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, 1998
[ ] 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)
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, 1998, 3,579,612 shares of the Registrant's $.10 par
value Common Stock were outstanding. As of November 30, 1998, the market value
of the Registrant's $.10 par value Common Stock, excluding shares held by
affiliates, was $1,276,798 based upon a closing bid price of $1.030 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 $11,019,456.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
<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 focusing on
sales of it's frozen beverage products in the convenience store market,
expanding its private label and contract packing operations, increasing its
production of certain food specialty products including barbeque sauces and
marinades and expanding it's 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 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
<PAGE>
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.
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,
<PAGE>
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, 1998, 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.
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.
<PAGE>
Bid Price
-------------------------
By Quarter Ended: High Low
- ----------------- ---- ---
September 30, 1998.......................... $1.00 $ .62
June 30, 1998............................... $1.25 $1.00
March 31, 1998.............................. $1.87 $1.50
December 31, 1997 .......................... $1.50 $0.75
September 30, 1997 ......................... $1.69 $1.12
June 30, 1997............................... $1.75 $1.25
March 31, 1997 ............................. $2.00 $1.50
December 1996 .............................. $0.60 $0.75
As of November 30, 1998, 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 December 15, 1998, there were 3,579,612 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
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
<PAGE>
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
Results of Operations-September 30, 1998 Compared to September 30, 1997
Net Sales for the 12 month period ended September 30, 1998 increased to $11
million from $9.9 million in 1997 which represents an increase of almost 11%.
Sales increases were a result of new private label packaging contracts for
sauces and beverage concentrates.
Cost of goods sold increase to 72.8% of sales or $8 million from 71.7% or
$7.1 million a year ago. Higher labor costs were the largest factor in this
increase.
Sales increases were instrumental in producing a 27% increase in operating
income to $817,770 from $642,005 for the previous year. Reduced interest expense
and a lower tax rate contributed to a 84% increase in net earnings to $561,402
or $0.15 per share from $304,155 or $0.08 per share a year ago.
<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, 1998 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 forsees a potential shortage of available
tomato paste. The Company has agreements in place with suppliers that should
provide an adequate supply of tomato paste 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.
This year we look for continued solid growth from our existing product lines
and are particularly enthusiastic about prospects for two new items, frozen
cappuccino's and smoothies. These two products received an overwhelmingly
positive response when they were recently introduced at the NACS show in Atlanta
and consequently we have high expectations for their performance.
The expansion 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 $200,000
per year.
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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
Tone Products, Inc.
Index to the Consolidated Financial Statements
As of September 30, 1998 and 1997 and
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
Consolidated Financial Statements of Tone Products, Inc.:
Report of Independent Auditors ...................................... F-1
Consolidated Balance Sheets,
September 30, 1998 and 1997 ................................... F-2
Consolidated Statements of Operations
For the Years Ended September 30, 1998 and 1997 ............... F-4
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1998 and 1997 ............... F-5
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1998 and 1997 ............... F-7
Notes to the Consolidated Financial Statements ................... F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Tone Products, Inc.
We have audited the accompanying consolidated balance sheets of Tone
Products, Inc. and subsidiaries as of September 30, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for years then ended. 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 financial position of Tone
Products, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Kelly & Company
- ----------------------------
Kelly & Company
Newport Beach, California
December 11, 1998
F-1
<PAGE>
Tone Products, Inc.
Consolidated Balance Sheets
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
ASSETS
1998 1997
---- ----
Current assets:
Cash and equivalents $ 458,343 $ 349,617
Accounts receivable 975,456 935,347
Accounts receivable - related party 10,760 21,770
Inventories 1,080,366 1,050,056
Prepaid expenses 20,424 11,481
Deferred tax asset 18,703 18,108
---------- ----------
Total current assets 2,564,052 2,386,379
Property and equipment, net 1,485,431 1,460,863
Goodwill 765,605 396,886
Other assets 4,648 4,090
---------- ----------
Total assets $4,819,736 $4,248,218
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F- 2
<PAGE>
Tone Products, Inc.
