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, 2000
[ ] 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, 2000, 2,219,260 shares of the Registrant's $.10 par
value Common Stock were outstanding. As of November 30, 2000, the market value
of the Registrant's $.10 par value Common Stock, excluding shares held by
affiliates, was $585,717 based upon a closing bid price of $0.750 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 $12,264,085.
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;
barbecue 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 steak and barbeque sauce manufacturing capabilities, expanding its
private label and contract packing operations, increasing its production of
certain food specialty products including barbecue 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.
<PAGE>
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 specialty 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.
<PAGE>
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, 2000, the Company employed 45 individuals including its
three 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, 2001 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, 2001 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.
<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, 2000.......................... $1.00 $0.62
June 30, 2000............................... $1.12 $0.81
March 31, 2000.............................. $1.25 $0.87
December 31, 1999 .......................... $1.25 $0.93
September 30, 1999 ......................... $1.00 $0.62
June 30, 1999............................... $1.25 $1.00
March 31, 1999 ............................. $1.00 $0.87
December 1998 .............................. $1.25 $0.75
As of November 30, 2000, the Company had approximately 500 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, 2000, there were 2,219,260 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, 2000 Compared to September 30, 1997
Net Sales for the 12 month period ended September 30, 2000 increased to
$12,264,085 from $11,675,668 in 1999, which represents an increase of 5%. Sales
increases were a result of overall growth in private label packaging.
Cost of goods sold increase to 75.5% of sales or $9,268,374 from 73.2% or
$8,552,954 a year ago. A one time charge for obsolete inventory and higher
inbound shipping costs were the two largest factors in this increase. The
obsolete inventory charge was a one time charge of $236,439 related to
dispensing equipment for a special cappuccino product that did not create enough
sales to warrant the continued expense of placing and servicing the equipment.
No further expenses related to that failed project are expected.
Operating expenses rose 4.4% to $2,396,520 from $2,293,989 for the previous
year. Increased expenses related to outbound shipping and repair of dispensing
equipment were the main factors in that increase.
Net Income after tax was $283,141 or 2.3% of sales, down from $415,971 or
3.5% of sales in 1999. The decrease resulted from the one time inventory related
charge discussed above.
<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, 2000 and believes it has sufficient
cash resources to meet its needs in calendar 2000.
Seasonality
A significant percentage of the Company's business is seasonal. The sale of
beverage syrups, fruit juice concentrates and barbecue 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
This year we expect to lose some revenue in the private label packaging
sector. We have lost two significant customers and a third has lost sales volume
that will effect the Company's sales. The total revenue decrease resulting from
the loss of these customers is expected to be approximately $1,000,000. The
Company's sales department is working to offset these losses with new business,
however the Company does expect to feel some significant effects of this
decrease in this fiscal year, and intends to watch expenses closely.
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 2001. The Company's purchasing power with suppliers continues to
grow, and cost of sales should not be adversely effected by raw material
purchasing calendar 2001.
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.
Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended
September 30, 2000
<PAGE>
Tone Products, Inc.
Index to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and For
Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
Report of Independent Auditors ....................................1
Consolidated Financial Statements of Tone Products, Inc.:
Consolidated Balance Sheets, September 30,
2000 and 1999.................................................2
Consolidated Statements of Operations for
Each of the Two Years in the Period
Ended September 30, 2000......................................4
Consolidated Statements of Shareholders'
Equity for Each of the Two Years in the
Period Ended September 30, 2000...............................5
Consolidated Statements of Cash Flows for
Each of the Two Years in the Period
Ended September 30, 2000......................................6
Notes to the Consolidated Financial Statements.....................8
<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 its subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended September 30, 2000. 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 its subsidiaries as at September 30, 2000 and 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
September 30, 2000, in conformity with generally accepted accounting principles.
By: /s/ KELLY & COMPANY
----------------------
Kelly & Compamy
Kelly & Company
Newport Beach, California
December 19, 2000
<PAGE>
Tone Products, Inc.
Consolidated Balance Sheets
As of September 30, 2000 and 1999
--------------------------------------------------------------------------------
ASSETS
2000 1999
---------- ----------
Current assets:
Cash and equivalents $ 163,942 $ 173,248
Accounts receivable trade, net 1,042,512 987,259
Inventories 1,174,754 1,725,472
Deferred tax asset 927 927
Prepaid income taxes 117,947 --
Other current assets 54,119 44,504
---------- ----------
Total current assets 2,554,201 2,931,410
Property and equipment, net 1,477,414 1,722,261
Intangible assets, net 638,722 702,163
Other assets 34,741 59,798
---------- ----------
Total assets $4,705,078 $5,415,632
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
Tone Products, Inc.
