U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
Delaware 11-3199437
- - - --------------------------------- ---------------------------------
(State or other Jurisdiction (IRS Employer Identification No.)
of 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 November 9, 1998 was 12,449,623
Transitional Small Business Disclosure Format (check one):
YES |_| NO |X|
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
For the Quarterly Period Ended September 30, 1998
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997............................................. 1
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1998 and September 30, 1997......................... 2
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998
and September 30, 1997............................................ 3
Notes to Consolidated Financial Statements........................ 4
Item 2. - Management's Discussion and Analysis or Plan
of Operation.................................................. 7
PART II - OTHER INFORMATION...................................................11
SIGNATURE.....................................................................12
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<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
(Unaudited) (Note)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 400,703 $ 576,175
Receivables, net 2,557,793 2,197,586
Inventories 2,914,480 3,347,439
Prepaid expenses and other current assets 70,400 58,879
Current assets of discontinued operations -- 904,894
------------ ------------
Total current assets 5,943,376 7,084,973
Fixed assets, net 627,136 727,322
Intangible assets, net 1,135,084 3,097,476
Other assets 386,897 38,466
Notes receivable from related parties 267,781 279,520
Non-current assets of discontinued operations -- 3,147,337
------------ ------------
Total assets $ 8,360,274 $ 14,375,094
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,583,309 $ 921,997
Accrued expenses 695,175 418,652
Revolving credit facility (see Note 6) 2,012,634 --
Current portion of long-term debt 33,374 27,212
Current liabilities of discontinued operations -- 718,997
------------ ------------
Total current liabilities 4,324,492 2,086,858
Long-term debt 50,507 1,966,275
Deferred credits 318,637 34,367
Long-term debt of discontinued operations -- 4,738,019
------------ ------------
4,693,636 8,825,519
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, issued
12,449,623 and 12,374,623 shares,
respectively 124,496 123,746
Paid-in capital 10,160,911 10,138,161
Accumulated deficit (6,618,769) (4,476,048)
Unearned compensation arising from stock awards
of discontinued operations -- (236,284)
------------ ------------
Total stockholders' equity 3,666,638 5,549,575
------------ ------------
Total liabilities and
stockholders' equity $ 8,360,274 $ 14,375,094
============ ============
Note: The balance sheet at December 31, 1997 has been restated for presentation
purposes to reflect the Company's discontinued operations relating to the sale
of its Seasoning Division on August 25, 1998 to Mane-Seafla, Inc., a subsidiary
of Mane USA, Inc. Such balance sheet does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See Note 4 to Notes to Consolidated Financial Statements.
See Accompanying Notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30,
------------- -------------
1998 (Note) 1997 (Note) 1998 (Note) 1997 (Note)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,281,692 $ 4,562,127 $ 10,471,529 $ 15,597,272
Cost of sales 2,158,464 2,712,440 6,322,015 9,221,133
------------ ------------ ------------ ------------
Gross profit 1,123,228 1,849,687 4,149,514 6,376,139
------------ ------------ ------------ ------------
Operating expenses:
Selling 822,292 748,633 2,153,498 2,153,118
General and administrative 646,539 552,673 1,570,431 1,493,532
Research and development 336,233 444,533 1,085,985 1,236,454
Amortization expense 62,640 125,727 327,349 376,626
Write-down of intangible assets
and other charges 2,034,760 -- 2,034,760 --
------------ ------------ ------------ ------------
Total operating expenses 3,902,464 1,871,566 7,172,023 5,259,730
------------ ------------ ------------ ------------
(Loss) income from operations (2,779,236) (21,879) (3,022,509) 1,116,409
Interest expense, net 30,438 65,912 93,758 183,393
------------ ------------ ------------ ------------
(Loss) income before provision
for income taxes (2,809,674) (87,791) (3,116,267) 933,016
Provision for income taxes -- 1,045 1,730 4,420
------------ ------------ ------------ ------------
(Loss) income from
continuing operations (2,809,674) (88,836) (3,117,997) 928,596
Discontinued operations:
Gain on disposal of
discontinued operations 1,080,157 -- 1,080,157 --
Loss from discontinued operations (3,126) (204,513) (104,881) (482,659)
------------ ------------ ------------ ------------
1,077,031 (204,513) 975,276 (482,659)
------------ ------------ ------------ ------------
Net (loss) income $ (1,732,643) $ (293,349) $ (2,142,721) $ 445,937
============ ============ ============ ============
Net (loss) income per common share:
Continuing operations $ (.23) $ (.01) $ (.25) $ .07
Discontinued operations .09 (.02) .08 (.04)
------------ ------------ ------------ ------------
Net loss (income) per share $ (.14) $ (.03) $ (.17) $ .03
============ ============ ============ ============
Weighted average shares outstanding 12,412,123 11,956,968 12,387,123 12,579,414
============ ============ ============ ============
</TABLE>
Note: The consolidated statements of operations for the three and nine month
periods ended September 30, 1998 and 1997 have been restated for presentation
purposes to reflect the Company's discontinued operations relating to the sale
of its Seasoning Division on August 25, 1998 to Mane-Seafla, Inc., a subsidiary
of Mane USA, Inc. Such statements of operations do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See Note 4 to Notes to Consolidated Financial
Statements.
