW-Dixie Bash, LLC and Tumbleweed, LLC (for Valley Station
restaurant)*
10.13 Asset Purchase Agreement, dated October 1, 1996, between
Tex-Mex To You, LLC and Tumbleweed, LLC*
10.14 Commitment Letter, dated June 12, 1997, between CNL Fund
Advisors, Inc. and TW Tennessee, LLC*
10.15 Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation
Plan*
10.16 Form of Standard Franchise Agreement for Tumbleweed, LLC*
10.17 Articles of Incorporation of Tumbleweed Marketing Fund, Inc.*
10.18 By-laws of Tumbleweed Marketing Fund, Inc.*
10.19 Bonus Compensation Plan for Senior Executives*
27 Financial Data Schedule
99 Registration Rights Agreement between Tumbleweed, Inc. and
Tumbleweed, LLC*
- --------------
* Incorporated by reference to exhibits of the same number filed with
Registration No. 333-57931
** Incorporated by reference to exhibits of the same number filed with
Form 8-A filed by Tumbleweed, Inc. on February 25, 1999.
(b) During the quarter ended December 31, 1998, the Company did not file any
Reports on Form 8-K.
- 32 -
INDEX TO FINANCIAL STATEMENTS
PAGE
Tumbleweed, Inc.
Report of Independent Auditors...................................- F-1 -
Financial Statements
Balance Sheet as of December 31, 1998.....................- F-2 -
Notes to the Balance Sheet................................- F-3 -
Tumbleweed, LLC
Report of Independent Auditors...................................- F-5 -
Financial Statements
Statements of Income for the years ended December 31,
1996, 1997 and 1998..................................- F-6 -
Balance Sheets as of December 31, 1997 and 1998...........- F-7 -
Statements of Redeemable Members' Equity, Members'
Equity and Retained Earnings (Deficit) for the
years ended December 31, 1996, 1997 and 1998.........- F-9 -
Statements of Cash Flows for the years ended December
31, 1996, 1997 and 1998.............................- F-10 -
Notes to the Financial Statements........................- F-11 -
Report of Independent Auditors
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying balance sheet of Tumbleweed, Inc. as of
December 31, 1998. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Tumbleweed, Inc. as of December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 1, 1999
F-1
Tumbleweed, Inc.
Balance Sheet
December 31, 1998
Assets
Cash $ 1
------------------
Total assets $ 1
==================
Stockholders' equity
Preferred stock, $.01 par value,
1,000,000 shares authorized;
no shares issued and outstanding $ -
Common stock, $.01 par value,
16,500,000 shares authorized;
13 shares issued and outstanding 1
Paid-in capital 129
Retained earnings (deficit) (129)
-----------------
Total stockholders' equity $ 1
==================
See accompanying notes.
F-2
Tumbleweed, Inc.
Notes to the Balance Sheet
December 31, 1998
1. DESCRIPTION OF BUSINESS
Tumbleweed, Inc. (the Company) was legally formed in December 1997 and
capitalized on June 23, 1998 with the issuance of 13 shares of Company common
stock at $10 per share. Effective January 1, 1999, and as a result of the sale
of 776,543 shares of common stock in an initial public offering (IPO),
Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of the
current members of Tumbleweed were converted into a total of 5,105,000 shares of
Company common stock. As of December 31, 1998, Tumbleweed owns and operates 25
restaurants in Kentucky, Indiana and Ohio, and franchises an additional 13
restaurants in Indiana, Illinois, Tennessee and Wisconsin. Tumbleweed also
licenses five restaurants in Germany, Saudi Arabia and Jordan.
2. BASIS OF PRESENTATION
The Company's assets at December 31, 1998 consist solely of cash received in
connection with the capitalization of the Company. The Company has not conducted
any operations and all activities to date have been related to the IPO and the
merger with Tumbleweed. During 1998, the Company opened a bank account for the
cash received in connection with the capitalization and, as a result of
maintaining the cash account, the Company incurred expenses totaling $129 during
1998. All expenditures related to the IPO have been funded and recorded by
Tumbleweed. Accordingly, statements of operations, changes in stockholders'
equity and cash flows would not provide meaningful information and have been
omitted.
3. STOCK INCENTIVE PLAN
In June 1998, the Company adopted a Stock Option and Incentive Compensation Plan
(the "Plan"). The Plan provides for the granting of any of the following awards
to eligible employees or directors of the Company and its subsidiaries: (i)
employee stock options, including both "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code ("ISOs") and options that do
not qualify as ISOs; (ii) automatic grants of options to nonemployee directors;
(iii) stock appreciation rights; and (iv) restricted stock and performance stock
awards. The Plan is intended to
F-3
Tumbleweed, Inc.
Notes to the Balance Sheet (continued)
3. STOCK INCENTIVE PLAN (Continued)
provide incentives and rewards for employees and directors to support the
implementation of the Company's business plan and to align the interests of
employees and directors with those of the Company's stockholders. There were no
awards issued or outstanding under the Plan as of December 31, 1998.
