U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
Delaware 11-3199437
- ------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
-------------------------------------------------
(Address of Principal Executive Offices)
(516) 842-7600
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
The number of outstanding shares of the Registrant's only class of common stock
as of May 1, 1998: 12,374,623
Transitional Small Business Disclosure Format (check one):
YES |_| NO |X|
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
March 31, 1998
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997............................................. 1
Consolidated Statements of Operations
for the Three Months Ended March 31, 1998
and March 31, 1997................................................ 2
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998
and March 31, 1997................................................ 3
Notes to Consolidated Financial Statements........................ 4
Item 2. - Management's Discussion and Analysis.......................... 5
PART II - OTHER INFORMATION................................................... 8
SIGNATURE............................................................... ..... 9
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<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
AT AT
MARCH 31, DECEMBER 31,
1998 1997
(Unaudited) (Note)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 94,939 $ 582,972
Receivables, net 3,546,600 2,693,081
Inventories 3,558,726 3,740,480
Prepaid expenses and other current assets 114,387 68,440
------------ ------------
Total current assets 7,314,652 7,084,973
Fixed assets, net 1,207,276 1,276,619
Intangible assets, net 5,398,376 5,558,993
Other assets 228,966 174,989
Notes receivable from related parties 274,909 279,520
------------ ------------
Total assets $ 14,424,179 $ 14,375,094
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 2,031,392 $ 1,294,429
Accrued expenses 373,621 615,217
Current portion of long-term debt 178,135 177,212
------------ ------------
Total current liabilities 2,583,148 2,086,858
Long-term debt 6,558,985 6,704,294
Deferred rent payable 37,457 34,367
------------ ------------
9,179,590 8,825,519
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, issued
12,374,623 shares 123,746 123,746
Paid-in capital 10,138,161 10,138,161
Accumulated deficit (4,801,286) (4,476,048)
Unearned compensation arising from stock awards (216,032) (236,284)
------------ ------------
Total stockholders' equity 5,244,589 5,549,575
------------ ------------
Total liabilities and
stockholders' equity $ 14,424,179 $ 14,375,094
============ ============
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
For the three months ended March 31,
------------------------------------
1998 1997
------------ ------------
Net sales $ 4,649,458 $ 6,779,837
Cost of sales 2,822,166 4,130,357
------------ ------------
Gross profit 1,827,292 2,649,480
------------ ------------
Operating expenses:
Selling 789,768 834,874
General and administrative 564,328 618,549
Research and development 472,561 473,506
Amortization 186,847 221,986
------------ ------------
Total operating expenses 2,013,504 2,148,915
------------ ------------
(Loss) income from operations (186,212) 500,565
Interest expense, net (136,876) (171,042)
------------ ------------
(Loss) income before provision
for income taxes (323,088) 329,523
Provision for income taxes (2,150) (1,350)
------------ ------------
Net (loss) income $ (325,238) $ 328,173
============ ============
Net (loss) income per common share $ (.03) $ .03
============ ============
Weighted average shares outstanding 12,374,623 12,516,741
============ ============
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. Dollars) (Unaudited)
For the three months ended March 31,
------------------------------------
1998 1997
--------- -----------
Cash flows from operating activities:
Net (loss) income $(325,238) $ 328,173
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 256,190 303,922
Deferred rent 3,090 3,090
Changes in assets and liabilities:
Accounts receivable (853,519) (1,175,112)
Inventories 181,754 (130,628)
Prepaid expenses and other current assets (45,947) (62,981)
Other assets (59,955) 1,414
Accounts payable 736,963 100,292
Accrued expenses (241,596) (124,103)
--------- -----------
Net cash used in operating activities (348,258) (755,933)
--------- -----------
Cash flows from investing activities:
Purchase of fixed assets -- (58,370)
Notes receivable 4,611 1,556
--------- -----------
Net cash provided by (used in)
investing activities 4,611 (56,814)
--------- -----------
Cash flows from financing activities:
Proceeds from long-term bank debt 250,000 800,000
Repayment of long-term debt (394,386) (4,822)
--------- -----------
Net cash (used in) provided by
financing activities (144,386) 795,178
--------- -----------
Decrease in cash (488,033) (17,569)
Cash - beginning of period 582,972 233,566
--------- -----------
Cash - end of period $ 94,939 $ 215,997
========= ===========
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavor, fragrance and seasoning products used to provide or enhance
