U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
Delaware 11-3199437
------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(516) 842-7600
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 |_|
The number of outstanding shares of the Registrant's only class of common stock
as of September 30, 1996: 11,756,568
Transitional Small Business Disclosure Format (check one):
YES |_| NO |X|
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
September 30, 1996
PART 1 - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations
for The Three Months Ended September 30, 1996
and September 30, 1995 4
Consolidated Statements of Operations
for The Nine Months Ended September 30, 1996
and September 30, 1995 5
Consolidated Statements of Cash Flows
for The Nine Months Ended September 30, 1996
and September 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis
or Plan of Operation 9
PART 11 - OTHER INFORMATION 11
SIGNATURE 12
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<PAGE>
Technology Flavors & Fragrances, Inc.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED) (Note)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 372,197 $ 467,134
Receivables 3,792,787 2,653,731
Inventories 3,924,151 3,420,254
Prepaid expenses and other current assets 214,142 195,287
------------ ------------
Total current assets 8,303,277 6,736,406
Fixed assets, net 1,337,865 1,480,101
Intangible assets, net 6,429,299 6,812,137
Other assets 257,556 387,787
Notes receivable from related parties 284,961 316,774
------------ ------------
Total assets $ 16,612,958 $ 15,733,205
============ ============
LIABILITIES
Current liabilities:
Notes payable $ 1,450,000 $ 1,100,000
Current portion of long-term debt 177,604 52,000
Accounts payable 2,966,242 2,318,968
Accrued expenses 573,993 288,245
------------ ------------
5,167,839 3,759,213
Long-term debt 4,210,415 4,388,019
Deferred rent payable 19,625 12,479
------------ ------------
9,397,879 8,159,711
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 121,667 121,667
Paid-in capital 9,463,751 9,457,251
Accumulated deficit (1,715,950) (1,290,277)
Less:
Unearned compensation arising from
stock awards (337,548) (398,306)
Treasury stock at cost (409,738 shares
of common stock) (316,841) (316,841)
------------ ------------
Total stockholders' equity 7,215,079 7,573,494
------------ ------------
Total liabilities and
stockholders' equity $ 16,612,958 $ 15,733,205
============ ============
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for audited
financial statements.
See Notes to Consolidated Financial Statements.
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<PAGE>
Technology Flavors & Fragrances, Inc.
CONSOLIATED STATEMENTS OF OPERATIONS
Unaudited (In U.S. Dollars)
Three months ended September 30
-------------------------------
1996 1995
------------ -----------
Net sales $ 5,139,096 $ 4,075,979
Cost of sales 3,172,693 2,510,934
------------ -----------
Gross profit 1,966,403 1,565,045
------------ -----------
Operating expenses:
Selling 924,566 567,008
General and administrative 857,291 534,735
Research and development 382,034 276,526
Amortization of intangible assets 178,536 110,391
------------ -----------
Total operating expenses 2,342,427 1,488,660
------------ -----------
(Loss) income from operations (376,024) 76,385
Interest expense and other 117,577 21,605
------------ -----------
(Loss) income before provision
for income taxes (493,601) 54,780
Provision for income taxes 1,364 --
------------ -----------
Net (loss) income $ (494,965) $ 54,780
============ ===========
Net (loss) income per share $ (.04) $ .005
============ ===========
Weighted average shares outstanding 11,756,568 11,000,339
============ ===========
See Notes to Consolidated Financial Statements.
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<PAGE>
Technology Flavors & Fragrances, Inc.
CONSOLIATED STATEMENTS OF OPERATIONS
Unaudited (In U.S. Dollars)
Nine months ended September 30
------------------------------
1996 1995
------------ -----------
Net sales $ 16,029,331 $11,960,168
Cost of sales 9,754,345 $ 7,184,117
------------ -----------
Gross profit 6,274,986 4,776,051
------------ -----------
Operating expenses:
Selling 2,381,284 1,862,145
General and administrative 2,221,771 1,478,592
Research and development 1,162,992 848,627
Amortization of intangible assets 535,610 331,173
------------ -----------
Total operating expenses 6,301,657 4,520,537
------------ -----------
(Loss) income from operations (26,671) 255,514
Interest expense and other 396,283 56,869
------------ -----------
(Loss) income before provision
for income taxes (422,954) 198,645
Provision for income taxes 2,719 --
------------ -----------
Net (loss) income $ (425,673) $ 198,645
============ ===========
Net (loss) income per share $ (.04) $ .02
============ ===========
Weighted average shares outstanding 11,756,568 11,174,062
============ ===========
See Notes to Consolidated Financial Statements.
