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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED] for the fiscal year ended December 31, 1996
/ / 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. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
(Name of Small Business Issuer in its Charter)
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<S> <C>
DELAWARE 11-3199437
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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10 EDISON STREET, EAST
AMITYVILLE, NEW YORK 11701
(Address of Principal Executive Offices)
(516) 842-7600
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Check whether the Issuer (1) 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 filing requirements for the past 90 days.
Yes _X_ No __
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will 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 Issuer's revenues for the fiscal year ended December 31, 1996 were
$21,017,960.
The aggregate market value of Registrant's voting stock (Common Stock) held
by non-affiliates on April 8, 1997 was approximately $11,158,750 based on the
closing sales price of the Common Stock on such date of U.S.$1.59, as reported
by the Toronto Stock Exchange.
The number of shares outstanding of each class of the Registrant's common
equity as of the date set forth below was:
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COMMON STOCK, $.01 PAR VALUE 11,956,968
Class Outstanding at April 8, 1997
</TABLE>
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes __ No _X_
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TECHNOLOGY FLAVORS & FRAGRANCES, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART 1..................................................................................................... 1
ITEM 1--DESCRIPTION OF BUSINESS.......................................................................... 1
ITEM 2--DESCRIPTION OF PROPERTY.......................................................................... 6
ITEM 3--LEGAL PROCEEDINGS................................................................................ 6
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 6
PART II.................................................................................................... 7
ITEM 5-- MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................
7
ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS............................................................. 8
ITEM 7--FINANCIAL STATEMENTS............................................................................. 11
ITEM 8-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............
11
PART III................................................................................................... 12
ITEM 9-- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT................................................................................. 12
ITEM 10--EXECUTIVE COMPENSATION.......................................................................... 15
ITEM 11-- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................
22
ITEM 12-- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 24
ITEM 13--EXHIBITS AND REPORTS ON FORM 8-K................................................................ 25
FINANCIAL STATEMENTS....................................................................................... F-1
</TABLE>
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PART I
ITEM 1--DESCRIPTION OF BUSINESS
INTRODUCTION
Technology Flavors & Fragrances, Inc. ("TFF" or the "Company") develops,
manufactures and markets flavors, fragrances and seasonings that are
incorporated by its customers in a wide variety of consumer and institutional
products including natural and artificial flavored beverages, confections,
foods, tobaccos, pharmaceuticals, aromatherapy essential oils, perfumes, and
health and beauty products. The Company's proprietary formulations are currently
used in more than 1,500 products sold by more than 500 companies worldwide, many
of which are Fortune 1000 companies. TFF's executive offices are located in
Amityville, New York while its manufacturing, research and development, sales
and marketing, and distribution facilities are located in Amityville, New York
and Milford, Ohio.
In March 1994, TFF completed the initial public offering of its common
stock, par value $.01 per share (the "Common Stock"), in the Canadian provinces
of Ontario and British Columbia. Since then, the Common Stock has traded on The
Toronto Stock Exchange. Effective October 29, 1995, the Company became subject
to the informational reporting requirements of the Securities Exchange Act of
1934, as amended, and the Company's Common Stock is now quoted on the Nasdaq OTC
Bulletin Board. See "Item 5--Markets For Common Equity and Related Stockholder
Matters."
Unless the context otherwise requires, (i) the term, the "Company" refers to
Technology Flavors & Fragrances, Inc., a Delaware corporation, together with its
wholly-owned subsidiary, Technology Flavors & Fragrances, Inc. (Canada), and
(ii) all references to "dollars" refers to U.S. dollars.
HISTORY
The Company was incorporated in New York in 1989 under the name "Aroma
Globe, Inc." It later changed its name to "Technology Flavors & Fragrances,
Inc." in January 1991, when it acquired the assets and business of another
company by that name. Since then, the Company has continued to expand its
operations primarily through acquisitions of other businesses and internal
growth.
In July 1993, TFF acquired most of the assets of the Fragrance Division
("F&C Fragrance Division") of F&C International Inc. for $5,441,000 in cash. The
acquisition was funded by bank debt of approximately $3,500,000 and the sale, in
a private offering, of 1,080,268 shares of Common Stock for net proceeds of
$1,499,000.
In November 1993, TFF reincorporated in Delaware. In that month it also
merged with Canamerica Corp., a private corporation owned by Mr. Philip Rosner,
one of the founders and principal stockholders of the Company. Mr. Rosner was
issued 200,000 shares of Common Stock in the merger.
In March 1994, TFF completed concurrent offerings of a total of 5,000,000
shares of Common Stock, 4,670,000 of those shares being sold to the public in
the Canadian Provinces of Ontario and British Columbia at a price of Cdn. $2.00
per share and the other 330,000 shares being sold privately in the United States
for the equivalent price of U.S. $1.44 per share. The proceeds of these sales
were used to repay the bank debt that was incurred to acquire assets of the F&C
Fragrance Division.
On December 6, 1995, TFF acquired substantially all of the assets and
assumed the trade obligations and certain other liabilities (the "Seafla
Acquisition") of Seafla, Inc. ("Seafla"), a Milford, Ohio producer of savory and
dairy flavors. In consideration therefor, TFF paid $3,000,000 in cash and issued
a 12% promissory note for $888,019, payable in installments of $177,604. In
March 1997, the promissory note was amended to provide that the first of such
installments is due on March 31, 1998 and the remaining installments are payable
on each January 1 thereafter through 2002, with interest at 12% per annum.
Concurrently with the closing of this acquisition, TFF entered into a five-year
employment agreement with Richard Higgins, the President of Seafla, to be the
President of the TFF Seafla Division. See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions." TFF funded the cash portion of the Seafla purchase price through
bank borrowings of $3,500,000. See "Management's Discussion and
Analysis--Liquidity and Capital Resources."
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F & C ACQUISITION
On July 27, 1993, TFF, purchased all formulas and customer lists, certain
machinery, equipment and inventory (collectively the "F & C Assets") of the F &
C Fragrance Division at auction in United States Bankruptcy Court in Cincinnati,
Ohio for $5,441,000.
The F & C Fragrance Division was engaged in the business of developing,
manufacturing, marketing and selling, domestically and internationally,
fragrance formulations for personal care, cosmetic and toiletry, household,
industrial and commercial products. The acquisition provided TFF with a library
of over 12,000 proprietary formulations and an introduction to certain large
U.S. manufacturers of household and personal care products and of industrial and
commercial products.
The F & C Fragrance Division serviced its fragrance customers from its
production facility in Brooklyn, New York, its marketing and research
development facilities in Allendale, New Jersey, and two warehousing facilities
located in southern California and Toronto, Canada. TFF thereafter consolidated
the manufacturing, marketing and research and development activities of the F&C
Fragrance Division at its Amityville, New York facilities and moved a portion of
the warehousing function to an adjoining Amityville building.
SEAFLA ACQUISITION
On December 6, 1995, TFF, purchased all of the assets and business of
Seafla, a Milford, Ohio producer of savory and dairy flavors, for $3,888,019.
The Company paid $3,000,000 in cash and $888,019 by a promissory note (the
"Seafla Note") issued to Mr. Richard Higgins, Seafla's President and sole
stockholder. The Seafla Note bears interest at 12% per annum, and was originally
payable in five installments of $177,604 plus accrued interest on January 1 of
each year, commencing January 1, 1997. In March 1997, the Seafla Note was
amended to defer the first payment due thereunder from January 1, 1997 to March
31, 1998; the remaining payments will be made on each January 1 thereafter
through 2002. TFF also assumed Seafla's trade payables and certain of its other
liabilities. See "Management's Discussion and Analysis--Liquidity and Capital
Resources."
TFF operates Seafla's business as a Division of the Company headed by
Richard Higgins. Seafla's products are purchased principally by manufacturers of
dairy products, snack foods and baked goods.
1996 CONVERTIBLE DEBT FINANCING
On October 17, 1996, the Company consummated a financing providing for the
issuance of (i) $1,500,000 aggregate principal amount of 9% Convertible
Subordinated Notes due October 17, 1998 (the "Convertible Notes"), (ii) Class A
Stock Purchase Warrants ("Class A Warrants") to purchase an aggregate of 450,000
shares of 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 for shares of Common Stock
at exercise prices of $2.40 per share and $2.70 per share, respectively, subject
to adjustments under certain circumstances.
The Convertible 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 average market price of the Common Stock for the
ten trading days immediately preceding the date of determination. From October
17, 1997 to maturity, 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 for the ten trading days immediately
preceding the date of determination or the floor price ($1.50, subject to
adjustments under certain circumstances). On April 7, 1997, the Company's senior
lender under a consolidated, modified revolving credit facility (the "Credit
Facility") waived compliance by TFF with certain covenants under the Credit
Facility for 1996 and agreed to amend one of such covenants effective January 1,
1997. Pursuant to such waiver and amendment, the Company is required to convert
all of the Convertible Notes into Common Stock on or prior to October 17, 1997.
See "Markets for Common Equity and Related Stockholder Matters" and
"Management's Discussion and Analysis--Liquidity and Capital Resources."
2
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PRODUCTS
The Company's principal product categories include: natural flavors,
artificial flavors, seasonings and fragrances. The five largest end-user
categories for the Company's products are: beverages, snack foods, confections,
cosmetics and tobacco.
TFF's flavor formulations are sold primarily to the beverage, food and
tobacco industries. Its principal flavor product lines include sweet goods,
culinary, savory, dairy and tobacco flavorings and seasonings. Examples of
consumer products containing the Company's flavor products include: confections,
toothpaste, chewing gums, prepared foods, ice creams, animal feeds, candy,
tobacco, alcoholic and non-alcoholic beverages, poultry and seafood, processed
meats and snack foods.
Areas which the Company believes currently offer significant growth
opportunities include: flavor products to enhance "natural foods"; products to
restore the flavors in non-fat and low fat, sugar, salt and cholesterol foods;
and flavor products able to withstand the effects of microwaving and freezing
(i.e., convenience foods).
TFF's fragrance formulations are sold primarily to the personal care,
cosmetic and toiletry, household and industrial product industries. Fragrances
are used by customers in the manufacture of a wide variety of consumer products,
such as soaps, detergents, household cleaners, cosmetic creams, lotions and
powders, after-shave lotions, deodorants, air fresheners, perfumes, colognes,
aromatherapy oils and hair care products.
RESEARCH AND DEVELOPMENT
The principal research and development ("R&D") activities of the Company are
conducted at its Amityville, New York and Milford, Ohio operating facilities.
TFF maintains R&D labs as well as applications labs, both of which are necessary
for the development of high quality flavor and fragrance compounds.
The Company believes that the most fundamental challenge in creating flavor
and fragrance formulations, from a technical standpoint, is to develop flavors
and fragrances which are: (1) able to withstand the rigors of processing,
storage, and final preparation; and (2) able to maintain the integrity of the
basic taste and scent characteristics for the useful life of the final product.
In the case of certain products, such as perfumes, colognes and frozen foods,
the potential life of the product may represent a period of years.
Additional product performance challenges that need to be accounted for in
the R&D phase are the result of changes in consumer demographics and lifestyles.
Microwaveable foods, for example, are a relatively recent phenomenon
necessitating new development and testing techniques. Non-traditional
applications for flavor and fragrance materials, such as fragranced plastic and
rubber products, are another example. Due to the slow rate of growth of many
traditional flavor and fragrance applications, management believes that the
Company's ability to develop and offer new products for emerging new categories
is increasingly important.
TFF works in association with existing and potential customers in the
development of an appropriate flavor or fragrance for a new consumer product.
During the process, which generally takes between six and nine months, it is not
unusual for the representative to present the customer with several
formulations. Typically, a particular flavor or fragrance formulation is created
and produced for one customer.
In the last two years, TFF has furnished over 10,000 samples to existing and
potential new customers. The typical lag time between when samples are tested
and when customers may place production orders historically has ranged from 6 to
18 months.
In 1996, TFF developed a unique "Maillard" Reactions Laboratory that
utilizes amino acids and sugars in a water medium to produce meat, poultry and
roasted flavors and aromas. The Company expects to offer these new and
innovative products during the first half of 1997.
The flavor industry has had to respond to new demands by consumers for (i)
products with little or no cholesterol, fat, sugar or salt, (ii) products that
withstand mircowaving or freezing, and (iii) products that contain more natural
ingredients. Each of these demands results in taste differences from what
consumers have come to expect so that new flavor formulations are necessary to
satisfy taste expectations. At the same
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time, the range of products that are offered in scented versions, including a
variety of plastic and rubber products, is expanding. Consequently, research and
development capabilities are increasingly important for successful flavor
companies.
RAW MATERIALS
The Company currently utilizes over 1,200 different raw materials in the
preparation of its flavor and fragrance formulations. Considerable effort is
devoted to ensuring that these ingredients remain uniform and consistent over
time--a critical process, since many of the raw materials are inherently
unstable, and/ or derived from plants that vary naturally with seasons and crop
years. Accordingly, shipments of raw materials received by the Company are
tested and analyzed for compliance with set specifications.
The Company purchases raw materials from various suppliers. Although there
can be no assurance, the Company believes that alternate sources of raw
materials are available in the event of an interruption in the supply of raw
materials from a single supplier.
INDUSTRY OVERVIEW
GENERAL. The flavor and fragrance industry sells primarily to manufacturers
of consumer products. The cost of the flavor or fragrance component of a
consumer product typically represents a small portion of the total cost of the
consumer product. As a result, in selling flavor and fragrance products, price
is a less significant factor than product performance and customer service.
The Company believes that important changes in consumer buying habits and
preferences over the past few years have had a significant impact on the flavors
and fragrances industry as a whole. The Company believes that these changes have
contributed to a demand for new and innovative products.
TRENDS. The Company believes that currently there is a trend toward more
natural foods in the marketplace, requiring manufacturers to produce more
naturally-flavored products. Not only has this translated into a steady shift
from artificial ingredients to natural ones, but it is also placing greater
emphasis on achieving flavors that more effectively impart "natural" tastes in
processed foods. The Company believes that a growing desire among consumers to
adopt a healthier lifestyle is increasing the demand for lighter, healthier
foods. This has posed new challenges for TFF to come up with ways of replacing
the tastes lost when sugar, salt, fat, and cholesterol are reduced or eliminated
from traditional food preparations.
The Company believes that another important trend in the industry is the
growing consumption of processed foods. It is estimated that more than 80% of
the food consumed today is in processed form, and over 1,000 natural and
synthetic flavoring agents are used to produce these foods. The Company believes
that as the demand for microwaveable products and prepared and frozen
convenience foods continues to rise, so, too, will the need for new flavor
products to counteract the adverse effects of microwaving and freezing.
The Company believes that the trend towards natural, healthier ingredients
also includes soaps, shampoos, and cosmetics, detergents and other cleaning
products, air fresheners, and numerous other household items.
TFF has devoted considerable resources to address both the emerging product
needs of the market, as well as to service the needs of growth oriented consumer
products manufacturers--including the need for additional product concept
development assistance.
SEASONALITY
Historically, TFF's sales tend to be somewhat higher in the quarters ending
June 30 and September 30 because the demands from its beverages and snack foods
customers rise during those periods. The Company believes that seasonal
fluctuations will not significantly impact its operations.
COMPETITION
The flavor and fragrance industry is highly fragmented with a few large
companies, such as International Flavors & Fragrances, Inc., Haarmann & Reimer
and Firmenich Incorporated, competing against many smaller producers. Certain of
the Company's competitors have substantially greater financial,
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marketing and other resources than the Company. Recently, there have been trends
towards increased industry concentration as companies vertically integrate with
suppliers and expand horizontally through acquisitions.
The Company believes that its competitiveness depends upon its creativity,
responsiveness and reliability, as well as the diversity of its customers and
products. Management expects that TFF will continue to sell to both large
companies that do not purchase all of their fragrance and flavor products from a
single supplier and to smaller companies that TFF's large competitors do not
choose to service.
CUSTOMERS
The Company's formulations are currently used in more than 1,500 products
sold by more than 500 companies worldwide, many of which are Fortune 1000
companies. TFF cooperates with these customers in the development of specific
flavors or fragrances for a particular end product.
No one customer accounted for more than 10% of the Company's revenues in
1995 or 1996.
BACKLOG
Customers purchase TFF products as they are required, normally for delivery
within two to four weeks. Consequently, backlog is not a significant indicator
of the volume of the Company's business over an extended period.
GOVERNMENTAL REGULATIONS
The Company is subject to regulations regarding, among other things, the
manufacturing of flavors and seasonings for food, the handling of alcohol, the
generation, storage, transportation and disposal of hazardous materials and the
safety and health of its employees. Although there can be no assurance, the
Company believes that it currently complies in all material respects with such
laws. The Company could be subject to, among other things, sanctions, penalties
(including significant fines) and suspension or revocation of required licenses
or permits for failure to comply with applicable governmental regulations. In
addition, at this time the Company is unable to anticipate the impact, if any,
that subsequent changes or new interpretations to applicable regulations may
have on the Company's business, financial condition or results of operations.
EMPLOYEES
At March 31, 1997, TFF had 106 full-time employees, categorized as follows:
10 management, 17 administrative, 12 marketing and sales, 31 production, 27
research and development, and 9 customer service. The Company considers its
relationships with employees to be satisfactory.
PROPRIETARY RIGHTS
The Company's business depends on its ability to protect trade secrets, to
operate without infringing upon the proprietary rights of others and to prevent
others from infringing upon the proprietary rights of the Company. Trade secrets
are difficult to protect and there can be no assurance that others will not gain
access to the Company's trade secrets (or others will not independently develop
substantially equivalent proprietary information or techniques), that such trade
secrets will not be disclosed or that the Company can adequately protect its
rights to trade secrets.
