SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the fiscal year ended September 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from __________ to ___________________
Commission File No. 0-4289
TONE PRODUCTS, INC.
--------------------------------------------
(Name of small business issuer in its charter)
Arkansas 71-0390957
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2129 North 15th Street
Melrose Park, Illinois 60160
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (708) 681-3660
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.10 Par Value Common Stock
(Title of Class)
<PAGE>
Check 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
----- -----
As of November 30, 1997, 3,692,102 shares of the Registrant's $.10 par
value Common Stock were outstanding. As of November 30, 1997, the market value
of the Registrant's $.10 par value Common Stock, excluding shares held by
affiliates, was $1,394,561 based upon a closing bid price of $1.125 per share of
Common Stock on the Electronic Bulletin Board.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, 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-KSB or any amendment to
this Form 10-KSB.[ X ]
The registrant's revenues for its most recent fiscal year were $9,939,635.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
Except for the historical information contained herein, the matters set
forth in this Report include forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks and
uncertainties are detailed throughout this Report and will be further discussed
from time to time in the Company's periodic reports filed with the Commission.
The forward-looking statements included in this Report speak only as of the date
hereof.
Business
The Company manufactures, distributes and markets under its own proprietary
brand names, as well as under private labels developed for others, a line of
specialty beverages, snack foods and condiments. The Company's product lines
include fruit and other drink concentrates; juices and juice blends; bar mixes
and cocktail bases; snow cone syrups; pancake, waffle, corn and molasses syrups;
barbeque and steak sauces, marinades and dressings; popcorn, cookies, nuts and
other snack foods.
The Company's proprietary products are marketed under a number of its own
brand names including "Bonnie", "Hi-Tone", "Evons", "Rainbo-Rich" and "Players'
Choice." As indicated, the Company also manufactures products for its customers
under private label brand names designated by the customers, and also enters
into copacking arrangements with other manufacturers for some of its products
and acts solely as a distributor for other products.
The Company's customers include large domestic grocery store chains (such
as Aldi's, and Von's), domestic mass merchandisers (such as Sams Club, and
Market Day), large retail food service distributors (such as Marriott, Sysco,
and Alliant), brand name soft drink bottling companies and federal, state and
local government agencies including school districts, colleges and prisons.
The Company manufactures its own products and its private label products in
a 72,000 square foot manufacturing and distribution facility in Melrose Park,
Illinois, and a 17,000 square foot manufacturing and distribution facility in
Las Vegas, Nevada. See "Item 2". These products are marketed through the
Company's own marketing staff consisting of six individuals. Marketing efforts
include direct sales calls, attendance at trade shows, advertisements in trade
journals, and the use of food brokers and sales representatives.
The Company's business strategy is to increase revenues by adding
additional regional and national distributors, expanding its private label and
contract packing operations, increasing its production of certain food specialty
products including barbeque sauces and marinades and instituting a direct store
delivery system ("DSD") at the Company's Fun City Popcorn unit in Las Vegas,
Nevada. The Company believes that existing revenues may be increased without a
3
<PAGE>
pro rata increase in fixed expenses, thereby generating economies of scale
(primarily in manufacturing operations) which will create higher levels of
earnings as a percentage of total revenues.
History
Tone Products, Inc., an Illinois corporation ("TPI") was organized in
March, 1947 to manufacture and market concentrated beverage syrups. In May 1996
TPI was acquired by Minute Man of America, Inc., an Arkansas corporation ("MMA")
in a reverse merger transaction. Under the terms of the reverse merger
transaction, MMA reverse split its stock on the basis of one share for each four
shares outstanding (resulting in 773,752 shares outstanding) and initially
issued an additional 2,275,000 shares to acquire all of the outstanding shares
of TPI. As a result, the management and principal stockholders of TPI became the
management and principal stockholders of the Company. In connection with the
reverse merger transaction, MMA also sold 478,850 shares of its Common Stock at
$2.00 per share in a private placement of its securities ("Private Placement").
In May, 1996, the Company acquired Fun City Popcorn, Inc. ("FCP") for
$875,000 in cash generated from the sale of securities under the Private
Placement and the issuance of 100,000 shares of the Company's Common Stock.
Competition
The speciality beverage, snack food and condiments industries are highly
competitive, and there are numerous multinational, regional and local firms that
currently compete, or are capable of competing, with the Company. Specialty
beverage competitors include Nedlog, Damon and Pride Beverages; snack food
competitors include Frito-Lay, Snak-King and Granny Goose; and condiment
competitors include Redwing and Brooks. Most of the Company's competitors are
larger than the Company and have superior financial, marketing and management
resources, and brand name recognition, than the Company. Competitive factors in
these specialty foods industries include price, product quality and product
flavor. The Company believes its products compete favorably against similar
specialty food products.
Government Regulation
The Company is subject to various federal, state and local regulations
relating to cleanliness, maintenance of food production equipment, food storage
and food handling, and the Company is subject to unannounced on-site inspections
of its food production facilities. As a manufacturer and distributor of foods,
the Company is subject to regulation by the U.S. Food and Drug Administration
("FDA"), state food and health boards, and local health boards in connection
with the manufacturing, handling, storage, transportation, labeling and
processing of food products. Future changes in the regulations may adversely
impact the Company by raising the cost to manufacture and deliver the Company's
products and/or by affecting the perceived healthfulness of the Company's
products. A failure to comply with one or more regulatory requirements could
interrupt the Company's operations and result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store shelves.
The Company holds all material licenses and permits required to conduct its
operations.
4
<PAGE>
The Company is also subject to federal and state laws establishing minimum
wages and regulating overtime and working conditions. Since some of the
Company's personnel are paid at rates not far above federal or state minimum
wage levels, future increases in federal or state minimum wage levels may result
in increases in the Company's labor costs.
Trade Names and Trademarks
The Company has registered a number of its proprietary brand names as
trademarks or trade names in Illinois or with the United States Patent office,
including "Bonnie", "Rainbo-Rich", and "Players' Choice". There can be no
assurance that the Company's trademarks or trade names will not be copied or
challenged by others.
