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UNITED STATES
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, 1999
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
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 10, 2000, was approximately $6,019,697. 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 closing sale price of the registrant's common stock on
March 10, 2000 ($5.13) as reported on The Nasdaq Stock Market's National Market.
The number of shares of common stock, par value of $.01 per share, outstanding
on March 10, 2000, was 5,863,930.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are
Part of Form 10-K incorporated by reference
- ---------------------- ------------------------------------------
Part III Proxy statement relating to the registrant's Annual
Meeting of Shareholders to be held May 11, 2000
Exhibit Index: Page 42-43
TUMBLEWEED, INC
PART I
ITEM 1. BUSINESS
At December 31, 1999, we owned, franchised or licensed 51 Tumbleweed Southwest
Mesquite Grill & Bar ("Tumbleweed") restaurants. We owned and operated 29
Tumbleweed restaurants in Kentucky, Indiana and Ohio. There were 17 franchised
Tumbleweed restaurants located in Indiana, Illinois, Kentucky, Tennessee and
Wisconsin, and five licensed restaurants located outside the United States in
Germany, Jordan, Egypt 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
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 12.2% of
restaurant sales during 1999.
Tumbleweed's menu pricing is designed to create a strong perception of value by
consumers. Prices for Tex-Mex dishes range from $1.59 for a single corn-shell
taco to $11.79 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.
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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.
MAINTAINING A FAVORABLE PRICE-TO-VALUE RELATIONSHIP. Tumbleweed's pricing
strategy is intended to appeal to value- driven customers as well as traditional
casual dining customers. Tumbleweed offers a wide selection of distinctive items
at a broad range of price points while, in management's view, providing a level
of food quality and service comparable or superior to that of other casual
dining restaurants. For 1999, the average check at a full-service Tumbleweed
restaurant, including beverages, was approximately $8.20 for lunch and $10.33
for dinner. Management believes that this pricing approach, together with
Tumbleweed's emphasis on variety and quality, creates a favorable price-to-value
perception that can increase customer volume and generate more frequent repeat
visits.
ACHIEVING TOTAL GUEST SATISFACTION. We are committed to providing prompt,
friendly and attentive service and consistent food quality to our customers. We
employ a quality control supervisor independent of our 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. We also use a "mystery shopper" program to compare actual
performance of restaurants to Tumbleweed standards and solicit comment cards
from customers to monitor and modify restaurant operations.
OPERATING STRATEGY
We use the following key operating strategies to make certain that we exceed the
expectations of our 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"). Our 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, we foster a strong corporate culture and encourage a
sense of personal commitment from our employees. We have 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. We are committed to offering
distinctive Tex-Mex and mesquite grilled foods to customers at reasonable prices
through the use of a commissary-based system. Management believes that the use
of a central commissary provides a significant strategic and competitive
advantage by enhancing our ability to maintain consistently high food quality,
minimizing restaurant kitchen space and equipment, and reducing the number of
skilled cooking positions. The system also enables restaurant managers and
kitchen staff to focus on the final preparation of menu items to Tumbleweed
standards.
Whenever feasible, the cooked ingredients used in Tumbleweed menu selections,
such as ground beef, chile con queso, and Mexican beans, are prepared in advance
at the commissary according to procedures designed to extend shelf life without
the addition of preservatives. The kitchen staff at each restaurant uses
commissary-supplied and other fresh ingredients for the final preparation of
individual orders. Management believes this system enhances our ability to
maintain rigorous operational and food preparation procedures and stringent
product shelf life standards. The commissary operates according to stringent
quality control standards and is subject to a daily inspection by a USDA
inspector on the premises. We maintain a contingency plan under which
centralized food preparation could be quickly resumed at another company's
facility should the commissary be rendered inoperative by weather or other
disaster.
GROWTH STRATEGY
Out 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, we have added new Company-owned and franchised
restaurants, while developing the infrastructure necessary to support our 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 our expansion strategy:
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OPENING RESTAURANTS IN TARGET MARKETS. We target mid-sized metropolitan markets,
initially concentrating in the Midwest, Mid-Atlantic and Southeast regions,
where income levels and the presence of shopping and entertainment centers,
offices and/or colleges and universities indicate that a significant base of
potential customers exists. Management considers the feasibility of opening
multiple restaurants in a target market, which offers greater operating and
advertising efficiency. As we add additional restaurants in a target market,
there may be short-term decreases in same store sales. However, management
believes this clustering strategy can enhance long-term performance through
economies of scale and shared advertising expenses. Management also views
smaller markets with fewer competing casual dining restaurants as presenting
growth 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 our management and other employees, as well as
with the assistance of consultants when deemed advisable. We believe that our
site selection strategy and procedures, together with our menu and pricing
strategies, our commitment to quality food products and excellent service, and
our advertising, marketing and promotional efforts, will enhance our ability to
generate our anticipated customer volumes.
FRANCHISING. We expect that continued growth will come from the further
development of new and existing markets by us and by franchisees. We intend to
pursue an active franchising program with current and new franchisees under
controlled guidelines. We offer franchisees both rights to develop individual
restaurants as well as area development rights for the establishment of more
than one new restaurant over a defined period of time and in a defined
geographic area. The specific locations of the restaurants are subsequently
designated by us and the franchisee in separate franchise agreements. Under the
standard area development agreement currently in use, a franchisee is required
to pay at the time the agreement is signed a non-refundable fee of $5,000 per
potential restaurant in the defined geographic area, to be applied against the
initial franchise fee payable for each restaurant. Our current area development
agreement also provides for a franchise fee of $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 our policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. Under our criteria
for selecting new franchisees, Tumbleweed requires that potential franchisees
have adequate capital, experience in the restaurant industry, and access to
locations suitable for development. Except for locations managed directly by us,
we generally require that a franchisee have a principal operator with at least a
ten percent ownership interest who must devote full time to the restaurant
operation. In addition, we may acquire restaurants from our franchisees from
time to time.
MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, we generally use one of three prototype designs management believes
is best suited to a particular site. Our Mini, Midi and Maxi prototype
restaurants accommodate approximately 150, 225, and 265 guests, respectively.
Each size restaurant offers full service casual dining and a menu containing a
wide assortment of Tex-Mex and mesquite grilled selections. Management believes
that the use of multiple prototypes permits us to more closely match the
investment in a restaurant site with the site's estimated sales potential. These
factors allow for more efficient utilization of financial resources by us and
our franchisees.
During 1999, we opened 4 new Company-owned restaurants and 7 new Franchised
restaurants in the following areas:
COMPANY OWNED FRANCHISEE OWNED
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Ft. Wayne, IN (1) Evansville, IN (1)
Henderson, KY (1) Seymour, IN (1)
Bellefontaine, OH (1) Hillview, KY (1)
Cincinnati, OH (1) Glasgow, KY (1)
Medina, OH (1)
Hermitage, TN (1)
New Berlin, WI (1)
- 4 -
Our international licensee also opened one new licensed restaurant during 1999
in Cairo, Egypt. During 1999, a franchisee elected to close three restaurants in
Hendersonville, Nashville and Cookeville, Tennessee, which had been converted
from the Barbwire Restaurant concept to the Tumbleweed concept. Management
believes that these locations failed to overcome a negative public perception of
the Barbwire concept. During 1999, our international licensee elected to close
its Erlangen, Germany location.