Consolidated Balance Sheets
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
---- ----
Current liabilities:
Lines of credit $ 240,000 $ 200,000
Accounts payable, trade 614,696 569,764
Notes payable, current portion 82,361 75,197
Income taxes payable 156,536 254,791
---------- ----------
Total current liabilities 1,093,593 1,099,752
Notes payable, net of current portion 165,960 140,192
Deferred tax liability 62,150 92,778
---------- ----------
Total liabilities 1,321,703 1,332,722
Commitments and contingencies
Shareholders' equity:
Convertible Series A preferred stock; $10
par value; 500,000 shares authorized; none
issued and outstanding at September 30, 1998
and 1997 -- --
Common stock; $0.10 par value; 50,000,000
shares authorized; 3,579,612 and 3,692,102
shares issued and outstanding at September 30,
1998 and 1997, respectively 357,961 369,211
Common stock committed to be issued 21,136 --
Additional paid-in capital 1,023,307 1,012,057
Retained earnings 2,095,629 1,534,228
---------- ----------
Total shareholders' equity 3,498,033 2,915,496
Total liabilities and shareholders' equity $4,819,736 $4,248,218
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
Tone Products, Inc.
Consolidated Statements of Operations
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
Net sales $ 11,019,456 $ 9,944,232
Cost of sales 8,024,387 7,132,544
------------ ------------
Gross profit 2,995,069 2,811,688
Operating costs and expenses 2,177,299 2,165,086
------------ ------------
Income from operations 817,770 646,602
------------ ------------
Other income (expense):
Interest expense (60,211) (89,547)
Other income 5,291 4,173
------------ ------------
(54,920) (85,374)
------------ ------------
Income before provision for income taxes 762,850 561,228
Provision for income taxes 201,449 257,073
------------ ------------
Net income $ 561,401 $ 304,155
============ ============
Net income per share, basic and diluted $ 0.15 $ 0.08
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Tone Products, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1998 and 1997
Tone Product, Inc. Tone Products, Inc.
(An Illinois Corporation) (An Arkansas Corporation)
------------------------------ -------------------------------------------------------
Convertible Convertible
Series A Series A
Common Common Preferred Preferred Common Common
Shares Stock Stock Stock Shares Stock
------ ----- ----- ----- ------ -----
Balance,
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996 600 $ 60,000 -- -- -- --
Shares outstanding
prior to a reverse
stock split -- -- -- -- 3,093,750 $ 309,375
Reduction in shares
as a result of the
one for four split
prior to reorganization -- -- -- -- (2,319,998) (231,999)
---------- ---------- ------- ------- ---------- ----------
Shares outstanding prior
to the reorganization -- -- -- -- 773,752 77,376
The effect of shares
exchanged in the
reorganization (reverse
merger) of Tone Products,
Inc. (an Illinois
corporation) (600) (60,000) -- -- 2,275,000 227,500
---------- ---------- ------- ------- ---------- ----------
Balance,
September 30, 1996
as restated -- -- -- -- 3,048,752 304,876
Shares issued on the
conversion of debt -- -- -- -- 64,500 6,450
Subscription of shares -- --
Issuance of subscribed
shares -- -- -- -- 578,850 57,885
Net income -- -- -- -- -- --
---------- ---------- ------- ------- ---------- ----------
Balance,
September 30, 1997 -- -- -- -- 3,692,102 369,211
Shares retired that
were exchanged in
the reorganization
(reverse merger) of
Tone Products, Inc. -- -- -- -- (112,490) (11,250)
Shares committed and
fully paid but not
issued in the
acquisition of T.J
Distributing -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ------- ------- ---------- ----------
Balance,
September 30, 1998 -- -- -- -- -- --
========== ========== ======= ======= ========== ==========
F-5
<PAGE>
Tone Products, Inc.
