SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Event Requiring Report: April 17, 2000
TWISTEE TREAT CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-294339 43-1796135
(State of Incorporation) (Commission (IRS Employer
File Number) Identification #)
301 Clark Street, Warrensburg, Missouri 64093
----------------------------------------
(Address of Principal Executive Offices)
(660) 747-4272
----------------------------------------
(Registrant's telephone number, including area code) ITEM 1.
Not applicable.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Not Applicable.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable
ITEM 5. OTHER EVENTS
Not applicable.
ITEM 6.
Not applicable.
ITEM 7. FINANCIAL STATEMENTS
By Current Report on Form 8-K filed April 6, 2000, the Registrant
reported a business combination and indicated that the required financial
statements would be forthcoming within 60 days thereof. The following financial
statements and notes thereto are filed herewith beginning on page F-1.
ITEM 8. CHANGE IN FISCAL YEAR
Not applicable.
<PAGE>
TWISTEE TREAT CORPORATION
FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 1999
<PAGE>
TWISTEE TREAT CORPORATION
CONTENTS
--------
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 BALANCE SHEET AS OF NOVEMBER 30, 1999
PAGE 3 STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED nOVEMBER 30, 1999 AND 1998
PAGE 4 STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED NOVEMBER 30,
1999 AND 1998
PAGE 5 STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED NOVEMBER 30, 1999 AND 1998
PAGES 6 - 17 NOTES TO FINANCIAL STATEMENTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Twistee Treat Corporation
We have audited the accompanying balance sheet of Twistee Treat Corporation as
of November 30, 1999 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended November 30, 1999 and
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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 Twistee Treat Corporation as of
November 30, 1999 and the results of its operations and its cash flows for the
years ended November 30, 1999 and 1998 in conformity with generally accepted
accounting principles.
By:/s/Weinberg & Company, P.A.
------------------------------
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 13, 2000
1
<PAGE>
TWISTEE TREAT CORPORATION
BALANCE SHEET
NOVEMBER 30, 1999
-----------------
ASSETS
CURRENT ASSETS
Cash $ 84,921
Advances 10,000
Notes receivable - trade 90,000
Notes receivable other - current 80,670
Inventory 116,650
-----------
Total Current Assets 382,241
-----------
PROPERTY AND EQUIPMENT, NET 328,431
-----------
OTHER ASSETS
Notes receivable - trade 20,000
Notes receivable other 74,000
Other receivable 50,000
Deposits 1,150
Intangible assets 227,011
-----------
Total Other Assets 372,161
-----------
TOTAL ASSETS $ 1,082,833
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 147,797
Notes and loans payable - current 306,102
Capital lease - current 507
Deferred revenue 154,651
-----------
Total Current Liabilities 609,057
NOTES PAYABLE 34,792
-----------
TOTAL LIABILITIES 643,849
-----------
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value,
10,000,000 shares authorized, none
issued and outstanding --
Common stock, $.0001 par value,
50,000,000 shares authorized, 6,769,950
shares issued and outstanding 676
Common stock to be issued, $.0001 par
value, 212,500 shares 21
Additional paid in capital 1,929,249
Accumulated deficit (1,490,962)
-----------
Total Stockholders' Equity 438,984
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,082,833
===========
See accompanying notes to financial statements.