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 us or our
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 our prototype designs can be adapted for developing
Tumbleweed restaurants in existing structures. This capability may give us
access to quality sites not otherwise available and may reduce the time or
expense of development in certain circumstances.
RESTAURANT OPERATIONS
RESTAURANT MANAGEMENT. We employ area directors who are responsible for
supervising the operations of Tumbleweed restaurants within their geographic
region and the continuing development of each restaurant's managers and
employees. Through regular visits to the restaurants, the area directors ensure
that the Tumbleweed concept, strategies, core values and standards of quality
are being observed in all aspects of restaurant operations. Area directors are
chiefly responsible for the implementation of the TGS program.
Each of our restaurants has one general manager, one kitchen manager and from
one to three assistant managers, based on restaurant volume. The general manager
of each restaurant has primary responsibility for the day-to-day operations of
the entire restaurant, including sales, physical plant, financial controls and
training, and is responsible for maintaining the standards of quality and
performance established by us. In selecting managers, we generally seek persons
who have significant prior experience in the restaurant industry as well as
employees who have demonstrated managerial potential and a commitment to the
Tumbleweed concept and philosophy. We seek to attract and retain high caliber
managers and hourly employees by providing them with competitive salaries,
monthly bonuses and a casual, entertaining and challenging working environment.
COMPREHENSIVE TRAINING AND DEVELOPMENT. We have developed a comprehensive
training program for managers and hourly employees. Managers are required to
complete a ten-week initial training course and regular training programs. The
course emphasizes our culture, commitment to TGS, operating procedures and
standards, and internal controls.
The general managers and the area directors are responsible for selecting and
training hourly employees at each restaurant. We employ training coordinators to
assist with training and development of employees. Before the opening of each
new restaurant, one of our training managers leads a team of experienced
employees to train and educate the new employees. The training period for new
employees 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. We closely monitor sales, costs of food and beverages, and
labor at each of our restaurants. Management analyzes daily and weekly
restaurant operating results to identify trends at each location, and acts
promptly to remedy negative trends where possible. We use an accounting and
management information system that operates at the restaurant level to ensure
the maintenance of financial controls and operations. Administrative staff
prepare daily reports of sales, labor and customer counts. Cost of sales and
condensed profit and loss statements compiled bi-monthly by store-level
personnel and monthly by our accounting department are provided to management
for analysis and comparison to past performance and budgets. We use a
specialized software system to measure theoretical food costs against actual
costs. To improve our performance analysis capabilities, we have upgraded the
system which schedules 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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SEASONALITY. We consider restaurant operations to be somewhat seasonal in nature
with the second and third quarters being the peak sales periods.
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. We currently operate our 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 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 we receive a royalty based upon production and sales.
DEVELOPMENT AND CONSTRUCTION. We maintain 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. We use radio, print, billboard, and direct mail
advertising in our various markets, as well as television advertising in certain
larger markets. We also engage in a variety of other promotional activities,
such as contributing goods, time and money to charitable, civic and cultural
programs, in order to increase public awareness of our restaurants. The cost
associated with these promotional activities in 1999 was approximately 2.6% of
sales.
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RESTAURANT LOCATIONS
At December 31, 1999, we owned and operated 29 Tumbleweed restaurants. The
following table sets forth the location (including the number of restaurants at
each location) of these 29 restaurants:
NO. OF
STATE LOCATION RESTAURANTS
- ----- -------- -----------
Indiana Evansville 1
Indiana Ft. Wayne 1
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Elizabethtown 1
Kentucky Florence 1
Kentucky Frankfort 1
Kentucky Henderson 1
Kentucky Louisville 7
Kentucky Owensboro 1
Ohio Bellefontaine 1
Ohio Chillicothe 1
Ohio Cincinnati 1
Ohio Columbus 3
Ohio Hamilton 1
Ohio Heath 1
Ohio Mason 1
Ohio Springdale 1
Ohio Springfield 1
Ohio Wooster 1
Ohio Zanesville 1
--
TOTAL 29
==
- 7 -
FRANCHISED RESTAURANTS
As of December 31, 1999, we had eight franchisees that owned and operated 17
Tumbleweed restaurants. The following table sets forth the franchisee and the
location ( including the number of restaurants at each location) of these 17
restaurants:
No. of Total By
Franchisee State Location Restaurants Franchisee
- ---------- ----- -------- ----------- ----------
TW-Indiana, LLC Indiana Floyd Knobs 1
Indiana New Albany 2
Indiana Salem 1
Kentucky Lexington 1
---
5
Diamondback
Management Corp. Illinois Rockford 1
Wisconsin Appleton 1
Wisconsin Madison 1
Wisconsin Milwaukee 1
Wisconsin New Berlin 1
---
5
TW-Tennessee, LLC (1) Tennessee Clarksville 1
Tennessee Hermitage 1
---
2
TW-Seymour, LLC Indiana Seymour 1
---
1
TW-Glasgow, Inc. Kentucky Glasgow 1
---
1
TW-Medina, LLC Ohio Medina 1
---
1
TW-Bullitt, Inc. Kentucky Hillview 1
---
1
TW-Evansville, LLC Indiana Evansville 1
---
1
---
17
===
(1) During 1999, TW-Tennessee, LLC also owned and operated restaurants in
Cookeville, Hendersonville and Nashville, Tennessee. Prior to December 31, 1999,
the franchisee elected to close these locations.
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INTERNATIONAL LICENSING AGREEMENT
We have entered into a license agreement (the "International Agreement") with
Tumbleweed International, LLC ("International"), a restaurant developer based in
Brussels, Belgium, to develop Tumbleweed restaurants outside of the Western
Hemisphere. During 1999, International was operating its restaurants in
Erlanger, Frankfort and Vilsek, Germany, Amman, Jordan, Jeddah, Saudi Arabia and
Cairo, Egypt as Tumbleweed restaurants. Prior to December 31, 1999, the
franchisee elected to close the Erlangen, Germany restaurant. See Item 13
"Certain Relationships and Related Transactions" for additional information
regarding International.
The International Agreement also contains certain provisions relating to quality
control, restrictions on ownership of and participation in competing businesses
by International and its principals. The International Agreement grants us a
right of first refusal if International proposes to sell or assign its rights
under the Agreement, or to sell equity interests in International.
SERVICE MARKS
A wholly-owned subsidiary of the Company owns and licenses to the Company
various service marks and trademarks that are registered on the Principal
Register of the United States Patent and Trademark Office. We regard our service
marks and trademarks as having significant value and being an important factor
in the development of the Tumbleweed concept. Our policy is to pursue and
maintain registration of our service marks and trademarks whenever possible and
to oppose vigorously any infringement or dilution of our service marks and
trademarks.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local laws. Our commissary is
licensed and subject to regulation by the USDA. Each of our restaurants is
subject to permitting, licensing and regulation by a number of government
authorities, including alcoholic beverage control, health, safety, sanitation,
building and fire agencies in the state or municipality in which the restaurant
is located. Difficulties in obtaining or failure to obtain required licenses or
approvals could delay or prevent the development of a new restaurant in a
particular area.
Approximately 12.2 % of our restaurant sales were attributable to the sale of
alcoholic beverages for the year ended December 31, 1999. Alcoholic beverage
control regulations require each of our restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
restaurant operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages.