The Company may be required to obtain licenses to patents or proprietary
rights of others and no assurance can be given that any required license would
be available to the Company (on acceptble terms or otherwise). The Company may
encounter delays or be foreclosed from product market introductions if it does
not obtain a required license. In addition, the Company may be involved in
litigation in order to, among other things, defend against or assert claims of
infringement, protect trade secrets or know-how owned by the Company or
determine the scope or validity of proprietary rights of others. Any litigation
could have a material adverse impact on or result in substantial costs to the
Company.
TFF, like other fragrance and flavor companies, customarily owns the
formulas of its products. Product formulations are generally not protectable by
copyrights or trademarks.
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ITEM 2--DESCRIPTION OF PROPERTY
TFF's principal properties are its 36,000 square foot headquarters and
production facility at 10 Edison Street, East in Amityville, New York, with an
adjoining 12,000 square foot warehouse, and a 37,000 square foot facility in
Milford, Ohio. The Company's lease concerning its principal executive offices
and production facility in Amityville, New York, expires in 2006 and its lease
for its Ohio facility expires in 2014. The Ohio facility is leased from a
partnership in which Mr. Richard Higgins, the Company's Executive Vice
President, is a partner. See "Certain Relationships and Related Transactions."
TFF also maintains leased marketing, warehouse and customer service facilities
in southern California, Toronto, Canada, and Chile, South America. The Company
believes that its existing leases will be renegotiated as they expire or it will
lease alternative properties on acceptable terms. The Company believes its
present facilities are adequate for its current and anticipated operations.
ITEM 3--LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
ordinary litigation incidental to its business.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1996, the Company held a special meeting of shareholders (the
"Special Meeting"). The proposals voted upon at the Special Meeting and the
results with respect to each proposal are set forth below:
PROPOSALS VOTED UPON AT SPECIAL MEETING
1. To elect five directors to serve for a term of one year and until their
respective successors are duly elected and qualified.
2. To approve the appointment by the Board of Directors of Ernst & Young
L.L.P. as independent certified public accounts of the Company for the fiscal
year ended December 31, 1996 and to authorize the Board of Directors to set
their remuneration.
3. To ratify reduction of the exercise prices of all outstanding options
under the 1993 Option Plan and 1994 Option Grants.
4. To ratify adoption of the 1996 Option Plan.
5. To ratify and approve the issuance to Strategic Growth International,
Inc. of five-year warrants to purchase 600,000 shares of Common Stock.
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ABSTAIN/NOT
PROPOSALS FOR AGAINST VOTING
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No. 1 (Election of Directors)
Philip Rosner................................................................ 8,865,450 -- --
A. Gary Frumberg............................................................. 8,865,450 -- --
Richard R. Higgins........................................................... 8,801,426 -- 64,114
Sydney Stein................................................................. 8,865,450 -- --
Duncan Shirreff.............................................................. 8,865,450 -- --
No. 2........................................................................ 8,772,652 92,888 --
No. 3........................................................................ 1,742,458 146,940 10,000
No. 4........................................................................ 8,538,794 291,656 21,000
No. 5........................................................................ 6,449,920 309,546 14,000
</TABLE>
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PART II
ITEM 5--MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TORONTO STOCK EXCHANGE. The Company's Common Stock has traded on the
Toronto Stock Exchange (the "TSE") since March 28, 1994 (Symbol: "TFF"). The
following table sets forth the reported high and low prices (as furnished by the
Toronto Stock Exchange) for the Company's Common Stock for each calendar quarter
from January 1, 1995 through March 31, 1997, in Canadian dollars and translated
into U.S. dollars at the exchange rates in effect on those dates.
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1995 HIGH LOW
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First Quarter........... Cdn. $1.90 (U.S. $1.36) Cdn. $1.05 (U.S. $0.75)
Second Quarter.......... Cdn. $1.65 (U.S. $1.05) Cdn. $1.05 (U.S. $0.76)
Third Quarter........... Cdn. $1.25 (U.S. $0.92) Cdn. $0.85 (U.S. $0.63)
Fourth Quarter.......... Cdn. $1.35 (U.S. $0.99) Cdn. $0.60 (U.S. $0.44)
1996
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First Quarter........... Cdn. $2.45 (U.S. $1.78) Cdn. $1.20 (U.S. $0.88)
Second Quarter.......... Cdn. $3.42 (U.S. $2.50) Cdn. $2.00 (U.S. $1.47)
Third Quarter........... Cdn. $2.95 (U.S. $2.15) Cdn. $2.05 (U.S. $1.49)
Fourth Quarter.......... Cdn. $2.68 (U.S. $1.97) Cdn. $1.50 (U.S. $1.12)
1997
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First Quarter........... Cdn.$2.25 (U.S. $1.64) Cdn. $1.75 (U.S. $1.29)
</TABLE>
The closing price of the Common Stock on the Toronto Stock Exchange on April
8, 1997 was Cdn.$2.20 (U.S.$1.59).
OTC BULLETIN BOARD. Information regarding the Company's Common Stock is
available through the Nasdaq OTC Bulletin Board. The Company's Common Stock
(Symbol: "TFFI") was first quoted on the OTC Bulletin Board on March 12, 1996.
The following table sets forth the range of high and low closing bid quotations
on the OTC Bulletin Board as reported by Nasdaq for the period from March 12,
1996 through March 31, 1997.
<TABLE>
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1996 HIGH LOW
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First Quarter (from March 11, 1996)....................................................... U.S. $1.625 U.S. $1.125
Second Quarter............................................................................ U.S. $2.0625 U.S. $1.375
Third Quarter............................................................................. U.S. $2.0625 U.S. $1.50
Fourth Quarter............................................................................ U.S. $1.875 U.S. $1.1187
1997
- ------------------------------------------------------------------------------------------
First Quarter............................................................................. U.S. $1.69 U.S. $1.25
</TABLE>
The closing bid price of the Common Stock on the OTC Bulletin Board, as
reported by Nasdaq on April 8, 1997, was U.S. $1.656.
At December 31, 1996, there were approximately 650 holders of the Company's
Common Stock, including holders whose shares are registered in the names of
brokers and clearing agencies.
To date, the Company has not paid any dividends on its Common Stock and does
not anticipate paying dividends in the foreseeable future. The declaration and
payment of dividends on the Common Stock is in the discretion of the Board of
Directors and will depend on, among other things, the Company's operating
results, financial condition, capital requirements, contractual restrictions or
prohibitions with respect to the payment of dividends, and such other factors as
the Board of Directors may deem relevant. See "Management's Discussion and
Analysis--Liquidity and Capital Resources."
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ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
In 1996, the Company expanded its operations through (i) increased research
and development activities, (ii) increased marketing activities and (iii)
increased diversification of its marketing channels. The Company believes these
steps can provide it with more opportunities for sales growth and more favorable
results of operations in the future.
The Company made significant technological investments during 1996,
particularly during the latter part of the year, to enhance its position as a
multi-product, multi-customer company in the flavors, fragrances and seasonings
markets. Towards the end of 1996, the Company focused its efforts on the
development and implementation of a strategic business plan related primarily to
cost reduction and containment and aggressive sales and marketing strategies in
order to increase sales.
In order to meet established growth objectives, the Company hired a number
of additional key management, sales, marketing, and technical R&D personnel.
While the investment in personnel initially had an unfavorable cost impact on
the Company in 1996, management believes that future benefits will be realized
from this investment.
As part of its business strategy, the Company invested over 9% of its net
sales into expanded research and development activities. The Company's continued
commitment to R&D is expected to result in new and innovative products in the
future. During the latter part of 1996, the Company incurred approximately
$781,000 of research and development, start-up and pre-production costs relating
to a 1997 product launch for one of its significant customers. Although these
costs were expensed in 1996, product sales began in early 1997.
RESULTS OF OPERATIONS
The following information for the years ended December 31, 1996, 1995 and
1994 has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with such statements and the notes
thereto included elsewhere in this Annual Report on Form 10-KSB.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Net sales....................................... $ 21,018 100.0% $ 15,192 100.0% $ 15,568 100.0%
Gross profit.................................... 7,863 37.4 5,833 38.4 6,089 39.1
Operating expenses:
Selling....................................... 3,543 16.9 2,458 16.2 2,646 17.0
General and administrative.................... 3,492 16.6 2,012 13.2 1,955 12.6
Research and development...................... 1,972 9.4 1,146 7.5 1,111 7.1
Amortization expense.......................... 833 4.0 449 3.0 441 2.8
Loss from operations............................ (1,977) 9.4 (232) 1.5 (64) .4
Interest expense, net........................... 558 2.7 115 0.8 207 1.3
Provision for income taxes...................... 3 -- 20 0.1 28 .2
Net loss........................................ (2,538) 12.1 (367) 2.4 (299) 1.9
</TABLE>
NET SALES. Net sales increased 38% to $21,018,000 in 1996 from $15,192,000
in 1995 primarily due to 1996 sales of $5,345,000 contributed by the Seafla
Division, which had been acquired in December 1995. The balance of the sales
increase came principally from the Company's flavor products. By expanding
Seafla's customer base to include those of TFF, sales generated from the Seafla
Division in 1996 were $1,120,000 higher than in 1995.
8
<PAGE>
Net sales for 1995 were $15,192,000, a decrease of $376,000 or 2%, from net
sales of $15,568,000 in 1994. The decrease of $376,000 was primarily
attributable to a reduction of $900,000 of fragrance products resulting from
lower domestic and overseas sales of fragrance products. Although sales to TFF's
largest beverage customer decreased approximately $1,200,000 (from $2,600,000 in
1994 to $1,400,000 in 1995), new flavor products sales overall increased by
$504,000.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 37.4% on
sales of $21.0 million in 1996, as compared to 38.4% on sales of $15.2 million
in 1995, principally as a result of the Seafla Division, which has operated
historically at a gross profit of approximately 36%.
Gross profit decreased $256,000 or 4% to $5,833,000 in 1995 from $6,089,000
in 1994 primarily as a result of decreased net sales. Gross profit as a
percentage of sales decreased approximately 0.8% due to sales of lower margin
products by the Company's Canadian subsidiary in 1995 when compared to 1994.
OPERATING EXPENSES:
SELLING EXPENSES. Selling expenses increased to $3,543,000 in 1996 from
$2,458,000 in 1995. The increase was primarily attributable to the Seafla
Acquisition, which resulted in additional selling expenses in 1996 of $731,000.
The balance of the increase resulted from expansion of the Company's sales and
marketing activities, including the addition of personnel and increased
expenditures for sales support, and costs associated with the Company's share of
certain co-operative start-up marketing and advertising costs incurred by a
significant Company customer associated with a new product scheduled for
production during the first quarter of 1997.
In 1995, selling expenses decreased to $2,458,000 from $2,646,000 in 1994,
primarily as a result of a reduction in sales personnel and support costs, and a
reduction in customer freight charges.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
rose to $3,491,000 in 1996 from $2,012,000 in 1995. The Seafla Acquisition
resulted in $751,000 of the incremental costs, while the hiring of additional
key management personnel and higher professional and consulting services fees,
occurring principally during the second half of 1996, also contributed to such
increase. In addition, during the fourth quarter of 1996, the Company incurred
approximately $122,000 of costs associated with the start-up and pre-production
phases of a major product development program by a significant Company customer
which commenced production in early 1997. The Company began implementing a
comprehensive cost containment program late in the fourth quarter of 1996,
however, the anticipated effects of the program are not expected before the
second of 1997.
General and administrative expenses in 1995 were consistent with those of
1994.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $1,972,000 in 1996 from $1,146,000 in 1995. The Seafla Division
accounted for $383,000 of the increase while the balance principally pertained
to costs associated with a major product development program by a significant
Company customer and was incurred primarily during the fourth quarter of 1996.
Full production and sales by such customer from this program commenced during
the first quarter of 1997.
Research and development expenses were $1,146,000 in 1995 as compared to
$1,111,000 in 1994.
AMORTIZATION EXPENSE. Amortization expense amounted to $833,000 in 1996, an
increase of $384,000 from 1995's total of $449,000. The increase was principally
attributable to the Seafla Acquisition and the amortization of associated
deferred financing costs.
Amortization expense of $449,000 in 1995 was relatively consistent with 1994
levels.
INTEREST EXPENSE, NET. Interest expense rose to $558,000 in 1996 from
$115,000 in 1995. The increase was due primarily to debt financing for the
Seafla Acquisition.
9
<PAGE>
Interest expense decreased by $92,000 in 1995 as compared to 1994 due to the
repayment during March 1994 of bank debt that was incurred to finance the
acquisition of the F&C Division.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, cash used in operating activities of $1,615,000 was primarily
financed through borrowings from the Company's revolving credit line and the
issuance of the Convertible Notes. Working capital at December 31, 1996 was
$4,020,000 as compared to $2,977,000 a year earlier. The increase of $1,043,000
was principally attributable to the addition of Seafla's working capital and the
refinancing of the Company's revolving line of credit in October 1996. It is
expected that the Company's working capital requirements in 1997 can be met
through cash flow generated from operations and its credit facility.
On December 6, 1995, the Company completed the Seafla Acquistion, and, in
connection therewith, paid Seafla $3,000,000 in cash and issued the Seafla Note
in the principal amount of $888,019. The Seafla Note was payable in five equal
annual principal installments of $177,604 plus accrued interest beginning in
January 1997. In March 1997, the Seafla Note was amended in order to extend the
Company's obligation to pay the first principal installment of $177,604 until
March 31, 1998; and the remaining four installments are due on January 1 of each
year through January 2002. Outstanding amounts under the Seafla Note bear
interest at a rate of 12% per annum. Under the Seafla Note, as amended, the
Company is required to pay the interest accrued through December 31, 1996 in
nine equal monthly installments of $10,000 beginning April 15, 1997 with the
final installment of $12,767 to be paid in January 1998. 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.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. Prior to 1996, the Company's principal
line of credit for working capital requirements was a 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 prime rate.
On October 17, 1996, the Company consolidated its existing $3,500,000 term
loan and its $2,000,000 revolving line of 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 December 31, 1996, the Company had outstanding borrowings under the
Credit Facility of $4,375,000 and approximately $650,000 available for borrowing
against its 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 with certain covenants for 1996, amended
one of such covenants for 1997 and included additional events of default to the
note governing the Credit Facility.
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.
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
10
<PAGE>
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 issuances of Common Stock 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 issue more or less shares
of Common Stock than reflected in such estimate and such difference could be
material.
In connection with the Convertible Note financing, the Company granted the
purchasers certain registration rights relating to the shares of Common Stock
issuable upon conversion of the Convertible 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 Convertible Notes into shares of Common Stock.
ITEM 7--FINANCIAL STATEMENTS
The audited consolidated financial statements of the Company for the fiscal
years ended December 31, 1996 and 1995 begin on page F-1 of this Annual Report
on Form 10-KSB.
ITEM 8-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 9-- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
INFORMATION CONCERNING THE COMPANY'S BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Philip Rosner.......................... 61 President, Chairman of the Board and Director
A. Gary Frumberg....................... 63 Executive Vice President and Director
Richard R. Higgins..................... 58 Executive Vice President and Director
Sydney Stein........................... 61 Director
Duncan Shirreff........................ 45 Director
Scott Cunningham....................... 62 Director
Joseph A. Gemmo........................ 51 Vice President and Chief Financial Officer
Paul E. Hoffmann....................... 50 Secretary and Treasurer
Ronald J. Dintemann.................... 53 Vice President-Operations
Harvey Farber.......................... 56 Senior Vice President-Flavor Development
</TABLE>
The business experience of each of the persons listed above for at least the
last five years is as follows:
PHILIP ROSNER has been the President and Chairman of the Board of the
Company since its inception in 1989. He has been engaged in the flavor and
fragrance industry for over 40 years. Before 1989, Mr. Rosner was the President
of Globe Extracts, Inc. and, for 15 years before that, the President of Felton
Worldwide, Inc., both of which produced and marketed flavors and fragrances.
A. GARY FRUMBERG has been the Executive Vice President of the Company since
1989. Prior to 1989, Mr. Frumberg served as Vice President-International Sales
of Felton Worldwide, Inc.
RICHARD R. HIGGINS has been a Director of the Company since June 1996, and
an Executive Vice President of the Company and President of the Company's Seafla
Division since December 1995. Prior to that, Mr. Higgins was President of
Seafla, Inc. from 1980 until that business was acquired by the Company in
December 1995.
SYDNEY STEIN has been a Director of the Company since 1993. Since 1974, Mr.
Stein has been President of Syco Holdings Ltd., a Montreal-based retail chain.
In addition, from March 1991 to May 1994, Mr. Stein was President of Kasyco,
Inc., a Montreal-based wholesaler.
DUNCAN SHIRREFF has been a Director of the Company since 1994. Since 1994,
Mr. Shirreff also has been the Resident Director of the Toronto Branch of the
Canadian merchant banking firm of CM Oliver & Company Limited in charge of
corporate finance and European capital markets. From 1991 to 1994, he was an
independent financial consultant to various corporations. Prior to 1991, Mr.
Shirreff served as a Director of, and in senior executive positions with, Scotia
McLeod, Inc., a Toronto merchant banking firm.
SCOTT CUNNINGHAM has been a Director of the Company since February 1997.
Since 1993, Dr. Cunningham has been President of Stonehouse Development Co., a
food technology company, and since 1986 he has been a Managing Director of
Interlaken Capital, Inc., a management consulting firm specializing in the food
and other industries.
JOSEPH A. GEMMO has been Vice President and Chief Financial Officer of the
Company since August 1996. From January 1994 to April 1996, Mr. Gemmo was the
Chief Financial Officer of Bio-Botanica, Inc., a developer and manufacturer of
herbal extracts. Prior to that, Mr. Gemmo was the Chief Financial Officer of
General Aerospace Materials Corp. from 1989 to 1994.