Employees
At November 30, 1997, the Company employed 45 individuals including its
four executive officers, 11 administrative and clerical employees and 30 factory
and warehouse employees. The Company believes that its relations with its
employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company leases 72,000 square feet of office, warehouse and
manufacturing space in Melrose Park, Illinois on a one year lease expiring
September 30, 1998 at a monthly rental of $33,235 or $5.54 per square foot. The
Company also leases 16,802 square feet of office and warehouse space in Las
Vegas, Nevada on a one year lease expiring May 31, 1998 at a monthly rental of
$8,544 or $6.10 per square foot. The Company leases its Melrose Park, Illinois
facility from three of its executive officers and directors and its Las Vegas,
Nevada facility from one of the directors. The Company believes that the terms
of both such facilities leases are fair, reasonable, and consistent with the
terms of leases which could be obtained from unaffiliated parties. The Company
believes its facilities are adequate for its needs in the foreseeable future and
that additional space is available at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock is traded over-the-counter on the Electronic
Bulletin Board ("EBB") under the symbol "TNPD".
The following table sets forth for the quarters indicated the range of high
and low bid prices of the Company's Common Stock on the EBB.
Bid Price
-------------------------
By Quarter Ended: High Low
- ----------------- ---- ---
September 30, 1997.......................... $1.69 $1.12
June 30, 1997............................... $1.50 $1.25
March 31, 1997.............................. $2.00 $1.50
December 31, 1996 .......................... $0.60 $0.75
September 30, 1996 ......................... $0.75 $0.44
June 30, 1996............................... $0.75 $0.44
March 31, 1996 ............................. $0.75 $0.44
December 1995 .............................. $0.75 $0.44
As of November 30, 1997, the Company had approximately 600 beneficial
holders of its Common Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends
to retain earnings, if any, for use in the operation and expansion of its
business. The amount of future dividends, if any, will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and other conditions.
Description of Securities
Common Stock
The Company is authorized to issue 50,000,000 shares of $.10 par value
Common Stock. At November 30, 1997, there were 3,692,102 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of directors. There is no right to cumulate votes in the election of
directors. The holders of Common Stock are entitled to any dividends that may be
6
<PAGE>
declared by the Board of Directors out of funds legally available therefor
subject to any prior rights of holders of Preferred Stock. In the event of
liquidation or dissolution of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of Preferred Stock. Holders of
Common Stock have no preemptive rights and have no right to convert their Common
Stock into any other securities. All of the outstanding shares of Common Stock
are fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 500,000 shares of Preferred Stock,
$10.00 par value, none of which are outstanding. The Preferred Stock may,
without action by the stockholders of the Company, be issued by the Board of
Directors from time to time in one or more series for such consideration and
with such relative rights, privileges and preferences as the Board may
determine. Accordingly, the Board has the power to fix the dividend rate and to
establish the provisions, if any, relating to voting rights, redemption rate,
sinking fund, liquidation preferences and conversion rights for any series of
preferred stock issued in the future.
It is not possible at this time to state the actual effect of any
authorization of Preferred Stock upon the rights of holders of Common Stock
until the Board determines the specific rights of the holders of any series of
preferred stock. The Board's authority to issue Preferred Stock also provides a
convenient vehicle in connection with possible acquisitions and other corporate
purposes, but could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock. Accordingly, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders of the Company, and may adversely
affect the holders of the Common Stock.
Stock Transfer and Warrant Agent
Security Transfer Corporation is the stock transfer agent for the Company's
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
General
The Company was acquired by MMA in a reverse merger in October 1996, and
subsequently changed its fiscal year end to September 30 from December 31. As a
result of the reverse merger and subsequent fiscal year end change, the
comparative financial statements included in this report are insufficient to
gain an understanding of the Company's business and business trends. Therefore
management has included an unaudited statement for the 12 months ended September
30, 1996 in order to help identify the key financial elements of the Company's
operations.
7
<PAGE>
Tone Products, Inc.
Consolidated Statements of Operations
For the Year Ended September 30, 1997 and
the Year Ended September 30, 1996
Company Unaudited
1997 1996
----------- -----------
Net sales $ 9,939,635 $ 7,315,379
Cost of sales 6,744,958 5,321,114
----------- -----------
Gross profit 3,194,677 1,994,265
Operating costs and expenses 2,552,672 1,842,382
----------- -----------
Income from operations 642,005 151,883
----------- -----------
Other income (expense):
Interest expense (89,547) (86,653)
Other income 8,770 2,139
----------- -----------
(80,777) (84,514)
----------- -----------
Income before provision for income taxes 561,228 67,369
Provision for income taxes 257,073 75,250
----------- -----------
Net income $ 304,155 ($ 7,881)
=========== ===========
Net income per common share, share equivalent
primary $ 0.08 ($ 0.00)
=========== ===========
Net income per common share, share equivalent
fully diluted $ 0.08 ($ 0.00)
=========== ===========
Results of Operations-September 30, 1997 Compared to September 30, 1996
The Company had gross revenues of $9,939,635 for the twelve months ended
September 30, 1997, with net income of $304,155 for the same period. Gross
revenues increased by $2,624,256 during the period, which represents an increase
of 36% from 1996 gross revenues. The revenue increase is comprised largely of
the following (i) a full year of Fun City Popcorn sales in 1997 versus six
months of sales in 1996, which amounted to $1,100,000, (ii) a $650,000 increase
in juice sales, and (iii) a $500,000 increase in sauce sales.
Gross margins as a percent of sales increased by 4.88% to 32.14% during
fiscal 1997. This increase in gross margin is largely due to economies of scale
in the manufacturing process, primarily related to direct labor costs. Net
income increased by $312,036 or 3% of gross sales due to the revenue increases
and economies of scale.
8
<PAGE>
Liquidity and Capital Resources
The Company has access to traditional lines of credit and term financing
and has in each of the past three years increased its lines of credit in order
to keep pace with growth. The Company had not made any material commitments for
capital expenditures as of September 30, 1997 and believes it has sufficient
cash resources to meet its needs in calendar 1998.