The failure of a restaurant to obtain or retain liquor or food service licences
would have a material adverse effect on the restaurant's operations. To reduce
this risk, each of our restaurants are operated in accordance with procedures
intended to assure compliance with applicable codes and regulations.
The Federal Americans With Disabilities Act (The "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. The ADA
became effective as to public accommodations in January 1992 and as to
employment in July 1992. We currently design our new restaurants to be
accessible to the disabled, and believe that we are in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. We intend to comply with future regulations relating to
accommodating the needs of the disabled, and we do not currently anticipate that
such compliance will require us to expend substantial funds.
We are subject in certain states to "dram shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance, as well as excess liability coverage.
We have never been named as a defendant in a lawsuit involving "dram shop"
liability.
Our restaurant operations are also subject to federal and state laws governing
such matters as the minimum hourly wage, unemployment tax rates, sales tax and
similar matters, over which we have no control. Significant numbers of our
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service, food preparation and other personnel are paid at rates related to the
federal minimum wage, and increases in the minimum wage could increase our labor
costs.
The development and construction of additional restaurants are subject to
compliance with applicable zoning, land use and environmental laws and
regulations.
EMPLOYEES
As of December 31, 1999, we had approximately 2,200 employees, of whom 45 are
executive and administrative personnel, 117 are restaurant management personnel,
and the remainder are hourly restaurant and commissary personnel. Many of our
hourly restaurant employees work part-time. None of our employees are covered by
a collective bargaining agreement. We consider our employee relations to be
good.
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, we have grown while developing the operational
systems, internal controls, and management personnel that management believed
was necessary to support our plans for continued expansion. In the course of
expanding our business, we will enter new geographic regions in which we have 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, we intend 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.
The continued growth of our business will depend upon our ability to open and
operate additional restaurants profitably, which in turn will depend upon
several factors, many of which are beyond our control. 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. Our ability to expand into new geographic
regions is also dependent upon our ability to expand our existing commissary
facilities or open and successfully operate additional commissaries, as may be
necessary to support additional restaurants. There can be no assurance that we
will be successful in achieving our growth plans or managing our expanding
operations effectively, nor can there be any assurance that new restaurants we
open will be operated profitably.
RESTAURANT BASE. We currently operate 29 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 we currently
operate, 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 our results of operations than would be the case in a
restaurant company with more restaurants. In addition, we lease certain of our
restaurants. Each lease agreement provides that the lessor may terminate the
lease for a number of reasons, including if we default in payment of any rent or
taxes or breach any covenants or agreements contained in the lease. Termination
of any of our leases pursuant to such terms could adversely affect our results
of operations.
CHANGES IN FOOD AND OTHER COSTS; SUPPLY RISKS. Our profitability is
significantly dependent on our ability to anticipate and react to changes in
food, labor, employee benefits and similar costs over which we have no control.
Specifically, we are dependent on frequent deliveries of produce and fresh beef,
pork, chicken and seafood. As a result, we are subject
- 10 -
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 we have been able to
anticipate and react to changing costs through our purchasing practices or menu
price adjustments without a material adverse effect of profitability, there can
be no assurance that we 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 our restaurants in particular.
COMPETITION. The restaurant industry is intensely competitive with respect to
price, service, location and food quality. We 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 us. A significant change in pricing or other
business strategies by one or more of our competitors, including an increase in
the number of restaurants in our territories, could have a materially adverse
impact on our sales, earnings and growth.
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, we
are 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 us.
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. .... 51 President, Chief Executive Officer, and Director
James M. Mulrooney ...... 48 Executive Vice President, Chief Financial Officer,
and Director
John L. Brewer .......... 47 Vice President of Operations
Wayne P. Jones .......... 57 Vice President of Marketing and Development
Gary T. Snyder........... 45 Vice President - Company Operations
Glennon F. Mattingly..... 48 Vice President - Controller
Gregory A. Compton....... 39 Vice President, Secretary and General Counsel
John A. Butorac, Jr. has served as President and Chief Executive Officer of the
Company since it was formed in 1997, and is a Director of the Company. Mr.
Butorac also served as President and Chief Executive Officer of Tumbleweed, LLC
from January 1995 to its merger with the Company in January 1999. From October
1991 to January 1995, Mr. Butorac served in various capacities with Tumbleweed
Mexican Restaurants Group, including Director of Operations and Director of
Corporate Development.
- 11 -
James M. Mulrooney has served as Executive Vice President and Chief Financial
Officer of the Company since it was formed in 1997, and is a Director of the
Company. Mr. Mulrooney also served as Executive Vice President and Chief
Financial Officer of Tumbleweed, LLC from January 1995 to its merger with the
Company in January 1999. 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.
John L. Brewer has served as Vice President of Operations for the Company since
it was formed in December 1997, and for Tumbleweed, LLC, the Company's
predecessor, from April 1996 to its merger with the Company in January 1999.
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.
Wayne P. Jones has served as Vice President of Marketing and Development for the
Company since it was formed in December 1997, and for Tumbleweed, LLC, the
Company's predecessor, from August 1997 to its merger with the Company in
January 1999. From 1993 to 1997, he served as Executive Director and Chief
Executive Officer of the Pizza Hut Franchise Association.
Gary T. Snyder joined Tumbleweed, LLC, the Company's predecessor, as Director of
Training and Human Resources in June 1996 and was appointed Vice President of
Company Operations in April 1998. Mr. Snyder continues to serve the Company in
that capacity. He previously served for 17 years with Bob Evans Farms, Inc.
Glennon F. Mattingly joined Tumbleweed, LLC, the Company's predecessor, as
Controller in March 1995 and was named Vice President-Controller in April 1998.
Mr. Mattingly continues to serve the Company in that capacity. Before coming to
Tumbleweed, Mr. Mattingly held various positions with Chi-Chi's, Inc. including
six years as Director of Budgeting and Financial Analysis.
Gregory A. Compton joined Tumbleweed, LLC, the Company's predecessor, in June
1998 as Vice President, Secretary and General Counsel, and continues to serve
the Company in that capacity. 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.
SEGMENT INFORMATION
Segment information for the years ended December 31, 1999, 1998 and 1997 are
presented in Note 12 to our Consolidated Financial Statements contained in Item
8.
ITEM 2. PROPERTIES
Of the 29 Company-owned restaurants in operation at December 31, 1999, 12 are
owned by us in fee simple while the remainder are leased. Two of the leased
locations are owned by entities whose principals are affiliated with us.
Restaurant lease expirations range from 2005 to 2018, with the majority of the
leases providing for an option to renew for additional terms ranging from five
to twenty years. All of our 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 us to pay the cost of insurance and taxes. Our executive offices
and our commissary are located in Louisville, Kentucky, in office, commissary
and warehouse space owned in fee simple by us.
ITEM 3. LEGAL PROCEEDINGS
We are involved in litigation and proceedings in the ordinary course of our
business. We do not believe the outcome of any such litigation will have a
material adverse effect upon our 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, 1999.
- 12 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 10, 2000, 5,863,930 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. We sold 776,630 shares at the offering price of $10 per share in a
direct offering of our common stock to the public, raising a total of
$7,766,300.
