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 June 30, 1998
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
Delaware 11-3199437
------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
-------------------------------------------------
(Address of Principal Executive Offices)
(516) 842-7600
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
The number of outstanding shares of the Registrant's only class of common stock
as of August 14, 1998 was 12,374,623
Transitional Small Business Disclosure Format (check one):
YES |_| NO |X|
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
June 30, 1998
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 .......................................... 1
Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 1998
and June 30, 1997 .............................................. 2
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998
and June 30, 1997 .............................................. 3
Notes to Consolidated Financial Statements ..................... 4
Item 2. - Management's Discussion and Analysis ....................... 5
PART II - OTHER INFORMATION ................................................ 8
SIGNATURE .................................................................. 9
-i-
<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(in U.S. Dollars)
<TABLE>
<CAPTION>
AT AT
JUNE 30, DECEMBER 31,
1998 1997
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 407,394 $ 582,972
Receivables, net 3,816,107 2,693,081
Inventories 3,648,193 3,740,480
Prepaid expenses and other current assets 86,713 68,440
------------ ------------
Total current assets 7,958,407 7,084,973
Fixed assets, net 1,154,326 1,276,619
Intangible assets, net 5,237,759 5,558,993
Other assets 263,842 174,989
Notes receivable from related parties 271,165 279,520
------------ ------------
Total assets $ 14,885,499 $ 14,375,094
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 2,343,281 $ 1,294,429
Accrued expenses 479,467 615,217
Current portion of long-term debt 182,210 177,212
------------ ------------
Total current liabilities 3,004,958 2,086,858
Long-term debt 6,659,992 6,704,294
Deferred rent payable 40,547 34,367
------------ ------------
9,705,497 8,825,519
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, issued 12,374,623 shares 123,746 123,746
Paid-in capital 10,138,161 10,138,161
Accumulated deficit (4,886,126) (4,476,048)
Unearned compensation arising from stock awards (195,779) (236,284)
------------ ------------
Total stockholders' equity 5,180,002 5,549,575
------------ ------------
Total liabilities and
stockholders' equity $ 14,885,499 $ 14,375,094
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Accompanying Notes.
-1-
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,237,692 $ 7,044,867 $ 9,887,150 $ 13,824,704
Cost of sales 3,031,548 4,193,979 5,853,714 8,324,336
------------ ------------ ------------ ------------
Gross profit 2,206,144 2,850,888 4,033,436 5,500,368
------------ ------------ ------------ ------------
Operating expenses:
Selling 817,144 881,914 1,606,912 1,716,788
General and administrative 647,598 654,234 1,211,926 1,272,783
Research and development 420,130 486,764 892,691 960,270
Amortization expense 260,058 223,619 446,905 445,605
------------ ------------ ------------ ------------
Total operating expenses 2,144,930 2,246,531 4,158,434 4,395,446
------------ ------------ ------------ ------------
Income (loss) from operations 61,214 604,357 (124,998) 1,104,922
Interest expense, net 144,744 187,844 281,620 358,886
------------ ------------ ------------ ------------
(Loss) income before provision
for income taxes (83,530) 416,513 (406,618) 746,036
Provision for income taxes 1,310 5,400 3,460 6,750
------------ ------------ ------------ ------------
Net (loss) income $ (84,840) $ 411,113 $ (410,078) $ 739,286
============ ============ ============ ============
Net (loss) income per common share $ (.01) $ .03 $ (.03) $ .06
============ ============ ============ ============
Weighted average shares outstanding 12,374,623 12,579,966 12,374,623 12,548,354
============ ============ ============ ============
</TABLE>
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 Six Months Ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (410,078) $ 739,286
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 578,254 610,567
Deferred rent 6,180 6,180
Changes in assets and liabilities:
Accounts receivable (1,123,026) (1,109,181)
Inventories 92,287 (505,079)
Prepaid expenses and other current assets (18,273) (49,097)
Other assets (88,853) 1,976
Accounts payable 1,048,852 302,175
Accrued expenses (210,750) (161,827)
----------- -----------
Net cash used in operating activities (125,407) (165,000)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (19,222) (41,567)
Notes receivable 8,355 4,082
----------- -----------
Net cash used in investing activities (10,867) (37,485)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 550,000 800,000
Repayment of long-term debt (589,304) (411,395)
----------- -----------
Net cash (used in) provided by financing activities (39,304) 388,605
----------- -----------
(Decrease) increase in cash (175,578) 186,120
Cash-beginning of period 582,972 233,566
----------- -----------
Cash-end of period $ 407,394 $ 419,686
=========== ===========
</TABLE>
See Accompanying Notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
Technology Flavors & Fragrances, Inc. (the "Company") develops and
manufactures flavor, fragrance and seasoning products used to provide or enhance
flavors or fragrances in a wide variety of consumer and industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 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.