Seasonality
A significant percentage of the Company's business is seasonal. The sale of
beverage syrups, fruit juice concentrates and barbeque sauces are greater during
warm weather. The holiday season, Thanksgiving through the New Year, helps to
offset this seasonality to some degree. Management has established lines of
credit to offset cash shortages during slow periods and has also instituted
policies and practices to manage cash flow.
Trends
The Company expects the supply of raw materials in the three largest
purchase categories to remain stable, if not increase. Liquid sweeteners, juice
concentrates and packaging materials are expected to remain in adequate supply
through fiscal 1998. The Company's purchasing power with suppliers continues to
grow, and cost of sales should not be adversely effected by raw material
purchasing calender 1998.
The Company has begun an effort to sell its branded products and private
label packaging services in a five state region surrounding the Chicago
metropolitan area. This sales effort is targeting regional and national food
service and food distribution companies, as well as large institutional and
private label companies. The Company is employing its existing sales force in
this effort and expects additional expenses related to sales to be relatively
small. If additional sales require the purchase of dispensing equipment, the
Company has ample borrowing capacity to handle such capital requirements.
The potential addition of direct store delivery at the Company's Fun City
Popcorn division may be an opportunity to increase sales in Las Vegas by up to
$750,000 per year. First year sales will depend upon the timely completion of
the proposed purchase of existing sales routes from a retiring vendor. The cost
of the routes and additional delivery equipment is still being negotiated. The
total cost of adding the business would be largely goodwill amortized over 15
years and is not expected to significantly effect the expense portion of the
Company's income statement. The management of direct store delivery routes is
often difficult. For instance, truck inventories must be closely maintained and
delivery route drivers must be managed to promote sales. Although there may be
difficulties in assimilating this business, the Company believes it has the
necessary management and staff in place.
9
<PAGE>
The Company has brought "in house" the servicing of Chicago area dispensing
equipment which the Company provides to purchasers of its beverage products.
Previously service of this equipment was purchased from an outside contractor.
The Company believes that the additional quality of service gained by tighter
controls in this area will provide significant returns in customer satisfaction
without increasing service expense as a percentage of sales.
This Form 10-KSB specifies the forward looking statements of management.
Forward looking statements are statements that estimate or anticipate the
happening of future events. The forward looking statement of management
specified in this Form 10-KSB have been compiled on the basis of assumptions
made by management and considered to be reasonable. Future operating results of
the Company, however, are impossible to predict and not representation regarding
future operating results of the Company is to be inferred from those forward
looking statements. The assumptions used for purposes of the forward looking
statements specified in this Form 10-KSB represent estimates of future events
and are subject to uncertainty as to possible changes in economic, legislature,
industry, and other circumstances. As a result, the developing and selecting
assumptions from and among reasonable alternatives require the exercise of
judgement to the extent that the assumed events do not occur. The outcome may
vary substantially from that projected, and accordingly, no opinion is expressed
regarding the achievability of particular forward looking results. In addition,
those forward looking statements have been compiled as of the date of this Form
10-KSB and should be evaluated with consideration of any changes occurring after
the date of this Form 10- KSB.
10
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ITEM 7. FINANCIAL STATEMENTS
The financial information required by this item is found beginning on page
F-1.
11
<PAGE>
Tone Products, Inc.
Consolidated Financial Statements
As of September 30, 1997 and 1996 and
For the Year Ended September 30, 1997 and
The Nine Months Ended 1996
<PAGE>
Tone Products, Inc.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Report of Independent Auditors . . . . . . . . . . . . . . . . . 1
Financial Statements of Tone Products, Inc.:
Consolidated Balance Sheets, September 30, 1997 and 1996. . 2
Consolidated Statements of Operations for the
Year Ended September 30, 1997 and the
Nine Months Ended September 30, 1996. . . . . . . . . . . 4
Consolidated Statements of Shareholders' Equity for the
Year Ended September 30, 1997 and the
Nine Months Ended September 30, 1996. . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Year Ended September 30, 1997 and the
Nine Months Ended September 30, 1996 . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . 8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
Tone Products, Inc.
We have audited the accompanying consolidated balance sheet of Tone Products,
Inc. and subsidiaries as of September 30, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for year
ended September 30, 1997 and nine months ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tone
Products, Inc. and its subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the year ended
September 30, 1997 and the nine months ended September 30, 1996 in conformity
with generally accepted accounting principles.
Kelly & Company
Newport Beach, California
December 5, 1997
F-1
<PAGE>
Tone Products, Inc.
Consolidated Balance Sheets
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
ASSETS
Predecessor
Company Entity
---------- ----------
1997 1996
---------- ----------
Current assets:
Cash and equivalents $ 349,617 $ 155,746
Accounts receivable 957,117 939,332
Inventory 1,050,056 1,113,177
Prepaid expenses 11,481 6,685
Deferred tax asset 18,108 5,230
---------- ----------
Total current assets 2,386,379 2,220,170
Property and equipment, net 1,460,863 1,464,724
Other assets 4,090 --
Goodwill 396,886 432,252
---------- ----------
Total assets $4,248,218 $4,117,146
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
<PAGE>
Tone Products, Inc.
Consolidated Balance Sheets
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Predecessor
Company Entity
----------- ------------
1997 1996
----------- -----------
Current liabilities:
Line of credit payable $ 200,000 $ 610,927
Accounts payable 569,764 853,196
Notes payable, current portion 75,197 224,007
Income taxes payable 254,791 28,224
----------- -----------
Total liabilities 1,099,752 1,716,354
Notes payable, long term 140,192 14,269
Deferred tax liability 92,778 67,882
----------- -----------
Total liabilities 1,332,722 1,798,505
----------- -----------
Commitments and contingencies
Shareholders' equity:
Convertible Series A preferred stock;
$10 par value; 500,000 shares
authorized; none issued and
outstanding at September 30, 1997 -- --
Common stock; $0.10 par value;
50,000,000 shares authorized;
3,692,102 and 3,048,752 shares
issued and outstanding
at September 30, 1997 and 1996, 369,211 304,876
respectively
Paid-in capital 1,012,057 (204,308)
Stock subscription proceeds -- 988,000
Retained earnings 1,534,228 1,230,073
----------- -----------
Total shareholders' equity 2,915,496 2,318,641
----------- -----------
Total liabilities and
shareholders' equity $ 4,248,218 $ 4,117,146
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
Tone Products, Inc.