Consolidated Statements of Shareholders' Equity (Continued)
For the Years Ended September 30, 1998 and 1997
Common Stock Additional Stock
Committed Paid-in Subscription Retained
To Be Issued Capital Proceeds Earnings Total
------------ ------- -------- -------- -----
Balance,
September 30, 1996 -- $ (9,432) $ 1,038,000 $ 1,230,073 $ 2,318,641
Shares outstanding
prior to a reverse
stock split -- (309,375) -- -- --
Reduction in shares
as a result of the
one for four split
prior to reorganization -- 231,999 -- -- --
----------- ----------- ----------- ----------- -----------
Shares outstanding prior
to the reorganization -- (77,376) -- -- --
The effect of shares
exchanged in the
reorganization (reverse
merger) of Tone Products,
Inc. (an Illinois
corporation) -- (117,500) (50,000) -- --
----------- ----------- ----------- ----------- -----------
Balance,
September 30, 1996
as restated -- (204,308) 988,000 1,230,073 2,318,641
Shares issued on the
conversion of debt -- 122,550 -- -- 129,000
Subscription of shares -- -- 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
Shares retired that
were exchanged in
the reorganization
(reverse merger) of
Tone Products, Inc. -- 11,250 -- -- --
Shares committed and
fully paid but not
issued in the
acquisition of T.J
Distributing $ 21,136 -- -- -- 21,136
Net income -- -- -- 561,401 561,401
----------- ----------- ----------- ----------- -----------
Balance,
September 30, 1998 $ 21,136 $ 1,023,307 -- $ 2,095,629 $ 3,498,033
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tone Products, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 561,401 $ 304,155
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and amortization 347,360 288,386
Uncollectable accounts 211,186 12,254
Inventory obsolescence 22,147 --
Decrease (increase) in assets, net of effects
from purchase of T. J. Distributing:
Accounts receivable (251,295) (38,269)
Accounts receivable - related party 11,010 8,230
Inventories (42,457) 63,121
Prepaid expenses (8,943) (4,796)
Deferred tax asset (595) (12,878)
Other assets (558) (4,090)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 44,932 (154,432)
Income taxes payable (98,255) 226,567
Deferred tax liabilities (30,628) 24,896
--------- ---------
Cash provided by (used in) operating activities 765,305 713,144
--------- ---------
Cash flows used in investing activities
Purchase of T.J. Distributing (36,000) --
Acquisition of tradename (300,000) --
Purchase of property and equipment (308,511) (195,270)
--------- ---------
Cash used in investing activities (644,511) (195,270)
--------- ---------
Cash flows provided by (used in) financing activities:
Net proceeds from (reductions on) line of credit 40,000 (410,927)
Payment on notes payable (92,068) (250,235)
Proceeds from the issuance of notes payable 40,000 173,459
Proceeds from the issuance of common stock -- 163,700
--------- ---------
Cash provided by (used in) financing activities (12,068) (324,003)
--------- ---------
Net increase in cash 108,726 193,871
Cash at beginning of period 349,617 155,746
--------- ---------
Cash at end of period $ 458,343 $ 349,617
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
F-7
</TABLE>
<PAGE>
Tone Products, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
1998 1997
---- ----
Interest paid $ 60,211 $ 89,547
Income taxes paid 330,332 $ 5,610
Supplemental Schedule of Non-Cash Investing and Financing Activities
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)
Business acquisition:
Assets acquired $ 106,136 --
Liabilities incurred $ (85,000) --
Common stock committed to be issued $ (21,136) --
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tone Products, Inc. (an Arkansas corporation)(the "Company") and its
subsidiaries, Fun City Popcorn, Inc. (a Nevada Corporation)("Fun City") and
Tone Products, Inc. (an Illinois corporation)("Tone Products"). Fun City,
prior to the reverse merger acquisition, was a subsidiary of Tone Products.
All significant intercompany transactions have been eliminated. Prior to
October 15, 1996, the Company was named Minute Man of America, Inc.("Minute
Man").
Operations
The Company is engaged in the purchase, manufacture, and wholesale
distribution of food products in the beverage, dry mix beverage, snack,
syrup, condiments, and sauce categories.
Recognition of Revenue
Revenues are recognized when the Company's products are shipped.