2. INVENTORIES
Components of inventories are summarized as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Raw Materials $2,656,787 $2,763,286
Finished Goods 991,406 977,194
---------- ----------
$3,648,193 $3,740,480
========== ==========
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 income per share for the
three and six month periods ended June 30, 1997 was calculated using the
weighted average common and common equivalent shares that were outstanding
during the periods. Diluted net loss per share for the three and six month
periods ended June 30, 1998 was calculated using the weighted average number of
shares of common stock outstanding during the periods.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following information for the three month and six month periods ended
June 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.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 5,238 100.0% $ 7,045 100.0% $ 9,887 100.0% $13,825 100.0%
Gross profit 2,206 42.1 2,851 40.5 4,033 40.8 5,500 39.8
Operating expenses:
Selling 817 15.6 882 12.5 1,607 16.3 1,717 12.4
General and administrative 648 12.4 654 9.3 1,212 12.3 1,273 9.2
Research and development 420 8.0 487 6.9 892 9.0 960 6.9
Amortization expense 260 4.9 224 3.2 447 4.5 445 3.2
Income (loss) from operations 61 1.2 604 8.6 (125) 1.3 1,105 8.0
Interest expense, net 145 2.8 188 2.7 282 2.8 359 2.6
Provision for income taxes 1 -- 5 -- 3 -- 7 --
Net (loss) income (85) 1.6 411 5.8 (410) 4.1 739 5.3
</TABLE>
Net sales. Net sales decreased 26% to $5,238,000 for the three months
ended June 30, 1998 from $7,045,000 for the same period in 1997 and decreased
28% to $9,887,000 for the six months ended June 30, 1998 from $13,825,000 for
the comparable six months of 1997. These decreases were primarily due to a
reduction in sales in 1998 of $1,524,000 and $2,854,000 for the three months and
six month periods ended June 30, 1998, respectively, as compared to the same
periods in 1997, relative to a weakening in demand of a new product line by a
significant customer which generated significant sales to such customer during
its initial launch in January 1997, and to a lesser extent, a weakening of
demand of certain seasoning and flavor products.
Gross profit. Gross profit, as a percentage of sales, increased to 42.1%
for the three months ended June 30, 1998 from 40.5% during last year's
comparable quarter and increased to 40.8% for the six month period ended June
30, 1998 from 39.8% during last year's comparable six month period. Higher gross
margin percentages are being generated on 1998 product shipments as compared to
1997 product shipments as a result of favorable differences in product mix which
more than offset the impact of lower sales volume which normally results in a
lower gross margin percentage.
Selling expenses. Selling expenses decreased to $817,000 for the three
months ended June 30, 1998 from $882,000 for the comparable 1997 period, and
decreased to $1,607,000 for the six months ended June 30, 1998 from $1,717,000
for the comparable 1997 period. These decreases were due principally to lower
sales commissions and freight-out costs on decreased sales.
General and administrative expenses. General and administrative expenses
decreased slightly to $648,000 for the three months ended June 30, 1998 from
$654,000 for the three months ended June 30, 1997, and decreased to $1,212,000
for the six months ended June 30, 1998 from $1,273,000 for the six month period
in 1997. The reduced level is a result of the Company's cost reduction program.
Research and development expenses. Research and development expenses
decreased to $420,000 for the three months ended June 30, 1998 from $487,000 for
the three months ended June 30, 1997, and decreased to
-5-
<PAGE>
$892,000 for the six months ended June 30, 1998 from $960,000 for the comparable
six month period in 1997 as a result of the Company's cost reduction program
implemented during the latter part of 1997.
Amortization expense. Amortization expense increased to $260,000 for the
three months ended June 30, 1998 from $224,000 for the second quarter of 1997.
Amortization expense of $447,000 for the six months ended June 30, 1998 was
relatively unchanged from $445,000 for the comparable six month period in 1997.
The increase during the second quarter of 1998 was due principally to the
amortization of deferred charges associated with the Company's revolving credit
facility.
Interest expense, net. Interest expense decreased to $145,000 for the
three months ended June 30, 1998 from $188,000 for the comparable 1997 period,
and decreased to $282,000 for the six months ended June 30, 1998 from $359,000
for the six months ended June 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 Resourses."
Provision for income taxes. Provision for income taxes represents state
franchise taxes.
Liquidity and Capital Resources
During the six months ended June 30, 1998, cash used in operating
activities totalled $125,000 as compared to $165,000 for the six months ended
June 30, 1997. Working capital at June 30, 1998 was $4,953,000 as compared to
$4,998,000 at December 31, 1997.
Historically, the Company's financing needs have been met through the
issuances of equity and debt securities. On October 16, 1997, the Company
entered into a new credit agreement with a bank providing for a $6,000,000
revolving credit facility and a $750,000 term loan facility (the "1997 Credit
Facility"). The 1997 Credit Facility replaced 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 bear
interest based on the bank's London Interbank Offering Rate ("LIBOR") plus 2
1/2% (which currently equates to approximately 1/4 of 1% below the bank's prime
rate) or 1/2 of 1% above the bank's prime rate, at the Company's option. As of
June 30, 1998, the outstanding borrowings under the 1997 Credit Facility bore
interest at the rate of approximately 8.2% per annum.