Consolidated Statements of Operations
For the Year Ended September 30, 1997 and
The Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
Predecessor
Company Entity
----------- ------------
1997 1996
----------- -----------
Net sales $ 9,939,635 $ 6,245,918
Cost of sales 6,744,958 4,607,858
----------- -----------
Gross profit 3,194,677 1,638,060
Operating costs and expenses 2,552,672 1,443,336
----------- -----------
Income from operations 642,005 194,724
----------- -----------
Other income (expense):
Interest expense (89,547) (62,536)
Other income 8,770 2,139
----------- -----------
(80,777) (60,397)
----------- -----------
Income before provision for income taxes 561,228 134,327
Provision for income taxes 257,073 75,250
----------- -----------
Net income $ 304,155 $ 59,077
=========== ===========
Net income per common share,
share equivalent primary $ 0.08 $ 0.02
=========== ===========
Net income per common share,
share equivalent fully diluted $ 0.08 $ 0.02
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
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<TABLE>
<CAPTION>
Tone Products, Inc.
Consolidated Statements of Shareholders' Equity
For the Year Ended September 30, 1997 and
The Nine Months Ended September 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Tone Products, Inc. Tone Products, Inc.
(An Illinois Corporation) (An Arkansas Corporation)
------------------------ -----------------------------------------------
Common Common Preferred Preferred Common Common
Shares Stock Shares Stock Shares Stock
------ ----- ------ ----- ------ -----
Balance, December 31, 1995,
<S> <C> <C> <C> <C> <C> <C>
previously reported 600 $ 60,000 -- -- -- --
Shares outstanding prior to reorganization -- -- -- -- 3,093,750 $309,375
One for four reverse stock split prior -- --
to reorganization -- -- -- -- (2,319,998) (231,999)
Shares issued in the acquisition of
Tone Products, Inc. (an Illinois
corporation) by the Company (600) (60,000) -- -- 2,275,000 227,500
------ ------- ----- ----- --------- -------
Balance, December 31, 1995, as restated -- -- -- -- 3,048,752 304,876
Distribution of a building to the
Tone Products, Inc. (an Illinois
Corporation) shareholders -- -- -- -- -- --
Shares subscribed -- -- -- -- -- --
Net income -- -- -- -- -- --
------ ------- ----- ----- --------- -------
Balance, September 30, 1996 -- -- -- -- 3,048,752 304,876
Shares issued in payment for debt -- -- -- -- 64,500 6,450
Shares subscribed -- -- -- -- -- --
Issuance of subscribed shares -- -- -- -- 578,850 57,885
Net income -- -- -- -- -- --
------ ------- ----- ----- --------- --------
Balance, September 30, 1997 -- -- -- -- 3,692,102 $369,211
====== ======= ===== ===== ========= ========
Stock
Paid-in Subscription Retained
Capital Proceeds Earnings Total
--------- -------- -------- -----
Balance, December 31, 1995,
previously reported $ 50,127 -- $1,170,996 $ 1,281,123
Shares outstanding prior to reorganization (309,375) -- -- --
One for four reverse stock split prior
to reorganization 231,999 -- -- --
Shares issued in the acquisition of
Tone Products, Inc. (an Illinois
corporation) by the Company (117,500) (50,000) -- --
----------- ---------- ---------- -----------
Balance, December 31, 1995, as restated (144,749) (50,000) 1,170,996 1,281,123
Distribution of a building to the
Tone Products, Inc. (an Illinois
Corporation) shareholders (59,559) -- -- (59,559)
Shares subscribed -- 1,038,000 -- 1,038,000
Net income -- -- 59,077 59,077
----------- ---------- ---------- -----------
Balance, September 30, 1996 (204,308) 988,000 1,230,073 2,318,641
Shares issued in payment for debt 122,550 -- -- 129,000
Shares subscribed -- 163,700 -- 163,700
Issuance of subscribed shares 1,093,815 (1,151,700) -- --
Net income -- -- 304,155 304,155
----------- ---------- ---------- -----------
Balance, September 30, 1997 $ 1,012,057 -- $1,534,228 $ 2,915,496
=========== ========== ========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
</TABLE>
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Tone Products, Inc.
Consolidated Statements of Cash Flows
For the Year Ended September 30, 1997 and
The Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
Predecessor
Company Entity
----------- -----------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 304,155 $ 59,077
Adjustments to reconcile income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 288,386 175,766
Decrease (increase) in assets:
Accounts receivable (17,785) (382,936)
Inventory 63,121 (228,271)
Prepaid expenses (4,796) 16,601
Deferred tax asset (12,878) (317)
Other assets (4,090) --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (154,432) 53,330
Advances to shareholders -- (26,913)
Income taxes payable 226,567 (36,154)
Deferred tax liabilities 24,896 (78,657)
----------- -----------
Cash provided by (used in) operating
activities 713,144 (448,474)
----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment (195,270) (92,549)
Acquisition of Fun City Popcorn, Inc. -- (770,254)
----------- -----------
Cash used in investing activities (195,270) (862,803)
----------- -----------
Cash flows provided by (used in)
financing activities:
Net (reductions on) proceeds from
line of credit (410,927) 610,927
Repayment of notes payable (250,235) (271,756)
Proceeds from notes payable 173,459 221,441
Subscription of common stock 163,700 788,000
----------- -----------
Cash provided by (used in)
financing activities (324,003) 1,348,612
----------- -----------
Net increase in cash 193,871 37,335
Cash at beginning of period 155,746 118,411
----------- -----------
Cash at end of period $ 349,617 $ 155,746
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
Tone Products, Inc.
