<PAGE>
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 three months ended March 31,1997
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
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(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 equity
as of April 8, 1997: 11,956,968 shares of Common Stock
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
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TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
March 31, 1997
PAGE
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996........................................ 1
Consolidated Statements of Operations
for the Three Months Ended March 31, 1997
and March 31, 1996........................................... 2
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997
and March 31, 1996........................................... 3
Notes to Consolidated Financial Statements................... 4
Item 2. - Management's Discussion and Analysis.................... 5
PART II - OTHER INFORMATION........................................... 8
SIGNATURE............................................................. 9
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ITEM 1 - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
AT AT
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (NOTE)
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 215,997 $ 233,566
Receivables, net 4,705,109 3,529,997
Inventories 4,156,214 4,025,586
Prepaid expenses and other current assets 160,598 97,617
----------- -----------
Total current assets 9,237,918 7,886,766
Fixed assets, net 1,377,495 1,401,062
Intangible assets, net 6,045,137 6,205,754
Other assets 286,141 328,670
Notes receivable from related parties 279,455 281,011
----------- -----------
Total assets $17,226,146 $16,103,263
----------- -----------
----------- -----------
LIABILITIES
Current liabilities:
Accounts payable $ 3,007,850 $ 2,907,558
Accrued expenses 815,533 939,636
Current portion of long-term debt 197,468 19,078
----------- -----------
Total current liabilities 4,020,851 3,866,272
Long-term debt 7,457,317 6,840,529
Deferred rent payable 25,097 22,007
----------- -----------
11,503,265 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 (3,499,717) (3,827,890)
Unearned compensation arising from
stock awards (297,042) (317,295)
Treasury stock at cost (36,438
shares of common stock) (10,000) (10,000)
----------- -----------
Total stockholders' equity 5,722,881 5,374,455
----------- -----------
Total liabilities and
stockholders' equity $17,226,146 $16,103,263
----------- -----------
----------- -----------
Note: The balance sheet at December 31, 1996 has been derived from the
Company's audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes.
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TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
---- ----
Net Sales $6,779,837 $5,262,419
Cost of Sales 4,130,357 3,278,061
---------- ----------
Gross Profit 2,649,480 1,984,358
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Operating expenses:
Selling 834,874 708,243
General and administrative 618,549 684,505
Research and development 473,506 398,872
Amortization expense 221,986 176,037
---------- ----------
Total operating expenses 2,148,915 1,967,657
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Income from operations 500,565 16,701
Interest expense, net (171,042) (129,692)
---------- ----------
Income (loss) before provision
for income taxes 329,523 (112,991)
Provision for income taxes (1,350) (2,635)
---------- ----------
Net income (loss) $ 328,173 $ (115,626)
---------- ----------
---------- ----------
Net income (loss) per share $ .03 $ (.01)
---------- ----------
---------- ----------
Weighted average shares outstanding 12,516,741 11,756,968
---------- ----------
---------- ----------
See Accompanying Notes.
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TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS) (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31,
---------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $328,173 $(115,626)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation and amortization 303,922 275,319
Deferred rent 3,090 2,382
Changes in assets and liabilities:
Accounts receivable (1,175,112) (1,232,949)
Inventories (130,628) 221,195
Prepaid expenses and other current
assets (62,981) (221,886)
Other assets 1,414 6,755
Accounts payable 100,292 641,784
Accrued expenses (124,103) 18,734
-------- --------
Net cash used in operating activities (755,933) (404,292)
-------- --------
Cash flows from investing activities:
Purchase of fixed assets (58,370) (19,175)
Notes receivable 1,556 10,893
Decrease in cash surrender value of life
insurance policy - 288,153
Acquisition of Seafla - (24,594)
-------- --------
Net cash (used in) provided by investing
activities (56,814) 255,277
-------- --------
Cash flows from financing activities:
Proceeds from long-term bank debt 800,000 -
Repayment of long-term debt (4,822) (52,000)
-------- --------
Net cash provided by (used in) financing
activities 795,178 (52,000)
-------- --------
Decrease in cash (17,569) (201,015)
Cash-beginning of period 233,566 467,134
-------- --------
Cash-end of period $215,997 $266,119
-------- --------
-------- --------
See Accompanying Notes
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TECHNOLOGY FLAVORS AND FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(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 month period ended March 31, 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:
March 31, 1997 March 31, 1996
-------------- --------------
Raw Material $3,152,715 $3,145,743
Finished Goods 1,003,499 879,843
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$4,156,214 $4,025,586
---------- ----------
---------- ----------
3. EARNINGS PER SHARE
Net income per share is based on the weighted average number of common
shares 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VS. THREE MONTHS ENDED MARCH 31, 1996
The following information for the quarters ended March 31, 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.
