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, 1997
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
Delaware 11-3199437
- --------------------------------------------- ---------------------------------
(State or other Jurisdiction of Incorporation (IRS Employer Identification No.)
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 November 10, 1997: 12,344,623
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
September 30, 1997
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996........................................... 1
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1997 and September 30, 1996....................... 2
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and September 30, 1996.......................................... 3
Notes to Consolidated Financial Statements...................... 4
Item 2. - Management's Discussion and Analysis........................ 5
PART II - OTHER INFORMATION................................................. 8
SIGNATURE................................................................... 9
-i-
<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
AT AT
SEPTEMBER 30, DECEMBER 31,
1997 1996
(Unaudited) (Note)
----------- ------
ASSETS
Current assets:
Cash and cash equivalents $ 142,241 $ 233,566
Receivables, net 4,242,736 3,529,997
Inventories 4,305,459 4,025,586
Prepaid expenses and other current assets 139,635 97,617
------------ ------------
Total current assets 8,830,071 7,886,766
Fixed assets, net 1,223,214 1,401,062
Intangible assets, net 5,720,618 6,205,754
Other assets 204,714 328,670
Notes receivable from related parties 271,981 281,011
------------ ------------
Total assets $ 16,250,598 $ 16,103,263
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 2,409,034 $ 2,907,558
Accrued expenses 735,497 939,636
Current portion of long-term debt 199,138 19,078
------------ ------------
Total current liabilities 3,343,669 3,866,272
Long-term debt 6,994,501 6,840,529
Deferred rent payable 31,277 22,007
------------ ------------
10,369,447 10,728,808
STOCKHOLDERS' EQUITY
Common stock, issued 11,993,406 shares 119,934 119,934
Paid-in capital 9,409,706 9,409,706
Accumulated deficit (3,381,953) (3,827,890)
Unearned compensation arising from
stock awards (256,536) (317,295)
Treasury stock at cost (36,438 shares
of common stock) (10,000) (10,000)
------------ ------------
Total stockholders' equity 5,881,151 5,374,455
------------ ------------
Total liabilities and
stockholders' equity $ 16,250,598 $ 16,103,263
============ ============
Note: The balance sheet at December 31, 1996 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 accompanying notes.
-1-
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,889,589 $ 5,139,096 $ 19,714,293 $ 16,029,331
Cost of sales 3,620,186 3,172,693 11,944,522 9,754,345
------------ ------------ ------------ ------------
Gross profit 2,269,403 1,966,403 7,769,771 6,274,986
------------ ------------ ------------ ------------
Operating expenses:
Selling 929,009 924,566 2,645,797 2,381,284
General and administrative 687,622 857,291 1,960,405 2,221,771
Research and development 531,336 382,034 1,491,606 1,162,992
Amortization expense 223,080 178,536 668,685 535,610
------------ ------------ ------------ ------------
Total operating expenses 2,371,047 2,342,427 6,766,493 6,301,657
------------ ------------ ------------ ------------
Income (loss) from operations (101,644) (376,024) 1,003,278 (26,671)
Interest expense, net 189,615 117,577 548,501 396,283
------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes (291,259) (493,601) 454,777 (422,954)
Provision for income taxes 2,090 1,364 8,840 2,719
------------ ------------ ------------ ------------
Net income (loss) $ (293,349) $ (494,965) $ 445,937 $ (425,673)
============ ============ ============ ============
Net income (loss) per share $ (.02) $ (.04) $ .04 $ (.04)
============ ============ ============ ============
Weighted average shares
outstanding 11,956,968 11,756,568 12,579,414 11,756,568
============ ============ ============ ============
</TABLE>
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 445,937 $ (425,673)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 916,685 833,286
Deferred rent 9,270 7,146
Changes in assets and liabilities:
Accounts receivable (712,739) (1,139,056)
Inventories (279,873) (503,897)
Prepaid expenses and other current assets (42,018) (18,855)
Other assets 1,166 (206,272)
Accounts payable (498,524) 647,274
Accrued expenses (204,139) 285,748
----------- -----------
Net cash used in operating activities (364,235) (520,299)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (70,152) (94,682)
Notes receivable 9,030 31,813
Decrease in cash surrender value of life insurance policy -- 288,153
Acquisition of Seafla, Inc. -- (104,422)
----------- -----------
Net cash (used in) provided by investing activities (61,122) 120,862
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 1,050,000 350,000
Repayment of long-term debt (715,968) (52,000)
Proceeds from issuance of common stock -- 6,500
----------- -----------
Net cash provided by financing activities 334,032 304,500
----------- -----------
Decrease in cash (91,325) (94,937)
Cash - beginning of period 233,566 467,134
----------- -----------
Cash - end of period $ 142,241 $ 372,197
=========== ===========
</TABLE>
See accompanying notes.