Consolidated Statements of Cash Flows
For the Year Ended September 30, 1997 and
The Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Predecessor
Company Entity
----------- -----------
1997 1996
----------- -----------
Interest $ 89,547 $ 64,983
Income taxes 5,610 33,064
Supplemental Schedule of Non-Cash Investing and Financing Activities
Distribution of building to shareholder
Equity distributed -- $ 59,559
Liability satisfied -- 625,000
Net book value of asset distributed -- (684,559)
Acquisition of Fun City Popcorn, Inc.
(non-cash portion):
Assets acquired -- 300,000
Liabilities incurred -- (50,000)
Subscribed shares -- (250,000)
Acquisition of equipment
Assets acquired $ 53,889 --
Liabilities incurred (53,889) --
Satisfaction of debt through issuance
of stock
Liabilities satisfied 129,000 --
Shares issued (129,000) --
Issuance of subscribed stock
Reduction of subscribed stock 1,151,700 --
Shares issued (1,151,700) --
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
- -- ------------------------------------------
Basis of Presentation
The consolidated financial statements include the accounts of Tone
Products, Inc. and subsidiaries, Fun City Popcorn, Inc. (a Nevada
corporation) and Tone Products, Inc. (an Illinois corporation) (the
"Company"). All significant intercompany transactions have been eliminated.
Prior to October 15, 1996, the Company was named Minute Man of America,
Inc.
Operations
The Company is engaged in the purchase, manufacture, and wholesale
distribution of food products in the beverage, snack, syrup, condiments,
and sauce categories.
Business Combination
On October 15, 1996, the Company acquired, in a reverse merger transaction,
Minute Man of America, Inc. The effective purchase price was 773,752 shares
of the Company's common stock, and the transaction was treated as a
purchase. Minute Man of America, Inc. had no operations, assets, or
liabilities at the acquisition date. No goodwill has been recorded as a
result of this transaction.
Recognition of Revenue
Revenues are recognized when the Company's products are shipped.
Cash and Equivalents
The Company classifies all highly liquid investments with maturities of
three months or less as cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. The Company regularly monitors inventory
for excess or obsolete items and makes any valuation corrections when such
adjustments are needed.
F-8
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Continued
- -- -----------------------------------------------------
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below.
Expenditures for normal maintenance and repairs are charged to income, and
significant improvements are capitalized. The cost and related accumulated
depreciation of assets are removed from the accounts upon retirement or
other disposition, and resulting profit or loss is reflected in the
statement of operations.
Estimated Useful
Life
--------------
Leasehold improvements 39 years
Machinery and equipment 7 years
Furniture and fixtures 5 - 7 years
Vehicles 5 - 7 years
Goodwill
Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value. It is amortized over fifteen years
utilizing the straight-line method. The Company evaluates goodwill for
impairment at least annually. In completing this evaluation, the Company
compares its best estimate of future cash flows, excluding interest cost,
with the carrying value of goodwill. The Company determined that there was
no impairment at September 30, 1997 and 1996. Amortization expense for the
year and the nine months ended September 30, 1997 and 1996 was $35,366 and
$9,824, respectively.
Income Taxes
The Company accounts for deferred income taxes using the liability method.
Deferred income taxes are computed based on the tax liability or benefit in
future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting
purposes. Deferred tax assets and/or liabilities are classified as current
and noncurrent based on the classification of the related asset or
liability for financial reporting purposes, or based on the expected
reversal date for deferred taxes that are not related to an asset or
liability. The Company files a consolidated federal income tax return and
reports results from operations on a unitary basis for state income tax
purposes.
F-9
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Continued
- --------------------------------------------------------
Stock Split
All common shares and per share amounts have been adjusted to give
retroactive effect, where applicable, to a one for four reverse stock split
that occurred during 1997.
Disclosures About Fair Value of Financial Investments
The Company accounts for the value of financial instruments using the fair
value method.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising expense
was $61,401 and $32,594 for the year ended September 30, 1997 and the nine
months ended September 30, 1996, respectively.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. Accounts Receivable
- -- --------------------
Accounts receivable consists of the following:
1997 1996
-------- --------
Trade accounts receivable $935,347 $909,332
Due from a related party 21,770 30,000
-------- --------
Total accounts receivable $957,117 $939,332
======== ========
During the year ended September 30, 1997 and the nine months ended
September 30, 1996, respectively, the Company charged to operations $12,254
and $46,364, in uncollectible accounts receivable.
F-10
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Inventory
- -- ---------
Inventory consists of the following:
1997 1996
---------- ----------
Raw materials $ 602,252 $ 782,623
Finished goods 447,804 330,554
---------- ----------
Total inventory $1,050,056 $1,113,177
========== ==========
4. Property and Equipment
- -- ----------------------
Property and equipment consist of the following:
1997 1996
---------- ----------
Leasehold improvements $ 402,011 $ 369,890
Machinery and equipment 2,432,422 2,261,941
Furniture and fixtures 101,410 95,178
Vehicles 311,789 271,464
---------- ----------
3,247,632 2,998,473
Less: accumulated depreciation (1,786,769) (1,533,749)
---------- ----------
Total property and equipment $1,460,863 $1,464,724
========== ==========
Depreciation expense for the year and nine months ended September 30, 1997
and 1996, was $253,020 and $165,942, respectively.