See Accompanying Notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1998 (Note) 1997 (Note)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,142,721) $ 445,937
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Net gain on sale of Seasoning Division (1,080,157) --
Depreciation and amortization 321,563 916,685
Write-down of intangible assets 1,723,000 --
Provision for bad debts 195,000 --
Deferred rent 9,270 9,270
Loss on disposal of fixed assets 24,073 --
Changes in assets and liabilities:
Accounts receivable (555,207) (712,739)
Inventories 432,959 (279,873)
Prepaid expenses and other current assets (11,521) (42,018)
Other assets (73,431) 1,166
Accounts payable 661,312 (498,524)
Accrued expenses 276,523 204,139)
----------- -----------
Net cash used in operating activities (219,337) (364,235)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of Seasoning Division 3,911,656 --
Purchase of fixed assets (6,058) (70,152)
Reduction of notes receivable 11,739 9,030
----------- -----------
Net cash provided by (used in) investing activities 3,917,337 (61,122)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 700,000 1,050,000
Repayment of long-term debt (4,596,972) (715,968)
Proceeds from issuance of common stock 43,500 --
Payment for cancellation of warrants (20,000) --
----------- -----------
Net cash (used in) provided by financing activities (3,873,472) 334,032
----------- -----------
Decrease in cash (175,472) (91,325)
Cash-beginning of period 576,175 233,566
----------- -----------
Cash-end of period $ 400,703 $ 142,241
=========== ===========
</TABLE>
Note: The consolidated statements of cash flows for the nine month periods ended
September 30, 1998 and 1997 have been restated for presentation purposes to
reflect the Company's discontinued operations relating to the sale of its
Seasoning Division on August 25, 1998 to Mane-Seafla, Inc., a subsidiary of Mane
USA, Inc. Such statements of cash flows do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See Note 4 to Notes to Consolidated Financial Statements.
See Accompanying Notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavor and fragrance 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 and nine month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1998. 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.
The accompanying unaudited consolidated financial statements of the
Company have been restated for presentation purposes to reflect the Company's
discontinued operations relating to the sale of its Seasoning Division (the
"Division") on August 25, 1998 to Mane-Seafla, Inc., a subsidiary of Mane USA,
Inc. (collectively, "Mane").
2. INVENTORIES
Components of inventories are summarized as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw Materials $2,106,255 $2,479,679
Finished Goods 808,225 867,760
---------- ----------
$2,914,480 $3,347,439
========== ==========
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"). FAS 128
replaced the previously reported primary and fully diluted earnings per share.
Net (loss) income amounts for all periods have been presented, and where
necessary restated, to conform to the FAS 128 requirements. Basic net (loss)
income per share is calculated using the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share for the
three and nine month periods ended September 30, 1998 and the three month period
ended September 30, 1997 was calculated using the weighted average number of
shares of common stock outstanding during the periods. Diluted net income per
share for the nine month period ended September 30, 1997 was calculated using
the weighted average common and common equivalent shares that were outstanding
during the period. The effect of common stock equivalents for the nine month
period ended September 30, 1997 was not material and, thus, diluted net income
per share was not presented.
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<PAGE>
4. DISCONTINUED OPERATIONS
On August 25, 1998, the Company sold substantially all of the assets and
certain liabilities relating to the Division, located in Milford, Ohio, to Mane,
for $5.5 million in cash, less an aggregate of $1,003,454 in principal and
interest assumed by Mane which was owed under a promissory note to a former
director and executive officer of the Company in connection with the Company's
acquisition of the Division in December 1995. Of the total purchase price paid,
$275,000 is being held in escrow until August 25, 2000 to secure certain
indemnification obligations of the Company. The sale of the Division is expected
to allow management to focus on the Company's core flavor and fragrance
operations and on increasing product sales and reducing debt. The results of
operations of the Division have been accounted for as discontinued operations in
the accompanying financial statements.