2
<PAGE>
TWISTEE TREAT CORPORATION
STATEMENTS OF operations
FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998
----------------------------------------------
1999 1998
----------- -----------
NET SALES $ 176,081 $ 123,202
COST OF SALES 122,373 150,668
----------- -----------
GROSS PROFIT (LOSS) 53,708 (27,466)
----------- -----------
OPERATING EXPENSES
Payroll and contractual compensation 200,168 156,026
Depreciation and amortization expense 48,808 48,669
Consulting expense -- 3,163
Legal and professional fees 144,992 106,707
Other general administrative expenses 232,957 140,472
----------- -----------
Total Operating Expenses 626,925 455,037
----------- -----------
LOSS FROM OPERATIONS (573,217) (482,503)
----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of franchise facility 970 --
Miscellaneous income 417 --
Interest income 3,083 --
Interest expense (30,751) (8,290)
Loss on disposal of fixed assets -- (4,286)
----------- -----------
Total Other (Expense) (26,281) (12,576)
----------- -----------
Loss Before Extraordinary Item (599,498) (495,079)
EXTRAORDINARY ITEM
Gain (loss) on early extinguishment
of debt, net (10,000) 31,983
----------- -----------
NET LOSS $ (609,498) $ (463,096)
=========== ===========
Net loss per common share and equivalents
- basic and diluted $ (0.09) $ (0.09)
=========== ===========
Weighted average number of shares
outstanding during period - basic
and diluted 6,811,154 5,309,861
=========== ===========
See accompanying notes to financial statements
3
<PAGE>
TWISTEE TREAT CORPORATION
STATEMENTS OF changes in stockholders' equity
FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK TO ADDITIONAL
COMMON STOCK BE ISSUED PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance,
December 1,1997 5,143,900 $ 514 -- $ -- $ 685,333
Issuance of common stock
in 504 offering 1,125,050 112 -- -- 596,987
Treasury stock returned -- -- -- -- --
Issuance of common stock
for legal services 50,000 5 -- -- 81,495
Net loss for the year ended
November 30, 1998 -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, November 30,
1998 6,318,950 631 -- -- 1,363,815
Issuance of common stock
for cash 451,000 45 212,500 21 565,434
Net loss for the year ended
November 30, 1999 -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, November
30, 1999 6,769,950 $ 676 212,500 $ 21 $1,929,249
========== ========== ========== ========== ==========
</TABLE>
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
----------- ----------- -----------
Balance,
December 1, 1997 $ (418,368) $ (600,000) $ (332,521)
Issuance of common stock
in 504 offering -- -- 597,099
Treasury stock returned -- 600,000 600,000
Issuance of common stock
for legal services -- -- 81,500
Net loss for the year ended
November 30, 1998 (463,096) -- (463,096)
----------- ----------- -----------
Balance, November 30,
1998 (881,464) -- 482,982
Issuance of common stock
for cash -- -- 565,500
Net loss for the year ended
November 30, 1999 (609,498) -- (609,498)
----------- ----------- -----------
Balance, November
30, 1999 $(1,490,962) $ -- $ 438,984
=========== =========== ===========
See accompanying notes to financial statements.
4
<PAGE>
TWISTEE TREAT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998
----------------------------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(609,498) $(463,096)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Organization cost written off 9,000 --
Depreciation and amortization 48,808 48,669
Amortization of intangible assets 8,467 --
Issuance of common stock for services -- 81,500
Extraordinary gain on early extinguishment of debt -- (31,983)
Gain on sale of franchise facility (970) --
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable -- 21,352
Notes receivable - trade (110,000) --
Advances (10,000) --
Deposits (100) 24,450
Inventory (11,400) 2,886
Increase (decrease) in:
Accounts payable and accrued expenses 86,653 (15,053)
Deferred revenue 105,500 (44,250)
--------- ---------
Net Cash Used In Operating Activities (483,540) (375,525)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (98,334) (12,223)
Increase in notes receivable other (3,170) --
Cash received on notes receivable other 2,500 --
Other receivable -- (50,000)
--------- ---------
Net Cash Used In Investing Activities (99,004) (62,223)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable 54,481 (134,908)
Proceeds from stock sale 565,500 597,099
Payment of capital lease obligations (2,163) (1,399)
--------- ---------
Net Cash Provided By Financing Activities 617,818 460,792
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 35,274 23,044
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 49,647 26,603
--------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 84,921 $ 49,647
========= =========
Cash paid during the year for:
Interest $ -- $ 4,493
========= =========
Income taxes $ -- $ --
========= =========
See accompanying notes to financial statements.
5
<PAGE>
TWISTEE TREAT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998
----------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
- -----------------------------------------------------------------------
During 1999, the Company purchased a vehicle financed by a loan of an amount of
$32,091.
During 1999, the Company sold two franchise facilities for notes receivable of a
total of $151,500 recording the major part of the gain as deferred revenue.
During 1999, the Company recorded $40,000 of deferred franchise revenue in
exchange for two trade notes receivable.
During 1999, the Company recorded deferred revenue and a trade note receivable
in the amount of $62,500 arising from the sale of a regional development area to
an individual. In connection with this transaction, the Company amortized
$42,333 of the total cost to acquire the regional development area which was
offset against the deferred revenue.
During 1998, the Company acquired property and equipment for a note payable of
$39,500.
During 1998, the Company returned treasury stock of $600,000 for cancellation of
two notes payable previously issued to acquire the stock.
See accompanying notes to financial statements.