5. Bank Line of Credit
- -- -------------------
The Company has operating lines of credit with a bank as follows:
Line of credit with a maximum amount of
$800,000 available, secured by the Company
and three officers of the Company who are
also its largest shareholders. The bank line
of credit has an interest rate of bank prime
(8.50% at September 30, 1997), due in January
1998. -- $610,927
F-11
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Bank Line of Credit, Continued
- -- ------------------------------
Line of credit with a maximum amount of
$200,000 available, secured by Fun City
Popcorn, Inc.'s assets and guaranteed by the
Company and three officers of the Company who
are also its largest shareholders. The bank
line of credit has an interest rate of bank
prime (8.50% at September 30, 1997), due in
February 1998. $200,000 --
-------- --------
$200,000 $610,927
======== ========
6. Notes Payable
- -- -------------
Notes payable consist of the following:
1997 1996
---- ----
Note payable to a bank, secured by the
Company's assets, payable in monthly
principal installments of $3,690 plus accrued
interest, due in April 2001. Interest is
calculated at the bank's prime rate plus
three-quarters of a point (8.50% at September
30, 1997). $158,697 $199,289
Notes payable consisting of eight separate
promissory notes are secured by Company
vehicles. The notes payable call for monthly
installments of principal and interest of
$3,847 for terms which do not exceed three
years. At September 30, 1997, the promissory
notes bear interest rates between 1.95% and
10.50% 56,692 38,987
-------- --------
Total notes payable 215,389 238,276
Less: current maturities (75,197) (224,007)
-------- --------
Long term portion of notes payable $140,192 $ 14,269
======== ========
F-12
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
6. Notes Payable, Continued
- -- ------------------------
Maturities of notes payable for the years ending September 30:
1998 $75,197
1999 58,334
2000 51,894
2001 29,964
2002 and thereafter --
7. Deferred Income Taxes
- -- ---------------------
The components of the provision for income taxes are as follows:
1997 1996
Current tax expense:
Federal $215,079 $48,292
State 49,332 12,656
-------- -------
264,411 60,948
-------- -------
Deferred tax expense (benefit):
Federal (8,380) 11,775
State 1,042 2,527
-------- -------
(7,338) 14,302
-------- -------
Total provision $257,073 $75,250
======== =======
Significant components of the Company's deferred income tax assets and
liabilities at September 30, 1997 and 1996, are as follows:
Deferred income tax asset:
State taxes $21,816 $ 8,584
Other 987 986
------- -------
Total deferred income tax asset 22,803 9,570
Valuation allowance -- --
------- -------
Total deferred income tax assets 22,803 9,570
------- -------
Deferred income tax liability:
Depreciation 78,117 72,222
------- -------
Total deferred income tax liability 78,117 72,222
------- -------
Net deferred income tax liability $55,314 $62,652
======= =======
F-13
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Deferred Income Taxes, Continued
- -- --------------------------------
Reconciliation of the effective tax rate to the U.S. statutory rate is as
follows:
Tax expense at U.S. statutory rate 34.0% 34.0%
State tax provision 5.9 7.5
Non-deductible expenses 6.2 10.8
Other (.3) 3.8
---- ----
Effective income tax rate 45.8% 56.1%
==== ====
8. Commitments
- -- -----------
The Company has operating leases for certain of its facilities. The
operating leases are with entities owned by officers of the Company who are
also its three largest shareholders. The leases are annual in nature and
have been renewed in the past. It is management's belief that the leases
will continue to be renewed into the foreseeable future. Future minimum
lease payments at September 30, 1997, are as follows:
Due to
Total Related Parties
-------- ---------------
1998 $390,132 $375,012
1999 -- --
-------- --------
Total future minimum lease payments $390,132 $375,012
======== ========
Rental expense resulting from operating lease agreements was $364,828 and
$172,012 for the year ended September 30, 1997 and the nine months ended
September 30, 1996, respectively.
The Company is a guarantor on a $300,000 promissory note with a bank for
the benefit of the Company's three largest shareholders. All terms and
conditions of the loan agreement are being met by the shareholders.
9. Concentration of Credit Risk
- -- ----------------------------
The Company sells products to private companies, certain governmental
entities, and public institutions primarily with a 300-mile radius of each
of their two locations. Credit is extended based on an evaluation of the
customer's financial condition. Exposure to losses on accounts receivable
is principally dependant on each customer's financial condition. The
Company monitors its exposure for credit losses and writes off accounts
receivable that it deems are not collectible.
F-14
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Concentration of Credit Risk, Continued
- -- ---------------------------------------
The Company maintains its cash in bank deposit accounts which exceed
federally insured limits by $240,341 and $55,746 at September 30, 1997 and
1996, respectively; however, the Company has not experienced any losses in
such accounts.
10. Disclosures about Fair Values of Financial Instruments
- --- ------------------------------------------------------
The estimated fair value amounts of all financial instruments, both on and
off the Company's balance sheet, have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial statements:
Cash and equivalents, accounts receivable, inventory, prepaids, accounts
payable, line of credit payable, current portion of notes payable, and
certain other current liability amounts are reported in the balance sheet
at approximate fair value due to the short term maturities of these
instruments.
The fair value of the notes payable is estimated by determining the net
present value of future payments. The carrying amount on the balance sheet
approximates the fair value as the interest rates approximate current
market rates.
11. Profit-Sharing Plan
- --- -------------------
Effective January 1, 1989, the Company amended and restated a
noncontributory profit sharing retirement plan covering substantially all
employees. Annual employer contributions to the plan are made at the
discretion of management. No employer contribution was made for the year
ended September 30, 1997 and the nine months ended September 30, 1996.
12. Related Party Transactions
- --- --------------------------
The Company leases from entities owned by its three largest shareholders
certain operating facilities. For the year ended September 30, 1997 and the
nine months ended September 30, 1996, respectively, the Company paid the
entities $325,530 and $161,849 in rent.
F-15
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
12. Related Party Transactions, Continued
- --- -------------------------------------
On February 2, 1996, the predecessor company made an election and adopted a
corporate reorganization and disposed of certain assets and the related
liability to the Company's shareholders. This transaction resulted in no
gain or loss to the predecessor company and resulted in a distribution from
shareholders' equity of $59,559 to its shareholders.
During the year ended September 30, 1997 and the nine months ended
September 30, 1996, respectively, the Company had sales of $0 and $39,316,
respectively, to a related entity. Included in accounts receivable at
September 30, 1997 and 1996, was $21,770 and $30,000, respectively, due
from this entity.