Three months ended March 31,
------------------------------
1997 1996
---------- ----------
(dollar amounts in thousands)
Net sales $6,780 100.0% $5,262 100.0%
Gross profit 2,649 39.1 1,984 37.7
Operating expenses:
Selling 835 12.3 708 13.5
General and administrative 619 9.1 684 13.0
Research and development 473 7.0 399 7.6
Amortization expense 222 3.3 176 3.3
Income from operations 500 7.4 17 .3
Interest expense, net 171 2.5 130 2.5
Provision for income taxes 1 - 3 -
Net income (loss) 328 4.8 (116) (2.2)
NET SALES. Net sales increased 29% to $6,780,000 for the first quarter of
1997 from $5,262,000 for the first quarter of 1996 primarily due to: (1) the
commencement of shipments relative to a new product developed in 1996 for a
significant customer, (2) the benefits derived from the integration of the sales
and marketing activities of the Company's Seafla Division (acquired in
December 1995), and (3) increased international sales.
GROSS PROFIT. Gross profit, as a percentage of sales, improved to 39.1% on
sales of $6.8 million for the first quarter of 1997 as compared to 37.7% on
sales of $5.3 million for the first quarter of 1996. Such increase was
principally attributable to higher sales volume and production efficiencies.
OPERATING EXPENSES:
SELLING EXPENSES. Selling expenses increased to $835,000 for the first
quarter of 1997 from $708,000 for the comparable 1996 period due principally to
the hiring of additional sales personnel and expanded sales support during the
latter part of 1996 and increased sales commissions on higher volume sales.
Selling expenses, as a percentage of sales, decreased to 12.3% in the 1997
quarter as compared to 13.5% in last year's comparable quarter as a result of
increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $619,000 for the first quarter of 1997 from $684,000
for the first quarter of 1996, primarily as a result of the Company's cost
reduction program implemented in the latter part of 1996. General and
administrative expenses, as a percentage of sales, dropped to 9.1% in the
1997 first quarter as compared to 13.0% in last year's comparable quarter.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $473,000 for the first quarter of 1997 from $399,000 reported in
the first quarter of 1996 a year earlier due primarily to expanded research
and development activities.
AMORTIZATION EXPENSE. Amortization expense increased to $222,000 for the
1997 quarter as compared to $176,000 for the first quarter of 1996, due
principally to the amortization of deferred charges associated with the
Company's $1.5 million convertible debt financing in October 1996.
INTEREST EXPENSE, NET. Interest expense increased to $171,000 for the
three months ended March 31, 1997 from $130,000 for the comparable 1996
period. The increase was 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.
PROVISION FOR INCOME TAXES. Provision for income taxes represents state
franchise taxes. No Federal income tax provision for the first quarter of 1997
is provided due to the Company's availability of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997, cash used in operating
activities of $756,000 was primarily financed through borrowings from the
Company's $5.5 million senior secured revolving line of credit. Working
capital at March 31, 1997 was $5,217,000 as compared to $4,020,000 at
December 31, 1996. The increase of $1,197,000 was principally attributable
to the growth in accounts receivables.