Outstanding borrowings are collateralized by substantially all of the
assets of the Company and are subject to eligibility requirements relating to
the Company's receivables, inventories and product formulations. In December
1997, the Company was in violation of certain financial covenants in the credit
agreement relating to the 1997 Credit Facility. In March 1998, the Company and
the lender under the 1997 Credit Facility entered into a waiver and amendment
agreement (the "1998 Amendment") which waived compliance by the Company with
certain covenants for 1997 and amended certain financial covenants for 1998 and
beyond. In June 1998, the Company was in violation of certain financial
covenants in the credit agreement relating to 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 March 9, 1998, the Company's $888,019 subordinated note payable was
amended to extend the first principal installment of $177,604 from March 31,
1998 to January 1, 2000. The remaining four principal installments are payable
on January 1 each year thereafter through 2004. As of June 30, 1998, the
Company's outstanding capital lease obligations amounted to approximately
$92,000. As of June 30, 1998, the Company had outstanding borrowings under its
term loan facility of approximately $638,000, including current maturities, and
approximately $5,263,000 under its revolving credit facility, and approximately
$664,000 was available for borrowings against its borrowing base.
-6-
<PAGE>
Under the credit agreement relating to the 1997 Credit Facility, the
Company is prohibited from incurring any indebtedness other than, among other
things, existing indebtedness, subordinated debt (with the consent of the bank),
and unsecured trade indebtedness in the ordinary course of business, and is
restricted in its ability to, among other things, incur liens, make investments,
sell assets, make acquisitions and pay dividends.
The Company believes it has adequate capital to fund current operations
for the remainder of 1998. However, the Company may be required to obtain
additional financing earlier in order to continue its operations or otherwise.
There can be no assurance that additional funds will be available when needed,
or if available, will be on favorable terms or in the amounts required by the
Company. If adequate funds are not available to the Company when needed, it may
be required to delay, scale back or eliminate some or all of its marketing and
development efforts or other operations, which could have a material adverse
effect on the Company's business, results of operations and prospects. Further
issuances of the Company's securities will cause dilution to the Company's then
existing stockholders, which in certain circumstances could be substantial.
Year 2000
The Company has updated its software so that it believes its computer
systems are Year 2000 compliant. However, there can be no assurance that the
Company will not be adversely affected by unanticipated Year 2000 issues. The
costs associated with upgrading the computer systems to become Year 2000
compliant were not material and were expensed in 1997.
-7-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 29, 1998, the Company held an annual meeting of stockholders (the
"Annual Meeting"). The proposals voted upon at the Annual Meeting and the
results with respect to each proposal are set forth below:
Proposals Voted Upon at Annual Meeting
1. To elect seven directors to serve for a term of one year and until
their respective successors are duly elected and qualified.
2. To ratify the selection by the Company's Board of Directors of Ernst &
Young LLP as independent auditors of the Company for the fiscal year ending
December 31, 1998 and to authorize the Board of Directors to fix their
remuneration.
Proposals
Abstain/Not
For Against Voting
--------- ------- -----------
No. 1 (Election of Directors)
Philip Rosner ..................... 5,674,597 27,001 118,700
A. Gary Frumberg .................. 5,773,397 27,001 19,900
Richard R. Higgins ................ 5,707,886 31,001 81,411
Sean Deson ........................ 5,780,897 27,001 12,400
Bruce S. Foerster ................. 5,780,897 27,001 12,400
Werner F. Hiller .................. 5,780,897 27,001 12,400
Irwin D. Simon .................... 5,780,897 27,001 12,400
No.2 ................................. 5,768,828 0 51,470
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27 (Appendix A to Item 601(c) of Regulation S-B)
b) Reports on Form 8-K
None
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<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 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)
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 407,394
<SECURITIES> 0
<RECEIVABLES> 4,011,107
<ALLOWANCES> 195,000
<INVENTORY> 3,648,193
<CURRENT-ASSETS> 7,958,407
<PP&E> 3,024,100
<DEPRECIATION> 1,869,774
<TOTAL-ASSETS> 14,885,499
<CURRENT-LIABILITIES> 3,004,958
<BONDS> 6,659,992
0
0
<COMMON> 123,746
<OTHER-SE> 5,056,256
<TOTAL-LIABILITY-AND-EQUITY> 14,885,499
<SALES> 9,887,150
<TOTAL-REVENUES> 9,887,150
<CGS> 5,853,714
<TOTAL-COSTS> 4,158,434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 281,620
<INCOME-PRETAX> (406,618)
<INCOME-TAX> 3,460
<INCOME-CONTINUING> (410,078)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (410,078)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