-3-
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavors, fragrances and seasonings used to provide or enhance
flavors or fragrances in a wide variety of consumer and industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB/A for
the year ended December 31, 1996.
2. INVENTORIES
Components of inventories are summarized as follows:
September 30, 1997 December 31, 1996
------------------- -----------------
Raw Materials $3,111,369 $3,145,743
Finished Goods 1,194,090 879,843
---------- ----------
$4,305,459 $4,025,586
========== ==========
3. EARNINGS PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares outstanding after giving effect to dilutive stock options and
warrants. Fully diluted earnings per share has not been presented as the
dilutive effect is not material.
4. SUBSEQUENT EVENTS
On October 16, 1997, the Company entered into a credit agreement with a
bank providing for a $6,000,000 Revolving Credit Facility and a $750,000 Term
Loan Facility. These Credit Facilities replace its existing $5,500,000 credit
line with another bank and refinances $750,000 of its 9% Convertible
Subordinated Notes. Outstanding borrowings under the new Credit Facilities bear
interest based on the bank's London Interbank Offering Rate ("LIBOR") plus
2-1/2% (which currently equates to approximately 1/4 of 1% below the bank's
prime rate) or 1/2 of 1% above the bank's prime rate, at the Company's option.
The credit agreement requires the maintenance of financial and other covenants.
Outstanding borrowings are secured by substantially all of the assets of the
Company and are subject to eligibility requirements relating to the Company's
receivables, inventories and product formulations.
In conjunction with this refinancing, the Company converted one-half of
its $1.5 million 9% Convertible Notes in exchange for 387,655 shares of the
Company's common stock based on the weighted average share price during the
preceding ten trading days prior to the closing.
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following information for the three and nine month periods ended
September 30, 1997 and 1996 has been derived from the Company's unaudited
consolidated financial statements and should be read in conjunction with the
Company's annual report on Form 10-KSB/A for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------------- ---------------- -------------- ----------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 5,890 100.0% $ 5,139 100.0% $19,714 100.0% $16,029 100.0%
Gross profit 2,269 38.5 1,966 38.3 7,770 39.4 6,275 39.1
Operating expenses:
Selling 929 15.8 925 18.0 2,646 13.4 2,381 14.9
General and administrative 688 11.7 857 16.7 1,960 9.9 2,222 13.9
Research and development 531 9.0 382 7.4 1,492 7.6 1,163 7.3
Amortization expense 223 3.8 178 3.5 669 3.4 536 3.3
Income (loss) from operations (102) (1.7) (376) (7.3) 1,003 5.1 (27) (.2)
Interest expense, net 189 3.2 118 2.3 548 2.8 396 2.5
Provision for income taxes 2 -- 1 -- 9 -- 3 --
Net income (loss) (293) (5.0) (495) (9.6) 446 2.3 (426) (2.7)
</TABLE>
Net sales. Net sales increased 15% to $5,890,000 for the three months
ended September 30, 1997 from $5,139,000 for the same period in 1996 and
increased 23% to $19,714,000 for the nine months ended September 30, 1997 from
$16,029,000 for the comparable nine months of 1996. The increase during the
three months ended September 30, 1997 was primarily due to shipments of several
new flavor and fragrance products to new and existing customers relative to
increased marketing activities, while the increase in net sales for the nine
months ended September 30, 1997 also included shipments of a new flavor product
to a significant customer during the first and second quarters.
