U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
-------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 11-3199437
--------------------------------- ------------------------------------
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
-------------------------------------------------
(Address of Principal Executive Offices)
(631) 842-7600
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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 such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the issuer's common stock, par value $.01
per share, as of July 21, 2000, was 12,531,491.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
JUNE 30, 2000
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999....................................... 1
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 2000 and June 30, 1999............................. 2
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000
and June 30, 1999........................................... 3
Notes to Consolidated Financial Statements.................. 4
Item 2. - Management's Discussion and Analysis or
Plan of Operation.......................................... 5
PART II - OTHER INFORMATION.............................................. 8
SIGNATURES............................................................... 10
-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,
2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 153,891 $ 154,535
Receivables, net 4,643,705 3,270,571
Inventories 2,904,699 2,634,997
Prepaid expenses and other current assets 112,140 54,995
------------ ------------
Total current assets 7,814,435 6,115,098
Fixed assets, net 568,247 577,482
Intangible assets, net 864,826 945,903
Other assets 416,358 382,708
Notes receivable from related parties 141,447 292,101
------------ ------------
Total assets $ 9,805,313 $ 8,313,292
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,952,589 $ 1,565,575
Accrued expenses 255,576 301,775
Revolving credit facility 2,159,471 1,544,607
Current portion of capital lease obligations 25,190 39,354
------------ ------------
Total current liabilities 4,392,826 3,451,311
Capital lease obligations 27,987 35,359
Deferred credits 340,267 334,087
------------ ------------
4,761,080 3,820,757
STOCKHOLDERS' EQUITY
Common stock:
$.01 par value, issued 12,531,491 and
12,549,223 shares, respectively 125,315 125,492
Paid-in capital 10,101,254 10,222,544
Accumulated deficit (5,182,336) (5,855,501)
------------ ------------
Total stockholders' equity 5,044,233 4,492,535
------------ ------------
Total liabilities and stockholders' equity $ 9,805,313 $ 8,313,292
============ ============
</TABLE>
NOTE: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,471,740 $ 3,792,587 $ 8,687,955 $ 7,434,975
Cost of sales 2,492,036 2,084,144 4,954,976 4,148,452
------------ ------------ ------------ ------------
Gross profit 1,979,704 1,708,443 3,732,979 3,286,523
------------ ------------ ------------ ------------
Operating expenses:
Selling 631,675 574,917 1,243,611 1,147,147
General and administrative 466,823 402,526 909,508 809,344
Research and development 360,669 364,299 697,685 675,878
Amortization 48,714 40,539 97,428 81,078
------------ ------------ ------------ ------------
Total operating expenses 1,507,881 1,382,281 2,948,232 2,713,447
------------ ------------ ------------ ------------
Income from operations 471,823 326,162 784,747 573,076
Interest expense, net (46,208) (46,259) (88,227) (85,563)
------------ ------------ ------------ ------------
Income before provision for income taxes 425,615 279,903 696,520 487,513
Provision for income taxes (13,000) (4,122) (23,355) (8,058)
------------ ------------ ------------ ------------
Net income $ 412,615 $ 275,781 $ 673,165 $ 479,455
============ ============ ============ ============
Net income per common share - basic and diluted $ .03 $ .02 $ .05 $ .04
============ ============ ============ ============
Weighted average shares outstanding 12,491,015 12,451,845 12,520,401 12,450,734
============ ============ ============ ============
</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,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 673,165 $ 479,455
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 185,001 155,226
Deferred rent 6,180 6,180
Changes in assets and liabilities:
Accounts receivable (1,373,134) (933,388)
Inventories (269,702) 200,034
Prepaid expenses and other current assets (57,145) (18,168)
Other assets (50,000) (29,047)
Accounts payable 387,014 (95,783)
Accrued expenses (46,199) (132,356)
----------- -----------
Net cash used in operating activities (544,820) (367,847)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (78,339) (48,859)
Notes receivable (30,896) (10,879)
----------- -----------
Net cash used in investing activities (109,235) (59,738)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility 7,730,000 3,185,412
Repayment of revolving credit facility (7,115,136) (2,783,068)
Payment of capital lease obligations (21,536) (19,207)
Issuance of common stock 60,083 58,000
----------- -----------
Net cash provided by financing activities 653,411 441,137
----------- -----------
(Decrease) increase in cash (644) 13,552
Cash and cash equivalents - beginning of period 154,535 317,034
----------- -----------
Cash and cash equivalents - end of period $ 153,891 $ 330,586
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
Technology Flavors & Fragrances, Inc. (the "company," "us," "we" or "our")
develops, manufactures, and markets 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 our management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month and six month periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-KSB for the year
ended December 31, 1999.