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<PAGE>
Technology Flavors & Fragrances, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In U.S. Dollars)
Nine months ended September 30
------------------------------
1996 1995
----------- ---------
Cash flows from operating activities:
Net (loss) income $ (425,673) $ 198,645
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation & amortization 772,528 514,284
Unearned compensation 60,758 --
Deferred rent 7,146 (6,202)
Changes in assets and liabilities:
Accounts receivable (1,139,056) (818,443)
Inventories (503,897) (167,423)
Prepaid expenses and other assets (18,855) 27,282
Other assets (206,272) 16,255
Accounts payable 647,274 465,203
Accrued expenses 285,748 99,955
----------- ---------
Net cash (used in) provided by
operating activities (520,299) 329,556
----------- ---------
Cash flows from investing activities:
Capital expenditures (94,682) (32,178)
Notes receivable 31,813 (69,476)
Decrease (increase) in cash surrender value
of life insurance policy 288,153 (46,241)
Acquisition of Seafla, Inc. 104,422 --
----------- ---------
Net cash provided by (used in)
investing activities 120,862 (147,895)
----------- ---------
Cash flows from financing activities:
Proceeds from notes payable 350,000 --
Purchase of treasury stock -- (306,826)
Repayment of long-term debt (52,000) (63,000)
Proceeds from issuance of common stock 6,500 --
----------- ---------
Net cash provided by (used in)
financing activities 304,500 (369,826)
----------- ---------
Decrease in cash (94,937) (188,165)
Cash, beginning of period 467,134 505,692
----------- ---------
Cash, end of period $ 372,197 $ 317,527
=========== =========
See Notes to Consolidated Financial Statements.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company" or "TFF") develops
and manufactures flavors, fragrances, and seasonings for use in a wide variety
of natural flavored beverages, confectioneries, health foods, pharmaceuticals,
aromatherapy essential oils, and perfumes for the fragrance, cosmetic, household
and food industries.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting principally of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1996, the consolidated results of operations for the
three and nine months ended September 30, 1996 and 1995 and the statements of
cash flows for the nine months then ended. Accordingly, they do not include all
of the information and footnote disclosures required for audited financial
statements in accordance with generally accepted accounting principles. The
accompanying consolidated financial statements and related notes should be read
in conjunction with the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 1995. The results of operations for the three and nine
months ended September 30, 1996 and 1995 are not necessarily indicative of the
operating results for the full year.
2. INVENTORIES
Components of inventories are summarized as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
Raw Material $ 2,995,507 $ 2,333,653
Finished Goods 928,644 1,086,601
------------ -------------
$ 3,924,151 $ 3,420,254
============ =============
3. LONG-TERM DEBT
As of September 30, 1996, the Company had a $3.5 million term loan and a
$2.0 million revolving line of credit. As of September 30, 1996, borrowings
under the term loan bore interest at the rate of one and one-half percent above
the bank's prime rate and the borrowings mature in December 1998. Borrowings
under the revolving credit line amounted to $1,450,000 as of September 30, 1996,
and bore interest at the rate of one percent above the bank's prime rate. The
revolving credit line expires in June 1997 (See Note 6 hereof).
4. NET LOSS PER COMMON SHARE
Net (loss) income per share is based on the weighted average number of
common shares and equivalents outstanding for each period. Primary and fully
diluted earnings per share are the same.
5. INCOME TAXES
For the nine month period ended September 30, 1996, the Company has
provided approximately $2,700 for state income taxes. At September 30, 1996, the
Company's net operating loss carryforwards, for federal income tax purposes,
was approximately $1,550,000, which, if not utilized, will expire at various
dates through 2010.
-7-
<PAGE>
6. SUBSEQUENT EVENTS
LONG TERM DEBT
On October 17, 1996, the Company consolidated its existing $3.5 million
bank term loan and its $2.0 million revolving line of credit into a $5.5 million
revolving credit line. Borrowings under the credit line bear interest at one and
one-quarter percent above the bank's prime rate and mature on January 15, 1999.