The Company recognized a net gain of approximately $1,080,000 on the sale
of the Division. Net losses attributable to the discontinued operations have
been shown separately in the Consolidated Statement of Operations for all
periods presented. Net sales of the discontinued operations were $714,999 and
$1,327,462 for the three month periods ended September 30, 1998 and September
30, 1997, respectively, and $3,412,312 and $4,117,021 for the nine month periods
ended September 30, 1998 and September 30, 1997, respectively.
The assets and liabilities of the discontinued Division as of December 31,
1997 are summarized as follows:
Current Assets $ 904,894
Fixed assets, net 549,297
Intangible assets, net 2,461,517
Other assets 136,523
-----------
Total assets 4,052,231
-----------
Current liabilities (718,997)
Long-term debt (4,738,019)
-----------
Total liabilities (5,457,016)
-----------
Net liabilities $(1,404,785)
===========
5. WRITE-DOWN OF INTANGIBLE ASSETS AND OTHER CHARGES
Due primarily to the continued competitiveness of the flavor and fragrance
industry and the relative weakness of the market for flavors in 1998 and the
Company's focus on increasing product sales, management determined that certain
previously acquired product formulations, which have historically been included
in intangible assets, have been impaired. In accordance with the guidance
provided by Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS 121"), the Company has determined that the undiscounted cash flows
estimated to be generated in the future from certain purchased product
formulations was less than the carrying amount of such formulations.
Accordingly, the Company has recorded a write-down of such intangible assets to
their estimated fair values resulting in a $1,723,000 one-time non-cash charge
in the quarter ended September 30, 1998.
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<PAGE>
Other charges include $186,000 in severance costs related to the
termination of certain employees resulting from the implementation of a cost
reduction program in September 1998, and $126,000 for the settlement of a
litigation brought against the Company in February 1998 by Strategic Growth
International, Inc., the Company's former investor relations consultant
("Strategic"). In February 1998, Strategic commenced an action against the
Company in the Supreme Court of the State of New York, County of Nassau, seeking
damages for the Company's alleged failure to perform its obligations under an
agreement between the parties concerning Strategic's services to be performed.
Strategic, whose services were terminated by the Company in October of 1997,
sought damages in the amount of $124,950. On November 6, 1998, Strategic and the
Company entered into a stipulation and order of settlement agreement without
prejudice and without costs.
6. REVOLVING CREDIT FACILITY
The Company's current revolving credit facility with its lender expires
March 31, 1999. The Company is in the process of obtaining a letter of intent
with another lender regarding a three-year $4.0 million credit facility to
refinance its existing revolving credit facility. The closing of the new credit
facility would be subject to a customary lender audit review, an appraisal and
final credit approval.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The following information for the three month and nine month periods ended
September 30, 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. The
unaudited consolidated financial statements of the Company contained in this
quarterly report on Form 10-QSB have been restated for presentation purposes to
reflect the Company's discontinued operations relating to the sale of the
Division on August 25, 1998 to Mane.
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
--------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
--------------------- --------------------- --------------------- ---------------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 3,282 100.0% $ 4,562 100.0% $ 10,471 100.0% $ 15,597 100.0%
Gross profit 1,123 34.2 1,850 40.6 4,149 39.6 6,376 40.9
Operating expenses:
Selling 822 25.1 749 16.5 2,153 20.5 2,153 13.8
General and administrative 646 19.7 553 12.1 1,570 15.0 1,494 9.6
Research and development 336 10.2 444 9.7 1,086 10.4 1,236 7.9
Amortization expense 63 1.9 126 2.8 327 3.1 377 2.4
Write-down of intangible
assets and other charges 2,035 62.0 -- -- 2,035 19.4 -- --
(Loss) income from
operations (2,779) 84.7 (22) .5 (3,022) 28.8 1,116 7.2
Interest expense, net 31 .9 66 1.5 94 .9 183 1.2
Provision for income taxes -- -- 1 -- 2 -- 4 --
(Loss) income from
continuing operations (2,810) 85.6 (89) 2.0 (3,118) 29.7 929 6.0
Discontinued operations:
Gain on disposal of
discontinued operations 1,080 32.8 -- -- 1,080 10.3 -- --
Loss from discontinued
operations (3) -- (204) 4.5 (105) 1.0 (483) 3.1
Net (loss) income (1,733) 52.8 (293) 6.4 (2,143) 20.4 446 2.9
</TABLE>
Net sales. Net sales decreased 28% to $3,282,000 for the three months
ended September 30, 1998 from $4,562,000 for the same period in 1997 and
decreased 33% to $10,471,000 for the nine months ended September 30, 1998 from
$15,597,000 for the comparable nine months of 1997. These decreases were
primarily due to a decrease in demand for a new product line offered by the
Company by a significant customer, which new product line generated significant
sales in 1997 and, to a lesser extent, a general weakening in demand for
products of the flavor industry.