The Plan is administered by the Compensation Committee of the Company's Board of
Directors. The Committee is comprised of three independent directors, who are
not current employees of the Company and who do not receive any remuneration
from the Company in any capacity other than as a director. The Committee is
authorized, among other things, to determine employees to whom grants of awards
will be made and take such action as it deems necessary or advisable for the
administration of the Plan.
The Common Stock subject to the Plan will be authorized but unissued shares or
previously acquired shares. The number of shares of Common Stock available for
grant of awards under the Plan equals the greater of 635,000 shares, or 10% of
the number of shares of Common Stock outstanding from time to time, including
100,000 shares reserved for options automatically granted to nonemployee
directors under the Plan.
As of February 15, 1999, the Company granted options for a total of
approximately 340,000 shares to eligible employees and 60,000 shares to
nonemployee directors. The exercise price of the options is equal to the initial
public offering price of $10 per share. The exercise price of future grants will
be equal to the market price as of the dates of such grants. Stock options
granted under the Plan will be exercisable for a term of not more than ten
years, as determined by the Committee. The option grants will become exercisable
for 33% of the number of shares subject to the option on each of the first,
second and third anniversaries of the date of grant and expire ten years from
the date of grant.
4. SUBSEQUENT EVENTS
In February 1999, the Company entered into a secured mortgage arrangement for a
restaurant location in an amount totaling approximately $1,060,000.
F-4
Report of Independent Auditors
The Members
Tumbleweed, LLC
We have audited the accompanying balance sheets of Tumbleweed, LLC as of
December 31, 1997 and 1998, and the related statements of income, redeemable
members= equity, members= equity and retained earnings (deficit) and cash flows
for each of three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company=s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tumbleweed, LLC at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 1, 1999
- F5 -
Tumbleweed, LLC
Statements of Income
Years ended December 31
1996 1997 1998
--------------------------------------------
Revenues:
Restaurant sales $ 23,284,007 $ 27,891,128 $ 40,490,933
Commissary sales 1,795,529 1,007,011 1,041,266
Franchise fees and royalties 474,870 563,056 770,806
Other revenues 177,317 365,054 504,639
------------- ------------ ------------
Total revenues 25,731,723 29,826,249 42,807,644
Operating expenses:
Restaurant cost of sales 7,103,357 8,191,928 11,788,578
Commissary cost of sales 1,649,502 887,793 905,814
Operating expenses 12,386,119 14,035,693 20,881,212
Selling, general and administrative expenses 2,250,827 3,051,740 4,150,303
Preopening amortization 405,502 544,723 816,604
Depreciation and amortization 1,231,290 971,863 1,442,011
------------- ------------ ------------
Total operating expenses 25,026,597 27,683,740 39,984,522
------------- ------------ ------------
Income from operations 705,126 2,142,509 2,823,122
Other income (expense):
Interest income 18,313 62,120 61,759
Interest expense (222,123) (490,718) (931,471)
------------- ------------ ------------
Total other expense (203,810) (428,598) (869,712)
------------- ------------ ------------
Net income $ 501,316 $ 1,713,911 $ 1,953,410
============ ============ ============
Pro forma income data (unaudited):
Net income as reported $ 501,316 $ 1,713,911 $ 1,953,410
Pro forma income taxes (180,474) (617,008) (703,228)
------------ ------------ ------------
Pro forma net income $ 320,842 $ 1,096,903 $ 1,250,182
============ ============ ============
Pro forma net income per share-basic and diluted $ 0.06 $ 0.21 $ 0.24
============ ============ ============
Shares used in computing pro forma net income per share 5,105,000 5,105,000 5,105,000
============ ============ ============
See accompanying notes.
F-6
Tumbleweed, LLC
Balance Sheets
Pro forma
December 31 December 31
1997 1998 1998
------------------------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,228,867 $ 1,898,973 $ 1,898,973
Accounts receivable 346,700 433,872 433,872
Note receivable from affiliate 100,000 - -
Inventories 825,029 1,333,591 1,333,591
Deferred preopening expenses 267,100 524,669 524,669
Prepaid expenses 282,590 330,439 330,439
---------------------------- ------------
Total current assets 3,050,286 4,521,544 4,521,544
Property and equipment, net 19,330,132 24,920,797 24,920,797
Note receivable from affiliate 300,000 - -
Goodwill, net of accumulated amortization of
$329,442 in 1997 and $440,242 in 1998 2,944,504 2,833,704 2,833,704
Other assets 443,559 1,404,861 1,404,861
---------------------------- -------------
Total assets $ 26,068,481 $ 33,680,906 $ 33,680,906
============================ =============
See accompanying notes.