Consolidated Balance Sheets
As of September 30, 2000 and 1999
--------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
----------- -----------
Current liabilities:
<S> <C> <C>
Lines of credit $ 214,954 $ 835,954
Accounts payable trade 374,867 402,746
Accrued expenses 273,004 299,699
Notes payable, current maturities 157,235 104,010
Income taxes payable -- 6,404
----------- -----------
Total current liabilities 1,020,060 1,648,813
Notes payable, net of current maturities 547,436 139,505
Deferred tax liability 64,432 66,584
----------- -----------
Total liabilities 1,631,928 1,854,902
----------- -----------
Commitments and contingencies
Shareholders' equity:
Convertible Series A preferred stock; $10 par value;
500,000 shares authorized; none issued and outstanding at
September 30, 2000-and 1999 -- --
Common stock; $0.10 par value; 50,000,000 shares
authorized; 2,722,910 and 3,235,200 shares issued and
2,395,260 and 3,2272,291 shares outstanding at September
30, 2000 and 1999, respectively 272,291 323,520
Common stock held in treasury, 327,650 and 0 shares at
September 30, 2000 and 1999, respectively (32,765) --
----------- -----------
239,526 323,520
Common stock committed to be issued -- 15,364
Additional paid in capital 529,222 804,746
Retained earnings 2,304,402 2,417,100
----------- -----------
Total shareholders' equity 3,073,150 3,560,730
----------- -----------
Total liabilities and shareholders' equity $ 4,705,078 $ 5,415,632
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
3
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<CAPTION>
Tone Products, Inc.
Consolidated Statements of Operations
For Each of the Two Years in the Period Ended September 30, 2000
---------------------------------------------------------------------------------------------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 12,264,085 $ 11,675,668
Cost of sales 9,268,374 8,552,954
------------ ------------
Gross profit 2,995,711 3,122,714
Operating costs and expenses 2,396,520 2,293,989
------------ ------------
Income from operations 599,191 828,725
------------ ------------
Other income (expense):
Interest expense (90,644) (62,698)
Interest income 4,612 3,106
Other income, net 3,746 19,809
------------ ------------
(82,286) (39,783)
------------ ------------
Income before provision for income taxes 516,905 788,942
Provision for income taxes 233,764 372,971
------------ ------------
Net income $ 283,141 $ 415,971
============ ============
Net income per share, basic and diluted $ 0.09 $ 0.12
============ ============
Basic weighted average common shares outstanding 3,115,860 3,417,841
============ ============
Diluted weighted average common shares outstanding 3,115,860 3,428,146
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
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<CAPTION>
Tone Products, Inc.
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended September 30, 2000
---------------------------------------------------------------------------------------------------
Common Stock Common Stock
Common Common Held in Committed
Shares Stock Treasury To Be Issued
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1998 3,579,612 $ 357,961 -- $ 21,136
Treasury stock:
Shares repurchased (347,900) -- $ (34,790) --
Shares retired -- (34,790) 34,790 --
Issuance of committed shares 3,488 349 -- (5,772)
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 1999 3,235,200 323,520 -- 15,364
Treasury stock:
Shares repurchased (839,940) -- (83,994) --
Shares retired -- (51,229) 51,229 --
Cash paid in lieu of issuance of
committed shares -- -- -- (15,364)
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 2000 2,395,260 $ 272,291 $ (32,765) --
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
5
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<CAPTION>
Tone Products, Inc.
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended September 30, 2000
(Continuned)
------------------------------------------------------------------------------------
Additional
Paid-in Retained
Capital Earnings Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, September 30, 1998 $ 1,023,307 $ 2,095,629 $ 3,498,033
Treasury stock:
Shares repurchased (223,984) (94,500) (353,274)
Shares retired -- -- --
Issuance of committed shares 5,423 -- --
Net income 415,971 415,971
----------- ----------- -----------
Balance, September 30, 1999 804,746 2,417,100 3,560,730
Treasury stock:
Shares repurchased (280,583) (395,839) (760,416)
Shares retired -- -- --
Cash paid in lieu of issuance of
committed shares 5,059 -- (10,305)
Net income -- 283,141 283,141
----------- ----------- -----------
Balance, September 30, 2000 $ 529,222 $ 2,304,402 $ 3,073,150
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
5(Con't)
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<CAPTION>
Tone Products, Inc.