6
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- --------------------------------------------------------------------
(A) Description of Business
- ---------------------------
Twistee Treat Corporation ("the Company") was originally incorporated under the
laws of Missouri in 1995. The Company merged with Twistee Treat Corporation, a
Delaware Corporation in June 1997 with the same name in a tax-free transaction
(see Note 8 (A)).
The Company operates and franchises soft-serve ice cream, non-fat soft-serve
yogurt, non-dairy soft-serve desserts and an assortment of other foods and
beverages in distinctive freestanding Twistee Treat cone-shaped buildings
designed for "drive-thru" and walk-up service. In addition to the free standing
building, the Company offers specialty kiosk units designed to be located in
stores, malls, food courts, business facilities, and colleges and mobile trailer
units (concession units) designed for short-term events such as fairs, carnivals
and sporting events. As of November 30, 1999 the Company has four franchises and
one company owned store.
(B) Use of Estimates
- --------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
(C) Cash and Cash Equivalents
- -----------------------------
For purpose of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at time of purchase
to be cash equivalents.
(D) Inventories
- ---------------
Inventories primarily consist of ice cream machines and restaurant supplies.
Inventories are stated at the lower of cost or market value, as determined using
the first in, first out method.
(E) Property and Equipment
- --------------------------
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets from 5 to 10 years.
7
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
(F) Revenue Recognition and Deferred Revenue
- --------------------------------------------
In connection with its franchising operations, the Company sells franchise
facilities on a turnkey basis, receiving income from initial franchise fees,
development fees, royalties and product sales. Revenue from the sale of
franchise equipment and leasehold improvements is recognized when delivery takes
place and adequate consideration is received. In 1999, two franchise equipment
and leasehold improvement installations were sold. The major portion of the gain
of approximately $59,000 was deferred in 1999 because of the lack of adequate
consideration being received and is included in deferred revenue. Initial
franchise fees are recognized as income when substantially all services and
conditions relating to the sale of the franchise have been performed and
adequate consideration has been received. Development fees are non-refundable
and recognized when received. The Company Agreements call for additional
franchise fees as franchises are sold in the development regions. These fees are
recognized as income on the same basis as franchise fees. As of November 30,
1999, the Company had deferred revenues originating from franchise and
development fees of approximately $95,000. Royalties, which are based upon a
percentage of the franchise's gross sales, are recognized as income when the
fees are earned and become receivable and collectable. As of November 30, 1999,
the company had not collected any royalty fees due under the franchise
agreements. Revenue from the sales of product to the franchisees is recognized
when the merchandise is shipped.
The Company also earned revenue from the sale of merchandise through one and
three stores that it owned and operated during the years ended November 30, 1999
and 1998, respectively.
(G) Advertising Costs
- ---------------------
In accordance with the American Institute of Certified Public Accountants'
Statement of Position No. 93-7, the Company expenses advertising costs as
incurred. During 1999 and 1998, the Company expensed $5,482 and $2,017,
respectively.
(H) Income Taxes
- ----------------
The Company accounts for income taxes under the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109. "Accounting for
Income Taxes" ("Statement No.109"). Under Statement No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those assets or liabilities are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
8
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
(I) Earnings per Share Data
- ---------------------------
Basic and diluted net loss per common share for the years ended November 30,
1999 and 1998 is computed based on the weighted average common shares and
dilutive common stock equivalents outstanding during the year as defined by
statement of Financial Accounting Standards No. 128 "Earnings Per Share". The
assumed exercise of common stock equivalents was not utilized since the effect
was antidilutive.
(J) Fair Value of Financial Instruments
- ---------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amount of the Company's financial instruments, including accounts
receivable, accounts payable, accrued liabilities, capital lease obligations and
notes payable, approximates fair value due to the relatively short period to
maturity for these instruments.
(K) Recent Account Pronouncements
- ---------------------------------
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements. Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by Statement No. 137, establishes
accounting and reporting standards for derivative instruments and related
contracts and hedging activities. This statement, as amended, is affective for
all fiscal quarters and fiscal years beginning after June 15, 2000. The Company
believes that future adoption of this pronouncement will not have a material
effect on the Company's financial position or results of operations.
(L) Segment Information
- -----------------------
The Company follows statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information". In 1999
and 1998 the Company operated in one segment. Therefore, segment disclosure has
not been presented.