F-7
Pro forma
December 31 December 31
1997 1998 1998
------------------------------- ----------------
(Unaudited)
Liabilities, Redeemable Members' Equity,
Members' Equity and Retained Earnings (Deficit)
Current liabilities:
Short-term borrowings $ - $ 6,990,348 $ 6,990,348
Accounts payable 1,174,645 1,781,418 1,781,418
Accrued liabilities 890,255 1,873,651 1,873,651
Deferred income taxes - - 467,420
Current maturities on long-term
debt and capital leases 509,779 895,310 895,310
------------------------------- ----------------
Total current liabilities 2,574,679 11,540,727 12,008,147
Long-term debt, less current maturities 5,750,841 9,180,358 9,180,358
Capital lease obligations, less current
maturities 2,280,964 3,287,296 3,287,296
Deferred income taxes - - 172,203
Other liabilities 118,584 94,838 94,838
------------------------------- ----------------
Total long-term liabilities 8,150,389 12,562,492 12,734,695
------------------------------- ----------------
Total liabilities 10,725,068 24,103,219 24,742,842
Redeemable members' equity 23,419,738 18,924,688 -
Members' equity 6,959 354,459 -
Retained earnings (deficit) (8,083,284) (9,701,460) -
Pro forma stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued
and outstanding
Common stock, $.01 par value,16,500,000
shares authorized; 5,105,000 shares
issued and outstanding 51,050
Paid-in capital 8,887,014
------------------------------- ----------------
Total pro forma stockholders' equity - - 8,938,064
------------------------------- ----------------
Total liabilities, redeemable members'
equity, members' equity and retained
earnings (deficit) $ 26,068,481 $33,680,906 $ 33,680,906
=============================== ================
See accompanying notes.
F-8
Tumbleweed, LLC
Statements of Redeemable Members' Equity, Members' Equity and Retained Earnings (Deficit)
Years ended December 31, 1996, 1997 and 1998
Redeemable Members' Equity (Deficiency)
Members ------------------------------------------ Retained
Equity-Class A Common Class B Class C Earnings
Members Members Members Member Total (Deficit)
--------------------------------------------------------------------------
Balance at January 1, 1996 $ 16,413,197 $ 6,000 $ 459 $ 500 $ 6,959 $ (2,721,253)
Proceeds from issuance of members' equity 582,962 - - - - -
Distributions of members' equity (628,677) - - - - -
Net income - - - - - 501,316
Accretion of redeemable members' equity 3,865,037 - - - - (3,865,037)
---------------------------------------------------------------------------
20,232,519 6,000 459 500 6,959 (6,084,974)
Balance at December 31, 1996
Proceeds from issuance of members' equity 50,958 - - - - -
Distributions of members' equity (575,960) - - - - -
Net income - - - - - 1,713,911
Accretion of redeemable members' equity 3,712,221 - - - - (3,712,221)
---------------------------------------------------------------------------
Balance at December 31, 1997 23,419,738 6,000 459 500 6,959 (8,083,284)
Capital contribution - - 747,500 - 747,500 -
Distributions of members' equity (1,076,288) (400,000) - - (400,000) -
Assumption of members' line of credit (6,990,348) - - - - -
Net income - - - - - 1,953,410
Accretion of redeemable members' equity 3,571,586 - - - - (3,571,586)
---------------------------------------------------------------------------
Balance at December 31, 1998 $ 18,924,688 $ (394,000) $ 747,959 $ 500 $ 354,459 $ (9,701,460)
===========================================================================
See accompanying notes.
F-9
Tumbleweed, LLC
Statements of Cash Flows
Years ended December 31
1996 1997 1998
----------------------------------------
Operating activities:
Net income $ 501,316 $ 1,713,911 $ 1,953,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 604,534 829,250 1,285,833
Amortization 626,756 142,613 156,178
Preopening amortization 405,502 544,723 816,604
Gain on sale of food courts (71,298) - -
Loss on disposition of property and equipment 2,732 13,499 7,324
Changes in operating assets and liabilities:
Accounts receivable 87,382 (50,091) (87,172)
Inventories (307,900) (126,573) (508,562)
Deferred preopening expenses (726,601) (316,822) (1,074,173)
Prepaid expenses (62,063) 19,062 (51,466)
Other assets (207,125) (98,042) (114,550)
Accounts payable 124,097 31,938 104,590
Accrued liabilities 92,647 258,784 983,396
Other liabilities - 78,584 (23,746)
----------------------------------------
Net cash provided by operating activities 1,069,979 3,040,836 3,447,666
Investing activities:
Purchases of property and equipment (4,712,962) (4,105,089) (5,313,575)
Proceeds from sale of property and equipment 1,635,815 - -
Proceeds from sale of food courts, net of
cash relinquished 96,100 100,000 -
----------------------------------------
Net cash used in investing activities (2,981,047) (4,005,089) (5,313,575)
Financing activities:
Capital contribution from Class B members - - 747,500
Proceeds from issuance of members' equity 582,962 50,958 -
Distribution of members' equity (628,677) (575,960) (1,076,288)
Proceeds from issuance of long-term debt 5,437,311 3,452,361 5,580,463
Payments on long-term debt and capital lease
obligations (4,532,110) (1,654,463) (2,329,328)
Payment of public offering costs - (111,485) (386,332)
----------------------------------------
Net cash provided by financing activities 859,486 1,161,411 2,536,015
----------------------------------------
Net increase (decrease) in cash and cash equivalents (1,051,582) 197,158 670,106
Cash and cash equivalents at beginning of year 2,083,291 1,031,709 1,228,867
----------------------------------------
Cash and cash equivalents at end of year $ 1,031,709 $ 1,228,867 $ 1,898,973
========================================
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 222,123 $ 473,055 $ 947,674
========================================
Noncash investing and financing activities:
Property and equipment acquired by seller
financing and capital lease obligations $ 1,793,991 $ 967,529 $ 1,570,246
========================================
Public offering costs not paid at year-end $ - $ - $ 502,183
========================================
See accompanying notes.