On January 1, 1999, the merger of Tumbleweed, LLC into Tumbleweed, Inc. became
effective. The merger reorganized Tumbleweed, LLC, which had owned, franchised
or licensed 43 Tumbleweed Southwest Mesquite Grill & Bar restaurants, into a
corporation for purposes of the stock offering. In the reorganization, the
membership interests of the approximately 80 former members of Tumbleweed, LLC
were converted into a total of 5,105,000 shares of 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.
We received net proceeds of approximately $6,800,000 from the stock offering. We
used the offering proceeds, plus the additional cash contributions of $747,500
we received in the reorganization, to repay bank indebtedness totaling
$7,043,366 and to pay offering expenses. The bank indebtedness was an obligation
of the former Class A members of Tumbleweed, LLC, including certain 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.
Our common stock trades on the Nasdaq Stock Market's National Market under the
symbol "TWED." The following table shows quarterly high and low closing prices
for the Common Stock during 1999 for the periods indicated, as reported by the
Nasdaq National Market.
High Low
---- ---
First Quarter (1) $12.00 $ 8.50
Second Quarter 11.25 7.50
Third Quarter 9.87 7.00
Fourth Quarter 8.50 5.00
(1) Beginning in March 1999, bid and asked quotations for Tumbleweed shares were
reported on the OTC Bulletin Board under the trading symbol TWED. On March 29,
1999, our common stock began trading on the Nasdaq Stock Market's National
Market.
We have never paid a dividend on our Common Stock nor do we expect to pay a cash
dividend in the foreseeable future. We currently intend to retain any future
earnings to finance the development of additional restaurants and the growth of
our business generally. We are also prohibited from paying dividends under the
terms of our credit facility with National City Bank.
ITEM 6. SELECTED FINANCIAL DATA
Effective January 1, 1999, Tumbleweed, LLC was merged into Tumbleweed, Inc. as a
result of the sale of common stock in an initial public offering. Tumbleweed,
Inc. had not conducted any operations prior to the merger. In the following
table, the income statement and balance sheet data of Tumbleweed, LLC for the
years ended December 31, 1998, 1997, 1996 and 1995 and Tumbleweed, Inc. for the
year ended December 31, 1999 have been derived from
- 13 -
financial statements which have been audited by Ernst & Young, LLP, independent
auditors, whose report thereon is included elsewhere in this filing. The
information set forth below should be read in conjunction with, and are
qualified in their entirety by, the 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
---------------------------------------------------------------------
Tumbleweed, Tumbleweed,
Inc. LLC
------------- ------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
Restaurant Sales $ 48,578,123 $ 40,490,933 $ 27,891,128 $ 23,284,007 $ 17,254,058
Commissary sales 1,168,836 1,041,266 1,007,011 1,795,529 1,574,847
Franchise fees and royalties 1,064,952 770,806 563,056 474,870 540,157
Other revenues 532,976 504,639 365,054 177,317 177,960
------------- ------------ ------------ ----------- -------------
Total Revenues 51,344,887 42,807,644 29,826,249 25,731,723 19,547,022
Operating expenses:
Restaurant cost of sales 14,232,564 11,788,578 8,191,928 7,103,357 5,132,549
Commissary cost of sales 1,053,083 905,814 887,793 1,649,502 1,424,077
Operating expenses 24,377,631 20,881,212 14,035,693 12,386,119 8,896,704
Selling, general and administrative 4,981,721 4,150,303 3,051,740 2,250,827 1,962,036
Preopening expenses 395,768
Depreciation and amortization 1,804,757 1,442,011 971,863 1,231,290 1,033,349
------------- ------------ ------------ ----------- -------------
Total operating expenses 46,845,524 39,984,522 27,683,740 25,026,597 18,597,853
------------- ------------ ------------ ----------- -------------
Income from operations 4,499,363 2,823,122 2,142,509 705,126 949,169
Interest expense, net (1,128,906) (869,712) (428,598) (203,810) (266,530)
------------- ------------ ------------ ----------- -------------
Income before income taxes and
cumulative effect of a change in
accounting principle 3,370,457 1,953,410 1,713,911 501,316 682,639
Provision for income taxes:
Current and deferred (1,179,659) - - - -
Deferred taxes related to change in
tax status (3) (639,623) - - - -
------------- ------------ ------------ ----------- -------------
Total provision for income taxes (1,819,282) - - - -
------------- ------------ ------------ ----------- -------------
Income before cumulative effect of a
change in accounting principle 1,551,175 1,953,410 1,713,911 501,316 682,639
Cumulative effect of a change in
accounting principle, net of tax (341,035) - - - -
------------- ------------ ------------ ----------- -------------
Net income $ 1,210,140 $ 1,953,410 $ 1,713,911 $ 501,316 $ 682,639
============= ============ ============ =========== =============
Basic and diluted earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.27
Cumulative effect of a change in
accounting principle, net of tax (0.06)
-------------
Net income $ 0.21
=============
- 14 -
Pro forma income data (unaudited):
Income before income taxes
and cumulative effect of a change
in accounting principle as reported $ 3,370,457 $ 1,953,410 $ 1,713,911 $ 501,316 $ 682,639
Pro forma income taxes (1) (1,179,659) (683,693) (599,896) (175,461) (238,924)
------------- ------------ ------------ ----------- -------------
Pro forma income before cumulative
effect of a change in accounting
principle 2,190,798 1,269,717 1,114,015 325,855 443,715
Cumulative effect of a change in
accounting principle, net of tax (341,035) - - - -
------------- ------------ ------------ ----------- -------------
Pro forma net income $ 1,849,763 $ 1,269,717 $ 1,114,015 $ 325,855 $ 443,715
============= ============ ============ =========== =============
Pro forma basic and diluted earnings
per share:
Pro forma income before cumulative
effect of a change in accounting
principle $ 0.37 $ 0.25 $ 0.22 $ 0.06 $ 0.09
Cumulative effect of a change in
accounting principle, net of tax (0.06) - - - -
------------- ------------ ------------ ----------- -------------
Pro forma net income $ 0.31 $ 0.25 $ 0.22 $ 0.06 $ 0.09
============= ============ ============ =========== =============
As of December 31
----------------------------------------------------------------------
Tumbleweed, Tumbleweed,
Inc. LLC
----------- ----------------------------------------------------------
Pro
Forma
1999 1998 (3) 1998 1997 1996 1995
---- -------- ---- ---- ---- ----
(In thousand)
Balance Sheet Data:
Total assets $ 36,579 $ 33,681 $ 33,681 $ 26,068 $ 21,262 $ 17,831
Long-term debt and capital lease
obligations, including current
maturities 15,145 13,363 13,363 8,542 5,776 3,077
Total liabilities 19,016 24,743 24,103 10,725 7,108 4,132
Redeemable members' equity - - 18,925 23,420 20,233 16,413
Members' equity - - 354 7 7 7
Members' retained earnings (deficit) - - (9,701) (8,083) (6,085) (2,721)
Stockholders' equity 17,563 - - - - -
Pro forma stockholders' equity - 8,938 - - - -
(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 35%.
(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 related
to the termination of Tumbleweed, LLC's limited liability company status
and the conversion of Tumbleweed, LLC's members' interests into 5,105,000
shares of Company common stock effective January 1,1999.
- 15 -
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 restaurants, the
availability of experienced management and hourly employees, and other factors
set forth below and in "Forward-Looking Statements/Risk Factors" in Item 1.