PAUL E. HOFFMANN has been the Secretary and Treasurer of the Company since
1990 and was a Director of the Company until June 1996. Before he joined the
Company, Mr. Hoffman was Vice President, Finance of Globe Extracts, Inc. for
more than eight years.
12
<PAGE>
RONALD J. DINTEMANN has been Vice President-Operations of the Company since
May 1989 after serving as Vice President-Operations of Globe Extracts, Inc.
HARVEY FARBER has been Senior Vice President-Flavor Development of the
Company since October 1995 after serving as Vice President-Flavor Development at
J. Manheimer Inc. for 12 years.
All directors of the Company serve until the next annual meeting of
shareholders or until their successors are elected and qualified. Officers serve
at the discretion of the Board of Directors, subject to rights, if any, under
contracts of employment. There are no family relationships among the directors
and executive officers of the Company. See "Director Compensation" and
"Executive Compensation."
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
The business affairs of the Company are managed under the direction of the
Board of Directors. Members of the Board of Directors are informed about the
Company's affairs through presentations, reports and documents distributed to
them, through operating and financial reports routinely presented at meetings of
the Board of Directors and committee meetings, and through other means. In
addition, directors of the Company discharge their duties throughout the year
not only by attending Board of Directors meetings but also through personal
meetings and other communications, including telephone contact with management
and others regarding matters of interest and concern to the Company.
In February 1997, the Board of Directors approved an increase in the number
of directors constituting the whole Board from five to seven. Currently, there
is one vacancy on the Board of Directors.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee. The Company does
not have either a compensation or a nominating committee. The members of the
Audit Committee are appointed by the Board of Directors.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the firm to be selected each year as independent auditors of the Company's
financial statements and to perform services related to such audit. The Audit
Committee also has responsibility for (i) reviewing the scope and results of the
audit with the independent auditors, (ii) reviewing the Company's financial
condition and results of operations with management, (iii) considering the
adequacy of the internal accounting, bookkeeping and control procedures of the
Company, and (iv) reviewing any non-audit services and special engagements to be
performed by the independent auditors and considering the effect of such
performance on the auditors' independence. The current members of the Audit
Committee are Messrs. Stein, Shirreff and Rosner.
The Company has not established a nominating committee and/or a corporate
governance committee as recommended by the TSE Report (as defined herein),
however, the Company believes that the nomination of directors and other issues
normally considered by these committees can be effectively managed by the Board
of Directors due to its relatively small size, or by the Audit Committee which
is composed substantially of "unrelated directors." See "Statement of Corporate
Governance Practices."
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses actually incurred in
connection with attending each formal meeting of the Board of Directors or any
committee thereof. In addition, each outside director of the Company is paid a
$10,000 annual fee plus $500 for each formal meeting attended.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Company's Common Stock is listed on the Toronto Stock Exchange. The
by-laws of the TSE require listed companies to disclose their approach to
corporate governance on an annual basis and within the context of certain
guidelines proposed in the December 1994 report issued by The Toronto Stock
Exchange Committee on Corporate Governance in Canada (the "TSE Report"). The
report's focus is on the importance of each company addressing the governance
issue in its own context and the receipt by the company's shareholders of an
explanation for each company's approach to governance. There is no
13
<PAGE>
requirement for the Company to comply with the guidelines in the TSE Report, and
the report itself recognizes that each company should have the flexibility to
develop its own approach to corporate governance.
Of particular significance is the fact that the Company is organized under
the laws of the State of Delaware, and therefore is subject to that State's laws
and principles of corporate governance. The Company is of the opinion that its
approach to corporate governance is in compliance with Delaware law and
therefore is also in accordance with the fundamental principles upon which the
TSE Report was based. Moreover, the Company's Board of Directors has considered
the guidelines in the TSE Report and believes that the Company's approach to
corporate governance is working effectively for the Company and its
shareholders. In particular, the Board of Directors believes that many of the
guidelines in the TSE Report are better suited to larger companies and companies
with securities that are more widely held than those of the Company.
UNRELATED DIRECTORS
Much of the discussion in the TSE Report focuses on the composition of a
company's Board of Directors and, in particular, the number of "unrelated
directors." In the TSE Report, an "unrelated director" is a director who is free
from any interest and any business or other relationship which could, or could
reasonably be perceived to, materially interfere with that director's ability to
act with a view to the best interests of the Company, other than an interest
arising from such director's status as a shareholder. The TSE Report also
focuses on the importance of having an appropriate portion of the Board of
Directors which is free from any interest or relationship with a "significant
shareholder" of the company (i.e., a shareholder controlling more than 50% of
the company's common stock). The Company does not have a "significant
shareholder" within the meaning of the TSE Report.
The Company believes that three (i.e., Messrs. Stein, Shirreff and
Cunningham) of its six directors are "unrelated" within the meaning of the TSE
Report. While the number of unrelated directors is less than the majority
suggested by the TSE Report, the Company's Board of Directors believes that the
number is appropriate for the effective operations of the Company. The Board of
Directors believes that the presence of the President/Chairman of the Board of
Directors and the Executive Vice Presidents on the Board of Directors is key to
the effective corporate governance of the Company. The knowledge that each of
these directors brings to the Board of Directors and the insight that each
offers into his particular area of responsibility within the Company have been
instrumental in creating a Board of Directors that functions effectively, and,
in turn, in achieving successful results for the Company's growth and
development.
The Company's Board of Directors believes that its relationship with
management in supervising the business and affairs of the Company is
appropriate, and that the focus of the TSE Report on a majority of the Board
being comprised of unrelated directors is neither necessary nor desirable for
the Company under its present circumstances. The significant contributions of
current management to the formation and continued growth of the Company and the
confidence which the Board of Directors understands the Company's shareholders
have in management are factors supporting the Board of Directors' opinion that
additional independence is not required.
The Board of Directors has no formal policy setting out which specific
matters must be brought by the President and management and the Board of
Directors for approval, although there is a clear understanding between
management and the Board of Directors through historical and accepted legal
practice that all transactions or other matters of a material nature must be
presented by management for approval by the Board of Directors.
Management is available to shareholders to respond to questions and concerns
on a prompt basis. The Board of Directors believes that the Company's
communications with shareholders and others interested in the Company with
respect to addressing their inquiries about the Company are responsive.
14
<PAGE>
EXPECTATIONS OF MANAGEMENT
The Board of Directors works closely with members of management. The Board
of Directors' access to information relating to the operations of the Company,
through membership on the Board of Directors of several key members of
management and, as necessary, attendance by other members of management at the
request of the Board of Directors, are key elements to the effective and
informed functioning of the Company's Board of Directors.
The Board of Directors expects the Company's management to take the
initiative in identifying opportunities and risks affecting the Company's
business and finding means to deal with such opportunities and risks for the
benefit of the Company. The Board of Directors is confident that the Company's
management responds ably to this expectation.
LIMITATION OF PERSONAL LIABILITY AND INDEMNIFICATION
The General Corporation Law of Delaware permits a corporation through its
certificate of incorporation to eliminate the personal liability of its
directors to the corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director, with certain exceptions. The exceptions include
a breach of fiduciary duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, improper
declarations of dividends and transactions from which the directors derived an
improper personal benefit. The Company's Certificate of Incorporation, as
amended, exonerates its directors from monetary liability to the fullest extent
permitted by this statutory provision but does not restrict the availability of
non-monetary and other equitable relief.
The Company's Certificate of Incorporation, as amended, and By-laws provide
that the Company shall indemnify its directors and officers to the fullest
extent permitted by Delaware law.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission (the "Commission") has comprehensive
rules relating to the reporting of securities transactions by directors,
officers and shareholders who beneficially own more than 10% of the Company's
Common Stock (collectively, the "Reporting Persons"). These rules are complex
and difficult to interpret. Based solely on a review of Section 16 reports
received by the Company from Reporting Persons, the Company believes that no
Reporting Person has failed to file a Section 16 report on a timely basis during
the most recent fiscal year, except for Messrs. Philip Rosner, A. Gary Frumberg,
Paul Hoffmann, Richard Higgins, Ronald Dintemann, Duncan Shirreff, Sydney Stein,
and Harvey Farber, each of whom did not timely file their respective Form 3
reports in 1996, and Mr. Frumberg who did not timely file four Form 4 reports in
1996.
15
<PAGE>
ITEM 10--EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid to or earned by the Company's Chairman of the Board and
President and the other four most highly compensated executive officers of the
Company (other than the Chairman of the Board and President) whose total annual
salaries and bonuses exceeded $100,000 for the year ended December 31, 1996 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS
ANNUAL ------------- PAYOUTS
COMPENSATION SECURITIES ----------------
------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS COMPENSATION(1)
- ----------------------------------------------------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Philip Rosner........................................ 1996 $ 235,000 $ 100,000( (3) $ 17,216
Chairman and President 1995 200,000 -- 16,001
1994 236,634 100,000( (3) 19,476
A. Gary Frumberg..................................... 1996 199,903 100,000( (3) 17,010
Executive Vice President 1995 164,000 -- 12,305
1994 200,000 100,000( (3) 12,181
Richard R. Higgins................................... 1996 150,000 -- 16,757
Executive Vice President 1995 5,769 -- 1,261
1994 -- -- --
Harvey Farber........................................ 1996 161,509 10,000 8,429
Senior Vice President-Flavor Development 1995 36,821 -- 1,850
1994 -- -- --
Ronald J. Dintemann.................................. 1996 134,085 75,000( (3) 22,580
Vice President-Operations 1995 97,176 -- 10,909
1994 105,423 75,000( (3) 10,387
</TABLE>
- ------------------------
(1) Represents Company reimbursed automobile expenses of such executive.
(2) On October 31, 1995, the Company's Board of Directors approved a resolution
which reduced the exercise prices of options granted under the Company's
1993 Option Plan, including to Messrs. Rosner, Frumberg and Dintemann,
subject to stockholder approval, and options granted in April 1994 to
certain of the Company's directors, executive officers and employees. In
October 1996, stockholder approval was obtained with respect to such
reductions at the Company's Special Meeting of the shareholders held on
October 30, 1996. See "--Option Grants in 1996"
(3) Represents those stock options set forth in footnote (2) of this table which
the Company granted to the respective executive officers in 1994. The
exercise prices of such options were reduced by the Company in 1995, subject
to shareholders approval. See "--Option Grants in 1996"
16
<PAGE>
OPTION GRANTS IN YEAR 1996
The following table sets forth certain information concerning individual
option grants or the repricing of options during the year ended December 31,
1996 to each of the Named Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENTAGE OF TOTAL APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED YEAR(1) PER SHARE DATE 5% 10%
- ---------------------------------- --------- ------------------- ----------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Philip Rosner..................... 100,000 20.3% $ .64 4/8/99 $ 24,000 $ 66,000
A. Gary Frumberg.................. 100,000 20.3% $ .64 4/8/99 $ 24,000 $ 66,000
Ronald J. Dintemann............... 75,000 15.2% $ .58 4/8/04 $ 22,500 $ 54,000
</TABLE>
- ------------------------
(1) In 1994, the Company granted options to purchase 492,500 shares of Common
Stock to employees under the 1993 Option Plan. The total percentage is based
upon those options granted by the Company to employees in 1994 under the
1993 Option Plan with exercise prices which were reduced in 1996. Such
percentage excludes option grants by the Company in 1996 for an aggregate of
120,000 shares of Common Stock.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the Securities and Exchange Commission and do not represent the
Company's estimate or projection of future Common Stock prices.
AGGREGATE OPTION EXERCISES IN YEAR 1996 AND 1996 YEAR-END OPTION VALUES
The following table provides certain information regarding stock option
ownership and exercises by the President and the Named Executive Officers, as
well as the number and assumed value of exercisable and unexercisable options
held by those persons at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT DECEMBER 31, 1996 DECEMBER 31, 1996 ($)
NAME EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------- ----------------- --------------- ----------------------------- -----------------------
<S> <C> <C> <C> <C>
Philip Rosner........................ -- -- 50,000/50,000 43,000/43,000
A. Gary Frumberg..................... -- -- 50,000/50,000 43,000/43,000
Harvey Farber........................ -- -- 0/10,000 0/3,500
Ronald J. Dintemann.................. -- -- 37,500/37,500 34,500/34,500
</TABLE>
- ------------------------
(1) Value of exercisable "in-the-money" options is equal to the difference
between the closing bid price per share of the Common Stock on the TSE at
December 31, 1996 (U.S. $1.50) and the option exercise price per share (as
reduced) multiplied by the number of shares subject to options.
EMPLOYMENT AGREEMENTS
In October 1995, the Company entered into five-year employment agreements
with Messrs. Rosner, Frumberg and Hoffmann which provide such executives with
annual salaries (adjustable in accordance with the Consumer Price Index) of
$235,000, $200,000 and $135,000, respectively. Each agreement contains, among
other things, customary termination and confidentiality provisions.
17
<PAGE>
In October 1995, the Company entered into a three-year employment agreement
with Mr. Farber. Pursuant to the employment agreement, Mr. Farber is entitled to
receive an annual salary of $160,000. In addition, the employment agreement
provides that Mr. Farber is entitled to an annual bonus, payable at the sole
discretion of the Company.
In December 1995, the Company entered into an employment agreement with Mr.
Higgins. Pursuant to the employment agreement, Mr. Higgins is entitled to
receive an annual salary of $150,000 plus an amount, each year, equal to 2% of
the Company's sales produced but not generated by the Seafla Division in that
year. However, Mr. Higgins' annual compensation is not to exceed Mr. Rosner's
annual compensation or $200,000, whichever is higher. Pursuant to the Seafla
Acquisition, Mr. Higgins also received an aggregate of 750,000 restricted shares
of Common Stock. See "Higgins' Restricted Shares."
In January 1996, the Company entered into a five-year employment agreement
with Ronald J. Dintemann with an annual salary (adjustable in accordance with
the Consumer Price Index) of $135,000 per annum. The agreement contains, among
other things, customary termination and confidentiality provisions.
On August 2, 1996, the Company entered into a three-year employment
agreement with Joseph A. Gemmo to serve as the Company's Vice President and
Chief Financial Officer effective August 19, 1996. Pursuant to such agreement,
Mr. Gemmo is paid an annual salary of $115,000 and received an option to
purchase 100,000 shares of the Company's Common Stock. In addition, the
employment agreement provides that Mr. Gemmo is entitled to an annual bonus,
payable at the sole discretion of the Company.
CONSULTING AGREEMENT
In October 1995, the Company entered into a one-year consulting agreement
with Strategic Growth International, Inc. ("SGI"), pursuant to which SGI, on
behalf of the Company, agreed to (A) arrange and conduct meetings with the
professional investment community and investor groups, (B) develop and implement
a comprehensive investor relations program, and (C) provide professional staff
services to assist the Company in carrying out its programs and objectives (the
"Consulting Agreement"). Under the Consulting Agreement, the Company pays SGI a
retainer fee of $8,000 per month plus reasonable expenses and issued to SGI
warrants (the "Warrants") to purchase an aggregate of 600,000 shares of Common
Stock at an initial exercise price of $0.56, the market price of the Common
Stock on the TSE on the date of issuance, subject to adjustment in certain
circumstances pursuant to the terms and conditions set forth in the Warrant
Agreement dated as of October 25, 1995, as amended (the "Warrant Agreement").
Under the Warrant Agreement, the Company retained the right, exercisable at
its option at any time after December 31, 1999, to redeem all, but not part, of
the Warrants upon not less than thirty (30) days notice to the holder thereof,
at a redemption price of one cent ($.01) per Warrant, in the event that the
average trading price on the TSE of the Company's Common Stock equals or exceeds
Cdn. $1.50 for 30 consecutive trading days prior to the date of such notice. The
Warrant Agreement expires on October 24, 2000.
In October 1996, the Consulting Agreement expired by its terms. The Company
has elected to continue to pay SGI for its services under the Consulting
Agreement pursuant to its terms on a month to month basis, subject to
cancellation at any time.
DESCRIPTION OF THE 1993 OPTION PLAN
In November 1993, the Company adopted the 1993 Option Plan (the "1993 Plan")
permitting the Company to grant options to its employees to purchase up to
500,000 shares of Common Stock. The options granted under the 1993 Plan may be
exercised during the ten year period after they are granted, at an exercise
price equal to the mean between the high and low selling prices of the Company's
Common Stock on the TSE on the date of grant. Nevertheless, options granted to
any person who beneficially owns ten percent (10%) or more of the Common Stock
may be exercised only until the fifth anniversary of the
18
<PAGE>
date of the grant and must be granted at an exercise price equal to 110% of the
market price at the date of the grant.
OPTIONS GRANTED UNDER THE 1993 OPTION PLAN
On April 8, 1994, the Company granted options to purchase an aggregate of
492,500 shares of Common Stock to 71 employees. Of such amount, (A) ten-year
options were granted to purchase 289,500 shares of Common Stock to 66 employees
in the United States (including options for 75,000 shares to Mr. Hoffmann, the
Company's Secretary and Treasurer) at an exercise price of U.S. $1.38, (B)
ten-year options to purchase 3,000 shares of Common Stock were granted to three
employees in Canada at the equivalent exercise price of Cdn. $1.90 and (C)
five-year options to purchase 100,000 shares of Common Stock at an exercise
price of U.S. $1.52 were granted to each of Philip Rosner and A. Gary Frumberg,
each of whom beneficially owned at least 10% of the Common Stock at the time of
grant. In each instance, 25% of the options become exercisable on each of the
first four anniversaries of the grant date. The options granted to Messrs.