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended September 30, 2000
---------------------------------------------------------------------------------------------------------------
2000 1999
----------- -----------
Cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income $ 283,141 $ 415,971
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 416,380 397,719
Allowance for uncollectable accounts receivable 15,058 6,105
Loss (gain) on sale of assets 4,005 (11,526)
Decrease (increase) in assets:
Accounts receivable - trade, net (46,695) (73,058)
Due from a related party -- 10,760
Inventories 550,718 (645,106)
Other current assets (9,613) (24,080)
Prepaid income taxes (117,947) --
Deferred tax asset -- 17,776
Other assets 1,441 --
Increase (decrease) in liabilities:
Accounts payable trade (27,879) (3,307)
Accrued expenses (26,694) 91,056
Income taxes payable (6,404) (150,132)
Deferred tax liability (2,152) 4,434
----------- -----------
Cash provided by operating activities 1,033,359 36,612
----------- -----------
Cash flows provided by (used in) investing activities
Purchase of property and equipment (116,558) (589,546)
Sale of property and equipment 4,461 29,965
----------- -----------
Cash used in investing activities (112,097) (559,581)
----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
6
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<CAPTION>
<PAGE>
Tone Products, Inc.
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended September 30, 2000
----------------------------------------------------------------------------------------------------------
2000 1999
--------- ---------
Cash flows provided by (used in) financing activities:
<S> <C> <C>
Net proceeds (payments) from the line of credit $(453,195) $ 595,954
Payment on notes payable (128,256) (92,217)
Proceeds from the issuance of notes payable -- 87,411
Satisfaction of committed stock (10,305) --
Repurchase of Company common stock (338,812) (353,274)
--------- ---------
Cash provided by (used in) financing activities (930,568) 237,874
--------- ---------
Net increase (decrease) in cash (9,306) (285,095)
Cash at beginning of period 173,248 458,343
--------- ---------
Cash at end of period $ 163,942 $ 173,248
======== =========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 90,644 $ 62,698
Income taxes paid $ 352,800 $ 527,537
Supplemental Schedule of Non-Cash Investing and Financing Activities
Issuance of committed stock:
Common stock committed to be issued -- $ 5,772
Common stock -- $ (349)
Additional paid-in capital -- $ (5,423)
Repurchase and retirement of common shares:
Retained earnings $ 395,839 --
Common stock $ 46,845 --
Additional paid-in capital $ (21,080) --
Line of credit $(421,604) --
Debt refinancing:
Line of credit $ 589,412 --
Note payable $(589,412) --
The accompanying notes are an integral part of the consolidated financial statements.
7
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<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
1. Description of Business
-----------------------------
Operations
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") are engaged
in the purchase, manufacture, and wholesale distribution of food products
in the beverage, dry mix beverage, snack, syrup, condiments, and sauce
categories.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Fun City and Tone Products. All
significant intercompany transactions have been eliminated.
Recognition of Revenue
Revenues are recognized when the Company's products are shipped. Provisions
for discounts and rebates to customers, estimated returns and allowances,
and other adjustments are provided for in the same period the related
revenues are recorded.
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 $32,804 and
$14,126 at September 30, 2000 and 1999, 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
facility locations. Exposure to losses on accounts receivable is
principally dependent on the individual customer's financial condition, as
8
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
Concentration of Credit Risk, Continued
credit sales are not collateralized. The Company monitors its exposure to
credit losses and reserves for those accounts receivable that it deems to
be not collectible. No single customer accounted for more than 10% of the
accounts receivable at September 30, 2000 and 1999 or of the revenues for
the years then ended.
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 Lives
------------
Property and equipment 7 years
Furniture and fixtures 5 - 7 years
Vehicles 5 - 7 years
Leasehold improvements 5 - 39 years
Intangible Assets
Intangible assets is comprised of goodwill resulting from business
acquisitions and purchased intangible assets, which represents the excess
of the acquisition cost over the value assigned to the net tangible assets
at the date a business or asset is acquired. Intangible assets are
amortized over their estimated useful lives, which is fifteen years
utilizing the straight-line method.