13. Common Stock
- --- ------------
Transactions Prior to the One for Four Reverse Stock Split
Stock Subscription
------------------
During the nine months ended September 30, 1996, the Company raised
$838,000 through a private placement. The 419,000 shares involved in
the stock subscription were not issued until subsequent to September
30, 1996. The shares involved were post stock split shares.
Acquisition of Fun City Popcorn, Inc.
-------------------------------------
As part of the acquisition price of Fun City Popcorn, Inc., its former
owner, who is now on the Company's Board of Directors, received
100,000 shares at $2.00 per share value. The shares involved were post
stock split shares.
Stock Split
In October 1996, concurrent with a business combination, the Company's
shareholders approved a one for four reverse stock split of the Company's
common stock. Accordingly, $231,999 was transferred from common stock to
paid in capital representing the par value of the shares canceled in the
reverse split.
F-16
Continued
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
13. Common Stock, Continued
- --- -----------------------
Transactions Subsequent to the One for Four Reverse Stock Split
Acquisition of Tone
-------------------
On October 15, 1996, the Company sold ( in a reverse acquisition) a
70.5% interest in Minute Man of America, Inc. ("MMA") to the
shareholders of TPI. The shareholders of TPI exchanged all of their
stock in TPI for 2,275,000 common shares of MMA. As part of this
transaction:
1. MMA changed its name to Tone Products, Inc.
2. The board of directors of MMA was expanded from three to
seven members. Tone has placed six members on the board and
one former MMA board member will remain.
Common Stock Issued in Exchange for Debt
----------------------------------------
In 1997 the Company issued 64,500 shares of common stock in
payment of debt of $129,000.
Issuance of Subscribed Stock
----------------------------
In 1997 the Company issued 578,850 shares of stock that had been
subscribed during a private placement.
14. Earnings per Common Share
- --- -------------------------
The computation of both primary and fully diluted earnings per common and
common equivalent share are computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding during
each year. The primary and fully diluted weighted average common and common
equivalent shares, as applicable, outstanding during the year ended
September 30, 1997 was 3,677,082 and was used in calculating the earnings
per share for the year and nine months ended September 30, 1997 and 1996
respectively.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------
On October 3, 1996, the Audit Committee of the Board of Directors of Minute
Man of America, Inc. ("MMA") approved the dismissal of Samson, Robbins &
Associates, P.L.L.C., ("SRA"), Dallas, Texas, independent auditors and the
retention of Kelly & Company, Newport Beach, California, as MMA's new principal
independent auditors. The change was implemented due to budgetary
considerations.
Neither of SRA's reports on MMA's financial statements for the past two
fiscal years contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of MMA's financial statements for each of the two
fiscal years ended September 30, 1995 and September 30, 1994, and in the
subsequent interim period, there were no disagreements with SRA on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which if not resolved to the satisfaction of SRA
would have cause SRA to make reference to the matter in their report.
SRA furnished a letter to the Commission confirming the above information
with the exception of an explanatory paragraph included in its January 4, 1996
Report regarding the consolidated financial statements of MMA.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------
Directors and Executive Officers
The following table sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
Officer or
Name Age Office Director Since(1)
---- --- ------ -----------------
<S> <C> <C> <C>
Timothy E. Evon 43 President, Chief Executive October, 1996
Officer, and Director
Michael W. Evon 37 Vice-President - Sales and October, 1996
Marketing, and Director
Thomas J. Evon 42 Vice-President - Special November, 1996
Accounts, and Director
William H. Hamen 37 Secretary, Treasurer, and Chief
Financial Officer November, 1996
Jack T. Cory 56 Director October, 1996
Charles A. Ehemann 45 Director October, 1996
Edward R. Jancauskas 56 Director November, 1997
</TABLE>
(1) Reflects the date TPI was acquired by the Company. Messrs. Evon, Evon and
Evon had been directors of TPI, the Company's predecessor, from September
1978.
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. Directors not employed by the Company do not receive
fees for attending Board of Directors' meetings but are reimbursed for
out-of-pocket expenses, and each is granted stock options to purchase 25,000
shares of the Company's Common Stock after one year of service. Timothy E. Evon,
Michael W. Evon and Thomas J. Evon are brothers.
Background
The following is a summary of the business experience of each executive
officer and director of the Company for at least the last five years:
13
<PAGE>
Timothy E. Evon has been President of TPI, and subsequently the Company,
since 1989 and is responsible for the Company's overall operations, with
emphasis upon management of production facilities and sauce operations.
Michael W. Evon has been a Vice-President of TPI, and subsequently the
Company, since 1989 and its National Sales Manager since 1993.
Thomas J. Evon has been an executive officer of TPI, and subsequently the
Company, since 1989 with principal responsibility for marketing the Company's
products primarily to government agencies, including school districts, colleges
and prisons.
William H. Hamen has been the Company's controller since 1996 and was named
its Secretary, Treasurer and Chief Financial Officer in November 1997 with
principal responsibility for accounting and related functions. Previously, Mr.
Hamen was an independent systems consultant and a computer network engineer
since 1992.
Jack T. Cory founded Fun Foods, a California based popcorn and snack foods
manufacturer in 1967 and sold the company in 1982. In 1985 he founded and
subsequently managed Fun City Popcorn, Inc. ("FCP") until he sold FCP to the
Company in May 1996.
Charles A. Ehemann has been employed by Wixon/Fontarome, a spice,
seasoning, flavors, and food chemicals manufacturer since 1974 and has acted as
its Executive Vice President since 1991.
Edward R. Jancauskas has been employed by Coca-Cola Bottling Company of
Chicago since 1968 and has been its Director of Immediate Consumption since
1988. He is an elected trustee of Mokena, Illinois. Mr. Jancauskas earned a
Bachelor's Degree in Management form of St. Joseph Calumet College.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth certain information concerning compensation
paid to the Company's Chief Executive Officer for the years ended September 30,
1996 and 1997. Timothy E. Evon, Michael W. Evon and Thomas J. Evon currently
receive annual salaries of $92,300 each.