Outstanding borrowings under the credit line are secured by substantially all of
the assets of the Company.
SUBORDINATED DEBT
On October 17, 1996, the Company consummated a financing which provided
for the issuance of (i) $1,500,000 principal amount of 9% Convertible
Subordinated Notes due October 17, 1998 (the "Notes"), (ii) Class A Stock
Purchase Warrants ("Class A Warrants") to purchase an aggregate of 450,000
shares of the Company's common stock, $.01 par value (the "Common Stock"), and
(iii) Class B Stock Purchase Warrants ("Class B Warrants") to purchase an
aggregate of 156,250 shares of Common Stock. The Class A Warrants and the Class
B Warrants are exercisable into shares of Common Stock at exercise prices of
$2.40 per share and $2.70 per share, respectively, subject to adjustments under
certain circumstances pursuant to the financing.
The Notes are secured by liens on substantially all of the assets of the
Company and are convertible into shares of Common Stock, at the option of the
Company, at any time on or prior to October 16, 1997, at a conversion price
equal to the market price at that time. From October 17, 1997 to maturity, the
Notes are convertible into shares of Common Stock, at the option of the holders,
at a conversion price equal to the greater of the market price at that time or
the floor price ($1.50, subject to adjustments under certain circumstances).
-8-
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of
Operation
Results of Operations
Three Months Ended September 30, 1996 vs. Three Months Ended September 30, 1995:
Net sales increased by $1,063,000 or 26% to $5,139,000 for the three
months ended September 30, 1996 from $4,076,000 during last year's comparable
period. This increase was due principally to the addition of net sales arising
out of the December 1995 acquisition of Seafla, Inc. ("Seafla").
Gross profit increased by $401,000 or 26% to $1,966,000 for the three
month period ended September 30, 1996 from gross profit of $1,565,000 reported
in the prior period. This increase was due primarily to the increase in net
sales. Gross profit as a percentage of sales was relatively the same for both
periods.
Operating expenses for the three months ended September 30, 1996 increased
by 57% from $1,489,000 to $2,342,000. This increase was attributable to costs of
$615,000 associated with Seafla's operations, and increases in TFF's selling and
general and administrative expenses of $238,000 due to the hiring of key sales,
management and administrative personnel and additional professional and
consulting fees. As a result, operating expenses as a percentage of net sales
increased by 9.0% for the quarter.
Interest expense increased for the period ended September 30, 1996 by
$96,000 as a result of the Seafla acquisition financing.
Net loss for the three months ended September 30, 1996 was $495,000, or
$.04 per share, compared to net income of $55,000 or $.005 per share during last
year's comparable quarter.
Nine Months Ended September 30, 1996 vs. Nine Months Ended September 30, 1995:
Net sales increased by $4,069,000 or 34.0% to $16,029,000 for the nine
months ended September 30, 1996 from $11,960,000 during the comparable period in
1995. This increase was primarily attributable to the addition of net sales
arising out of the acquisition of Seafla and, to a lesser extent, an increase in
sales at the Company's Canadian subsidiary.
Gross profit increased by $1,499,000 or 31.4% to $6,275,000 for the nine
months ended September 30, 1996 from gross profit of $4,776,000 during the
comparable period in 1995. This increase was due primarily to the increase in
net sales. Gross profit as a percentage of sales was relatively the same for
both periods.
Operating expenses for the nine months ended September 30, 1996 increased
by 39% from $4,521,000 to $6,302,000. Costs relating to the Seafla operations
accounted for $1,365,000 of the increase, and amortization of goodwill relating
to the acquisition and increases in selling and general and administrative
expenses attributable to the build-up in the Company's sales force and the
hiring of additional key sales, management and administrative personnel
accounted principally for the remainder of the increase. Operating expenses as a
percentage of net sales decreased approximately 1.5% due to increased net sales
partially offset by increases in expenditures described above.
Interest expense increased by $339,000 for the 1996 nine-month period as a
result of the Seafla acquisition financing.
Net loss for the nine months ended September 30, 1996 was $426,000, or
$.04 per share, compared to net income of $199,000, or $.02 per share, during
the comparable period in 1995.