9
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
Treasury Stock
In the year ended September 30, 1999, the Company's board of directors
authorized the repurchase, at management's discretion, of shares of the
Company's common stock. Shares repurchased under the board of directors'
authorization may be retired or held for later reissuance. The Company
accounts for its treasury share transactions utilizing the par value
method.
Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets, including
intangible assets 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, 2000 and 1999.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities. They are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The Company
is required to adjust its deferred tax liabilities in the period when tax
rates or the provisions of the income tax laws change. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, established accounting and disclosure
requirements using a fair value based method of accounting for stock-based
employee compensation plans. As permitted by SFAS No. 123, the Company
continues to account for stock-based employee compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. Compensation cost of
stock options granted to employees, if any, is measured as the excess 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. Compensation cost is
recognized over the requisite vesting periods.
10
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising expense
was $4,396 and $75,905 for the years ended September 30, 2000 and 1999,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.
Financial Statement Classification
Certain amounts within the 1999 financial statements have been reclassified
in order to conform to the 2000 financial statement presentation.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities,
which established accounting and reporting standards for derivative
instruments. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the
FASB issued SFAS No.137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133,
which postponed the adoption date of SFAS No. 133. The statement is
effective for all fiscal years beginning after June 15, 2000. As such, the
Company is not required to adopt the new statement until the year ending
September 30, 2001. The Company is currently evaluating the effect that
implementation of the new standard will have on its results of operations
and financial position. However, due to the Company's limited use of
derivative instruments, adoption of SFAS No. 133 is not expected to have a
significant effect on the Company's consolidated balance sheets, statements
of operations, or statements of cash flows.
11
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
3. Accounts Receivable - Trade, Net
--------------------------------
During the years ended September 30, 2000 and 1999, the recognized bad debt
expense of $1,558 and $6,104, respectively. As of September 30, 2000 and
1999, the provision for uncollectable accounts receivable was $0.
4. Inventories
-----------
At September 30, 2000 and 1999 inventories consisted of the following:
2000 1999
---- ----
Raw materials $ 604,562 $ 918,061
Work-in-process -- 215,640
Finished goods 570,192 591,771
------------ ------------
Total inventories $ 1,174,754 $ 1,725,472
============ ============
During the year ended September 30, 1999, the Company purchased fabricated
parts to manufacture new Company developed drink dispensing machine. The
costs of these parts, including purchases made during the year ended
September 30, 2000 amounted to $236,439 and were included in work in
process inventory. The Company issued the drink dispensing machines at no
cost to the customers as part of a new drink product sales program during
the year ended September 30, 2000. This new product sales program was
eventually cancelled due to lack of customer interest. The still remaining
fabricated parts were sold at scrap value and the loss resulting from their
sale was reported in the cost of sales portion of the statement of
operations for the year ended September 30, 2000.
5. Property and Equipment
----------------------
At September 30, 2000 and 1999, property and equipment consisted of the
following:
2000 1999
---- ----
Property and equipment $ 3,119,812 $ 3,004,079
Furniture and fixtures 111,766 111,766
Vehicles 321,164 338,679
Leasehold improvements 582,476 581,651
------------ ------------
4,135,218 4,036,175
Less: accumulated depreciation 2,657,804) (2,313,914)
------------ ------------
Total property and equipment, net $ 1,477,414 $ 1,722,261
============ ============
12
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
5. Property and Equipment, Continued
---------------------------------
Depreciation expense for the years ended September 30, 2000 and 1999 was
$352,939 and $334,277, respectively.
6. Intangible Assets
-----------------
At September 30, 2000 and 1999, intangible assets was comprised of the
following:
2000 1999
---- ----
Goodwill resulting from the acquisition of Fun
City Popcorn, Inc. $ 442,076 $ 442,076
Goodwill resulting from the acquisition of
T.J. Distributing 121,136 121,136
Acquisition cost of the Balboa Bay trademark 300,000 300,000
---------- ----------
863,212 863,212
Less: accumulated amortization (224,490) (161,049)
---------- ----------
Intangible assets, net $ 638,722 $ 702,163
========== ==========
Amortization expense for the years ended September 30, 2000 and 1999 was
$63,441 and $63,442, respectively.