Cash and Equivalents
The Company invests portions of its excess cash in highly liquid
investments. Cash and equivalents include time deposits and commercial
paper with original maturities of three months or less. The Company has no
requirements for compensating balances. The Company maintains cash balances
in accounts which exceeded the federally insured limits by $421,589 and
$236,509 at September 30, 1998 and 1997, respectively; however, the Company
has not experienced any losses in such accounts.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company sells products to private and public companies
supplying the food services industry, certain governmental entities, and
public institutions primarily within a 300-mile radius of each of its two
locations. Exposure to losses on accounts receivable is principally
dependent on the individual customer's financial condition, as credit sales
are not collateralized. The Company monitors its exposure to credit losses
and writes off those accounts receivable that it deems to be not
collectible. No single customer accounted for more than 10% of revenues for
the years ended September 30, 1998 and 1997.
F-9
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a standard cost basis, which approximates the first in-first out method
of valuation. The Company's management monitors inventories for excess,
obsolete, and calendar date sensitive items and makes necessary valuation
corrections when such adjustments are required.
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 operations.
The cost and related accumulated depreciation of assets are removed from
the accounts upon retirement or other disposition, and the resulting profit
or loss is reflected in the statement of operations. Renewals and
betterments that materially extend the life of the assets are capitalized.
Estimated Useful
Life
----------------
Property and equipment 7 years
Furniture and fixtures 5 - 7 years
Vehicles 5 - 7 years
Leasehold improvements 39 years
Goodwill
Goodwill represents the excess of the acquisition cost over the value
assigned to the net tangible assets at the date a business or assets are
acquired. Goodwill is amortized over fifteen years utilizing the
straight-line method. Amortization expense for the years ended September
30, 1998 and 1997 was $52,417 and $35,366, respectively.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including
identifiable intangible assets, such as goodwill for potential impairment.
When circumstances indicate that the carrying amount of an asset is not
recoverable, as demonstrated by the projected undiscounted cash flows, an
impairment loss is recognized. The Company's management has determined that
there was no such impairment present at September 30, 1998 and 1997.
F-10
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
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.
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 and its corporate subsidiaries file a consolidated federal income
tax return and report results from operations on a unitary basis for state
income tax purposes.
Common Shares and Per Share Amounts
All common shares and per share amounts have been adjusted to give
retroactive effect, where applicable to the following:
* A one for four reverse stock split
* A business combination described as a reverse acquisition
Disclosures about Fair Value of Financial Instruments
The Company accounts for the value of financial instruments using the fair
value method.
Earnings per Common Share
In 1997 the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128 "Earnings Per Share". This
pronouncement replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share, respectively.
Earnings for the years ended September 30, 1998 and 1997 have been
calculated in accordance with this pronouncement.
Basic earnings per share ("EPS") is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution that
could occur if diluted securities and other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the Company's earnings.
F-11
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
Earnings per Common Share, Continued
During the year ended September 30, 1998, the Company, as part of the
consideration in a purchase business combination committed to issue 13,793
common shares in future years. The common stock committed to be issued is
treated as dilutive common shares and is considered in the diluted earnings
per share calculation for the year ended September 30, 1998; however, these
shares had no impact on dilutive earnings per share.
Advertising Costs
Advertising costs are expensed when they are incurred. Advertising expense
was $ 97,309 and $61,401 for the years ended September 30, 1998 and 1997,
respectively. The increase in advertising between years is due to a brand
name promotion program started in the year ended September 30, 1998.
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.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements
in order to conform to the 1998 financial statement presentation.
F-12
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
2. Accounts Receivable
-------------------
During the years ended September 30, 1998 and 1997, the Company charged to
operations certain accounts receivable determined to be uncollectable
amounting to $ 211,186 and $12,254, respectively. The increase in bad debt
expense resulted from five customers filing for bankruptcy in the year
ended September 30, 1998. The five customers' uncollectibility write off
amounted to $174,924 and the Company's sales to them were $156,743 and
$312,442 for the years ended September 30, 1998 and 1997, respectively.
Collection on accounts previously written off are included in income as
they are received.