F-10
Tumbleweed, LLC
Notes to Financial Statements
1. ORGANIZATIONAL MATTERS
The Company operates and franchises Tumbleweed Southwest Mesquite Grill and Bar
full service restaurants. Following is a summary of the number of restaurants
open at the end of each year:
December 31
1996 1997 1998
------------------------------------------
Company owned 15 17 25
Franchised and licensed 9 12 18
--- -- --
Total 24 29 43
== == ==
The restaurant facilities are located in Kentucky, Indiana, Ohio, Illinois,
Wisconsin, Tennessee and five overseas restaurants are located in Germany, Saudi
Arabia and Jordan.
Effective January 1, 1999, the Company merged into Tumbleweed, Inc. as discussed
below. Prior to the merger, the Company and its owners (Members) operated
pursuant to an Operating Agreement dated September 19, 1994. Members of the
Company consisted of Common Members, Class A Members, Class B Members and a
Class C Member. Certain Common Members acted as the Managers of the Company and,
acting unanimously, generally had voting control of the Company.
Class A Members of the Company had, in addition to their cash contributions,
provided financing which was accounted for as redeemable members' equity prior
to the Company's assumption of the debt on December 31, 1998 (see Note 7). The
capital accounts of the Common, Class B and Class C Members, totaling
$(394,000), $747,959 and $500, respectively, at December 31, 1998 represent
these members' equity investment in the Company.
IPO REGISTRATION AND REORGANIZATION
Tumbleweed, Inc. was incorporated in December 1997 and capitalized in June 1998
in anticipation of an initial public offering in 1998. Effective January 1,
1999, and as a result of the sale of 776,543 shares of common stock at $10 per
share in the IPO, the Company was merged into Tumbleweed, Inc. The interests of
the current members of the Company were converted into a total of 5,105,000
shares of Tumbleweed, Inc. common stock.
F-11
Tumbleweed, LLC
Notes to Financial Statements
1. ORGANIZATIONAL MATTERS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the accompanying pro forma balance sheet as of December 31, 1998 reflects the
change in capitalization attributable to the conversion of the Company's
members' interests into 5,105,000 shares of Tumbleweed, Inc. common stock as if
the IPO had closed on December 31, 1998 (excluding the effects of the offering
proceeds). The pro forma balance sheet also reflects the deferred tax effects of
the Company changing from a limited liability company (which is taxed as a
partnership) to a regular corporate taxable status. Such deferred tax effects
will be included in income on January 1, 1999, the date the change in tax status
occurred.
Additionally, pro forma net income in the accompanying pro forma income data for
the year ended December 31, 1998 reflects a pro forma adjustment to historical
net income for federal and state income taxes at an assumed effective rate of
36%. Pro forma net income per share is computed based upon pro forma net income
and the weighted average number of shares of common stock outstanding during the
year assuming the conversion of the Company's members' interests into common
stock as of the beginning of the year.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and deposits at financial
institutions with maturities of less than three months when purchased.
INVENTORIES
Inventories, which consist of smallwares, food, beverages and supplies, are
stated at the lower of average cost or market.
F-12
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED PREOPENING EXPENSES
Deferred preopening expenses include the direct costs typically associated with
opening a new restaurant. These costs consist primarily of costs incurred to
develop the new restaurant management team, marketing and training. These
expenses are amortized on a straight-line method over twelve months from the
restaurant opening date.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities.
The SOP is effective beginning on January 1, 1999, and requires that start-up
costs capitalized prior to January 1, 1999 be written-off and any future
start-up costs to be expensed as incurred. The unamortized balance of the
Company's deferred preopening costs ($524,669 as of December 31, 1998) will be
written-off (net of income taxes) as a cumulative effect of an accounting change
on January 1, 1999. It is not practical to estimate what the effect of the
change will be on 1999 earnings.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on the straight-line
method. Buildings and leasehold improvements are amortized over the lesser of
the terms of the leases, including renewal options, or the estimated useful
lives of the assets, which range from ten to thirty years. Equipment is
depreciated over the estimated useful lives of the assets, which range from five
to ten years. Maintenance and repairs which do not enhance the value of or
increase the life of the assets are charged to costs and expenses as incurred.