Business.
Of the 51 Tumbleweed restaurants as of December 31, 1999, we owned and operated
29 restaurants in Kentucky, Indiana and Ohio, franchised 17 restaurants in
Indiana, Illinois, Kentucky, Tennessee and Wisconsin, and licensed five
restaurants in Germany, Jordan, Egypt and Saudi Arabia. The following table
reflects changes in the number of company-owned restaurants for the years
presented.
Company Restaurants 1999 1998 1997
------------------- ---- ---- ----
In operation, beginning of year 25 17 15
Restaurants opened 4 8 2
Restaurants closed 0 0 0
--- --- ---
In operation, end of year 29 25 17
--- --- ---
Franchise and Licensed Restaurants
In operation, beginning of year 18 12 9
Restaurants opened 8 7 3
Restaurants closed (4) (1) 0
--- --- ---
In operation, end of year 22 18 12
--- --- ---
System total 51 43 29
=== === ===
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, we had
been treated as a partnership for income tax purposes and, accordingly, had
incurred no federal or state income tax liability. The discussion of financial
condition and results of operations included in the paragraphs that follow
reflect a pro forma adjustment for federal and state income taxes that would
have been recorded during these years if we had been subject to corporate income
taxes for the years presented.
The following section should be read in conjunction with "Selected Financial
Data" included above in Item 6 and our financial statements and the related
notes included below in Item 8.
- 16 -
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.
Years Ended December 31
1999 1998 1997
-----------------------------
Revenues:
Restaurant sales 94.6% 94.6 % 93.5 %
Commissary sales 2.3 2.4 3.4
Franchisee fees and royalties 2.1 1.8 1.9
Other revenues 1.0 1.2 1.2
-----------------------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 29.3 29.1 29.4
Commissary cost of sales (2) 90.1 87.0 88.2
Operating expenses (1) 50.2 51.6 50.3
Selling, general and administrative 9.7 9.7 10.2
Preopening expenses 0.8 1.9 1.8
Depreciation and amortization 3.5 3.4 3.3
Total operating expenses 91.2 93.4 92.8
-----------------------------
Income from operations 8.8 6.6 7.2
Interest expense, net (2.2) (2.0) (1.4)
-----------------------------
Income before income taxes and cumulative
effect of a change in accounting
principle 6.6 4.6 5.8
Provision for income taxes:
Current and deferred (2.3) - -
Deferred taxes related to a change
in tax status (1.3) - -
-----------------------------
Total provision for income taxes (3.6) - -
-----------------------------
Income before cumulative effect
of a change in accounting principle 3.0 4.6 5.8
Cumulative effect of a change in
accounting principle, net of tax (0.7) - -
-----------------------------
Net income 2.3% 4.6% 5.8%
=============================
Pro forma income data (unaudited):
Income before income taxes and
cumulative effect of a change in
accounting principle as reported 6.6% 4.6% 5.8%
Pro forma income taxes (3) (2.3) (1.6) (2.1)
-----------------------------
Pro forma income before cumulative
effect of a change in accounting
principle 4.3 3.0 3.7
Cumulative effect of a change in
accounting principle, net of tax (0.7) - -
-----------------------------
Pro forma net income 3.6% 3.0% 3.7%
=============================
(1) As percentage of restaurant sales.
(2) As percentage of commissary sales.
(3) The pro forma income taxes reflect the effect of the corporate
reorganization on the historical net income assuming the Company was
taxed as a C corporation for income tax purposes throughout the years
presented with an assumed combined federal and state effective tax rate
of 35%.
- 17 -
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 and 1998
Total revenues increased by $8,537,243 or 19.9% in 1999 compared to 1998
primarily as a result of the following:
Restaurant sales increased by $8,087,190 or 20.0% in 1999 compared to 1998. The
increase is due primarily to the addition of four Company-owned restaurants
during 1999 and an increase in same store sales of 1.3%.
Commissary sales to franchised restaurants increased by $127,570 or 12.3% in
1999 compared to 1998. The increase is due primarily to the addition of four
additional franchised or licensed restaurants during 1999.
Franchise fees and royalties increased by $294,146 or 38.2% in 1999 compared to
1998. The increase was due primarily to a $140,000 increase in franchise fees
received upon the opening of seven new franchised restaurants during 1999
compared to three during 1998. Additionally, royalty income increased
approximately $177,000 during 1999 compared to 1998 as a result of an increase
in franchised restaurants. The increase in franchise fees and royalties is
partially offset by an approximately $23,000 decrease in international territory
fees.
Other revenues increased by $28,337 or 5.6% in 1999 compared to 1998 primarily
due to an increase in volume related purchasing rebates.
Restaurant cost of sales increased by $2,443,986 or 20.7% in 1999 compared to
1998. The increase was principally due to the opening of four additional
Company-owned restaurants during 1999. Restaurant cost of sales increased as a
percentage of sales by 0.2% to 29.3% for 1999 compared to 29.1% for 1998.
Commissary cost of sales increased by $147,269 or 16.2% in 1999 compared to
1998. The increase in commissary cost of sales is due to increased commissary
sales in 1999 compared to 1998 and increased overhead costs. As a percentage to
sales, commissary cost of sales increased 3.1%.
Restaurant operating expenses increased by $3,496,419 or 16.7% in 1999 compared
to 1998. The increase reflects the addition of four Company-owned restaurants
during 1999. Operating expenses decreased as a percentage of restaurant sales to
50.2% for 1999 from 51.6% for 1998 primarily due to a 1.1% decrease in labor
costs and a 0.3% decrease in restaurant level promotional costs.
Selling, general and administrative expenses increased by $831,418 or 20.0% in
1999 compared to 1998. The increase was due in part to the addition of
management and staff personnel during 1999 to support the growing restaurant
base and additional advertising costs. Because of the Company's restaurant
growth plans, management expects selling, general and administrative expenses to
continue to increase during 2000 in absolute dollars. As a percentage to total
revenues, selling, general and administrative expenses were 9.7% of revenues in
1999 and 1998.
Preopening expenses were $395,768 in 1999 versus preopening amortization of
$816,604 in 1998. See Note 2 of the consolidated financial statements regarding
the adoption of Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activities." As a result of the adoption of SOP 98-5 on January 1,
1999, the Company recorded a charge to income, net of tax, of $341,035
representing the write-off of deferred preopening costs as of December 31, 1998.
The charge is reported net of taxes as a cumulative effect of a change in
accounting principle.
Depreciation and amortization expense increased by $362,746 or 25.1% in 1999
compared to 1998 due primarily to the addition of four Company-owned restaurants
during 1999.
Net interest expense increased by $259,194 or 29.8% in 1999 compared to 1998.
The increase resulted from increased borrowings to fund the growth in
Company-owned restaurants and increases in the prime interest rate during 1999.
The combined effective federal and state income tax rate was approximately 35%
for 1999 (excluding the charge related to change in tax status, discussed
below). The pro forma adjustments presented for 1998 provide for income taxes as
though we had been subject to corporate income taxes throughout the years
presented. Additionally, as a result of a change in tax status from a limited
liability corporation to a C corporation effective January 1, 1999, we recorded
a net deferred income tax liability and income tax expense of $639,623 in 1999.