Rosner, Frumberg, Hoffmann and Dintemann constituted 71% of the options granted
to the Company's employees in 1994. As of April 8, 1997, no options have been
exercised by Messrs. Rosner, Frumberg, Hoffmann or Dintemann.
On April 8, 1994, the Company granted ten-year options (the "1994 Option
Grants") to purchase 100,000 shares of Common Stock at an exercise price of U.S.
$1.38 to each of Seth H. Dubin and Sydney Stein, both of whom were then
directors, but not employees, of the Company. The options were granted at the
market price on the date of grant.
On November 14, 1994, Mr. Dubin resigned as a Director and exercised his
option in full before it expired at the reduced exercise price, as determined by
the Board of Directors.
On October 30, 1995, the Board of Directors reduced the exercise prices of
all outstanding options granted under the 1993 Option Plan and the 1994 Option
Grants from U.S. $1.38 per share to U.S. $.58 per share with respect to options
granted to employees, officers or directors of the Company who are not
beneficial owners of 10% or more of the Common Stock, and from U.S. $1.52 per
share to U.S. $.64 per share with respect to options granted to employees,
officers or directors who beneficially own 10% or more of the Common Stock.
The Company's Board of Directors decided to reduce the exercise prices of
all outstanding options in order to bring the exercise prices more in line with
the prevailing prices of the Company's Common Stock. The reduced exercise prices
approved by the Company's Board of Directors were based on the downward trend in
the price of the Company's Common Stock during the three quarterly periods
immediately preceding its decision. In addition, the reduced exercise prices are
consistent with the average of the high and low selling prices of the Company's
Common Stock on the TSE during the quarterly period in which such decision was
made.
DESCRIPTION OF THE 1996 OPTION PLAN
The following is a summary of the principal features of the 1996 Option
Plan. This summary is qualified in its entirety by reference to the specific
provisions of the plan.
ADMINISTRATION OF THE 1996 OPTION PLAN. The 1996 Option Plan may be
administered by the Board of Directors or by a committee (the "Committee") of
non-employee members of the Company's Board of Directors, none of whom is
eligible at any time for the grant of Options under the 1996 Option Plan and
each of whom is a "non-employee director" within the meaning of Rule 16b-3
promulgated under the Exchange Act and an "outside director" within the meaning
of Treasury Regulation Section 1.162-27(e)(3). The Committee is authorized to
interpret the 1996 Option Plan, adopt and amend rules and regulations relating
to the 1996 Option Plan. All Options must be evidenced by a written agreement.
SHARES AVAILABLE. Under the 1996 Option Plan, the maximum number of shares
of Common Stock that may be subject to Options may not exceed an aggregate of
1,000,000 shares. The maximum number of shares may be adjusted in certain
events, such as a stock split, reorganization or recapitalization.
19
<PAGE>
ELIGIBILITY. Employees (including officers and directors who are employees)
of the Company or its subsidiaries are eligible for the grant of Incentive
Options under the 1996 Option Plan. Directors who are not employees or officers
are not eligible to receive Incentive Options. Options may also be granted to
other persons, provided that such options shall be Non-Qualified Options. In the
event of Incentive Options, the aggregate fair market value (determined at the
time the Option is granted) of the Common Stock with respect to which Incentive
Options become exercisable for the first time by the Option holder (i.e., vest)
during any calendar year cannot exceed $100,000. This limit does not apply to
Non-Qualified Options. To the extent an Option that otherwise would be an
Incentive Option exceeds this $100,000 threshold, it will be treated as a
Non-Qualified Option.
EXERCISE PRICE OF OPTIONS. The Company will receive no monetary
consideration for the grant of Options under the 1996 Option Plan. In case of an
Incentive Option, the exercise price cannot be less than the fair market value
(as defined in the 1996 Option Plan) of the Common Stock on the date the Option
is granted and, if an optionee is a shareholder who beneficially owns 10% or
more of the outstanding Common Stock, the exercise price of Incentive Options
shall be determined by the Company's Board of Directors or the Committee but may
not be less than 110% of the fair market value of the Common Stock. The exercise
price of Options will be adjusted in certain events, such as a stock split,
reorganization or recapitalization.
PAYMENT UPON EXERCISE OF OPTIONS. Payment for shares purchased by
exercising an Option is to be made by cash or check, or by any other means which
the Board of Directors determines are consistent with the purposes of the 1996
Option Plan and with applicable laws and regulations.
TERM OF OPTIONS. The term of an Option cannot exceed ten years and, in the
case of an optionee who owns 10% or more of the outstanding Common Stock, cannot
exceed five years.
TERMINATION OF EMPLOYMENT. Individual option agreements generally will
provide that the Options will expire upon termination of employment except that
(A) in the case of termination that it is not for cause or otherwise
attributable to a breach by the optionee of an employment or confidentiality or
non-disclosure agreement, the Option will be exercisable for three months after
termination to the same extent that it was exercisable prior to termination, (B)
in the case of termination due to disability, the Option will be exercisable for
one year after termination (or within such lesser period as may be specified in
the applicable option agreement) to the same extent that it was exercisable
prior to termination, and (C) in the case of death while in the employ of the
Company or within the three month period referred to in (A), the Option will be
exercisable for one year after death (or within such lesser period as may be
specified in the applicable option agreement). After the death of an optionee,
the Option is exercisable by the legal representative of the optionee or by the
person that acquired the Option by reason of the death of the Optionee.
NON-TRANSFERABILITY OF OPTIONS. Options are not transferable by the
optionee except by will or by the laws of descent and distribution. The
disposition of shares acquired pursuant to the exercise of an Option will be
subject to any applicable restrictions on transferability imposed by Federal and
state securities laws and the Commission's regulations.
EFFECTIVE DATE. The 1996 Option Plan was adopted by the Board of Directors
and was subsequently approved by the Shareholders at the Special Meeting held on
October 30, 1996.
DURATION OF THE 1996 OPTION PLAN. The 1996 Option Plan will terminate
automatically and no Options may be granted more than ten years after the date
the 1996 Option Plan was approved by the Company's Board of Directors. The 1996
Option Plan may be terminated at any prior time by the Board of Directors.
Termination of the 1996 Option Plan will not affect Options that were granted
prior to the termination date.
AMENDMENTS OR MODIFICATIONS. The 1996 Option Plan may be amended or
modified from time to time by the Company's Board of Directors, subject to any
required regulatory approval: however, if at any time the approval of the
shareholders of the Company is required under Section 422 of the Code or Rule
16b-3 under the Exchange Act, the Board of Directors may not effect such
modification or amendment without such approval.
20
<PAGE>
ITEM 11--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 8, 1997
regarding the beneficial ownership of Common Stock by (A) each person known by
the Company to own beneficially more than 5% of the Common Stock, (B) each
director of the Company, (C) each of the Named Executive Officers, and (D) all
executive officers and directors of the Company as a group (10 persons).
`
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
NAME BENEFICIALLY OWNED (1) OWNED
- --------------------------------------------------------------------------------------- -------------------------- ------------
<S> <C> <C>
Philip Rosner(2)....................................................................... 2,450,465(3)(4) 19.9%
A. Gary Frumberg(2).................................................................... 1,426,999(3) 11.6%
Scott Cunningham....................................................................... -- --
Sydney Stein........................................................................... 100,000(6) *
Duncan Shirreff........................................................................ 1,000 *
Richard R. Higgins(7).................................................................. 931,500 7.6%
Ronald J. Dintemann.................................................................... 165,361(5) 1.3%
Harvey Farber.......................................................................... 3,700(8) *
All directors and executive officers as a group (9).................................... 5,231,168 42.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, to the Company's knowledge the nature of the
beneficial ownership for all shares of Common Stock listed above is sole
voting and investment power.
(2) The business address of Messrs. Rosner and Frumberg is 10 Edison Street
East, Amityville, New York 11701.
(3) Includes five-year options to purchase 75,000 shares of Common Stock granted
on April 8, 1994 to Messrs. Rosner and Frumberg and excludes options to
purchase an additional 25,000 shares that have not yet vested.
(4) Includes 36,438 shares of Common Stock held by Mr. Rosner's wife. Mr. Rosner
disclaims beneficial ownership of the shares held by his wife.
(5) Includes ten-year options to purchase 56,250 shares of Common Stock granted
to Mr. Dintemann on April 8, 1994 and excludes options to purchase an
additional 18,750 shares that have not yet vested.
(6) Represents ten-year options to purchase 100,000 shares of Common Stock
granted to Mr. Stein on April 8, 1994.
(7) The business address of Mr. Higgins is 999 Tech Drive, Milford, Ohio 45150.
(8) Includes ten-year options to purchase 2,500 shares of Common Stock granted
to Mr. Farber on January 23, 1996 and excludes options to purchase an
additional 7,500 shares that have not yet vested.
(9) Includes shares beneficially owned and options exercisable within 60 days of
April 8, 1997 by Philip Rosner, A. Gary Frumberg, Scott Cunningham, Sydney
Stein, Duncan Shirreff, Ronald J. Dintemann, Richard Higgins, Joseph A.
Gemmo, Harvey Farber and Paul Hoffman.
ESCROW
In connection with the Company's initial public offering of 4,670,000 shares
of Common Stock in Canada and pursuant to the requirements of the Ontario
Securities Act and the TSE, Messrs. Rosner and Frumberg placed 2,157,077 and
1,427,999 shares of Common Stock, respectively, in escrow with the Montreal
Trust Company of Canada. While in escrow, the shares may not be sold,
transferred or pledged
21
<PAGE>
without the consent of the Ontario Securities Commission except upon the death
or bankruptcy of the shareholder. Pursuant to the escrow agreement, 10% of the
shares were released from escrow on October 26, 1994, 20% were released on
October 26, 1995 and another 20% were released on October 26, 1996. In addition,
20% of the escrowed shares will be released on October 26, 1997 and 30% will be
released on October 26, 1998.
HIGGINS' RESTRICTED SHARES
In December 1995, the Company consummated the Seafla Acquisition and in
connection therewith, Richard R. Higgins, Seafla's president received 750,000
shares of restricted Common Stock under the terms of his employment agreement.
None of the shares issued to Mr. Higgins may be sold in the United States or to
United States persons until December 7, 1998.
22
<PAGE>
ITEM 12--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
On December 6, 1995, the Company consummated the Seafla Acquisition. As
consideration in such transaction, the Company paid $3,000,000 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 was payable on January 1, 1997 and
the remaining four installments were payable on each January 1 thereafter
through 2001. The Seafla Note bears interest at the rate of 12% per annum.
Concurrently with the closing of the acquisition, the Company entered into a
five-year employment agreement with Mr. Higgins, the President of Seafla, to be
the President of the Company's Seafla Division. The Company funded the cash
portion of the Seafla Acquisition purchase price through bank borrowings of
$3,500,000.
In connection with the Seafla Acquisition, the Company assumed the lease of
Seafla's 37,000 square foot facility in Milford, Ohio, with a term expiring in
2014. The owner of this leased facility is a partnership in which Mr. Higgins is
a partner. The annual rental paid by the Company in respect of this facility is
$192,000. In connection with the Seafla Acquisition, the Company obtained a
report of an independent appraisal firm which concluded that the rental paid by
the Company is at or very close to market value.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding loans made by
the Company to its directors and executive officers which were outstanding the
fiscal year ended December 31, 1996 (collectively, the "Loans"). As of April 8,
1997, the aggregate indebtedness owed to the Company pursuant to the Loans was
$279,936, including accrued interest thereon. The Loans are unsecured, bear
interest at a rate of 8% per annum and are due in installments of principal and
interest through December 31, 1999.
TABLE OF INDEBTEDNESS OF DIRECTORS
AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
AMOUNT
AMOUNT OUTSTANDING OUTSTANDING
INVOLVEMENT AS OF AS OF
NAME AND OF DECEMBER 31, APRIL 8,
PRINCIPAL POSITION ISSUER 1996(1) 1997(1)
- --------------------------------------------------------- ------------- ------------------ ------------------
<S> <C> <C> <C>
Philip Rosner............................................ Lender $ 192,361 $ 192,937
A. Gary Frumberg......................................... Lender $ 88,650 $ 86,999
</TABLE>
- ------------------------
(1) Includes accrued interest.
23
<PAGE>
ITEM 13--EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed below are filed as part of this Annual Report on
Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------- --------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Certificate of Incorporation and By-Laws. (A)
10.1 Lease for Property in Amityville, New York. (A)
10.2 1993 Employee Stock Option Plan. (A)
10.3 Seafla Inc. Asset Purchase Agreement dated December 6, 1995. (B)
10.4 Purchase Agreement, dated as of October 17, 1996, between the Company and the Purchasers listed (D)
herein.
10.5 General Security Agreement, dated as of October 17, 1996, between the Company and the Purchasers (D)
listed therein.
10.6 Class A Warrant Certificates. (D)
10.7 Class B Warrant Certificates. (D)
10.8 Letter Agreement, dated as of November 1, 1996, by and between the Company and the Purchasers (D)
listed therein.
10.9 Escrow Agreement relating to shares of Messrs. Rosner and Frumberg. (A)
*10.10 Amendment to Amended and Restated Promissory Note.
*10.11 Recognition, Subordination & Limited Waiver Agreement, dated October 17, 1996, by and among the
Company, North Fork Bank and the Purchasers under the Purchase Agreement dated October 17, 1996.
*10.12 Northfork Bank Consolidated, Modified Revolving Credit Note, dated October 22, 1996.
*10.13 Waiver and Amendment, dated April 9, 1997 between North Fork Bank and the Company.
*10.14 Amendment to Consolidated, Modified Revolving Note.
*10.15 Warrant Certificate to North Fork Bank.
16.1 Letter dated June 11, 1996 from Coopers & Lybrand, L.L.P. (C)
*21.1 Subsidiaries.
*23.1 Consent of Tabb, Conigliaro & McGann, P.C.
*27. Financial Data Schedule.
</TABLE>
- ------------------------
(A) Incorporated by reference to the Company's Registration Statement on Form
10-SB (File No. 0-26682) filed with the Commission on August 28, 1995.
(B) Incorporated by reference to the Company's Report on Form 8-K filed with the
Commission on December 20, 1995.
(C) Incorporated by reference to the Company's Report on Form 8-K, filed with
the Commission on June 12, 1996.
(D) Incorporated by reference to the Company's Report on Form 8-K filed with the
Commission on November 4, 1996.
* Filed herewith.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1996:
1. Report on Form 8-K, filed with the Commission on November 4, 1996.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By: /s/ JOSEPH A. GEMMO
-----------------------------------------
Joseph A. Gemmo
Dated: April 17, 1997 Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ PHILIP ROSNER President and Director
- ------------------------------ (Principal Executive April 17, 1997
Philip Rosner Officer)
/s/ A. GARY FRUMBERG Executive Vice President
- ------------------------------ and Director April 17, 1997
A. Gary Frumberg
/s/ RICHARD R. HIGGINS Executive Vice President
- ------------------------------ and Director April 17, 1997
Richard R. Higgins
Vice President and Chief
/s/ JOSEPH A. GEMMO Financial Officer
- ------------------------------ (Principal Financial and April 17, 1997
Joseph A. Gemmo Accounting Officer)
/s/ PAUL E. HOFFMANN Treasurer and Secretary
- ------------------------------ April 17, 1997
Paul E. Hoffmann
/s/ SYDNEY STEIN Director
- ------------------------------ April 17, 1997
Sydney Stein
/s/ DUNCAN SHIRREFF Director
- ------------------------------ April 17, 1997
Duncan Shirreff
/s/ SCOTT M. CUNNINGHAM Director
- ------------------------------ April 17, 1997
Scott M. Cunningham
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Technology Flavors & Fragrances, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Technology
Flavors & Fragrances, Inc. and Subsidiary as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Technology Flavors & Fragrances, Inc. and Subsidiary at December 31, 1996, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG L.L.P.
Melville, New York
March 25, 1997, except for
Note 10, as to which the
date is April 7, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Technology Flavors & Fragrances, Inc.
We have audited the accompanying consolidated balance sheet of Technology
Flavors & Fragrances, Inc. as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of the
Company's wholly-owned Seafla Division acquired on December 6, 1995, which
statements reflect total assets of $4,442,721 as of December 31, 1995, and total
revenues of $310,299 for the period December 6, 1995 through December 31, 1995.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for the
Seafla Division, is based solely on the report of the other auditors.
We conducted our audit 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 audit, and the report of the other auditors, provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Technology Flavors &
Fragrances, Inc. as of December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND, L.L.P.
Melville, New York
March 25, 1996
F-2
<PAGE>
To the Board of Directors
Technology Flavors & Fragrances, Inc.
Amityville, NY
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Seafla (a division of
Technology Flavors & Fragrances, Inc.) as of December 31, 1995 and the related
statements of income and cash flows for the period from inception (December 7,
1995) to December 31, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Seafla at December 31, 1995,
and the results of its operations and its cash flows for the period from
inception (December 7, 1995) to December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ TABB, CONIGLIARO & McGANN, P.C.