7. Lines of Credit
---------------
At September 30, 2000 and 1999, the Company had operating lines of credit
with a bank as follows:
Collateralized
2000 1999
---- ----
Line of credit with a maximum amount of
$1,300,000 available, collateralized by
certain Tone Products assets (with a net
carrying amount of approximately $3,300,000
at September 30, 2000) and guaranteed by its
two largest shareholders, who are also
corporate officers and members of the board
of directors of the Company (the "largest
shareholders"). The bank line of credit had a
weighted average interest rate of 8.70% and
7.64% for the years ended September 30, 2000
and 1999, respectively. The bank line of
credit expires in February 2001 and is
eligible for a one-year extension.
13
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
7. Lines of Credit, Continued
--------------------------
Collateralized, Continued
2000 1999
---- ----
It is the Company's intention at this time to
extend any unpaid balance at the due date. $ 125,000 $ 580,772
Line of credit with a maximum amount of
$650,000 available, collateralized by certain
Tone Products assets (with a net carrying
amount of approximately $3,300,000 at
September 30, 2000) and guaranteed by the
largest shareholders. The bank line of credit
had a weighted average interest rate of 8.14%
for the year ended September 30, 1999. In
March 2000 the Company converted the line of
credit to a term credit agreement, which is
due June 2003. -- 165,228
Line of credit with a maximum amount of
$300,000 available, collateralized by certain
Fun City assets (with a net carrying amount
of approximately $1,000,000 at September 30,
2000) and guaranteed by the largest
shareholders. The bank line of credit had a
weighted average interest rate of 8.70% and
7.89% for the years ended September 30, 2000
and 1999, respectively. The bank line of
credit expires in February 2001 and is
eligible for a one-year extension. It is the
Company's intention at this time to extend
any unpaid balance at the due date. 89,954 89,954
--------- ---------
Total lines of credit $ 214,954 $ 835,954
========= =========
14
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
8. Accrued Expenses
----------------
At September 30, 2000 and 1999, accrued expenses consist of the following:
Accrued co-operative promotional expenses $ 74,804 $ 119,625
Accrued real estate taxes 56,847 94,997
Accrued payroll and payroll taxes 51,750 54,253
Due to shareholder 39,908 --
Other accrued expenses 49,695 30,824
--------- ---------
Total accrued expenses $ 273,004 $ 299,699
========= =========
9. Notes Payable
-------------
At September 30, 2000 and 1999, notes payable consist of the following:
Collateralized
Note payable to a bank, collateralized by
certain Tone Products assets (with a net
carrying amount of approximately $3,300,000
at September 30, 2000), 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 (10.25% and 9.00%
per annum at September 30, 2000 and 1999,
respectively). $ 25,857 $ 70,137
Note payable to a bank, collateralized by
certain Tone Products assets (with a net
carrying amount of approximately $3,300,000
at September 30, 2000), payable in monthly
principal and interest installments of $813,
with any unpaid principal and interest due in
January 2003. Interest is calculated at a
fixed rate of 8.00% per annum. 20,748 29,067
Term credit agreement with a bank, which is a
long term line of credit, with a maximum
amount of $422,000 available, collateralized
by all Tone Products assets (with a net
carrying amount of approximately $3,600,000
at September 30, 2000), requiring minimum
monthly payments of $6,791 with any
15
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
9. Notes Payable, Continued
------------------------
Collateralized, Continued
2000 1999
---- ----
remaining unpaid balance due July 2005.
Interest is calculated at a fixed rate of
9.00% per annum. $ 414,619 --
Term credit agreement with a bank, with a
maximum amount of $300,000 available,
collateralized by all Tone Products assets
(with a net carrying amount of approximately
$3,600,000 at September 30, 2000), requiring
minimum monthly payments of $3,571 with any
remaining unpaid balance due June 2003.
Interest is calculated at the bank's prime
rate less one-quarter of a point (9.25% per
annum at September 30, 2000). In March 2000,
this term credit agreement was converted from
a line of credit. 154,928 --
Notes payable, collateralized by certain of
the Company's vehicles (with a net carrying
amount of approximately $100,000 at September
30, 2000). The notes provide for monthly
installments of principal and interest of
$3,411, maturing through September 2002. At
September 30, 2000, the interest is
calculated at rates varying between .90% and
7.50% per annum. 47,473 $ 87,460
Uncollateralized
Note payable to an individual as part of the
purchase price of a business acquisition;
payable in monthly principal and interest
installments of $1,600, with any unpaid
principal and interest due in January 2003.
