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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 1999
|_| 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.
(Name of Small Business Issuer in its Charter)
Delaware 11-3199437
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
10 Edison Street East
Amityville, New York 11701
(Address of Principal Executive Offices)
(631) 842-7600
(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Common Stock, $.01 par value
(Title of Class)
Securities to be registered under Section 12(g) of the 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 such 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. |_|
The Issuer's revenues for the fiscal year ended December 31, 1999 were
$14,769,130.
The aggregate market value of Registrant's voting stock (Common Stock)
held by non-affiliates on March 15, 2000 was approximately $22,912,000 based on
the closing sale price of the Common Stock on such date of U.S. $2.56 per share,
as reported by the Toronto Stock Exchange.
The number of shares outstanding of each class of the issuer common equity
as of March 15, 2000 was:
Common Stock, $0.01 par value 12,524,223
Class
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes |_| No |X|
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
1999 Annual Report on Form 10-KSB
TABLE OF CONTENTS
Page
----
PART 1 .................................................................... 1
ITEM 1-DESCRIPTION OF BUSINESS .......................................... 1
ITEM 2-DESCRIPTION OF PROPERTY .......................................... 4
ITEM 3-LEGAL PROCEEDINGS ................................................ 4
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 4
PART II ................................................................... 5
ITEM 5-MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........ 5
ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ........ 6
ITEM 7-FINANCIAL STATEMENTS ............................................. 9
ITEM 8-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ......................................... 9
PART III .................................................................. 10
ITEM 9-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ................ 10
ITEM 10-EXECUTIVE COMPENSATION .......................................... 13
ITEM 11-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .. 16
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 17
ITEM 13-EXHIBITS AND REPORTS ON FORM 8-K ................................ 19
SIGNATURES ................................................................ 20
FINANCIAL STATEMENTS ..................................................... F-1
i
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PART I
ITEM 1-DESCRIPTION OF BUSINESS
Introduction
Technology Flavors & Fragrances, Inc. develops, manufactures and markets
flavors and fragrances that are incorporated by our customers into a wide
variety of consumer and institutional products including natural and
artificially flavored beverages, confections, foods, tobaccos, pharmaceuticals,
aromatherapy essential oils, perfumes, and health and beauty products. Our
proprietary formulations are currently used in more than 1,200 products sold by
more than 500 companies worldwide, approximately 50 of which are Fortune 1,000
companies. Our executive offices, manufacturing, research and development, sales
and marketing, and distribution facilities are located in Amityville, New York.
We also have sales, marketing and warehouse facilities located in Inglewood,
California, Toronto, Canada and Santiago, Chile.
Unless the context otherwise requires, (i) the term "TFF", "company",
"our", "we" or "us" refers to Technology Flavors & Fragrances, Inc., a Delaware
corporation, together with its wholly-owned subsidiaries, Technology Flavors &
Fragrances, Inc. (Canada), and Technology Flavors & Fragrances S.A. (Chile), and
(ii) all references to "dollars" refer to U.S. dollars.
Background
We were incorporated in New York in 1989 under the name "Aroma Globe,
Inc." In May 1991, we changed our name to "Technology Flavors & Fragrances,
Inc." when we acquired the assets and business of another company by that name.
Since then, we have expanded our operations primarily through acquisitions of
other businesses and internal growth.
On August 25, 1998, we sold substantially all of the assets and certain
liabilities of the Seasoning Division to Mane-Seafla, Inc. ("Mane"), a
subsidiary of Mane USA, Inc., 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 our acquisition of Seafla 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 we have to Mane. In connection with
the transaction, we realized a net gain of approximately $1.1 million, excluding
the $275,000 held in escrow.
Industry Overview
The flavor and fragrance industry sells primarily to manufacturers of
consumer products. The cost of the flavor or fragrance component of a consumer
product typically represents a small portion of the total cost of the consumer
product. As a result, in selling such products, we believe that price is not as
significant as product performance and customer service.