New York, NY
March 1, 1996
F-3
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 233,566 $ 467,134
Receivables (less allowance for doubtful accounts of $150,000 in 1996 and
$139,000 in 1995) (Note 4)..................................................... 3,529,997 2,653,731
Inventories (Note 5)............................................................. 4,025,586 3,420,254
Prepaid expenses and other current assets........................................ 97,617 195,287
------------- -------------
Total current assets........................................................... 7,886,766 6,736,406
Fixed assets, net (Note 6)......................................................... 1,401,062 1,480,101
Intangible assets, net (Note 7).................................................... 6,205,754 6,812,137
Other assets....................................................................... 328,670 387,787
Notes receivable from related parties (Note 8)..................................... 281,011 316,774
------------- -------------
Total assets................................................................... $ 16,103,263 $ 15,733,205
------------- -------------
------------- -------------
LIABILITIES
Current liabilities:
Accounts payable................................................................. $ 2,907,558 $ 2,318,968
Accrued expenses................................................................. 939,636 288,245
Notes payable (Note 9)........................................................... -- 1,100,000
Current portion of long-term debt (Note 10)...................................... 19,078 52,000
------------- -------------
Total current liabilities...................................................... 3,866,272 3,759,213
Long-term debt (Note 10)........................................................... 6,840,529 4,388,019
Deferred rent payable.............................................................. 22,007 12,479
------------- -------------
10,728,808 8,159,711
Commitments (Note 12)
STOCKHOLDERS' EQUITY
Common stock:
$.01 par value, authorized 20,000,000 shares, issued 11,993,406 and 12,166,706
shares, respectively........................................................... 119,934 121,667
Paid-in capital.................................................................... 9,409,706 9,457,251
Accumulated deficit................................................................ (3,827,890) (1,290,277)
Unearned compensation arising from stock awards.................................... (317,295) (398,306)
Treasury stock at cost--36,438 and 409,738 shares of common stock, respectively.... (10,000) (316,841)
------------- -------------
Total stockholders' equity................................................... 5,374,455 7,573,494
------------- -------------
Total liabilities and stockholders' equity................................... $ 16,103,263 $ 15,733,205
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net sales.......................................................................... $ 21,017,960 $ 15,191,848
Cost of sales...................................................................... 13,155,260 9,358,590
------------- -------------
Gross profit................................................................. 7,862,700 5,833,258
------------- -------------
Operating expenses:
Selling.......................................................................... 3,543,130 2,457,955
General and administrative....................................................... 3,491,452 2,012,015
Research and development......................................................... 1,971,770 1,145,854
Amortization expense............................................................. 833,427 449,401
------------- -------------
Total operating expenses..................................................... 9,839,779 6,065,225
------------- -------------
Loss from operations............................................................... (1,977,079) (231,967)
Interest expense, net.............................................................. (557,660) (114,656)
------------- -------------
Loss before provision for income taxes............................................. (2,534,739) (346,623)
Provision for income taxes......................................................... (2,874) (19,906)
------------- -------------
Net loss........................................................................... $ (2,537,613) $ (366,529)
------------- -------------
------------- -------------
Net loss per common share.......................................................... $ (.21) $ (.03)
------------- -------------
------------- -------------
Weighted average shares outstanding................................................ 11,864,345 11,195,465
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNEARNED
COMMON STOCK COMPENSATION TREASURY STOCK
-------------------- PAID-IN (ACCUMULATED ARISING FROM --------------------
SHARES AMOUNT CAPITAL DEFICIT) STOCK AWARDS SHARES AMOUNT TOTAL
--------- --------- --------- ------------ ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994....................... 11,316,706 $ 113,167 $8,957,501 $ (923,748) (36,438) $ (10,000) $8,136,920
Shares issued upon exercise
of stock options......... 100,000 1,000 43,000 44,000
Shares issued in connection
with stock award......... 750,000 7,500 396,750 $(404,250)
Amortization of unearned
compensation............. 5,944 5,944
Warrants issued for
services................. 60,000 60,000
Purchase of treasury
stock.................... (373,300) (306,841) (306,841)
Net loss................... (366,529) (366,529)
--------- --------- --------- ------------ ------------- --------- --------- ---------
Balance at December 31,
1995....................... 12,166,706 121,667 9,457,251 (1,290,277) (398,306) (409,738) (316,841) 7,573,494
Shares issued in connection
with convertible debt
financing................ 100,000 1,000 105,063 106,063
Shares issued to broker in
connection with Seafla
acquisition.............. 100,000 1,000 150,500 151,500
Amortization of unearned
compensation............. 81,011 81,011
Cancellation of treasury
stock.................... (373,300) (3,733) (303,108) 373,300 306,841
Net loss................... (2,537,613) (2,537,613)
--------- --------- --------- ------------ ------------- --------- --------- ---------
Balance at December 31,
1996....................... 11,993,406 $ 119,934 $9,409,706 $(3,827,890) $(317,295) (36,438) $ (10,000) $5,374,455
--------- --------- --------- ------------ ------------- --------- --------- ---------
--------- --------- --------- ------------ ------------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Cash flows from operating activities:
Net loss.......................................................................... $ (2,537,613) $ (366,529)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization................................................... 1,146,126 713,457
Provision for bad debts......................................................... 150,664 123,100
Deferred rent................................................................... 9,528 6,277
Changes in assets and liabilities, net of effects of acquired business in 1995:
Accounts receivable........................................................... (1,026,930) (547,966)
Inventories................................................................... (605,332) (179,492)
Prepaid expenses and other current assets..................................... 47,670 122,826
Other assets.................................................................. (190,874) (57,394)
Accounts payable.............................................................. 740,090 342,905
Accrued expenses.............................................................. 651,391 (127,545)
------------- -------------
Net cash (used in) provided by operating activities............................. (1,615,280) 29,639
------------- -------------
Cash flows from investing activities:
Purchase of fixed assets.......................................................... (137,072) (44,537)
Notes receivable.................................................................. 35,763 (190,256)
Decrease (increase) in cash surrender value of life insurance policy.............. 307,785 (55,355)
Acquisition of Seafla, Inc........................................................ (47,764) (3,000,000)
Cash acquired in Seafla acquisition............................................... -- 86,125
------------- -------------
Net cash provided by (used in) investing activities............................. 158,712 (3,204,023)
------------- -------------
Cash flows from financing activities:
Proceeds from convertible debt financing.......................................... 1,500,000 --
Proceeds from long-term bank debt................................................. -- 3,500,000
Issuance of common stock.......................................................... -- 44,000
Repayment of long-term debt....................................................... (277,000) (101,333)
Purchase of treasury stock........................................................ -- (306,841)
------------- -------------
Net cash provided by financing activities....................................... 1,223,000 3,135,826
------------- -------------
Decrease in cash.................................................................... (233,568) (38,558)
Cash--beginning of year............................................................. 467,134 505,692
------------- -------------
Cash--end of year................................................................... $ 233,566 $ 467,134
------------- -------------
------------- -------------
Supplemental information:
Cash paid during the period for interest.......................................... $ 476,000 $ 103,000
------------- -------------
------------- -------------
Cash paid during the period for income taxes...................................... $ -- $ 4,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of non-cash investing and financing activities:
Equipment acquired under a capital lease obligation amounted to $97,000 in
1996.
In October 1996, the Company issued 100,000 shares of Common Stock
valued at $100,000 to a broker and issued 606,250 warrants to the
Convertible Note holders in connection with a convertible debt financing.
(See Note 10.)
In February 1996, the Company issued 100,000 shares of Common Stock
valued at $152,000 for services performed by a broker in connection with the
Company's December 1995 acquisition of Seafla, Inc. The issuance of shares
was in lieu of payment which had previously been accrued at December 31,
1995.
During 1995, the Company issued stock to an employee and recorded
unearned compensation aggregating $404,000.
In December 1995, the Company purchased the net assets of Seafla, Inc.
for cash and the issuance of a note payable for $888,019. Expenses of
$246,607 were accrued at December 31, 1995. (See Note 3.)
During 1995, the Company issued warrants with a value of $60,000 to a
service provider.
See accompanying notes.
F-8
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1. BACKGROUND AND DESCRIPTION OF BUSINESS
Technology Flavors & Fragrances, Inc. (the "Company") is a manufacturer of
flavor, fragrance and seasoning products used to provide or enhance flavors or
fragrances in a wide variety of consumer and industrial products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. The cost of raw materials is determined on the
specific identification method.
FIXED ASSETS
Machinery and equipment are recorded at cost and depreciated over their
estimated useful lives ranging from 5 to 10 years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the assets. Maintenance and repairs are charged to
expense as incurred and renewals and improvements, which extend the life of the
assets, are capitalized.
If events or changes in circumstances indicate that the carrying value of
the Company's long-lived assets may not be recovered, the Company estimates the
future net cash flows expected to result from the use of the asset. If this net
cash flow is less than the carrying value, the Company will recognize an
impairment loss. No such impairment loss has been recognized for any period
presented.
INTANGIBLE ASSETS
Amortization of intangible assets is provided on the straight-line method
over the estimated useful lives of the assets. Annually, the Company assesses
the realizability of its capitalized formulations based upon the yearly level of
product utilization and forecasted sales data (see Note 7).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount currently estimated to be realized.
F-9
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's Canadian
subsidiary are measured using local currency as the functional currency. Balance
sheet accounts are translated at the end of year exchange rate, and income
statement accounts are translated at the average rate of exchange prevailing
during the year. Translation adjustments arising from differences in exchange
rates between years are not material.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding in each period. The effect of including shares issuable upon
the assumed exercise of outstanding options and warrants or the conversion of
the subordinated note would be anti-dilative and, therefore, such effects have
not been included in the computation of net loss per share.
UNEARNED COMPENSATION
Unearned compensation is recorded as a separate component of stockholders'
equity for the fair market value of the shares at time of issuance and are
charged on a straight-line basis to general and administrative expenses over the
related vesting periods.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped and title legally
transfers to the purchaser.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
approximately $175,000 in 1996 and $14,000 in 1995.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, notes receivable and long-term debt are reflected
in the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value. The Company estimates the fair
value of its fixed rate note receivable and long-term debt by using a discounted
cash flow analysis.
RECLASSIFICATION
Certain prior year amounts have been reclassified in the financial
statements to be consistent with the current year presentation.
F-10
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
3. ACQUISITIONS
SEAFLA, INC.
Effective December 6, 1995, the Company acquired all of the assets and
assumed all of the liabilities of Seafla, Inc. ("Seafla") for $3,000,000 in cash
and a promissory note in the principal amount of $888,019 (see Note 10). Seafla
manufactures and distributes food seasonings and flavorings principally in the
midwest region of the United States. The acquisition has been accounted for by
the purchase method of accounting. The results of operations of Seafla are
included in the Company's statement of operations from the date of acquisition.
The total cost of the acquisition of $4,134,626, including expenses of
$246,607, was allocated on the basis of the fair value of assets acquired and
liabilities assumed and incurred. Approximately $1,416,000 was allocated to
tangible assets and $294,000 was allocated to liabilities. The excess of the
purchase price over the fair value of assets and liabilities assumed and
incurred of $3,012,478 was allocated to the following intangible assets:
<TABLE>
<S> <C>
Formulations.................................................... $1,750,000
Goodwill........................................................ 987,478
Covenant not to compete......................................... 150,000
Customer list................................................... 100,000
Trademarks...................................................... 25,000
</TABLE>
These intangible assets are being amortized on a straight-line basis over
their respective lives (see Note 7).
The unaudited pro forma financial information set forth below is based upon
the Company's historical consolidated statement of operations for the year ended
December 31, 1995, adjusted to give effect to the acquisition of Seafla as if it
occurred on January 1, 1995:
<TABLE>
<S> <C>
Net sales...................................................... $19,085,212
Net loss....................................................... $ (929,070)
Net loss per share............................................. $ ( .08)
</TABLE>
The unaudited pro forma information is presented for informational purposes
only and may not be indicative of what actual results of operations would have
been had the acquisition occurred on January 1, 1995, nor does it purport to
represent the results of operations for future periods.
F & C INTERNATIONAL, INC.
In July 1993, the Company purchased certain assets which included customer
lists and product formulas of F & C International, Inc.'s Fragrance Division and
a 5-year covenant not to compete for approximately $4,700,000 in cash. The
assets purchased include certain tangible assets with a fair market value of
$388,000, with the balance assigned to intangible assets to be amortized over 13
years, commencing August 1, 1993.
F-11
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
4. RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Trade............................................................ $3,222,157 $2,472,482
Alcohol drawbacks................................................ 154,430 165,726
Other............................................................ 153,410 15,523
------------ ------------
$3,529,997 $2,653,731
------------ ------------
------------ ------------
</TABLE>
In 1996 and 1995, the allowance for doubtful accounts increased by an
additional provision of $151,000 and $123,000, respectively, and was reduced by
bad debt write-offs of $140,000 and $66,000, respectively.
5. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials.................................................... $3,145,743 $2,333,653
Finished goods................................................... 879,843 1,086,601
------------ ------------
$4,025,586 $3,420,254
------------ ------------
------------ ------------
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Machinery and equipment.......................................... $1,595,536 $1,521,465
Leasehold improvements........................................... 685,596 640,349
Furniture and fixtures........................................... 584,918 473,343
------------ ------------
2,866,050 2,635,157
Less: accumulated depreciation and amortization.................. (1,464,988) (1,155,056)
------------ ------------
$1,401,062 $1,480,101
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense relating to fixed assets for the years
ended December 31, 1996 and 1995 was approximately $313,000 and $249,000,
respectively.
7. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
AMORTIZATION DECEMBER 31, DECEMBER 31,
PERIOD 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Goodwill.......................................... 15 $ 1,025,591 $ 987,478
Formulations...................................... 5-13 6,242,959 6,299,294
Organization costs................................ 5 44,640 77,520
Customer lists.................................... 5-13 360,000 360,000
Non-compete covenants............................. 4 150,000 355,000
Trademarks........................................ 5 39,095 39,095
------------- -------------
7,862,285 8,118,387
Less: accumulated amortization.................... (1,656,531) (1,306,250)
------------- -------------
$ 6,205,754 $ 6,812,137
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Amortization expense relating to intangible assets for the years ended
December 31, 1996 and 1995 was approximately $654,000 and $449,000,
respectively.
8. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties consist of amounts owed by two
executives and principal shareholders of the Company. The notes bear interest at
8% per annum and are due in monthly installments of principal and interest
through December 31, 1999.
9. NOTES PAYABLE
The Company had a line of credit from a bank for borrowings up to $2,000,000
at an interest rate based on the bank's prime lending rate plus 1/2% per annum.
As of December 31, 1995, $1,100,000 was outstanding under this facility. During
October 1996, this arrangement was consolidated into a long-term revolving
credit line facility (see Note 10).
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Revolving credit line borrowings bearing interest at 1 1/4% above
the bank's prime rate (8% at December 31, 1996) maturing
January 1999(a)................................................ $4,375,000 $3,500,000
Convertible subordinated notes payable bearing interest at 9% per
annum maturing October 1998(b)................................. 1,500,000 --
Note payable to the former Seafla shareholder bearing interest at
12% per annum payable in five equal annual installments
commencing March 1998(c)....................................... 888,019 888,019
Capital leases................................................... 96,588 --
Notes payable to former stockholders............................. -- 12,000
Non compete liability to former shareholders..................... -- 40,000
------------ ------------
6,859,607 4,440,019
Less: current maturities..................................... 19,078 52,000
------------ ------------
$6,840,529 $4,388,019
------------ ------------
------------ ------------
</TABLE>
(a) On October 22, 1996, the Company consolidated its existing $3,500,000
bank term loan and its $2,000,000 revolving line of credit into a $5,500,000
revolving credit line. Outstanding borrowings under the credit line are secured
by substantially all of the assets of the Company. The credit line requires the
maintenance of specified levels of tangible net worth, working capital and
limits on capital expenditures. On April 7, 1997, the bank has waived certain
covenant provisions for 1996 and has amended a covenant provision for 1997.
On April 7, 1997, in connection with the 1996 waivers and 1997 amendment,
the Company issued to the bank warrants to purchase 100,000 shares of the
Company's common stock at a price of $2.40 per share, subject to approval of the
TSE. The expiration of the warrants coincides with the expiration date of the
revolving credit line, January 15, 1999; however, if the credit line's maturity
is extended for any reason,
F-13
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
10. LONG-TERM DEBT (CONTINUED)
including any renewals, the expiration of the warrants will be automatically
extended, but not to exceed 5-years from date of issuance. 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.
The bank's "put" period will be for 120 days, to begin on the first
anniversary of the issuance of the warrants. The warrants contain anti-dilution
provisions and other benefits provided to the Convertible Subordinated Note
holders (see (b) below) in their warrants. 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. The "call" provision will be valid up to the first anniversary of the
issuance of the warrants. Should the Company exercise its "call" rights, the
bank will retain its right to "put" the remaining balance of the warrants to the
Company and be paid a fee of $10,000. In addition, the bank is requiring the
Company to exercise its option to convert the Convertible Subordinated Notes
into Common Stock pursuant to the terms of the financing agreement prior to
October 17, 1997.
(b) On October 17, 1996, the Company consummated a $1,500,000 Convertible
Subordinated Notes financing together with the issuance of stock purchase
warrants (see Note 13). 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 average market price for the ten trading days
immediately preceding the date of determination. 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,
as defined, at that time or the floor price of $1.50 per share, subject to
adjustments under certain circumstances as defined in the agreement. As
described in paragraph (a) above, the Company is required to exercise its option
to convert all of the Convertible Subordinated Notes to Common Stock prior to
October 17, 1997.
(c) In connection with the acquisition of Seafla, Inc. in December 1995, the
Company issued a promissory note of $888,019 payable in five annual installments
of $177,604 plus accrued interest, commencing January 1, 1997. In March 1997,
the note was amended to delay the initial principal payment plus accrued
interest for 1997 until March 31, 1998, while the accrued interest through
December 31, 1996 is payable in monthly installments from April 1997 through
January 1998. The remaining four principal installments plus accrued interest
shall be payable on the first day of January of each succeeding year after the
initial March 1998 payment until January 1, 2002.
11. INCOME TAXES
The income tax provision for the years ended December 31, 1996 and 1995
represents current state income taxes.