2. INVENTORIES
-----------
Components of inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $1,816,082 $1,427,698
Finished goods 1,088,617 1,207,299
---------- ----------
$2,904,699 $2,634,997
========== ==========
</TABLE>
3. EARNINGS PER SHARE
------------------
Basic net income per share is calculated using the weighted average number
of shares of our common stock outstanding during the period. Diluted net income
per share for the three month and six month periods ended June 30, 2000 and June
30, 1999 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 three month and six month periods ended June 30, 2000 and
June 30,1999 was not material and, thus, diluted net income per share was not
presented.
4. NOTES RECEIVABLE FROM RELATED PARTIES
-------------------------------------
On June 1, 2000, our Chairman and President surrendered to us 100,000
shares of the company's common stock owned by him which resulted in a partial
reduction of $141,300 of his outstanding loan to us.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The following information for the three month and six month periods ended
June 30, 2000 and June 30, 1999 have been derived from the our unaudited
consolidated financial statements and should be read in conjunction with our
Annual Report on Form 10-KSB for the year ended December 31, 1999.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $4,472 100.0% $3,793 100.0% $8,688 100.0% $7,435 100.0%
Gross profit 1,980 44.3 1,708 45.0 3,733 43.0 3,287 44.2
Operating expenses:
Selling 632 14.1 575 15.1 1,244 14.3 1,147 15.4
General and administrative 467 10.5 402 10.6 909 10.5 810 10.9
Research and development 360 8.1 364 9.6 698 8.1 676 9.1
Amortization 49 1.1 41 1.1 97 1.1 81 1.1
Income from operations 472 10.5 326 8.6 785 9.0 573 7.7
Interest expense, net 46 1.0 46 1.3 88 1.0 86 1.2
Provision for income taxes 13 .3 4 -- 23 .3 8 --
Net income 413 9.2 276 7.3 673 7.7 479 6.5
</TABLE>
NET SALES. Net sales increased by $679,000, or 17.9%, to $4,472,000 for the
three months ended June 30, 2000 from $3,793,000 for the same period last year
and increased by $1,253,000 to $8,688,000 for the six months ended June 30, 2000
from $7,435,000 for the comparable six-month period of 1999. The increases were
principally attributable to the launching of new beverage flavor products to new
and existing customers and increased business on certain existing flavor
products.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 44.3% on
sales of $4,472,000 for the three months ended June 30, 2000 as compared to
45.0% on sales of $3,793,000 for the same period last year and decreased to
43.0% on sales of $8,688,000 for the six months ended June 30, 2000 as compared
to 44.2% on sales of $7,435,000 for the comparable six- month period of 1999.
The decreases in gross profit for the 2000 periods were due primarily to lower
gross margins on new flavor products and differences in product mix.
-5-
<PAGE>
OPERATING EXPENSES:
SELLING EXPENSES. Selling expenses increased by $57,000 to $632,000 for the
three months ended June 30, 2000 from $575,000 for the same period last year and
increased by $97,000 to $1,244,000 for the six months ended June 30, 2000 from
$1,147,000 for the comparable six-month period of 1999. The increases were due
principally to the hiring of an additional sales person during the latter part
of 1999 to support expected growth in sales during 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $65,000 to $467,000 for the three months ended June 30, 2000 from
$402,000 for the comparable 1999 period and increased by $99,000 to $909,000 for
the six months ended June 30, 2000 from $810,000 for the comparable six-month
period of 1999. The increases were due principally to general wage increases and
implementation of a management incentive plan.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the three months ended June 30, 2000 of $360,000 were consistent with the
comparable 1999 period of $364,000. For the six months ended June 30, 2000,
research and development expenses of $698,000 were consistent with the
comparable 1999 period of $676,000.
AMORTIZATION EXPENSE. Amortization expense increased by $8,000 to $49,000
for the three months ended June 30, 2000 from $41,000 for the comparable 1999
period and increased by $16,000 to $97,000 for the comparable six-month period
of 1999. The increases were due principally to the increase in deferred
financing costs associated with our revolving credit facility entered into June
1999.
TOTAL OPERATING EXPENSES. Total operating expenses increased by $126,000 to
$1,508,000 for the three months ended June 30, 2000 from $1,382,000 for the
comparable period in 1999 and increased by $234,000 to $2,948,000 for the six
months ended June 30, 2000 from $2,714,000 for the comparable six-month period
of 1999.