CONSTRUCTION IN PROGRESS
The Company capitalizes all direct costs incurred in the construction of new
restaurants. Upon opening, these costs are depreciated or amortized and charged
to expense based upon their property classification.
GOODWILL
Goodwill is amortized on the straight-line method over thirty years.
F-13
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include costs incurred in connection with the Company's initial
public offering. These costs which total approximately $111,000 and $1,000,000
as of December 31 1997 and 1998, respectively, will be funded from the proceeds
of the offering when received in January 1999. Amortization expense in 1996
includes $500,000 related to a non-compete agreement which expired in 1996.
LONG-LIVED ASSETS
The carrying amount of long-lived assets, including goodwill, is reviewed if
facts and circumstances suggest that it may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined based on
the estimated undiscounted cash flows of the asset over the remaining
amortization period, the carrying amount of long-lived assets is reduced by the
estimated shortfall of cash flows. The Company assesses long-lived assets for
impairment under Financial Accounting Standards Board Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair value.
REVENUE RECOGNITION
Franchise fees are recognized when all material services, primarily site
approval and management and staff training, have been substantially performed by
the Company and the restaurant has opened for business. Fees received pursuant
to development agreements which grant the right to develop franchised
restaurants in future periods in specific geographic areas are deferred and
recognized on a pro rata basis as the franchised restaurants subject to the
development agreements begin operations. Franchise royalties, which are based on
a percentage of monthly sales, are recognized as income when earned. Costs
associated with franchise operations are expensed as incurred.
F-14
Tumbleweed, LLC
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs include Company-owned restaurant contributions to the
Tumbleweed Marketing Fund, Inc. ("the Marketing Fund") and developing and
conducting advertising activities, including the placement of electronic and
print materials developed by the Marketing Fund. All advertising and related
costs are expensed as incurred. Contributions by Company-owned and franchised
restaurants to the Marketing Fund are based on an established percentage of
monthly restaurant revenues. The Marketing Fund is responsible for the
development of marketing and advertising materials for use throughout the
Company's system. The Marketing Fund is accounted for separately and is not
included in the financial statements of the Company. Contributions to the
Marketing Fund for the years ended December 31, 1996, 1997 and 1998 were
$50,657, $66,488 and $95,674, respectively. Advertising expense, which includes
contributions to the Marketing Fund, for the years ended December 31, 1996, 1997
and 1998 were $463,637, $631,421 and $1,052,075, respectively.
INCOME TAXES
Through December 31, 1998, the Company was a limited liability company which is
taxed as a partnership for federal and state income tax purposes. Accordingly,
any tax liability related to income would be reported by the Members of the
Company. Subsequent to the merger discussed in Note 1, Tumbleweed, Inc. will be
taxed as a corporation.
RECENTLY ISSUED ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and also requires that those enterprises report
selected information about operating segments in interim financial reports. The
adoption of Statement 131 did not have an effect on the Company's results of
operations or financial position, but did effect the disclosure of segment
information (see Note 10).
F-15
Tumbleweed, LLC
Notes to Financial Statements
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
December 31
1997 1998
----------------------------
Land and land improvements $ 4,926,744 $ 6,869,638
Buildings and improvements 6,427,063 9,999,830
Leasehold improvements 1,831,734 2,318,396
Equipment 2,953,802 3,986,928
Building and equipment under capital leases 2,664,838 4,249,458
Construction in progress 2,297,135 536,324
----------------------------
21,101,316 27,960,574
Less accumulated depreciation and amortization (1,771,184) (3,039,777)
----------------------------
$ 19,330,132 $ 24,920,797
============================
4. ACCRUED LIABILITIES
Accrued liabilities consist of:
December 31
1997 1998
----------------------------
Accrued payroll and related taxes $ 416,066 $ 792,809
Accrued insurance and fees 120,800 284,270
Accrued taxes, other than income and payroll 157,693 393,593
Gift certificate liability 127,922 275,743
Other 67,774 127,236
----------------------------
$ 890,255 $ 1,873,651
============================
F-16
Tumbleweed, LLC
Notes to Financial Statements
5. LONG-TERM DEBT
Long-term debt consists of:
December 31
1997 1998
--------------------------------
Secured $5,000,000 mortgage revolving
line of credit note, bearing interest
at prime rate plus .25% (8.0% at December
31, 1998), due December 31, 2000 $ 3,260,391 $ 4,302,148
Secured mortgage note payable, bearing
interest at 8.5%, payable in monthly
installments through February 15, 2008 - 991,396
Secured mortgage note payable, bearing
interest at prime plus 1.25% (9.0% at
December 31, 1998), payable in monthly
installments, due November 27, 2016 709,375 671,875
Secured mortgage note payable, bearing
interest at commercial paper rate plus
3% (8.1% at December 31, 1998), due
January 1, 2005 1,200,000 1,111,928
Secured mortgage note payable, bearing
interest at prime rate plus 1% (8.75%
at December 31, 1998), payable in monthly
installments through October 1, 2017 133,937 1,084,274
Secured mortgage note payable, bearing
interest at commercial paper rate plus
3.1% (8.2% at December 31, 1998), due
May 1, 2005 - 695,230
Other installment notes payable 733,280 750,595
--------------------------------
6,036,983 9,607,446
Less current maturities 286,142 427,088
--------------------------------
Long-term debt $ 5,750,841 $ 9,180,358
================================
Property and equipment with a net book value of approximately $14,515,000 at
December 31, 1998 collateralize the Company's long-term debt.