Gross profit. Gross profit, as a percentage of sales, decreased to 34.2%
for the three months ended September 30, 1998 from 40.6% during last year's
comparable quarter and decreased to 39.6% for the nine month period ended
September 30, 1998 from 40.9% from last year's comparable nine month period. The
Company recorded a $280,000 charge to cost of sales during the quarter ended
September 30, 1998 primarily to reduce the carrying value of product inventory
that management believes is an impediment to increasing product sales. Prior to
this charge, the Company's gross profit, as a percentage of sales, increased to
42.7% and 42.3% during the three month and nine month periods ended September
30, 1998, respectively. Higher gross margin percentages generated on 1998
product shipments as compared to 1997 product shipments were primarily due to
favorable differences in product mix and higher margins on new products, which
was offset by the impact of lower sales volume.
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<PAGE>
Selling expenses. Selling expenses increased to $822,000 for the three
months ended September 30, 1998 from $749,000 for the comparable 1997 period,
and was relatively unchanged for the nine months ended September 30, 1998 at
$2,153,000. Included in selling expense for the three month and nine month
periods in 1998 were $150,000 of costs associated with the Company's share of
certain co-operative start-up marketing and advertising costs with a customer in
connection with the customer's product launches. Such costs are to be paid in
three annual installments beginning in December 1998. Prior to these
co-operative costs, selling expenses decreased during the 1998 periods due
principally to lower sales commissions and freight-out costs on decreased sales.
General and administrative expenses. General and administrative expenses
increased to $646,000 for the three months ended September 30, 1998 from
$553,000 for the three months ended September 30, 1997, and increased to
$1,570,000 for the nine months ended September 30, 1998 from $1,494,000 for the
nine month period in 1997. During the third quarter of 1998, the Company
recorded bad debt expense of $165,000 due principally to bankruptcy proceedings
relating to one customer. Prior to this charge, general and administrative
expenses decreased by $72,000 and $89,000 during the three month and nine month
periods ended September 30, 1998, respectively, as a result of the Company's
cost reduction programs implemented during the latter part of 1997 and during
September 1998.
Research and development expenses. Research and development expenses
decreased to $336,000 for the three months ended September 30, 1998 from
$444,000 for the three months ended September 30, 1997, and decreased to
$1,086,000 for the nine months ended September 30, 1998 from $1,236,000 for the
comparable nine month period in 1997 as a result of a cost reduction program
implemented by the Company in September 1998.
Amortization expense. Amortization expense decreased to $63,000 for the
three months ended September 30, 1998 from $126,000 for the three months ended
September 30, 1997, and decreased to $327,000 for the nine months ended
September 30, 1998 from $377,000 for the nine month period in 1997. These
decreases were due principally to the amortization of deferred charges during
the 1997 periods associated with the Company's $1.5 million convertible debt
financing, which was terminated in 1997.
Interest expense, net. Interest expense decreased to $31,000 for the three
months ended September 30, 1998 from $66,000 for the comparable 1997 period, and
decreased to $94,000 for the nine months ended September 30, 1998 from $183,000
for the nine months ended September 30, 1997. These decreases were 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. There is no federal income tax provision since the Company has
available net operating loss carryforwards.
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<PAGE>
Liquidity and Capital Resources
During the nine months ended September 30, 1998, cash used in operating
activities totaled $219,000 as compared to $364,000 for the nine months ended
September 30, 1997. Working capital at September 30, 1998 was $1,619,000 (see
Note 6 to Notes to Consolidated Financial Statements) 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 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, which terminates on March 31, 1999, replaced the
Company's then existing $5,500,000 credit line (the "1996 Credit Facility") and
allowed the Company to pay $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 initially bore interest based on the bank's London Interbank Offering
Rate ("LIBOR") plus 2.5%, or one-half of 1% above the bank's prime rate, at the
Company's option. Effective November 3, 1998, outstanding borrowings under the
new arrangement bear interest based on the bank's LIBOR plus 375 basis points,
or 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.
In December 1997, the Company was in violation of certain financial
covenants under 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 June 1998, the Company was in violation of certain financial
covenants under the 1997 Credit Facility. In August 1998, the lender waived
compliance by the Company with such covenants. In connection with the 1998
Amendment, the Company paid the bank $75,000 on July 1, 1998. On September 30,
1998, the lender eliminated two financial covenants and modified two other
financial covenants which became effective for the period ended September 30,
1998.