Interest is calculated at a fixed rate of
7.00% per annum. 41,046 56,851
------------------- ---------------
Total notes payable 704,671 243,515
Less: current maturities (157,235) (104,010)
--------- ---------
Long term portion of notes payable $ 547,436 $ 139,505
========= =========
16
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
9. Notes Payable, Continued
------------------------
Maturities of notes payable for the years ending September 30:
2001 $157,235
2002 127,788
2003 156,492
2004 60,244
2005 202,912
Interest expense during the years ended September 30, 2000 and 1999 was
$90,644 and $62,698, respectively.
10. Other Income
------------
For each of the two years in the period ended September 30, 2000, the
components of other income are:
2000 1999
---- ----
Gain (loss) on the sale of assets, net $ (4,005) $ 11,526
Miscellaneous other income 7,751 8,283
--------- ----------
Total other income, net $ 3,746 $ 19,809
========= ==========
11. Income Taxes
------------
At September 30, 2000 and 1999, the components of the provision for income
taxes are:
2000 1999
---- ----
Current tax expense:
Federal $ 200,062 $ 307,142
State 35,854 43,619
--------- ----------
235,916 350,761
--------- ----------
Deferred tax expense (benefit):
Federal (1,748) 21,375
State (404) 835
--------- ----------
(2,152) 22,210
--------- ----------
Total provision $ 233,764 $ 372,971
========= ==========
17
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
Significant components of the Company's deferred income tax assets and
liabilities at September 30, 2000 and 1999 are:
11. Income Taxes, Continued
-----------------------
2000 1999
------- -------
Deferred income tax asset:
State taxes $ 4,060 $ 4,198
Other 987 987
------- -------
Total deferred income tax asset 5,047 5,185
Valuation allowance -- --
------- -------
Net deferred income tax asset 5,047 5,185
------- -------
Deferred income tax liability:
Depreciation $68,552 $70,842
------- -------
Total deferred income tax liability 68,552 70,842
------- -------
Net deferred income tax liability $63,505 $65,657
======= =======
Reconciliation of the effective tax rate to the U.S. statutory rate is as
follows:
2000 1999
---- ----
Tax expense at U.S. statutory rate 34.0% 34.0%
State tax provision 4.5 3.7
Non-deductible expenses 6.9 4.6
Assessment of additional taxes related to a prior
period -- 2.8
Other (0.2) 2.2
----- -----
Effective income tax rate 45.2% 47.3%
===== =====
12. Stock-Based Compensation
------------------------
The Company's 1997 Stock Option Plan (the "plan") adopted in November 1997
provides for the issuance of up to 500,000 options to purchase shares of
its common stock to selected officers, outside directors, employees, and
consultants. The plan's 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 non-qualified options or incentive stock
options ("ISOs"). The exercise price for non-qualified options or ISOs may
not be less than the quoted market price of the stock on date the option is
granted. As of September 30, 2000, no options have ever been granted.
18
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
13. Disclosures about Fair Values of Financial Instruments
------------------------------------------------------
The estimated fair value amounts of all financial instruments on the
Company's September 30, 2000 and 1999 balance sheets, which are held for
nontrading purposes, 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 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 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, lines of credit payable, and certain other current
liability amounts, as reported in the balance sheet, approximate fair
value due to the short term maturities of these instruments.
The fair value of non-current notes payable is estimated by
determining the net present value of future payments. The carrying
amounts on the balance sheet approximate fair value.
14. Employee Benefit Plans
----------------------
Profit-Sharing Plan
In November 1998, the Company terminated its non-contributory profit
sharing plan (the "plan") that covered substantially all employees. No
employer contribution was ever made.
Employee Retirement Plan
In November 1998, the Company adopted an employee benefit plan, whereby
eligible employees may elect to defer a portion of their annual
compensation, up to a maximum of 15%, pursuant to Section 401(k) of the
Internal Revenue Code. Substantially all employees are eligible to
participate. The Company matches contributions on a discretionary basis as
determined by the board of directors, not to exceed 50% of the first 5% of
the employees elected deferral. The Company recognized $32,819 and $0 of
expense relating to the employee retirement plan for the years ended
September 30, 2000 and 1999, respectively.