F-17
Tumbleweed, LLC
Notes to Financial Statements
5. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities of long-term debt for the years subsequent to
December 31, 1998 are as follows:
1999 $ 427,088
2000 4,708,098
2001 418,951
2002 369,778
2003 276,893
Thereafter 3,406,638
----------
Total $9,607,446
==========
The terms of certain loan agreements include various provisions which require
the Company to (i) maintain defined net worth and coverage ratios, (ii) limit
the incurrence of certain liens or encumbrances in excess of defined amounts,
(iii) maintain defined leverage ratios and (iv) prohibit the payment of
dividends. Management does not believe that compliance with the credit terms
will adversely impact the Company's future operations.
Interest costs capitalized during the construction period of restaurants were
$157,286 in 1996, $103,488 in 1997 and $104,231 in 1998.
F-18
Tumbleweed, LLC
Notes to Financial Statements
6. LEASES
The Company leases certain buildings and equipment under capital lease
agreements with related and third parties. The equipment leases have five to
seven year terms. The building leases expire in 2016 and 2017. Future minimum
lease payments under the capital leases and the net present value of the future
minimum lease payments at December 31, 1998 were as follows:
Related Party Other
Lease Leases Total
-------------------------------------------------
1999 $ 84,000 $ 690,849 $ 774,849
2000 84,000 690,849 774,849
2001 84,000 690,849 774,849
2002 84,000 575,393 659,393
2003 84,000 457,248 541,248
Thereafter 1,176,000 1,316,394 2,492,394
-------------------------------------------------
Total minimum lease payments $ 1,596,000 $ 4,421,582 6,017,582
================================
Less amount representing
interest at 7.9% to 12.0% (2,262,064)
------------------
Net present value of lease payments 3,755,518
Less current maturities 468,222
------------------
Long-term portion of capital leases $ 3,287,296
==================
F-19
Tumbleweed, LLC
Notes to Financial Statements
6. LEASES (CONTINUED)
The Company leases certain restaurants and equipment under operating leases
having terms expiring between 1999 and 2017. Most of the restaurant facility
leases have renewal clauses of five to twenty years exercisable at the option of
the Company and some of the leases are with related parties. Certain leases
require the payment of contingent rentals based on a percentage of gross
revenues. Future minimum lease payments on operating leases at December 31, 1998
were as follows:
Related Party Other
Leases Leases Total
-----------------------------------------------------
1999 $ 298,689 $ 1,117,331 $ 1,416,020
2000 298,689 1,017,331 1,316,020
2001 298,689 1,016,411 1,315,100
2002 298,689 1,014,857 1,313,546
2003 298,689 1,030,257 1,328,946
Thereafter 1,952,843 8,065,599 10,018,442
-----------------------------------------------------
$ 3,446,288 $ 13,261,786 $ 16,708,074
=====================================================
Total rental expense was approximately $801,800 in 1996, $975,300 in 1997 and
$1,455,500 in 1998 and included contingent rent of approximately $16,800 in
1996, $30,700 in 1997 and $178,700 in 1998. Rental expense for the related party
leases was approximately $237,700 in 1996, $282,000 in 1997 and $436,200 in
1998.
7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT
As of December 31, 1998, the Company had a $7,500,000 line of credit with a bank
for borrowing at the bank's prime rate plus 1/4%. Under a related assumption
agreement, the Class A Members directly assumed the total liability on a pro
rata basis until December 31, 1998 at which time the Company assumed the total
liability of $6,990,348. (The Company had drawn down $7,024,717 and $6,990,348
at December 31, 1997 and 1998, respectively, under this line of credit which was
to expire on January 11, 1999.) Prior to the Company assuming this line of
credit, the amounts borrowed under the line of credit were, in the first
instance, obligations of the Class A Members and, accordingly, were accounted
for as redeemable members' equity, and any interest and other related costs on
the debt funded by the Company were accounted for as distributions to the Class
A Members.