We believe that changes in consumer buying habits and preferences over the
past few years have impacted on the industry as a whole and that these changes
have contributed to a demand for new and innovative products. We believe that
there is a trend toward more natural foods in the marketplace, requiring
manufacturers to produce more naturally-flavored products. Not only has this
translated into a steady shift from artificial to natural ingredients, but we
believe it is also placing greater emphasis on producing flavors that more
effectively impart "natural" tastes in processed foods. We believe that a
growing desire among consumers to adopt a healthier lifestyle is increasing the
demand for lighter, healthier foods. This has posed new challenges for us to
develop ways of replacing the tastes which are lost when sugar, salt, fat, and
cholesterol are reduced or eliminated from traditional food preparations.
Another important trend in the industry, we believe, is the growing
consumption of processed foods. We believe that more than 80% of the food
consumed in the home today is in processed form, with over 1,000 natural and
synthetic flavoring agents being used to produce these foods. We believe that as
the demand for microwaveable products and prepared and frozen convenience foods
continues to rise, so, too, will the need for new flavor products to counteract
the adverse effects of microwaving and freezing.
We believe that the trend towards natural, healthier products also
includes soaps, shampoos, cosmetics, detergents, and other cleaning products,
air fresheners, and numerous other household items.
Products
Our principal product categories include natural flavors, artificial
flavors and fragrances. The five largest end-user categories of our products are
beverages, baked goods, confections, cosmetics and tobacco. Our flavor products,
produced from our proprietary
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formulations, are sold primarily to the beverage, food and tobacco industries.
Examples of consumer products containing our flavor products include
confections, toothpaste, chewing gums, prepared foods, ice creams, animal feeds,
candy, tobacco, alcoholic and non-alcoholic beverages, poultry, seafood and
processed meats.
Areas which we believe currently offer growth opportunities include flavor
products to enhance "natural food" products to restore the flavors in non-fat
and low fat, sugar, salt and cholesterol foods, and flavor products able to
withstand the effects of microwaving and freezing (i.e., convenience foods).
Our fragrance products, produced from our proprietary formulations, are
sold primarily to the personal care, cosmetic and toiletry, and household and
industrial product industries. Fragrances are used by customers in the
manufacture of a wide variety of consumer products such as soaps, detergents,
household cleaners, cosmetic creams, lotions and powders, after-shave lotions,
deodorants, air fresheners, perfumes, colognes, aromatherapy oils and hair care
products.
Marketing and Distribution
Our marketing strategy principally involves the utilization of direct
sales and marketing personnel strategically located in regions in the U.S.,
Canada and South America, and to a lesser extent, independent sales brokers.
Typically, our research and development personnel accompany sales personnel in
making sales presentations to new and existing customers. We believe that this
strategy has worked effectively to promote our products.
Research and Development
Our research and development activities are conducted principally at our
Amityville, New York facility. We maintain research and development labs as well
as applications labs, both of which we believe are necessary for the development
of high quality flavor and fragrance compounds. In 1996, we installed a
Processed Flavor Laboratory that utilizes amino acids and sugars in a water
medium to produce meat, poultry and roasted flavors and aromas. We currently
offer new and innovative products developed in this laboratory.
We believe that one of the most fundamental challenges in creating flavor
and fragrance formulations, from a technical standpoint, is the development of
flavors and fragrances which are able to (i) withstand the rigors of processing,
storage, and final preparation, and (ii) maintain the integrity of the basic
taste and scent characteristics for the useful life of the final product. In the
case of certain products, such as perfumes, colognes and frozen foods, the
potential shelf-life of the product may be a period of up to one year.
We work in association with existing and potential customers to develop a
flavor or fragrance for a new consumer product. During this process, which
generally lasts between 6 and 12 months, we typically present the customer with
several samples from our proprietary formulations. Generally, a particular
flavor or fragrance formulation is created and produced for one customer.
In the last two years, we have furnished over 10,000 samples to existing
and potential customers. The typical lag time between initial sample submissions
and when customers place production orders has historically ranged from 6 to 18
months.