To minimize the negative cash flow from operations and required
investment in accounts receivable resulting from an anticipated increase in
sales in 1997, management's goal is to improve the days sales outstanding
("DSOs"), which is the measure of the average number of days taken by the
Company to collect its accounts receivable, calculated from the date of
product shipment. At March 31, 1997, the Company's average DSOs were 62 days
as compared to 71 days at December 31, 1996.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. For several years prior to 1996,
the Company's principal line of credit for working capital requirements was a
$2 million short-term revolving note, which the Company extended upon
maturity. Borrowings under this short-term revolving line of credit bore
interest at the rate of one-half percent above prime rate.
On October 17, 1996, the Company consolidated a $3,500,000 term loan
(obtained in connection with the December 1995 acquisition of the assets of
Seafla, currently the Seafla Division) and its $2,000,000 revolving credit
into a $5,500,000 revolving credit line (the "Credit Facility"). Borrowings
under this Credit Facility bear interest at 1-1/4% above the lender's prime
rate and mature on January 15, 1999. The borrowings are secured by liens on
substantially all of the assets of the Company. At March 31, 1997, the
Company had outstanding borrowings under the Credit Facility of $5,175,000,
and $325,000 was available for borrowing under the borrowing base. In April
1997, the Company and the lender under the Credit Facility entered into a
waiver and modification agreement (the "Waiver") which waived compliance by
the Company of certain financial covenants for 1996 and amended one of such
covenants for 1997. Additional events of default were also added to the
Credit Facility. In connection with the Waiver, the Company issued the lender
a warrant to purchase 100,000 shares of Common Stock with an exercise price
of $2.40 per share.
On October 17, 1996, the Company consummated a financing which provided for
the issuance of $1,500,000 principal amount of 9% Convertible Subordinated Notes
due October 17, 1998 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 are secured by liens on substantially all of the
assets of the Company, which liens are junior to those of the Company's senior
lender under the Credit Facility.
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The Convertible 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 average market price of the Common Stock for
the ten trading days immediately preceding the conversion date (the "average
market price"). From October 17, 1997 to maturity on October 16, 1998, the
Convertible Notes are convertible into shares of Common Stock at the option
of the holders at a conversion price equal to the greater of the average
market price or the floor price of $1.50 per share (subject to adjustments
under certain circumstances). Pursuant to the Waiver, the Company is
required to exercise its option to convert the Convertible Notes into Common
Stock pursuant to the terms of the financing agreement related to the
Convertible Notes prior to October 17, 1997. The exact number of shares of
Common Stock issuable upon conversion of all of the Convertible Notes cannot
currently be determined but, generally, such number will vary inversely with
the market price of the Common Stock. On April 8, 1997, the closing bid
price of the Common Stock on the Nasdaq OTC Bulletin Board was US $1.656 per
share. If the closing bid price of the Common Stock on April 8, 1997 were
used to determine the number of shares of Common Stock issuable upon
conversion of the Convertible Notes, the Company would be obligated to issue
a total of approximately 906,000 shares of Common Stock, assuming all such
notes were converted at such time. To the extent the average market price
per share of the Common Stock is lower or higher, the Company would be
obligated to issue more or less shares of Common Stock than reflected in such
estimate and such difference could be material.
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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 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
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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: May 5, 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)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 215,997
<SECURITIES> 0
<RECEIVABLES> 4,855,109
<ALLOWANCES> (150,000)
<INVENTORY> 4,156,214
<CURRENT-ASSETS> 9,237,918
<PP&E> 2,924,420
<DEPRECIATION> (1,546,925)
<TOTAL-ASSETS> 17,226,146
<CURRENT-LIABILITIES> 4,020,851
<BONDS> 7,679,882
0
0
<COMMON> 119,934
<OTHER-SE> 5,602,947
<TOTAL-LIABILITY-AND-EQUITY> 17,226,146
<SALES> 6,779,837
<TOTAL-REVENUES> 6,779,837
<CGS> 4,130,357
<TOTAL-COSTS> 2,148,915
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,042
<INCOME-PRETAX> 329,523
<INCOME-TAX> 1,350
<INCOME-CONTINUING> 328,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328,173
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