F-20
Tumbleweed, LLC
Notes to Financial Statements
7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT (CONTINUED)
The $6,990,348 borrowed under the line of credit as of December 31, 1998 was
repaid on January 5, 1999 out of the gross proceeds of $7,765,430 from the
Company's IPO (see Note 1). If an IPO had not occurred, any Class A Member had
the right to sell to the Company their interest in the Company at any time after
the fifth anniversary of the date that a Class A Member was admitted to the
Company (generally 2000). The selling price was to be the sum of cash
contributed by the Class A Member and an amount equal to an annual 30% internal
rate of return on the Class A Member's cash contributions and pro rata assumed
principal portion of the line of credit, taking into account all prior
distributions to such Class A Member. The total Class A Members' interests which
would have been required to be purchased by the Company in any one year was
limited and would have been payable in equal installments over a five-year term,
with interest. Redeemable members' equity in the accompanying balance sheets
includes the accretion of the annual 30% internal rate of return.
Through December 31, 1998, capital contributions by the Class A Members were
limited to their initial cash contributions in 1995 which amounted to $7,034,375
and borrowings under the line of credit assumed by the Class A Members.
8. RELATED PARTY TRANSACTIONS
During 1996, the Company sold certain assets of its four food court restaurants
and it's 50% interest in a joint venture which operates a food court to T.M.
Riders, LLC (T.M. Riders). In exchange for essentially all the assets of the
food courts and its interest in the joint venture, the Company received $100,000
in cash and a note receivable for $500,000, due in annual installments of
$100,000 plus interest at the rate of 8% per year beginning December 1, 1997
over five years. The gain on the sale of the food courts and interest in the
joint venture of approximately $71,300 is included in other revenues in 1996.
In February 1997, the Company invested a nominal amount in T.M. Riders in
exchange for a 9.5% common member interest. After ten stores have opened, the
Company will receive fees from T.M. Riders based on store openings and royalty
fees based on T.M. Riders' system-wide sales. In September 1998, the Company
relinquished its interest in T.M. Riders.
F-21
Tumbleweed, LLC
Notes to Financial Statements
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In December 1998, the Company assigned the T. M. Riders' promissory note
receivable, which had an outstanding principal balance of $400,000 as of the
date of assignment, to the Common Members of the Company. In consideration for
the assignment, each Common Member assigned to the Company a proportionate
amount of their respective Common Member interests in the Company. This
transaction has been accounted for as a distribution to the Common Members and
the number of shares of common stock these members received was reduced by
40,000 shares in the merger of the Company into Tumbleweed, Inc.
In February 1997, the Company invested a nominal amount in TW-Tennessee, LLC
(TW-Tennessee), a newly formed Tennessee limited liability company, in exchange
for a 9.5% common member interest. On September 30, 1998, the Company sold its
interest in TW-Tennessee to certain members of the Company for $25,000.
TW-Tennessee was organized to open and operate Tumbleweed full service
restaurants as a franchisee of the Company.
The Company guaranteed, on a pro-rata basis, renewals of certain guaranteed
indebtedness and any replacement indebtedness of TW-Tennessee, to the extent and
in the amounts not to exceed the amounts guaranteed as of September 30, 1998. As
of December 31, 1998, the Company has guaranteed certain TW-Tennessee
obligations as follows: a) up to $1,200,000 under a bank line of credit, b)
approximately $1,700,000 of a lease financing agreement and c) equipment leases
with a bank totaling approximately $983,400 jointly and severally with
TW-Tennessee common members.
TW-Tennessee and T.M. Riders are governed and managed by Boards, some members of
which are also members of the Company's Board and investors in the Company.
Certain of these individuals are also investors in TW-Tennessee and T.M. Riders.
F-22
Tumbleweed, LLC
Notes to Financial Statements
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company accounted for its investments in TW-Tennessee and T.M. Riders on the
equity method prior to their disposition. Amounts in the financial statements
related to the Company's investments in these entities for the years ended
December 31, 1997 and 1998 were not significant. Franchise fees and royalties
recorded by the Company in relation to these entities were $17,000, $79,000 and
$225,600 in 1996, 1997 and 1998, respectively. The Company also provides
management and accounting services for these entities for which fees are
charged. Such management and accounting fees recorded in other revenues related
to these entities totaled approximately $15,500, $57,600 and $104,000 in 1996,
1997 and 1998, respectively.
In August 1997, the Company entered into the International Agreement with
Tumbleweed International LLC (International), a restaurant developer based in
Brussels, Belgium. The International Agreement grants certain licensing and
franchising rights to International for the development of Tumbleweed
restaurants outside of the Western Hemisphere. International is a limited
liability company owned by three corporations which are controlled by certain
Members of the Company. In 1997 and 1998, International paid $15,750 and $7,500,
respectively, in fees to the Company under the International Agreement.