9
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
NOTE 2 - notes RECEIVABLE
(A) Notes Receivable - Trade
- ----------------------------
The following schedule reflects the notes receivable - trade as of November 30,
1999:
<TABLE>
<CAPTION>
<S> <C>
Notereceivable from an individual arising from the sale of a regional
development area, non-interest bearing, due on November 30, 2000
$ 62,500
Note receivable from an individual, for initial franchise fee, originally due upon
execution of franchise agreement, extended to June 24, 2000, non-interest
bearing (see note 2(B)(a) for purchase of franchise store) 20,000
Note receivable, non-interest bearing, balance due upon delivery of a cone
building purchased by a regional developer 7,500
Notereceivable from an individual for payment of initial franchise fee
(together with purchase of franchise store - see Note 2 (B)(b)), payment of
$2,500 originally due on November 6, 1999, extended to June 1, 2000, monthly
payments of $705 at 9% interest originally due from September 1999 through
February 2000, extended to June 2000 through November 2000, monthly payments
of $1,180 at 8% interest originally due from March through November 2000,
extended to December 2000 through August 2001, renegotiation of finance
terms thereafter, but not exceeding 12% interest and 8 years remaining term
20,000
--------------------
110,000
Less current portion 90,000
--------------------
Notes receivable - trade, net of current portion $ 20,000
====================
(B) Notes Receivable - Other
The following schedule reflects the notes receivable as of November 30, 1999:
(a) Note receivable from an individual, 8% interest, $1,500 originally due on
July 24, 1999, extended to July 24, 2000, $20,000 originally due on
September 24, 1999, extended to September 1, 2000, remaining principal
and interest due on June 24, 2000.
$ 78,170
</TABLE>
10
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
<TABLE>
<CAPTION>
<S> <C>
(b) Note receivable from an individual for purchase of franchise store
(together with initial franchise fee - see Note 2 (A)), payment of $2,500
originally due on November 6, 1999, extended to June 1, 2000, monthly
payments of $705 at 9% interest originally due from September 1999
through February 2000, extended to June 2000 through November 2000,
monthly payments of $1,180 at 8% interest originally due from March
through November 2000, extended to December 2000 through August 2001,
renegotiation of finance terms thereafter, but not exceeding 12% interest
and 8 years remaining term
76,500
--------------------
154,670
Less current portion 80,670
--------------------
Notes receivable other, net of current portion $ 74,000
====================
</TABLE>
NOTE 3 - ADVANCES
The advance of $10,000 represents an advance made to a vendor for the production
of a cone building.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at November 30, 1999 consisted of the following:
Furniture and fixtures $ 12,644
Equipment 111,681
Molds 215,000
Vehicles 38,430
Leasehold improvements 2,904
C-I-P stores 83,983
Less accumulated depreciation (136,211)
----------------------
$ 328,431
======================
Depreciation expense for the years ended November 30, 1999 and 1998 was $48,808
and $45,669 respectively.
NOTE 5 - INTANGIBLE ASSET
On May 22, 1998, the Company entered into a purchase agreement with related
parties who were the owners of Twistee Treat Southeast, Inc. to acquire all the
rights, title and interest to Twistee Treat Southeast, Inc. and regional
developer rights and or franchise agreements within the territory being
purchased. The intangible asset will be amortized using a formula which
11
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
allocates the total cost to acquire the entire regional development area of
$277,811 based on the estimated revenue from the sale of portions of the
regional development area to the total estimated revenue from the sale of the
entire development area. During the year ended November 30, 1999 the South
Florida development area was sold. Therefore, the intangible asset was amortized
for an amount of $50,800. This amount was allocated to offset deferred revenues
and realized revenues based upon the realized and unrealized revenue
percentages.