-9-
<PAGE>
Liquidity and Capital Resources
During the nine months ended September 30, 1996, the Company generated
negative cash flow from operations of $520,000 primarily as a result of the net
loss of $426,000 for the period. The Company expended approximately $95,000 for
capital expenditures. Cash requirements during the nine months ended September
30, 1996 for operating activities and capital expenditures were met primarily
through borrowings from the Company's revolving credit line and a reduction in
the Company's cash on hand. At September 30, 1996, the Company's working capital
was $3,135,000, an increase of $158,000 from working capital at December 31,
1995.
On December 6, 1995, the Company acquired substantially all of the assets
and assumed the trade obligations and certain other liabilities of Seafla, a
producer of dairy and savory flavors. In consideration therefor, the Company
paid Seafla $3,000,000 in cash and issued a promissory note in the original
principal amount of $1,000,000, which principal amount was reduced to $888,019
through an adjustment to the purchase price. Of such principal amount of
$888,019, $177,604 is payable commencing on January 1, 1997 and on each January
1 thereafter through 2001. Outstanding amounts under the promissory note bear
interest at a rate of 12% per annum. The Company funded the cash portion of the
Seafla purchase price through a term loan in the amount of $3,500,000, with
interest payable monthly at one and one-half percent above the bank's prime
rate. The term loan expires in 1998.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. The Company's principal line of credit
was a one year revolving note, which the Company has extended from year to year
to June 1, 1997. Through June 3, 1996, borrowings under the revolving line of
credit bore interest at the rate of one-half percent above the bank's prime
rate. As of September 30, 1996, borrowings under the revolving line of credit
bore interest at the rate of one-percent above the bank's prime rate.
On October 17, 1996, the Company consolidated its existing $3.5 million
term loan and its $2.0 million revolving line of credit into a $5.5 million
revolving credit line. Borrowings under this credit line bear interest at one
and one-quarter percent above the bank's prime rate and mature on January 15,
1999. The borrowings are secured by a lien on substantially all of the assets of
the Company. As of November 19, 1996, the Company had outstanding borrowings
under the credit line of approximately $4,050,000 and availability was
approximately $1.0 million.
On October 17, 1996, the Company also consummated a financing which
provided for the issuance of $1,500,000 principal amount of 9% Convertible
Subordinated Notes due October 17, 1998 (the "Notes"), and the issuance of Class
A Warrants to purchase an aggregate of 450,000 shares of Common Stock at $2.40
per share, and Class B Warrants to purchase an aggregate of 156,250 shares of
Common Stock at $2.70 per share. The Notes are secured by a lien on
substantially all of the assets of the Company.
The Notes are convertible into shares of Common Stock at the option of the
Company at any time on or prior to October 16, 1997, at a conversion price equal
to the market price at that time. From October 17, 1997 to maturity, the Notes
are convertible into shares of Common Stock at the option of the holders at a
conversion price equal to the greater of the market price at that time or the
floor price of $1.50 per share (subject to adjustments under certain
circumstances).
In connection with the financing, the Company granted the purchasers
certain registration rights relating to the shares of Common Stock issuable upon
conversion of the Notes and exercise of the Class A and Class B Warrants. The
purchasers cannot require the Company to register such shares prior to October
18, 1997 or such earlier date upon which the Company converts the Notes into
shares of Common Stock.
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<PAGE>
PART 11 - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
-11-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 19th day of November, 1996.
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By:/s/ Joseph A. Gemmo
------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 372,197
<SECURITIES> 0
<RECEIVABLES> 3,889,696
<ALLOWANCES> (96,909)
<INVENTORY> 3,924,151
<CURRENT-ASSETS> 8,303,277
<PP&E> 2,728,851
<DEPRECIATION> (1,390,986)
<TOTAL-ASSETS> 16,612,958
<CURRENT-LIABILITIES> 5,167,839
<BONDS> 4,230,040
0
0
<COMMON> 121,667
<OTHER-SE> 7,093,412
<TOTAL-LIABILITY-AND-EQUITY> 16,612,958
<SALES> 16,029,331
<TOTAL-REVENUES> 16,029,331
<CGS> 9,754,345
<TOTAL-COSTS> 6,301,657
<OTHER-EXPENSES> 1,282
<LOSS-PROVISION> 52,839
<INTEREST-EXPENSE> 397,565
<INCOME-PRETAX> (422,954)
<INCOME-TAX> 2,719
<INCOME-CONTINUING> (425,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (425,673)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