Two Common Members of the Company (both of which are now common stockholders,
and one of which is also a Director, of Tumbleweed, Inc.) are members in
TW-Indiana, LLC, which in April 1998 acquired the franchise rights to five
full-service Tumbleweed restaurants in Indiana and Kentucky from a third party.
Franchise royalties recorded by the Company in relation to this entity were
approximately $242,500 in 1998.
In September 1998, the Company entered into an agreement to purchase the land
and building, including improvements, located in Columbus, Ohio which was
formerly leased from West Broad Development LLC. Certain members of the Company
(all of which are now common stockholders, and one of which is also a Director,
of Tumbleweed, Inc.) are members in West Broad Development LLC. The purchase
price of $1,250,000 was at fair market value as determined by an independent
appraisal. The Company, at the time of purchase, entered into an agreement with
a bank modifying an existing promissory note on the land and building by
increasing the principal amount to $1,000,000.
F-23
Tumbleweed, LLC
Notes to Financial Statements
9. COMMITMENTS
At December 31, 1998, the Company had commitments of approximately $1,016,000
for the completion of the construction of two restaurants, for which landlord
financing has been secured.
10. SEGMENT INFORMATION
The Company has three reportable segments: restaurants, commissary and
corporate. The restaurant segment consists of the operations of all
company-owned restaurants and derives its revenues from the sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to corporate-owned and franchised restaurants. The
corporate segment derives revenues from sale of franchise rights, franchise
royalties and related services used in restaurant operations, and contains the
selling, general and administrative activities of the Company.
Generally, the Company evaluates performance and allocates resources based on
net income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Segment information for the years ended December 31 is as follows:
1996:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 23,284,007 $ 1,795,529 $ 652,187 $ 25,731,723
Intersegment revenues - 2,929,546 - 2,929,546
General and administrative
expenses - - 1,787,190 1,787,190
Advertising expenses - - 463,637 463,637
Depreciation and
amoritzation 486,799 102,864 641,627 1,231,290
Net interest expense - 85,817 117,993 203,810
Segment net income (loss) 2,993,979 195,601 (2,688,264) 501,316
Segment fixed assets 13,223,329 1,025,949 368,580 14,617,858
Expenditures for long-lived
assets 6,216,821 1,325 288,807 6,506,953
F-24
Tumbleweed, LLC
Notes to Financial Statements
10. SEGMENT INFORMATION (CONTINUED)
1997:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 27,891,128 $ 1,007,011 $ 928,110 $ 29,826,249
Intersegment revenues - 2,349,693 - 2,349,693
General and administrative
expenses - - 2,420,319 2,420,319
Advertising expenses - - 631,421 631,421
Depreciation and
amortization 683,266 108,004 180,593 971,863
Net interest expense - 85,957 342,641 428,598
Segment net income (loss) 4,351,013 203,458 (2,840,560) 1,713,911
Segment fixed assets 17,851,495 1,069,434 409,203 19,330,132
Expenditures for long-lived
assets 4,847,429 126,493 98,696 5,072,618
1998:
Restaurant Commissary Corporate Totals
---------------------------------------------------
Revenues from external
customers $ 40,490,933 $ 1,041,266 $1,275,445 $ 42,807,644
Intersegment revenues - 2,429,620 - 2,429,620
General and administrative
expenses - - 3,098,228 3,098,228
Advertising expenses - - 1,052,075 1,052,075
Depreciation and
amortization 1,107,301 116,446 218,264 1,442,011
Net interest expense - 161,700 708,012 869,712
Segment net income (loss) 5,853,334 173,361 (4,073,285) 1,953,410
Segment fixed assets 23,341,248 1,004,373 575,176 24,920,797
Expenditures for long-lived
assets 6,733,972 26,388 123,461 6,883,821
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville,
State of Kentucky.
TUMBLEWEED, INC.
Date: March 24, 1999 By: /s/ John A. Butorac, Jr.
----------------------------------------------
John A. Butorac, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in capacities and on the dates
indicated.
Title Date
/s/ John A. Butorac, Jr.
- ---------------------------
John A. Butorac, Jr. President and Chief March 24, 1999
Executive Officer and Director
/s/ James M. Mulrooney
- ---------------------------
James M. Mulrooney Chief Financial Officer, March 24, 1999
Treasurer, and Executive Vice
President and Director(Principal
Accounting Officer)
/s/ David M. Roth
- ---------------------------
David M. Roth Director March 24, 1999
/s/ Minx Auerbach
- ---------------------------
Minx Auerbach Director March 24, 1999
/s/ Lewis Bass
- ---------------------------
Lewis Bass Director March 24, 1999
/s/ Roger Drury
- ---------------------------
Roger Drury Director March 24, 1999
/s/ George Keller
- ---------------------------
George Keller Director March 24, 1999
/s/ Terrance A. Smith
- ---------------------------
Terrance A. Smith Director March 24, 1999