3. Inventories
-----------
Inventories consists of the following:
1998 1997
---- ----
Raw materials $ 551,807 $ 602,252
Finished goods 528,559 447,804
---------------- --------------
Total inventories $ 1,080,366 $ 1,050,056
================ ==============
4. Property and Equipment
----------------------
Property and equipment consist of the following:
1998 1997
---- ----
Property and equipment $ 2,649,523 $ 2,432,422
Furniture and fixtures 109,655 101,410
Vehicles 317,789 311,789
Leasehold improvements 490,176 402,011
------------- -----------
3,567,143 3,247,632
Less: accumulated depreciation (2,081,712) (1,786,769)
------------ -----------
Total property and equipment $ 1,485,431 $ 1,460,863
============= ===========
Depreciation expense for the years ended September 30, 1998 and 1997 was
$294,943 and $253,020, respectively.
F-13
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
5. Lines of Credit
---------------
The Company has operating lines of credit with a bank as follows:
1998 1997
---- ----
Line of credit with a maximum amount of
$1,300,000 available, collateralized by
Company assets and guaranteed by its three
largest shareholders who are also corporate
officers and members of the board of
directors of the Company (the "largest
shareholders"). Any unpaid balance on the
bank line of credit is due in January 1999. - -
Line of credit with a maximum amount of
$240,000 available, collateralized by Fun
City's assets and collateralized by the
Company and the largest shareholders. The
bank line of credit had a weighted average
interest rate of 8.55% and 8.25% for the
years ended September 30, 1998 and 1997,
respectively. The unpaid balance is due in
February 1999 and is subject to a one-year
extension. It is the Company's intention at
this time to extend any unpaid balance at the
due date. $ 240,000 $ 200,000
----------- -----------
Total lines of credit $ 240,000 $ 200,000
============ ===========
6. Notes Payable
-------------
Notes payable consist of the following:
1998 1997
---- ----
Note payable to a bank, collateralized by
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, 1998). $ 114,417 $ 158,697
F-14
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
6. Notes Payable, Continued
------------------------
1998 1997
---- ----
Note payable issued as a portion of the
purchase price of a business acquisition
payable in monthly principal and interest
installments of $1,600, due in December 2002.
Interest is calculated at 7.00%. 71,590 -
Note payable to a bank, collateralized by the
Company's assets, payable in monthly
principal and interest installments of $813,
due in January 2003. Interest is calculated
at 8.00%. 35,554 -
Notes payable are collateralized by Company
vehicles. The notes payable call for
composite monthly installments of principal
and interest of $2,193 for varying terms,
none of which exceed three years. At
September 30, 1998, the interest is
calculated at rates between 1.95% and 10.50%. 26,760 56,692
---------- ---------
Total notes payable 248,321 215,389
Less: current maturities (82,361) (75,197)
---------- ---------
Long term portion of notes payable $ 165,960 $ 140,192
========== ==========
Maturities of notes payable for the years ending September 30:
1999 $ 82,361
2000 75,467
2001 55,377
2002 27,282
2003 and thereafter 7,834
Interest expense during the years ended September 30, 1998 and 1997 was
$60,211 and $89,547, respectively.
F-15
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
7. Deferred Income Taxes
---------------------
The components of the provision for income taxes are as follows:
1998 1997
---- ----
Current tax expense:
Federal $ 203,493 $ 215,079
State 29,179 49,332
--------- ---------
232,672 264,411
--------- ---------
Deferred tax expense (benefit):
Federal (23,555) (8,380)
State (7,668) 1,042
--------- ---------
(31,223) (7,338)
--------- ---------
Total provision $ 201,449 $ 257,073
========= =========
Significant components of the Company's deferred income tax assets and
liabilities at September 30, 1998 and 1997 are as follows:
1998 1997
---- ----
Deferred income tax asset:
State taxes $ 21,692 $ 21,816
Other 987 987
----------- -----------
Total deferred income tax asset 22,679 22,803
Valuation allowance - -
----------- -----------
Net deferred income tax asset 22,679 22,803
----------- -----------
Deferred income tax liability:
Depreciation 66,126 97,473
----------- -----------
Total deferred income tax liability 66,126 97,473
----------- -----------
Net deferred income tax liability $ 43,447 $ 74,670
============ ===========
Reconciliation of the effective tax rate to the U.S. statutory rate is as
follows:
1998 1997
---- ----
Tax expense at U.S. statutory rate 34.0 % 34.0 %
State tax provision 5.3 5.9
Non-deductible expenses 3.4 6.2
Utilization of pre-merger net operating
loss carryforward (14.7) -
Other (1.6) (0.3)
------ ------
Effective income tax rate 26.4 % 45.8 %
====== =======
F-16
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
8. Commitments
------------
The Company has operating leases for certain of its facilities. The
facilities operating leases are with entities owned by related parties.