NOTE 6 - NOTES AND LOANS PAYABLE
The following schedule reflects the notes and loans payable at November 30,
1999:
<TABLE>
<CAPTION>
<S> <C>
Note payable to individual, secured by building, in default as of November 20,
1999, paid in full in March 2000 (See Note 10(B)) $ 7,500
Note payable to stockholder, 9% interest, principal and interest originally due
in full December 22, 1999, extended to June 1, 2000, secured by Southeast
Regional
Development Rights 93,750
Note payable to stockholder, 9% interest, principal and interest originally due
according to payment schedule with last payment due on March 1, 1999, extended
to September 1, 2000, secured by Southeast Regional Development Rights
39,547
Note payable, 8% interest, principal and interest due according to payment
schedule with last payment due on January 15, 2001, unsecured
22,254
Note payable to related party, non-interest bearing, due on June 1, 2000, secured
by building 4,362
Note payable to individual, non-interest bearing, due on May 7, 2000
6,250
Note payable to individual, 12% interest, due at the earlier of March 2, 2000 or
upon lender obtaining financing sufficient to repay the note payable (See Note
10(B)) 100,000
Note payable to financing institution, 8.95% interest, due in monthly payments
of $688 through September 2004, secured by vehicle
31,231
Loan from stockholder, 9% interest, due on demand, unsecured 36,000
--------------------
340,894
Less current portion 306,102
--------------------
Notes and loans payable, net of current portion $ 34,792
====================
</TABLE>
12
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
Future maturities of the notes and loans payable in each of the next five years
are as follows:
Year ending
November 30
2000 $ 306,102
2001 14,946
2002 6,500
2003 7,107
2000 6,239
---------------
$ 340,894
Accrued interest of $26,653 on the notes and loans payable has been included in
accrued expenses at November 30, 1999.
NOTE 7 - RELATED PARTIES
Certain notes payable are owed to officers of the Company (See Notes 5 and 6).
NOTE 8 - COMMITMENTS AND CONTINGENCIES
(A) Year 2000 Issues
- --------------------
The Company is aware of the issues associated with the programming code in
existing computer systems caused by the arrival of the millenium (Year 2000).
The "Year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year to
00. The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company uses a standard off the shelf accounting software package for all of
its accounting requirements. Management has contacted the software vendor and
confirmed that the accounting software is Year 2000 compliant. Management has
contacted its critical vendors and suppliers, to determine their own Year 2000
efforts and has not identified any Year 2000 compliance issues with those
parties. Costs of investigating Year 2000 compliance issues have not been
material to date. As a result, management believes that the effect of
investigating and resolving Year 2000 compliance issues will not have a material
effect on the Company's future financial position or results of operations. As
of the date of this report, the Company has not been significantly affected by
Year 2000 issues.
13
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
(B) Capital Lease
- -----------------
As of November 30, 1999, the Company leases restaurant equipment under a
non-cancelable capital lease agreement dated May 29, 1997.
Future minimum lease payments under the capital lease are as follows at November
30, 1999:
Total future minimum lease payments $ 553
Less: interest 46
--------------
Present value of future minimum lease
payments 507
Less: current portion 507
--------------
Long-term obligation under capital lease $ -
==============
(C) Operating Lease Agreement
- -----------------------------
The Company leases corporate office space and two franchise sites under long
term operating leases. The leases have remaining terms varying from the year
2001 through 2008.
Future minimum lease payments for the operating leases are as follows at
November 30, 1999:
2000 $ 34,845
2001 11,015
2002 8,787
2003 8,963
2004 9,142
Thereafter 35,139
Rent expense for the years ended November 30, 1999 and 1998 amounted to $66,500
and $31,329, respectively.
(D) Employment Agreements
- -------------------------
Effective January 1, 1999, the Company entered into an employment agreement with
a principal shareholder and former franchise developer. The agreement calls for
the shareholder to become Chief Executive Officer of Twistee Treat Corporation
for five years at an annual salary of $90,000, $150,000, $150,000, $175,000 and
$175,000 respectively. The agreement contains a severance clause for early
termination of $250,000 and a death benefit of $25,000.
14
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
(E) Litigation, Claims, Assessments
- -----------------------------------
(i) Litigation, Claims Assessments
- ----------------------------------
The Company has filed a lawsuit contesting an alleged management contract
between the Company and a consultant. Upon the happening of several conditions
precedent, the corporations were to exchange stock and other obligations. The
Company's contention is that the contract was never valid, because several
conditions precedent never occurred. The Company has also asserted a replevin
action for the shares of its common stock that were transferred to the
consultant. Although there is not a fixed amount in the litigation at this time,
the Company is alleged to owe approximately $100,000. The Company continues to
vigorously contest the case and pursue its remedies.
In relation to the aforementioned management contract, two lawsuits were filed
against the Company claiming damages of approximately $25,000 and $40,000. These
actions are based on an alleged validity of the management contract described
above and the related assumption of the consultant's debt by the Company. The
Company contends that the agreement is an invalid and unenforceable instrument
due to a failed condition precedent. One of the cases has been dismissed for
failure to prosecute. The plaintiff, however, has filed a motion to set aside
the dismissal. In the other case, formal discovery has not begun as of the date
of this report. The Company, however, is confident, that in both cases it is not
liable for any of the damages claimed.