19
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
15. Related Party Transactions
--------------------------
Facilities Operating Leases
The Company leases its Chicago area facility from an entity owned by the
largest shareholders. For the years ended September 30, 2000 and 1999, the
Company paid facility rent of $390,042 and $333,060 respectively.
The Company leases its Las Vegas area facility from a former major Company
shareholder and the former owner of Fun City prior to its acquisition and
who is currently still a member of the Company's board of directors. For
the years ended September 30, 2000 and 1999, the Company paid the former
major shareholder facility rent of $82,008 for each year.
Due from Related
Party In years prior to the year ended September 30, 1999, the Company
conducted business with an entity owned by the largest shareholders. The
amount due from the entity to the Company was paid in full during the year
ended September 30, 1999.
16. Commitments
-----------
The Company leases its facilities from related parties (Note 14) on
operating leases with future minimum lease payments at September 30, 2000,
as follows:
2001 $ 450,702
2002 82,008
2003 54,672
----------
Total future minimum lease payments $ 587,382
==========
Rental expense was $472,050 and $415,068 during the years ended September
30, 2000 and 1999, respectively.
17. Earnings Per Share
------------------
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 is similar to basic EPS except that
the weighted average of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
20
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
17. Earnings Per Share, Continued
-----------------------------
The computation of basic and diluted earnings per common share at September
30, 2000 and 1999 are as follows:
2000 1999
---- ----
Basic earnings per common share:
Net income (numerator) $ 283,141 $ 415,971
Weighted-average shares outstanding
(denominator) 3,115,860 3,417,841
----------- -----------
Basic earnings per common share $ 0.09 $ 0.12
=========== ===========
Diluted earnings per common share:
Net income (numerator) $ 283,141 $ 415,971
----------- -----------
Weighted-average shares outstanding 3,115,860 3,417,841
Shares committed to be issued -- 10,305
----------- -----------
Shares outstanding for the diluted
earnings per common share calculation
after assumed issuance (denominator) 3,155,860 3,428,146
----------- -----------
Diluted earnings per common share $ 0.09 $ 0.12
=========== ===========
18. Common Stock
------------
Shares Committed
During the year ended September 30, 1998, the Company committed to issue
13,793 shares of its common stock over a four-year period as part of the
acquisition cost of a business. The fair value of the commitment to issue
the common shares over four years was $21,136. In the year ended September
30, 1999, the Company issued 3,488 of the committed shares. In the year
ended September 30, 2000, the Company paid $10,305 in full satisfaction of
the obligation in lieu of issuing the remaining 10,305 committed shares of
common stock.
Shares Retired
During the years ended September 30, 2000 and 1999, the Company repurchased
and retired 512,290 and 347,900 shares of its common stock for $464,584 and
$353,274, respectively. Of these repurchased shares, 468,452 and 100,000
for the years ended September 30, 2000 and 1999, respectively, were
repurchased from one of the largest shareholders who formerly was a
corporate officer and a member of the board of directors at prices greater
than the original issuance value resulting in decreases to retained
earnings of $395,842 and $94,500 for the years ended September 30, 2000 and
1999, respectively.
21
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
18. Common Stock, Continued
-----------------------
Treasury Shares
The Company accounts for treasury stock under the Par Value Method whereby
the treasury stock account is recorded at the aggregate par value of the
shares reacquired and the excess of the purchase price over the par value
is recorded to the additional paid in capital account.
During 2000, the Company repurchased 327,650 shares of common stock for an
aggregate cost of $295,832. Of those shares, 231,250 were purchased for
$208,125 from a former major Company shareholder and the former owner of
Fun City prior to its acquisition who currently is a member of the
Company's board of directors.
19. Geographical Business Segments
------------------------------
For the years ended September 30, 2000 and 1999, the Company operated in
two geographical business segments. Each of the business segments is a
separate legal entity; each operates in a distinct geographical area with
unique product lines.
Tone Products operates from facilities in Chicago, Illinois that
manufacture and distribute food products in the beverage, dry mix beverage,
syrup, condiment and sauce categories that are sold to wholesale customers.
Fun City operates from facilities in Las Vegas, Nevada that manufacture and
purchases snack food products that are sold to wholesale and retail
customers.
Both entities focus their marketing efforts for their products on the
client base within a 300-mile radius of the facilities.
22
<PAGE>
Tone Products, Inc.