F-14
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
11. INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision (benefit) at the statutory rate
to income tax expense at the Company's annualized estimated effective tax rate
for the years ended December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed tax at federal statutory rate.............................. $ (861,811) $ (114,381)
State and local income taxes--net of federal tax benefit............ 1,897 9,345
Non-deductible officers' life insurance premiums and travel and
entertainment expenses............................................ 33,784 11,473
Limitation on net operating loss carry-forward...................... 787,766 113,469
Other............................................................... 41,238 --
----------- -----------
Provision for income taxes.......................................... $ 2,874 $ 19,906
----------- -----------
----------- -----------
</TABLE>
The components of deferred taxes as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Deferred tax assets
Accounts receivable............................................. $ 57,000 $ 52,820
Capitalized inventory costs..................................... 68,537 36,788
Depreciation.................................................... 3,079 12,546
Amortization.................................................... 25,049 72,059
Straight-line rent.............................................. 8,363 4,750
Net operating loss carryforward................................. 1,271,055 379,148
------------- -----------
1,433,083 558,111
Valuation allowance............................................... (1,433,083) (558,111)
------------- -----------
Net deferred tax asset............................................ $ -- $ --
------------- -----------
------------- -----------
</TABLE>
The Company has net operating loss carryforwards of approximately $3,345,000
which expire at various dates through 2012.
12. COMMITMENTS
LEASE OBLIGATIONS
During 1994, the Company received a rent abatement of $150,000 relating to
its Amityville, New York facility. As a result of the abatement, the Company
paid no rent for the first six months of the lease term and paid reduced rent
for the next seventeen months. The lease includes a provision for annual
increases in rental payments. The Company has recorded rent expense under the
straight-line method based on the minimum rent payable over the 12-year period
of the lease.
In connection with the Company's acquisition of Seafla, the Company assumed
the lease of Seafla's 37,000 square foot facility in Milford, Ohio. The owner of
this facility is a partnership in which Mr. Richard Higgins, the Company's
Senior Vice President, is a partner. The annual rental paid by the Company for
F-15
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
12. COMMITMENTS (CONTINUED)
this facility is $192,000. The Company has an option to purchase the
manufacturing facility on or before December 6, 2000. If the option is exercised
within the first two years, the purchase price will be $1,600,000. If the option
is exercised within the last three years, the purchase price will be the fair
market value of the property determined by independent appraisers.
Future minimum commitments under noncancelable operating leases as well as
the lease on the Seafla facility, which the Company has the option to purchase
at fair value, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 523,680
1998............................................................................ 452,288
1999............................................................................ 385,207
2000............................................................................ 334,571
2001............................................................................ 329,360
Thereafter...................................................................... 3,066,272
</TABLE>
Rental expense charged to operations for the years ended December 31, 1996
and 1995 was $606,022 and $374,855, respectively, of which approximately
$192,000 and $16,000 was paid to a related party in 1996 and 1995, respectively.
EMPLOYMENT CONTRACTS
The Company is obligated under employment contracts, providing for annual
compensation, expiring on various dates through December 2000. Certain contracts
also call for additional compensation based on sales volumes.
Future fixed compensation under these contracts, not including commissions
based upon sales volume, as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
<S> <C>
1997............................................................................ $ 1,465,000
1998............................................................................ 1,232,500
1999............................................................................ 1,057,100
2000............................................................................ 859,000
</TABLE>
13. STOCKHOLDERS' EQUITY
WARRANTS/STOCK GRANTS
In October 1996, the Company consummated a financing which provided for the
issuance of $1,500,000 of Convertible Subordinated Notes (see Note 10) together
with Class A Stock Purchase Warrants, which entitle the holders to purchase an
aggregate of 450,000 shares of Common Stock, and Class B Warrants to purchase an
aggregate of 156,250 shares of Common Stock. The Class A and Class B Warrants,
which expire in 5 years, are exercisable into shares of Common Stock at exercise
prices of $2.40
F-16
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
13. STOCKHOLDERS' EQUITY (CONTINUED)
per share and $2.70 per share, respectively, subject to adjustments under
certain circumstances pursuant to the financing. The value received for these
warrants of $6,063 was credited to paid-in capital in 1996.
In October 1996, the Company issued 100,000 shares of Common Stock to a
broker in connection with the financing for the Company's Convertible
Subordinated Notes. The value associated with these shares of Common Stock is
approximately $100,000.
In February 1996, the Company issued 100,000 shares of Common Stock valued
at $152,000 for services performed by a broker in connection with the Company's
December 1995 acquisition of Seafla, Inc. The issuance of shares was in lieu of
payment which had previously been accrued at December 31, 1995.
During 1995, the Company issued warrants to purchase 600,000 shares of
common stock at an exercise price of U.S. $0.50 per share to a service provider,
which expire in 5 years. The value ascribed to these warrants of $60,000 was
amortized to expense over a one-year vesting period. Approximately $50,000
related to these warrants was expensed in 1996 and $10,000 in 1995.
STOCK OPTION PLANS
The Company has granted stock options under two separate plans: the 1996
Option Plan and the 1993 Option Plan.
Under the 1996 and 1993 Option Plans, employees (including officers and
directors who are employees) of the Company or its subsidiary are eligible for
the grant of Incentive Options to purchase up to a maximum of 1,000,000 and
500,000 shares, respectively, which vest ratably over periods ranging from three
to five years. Options may also be granted to other persons, provided that such
options shall be Non-Qualified Options. In the case of an Incentive Option, the
exercise price cannot be less than the fair market value of the shares on the
date the Option is granted, and if an optionee is a shareholder who beneficially
owns 10% or more of the outstanding Common Stock, the exercise price of the
Incentive Options cannot be less than 110% of such fair market value. The
exercise price of Non-Qualified Options shall be determined by the Company's
Board of Directors or the Committee appointed by the Board of Directors.
During 1996, the stockholders ratified the October 1995 Board of Directors'
resolution to reduce the exercise prices of all outstanding options granted
under the 1993 Option Plan from $1.38 per share to $.58 per share, with respect
to options granted to employees, officers or directors of the Company who were
not beneficial owners of 10% or more of the Common Stock and from $1.52 per
share to $.64 per share with respect to options granted to employees, officers
or directors who beneficially own 10% or more of the Common Stock.
STOCK BASED COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"), requires use of option valuation models that were not
developed for use in valuing such stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underl ying stock on the date of grant, no compensation expense is recognized.
F-17
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
13. STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net income or loss and net income or loss
per share is required by Statement 123, and has been determined as if the
Company has accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Sholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.3%; no dividend yields; volatility
factor of the expected market price of the Company's Common Stock of 50%; and a
weighted-average expected life of the options of 6 years at December 31, 1996
and 1995.
The Black-Sholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Net loss as reported............................................ $ (2,537,613) $ (366,529)
Pro forma net loss.............................................. (2,574,512) (408,806)
Net loss per share as reported.................................. (.21) (.03)
Pro forma net loss per share.................................... (.22) (.04)
</TABLE>
FASB No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995. As a result, the pro forma compensation cost may not
be representative of that to be expected in future years.
Information as to options for shares of common stock granted as of December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVG. WEIGHTED AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- --------------- ---------- ---------------
Outstanding at beginning of year............................ 552,000 $ .60 692,500 $ 1.42
Granted..................................................... 120,000 1.91 -- --
Exercised................................................... -- -- (100,000) .44
Canceled.................................................... (42,500) .58 (40,500) 1.38
--------- ----------
Outstanding at end of year.................................. 629,500 .86 552,000 .60
--------- ----- ---------- -----
--------- ----- ---------- -----
Exercisable at end of year.................................. 304,750 213,000
--------- ----------
--------- ----------
Weighted average fair value of options granted during the
year...................................................... $ 1.13 $ .60
----- -----
----- -----
</TABLE>
F-18
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
13. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS OPTIONS REMAINING CONTRACTUAL LIFE
EXERCISE PRICE OUTSTANDING EXERCISABLE IN YEARS
- ---------------------------------------------------------------------- ----------- ----------- ----------------------------
<S> <C> <C> <C>
$.58-.64.............................................................. 509,500 304,750 5.3
1.15.................................................................. 20,000 -- 9.1
2.06.................................................................. 100,000 -- 9.6
----------- ----------- ---
629,500 304,750 6.1
----------- ----------- ---
----------- ----------- ---
</TABLE>
At December 31, 1996, 970,500 shares of common stock were reserved for the
future issuance of stock options.
14. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan covering all non-union employees
meeting certain age and length of service requirements, pursuant to Section 401K
of the Internal Revenue Code. Participants may contribute a percentage of
compensation, but not in excess of the maximum allowable by law.
The Plan provides for a matching contribution by the Company which is one
half of the amount contributed by the participant up to a maximum of 3%.
Matching contributions amounted to $74,775 and $56,317 for the years ended
December 31, 1996 and 1995, respectively. Employees vest in the employer
contribution at the rate of 25% per year.
15. OTHER INFORMATION
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily trade accounts receivable. Ongoing
credit evaluation of customers' financial condition are performed and generally
no collateral is required. Credit losses have typically been within management's
expectations.
At December 31, 1996 and 1995, five customers accounted for approximately
42% and 29% of the accounts receivable balance, respectively. For the years
ended December 31, 1996 and 1995, no one customer accounted for more than 10% of
the Company's net sales.
For the years ended December 31, 1996 and 1995, export sales were
approximately 29% and 28%, respectively, of total sales. The Company's export
sales are made to entities located primarily in Canada, South America and
Europe.
Cash and cash equivalent balances are held primarily at one financial
institution and may, at times, exceed the amount insurable. The Company believes
it mitigates its risks by investing in or through major financial institutions.
Recoverability of investment is dependent upon the performance of the issuer.
F-19
<PAGE>
EXHIBIT 10.10
AMENDMENT TO AMENDED AND
RESTATED PROMISSORY NOTE
Reference is made to that certain Promissory Note dated December 6, 1995,
as Amended and Restated on June 3, 1996, in the aggregate principal amount of
$888,019, by Technology Flavors & Fragrances, Inc. ("TFF"), to Seafla, Inc. (now
known as RRHDH, Inc., the "Payee") (the "Note"). The undersigned hereby agree
to amend the Note as follows:
1. The initial installment payment of $177, 603.80 due January 1, 1997,
plus $106,562 in interest accrued thereon from January 1, 1997 to December 31,
1997, shall be payable on March 31, 1998. Each additional installment payment
thereafter of $177, 603.80 plus accrued interest shall be payable on the first
day of January of each succeeding year thereafter until January 1, 2002, on
which date the balance due, if any, of principal and interest, will be paid.
2. In consideration for the foregoing, TFF agrees that all interest
accrued from December 6, 1995 through December 31, 1996, totaling $102,767,
shall be paid in nine (9) equal monthly installments of $10,000, on the
fifteenth day of each month commencing on April 15, 1997, with a final
installment of $12,767 to be paid on January 15, 1998.
3. Except as expressly set forth above, the remaining provisions of the
Note shall remain in full force and effect.
AGREED TO AND ACCEPTED THIS 26TH DAY OF MARCH, 1997.
RRHDH, INC. (F/K/A) SEAFLA, INC.) TECHNOLOGY FLAVORS &
FRAGRANCES, INC.
By: /s/ RICHARD HIGGINS By: /s/ PHILIP ROSNER
-------------------------------------- ------------------
Name: Richard Higgins Name: Philip Rosner
Title: President Title: President
<PAGE>
EXHIBIT 10.11
RECOGNITION, SUBORDINATION and
LIMITED WAIVER AGREEMENT
Agreement entered into as of the 17th day of October, 1996 by and among
Technology Flavors & Fragrances, Inc., a Delaware corporation with offices
located at 10 Edison Street East, Amityville, NY 11701 ("Borrower"), North Fork
Bank, a New York banking corporation with offices located 245 Love Lane,
Mattituck, New York 11952 ("Bank"), and each of the "Purchasers" (the
"Purchasers") from time to time party to the Purchase Agreement dated as of
October 17, 1996 by and among the Borrower and the Purchasers (the "Purchase
Agreement").
WHEREAS, the Borrower is currently indebted to the Bank under certain loan
obligations evidenced, in part, by an existing Term Loan Agreement dated
December 4, 1995 in the outstanding principal amount of $3,500,000 (the "Term
Loan"), and that certain existing Modified Revolving Credit Note dated as of
June 3, 1996 in the principal face amount of $2,000,000 and the current
outstanding principal amount of $1,450,000 (the "Existing Revolving Loan"); and
WHEREAS, the Borrower has requested that the Bank consolidate and modify
the terms and provisions of the Term Loan and the Existing Revolving Loan into a
single loan facility in the aggregate principal amount of $5,500,000 (the "New
Revolving Loan") (for purposes hereof, the Term Loan, the Existing Revolving
Loan and the New Term Loan are collectively referred to herein as the "Loan")
pursuant to a Consolidated, Modified Revolving Credit Note made by the Borrower
payable to the order of the Bank (the "New Note"); and
WHEREAS, the Borrower intends to enter into the Purchase Agreement pursuant
to which each Purchaser will purchase from the Borrower certain nine (9%)
percent Convertible Subordinated Notes (the "Subordinated Notes") and warrants
to purchase common stock of the Borrower, all as more particularly outlined in
that certain Purchase Agreement (the "Purchase Agreement"), a copy of which has
been provided to the Bank (the aforementioned transaction is referred to herein
as the "HVF Transaction"); and
WHEREAS, the obligations of the Borrower to the Purchasers will be
guaranteed by the Borrower's wholly-owned subsidiary, Technology Flavors &
Fragrances, Inc., an Ontario corporation (the "Guarantor"), pursuant to a
Guaranty substantially in the form of Exhibit E to the Purchase Agreement; and
WHEREAS, the obligations of the Borrower and the Guarantor to the
Purchasers will be secured by the collateral security described in the Security
Agreements substantially in the forms of Exhibits G and L, respectively, to the
Purchase Agreement; and
<PAGE>
WHEREAS, consummation of the HVF Transaction would violate, and be
prohibited by, certain covenants and restrictions imposed upon the Borrower in
the documents evidencing the Loan; and
WHEREAS, the Borrower and the Purchaser have requested that the Bank
consent to the HVF Transaction (including, without limitation, the Guaranty and
Security Agreements described above); and
WHEREAS, the documents evidencing the Loan include a negative covenant
whereby the Borrower is prohibited from making or suffering advances to
shareholders and/or officers in excess of $10,000 per year; and
WHEREAS, the Borrower has indicated to the Bank that it has made advances
to Philip Rosner and A. Gary Frumberg in violation of the foregoing covenant and
has requested that the Bank consent to said advances and waive the declaration
of a default based upon same; and
WHEREAS, the Bank has conditionally consented to the aforementioned
requests for the New Revolving Loan and to the HVF Transaction on those terms
and conditions set forth herein and in the commitment letter issued by the Bank
dated October 1, 1996;
NOW, THEREFORE, in consideration of the mutual covenants, obligations and
provisions set forth herein, and other good and valuable consideration, it is
hereby mutually agreed as follows:
1. Payment of any moneys by the Borrower to the Purchaser under the
terms of the Subordinated Notes, and the application of any assets of the
Borrower to the purchase, acquisition and/or retirement of the Subordinated
Notes, shall in all respects be subject to the terms hereof.
2. The Borrower agrees that it shall notify the Bank of any
intention to pay or apply, any moneys or assets, toward the obligations
evidenced by the Subordinated Notes no later than ten (10) days prior to the
date of said intended payment or application. The Notice required hereby shall
be accompanied by a signed written statement executed by an authorized officer
of the Borrower confirming that said payment or application will comply in all
respects with the terms and provisions hereof, together with all documentation
as shall be requested by the Bank in order to confirm that: (a) no Event of
Default (as defined in the New Note) has occurred in respect of the payment of
principal or interest under the Loan within the six (6) month period prior to
the date of said intended payment or application, (b) no Event of Default has
occurred with respect to the financial test covenants under the Loan within
fiscal quarter
<PAGE>
immediately preceding the date of said intended payment or application and
(c) said payment and/or application will not cause or constitute an Event of
Default under the Loan.
3. The Borrower and the Purchaser acknowledge and agree that no
payment of any moneys shall be made, nor shall any assets be applied to the
purchase or other acquisition and/or retirement of the Subordinated Notes in the
event that:
(a) In the event that the Bank shall at any time accelerate the
maturity of the Loan;
(b) In the event that the Bank shall have notified the Purchasers
prior to the date of said intended payment or application that an
Event of Default in the payment of principal or interest shall have
occurred under the Loan within the last six (6) months prior to the
date of such payment or application;
(c) In the event that the Bank shall have notified the Purchasers prior to
the date of said intended payment or application that an Event of Default
shall have occurred with respect to the financial test covenants under the
Loan within the fiscal quarter immediately preceding the date of such
payment or application, unless ninety (90) days shall have elapsed from the
date that the Bank shall have received notice of said intended payment and
the Bank shall not have accelerated the maturity of the Loan and/or
(d) In the event that the Bank shall have notified the Purchasers prior to
the date of said intended payment or application that said payment and/or
application (with respect to principal only) would cause or constitute an
Event of Default under the Loan. In the event that said payment would
cause or constitute an Event of Default under the Loan with respect to the
financial test covenants, the Borrower may, ninety (90) days after the Bank
shall have received notice of the intended payment, (i) make payment to the
Purchaser in such amount as shall not cause an Event of Default under the
Loan and (ii) pay the balance of moneys due to the Purchaser in twelve (12)
equal monthly installments on the first day of the next twelve (12) months
thereafter provided, however, that during said twelve (12) month period the
Bank shall not accelerate the maturity of the Loan for any Event of Default
(including any Event of Default caused by said payments) in which event all
such payments shall cease in accordance with subsection (a) hereof;
(e) Notwithstanding the foregoing, in no event shall any Purchaser be
prohibited from receiving and retaining amounts due and owing to such
Purchaser for any period exceeding 270 consecutive days from the date that
the Bank shall have first given notice to the Purchasers under (b), (c) or
(d) above, unless the Bank shall have accelerated the maturity of the Loan.