flavors or fragrances in a wide variety of consumer and industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
2. INVENTORIES
Components of inventories are summarized as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw Materials $ 2,607,138 $ 2,763,286
Finished Goods 951,588 977,194
------------ ------------
$ 3,558,726 $ 3,740,480
============ ============
3. EARNINGS PER SHARE
Net (loss) income per share is based on the weighted average number of
shares of common stock outstanding after giving effect to dilutive stock options
and warrants. Diluted earnings per share has not been presented as the dilutive
effect is not material.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
The following information for the quarters ended March 31, 1998 and 1997
has been derived from the Company's unaudited consolidated financial statements
and should be read in conjunction with the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
Three months ended March 31,
----------------------------
1998 1997
------ ------
(dollar amounts in thousands)
Net sales $ 4,649 100.0% $ 6,780 100.0%
Gross profit 1,827 39.3 2,649 39.1
Operating expenses:
Selling 790 17.0 835 12.3
General and administrative 564 12.1 619 9.1
Research and development 472 10.2 473 7.0
Amortization expense 187 4.0 222 3.3
(Loss) income from operations (186) 4.0 500 7.4
Interest expense, net 137 2.9 171 2.5
Provision for income taxes 2 -- 1 --
Net (loss) income (325) 7.0 328 4.8
Net sales. Net sales decreased 31% to $4,649,000 for the first quarter of
1998 from $6,780,000 for the first quarter of 1997 primarily due to a reduction
in shipments in 1998 of a new product line to a significant customer (which
product line was initially launched in January 1997) ($1,381,000 to $51,000),
and to a lesser extent, a weakening of demand in the flavor industry.
Gross profit. Gross profit, as a percentage of sales, improved modestly to
39.3% on sales of $4,649,000 for the first quarter of 1998 as compared to 39.1%
on sales of $6,780,000 for the first quarter of 1997. Higher gross margin
percentages from product mix during the first quarter of 1998 offset the impact
of lower sales volume which normally results in a lower gross margin percentage.
Selling expenses. Selling expenses decreased to $790,000 for the first
quarter of 1998 from $835,000 for the comparable 1997 period due principally to
the effects of the Company's cost containment program implemented in the latter
part of 1997.
General and administrative expenses. General and administrative expenses
decreased to $564,000 for the first quarter of 1998 from $619,000 for the first
quarter of 1997 primarily as a result of reductions in administrative personnel,
professional and consulting services in accordance with the Company's cost
containment program.
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<PAGE>
Research and development expenses. Research and development expenses of
$472,000 for the first quarter of 1998 was relatively unchanged from the
$473,000 in the first quarter of 1997.
Amortization expense. Amortization expense decreased to $187,000 for the
first quarter of 1998 from $222,000 for the first quarter of 1997. Deferred
charges associated with the Company's October 1996 $1.5 million convertible debt
financing were expensed in 1997 in conjunction with the conversion of one-half
of the principal amount of the notes into Common Stock in October 1997.
Interest expense, net. Interest expense decreased to $137,000 for the
first quarter of 1998 from $171,000 for the comparable 1997 quarter. The
decrease was primarily due to the reduction in long-term debt and lower interest
rates as a result of the October 1997 refinancing. See "Liquidity and Capital
Resources."
Provision for income taxes. Provision for income taxes represents state
franchise taxes.
Liquidity and Capital Resources
During the three months ended March 31, 1998, cash used in operating
activities amounted to $348,000 as compared to $756,000 for the three months
ended March 31, 1997. Working capital at March 31, 1998 was $4,732,000 as
compared to $4,998,000 at December 31, 1997.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. On October 16, 1997, the Company
entered into a new credit agreement with a bank providing for a $6,000,000
revolving credit facility and a $750,000 term loan facility (the "1997 Credit
Facility"). The 1997 Credit Facility replaced its then existing $5,500,000
credit line (the "1996 Credit Facility") and paid $750,000 of the principal
amount of the Company's then outstanding 9% Convertible Subordinated Notes due
October 17, 1998 (the "October 1997 Refinancing"). Outstanding borrowings under
the 1997 Credit Facility bear interest based on the bank's London Interbank
Offering Rate ("LIBOR") plus 2 1/2% (which currently equates to approximately
1/4 of 1% below the bank's prime rate) or 1/2 of 1% above the bank's prime rate,
at the Company's option. As of March 31, 1998, the outstanding borrowings under
the 1997 Credit Facility bore interest at the rate of approximately 8.2% per
annum.