Notes to the Consolidated Financial Statements
As of September 30, 2000 and 1999 and
For Each of the Two Years in the Period Ended September 30, 2000
--------------------------------------------------------------------------------
19. Geographical Business Segments, Continued
2000 1999
---- ----
Revenue
Tone Products, Inc. $ 10,102,409 $ 9,295,681
Fun City Popcorn, Inc. 2,161,676 2,379,987
------------ ------------
Total revenue $ 12,264,085 $ 11,675,668
============ ============
Operating income (loss)
Tone Products, Inc. $ 653,655 $ 882,765
Fun City Popcorn, Inc. (54,464) (54,040)
------------ ------------
Total operating income (loss) $ 599,191 $ 828,725
============ ============
Depreciation and amortization
Tone Products, Inc. $ 283,701 $ 263,027
Fun City Popcorn, Inc. 132,680 134,692
------------ ------------
Total depreciation and amortization $ 416,380 $ 397,719
============ ============
Interest expense
Tone Products, Inc. $ 76,517 $ 46,350
Fun City Popcorn, Inc. 14,127 16,348
------------ ------------
Total interest expense $ 90,644 $ 62,698
============ ============
Identifiable assets
Tone Products, Inc. $ 3,582,386 $ 4,141,812
Fun City Popcorn, Inc. 1,122,692 1,273,820
------------ ------------
Total identifiable assets $ 4,705,078 $ 5,415,632
============ ============
Expenditures for long-lived assets
Tone Products, Inc. $ 114,368 $ 547,883
Fun City Popcorn, Inc. 2,190 41,663
------------ ------------
Total expenditures for long-lived
assets $ 116,558 $ 589,546
============ ============
23
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
NONE
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:
Officer or
Name Age Office Director Since(1)
---- --- ------ -----------------
Timothy E. Evon 47 President, Chairman of the October, 1996
Board, Chief Executive
Officer, and Director
Thomas J. Evon 45 Vice-President - Special November, 1996
Accounts, and Director
William H. Hamen 40 Secretary, Treasurer, November, 1996
Chief Financial Officer
and Director
Jack T. Cory 59 Director October, 1996
Charles A. Ehemann 48 Director October, 1996
Martin J. Finan 39 Director March, 1999
(1) Reflects the date TPI was acquired by the Company. Messrs. 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 and an additional
10,000 share option after their second year of service. Timothy E. Evon and
Thomas J. Evon are brothers.
<PAGE>
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.
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 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.
Martin J. Finan has been employed by S.G. Cowen Corp. since 1993 and
currently is the Director of the Structured Finance Group. Previously he was the
Vice President of Corporate Finance at Westpac Corp. Mr. Finan is a C.P.A. and
has a M.B.A. from the University of Chicago
<PAGE>
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,
1999 and 2000. Timothy E. Evon currently receives an annual salary of $132,600.
<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, 2000 $115,215 $23,000 $0 $0 $0
Chief Executive Officer 1999 $104,300 $3,450 $0 $0 $0
Thomas J. Evon, 2000 $101,380 $20,000 $0 $0 $0
Vice President
</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 500,000 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.
<PAGE>
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
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 400,000 shares have been
granted under the Plan, of which 170,000 options have been issued to the
Company's executive officers and directors. Options are exercisable at $1.00 to
$1.75 per share until November 2007, and none of such options have been
exercised.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following table sets forth certain information as of November 30, 2000
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 748,166 28.5%
Thomas J. Evon 748,166 28.5%
William H. Hamen 108,500 4.1%
Charles A. Ehemann 12,500 0.4%
Cede & Co. 590,787 22.5%
All officers and directors 1,617,332 61.7%
as a group (6 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."
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, 2000.
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
--------- ----- ----
By: /s/ Timothy E. Evon President Chief Executive December 24, 2000
--------------------------- Officer, and Director
Timothy E. Evon
By: /s/ Thomas J. Evon Vice-President - Special December 24, 2000
--------------------------- Accounts and Director
Thomas J. Evon
By: /s/ William H. Hamen Secretary, Treasurer, December 24, 2000
--------------------------- Chief Financial Officer
William H. Hamen (Principal Accounting Officer)
and Director
By: /s/ Jack T. Cory Director December 24, 2000
---------------------------
Jack T. Cory
By: /s/ Charles A. Ehemann Director December 24, 2000
---------------------------
Charles A. Ehemann
By: /s/ Martin J. Finan Director December 24, 2000
---------------------------
Martin J. Finan