Future minimum lease payments at September 30, 1998, are as follows:
Total
-----
1999 $ 415,068
2000 82,008
2001 82,008
2002 82,008
2003 61,506
-----------
Total future minimum lease payments $ 722,598
===========
Rental expense, resulting from operating lease agreements, was $401,547 and
$364,828 during the years ended September 30, 1998 and 1997, respectively.
9. Stock Options
-------------
The Company's 1997 Stock Option Plan (the "plan") instituted in November
1997 permits the issuance for up to 350,000 options for the purchase of its
common stock ("options") to selected officers, outside directors,
employees, and consultants. The plan options vest pro rata over a five year
period and expire ten years from the date of grant. Under the term of the
plan, options granted may be either nonqualified or incentive stock options
("ISOs"). The exercise price for nonqualified options or ISOs may not be
less than the fair value on the date of the grant. As of the year ended
September 30, 1998, no options have been granted.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation", encourages, but does not require companies to
record compensation cost for stock-based compensation plans at fair value.
The Company has chosen to account for the issuance of its options under the
plan using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation cost for stock options will be measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
F-17
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
10. Disclosures about Fair Values of Financial Instruments
-------------------------------------------------------
The estimated fair value amounts of all financial instruments, on the
Company's 1998 and 1997 balance sheets, have been determined by using
available market information and appropriate valuation methodologies.
Fair value is described as the amount at which the instrument could be
exchanged in a current transaction between informed willing parties,
other than in a forced liquidation. However, considerable judgment is
necessarily required in interpreting market data to develop the
estimates of fai 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 Company does not have any off
balance sheet financial instruments.
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 noncurrent 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 that covers substantially
all employees. Annual employer contributions to the plan are made at the
discretion of management. No employer contribution was made for the years
ended September 30, 1998 and 1997.
F-18
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
12. Acquisitions
------------
T. J. Distributing
On January 30, 1998, the Company acquired certain assets and related rights
of T. J. Distributing (a sole proprietorship) located in Las Vegas, Nevada,
for a purchase price of $142,136. The purchase price was comprised of cash,
promissory notes, and 13,793 shares of Company restricted common stock that
is committed to be issued pro rata annually over the next four years. The
acquisition was recorded using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocate to the net assets
acquired based on their estimated fair values. The fair value of tangible
assets acquired was $21,000. The balance of the purchase price, $121,136
was recorded as the excess of cost over net assets acquired (goodwill).
T.J. Distributings' results of operations have been reported by the Company
since February 1, 1998.
Minute Man (Reverse Merger)
On October 15, 1996, the Company acquired all of the outstanding common
stock of Tone Products in a business combination accounted for as a
purchase (the purchase transaction is described as a reverse merger
acquisition). The preliminary effective purchase price was 773,752 shares
of the Company's common stock. In the year ended September 30, 1998, the
Company completed its financial assessment of the transaction and 112,490
of those acquisition shares were retired. The Company formerly known as
Minute Man had no operations as of the acquisition date. No goodwill has
been recorded as a result of this transaction. As this transaction is
treated as a reverse merger acquisition, the historical statements are
those of Tone Products.
13. Related Party Transactions
--------------------------
Facilities Operating Leases
The Company leases its Chicago area facility from an affiliated entity
owned by the largest shareholders. For the years ended September 30, 1998
and 1997, the Company paid facility rent of $326,820 and $295,290,
respectively.
F-19
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
13. Related Party Transactions, Continued
--------------------------------------
Facilities Operating Leases, Continued
The Company leases its Las Vegas area facility from a major shareholder who
is the former owner of Fun City and currently a member of the Company's
board of directors. For the years ended September 30, 1998 and 1997, the
Company paid the major shareholder facility rent of $74,727 and $30,240,
respectively.