- 18 -
The Company's pro forma income before cumulative effect of a change in
accounting principle increased $921,081 or 72.5% in 1999 compared to 1998. Pro
forma basic and diluted earnings per share before cumulative effect of a change
in accounting principle increased to $0.37 in 1999 compared to $0.25 in 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 and 1997
Total revenues increased by $12,981,395 or 43.5% in 1998 compared to 1997
primarily as a result of the following:
Restaurant sales increased by $12,599,805 or 45.2% in 1998 compared to 1997.
The increase is due primarily to the addition of eight Company-owned restaurants
during 1998 and an increase in same stores sales of 1.5%.
Commissary sales to franchised restaurants increased by $34,255 or 3.4% in 1998
compared to 1997. In May 1997, we made a decision to discontinue sales of
product not manufactured by the commissary. As a result, commissary sales did
not increase proportionately to the increase in the number of franchised stores.
Franchise fees and royalties increased by $207,750 or 36.9% in 1998 compared to
1997. The increase was due primarily to $105,000 in franchise fees received upon
the opening of three franchised restaurants in 1998 compared to two in 1997,
$23,250 in territory fees received from international operations and additional
royalties from franchised restaurants opened in 1998 and 1997.
Other revenues increased by $139,585 or 38.2% in 1998 compared to 1997 primarily
due to an increase in volume related purchasing rebates of approximately
$141,000. The increase in other revenues from 1997 to 1998 is also a result of
approximately $140,000 received from the Ohio Bureau of Worker's Compensation
which represented a return of invested premiums by the State of Ohio. The
increases in other revenues were partially offset by the fact that 1997 other
revenues includes approximately $178,000 of insurance proceeds. There was no
similar income in 1998.
Restaurant cost of sales increased by $3,596,650 or 43.9% for 1998 compared to
1997. The increase was principally due to the opening of eight additional
Company-owned restaurants. Restaurant cost of sales decreased as a percentage of
sales by 0.3% to 29.1% for 1998 compared to 29.4% in 1997. The decrease resulted
primarily from improved operating efficiencies in the commissary and lower
product costs at the restaurant level.
Commissary cost of sales increased $18,021 or 2.0% in 1998 compared to 1997.
Commissary cost of sales did not increase proportionally to the increase in the
number of franchised stores due to the discontinuance of sales of products not
manufactured by the commissary. As a percentage to sales, commissary cost of
sales decreased 1.2%. This was due to lower ingredient costs for products sold
by the commissary.
Restaurant operating expenses increased by $6,845,519 or 48.8% in 1998 compared
to 1997. The increase reflects the addition of eight Company-owned restaurants.
Operating expenses increased as a percentage of restaurant sales to 51.6% in
1998 from 50.3% in 1997 primarily due to a 1.2% increase in freight and a 0.7%
increase in restaurant level promotional costs. These costs were offset in part
by a 0.7% decrease in labor costs.
Selling, general and administrative expenses increased by $1,098,563 or 36.0%
for 1998 compared to 1997. The increase was due in part to the addition of
management and staff personnel during 1998 to support the growing restaurant
base.
Preopening expenses increased $271,881 or 49.9% for 1998 compared to 1997. The
increase is due to the opening of eight additional Company-owned restaurants in
1998 as compared to two restaurants in 1997.
Depreciation and amortization expense increased $470,148 or 48.4% for 1998
compared to 1997 due primarily to the addition of eight Company-owned
restaurants.
Net interest expense increased $441,114 or 102.9% for 1998 compared to 1997. The
increase resulted from increased borrowings to fund the growth in Company-owned
restaurants.
- 19 -
The pro forma adjustment provides for income taxes and state tax rates then in
effect as though we had been subject to corporate income taxes for 1998 and
1997. The combined effective tax rate was 35% for 1998 and 1997.
The Company's pro forma income before cumulative effect of a change in
accounting principle increased $155,702 or 14.0% in 1998 compared to 1997. Pro
forma basic and diluted earnings per share before cumulative effect of a change
in accounting principle increased to $0.25 in 1998 compared to $0.22 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to expand our number of restaurants will depend on a number of
factors, including the selection and availability of quality restaurant sites,
the negotiation of acceptable lease or purchase terms, the securing of required
governmental permits and approvals, the adequate supervision of construction,
the hiring, training and retaining of skilled management and other personnel,
the availability of adequate financing and other factors, many of which are
beyond our control. The hiring and retention of management and other personnel
may be difficult given the low unemployment rates in the areas in which we
intend to operate. There can be no assurance that we will be successful in
opening the number of restaurants anticipated in a timely manner. Furthermore,
there can be no assurance that our new restaurants will generate sales revenue
or profit margins consistent with those of our existing restaurants, or that
these new restaurants will be operated profitably.
Our principal capital needs arise from the development of new restaurants, and
to a lesser extent, maintenance and improvement of existing facilities. The
principal sources of capital to fund these expenditures were members'
contributions (prior to January 1, 1999), internally generated cash flow, bank
borrowings, lease financing and an equity offering. The following table provides
certain information regarding our sources and uses of capital for the years
presented:
Years
Ended December 31
-----------------
1999 1998 1997
---- ---- ----
Net cash provided by operations $ 3,592,419 $ 3,447,666 $ 3,040,836
Purchases of property and equipment 6,915,544 5,313,575 4,105,089
Proceeds from common stock offering 7,766,300 - -
Net distributions of
members' equity - (328,788) (525,002)
Net borrowings of long-term debt and
capital lease obligations 1,781,865 3,251,135 1,797,898
Payment on short-term borrowings (6,990,348) - -
Our single largest use of funds has been for capital expenditures consisting of
land, building and equipment associated with our restaurant expansion program.
The substantial growth of the Company over the years has not required
significant additional working capital. Sales are predominantly for cash and the
business does not require the maintenance of significant receivables or
inventories. In addition, it is common within the restaurant industry to receive
trade credit on the purchase of food, beverage and supplies, thereby reducing
the need for incremental working capital to support sales increases.
We both own and lease our restaurant facilities. Management determines whether
to acquire or lease a restaurant facility based on our evaluation of the
financing alternatives available for a particular site.
We plan to open five Company-owned restaurants during 2000, depending on the
availability of quality sites, the hiring and training of sufficiently skilled
management and other personnel, and other factors. As of December 31, 1999, the
- 20 -
Company had one additional restaurant under construction, which is expected to
open in the second quarter of 2000. We will utilize mortgage, sale/leaseback and
landlord financing, as well as equipment leasing and financing, for a portion of
the development costs of restaurants opened during 2000. The remaining costs
will be funded by available cash reserves, cash provided from operations and
borrowing capacity. Management believes such sources will be sufficient to fund
our expansion plans through 2000. Should our actual results of operations fall
short of, or our rate of expansion significantly exceed plans, or should our
costs or capital expenditures exceed expectations, we may need to seek
additional financing in the future. In negotiating such financing, there can be
no assurance that we will be able to raise additional capital on terms
satisfactory to us.
In order to provide any additional funds necessary to pursue our growth
strategy, we may incur, from time to time, additional short and long-term bank
indebtedness and may issue, in public or private transactions, our equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to us.
