<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 2
(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)
<TABLE>
<S> <C>
DELAWARE 11-3199437
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
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:
<TABLE>
<S> <C>
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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<PAGE>
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.
2
<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.
3
<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
Cash used in operations amounted to $364,000 for the nine months ended
September 30, 1997 as compared to $520,000 for the same period of 1996. Working
capital at September 30, 1997 was $5,486,000 as compared to $4,020,000 at
December 31, 1996.
Historically, the Company's financing needs have been met through the
issuances of equity and debt. For several years prior to 1996, the Company's
principal line of credit for working capital requirements was a $2.0 million
short-term revolving note, which the Company extended upon maturity. Borrowings
under the revolving line of credit bore interest at the rate of one-half percent
above the then applicable prime rate.
In October 1996, the Company consolidated its then existing $3,500,000 term
loan (obtained in connection with the Seafla Acquisition) and its $2,000,000
revolving credit into a $5,500,000 revolving credit facility (the "1996 Credit
Facility"). The borrowings were collateralized by liens on substantially all of
the assets of the Company. In April 1997, the Company and the lender under the
1996 Credit Facility entered into a waiver and modification agreement (the
"Waiver") which waived compliance by the Company with certain covenants for 1996
and amended one such covenant for 1997. Additional events of default were also
added to the 1996 Credit Facility. In connection with the Waiver, the Company
issued the lender a warrant to purchase 100,000 shares of Common Stock, which
warrant expires on January 15, 1999, with an exercise price of $2.40 per share.
The warrant contains a "put" provision which gives the bank the right to require
the Company to purchase the warrant from the bank for $20,000. In addition, the
Company has the right at any time prior to April 7, 1998 to "call" 50,000 of the
warrants by paying the bank $20,000.
In October 1996, the Company also consummated a financing which provided for
the issuance of $1,500,000 in 9% Convertible Subordinated Notes due October 17,
1998 (the "Notes") and the issuance of the Class A Warrants to purchase an
aggregate of 450,000 shares of Common Stock at $2.40 per share (subject to
adjustments) and the Class B Warrants to purchase an aggregate of 156,250 shares
of Common Stock at $2.70 per share (subject to adjustments). The Notes were
collateralized by liens on substantially all of the assets of the Company, which
liens were junior to those in favor of the Company's lender under the 1996
Credit Facility.
On October 16, 1997, the Company entered into a credit agreement with a bank
providing for a $6,000,000 revolving credit facility and a $750,000 term loan
facility (the "1997 Credit Facility"). This 1997 Credit Facility replaced its
then existing $5,500,000 credit line (the 1996 Credit Facility) and refinanced
$750,000 of the Notes (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 the bank's prime rate) or 1/2 of 1% above the bank's prime rate,
at the Company's option. 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.
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 restricted
in its ability to incur liens, make investments, sell assets, make acquisitions
and pay dividends. The Company's inability to incur additional indebtedness when
additional funds are needed may cause it to delay, scale back or eliminate some
or all of its operations which could have a material adverse effect on its
operations.
4
<PAGE>
In conjunction with the October 1997 Refinancing, the Company converted an
aggregate principal amount of $750,000 of the Notes into 387,655 shares of the
Company's Common Stock, based on the weighted average share price during the
preceding ten trading days prior to the closing. As of January 16, 1998, the
Company had outstanding borrowings of approximately $713,000 under its term loan
facility and approximately $4,825,000 under its revolving credit facility and
approximately $390,000 was available for borrowings against its borrowing base.
As of January 16, 1998, the outstanding borrowings under the credit facility
bore interest at the rate of approximately 8.4% per annum.
As of January 16, 1998, the Company is in violation of two financial
covenants in the credit agreement relating to the 1997 Credit Facility. The
Company is seeking a waiver from its lender with respect to such default, but
there can be no assurance that the Company will obtain the waiver. If the
Company is unable to obtain the waiver, the lender may declare the indebtedness
under the facility to be immediately due and payable and, in the event the
Company is unable to satisfy its obligations, the lender can proceed to
foreclose on the assets of the Company pledged as collateral, which are
substantially all of the Company's assets. There can be no assurance that the
lender will not foreclose on the assets of the Company or take other action
detrimental to the Company.
Although there can be no assurance, the Company believes it has adequate
capital to fund current operations for at least the next 12 months, assuming the
Company can obtain a waiver from its lender with respect to the indebtedness
outstanding under the 1997 Credit Facility.
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/A.
5
<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: January 22, 1998
<TABLE>
<S> <C> <C>
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)
</TABLE>
6
<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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 25, 1997,
except for Note 10, as to which the date is April 7, 1997, management of the
Company, as discussed in Note 16, believes, based upon available information,
that the Company is in violation of two financial covenants contained in its
credit agreement. Management and the Company's lender are in the process of
discussing (i) a restructuring of the New Facility to provide additional
flexibility with respect to certain covenants, and (ii) the granting of waivers
for such covenant violations.
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 LLP
Melville, New York
March 25, 1997, except for
Note 10, as to which the
date is April 7, 1997
and Note 16, as to
which the date is
January 19, 1998
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 waived certain
covenant provisions for 1996 and 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. $0.56 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>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
16. SUBSEQUENT EVENTS
On October 16, 1997, the Company entered into a credit agreement with a
different bank which provided for a $6,000,000 Revolving Credit Facility and a
$750,000 Term Loan Facility (the "New Facility") to replace the $5,500,000
revolving credit line described in Note 10 and to refinance $750,000 of the 9%
Convertible Subordinated Notes also described in Note 10. The Company also
exercised its option to exchange the remaining balance of the $1,500,000
Convertible Subordinated Notes for 387,655 shares of the Company's common stock
in accordance with the terms of the Convertible Subordinated Notes.
The New Facility bears interest based on the bank's London Interbank
Offering Rate ("LIBOR") plus 2- 1/2% (which currently equates to approximately
the bank's prime rate) or 1/2 of 1% above the bank's prime rate, at the
Company's option. Outstanding borrowings are secured by substantially all of the
assets of the Company, subject to the Company's borrowing base which includes
eligible receivables, inventories and product formulations. The New Facility
requires the maintenance of certain financial and other covenants.
Management of the Company believes, based upon available information, that
the Company is in violation of two financial covenants contained in the New
Facility. Management and the Company's lender are in the process of discussing
(i) a restructuring of the New Facility to provide additional flexibility with
respect to certain covenants, and (ii) the granting of waivers for such covenant
violations.
F-20