Acquisition of a Tradename
During the year ended September 30, 1998, the Company purchased a tradename
it had formerly used under a licensing agreement. The tradename was
acquired for $300,000 from an entity owned by the largest shareholders.
Accounts Receivable
Prior to the year ended September 30, 1997, the Company conducted business
with an entity owned by the largest shareholders. The only remnant of that
business relationship is an amount owed by the entity to the Company. No
interest is being charged or accrued on the outstanding balance. As of
September 30, 1998 and 1997, $10,760 and $21,770, respectively, was due
from this entity.
14. Earnings Per Share
------------------
The computation of earnings per common share at September 30, 1998 and 1997
are as follows:
1998 1997
---- ----
Basic earnings per common share:
Net income (numerator) $ 561,401 $ 304,155
Weighted-average shares
outstanding (denominator) 3,642,483 3,677,082
---------- ----------
Basic earnings per common share $ 0.15 $ 0.08
========== ==========
F-20
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
14. Earnings Per Share, Continued
-----------------------------
Diluted earnings per common share:
Net income (numerator) $ 561,401 $ 304,155
------------- ------------
Weighted-average shares
outstanding 3,642,483 3,677,082
Shares committed to be issued 13,793 -
------------- ------------
Shares outstanding for the diluted
earnings per common share
calculation after assumed
issuance (denominator) 3,656,276 3,677,082
------------- ------------
Diluted earnings per common share $ 0.15 $ 0.08
============= ============
15. Common Stock
------------
Stock Split
In October 1996, the Board of Directors authorized a one for four reverse
share split of the Company's $0.10 par value common stock. As a result of
the reverse share split, the number of shares issued and outstanding was
reduced by 2,319,998 and additional paid-in capital was increased by
$231,999.
Reverse Merger
On October 15, 1996, Tone Products purchased (in a reverse merger
acquisition) a 70.50% interest in the Company. The shareholders of Tone
Products exchanged all of their shares for 2,275,000 common shares of the
Company. As part of this transaction:
1. Minute Man changed its name to Tone Products, Inc. (an Arkansas
corporation) (the "Company").
2. The board of directors of the Company was expanded from three to
seven members. Tone Products shareholders placed six members on
the board, and one former Minute Man board member remained. The
Minute Man board member subsequently was replaced.
Common Shares Issued in Exchange for Debt
In the year ended September 30, 1997, the Company issued 64,500 shares of
common stock in payment of debt of $129,000 to the largest shareholder. No
gain or loss was recognized on the extinguishment of the debt for common
stock.
F-21
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
15. Common Stock, Continued
-----------------------
Issuance of Subscribed Shares
In the year ended September 30, 1997, the Company issued 578,850 shares of
stock that had been subscribed during a private placement.
Retirement of Common Shares
In the year ended September 30, 1998, the Company determined the final
number of common shares to be issued as a result of the reverse merger
acquisition of Minute Man. The final determination resulted in the
retirement of 112,490 common shares originally issued. The financial effect
of the transaction was all within the equity section of the balance sheet.
16. Geographical Business Segments
------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The pronouncement requires
implementation for fiscal years beginning after December 15, 1997. While
not required to, the Company has elected early implementation. For the
years ended September 30, 1998 and 1997, the Company operated in two
geographical business segments. Each of the business segments are separate
legal entities; each operate in a distinct geographical area with unique
product lines.
Tone Products operates from a facility in Illinois that manufactures and
distributes food products in the beverage, dry mix beverage, syrup,
condiment and sauce categories that are sold to wholesale customers.
Fun City operates from a facility in Nevada that manufactures and purchases
snack food products that are sold to wholesale and retail customers.
Both entities sell their products within a 300 mile radius of the
facilities.
1998 1997
---- ----
Revenue
Tone Products, Inc. $ 8,795,531 $ 8,118,634
Fun City Popcorn, Inc. 2,223,925 1,825,598
--------------- ---------------
Total revenue $ 11,019,456 $ 9,944,232
=============== ===============
F-22
<PAGE>
Tone Products, Inc.