<PAGE>
For purposes of this paragraph, any such default as described herein shall
prohibit payment under the Subordinated Notes whether or not the Bank has
exercised its option to formally declare a default.
4. The Borrower and the Purchaser further acknowledge and agree that
the obligations of the Borrower to the Bank are secured by a first security
interest in all assets of the Borrower pursuant to a binding General Security
Agreement and subject UCC filings and that any security interest granted to the
Purchaser by the Borrower remains specifically subject and subordinate thereto.
5. Based upon the terms and conditions set forth herein and upon
consummation of the transaction relative to the New Revolving Loan, the Bank
consents to the HVF Transaction (including, without limitation, the Guaranty and
Security Agreement in favor of the Purchasers).
6. In the event that any moneys are paid, or any assets are applied,
toward or in payment of the Subordinated Notes in violation of this Agreement,
the Purchaser shall immediately deliver same to the Bank in the form received
(except for any endorsement or assignment where required by the Bank) for
application by the Bank to the Borrower's obligations under the Loan and until
so delivered, same shall be held in trust by the Purchaser for said purpose.
7. The Borrower represents that it shall in all respects utilize the
proceeds of the HVF Transaction solely for either (a) payment of the Loan or (b)
working capital purposes.
8. The Purchaser acknowledges that the Borrower and the Bank may
from time to time enter into agreements modifying, extending, renewing and/or
waiving certain terms and/or conditions of the Loan as shall hereafter be agreed
upon by both the Borrower and the Bank. The Purchaser agrees that no such
agreement or agreements shall in any way affect this Agreement and that (a) the
obligations of the Borrower to the Purchaser under the Subordinated Notes shall
remain subordinate to the obligations of the Borrower to the Bank under the
Loan, as modified, extended, renewed and/or waived, and (b) any security
interest granted by the Borrower to the Purchaser shall remain specifically
subordinate to that certain existing security interest granted by the Borrower
to the Bank.
9. The Bank hereby consents to those certain existing advances made
by the Borrower to Philip Rosner and/or A. Gary Frumberg, provided (a) the
aggregate principal amount of such advances is less than $40,000, and (b) all
such sums advanced shall be repaid to the Borrower in full no later than
December 31, 1996.
<PAGE>
10. The terms, covenants and provisions of this Agreement shall be
binding upon the successors and assigns of the parties hereto.
11. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York.
12. This Agreement (including this Section "12") may not be changed,
modified, amended, waived, discharged, abandoned or terminated except by a
written instrument executed by the party against whom enforcement of such
modification, amendment, waiver, discharge, abandonment or termination is
sought.
13. Any notice required hereunder shall be in writing and shall be
deemed sufficiently given or served if delivered in person or sent by registered
or certified mail, return receipt requested to the appropriate party (a) if to
the Borrower or the Bank, at their respective addresses specified in the
preamble hereto and (b) if to any Purchaser, to such Purchaser c/o The High View
Fund, L.P., 150 East 52nd Street, New York, New York 10022, Attention: Andrew
Brown, or, as to any party, to such other address as may be specified in a
notice given by such party to the other parties in the manner specified herein.
14. The parties hereto by the execution hereof, consents to the
jurisdiction of the Courts of New York State in connection with any dispute or
controversy that may arise hereunder and to the venue of such action in the
Supreme Court of the State of New York, County of Suffolk.
15. The Limited waivers and consents on the part of the Bank as set
forth herein are made as an accommodation to, and at the requests of, the
Borrower and/or the Purchasers. Nothing herein is to be interpreted as imposing
any obligation on the Bank to waive, or consent to, any violation of any
covenant or provision set forth in the documents evidencing the Loan except as
expressly set forth herein. This Agreement is specifically limited to its terms.
16. Failure or delay on the part of the Bank to pursue or enforce any
right hereunder shall not in any way be deemed a waiver of said right in any
other instance.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
NORTH FORK BANK
By: /s/ Bruce A. Salmon
_______________________________
Bruce A. Salmon, Vice President
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By: /s/ Philip Rosner
________________________
Philip Rosner, President
THE HIGH VIEW FUND, L.P.
By: High View Capital Corporation, General Partner
By: /s/
________________________
Managing Director
THE HIGH VIEW FUND
By: High View Asset Management Corp., its attorney-in-fact
By: /s/
________________________
Managing Director
<PAGE>
EXHIBIT 10.12
NORTH FORK BANK
CONSOLIDATED, MODIFIED REVOLVING CREDIT NOTE
BORROWER: TECHNOLOGY FLAVORS & FRAGRANCES, INC.
PRINCIPAL: $5,500,000 DATE: October 22, 1996
PROMISE TO PAY: The undersigned does hereby promise to pay to the order of
NORTH FORK BANK (the "Bank") at its offices at 245 Love Lane, Mattituck, New
York, or at any of its branches, the sum of FIVE MILLION FIVE HUNDRED THOUSAND
($5,500,000) DOLLARS or the aggregate unpaid principal amount of all advances
made to the undersigned by the Bank pursuant to the terms hereof, whichever
amount is less, plus interest thereon, from the date hereof in the manner set
below.
RATE AND PAYMENT: The Borrower shall pay to the Bank interest on the
outstanding principal balance hereof at that rate equal to one and one-quarter
(1.25%) percent in excess of that rate stated by the Bank to be its Prime Rate
from time to time in effect, payable monthly in arrears on the first (1st) day
of each month hereafter. This Note shall mature on January 15, 1999 on which
date all outstanding principal, interest and/or related charges due to the Bank
hereunder shall be due and payable. All interest payments shall be made by
automatic debit from an account maintained at the Bank in which Borrower shall
maintain balances sufficient to pay the monthly interest payments (currently
Account Number 3124011564).
Prime Rate as referred to herein shall refer to the rate of interest
determined or announced by the Bank from time to time as its prime rate and the
Prime Rate is not necessarily the lowest rate of interest charged by the Bank on
loans and other credit relationships. Each change in the Prime Rate shall effect
a simultaneous and corresponding change in the interest rate hereunder without
notice to the Borrower.
Payments shall be applied first to interest on unpaid principal balances to
the date payment is received by the Bank and then to reduction of principal.
Interest shall be calculated on a 360 day year and actual number of days
elapsed.
In addition to the foregoing, the Borrower shall pay to the Bank a fee equal
to one-quarter of one ( 1/4) percent of the unused portion hereof during the
immediately preceding quarter, payable quarterly in arrears commencing on
January 1, 1997 and on the first day of each April, July, October and January
thereafter until maturity.
<PAGE>
LOAN ADVANCES: The Borrower may borrow, repay in whole or in part, and
reborrow on a revolving basis an amount not to exceed an aggregate outstanding
principal balance in the amount of Five Million Five Hundred Thousand
($5,500,000) Dollars.
Notwithstanding anything to the contrary set forth herein, the outstanding
balance of all indebtedness from the Borrower to the Bank shall not exceed the
sum of the following by more than $250,000:
(a) Eighty-Five (85%) percent of the Borrower's Eligible Domestic
Accounts Receivable outstanding for less than ninety (90) days;
(b) Eighty-Five (85%) percent of the Borrower's Eligible Foreign
Accounts Receivable insured in a manner and by a company acceptable to the
Bank or backed by a Letter of Credit acceptable to the Bank (excluding
amounts due to the Borrower from Leo Salas);
(c) Thirty-Three (33%) percent of the Borrower's Eligible Inventory
(said 33% not to exceed One Million Five Hundred Thousand ($1,500,000)
Dollars);
(d) Fifty (50%) percent of the appraised fair market value of the
Borrower's machinery and equipment (as calculated by an appraiser selected
by the Bank); and
(e) For the period to expire on November 29, 1996, the additional sum of
ten (10%) percent of the net book value of the formulations owned by the
Borrower (said ten (10%) percent not to exceed $600,000).
During the term hereof, the Borrower shall submit to the Bank a monthly
Borrowing Base Certificate, in the bank-approved form for same, setting forth
the aforementioned calculation and confirming that the outstanding principal
balance of all indebtedness from the Borrower to the Bank does not exceed the
aforementioned limitation. In the event that said aggregate outstanding
principal balance of all indebtedness from the Borrower to the Bank hereunder
shall at any time exceed the specified amount, the Bank may, in its sole
discretion, (a) increase the interest rate applicable hereto by two (2%) percent
per annum, and/or (b) declare a monetary default hereunder.
2
<PAGE>
The Bank reserves the right to make or decline any request for an advance in
its sole discretion, provided such discretion is exercised in a commercially
reasonable manner, and may condition the availability of an advance upon, among
other things, the maintenance of a satisfactory financial condition. Borrower
authorizes the Bank to keep a record of the amounts and dates of all advances
and repayments hereunder, which record shall, in the absence of manifest error,
be conclusive as to the outstanding principal amount due hereunder; provided,
however, that the failure to record any advance or repayment shall not limit or
otherwise affect the obligation of Borrower under this Note.
The Borrower acknowledges that there is currently outstanding under the
terms of those certain notes consolidated herein the combined outstanding
aggregate principal balance of Four Million Fifty Thousand ($4,050,000) Dollars
and that only the sum of One Million Four Hundred Fifty Thousand ($1,450,000)
Dollars is available to the Borrower hereunder subject to those limitations
defined herein.
PREPAYMENT: Prepayment in whole or in part may be made at any time without
penalty. Any prepayment will be applied in inverse order of maturity and will
not defer the payment schedule.
DEFAULT INTEREST RATE: The unpaid principal sum due under this Note shall
bear interest at a rate equal to four (4%) percent above the rate set forth
above on and after the occurrence of any event of default and until the entire
principal sum hereof has been fully paid, both before and after the entry of any
judgment with respect to such event, but in no event shall the rate either
before or after the occurrence of an event of default exceed the highest rate of
interest, if any, permitted under applicable New York or Federal Law.
SECURITY: This Note is secured by:
(a) all accounts, accounts receivable, other receivables, contract
rights, chattel paper, general intangibles, instruments and documents, and
notes; any other obligations or indebtedness owed to Borrower from whatever
source arising; all rights of Borrower to receive any performance or any
payments in money or kind; all guaranties of the foregoing and security
therefor; all of the right, title and interest of Borrower in and with
respect to the goods, services, or other property that gave rise to or that
secure any of the foregoing or which are described in invoices and insurance
policies and proceeds relating thereto, and all rights of Borrower as an
unpaid seller of goods and services, including, but not limited to, the
rights to stoppage in transit, replevin, reclamation, and resale; and all of
the foregoing whether now owned or existing or hereafter created or
3
<PAGE>
acquired; any and all now owned or hereafter acquired inventory, goods,
merchandise, or other personal property, raw materials, parts, supplies,
work-in-process and finished products intended for sale, of every kind and
description, in the custody or possession, actual or constructive, of
Borrower, including such inventory as is temporarily out of the custody or
possession of Borrower, including insurance proceeds from insurance on any
of the above, all of the Borrower's interest in inventory described in
invoices, any returns upon any accounts and other proceeds, resulting from
the sale or disposition of any of the foregoing, including without
limitation, raw materials, work-in-process, and finished goods, (all of the
foregoing is collectively referred to herein as the "Collateral."); and
(b) all products of Collateral and all additions and accessions to,
replacements of, insurance or condemnation proceeds of, and documents
covering Collateral, all property received wholly or partly in trade or
exchange for Collateral, all leases of Collateral and all rents, revenues,
issues, profits and proceeds arising from the sale, lease, license,
encumbrance, collection, or any other temporary or permanent disposition, of
the Collateral or any interest therein.
The security interest granted to the Bank in the Collateral as described
herein is more fully set forth in that certain General Security Agreement dated
July 12 1993, previously amended and restated by that certain Amended and
Restated General Security Agreement dated December 4, 1995, and as further
restated and amended of even date herewith.
RIGHT OF OFFSET: If any payment is not made on time, or if the entire
balance becomes due and payable and is not paid, all or part of the amount due
may be offset out of any account or other property which the undersigned has at
the Bank without prior notice or demand.
LATE CHARGES: Undersigned will pay a charge of 4% of the amount of any
payment overdue more than ten (10) days (without taking into account any grace
period) at the time the late payment is made.
FINANCIAL STATEMENTS: Borrower shall furnish to the Bank the following:
(a) As soon as available, but in no event later than 120 days after the
end of each fiscal year, with annual reviewed financial statements with an
unqualified opinion, including balance sheets as of the last day of the
fiscal year and statements of income and retained earnings and changes in
financial condition for such fiscal year each prepared in accordance with
generally accepted accounting principles, consistently applied for the
period and prior periods by Ernst & Young, LLP, or by other independent
certified public accountants satisfactory to the Bank;
4
<PAGE>
(b) As soon as available, but in no event later than 60 days after the
end of each three (3) month period, quarterly financial statements,
including balance sheets and statements of income and retained earnings and
changes in financial condition for such semi-annual period each prepared in
accordance with generally accepted accounting principles, consistently
applied for the period and prior periods by independent certified public
accounts satisfactory to the Bank;
(c) Borrower shall furnish to the Bank a completed Borrowing Base
certificate along with an Accounts Receivable Aging Report by the 10th day
following the end of the previous month; and
(d) All other documents and/or information reasonably requested by the
Bank.
AFFIRMATIVE COVENANTS: The Borrower will, and with respect to the agreements
set forth in subsections (a) through (f) hereof, will cause each Subsidiary to:
(a) With respect to its properties, assets and business, maintain
insurance against loss or damage, to the extent that property, assets and
businesses of similar character are usually so insured by companies
similarly situated and operating like properties, assets or businesses with
responsible insurance companies satisfactory to the Bank, said insurance to
be assigned at closing to the Bank as its interests may appear;
(b) Duly pay and discharge all taxes or other claims which might become
a lien upon any of its properties except to the extent that such items are
being in good faith appropriately contested;
(c) Maintain, preserve and keep its properties in good repair, working
order and condition, and make all reasonable repairs, replacements,
additions, betterments and improvements thereto;
(d) Conduct its business in substantially the same manner and in
substantially the same fields as such business is now carried on and
conducted;
(e) Comply with all statutes, rules and regulations and maintain its
corporate existence;
(f) Permit the Bank to make or cause to be made, inspections and audits
of any books, records and papers of the Borrower and of any parent or
subsidiary and each endorser or Guarantor hereof and to make extracts
5
<PAGE>
therefrom at all such reasonable times and as often as the Bank may
reasonably require;
(g) Immediately give notice to the Bank that an Event of Default has
occurred or that an event which, with the giving of notice or lapse of time,
or both, would constitute an Event of Default, has occurred and specifying
the action which the Borrower has taken and proposes to take with respect
thereto.
NEGATIVE COVENANTS: During the term hereof the Borrower will not, and will
not permit any Parent or Subsidiary to:
(i) incur any indebtedness not in the ordinary course of business other
than that incurred with the Bank;
(ii) acquire all or any interest in any entity in excess of Fifty
Thousand ($50,000) Dollars without the prior written consent of the Bank;
(iii) make or suffer advances to affiliates, subsidiaries and/or
unrelated entities in excess of $10,000 per year, except in the ordinary
course of business;
(iv) make or suffer advances to shareholders and/or officers in excess
of $10,000 per year;
(v) invest in other entities in excess of Fifty Thousand ($50,000)
Dollars;
(vi) declare or pay any dividend without the prior written consent of
the Bank;
(vii) assume, endorse, be or become liable for or guarantee the
obligations of any person except by the endorsement of negotiable
instruments for deposit or collection in the ordinary course of business.
Notwithstanding the foregoing, the Borrower shall be permitted to guarantee
the obligations of any subsidiary in an amount not to exceed Fifty Thousand
($50,000) Dollars, provided said guaranty does not otherwise cause an Event
of Default hereunder;
(viii) (1) terminate any Pension Plan so as to result in any material
liability to The Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA (the "PBCG"), (2) engage in or permit any
6
<PAGE>
person to engage in any "prohibited transaction" (as defined in Section 406
of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended)
involving any Pension Plan which would subject the Borrower to any material
tax, penalty or other liability, (3) incur or suffer to exist any material
"accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, involving any Pension Plan, or (4) allow or suffer to
exist any event or condition, which presents a material risk of incurring a
material liability to the PBCG by reason of termination of any Pension Plan.