14
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------ ------------
Name and Other Annual Awards All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Timothy E. Evon, 1996 $69,923 $10,000 $0 $0 $0
Chief Executive Officer
1997 $92,300 500 0 0 0
</TABLE>
Stock Option Plan
In November 1997, the Company adopted its 1997 Stock Option Plan (the
"Plan"), which provides for the grant to employees, officers, directors and
consultants of options to purchase up to 350,000 shares of Common Stock,
consisting of both "incentive stock options" within the meaning of Section 422A
of the United States Internal Revenue Code of 1986 (the "Code") and
"non-qualified" options. Incentive stock options are issuable only to employees
of the Company, while non-qualified options may be issued to non-employee
directors, consultants and others, as well as to employees of the Company.
The Plan is administered by the Board of Directors, which determines those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, vesting periods required for issuance of
options, the number of shares of Common Stock that may be purchased under each
option and the option price.
The per share exercise price of the Common Stock subject to an incentive
stock option may not be less than the fair market value of the Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option is established by the Board of Directors. The
aggregate fair market value (determined as of the date the option is granted) of
the Common Stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option to him, more than 10% of the total combined voting power of all classes
of stock of the Company is eligible to receive any incentive stock options under
the Plan unless the option price is at least 110% of the fair market value of
the Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to these limitations.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which he or she can exercise the
15
<PAGE>
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for 12 months
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options with no additional investment other than his original shares. Any
unexercised options that expire or that terminate upon an optionee ceasing to be
an officer, director or an employee of the Company become available once again
for issuance.
As of the date of this Report, options to purchase 235,000 shares have been
granted under the Plan, of which 200,000 options have been issued to the
Company's executive officers and directors. All options are exercisable at $1.75
per share until November 2007, and none of such options have been exercised.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth certain information as of November 30, 1997
concerning stock ownership of the Company's Common Stock by all persons known to
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock, by each director and by all directors and officers as a group.
Except as otherwise noted, the persons named in the table own the shares
beneficially and of record and have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws, where applicable. Each stockholder's address is in care
of the Company at 2129 North 15th Street, Melrose Park, Illinois 60160. The
table also reflects all shares of Common Stock which may be acquired within 60
days from the date hereof upon exercise of stock options or common stock
purchase warrants.
16
<PAGE>
Number of
Shares of
Common
Stock Owned Percent of
of Record Common Stock
Name and Beneficially(1) Owned
---- ------------------- -----
Timothy E. Evon 738,166 18.8%
Michael W. Evon 738,166 18.8%
Thomas J. Evon 738,166 18.8%
Jack T. Cory 125,000 3.1%
Charles A. Ehemann 12,500 0.3%
Edward R. Jancauskas 1,000 0%
Cede & Co. 703,384 17.9%
All officers and directors 2,377,998 60.5%
as a group (7 persons)
- ----------
(1) Includes Stock Options exercisable within 60 days from the date hereof.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company believes that the transactions described below were fair,
reasonable and consistent with the terms of transactions which the Company could
have entered into with nonaffiliated third parties. All future transactions with
affiliates will be approved by a majority of the Company's disinterested
directors.
The Company leases office, warehouse and factory space in Melrose Park,
Illinois and Las Vegas, Nevada from certain of its executive officers and
directors. See "Item 2 - Description of Property."
In December 1997 the Company agreed to purchase from Tone Juices, Inc.,
("TJ") an affiliated company owned by Timothy E. Evon, Thomas J. Evon, and
Michael W. Evon, the trade name "Balboa Bay" which was owned by TJ, but used by
the Company as the brand name for fruit juices sold by the Company to certain
Coca-Cola bottlers. The purchase price of $300,000 will be paid by the Company's
assumption of a promissory note in like amount payable to a commercial bank and
executed by Timothy E. Evon, Thomas J. Evon, and Michael W. Evon. Management of
the Company believes that it was in the Company's best interest to acquire the
trade name in order for the Company to continue sales of its fruit juice
products under the "Balboa Bay" label to the Coca- Cola bottlers.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
a. Exhibits: None
b. Reports on Exhibit 8K: None
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
hereunto duly authorized, in Melrose Park, Illinois, on December 24, 1997.
TONE PRODUCTS, INC.
By /s/ Timothy E. Evon
------------------------------
Timothy E. Evon
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Timothy E. Evon President Chief Executive Officer, December 24, 1997
- --------------------------- and Director
Timothy E. Evon
/s/ Michael W. Evon Vice-President - Sales and December 24, 1997
- --------------------------- Marketing, and Director
Michael W. Evon
/s/ Thomas J. Evon Vice-President - Special Accounts December 24, 1997
- --------------------------- and Director
Thomas J. Evon
/s/ William H. Hamen Secretary, Treasurer and Chief December 24, 1997
- --------------------------- Financial Officer (Principal
William H. Hamen Accounting Officer)
/s/ Jack T. Cory Director December 24, 1997
- ---------------------------
Jack T. Cory
/s/ Charles A. Ehemann Director December 24, 1997
- ---------------------------
Charles A. Ehemann
/s/ Edward R Jancauskas Director December 24, 1997
- ---------------------------
Edward R. Jancauskas
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-KSB
FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 349
<SECURITIES> 0
<RECEIVABLES> 957
<ALLOWANCES> 0
<INVENTORY> 1,050
<CURRENT-ASSETS> 2,386
<PP&E> 3,247
<DEPRECIATION> 1,786
<TOTAL-ASSETS> 4,248
<CURRENT-LIABILITIES> 1,099
<BONDS> 0
0
0
<COMMON> 369
<OTHER-SE> 2,779
<TOTAL-LIABILITY-AND-EQUITY> 4,248
<SALES> 9,939
<TOTAL-REVENUES> 9,939
<CGS> 6,745
<TOTAL-COSTS> 6,745
<OTHER-EXPENSES> 2,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 561
<INCOME-TAX> 257
<INCOME-CONTINUING> 304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