On August 25, 1998, the Company sold substantially all of the assets and
certain liabilities relating to the Division to Mane for $5.5 million in cash,
less an aggregate of $1,003,454 in principal and interest assumed by Mane which
was owed under a promissory note to a former director and executive officer of
the Company in connection with the Company's acquisition of the Division in
December 1995. Of the total purchase price paid, $275,000 is being held in
escrow until August 25, 2000 to secure certain indemnification obligations of
the Company. The net cash proceeds from the Company's sale of the Division of
approximately $4.0 million, after deducting closing costs, was used to pay down
the Company's outstanding term loan balance under the 1997 Credit Facility of
$637,500 and a portion of the outstanding revolving loans of such credit
facility with the lender. As of September 30, 1998, approximately $2,013,000
remained outstanding under the revolving loan portion of the 1997 Credit
Facility. In connection with the Company's sale of the Division, on August 25,
1998 the Company and the lender reduced the maximum borrowings available to the
Company under the 1997 Credit Facility from $6,750,000 to $2,750,000. At
September 30, 1998, approximately $514,000 was available for borrowings against
the Company's borrowing base under the 1997 Credit Facility and the outstanding
borrowings under the 1997 Credit Facility bore interest at the rate of
approximately 8.2% per annum.
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<PAGE>
Under 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
until March 31, 1999. The term of the 1997 Credit Facility expires on March 31,
1999, and the Company may be required to obtain additional financing in order to
continue its operations or otherwise. The Company is in the process of obtaining
a letter of intent with another lender regarding a three-year $4.0 million
credit facility to refinance its existing revolving credit facility. The closing
of the new credit facility would be subject to numerous closing conditions,
including a customary lender audit review, an appraisal and final credit
approval. 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
operations, which could have a material adverse effect on the Company's
business, results of operations and prospects.
Year 2000 Compliance
The Company utilizes data processing systems and software to conduct its
general accounting and manufacturing operations. During the latter part of 1997,
the Company initiated a comprehensive review and assessment of its information
systems to confirm that such systems would function properly in the year 2000
and beyond. In connection with such efforts, the Company made modifications to
its existing software and hardware and believes its computer systems are Year
2000 compliant. The Company is currently in the process of formally
communicating with all significant customers and suppliers to determine the
extent to which they are Year 2000 compliant. Such determination is expected to
be completed during the first quarter of 1999. There can be no assurance that
the Company will not be adversely affected by unanticipated Year 2000 issues,
including the failure of a material supplier or customer to become Year 2000
compliant. The Company currently has no formal contingency plans in the event it
is adversely affected by unanticipated Year 2000 issues or a material customer
or supplier's failure to become Year 2000 compliant, other than to conduct
business with suppliers who are Year 2000 compliant and whom the Company has
identified as alternative suppliers. The costs associated with the evaluation
and modification of the Company's computer systems to become Year 2000 compliant
were not material and were expensed as incurred.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In February 1998, Strategic Growth International, Inc. ("Strategic"), the
Company's former investor relations consultant, commenced an action
against the Company in the Supreme Court of the State of New York, County
of Nassau, seeking damages for the Company's alleged failure to perform
its obligations under an agreement concerning certain services to be
performed . Strategic, whose services were terminated by the Company in
October 1997, sought damages in the amount of $124,950. On November 6,
1998, Strategic and the Company entered into a stipulation and order of
settlement without prejudice and without costs.
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:
The following Exhibit is hereby filed as part of this Quarterly
Report on Form 10-QSB: 27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a Form 8-K on September 9, 1998 with respect to
its sale of the Division to Mane, and filed an amendment thereto on
November 5, 1998 containing certain pro forma financial information
relating thereto.
-11-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: November 16, 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)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 400,703
<SECURITIES> 0
<RECEIVABLES> 2,917,793
<ALLOWANCES> 360,000
<INVENTORY> 2,914,480
<CURRENT-ASSETS> 5,943,376
<PP&E> 2,214,051
<DEPRECIATION> 1,586,915
<TOTAL-ASSETS> 8,360,274
<CURRENT-LIABILITIES> 4,324,492
<BONDS> 50,507
0
0
<COMMON> 124,496
<OTHER-SE> 3,542,142
<TOTAL-LIABILITY-AND-EQUITY> 8,360,274
<SALES> 10,471,529
<TOTAL-REVENUES> 10,471,529
<CGS> 6,322,015
<TOTAL-COSTS> 7,172,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 195,000
<INTEREST-EXPENSE> 93,758
<INCOME-PRETAX> (3,116,267)
<INCOME-TAX> 1,730
<INCOME-CONTINUING> (3,117,997)
<DISCONTINUED> 975,276
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,142,721)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