DEFAULT: The Bank may declare the entire unpaid balance of the Note due and
payable on the happening of any of the following events (each an "Event of
Default"):
(a) Failure to pay any amount required by this Note within five (5)
business days of its respective due date, or any other obligation owed to
the Bank by undersigned or any Guarantor within five (5) business days of
its respective due date, or failure to have sufficient funds in its account
for loan payments to be debited on the due date;
(b) Failure to perform or keep or abide by any term, covenant or
condition contained in this Note, any Guaranty or any other document given
to the Bank in connection with this Note within ten (10) business days after
written notice of said default;
(c) The filing of a bankruptcy proceeding, assignment for the benefit
of creditors, issuance of an execution, garnishment, or levy against, or
the commencement of any proceeding for relief from indebtedness by or
against the undersigned or any Guarantor, provided such proceeding is not
dismissed within sixty (60) days from the date of its filing or inception;
(d) The happening of any event which, in the reasonable judgment of the
Bank, materially adversely affects Borrower's or Guarantor's ability to
repay the Note or the value the Collateral is materially impaired;
(e) If any material written representation, warranty or statement made
to the Bank by Borrower or Guarantors is untrue;
(f) The occurrence of a default under any Guaranty or any other document
or instrument given to the Bank in connection with this Note, provided that
such default continues for a period of five (5) business days after written
notice thereof to the Borrower;
7
<PAGE>
(g) n]Failure to provide any financial information within ten (10) days
of the Bank's written request or failure to permit an examination of the
Borrower's books and records within ten (10) days of the Bank's written
request;
(h) Sale, disposal and/or transfer of any material fixed or intangible
asset(s) of the Borrower without the prior written consent of the Bank;
(i) In the event that the Borrower shall maintain a Debt Service
Coverage of less than 1.30 : 1. For purposes hereof, Debt Service Coverage
shall be tested on an annual basis and defined as (Operating Income +
Depreciation + Amortization) (Interest Expense + Principal Amortization,
excluding Principal Amortization due in connection with that certain
subordinated debt due to certain purchasers pursuant to that certain
Purchase Agreement dated of even date herewith in the amount of $1,500,000);
(j) In the event that the ratio of the Borrower's Senior Debt to
(Tangible Net Worth plus Subordinated Debt) shall exceed 3.25 : 1 prior to
December 30, 1997 and 2.50 : 1 thereafter;
(k) In the event that the Borrower shall maintain a Current Ratio
(Current Assets divided by Current Liabilities) of less than 1.5 : 1;
(l) In the event that the Borrower shall incur Capital Expenditures in
excess of Three Hundred Thousand ($300,000) Dollars per year.
MISCELLANEOUS: (a) All agreements, representations and warranties made
herein shall survive the delivery of this Note. The Borrower waives trial by
jury, set-off and counterclaim of any nature in any litigation in any court with
respect to, in connection with, or arising out of, this Note or any instrument
or document delivered pursuant hereto or the validity, protection,
interpretation, collection or enforcement hereof;
(b) No modification or waiver of or with respect to any provision of this
Note, or consent to any departure by the Borrower from any of the terms or
conditions hereof, shall in any event be effective unless it shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. No notice to or
demand on the Borrower in any case shall, of itself, entitle it to any other or
further notice or demand in similar or other circumstances;
8
<PAGE>
(c) Each and every right granted to the Bank hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of the Bank or the holder of this Note to exercise, and no delay in
exercising, any right shall operate as a waiver thereof, nor shall any single or
partial exercise of any right preclude any other or future exercise thereof or
the exercise of any other right;
(d) In the event that this Note is placed in the hands of an attorney for
collection by reason of any default hereunder, the Borrower agrees to pay
reasonable attorney's fees so incurred. The Borrower promises to pay all
expenses of any nature as soon as incurred whether in or out of court and
whether incurred before or after this Note shall become due at its maturity
date or otherwise and costs which the Bank may deem necessary or proper in
connection with the satisfaction of the indebtedness or the administration,
supervision, preservation, protection (including but not limited to
maintenance of adequate insurance) of or the realization upon the collateral;
(e) The Borrower hereby waives presentment, demand for payment, protest,
notice of protest, notice of dishonor, and any or all other notices or demands
except as otherwise expressly provided for herein;
(f) All accounting terms not otherwise defined in this Note shall have the
meanings ascribed thereto under generally accepted accounting principles;
(g) It is the specific intention of the parties that this Note is, and shall
continue to be, an instrument for the payment of money only and the Borrower
expressly grants to the Bank all rights and privileges attendant thereto;
(h) Notwithstanding anything to the contrary contained in this Note, the
rate of interest payable on this Note shall never exceed the maximum rate of
interest permitted under applicable law. If at any time the rate of interest
otherwise prescribed herein shall exceed such maximum rate, and such prescribed
rate is thereafter below such maximum rate, the prescribed rate shall be
increased to the maximum rate for such period of time as is required so that the
total amount of interest received by the Bank is that which would have been
received by the Bank, except for the operation of the first sentence of this
Section.
(i) This Note and the rights and obligations of the parties shall be
construed and interpreted in accordance with the laws of the State of New York
and the Borrower consents to the jurisdiction of the courts of New York in any
action brought to enforce any rights of the Bank under this Note.
9
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed this note as of the 22nd day
of October, 1996.
TECHNOLOGY FLAVORS & FRAGRANCES,
INC.
By: /s/ Philip Rosner
--------------------------------------
Philip Rosner, President
By: /s/ Joseph A. Gemmo
--------------------------------------
Joseph A. Gemmo, Vice President
10
<PAGE>
EXHIBIT 10.13
April 9, 1997
Mr. Philip Rosner
Technology Flavors & Fragrances, Inc.
10 Edison Street
East Amityville, New York 11701
RE: REQUESTED COVENANT/DEFAULT WAIVER
Dear Mr. Rosner:
The Borrower has requested that the Bank consent to the waiver and/or
modification of the financial covenants outlined in the CONSOLIDATED,
MODIFIED REVOLVING CREDIT NOTE, dated October 22, 1996, and further described
under section titled DEFAULT, item (i) and (j) and under section titled
NEGATIVE COVENANTS, item (iv), for its fiscal year end December 31, 1996
financial statements:
DEFAULT: (i) In the event that the borrower shall maintain
a Debt Service Coverage of less than 1.30:1.
THE BANK HEREBY WAIVES SAID DEFAULT FOR ONLY THE
PERIOD ENDING 12/31/96.
(j) In the event that the ratio of the Borrower's
Senior Debt to (Tangible Net Worth plus
Subordinated Debt) shall exceed 3.25:1 prior to
December 30, 1997 and 2.50:1 thereafter.
THE BANK HEREBY WAIVES SAID DEFAULT FOR ONLY THE
PERIOD ENDING 12/31/96. THE BANK FURTHER AMENDS/
MODIFIES THIS EVENT OF DEFAULT AS FOLLOWS: IN THE
EVENT THAT THE RATIO OF THE BORROWER'S SENIOR DEBT
TO TANGIBLE NET WORTH PLUS SUBORDINATED DEBT SHALL
EXCEED 5.0:1 ON MARCH 31, 1997 AND THEREAFTER; SHALL
EXCEED 4.0:1 ON JUNE 30, 1997 AND THEREAFTER; SHALL
EXCEED 3.5:1 ON SEPTEMBER 30, 1997 AND THEREAFTER;
AND SHALL EXCEED 3.0:1 ON OR AFTER 12/31/97.
NEGATIVE COVENANT: (iv) Make or suffer advances to shareholders
and/or officers in excess of $10,000 per year;
THE BANK HEREBY WAIVES SAID COVENANT FOR ONLY THE
PERIOD ENDING 12/31/96.
Nothing contained in this agreement or any negotiations or actions taken or
not taken by the bank shall be deemed to modify, amend, limit or act as a
waiver of any of the terms of, or the Bank's rights and remedies under the
Consolidated, Modified Revolving Credit Note, any other Loan Document, any
document or agreement referred to in any of the above, and/or under
applicable law, except as herein provided. These terms and provision of the
Credit Agreement, Security Agreement, Note and all of the other loan
documents shall remain in full force and effect. Nothing contained herein
shall be construed to limit or prevent the Bank from exercising any and all
rights available to it in respect of any event of default that may occur from
time to time.
Please indicate your agreement to the foregoing by countersigning this letter
and returning it to me.
Very truly yours,
/s/ Bruce A. Salmon
Bruce A. Salmon
Vice President
AGREED AND UNDERSTOOD BY:
TECHNOLOGY FLAVORS & FRANGRANCES, INC.
/s/ Philip Rosner
- ----------------------------------------
Philip Rosner, President
/s/ Joseph Gemmo
- ----------------------------------------
Joseph Gemmo, Vice President
<PAGE>
EXHIBIT 10.14
BANK: NORTH FORK BANK
BORROWER: TECHNOLOGY FLAVORS & FRAGRANCES, INC.
IN ADDITION TO THE TERMS AND CONDITIONS OUTLINED IN THE DEFAULT SECTION OF
THE CONSOLIDATED, MODIFIED REVOLVING CREDIT NOTE, DATED OCTOBER 22, 1996,
THE BANK AND THE BORROWER FURTHER AGREE, IN CONSIDERATION FOR THE WAIVERS AND
MODIFICATIONS PROVIDED BY THE BANK TO THE BORROWER OF SAID AGREEMENT, THAT
THE BANK MAY DECLARE THE ENTIRE UNPAID BALANCE OF THE NOTE DUE AND PAYABLE ON
THE HAPPENING OF ANY OF THE FOLLOWING EVENTS (EACH AN "EVENT OF DEFAULT"):
(m) If loans/advances made to shareholders exceed $20,000 on
December 31, 1997.
(n) That the Borower has not converted $1,500,000 of Convertible
Subordinated Notes issued on October 17, 1996 into common
stock on or prior to October 16, 1997.
(o) That the Borrower has made prior to March 31, 1998 any loan
payments, other than the 1996 accrued interest, to Richard
Higgins under that Certain Promissory Note dated
December 6, 1995, as Amended and restated June 3, 1996,
in the outstanding principal amount of $888,019.
(p) If the Borrower fails to provide the Bank with 30 days written
notice of its intention to make any loan payment to
Richard Higgins, other than payments of 1996 accured interest,
and provide along with said written notice proforma financial
statements reflecting the impact of said payment on the
Borrower's financial condition.
AGREED TO THIS 9th DAY OF APRIL, 1997.
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By: /s/ Philip Rosner
-------------------------------------
Philip Rosner, President
By: /s/ Joseph Gemmo
-------------------------------------
Joseph Gemmo, Vice President
<PAGE>
EXHIBIT 10.15
THIS WARRANT CERTIFICATE AND THE SHARES OF COMMON STOCK ISSUABLE THE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("1933 ACT"), AND NEITHER THIS WARRANT CERTIFICATE NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF MAY BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT COVERING SUCH SECURITIES OR SUCH SALE, TRANSFER, ASSIGNMENT
OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT,
AND THE HOLDER HAS OBTAINED THE PRIOR WRITTEN CONSENT OF THE COMPANY WITH
RESPECT THERETO.
EXERCISABLE ON OR AFTER APRIL 14, 1997
UNTIL 5:00 P.M. NEW YORK TIME ON JANUARY 15, 1999,
SUBJECT TO EXTENSION
No. NF-1 100,000 Warrants
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
(Incorporated Under the Laws of the State of Delaware)
WARRANT CERTIFICATE REPRESENTING WARRANTS TO
PURCHASE SHARES OF COMMON STOCK
AT $2.40 PER SHARE
This certifies that, for value received, NORTH FORK BANK (the "Holder"),
upon the exercise of this Warrant Certificate in accordance with the provisions
of Section 6.2 of the Purchase Agreement (as defined below) and the terms
hereof, shall receive, subject to the terms and conditions herein set forth, a
certificate for one fully paid and non-assessable share of Common Stock, par
value $.01 per share ("Common Stock"), of TECHNOLOGY FLAVORS & FRAGRANCES, INC.
(the "Company") upon payment of the Applicable Exercise Price, as defined below,
for each of the Warrants represented hereby which is then exercised in
accordance with the terms hereof, provided, that, this Warrant Certificate shall
be so surrendered after the date hereof and prior to 5:00 P.M., New York time,
on January 15, 1999, subject to extension as provided below (such date after
which the Warrants represented by this Warrant Certificate are no longer
exercisable being referred to herein as the "Expiration Date"). Subject to
adjustment as provided in Section 6.4 of the Purchase Agreement, the Applicable
Exercise Price payable to the Company upon the exercise of each Warrant
(referred to herein
<PAGE>
as the "Applicable Exercise Price") shall be $2.40 per share of Common Stock and
shall be payable in cash or by certified check, concurrently with the Holder's
delivery to the Company of the Holder's written notice to exercise.
In the event the Company extends the maturity date of the Consolidated,
Modified Revolving Credit Note due January 15, 1999, in the principal amount of
$5,500,000 (the "Note"), beyond January 15, 1999, the Expiration Date shall be
automatically extended to the maturity date of the Note, as extended, provided
that the Expiration Date shall in no event be later than April 14, 2002.
At any time during the period from April 14, 1998 to 5:00 P.M., New York
time, on August 14, 1998 (the "Mandatory Redemption Period"), upon the written
request of the Holder (the "Mandatory Redemption Notice"), the Company shall
purchase from the Holder all of the Warrants represented by this Warrant
Certificate, which in the aggregate represent the right to receive 100,000
shares of Common Stock, at a purchase price equal to $20,000 (the "Mandatory
Redemption Price") provided that such Mandatory Redemption Notice is received by
the Company during the Mandatory Redemption Period in accordance with Section
21(d) of the Purchase Agreement. The Mandatory Redemption Price assumes that
none of the Warrants have been exercised by the Holder and shall be reduced in
proportion to the amount of Warrants exercised by the Holder or purchased by the
Company prior to the Mandatory Redemption Notice to fairly protect the intent
and purposes of this paragraph.
At any time during the period from April 14, 1997 to April 14, 1998 (the
"Company Redemption Period"), the Company shall have the right, but not the
obligation, to redeem warrants representing the right to purchase 50,000 shares
of Common Stock for $20,000 (the "Company Redemption Price").
This Warrant Certificate is entitled to the benefits of, and shall be
governed by, those provisions of Sections 6.2, 6.4, 6.5, 6.6, 6.7, 12, 13, 16,
17, and 19 of the Purchase Agreement, dated October 17, 1996, between the
Company and the Purchasers named in such Purchase Agreement (the "Purchase
Agreement") which are applicable to the Warrants represented by this Warrant
Certificate; it being the express intention of the Company and the Holder that,
except as otherwise provided herein or where the context otherwise requires,
the terms and provisions of such sections shall apply to the Warrants
represented by this Warrant Certificate as if such Warrants were included in
the definition of "Warrants" in the Purchase Agreement. Notwithstanding the
foregoing, to the extent that the terms and provisions of this Warrant
Certificate are inconsistent with those contained in the applicable provisions
of the Purchase Agreement, the terms and provisions of this Warrant Certificate
shall govern. Reference is hereby made to the Purchase Agreement for a more
complete statement of the rights and limitations of the registered holder
hereof. A copy of the Purchase Agreement is on file at the principal executive
offices of the Company. The Holder of this Warrant Certificate, by accepting
the same, agrees to and shall be bound by the applicable provisions of the
Purchase Agreement as provided herein. Notwithstanding anything to the
contrary, this Warrant Certificate shall not be sold, transferred, assigned or
hypothecated without the written consent of the Company.
2
<PAGE>
Each Warrant is convertible into Common Stock in the manner, and upon those
applicable terms and conditions, including, without limitation, anti-dilution
provisions, provided in the Purchase Agreement or the terms hereof.
This Warrant Certificate is delivered in, and shall be construed and
enforced in accordance with and governed by, the laws of the State of New York
(other than any conflict of laws rule which might result in the application of
the laws of any other jurisdiction).
The Company may treat the person in whose name this Warrant Certificate is
registered as the owner and holder of this Warrant Certificate for all purposes
whatsoever, and the Company shall not be affected by any notice to the contrary
(except that the Company shall comply with the provisions of Section 12 of the
Purchase Agreement regarding the issuance of a new Warrant or Warrants).
The validity of this Warrant Certificate and the shares of Common Stock
issuable upon the exercise hereof is subject to the written consent of the
Toronto Stock Exchange ("TSE"). The Company agrees to use its reasonable
efforts to obtain such consent. In the event the Company fails to obtain the
written consent of the TSE for the issuance of the Warrant Certificates and the
shares of Common Stock upon the exercise thereof, the Company and the Holder
agree to enter into a new arrangement which reflects the intents and purposes of
this Warrant Certificate.
This Warrant Certificate is being issued to the Holders in connection with
that certain Waiver and Amendment, dated April 7, 1997, between the Company and
North Fork Bank.
3
<PAGE>
IN WITNESS WHEREOF, TECHNOLOGY FLAVORS & FRAGRANCES, INC. has caused this
Warrant Certificate to be dated, executed and issued on its behalf by its
officer thereto duly authorized.
Dated: April 15 , 1997
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By: /s/ Philip Rosner
--------------------------------------
Name:
Title:
4
<PAGE>
LIST OF SUBSIDIARIES
The Company has the following subsidiaries:
Name Jurisdiction of Incorporation
---- -----------------------------
1. Technology Flavors & Ontario, Canada
Fragrances, Inc. (Canada)
<PAGE>
EXHIBIT 23.1
[TABB, CONIGLIARO & MCGANN, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Annual Report on Form 10-KSB for the year ended December 31, 1996 and to the
incorporation by reference therein of our report dated March 1, 1996, with
respect to the financial statements and schedule of Seafla, Inc. for the year
ended December 31, 1995 included in its Annual Report on Form 10-KSB for the
year ended December 31, 1995, filed with the Securities and Exchange
Commission.
/s/ Tabb, Conigliaro & McGann, P.C.
TABB, CONIGLIARO & MCGANN, P.C.
New York, New York
April 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> $ 233,566
<SECURITIES> 0
<RECEIVABLES> 3,372,157
<ALLOWANCES> (150,000)
<INVENTORY> 4,025,586
<CURRENT-ASSETS> 7,886,766
<PP&E> 2,866,050
<DEPRECIATION> (1,464,988)
<TOTAL-ASSETS> 16,103,263
<CURRENT-LIABILITIES> 3,866,272
<BONDS> 6,881,614
0
0
<COMMON> 119,934
<OTHER-SE> 5,254,521
<TOTAL-LIABILITY-AND-EQUITY> 16,103,263
<SALES> 21,017,960
<TOTAL-REVENUES> 21,017,960
<CGS> 13,155,260
<TOTAL-COSTS> 9,839,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150,664
<INTEREST-EXPENSE> 557,660
<INCOME-PRETAX> (2,534,739)
<INCOME-TAX> 2,874
<INCOME-CONTINUING> (2,537,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,537,613)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