We have a $6,500,000 revolving line of credit with National City Bank (the
"Credit Facility"). As of December 31, 1999, we had outstanding borrowings under
the Credit Facility of $5,242,148. The note bears interest at the prime rate
plus .25% (8.75% at December 31,1999) and is due December 31, 2002. The Credit
Facility imposes restrictions on us with respect to the maintenance of certain
financial ratios, the incurrence of indebtedness, the sale of assets, mergers,
capital expenditures and the payment of dividends.
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting the Costs of Start-Up Activities."
The SOP was effective beginning January 1,1999 and requires that start-up costs
capitalized prior to January 1,1999 be written-off and any future start-up costs
be expensed as incurred. Prior to 1999, we capitalized our preopening costs
incurred in connection with opening new restaurant locations. The unamortized
balance of our deferred preopening costs ($524,669 as of December 31,1998) were
written-off (net of income taxes of $183,634) as a cumulative effect of an
accounting change on January 1,1999.
YEAR 2000
We experienced no disruptions to our business as a result of the conversion to
the Year 2000. The total Year 2000 project cost was approximately $400,000,
which includes the purchase of new hardware and software that was capitalized.
The project was funded by cash flow from operations. We do not anticipate any
significant additional expenditures for Year 2000 compliance. We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect our operations. A majority of our
employees are paid hourly rates related to federal and state minimum wage laws.
As a result of increased competition and the low unemployment rates in the
markets in which our restaurants are located, we have continued to increase
wages and benefits in order to attract and retain management personnel and
hourly workers. In addition, most of our leases require us to pay taxes,
insurance, maintenance, repairs and utility costs, and these costs are subject
to inflationary pressures. Most of the leases provide for increases in rent
based on increases in the Consumer Price Index when the leases are renewed. We
may attempt to offset the effect of inflation through periodic menu price
increases, economies of scale in purchasing and cost controls and efficiencies
at existing restaurants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative transactions or speculate on the future
direction of interest rates. We are exposed to interest rate changes primarily
as a result of our variable rate debt instruments. As of December 31, 1999,
approximately $10.8 million of our debt bore interest at variable rates. We
believe that the effect, if any, of reasonably possible near-term changes in
interest rates on our financial position, results of operations or cash flows
would not be significant.
- 21 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 23
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 24
Consolidated Balance Sheets as of December 31, 1999 and 1998 25
Statements of Redeemable Members' Equity, Members' Equity, Members'
Retained Earnings (Deficit) and Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
- 22 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tumbleweed, Inc.
We have audited the accompanying consolidated balance sheets of Tumbleweed, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
income, redeemable members' equity, members' equity, members' retained earnings
(deficit) and stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tumbleweed, Inc.
at December 31, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for pre-opening and other start-up
costs by adopting the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".
/s/ Ernst & Young, LLP
Louisville, Kentucky
March 3, 2000
- 23 -
Tumbleweed, Inc.
Consolidated Statements of Income
Years Ended December 31
1999 1998 1997
------------------------------------------
Revenues:
Restaurant sales $48,578,123 $ 40,490,933 $ 27,891,128 $
Commissary sales 1,168,836 1,041,266 1,007,011
Franchise fees and royalties 1,064,952 770,806 563,056
Other revenues 532,976 504,639 365,054
------------------------------------------
Total revenues 51,344,887 42,807,644 29,826,249
Operating expenses:
Restaurant cost of sales 14,232,564 11,788,578 8,191,928
Commissary cost of sales 1,053,083 905,814 887,793
Operating expenses 24,377,631 20,881,212 14,035,693
Selling, general and administrative expenses 4,981,721 4,150,303 3,051,740
Preopening expenses 395,768 816,604 544,723
Depreciation and amortization 1,804,757 1,442,011 971,863
------------------------------------------
Total operating expenses 46,845,524 39,984,522 27,683,740
------------------------------------------
Income from operations 4,499,363 2,823,122 2,142,509
Other income (expense):
Interest income 40,684 61,759 62,120
Interest expense (1,169,590) (931,471) (490,718)
------------------------------------------
Total other expense (1,128,906) (869,712) (428,598)
------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 3,370,457 1,953,410 1,713,911
Provision for income taxes:
Current and deferred (1,179,659) - -
Deferred taxes related to change in tax status (639,623) - -
------------------------------------------
Total provision for income taxes (1,819,282) - -
------------------------------------------
Income before cumulative effect of a change
in accounting principle 1,551,175 1,953,410 1,713,911
Cumulative effect of a change in accounting principle, net
of tax (341,035) - -
------------------------------------------
Net income $ 1,210,140 $ 1,953,410 $ 1,713,911
==========================================
Basic and diluted earnings per share:
Income before cumulative effect of a change in accounting principle $ 0.27 $ - $ -
Cumulative effect of a change in accounting principle, net of tax (0.06) - -
------------------------------------------
Net income $ 0.21 $ - $ -
==========================================
Pro forma income data (unaudited):
Income before income taxes and cumulative effect of a
change in accounting principle as reported $ 3,370,457 $ 1,953,410 $ 1,713,911
Pro forma income taxes 1,179,659) (683,693) (599,896)
-------------------------------------------
Pro forma income before cumulative effect of a change
in accounting principle 2,190,798 1,269,717 1,114,015
Cumulative effect of a change in accounting principle,
net of tax (341,035) - -
-------------------------------------------
Pro forma net income $ 1,849,763 $ 1,269,717 $ 1,114,015
===========================================
Pro forma basic and diluted earnings per share:
Pro forma income before cumulative effect of a change
in accounting principle $ 0.37 $ 0.25 $ 0.22
Cumulative effect of a change in accounting principle,
net of tax (0.06) - -
-------------------------------------------
Pro forma net income $ 0.31 $ 0.25 $ 0.22
===========================================
See accompanying notes.
- 24 -
Tumbleweed, Inc.
Consolidated Balance Sheets
Pro forma
December 31 December 31
1999 1998 1998
---------------------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 640,189 $ 1,898,973 $ 1,898,973
Accounts receivable 606,283 433,872 433,872
Inventories 1,597,794 1,333,591 1,333,591
Prepaid expenses 389,271 330,439 330,439
Deferred preopening expenses - 524,669 524,669
--------------------------- -------------
Total current assets 3,233,537 4,521,544 4,521,544
Property and equipment, net 30,147,559 24,920,797 24,920,797
Goodwill, net of accumulated amortization of
$551,478 in 1999 and $440,242 in 1998 2,737,265 2,833,704 2,833,704
Other assets 460,817 1,404,861 1,404,861
--------------------------- -------------
Total assets $ 36,579,178 $ 33,680,906 $ 33,680,906
=========================== =============
Liabilities, Redeemable Members' Equity, Members' Equity,
Members' Retained Earnings (Deficit) and Stockholders' Equity
Current liabilities:
Short-term borrowings $ - $ 6,990,348 $ 6,990,348
Accounts payable 1,102,024 1,781,418 1,781,418
Accrued liabilities 1,771,360 1,873,651 1,873,651
Income taxes payable 61,376 - -
Deferred income taxes 286,885 - 467,420
Current maturities on long-term
debt and capital leases 1,028,443 895,310 895,310
--------------------------- -------------
Total current liabilities 4,250,088 11,540,727 12,008,147
Long-term liabilities:
Long-term debt, less current maturities 11,347,047 9,180,358 9,180,358
Capital lease obligations, less current maturities 2,769,339 3,287,296 3,287,296
Deferred income taxes 489,869 - 172,203
Other liabilities 160,000 94,838 94,838
--------------------------- -------------
Total long-term liabilities 14,766,255 12,562,492 12,734,695
--------------------------- -------------
Total liabilities 19,016,343 24,103,219 24,742,842
Redeemable members' equity - 18,924,688 -
Members' equity - 354,459 -
Members' retained earnings (deficit) - (9,701,460) -
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued
and outstanding - - -
Common stock, $.01 par value, 16,500,000
shares authorized; 5,881,630 shares issued
and outstanding in 1999 (5,105,000 shares on a
pro forma basis in 1998) 58,818 - 51,050
Paid-in capital 16,294,006 - 8,887,014
Retained earnings 1,210,011 - -
--------------------------- -------------
Total stockholders' equity 17,562,835 - 8,938,064
--------------------------- -------------
Total liabilities and stockholders' equity $ 36,579,178 $ 33,680,906 33,680,906
=========================== =============
See accompanying notes.