Gross profit. Gross profit, as a percentage of sales, was 38.5% for the
three months ended September 30, 1997 and was consistent with last year's
comparable quarter. The gross profit percentage of 39.4% for the nine month
period ended September 30, 1997 was consistent with the gross profit percentage
of 39.1% reported during last year's nine month period.
Selling expenses. Selling expenses of $929,000 for the three months ended
September 30, 1997 was consistent with the 1996 period, while selling expenses
increased to $2,646,000 for the nine months ended September 30, 1997 from
$2,381,000 for the comparable 1996 period. The increase during the nine month
period was due principally to the hiring of additional sales personnel and
expanded sales support and increased sales commissions on higher volume sales.
Selling expenses, as a percentage of sales, decreased to 15.8% for the three
months ended September 30, 1997 from 18.0% for last year's comparable quarter
and decreased to 13.4% for the nine months ended September 30, 1997 from 14.9%
for last year's comparable nine month period as a result of increased sales.
General and administrative expenses. General and administrative expenses
decreased by 20% to $688,000 for the three months ended September 30, 1997 from
$857,000 for the same quarter in 1996 and decreased by 12% to $1,960,000 for the
nine months ended September 30, 1997 from $2,222,000 for the nine month period
in 1996. These decreases were primarily as a result of the effects of the
Company's cost reduction program implemented during the latter part of the
fourth quarter of 1996. General and administrative expenses, as a percentage of
sales, decreased to 11.7% for the three months ended September 30, 1997 from
-5-
<PAGE>
16.7% for last year's comparable quarter and decreased to 9.9% for the nine
months ended September 30, 1997 from 13.9% for the nine months ended September
30, 1996 as a result of cost reductions and increased sales volume.
Research and development expenses. Research and development expenses
increased to $531,000 for the three months ended September 30, 1997 from
$382,000 for the three months ended September 30, 1996 and increased to
$1,492,000 for the nine months ended September 30, 1997 from $1,163,000 for the
nine month period in 1996 due to expanded research and development projects and
the hiring of additional technical personnel during the period.
Amortization expense. Amortization expense increased to $223,000 for the
three months ended September 30, 1997 as compared to $178,000 for the third
quarter of 1996 and increased to $669,000 for the nine months ended September
30, 1997 from $536,000 for the comparable nine month period in 1996. The
increases were due principally to the amortization of deferred charges
associated with the Company's $1.5 million convertible debt financing
consummated in October 1996.
Interest expense, net. Interest expense increased to $189,000 for the
three months ended September 30, 1997 from $118,000 for the comparable 1996
period and increased to $548,000 for the nine months ended September 30, 1997
from $396,000 for the nine months ended September 30, 1996. These increases were
primarily due to the additional long-term debt incurred by the Company in
October 1996 in connection with the $1.5 million convertible debt financing. See
"Liquidity and Capital Resources".
Provision for income taxes. Provision for income taxes represents state
franchise taxes. No federal income tax provision for the nine months ended
September 30, 1997 was provided due to the Company's availability of net
operating loss carryforwards.
Liquidity and Capital Resources
Cash used in operations amounted to $364,000 for the nine months ended
September 30, 1997 compared to $520,000 for the same period of the prior year.
The change in net income from 1996 to 1997 of $872,000 (net loss of $426,000
during 1996 versus net income of $446,000 during 1997) was principally offset by
increases in working capital which amounted to $5,486,000 at September 30, 1997
compared to $4,020,000 at December 31, 1996.
Historically, the Company's financing needs have been met through the
issuances of equity and debt. For several years prior to 1996, the Company's
principal line of credit for working capital requirements was a $2.0 million
short-term revolving note, which the Company extended upon maturity. Borrowings
under the revolving line of credit bore interest at the rate of one-half percent
above the prime rate.
In October 1996, the Company consolidated a $3,500,000 term loan obtained
in connection with the December 1995 acquisition of the assets of Seafla, Inc.