INTEREST EXPENSE, NET. Interest expense, net for the three months and six
months ended June 30, 2000 of $46,000 and $88,000, respectively, was consistent
with the comparable 1999 periods of $46,000 and $86,000, respectively. Higher
interest rates during the three months and six months ended June 30, 2000 as
compared to the comparable periods of 1999 principally offset lower outstanding
borrowings during the 2000 periods as compared to the comparable periods of
1999.
PROVISION FOR INCOME TAXES. Provision for income taxes represents state and
franchise taxes and federal alternative minimum tax. There were no federal
income tax provisions for 2000 and 1999 since we had available net operating
loss carryforwards.
NET INCOME. Net income was $413,000 and $673,000 for the three month and
six month periods ended June 30, 2000 as compared to net income for the
comparable 1999 periods of $276,000 and $479,000, respectively.
-6-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, our financing needs have been met through the issuance of
equity and debt securities and commercial bank loans. On June 29, 1999, we
entered into a Loan and Security Agreement with a lender which provided for a
three year $3,000,000 revolving credit facility. We call this revolving credit
facility the "1999 Credit Facility". Outstanding borrowings under the 1999
Credit Facility initially bore interest at a rate of three quarters of one
percent (0.75%) in excess of a prime lending rate, and is subject to certain
adjustments based upon our financial performance. Effective January 1, 2000, the
interest rate was reduced to one quarter of one percent (0.25%) in excess of a
prime a lending rate. Borrowings under the 1999 Credit Facility are subject to
certain eligibility requirements relating to our receivables and inventories and
the discretion of the lender. Outstanding borrowings are secured by
substantially all of our assets, including our product formulations. We must
comply with certain financial and other covenants contained in the Loan and
Security Agreement. Our subsidiaries have guaranteed our obligations under the
1999 Credit Facility. Borrowings under the 1999 Credit Facility at June 30, 2000
and December 31, 1999 were $2,159,000 and $1,545,000, respectively. Borrowings
during the calendar year are generally higher than at the year-end date. At June
30, 2000, $841,000 was available for additional borrowings in accordance with
the terms of the 1999 Credit Facility. The outstanding borrowings under the 1999
Credit Facility are classified as a current liability. At June 30, 2000, the
outstanding borrowings bore interest at 9.75 % per annum.
At June 30, 2000, working capital increased by $758,000 or 28% to
$3,422,000 from $2,664,000 at December 31, 1999.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds On June 9, 2000.
We granted non-qualified stock options to an investor relations firm
under our 1999 Stock Option Plan for the purchase of 100,000 shares of
our common stock at an exercise price of $1.25 per share, the market
price of the common stock on the date of the grant. Such options vest
commencing one month after the grant date in eleven equal monthly
installments of 8,333 shares and 8,337 shares in the twelfth month.
The options were granted as partial consideration for investor
relations services to be rendered to our company, and in reliance upon
an exemption from the registration provisions of the Securities Act of
1933, as amended, as transactions by an issuer not involving any
public offering.
On June 26, 2000, a former investor relations consultant to our
company exercised warrants to purchase 107,143 shares of our common
stock at an exercise price of $0.56 per share. The sale of these
shares to the former investor relations consultant was made pursuant
to an exemption from the registration provisions of the Securities Act
of 1933, as amended, set forth in Section 4(2) thereof as a
transaction by an issuer not involving a public offering.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders On June 21, 2000.
We held our 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 five directors to serve for a term of one year and until
their respective successors are duly elected and qualified.
Phillip Rosner, A. Gary Frumberg, Sean Deson, Werner F. Hiller and
Irwin D. Simon were each re-elected to the Board of Directors. A
tabulation of the votes cast for in connection with election of each
of Messrs. Rosner, Frumburg, Deson, Hiller and Simon is set forth
below.
2. To ratify the appointment by our Board of Directors of Ernst & Young
LLC as our independent auditors for the year ending December 31, 2000
and to authorize our Board of Directors to fix their remuneration.
-8-
<PAGE>
PROPOSALS
<TABLE>
<CAPTION>
Abstain/Not
For Against Voting
--------- ------- -----------
<S> <C> <C> <C>
No. 1 (Election of Directors)
Philip Rosner ............................ 9,264,544 0 11,100
A. Gary Frumberg ......................... 9,264,544 0 11,100
Sean Deson ............................... 9,264,630 0 35,014
Werner F. Hiller ......................... 9,264,630 0 35,014
Irwin D. Simon ........................... 9,272,644 0 11,100
No. 2 (Appointment of Ernst & Young LLP)..... 9,272,644 1,000 2,000
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27.1 Financial Data Schedule
b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
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: July 25, 2000
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By /s/ Joseph A. Gemmo
--------------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of Registrant)
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