Outstanding borrowings are collateralized by substantially all of the
assets of the Company and are subject to eligibility requirements relating to
the Company's receivables, inventories and product formulations. In December
1997, the Company was in violation of two financial covenants in the credit
agreement relating to the 1997 Credit Facility. In March 1998, the Company and
the lender under the 1997 Credit Facility entered into a waiver and amendment
agreement (the "1998 Amendment") which waived compliance by the Company with
certain covenants for 1997 and amended certain financial covenants for 1998 and
beyond. In connection with the 1998 Amendment, the Company is obligated to pay
the bank $75,000 on or before July 1, 1998, provided however, that in the event
certain conditions are met, the amount required to be paid to the bank will be
reduced to $50,000.
On March 9, 1998, the Company's $888,019 subordinated note payable was
amended to extend the first principal installment of $177,604 from March 31,
1998 to January 1, 2000. The remaining four principal installments are payable
on January 1 each year thereafter through 2004. As of March 31, 1998, the
Company's outstanding capital lease obligations amounted to approximately
$99,000. As of March 31, 1998, the Company had outstanding borrowings of
approximately $675,000, including current maturities, under its term loan
facility and approximately $5,075,000 under its revolving credit facility and
approximately $713,000 was available for borrowings against its borrowing base.
-6-
<PAGE>
Under the credit agreement relating to the 1997 Credit Facility, the
Company is prohibited from incurring any indebtedness other than, among other
things, existing indebtedness, subordinated debt (with the consent of the bank),
and unsecured trade indebtedness in the ordinary course of business, and is
restricted in its ability to, among other things, incur liens, make investments,
sell assets, make acquisitions and pay dividends.
The Company believes it has adequate capital to fund current operations
for the remainder of 1998. However, the Company may be required to obtain
additional financing earlier in order to continue its operations or otherwise.
There can be no assurance that additional funds will be available when needed,
or if available, will be on favorable terms or in the amounts required by the
Company. If adequate funds are not available to the Company when needed, it may
be required to delay, scale back or eliminate some or all of its marketing and
development efforts or other operations, which could have a material adverse
effect on the Company's business, results of operations and prospects. Future
issuances of the Company's securities will cause dilution to the Company's then
existing stockholders, which in certain circumstances could be substantial.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in a certain legal action
arising out of the normal course of its operations, the final outcome of
which cannot presently be determined. On April 3, 1998, the Company filed
an Answer and Counterclaim denying the allegations in the complaint. The
Company intends to vigorously contest the action, and believes it to be
without merit. Although there can be no assurance, management is of the
opinion that the resolution of this matter will not have a significant
impact on the Company's financial position, results of operations or cash
flows.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
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<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 12, 1998
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By /s/ Joseph A. Gemmo
-------------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of Registrant)
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 94,939
<SECURITIES> 0
<RECEIVABLES> 3,711,600
<ALLOWANCES> (165,000)
<INVENTORY> 3,558,726
<CURRENT-ASSETS> 7,314,652
<PP&E> 3,040,100
<DEPRECIATION> (1,832,824)
<TOTAL-ASSETS> 14,424,179
<CURRENT-LIABILITIES> 2,583,148
<BONDS> 6,558,985
0
0
<COMMON> 123,746
<OTHER-SE> 5,120,843
<TOTAL-LIABILITY-AND-EQUITY> 14,424,179
<SALES> 4,649,458
<TOTAL-REVENUES> 4,649,458
<CGS> 2,822,166
<TOTAL-COSTS> 1,988,504
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,876
<INCOME-PRETAX> (298,088)
<INCOME-TAX> 2,150
<INCOME-CONTINUING> (325,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (325,238)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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