(currently the Seafla Division) and its $2,000,000 revolving credit into a
$5,500,000 revolving credit facility (the "1996 Credit Facility"). Borrowings
under the 1996 Credit Facility bore interest at 1 1/4% above the lender's prime
rate and the maturity date was January 15, 1999. At September 30, 1997, the
borrowings under the 1996 Credit Facility accrued interest at the rate of 9 3/4%
per annum. The borrowings were secured by liens on substantially all of the
assets of the Company. At September 30, 1997, the Company had outstanding
borrowings under the 1996 Credit Facility of $4,725,000 and $297,000 available
for borrowing against its borrowing base. In April 1997, the Company and the
lender under the 1996 Credit Facility entered into a waiver and modification
agreement (the "Waiver") which waived
-6-
<PAGE>
compliance by the Company with certain covenants for 1996 and amended one of
such covenants for 1997. Additional events of default were also added to the
1996 Credit Facility. In connection with the Waiver, the Company issued the
lender a warrant to purchase 100,000 shares of Common Stock, which expires on
January 15, 1999, with an exercise price of $2.40 per share. The warrants
contain a "put" provision which will give the bank the right to require that the
Company purchase the warrants from the bank for $20,000. In addition, the
Company has the right at any time prior to April 7, 1998 to "call" 50,000 of the
warrants by paying the bank $20,000.
In October 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 "Convertible 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 Convertible Notes were secured by liens on
substantially all of the assets of the Company, which liens were junior to those
in favor of the Company's lender under the 1996 Credit Facility.
On October 16, 1997, the Company entered into a credit agreement with a
bank providing for a $6,000,000 Revolving Credit Facility and a $750,000 Term
Loan Facility. These Credit Facilities replace its existing $5,500,000 credit
line with another bank and refinances $750,000 of its 9% Convertible
Subordinated Notes. Outstanding borrowings under the new Credit Facilities bear
interest based on the bank's London Interbank Offering Rate ("LIBOR") plus
2-1/2% (which currently equates to approximately 1/4 of 1% below the bank's
prime rate) or 1/2 of 1% above the bank's prime rate, at the Company's option.
The credit agreement requires the maintenance of financial and other covenants.
Outstanding borrowings are secured by substantially all of the assets of the
Company and are subject to eligibility requirements relating to the Company's
receivables, inventories and product formulations.
In conjunction with this refinancing, the Company converted one-half of
its $1.5 million 9% Convertible Notes in exchange for 387,655 shares of the
Company's common stock, based on the weighted average share price during the
preceding ten trading days prior to the closing. As of November 10, 1997, the
Company had outstanding borrowings of $750,000 under its Term Loan Facility and
$5,375,000 under its Revolving Credit Facility and $625,000 was available for
borrowings against its borrowing base. The outstanding borrowings bear interest
at the rate of 8.3% per annum.
The Company expects that available cash and existing short term available
credit will be sufficient to meet its estimated operating requirements,
including its research and development expenditures, for the foreseeable future.
-7-
<PAGE>
PART II - 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 27.1 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
-8-
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 10, 1997
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By \s\ Joseph A. Gemmo
-------------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of Registrant)
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 142,241
<SECURITIES> 0
<RECEIVABLES> 4,392,736
<ALLOWANCES> (150,000)
<INVENTORY> 4,305,459
<CURRENT-ASSETS> 8,830,071
<PP&E> 2,935,320
<DEPRECIATION> (1,712,106)
<TOTAL-ASSETS> 16,250,598
<CURRENT-LIABILITIES> 3,343,669
<BONDS> 7,193,639
0
0
<COMMON> 119,934
<OTHER-SE> 5,761,217
<TOTAL-LIABILITY-AND-EQUITY> 16,250,598
<SALES> 19,714,293
<TOTAL-REVENUES> 19,714,293
<CGS> 11,944,522
<TOTAL-COSTS> 6,766,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 548,501
<INCOME-PRETAX> 454,777
<INCOME-TAX> 8,840
<INCOME-CONTINUING> 445,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445,937
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