(ii) General Release and Settlement Agreement
- ---------------------------------------------
Under a General Release and Settlement Agreement ("Agreement") entered into in
November 1999, by and between the Company and one of its franchisees, both
parties have agreed to compromise, settle, release and resolve all claims
between and amongst themselves with regard to the claim of the franchisee for
fraud and breach of contract. In accordance with the terms of the Agreement, the
Company repurchased the ice cream machines it sold to the franchisee, paid the
franchisee a total of $42,500, and the franchisee removed the Company's
registered trade name and trademark from its facility. In addition, the
franchisee must refrain from further using such trade name or making the
Company's ice cream product in their machines. Both parties also agreed that the
franchisee owns the building and all other equipment that it had purchased from
the Company, except for the aforementioned machines repurchased.
NOTE 8 - STOCKHOLDER'S EQUITY
(A) Common and Preferred Stock
- ------------------------------
The Company has authorized 10,000,000 shares of preferred stock, $.0001 par
value and 50,000,000 shares of common stock, $.0001 par value. The preferred
stock will have such right and preferences as determined by the Board of
Directors.
15
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
During June 1997, the Company merged with Twistee Treat Corporation, a Delaware
Corporation with the same name, in a tax-free transaction. The founding
stockholders received 2.96 shares for each share of the old company they owned.
The remaining shareholders exchanged their shares at a ratio of 1:1. The effect
of the stock exchange has been presented retroactively in the accompanying
statement of stockholders' equity.
(B) Warrants
- ------------
At November 30, 1999, the Company had outstanding warrants to purchase 446,500
shares of the Company's common stock at an exercise price of $2.00 per share.
These warrants were issued during the year ended November 30, 1999 together with
common stock issuances. No value has been allocated to the warrants because they
were not trading at the time of issuance. The warrants became exercisable at the
grant date in June 1999 and expire in June 2001.
NOTE 9 - INCOME TAXES EXPENSE
- -----------------------------
The Company has the following current and deferred income tax expense at
November 30, 1999 and November 30, 1998:
1999 1998
---------------- ------------------
Current:
Federal: $ -- $ --
State -- --
Deferred: -- --
Federal and State -- --
---------------- ------------------
Income tax expense (benefit) $ -- $ --
================ ==================
The actual tax expense differs from the "expected" tax expense for the years
ended November 30, 1999 and 1998 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income loss before taxes), as follows:
1999 1998
--------- ---------
Computed "expected " tax expense (benefit) $(207,229) $(157,453)
Non - deductible stock based compensation -- 27,710
Effect of net operating loss carryforward 207,229 129,743
--------- ---------
$ -- $ --
========= =========
16
<PAGE>
TWISTEE TREAT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
--------------------------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at November 30, 1999 and 1998 are as
follows:
1999 1998
-------- --------
Deferred tax assets:
Net operating loss carryforward 479,217 271,988
Stock based compensation 27,710 27,710
-------- --------
Total gross deferred tax assets 506,927 299,698
Less valuation allowance (506,927) (299,698)
-------- --------
Net deferred tax assets -- --
======== ========
The Company has net operating loss carry-forwards of approximately $1,400,000
for income tax purposes available to offset future taxable income, expiring on
various dates beginning in 2016 and 2017.
The net change in the valuation allowance during the year ended November 30,
1999 was $207,229.
NOTE 10 - SUBSEQUENT EVENTS
- ---------------------------
(A) Private Placement
- ---------------------
During March 2000, the Company offered subscriptions pursuant to Rule 504 of
Regulation D of the Securities Act of 1933, as amended, of 8,000,000 shares of
common stock to accredited investors. The purchase price is $0.125 per share. As
of the date of this report, subscriptions for $1,000,000 or 8,000,000 shares
have been received at which time the offer has been closed. As of the same date,
the Company has received cash consideration of a total of $625,000 for the
common stock subscribed.
(B) Repayment of Loans Payable
- ------------------------------
In March 2000, the Company repaid a loan payable of $100,000 which was
outstanding as of November 30, 1999 (see Note 6).
In March 2000, the Company repaid a loan payable balance of $7,500 which was
outstanding as of November 30, 1999 (See Note 6).
17