- 25 -
Tumbleweed, Inc.
Consolidated Statements of Redeemable Members' Equity, Members' Equity,
Members' Retained Earnings (Deficit) and Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Redeemable
Members' Retained
Common Paid-In Equity - Class A Members' Earnings
Stock Capital Members Equity (Deficit) Total
----------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - $ - $ 20,232,519 $ 6,959 $ (6,084,974) $ 14,154,504
Proceeds from issuance of
members' equity - - 50,958 - - 50,958
Distributions of members' equity - - (575,960) - - (575,960)
Net income - - - - 1,713,911 1,713,911
Accretion of redeemable
members' equity - - 3,712,221 - (3,712,221) -
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 23,419,738 6,959 (8,083,284) 15,343,413
Captial contribution - - - 747,500 - 747,500
Distributions of members' equity - - (1,076,288) (400,000) - (1,476,288)
Assumption of members' line
of credit - - (6,990,348) - - (6,990,348)
Net income - - - 1,953,410 1,953,410
Accretion of redeemable
members' equity - - 3,571,586 - (3,571,586) -
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 18,924,688 354,459 (9,701,460) 9,577,687
Merger of Tumbleweed, LLC
into Tumbleweed, Inc. 51,050 9,526,637 (18,924,688) (354,459) 9,701,460 -
Tumbleweed, Inc. balances as of
January 1, 1999 1 129 - - (129) 1
Proceeds from common stock offering 7,767 7,758,533 - - - 7,766,300
Public offering costs - (991,293) - - - (991,293)
Net income - - - - 1,210,140 1,210,140
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 58,818 $ 16,294,006 $ - $ - $ 1,210,011 $ 17,562,835
=========================================================================================
See accompanying notes.
- 26 -
Tumbleweed, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31
1999 1998 1997
------------------------------------------------
Operating activities:
Net income $ 1,210,140 $ 1,953,410 $ 1,713,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,650,327 1,285,833 829,250
Amortization 154,430 156,178 142,613
Preopening cost amortization - 816,604 544,723
Deferred income taxes 776,754 - -
Loss on disposition of property and equipment 38,455 7,324 13,499
Changes in operating assets and liabilities:
Accounts receivable (172,411) (87,172) (50,091)
Inventories (264,203) (508,562) (126,573)
Deferred preopening expenses 524,669 (1,074,173) (316,822)
Prepaid expenses (79,021) (51,466) 19,062
Other assets (93,756) (114,550) (98,042)
Accounts payable (177,212) 104,590 31,938
Accrued liabilities (102,291) 983,396 258,784
Income taxes payable 61,376 - -
Other liabilities 65,162 (23,746) 78,584
------------------------------------------------
Net cash provided by operating activities 3,592,419 3,447,666 3,040,836
Investing activities:
Purchases of property and equipment (6,915,544) (5,313,575) (4,105,089)
Proceeds from sale of food courts, net of cash
relinquished - - 100,000
------------------------------------------------
Net cash used in investing activities (6,915,544) (5,313,575) (4,005,089)
Financing activities:
Capital contribution from Class B members - 747,500 -
Proceeds from issuance of members' equity - - 50,958
Distribution of members' equity - (1,076,288) (575,960)
Proceeds from common stock offering 7,766,300 - -
Proceeds from issuance of long-term debt 8,193,436 5,580,463 3,452,361
Payments on long-term debt and capital lease obligations (6,411,571) (2,329,328) (1,654,463)
Payment on short-term borrowings (6,990,348) - -
Payment of public offering costs (493,476) (386,332) (111,485)
------------------------------------------------
Net cash provided by financing activities 2,064,341 2,536,015 1,161,411
------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,258,784) 670,106 197,158
Cash and cash equivalents at beginning of year 1,898,973 1,228,867 1,031,709
------------------------------------------------
Cash and cash equivalents at end of year $ 640,189 $ 1,898,973 $ 1,228,867
================================================
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 1,166,934 $ 947,674 $ 473,055
================================================
Noncash investing and financing activities:
Equipment acquired by capital lease obligations $ - $ 1,570,246 $ 967,529
================================================
Public offering costs not paid at year-end $ - $ 502,183 $ -
================================================
See accompanying notes.
- 27 -
TUMBLEWEED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
MERGER OF TUMBLEWEED, LLC AND TUMBLEWEED, INC.
Tumbleweed, Inc. (the Company) was legally formed in December 1997 and
capitalized on June 23, 1998 with the issuance of 13 shares of Company common
stock at $10 per share. Effective January 1, 1999, and as a result of the sale
of 776,630 shares of common stock in an initial public offering (IPO),
Tumbleweed, LLC (Tumbleweed) was merged into the Company. The interests of
Tumbleweed members at the time of the merger were converted into a total of
5,105,000 shares of Company common stock. As of December 31, 1998, the Company
had not conducted any operations and all expenditures through December 31, 1998
related to the IPO were funded and recorded by Tumbleweed. The accompanying
consolidated statements of income and cash flows for the years ended December
31, 1998 and 1997 and balance sheet and pro forma balance sheet as of December
31, 1998 are those of Tumbleweed and are included for comparative purposes since
it was the predecessor company.
Prior to the merger, Tumbleweed and its owners (Members) operated pursuant to an
Operating Agreement dated September 19, 1994. Members of Tumbleweed consisted of
Common Members, Class A Members, Class B Members and a Class C Member. Certain
Common Members acted as the Managers of Tumbleweed and, acting unanimously,
generally had voting control of Tumbleweed.
Class A Members had, in addition to their cash contributions, provided financing
which was accounted for as redeemable members' equity prior to Tumbleweed's
assumption of the debt on December 31, 1998 (see Note 7). The capital accounts
of the Common, Class B and Class C Members were $6,000, $459 and $500,
respectively, as of December 31, 1997 and 1996. During 1998, the Common Members
received a distribution of $400,000 and the Class B Members made a capital
contribution of $747,500. The capital accounts of the Common, Class B and Class
C Members were $(394,000), $747,959 and $500, respectively, as of December 31,
1998.
RESTAURANT FACILITIES
The Company operates and franchises Tumbleweed Southwest Mesquite Grill and Bar
full service restaurants. Following is a summary of the number of restaurants
open as of December 31:
1999 1998 1997
---- ---- ----
Company owned 29 25 17
Franchised and licensed 22 18 12