Notes to Consolidated Financial Statements, Continued
For the Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
16. Geographical Business Segments, Continued
-----------------------------------------
1998 1997
---- ----
Operating income (loss)
Tone Products, Inc. $ 896,555 $ 709,421
Fun City Popcorn, Inc. (78,785) (62,819)
------------ ------------
Total operating
income (loss) $ 817,770 $ 646,602
============ ============
Depreciation and amortization
Tone Products, Inc. $ 224,032 $ 181,500
Fun City Popcorn, Inc. 123,328 106,886
------------ ------------
Total depreciation
and amortization $ 347,360 $ 288,386
============ ============
Interest expense
Tone Products, Inc. $ 31,680 $ 73,009
Fun City Popcorn, Inc. 28,531 16,538
------------- ------------
Total interest expense $ 60,211 $ 89,547
============= ============
Identifiable assets
Tone Products, Inc. $ 3,485,527 $ 2,956,021
Fun City Popcorn, Inc. 1,334,209 1,292,197
------------- ------------
Total identifiable assets $ 4,819,736 $ 4,248,218
============= ============
Expenditures for long lived assets
Tone Products, Inc. $ 293,408 $ 153,619
Fun City Popcorn, Inc. 26,103 41,651
------------- ------------
Total expenditures for
long lived assets $ 319,511 $ 195,270
============= ============
17. Year 2000 Disclosure
--------------------
The Company has conducted a comprehensive review of its computer operations
to identify the systems that could have been adversely affected by the Year
2000 Issue and has developed and implemented a plan that it believes has
resolved the issue. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable
year. Any of the Company's programs that have time-sensitive software might
have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted in a major system failure or
miscalculations. The Company presently believes that, with modifications
already made to existing software and conversions to new software, the Year
2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted.
F-23
<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.
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 November, 1996
Financial Officer
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.
<PAGE>
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:
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.
<PAGE>
William H. Hamen has been the Company's controller since 1996 and was named
its Secretary, Treasurer and Chief Financial Officer in November 1998 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,
1997 and 1998. Timothy E. Evon, Michael W. Evon and Thomas J. Evon currently
receive annual salaries of $92,300 each.
<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, 1997 $92,300 $500 $0 $0 $0
Chief Executive Officer 1998 $92,300 $500 $0 $0 $0
</TABLE>
<PAGE>
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
<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, 1998
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.
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.
<PAGE>
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
<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, 1998.
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.
Signature Title Date
--------- ----- ----
/s/ Timothy E. Evon President Chief Executive December 24, 1998
- --------------------------- Officer, and Director
Timothy E. Evon
/s/ Michael W. Evon Vice-President - Sales and December 24, 1998
- --------------------------- Marketing, and Director
Michael W. Evon
/s/ Thomas J. Evon Vice-President - Special December 24, 1998
- --------------------------- Accounts and Director
Thomas J. Evon
/s/ William H. Hamen Secretary, Treasurer and December 24, 1998
- --------------------------- Chief Financial Officer
William H. Hamen (Principal Accounting Officer)
/s/ Jack T. Cory Director December 24, 1998
- ---------------------------
Jack T. Cory
/s/ Charles A. Ehemann Director December 24, 1998
- ---------------------------
Charles A. Ehemann
/s/ Edward R Jancauskas Director December 24, 1998
- ---------------------------
Edward R. Jancauskas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-KSB FOR
THE YEAR ENDED SEPTEMBER 30, 1998 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-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 458
<SECURITIES> 0
<RECEIVABLES> 975
<ALLOWANCES> 0
<INVENTORY> 1,080
<CURRENT-ASSETS> 2,564
<PP&E> 3,567
<DEPRECIATION> 2,081
<TOTAL-ASSETS> 4,819
<CURRENT-LIABILITIES> 1,093
<BONDS> 0
0
0
<COMMON> 357
<OTHER-SE> 3,141
<TOTAL-LIABILITY-AND-EQUITY> 4,819
<SALES> 11,019
<TOTAL-REVENUES> 11,019
<CGS> 8,024
<TOTAL-COSTS> 8,024
<OTHER-EXPENSES> 2,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 762
<INCOME-TAX> 201
<INCOME-CONTINUING> 762
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<NET-INCOME> 201
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