During the past several years, the flavor industry has had to respond to
new demands by consumers for (i) products with little or no cholesterol, fat,
sugar or salt, (ii) products that withstand microwaving or freezing, and (iii)
products that contain more natural ingredients. Each of these demands results in
taste differences from what consumers have come to expect so that new flavor
formulations are necessary to satisfy taste expectations. Consequently, the
Company believes its research and development abilities are increasingly
important for flavor products.
We spent $1,307,000 and $1,396,000 in research and development during 1999
and 1998, respectively, and we expect our research and development expenses to
remain at approximately this level in year 2000.
Raw Materials
We utilize a significant number of different raw materials in the
preparation of our flavor and fragrance formulations. Considerable effort is
devoted to ensuring that these ingredients remain uniform and consistent over
time " a critical process since many of the raw materials used by us are
inherently unstable and/or are derived from plants that vary naturally with
seasons and crop years. Accordingly, shipments of raw materials received by us
are routinely tested and analyzed for compliance with specifications we set.
We purchase raw materials from numerous suppliers. For the year ended
December 31, 1999, no single supplier provided us with more than approximately
13.6% of our raw material requirements. Three other suppliers provided us with
approximately 20% of our raw material requirements. Although there can be no
assurance, we believe that alternate sources of raw materials are available in
the event of an interruption in the supply of raw materials from a single
supplier.
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Seasonality
Historically, our sales tend to be higher in the calendar quarters ending
June 30 and September 30, primarily due to higher consumer demand from our
beverage customers during those periods. There can be no assurance that the
seasonality of our business will not have a material adverse effect on our
operations.
Competition
The flavor and fragrance industry is highly fragmented with a few large
companies, such as International Flavors & Fragrances, Inc., Haarmann & Reimer
Corporation and Firmenich, Inc., competing against many smaller companies.
Certain of our competitors have substantially greater financial, marketing and
other resources than us. Recently, there have been trends toward increased
industry consolidation as companies vertically integrate with suppliers and
expand horizontally through acquisitions. We believe that our competitiveness
depends upon our creativity, responsiveness and reliability, as well as the
diversity of our customers and products. Management expects that we will
continue to sell to large companies that do not purchase all of their flavor and
fragrance products from a single supplier and to smaller companies that our
large competitors choose not to service.
Customers
Our formulations from continuing operations are currently used in more
than 1,200 products sold by more than 500 companies worldwide, approximately 50
of which are Fortune 1,000 companies. We work with our customers in the
development of specific flavors or fragrances for a particular end product. For
the years ended December 31, 1999 and 1998, no one customer accounted for more
than 10% of our sales, and the top ten customers accounted for approximately 36%
and 37% of our sales, respectively.
Backlog
Customers purchase our products as required, and normally delivery can be
made within two to four weeks thereafter. Consequently, backlog is not a
significant indicator of the volume of our business over an extended period of
time.
Foreign Operations
Approximately 8% and 9% of our net sales from continuing operations for
the years ended December 31, 1999 and 1998, respectively, were derived from
sales denominated in foreign currencies, principally in Canada. The effect of
foreign currency exchange rate fluctuations on such sales is largely offset to
the extent expenses of our international operations are incurred and paid for in
the same currencies as those of our sales.
Export Sales
For the years ended December 31, 1999 and 1998, export sales were
approximately 27% and 33%, respectively, of total sales. Our export sales are
made to entities located primarily in Canada and South America. Receivables from
such foreign sales at December 31, 1999 and 1998 amounted to approximately 43%
and 50%, respectively, of total accounts receivable.
Governmental Regulations
Production of many of our products involves the manufacturing of flavors
for foods and beverages, the handling of alcohol and the generation, storage,
transportation and disposal of hazardous waste. Accordingly, our operations are
subject to extensive federal, state and local laws and regulations relating to
such matters, and to the safety and health of our employees and others. Although
there can be no assurance, we believe that we currently comply in all material
respects with such applicable laws and regulations. We could be subject to,
among other things, sanctions, penalties (including significant fines), and
suspension or revocation of required licenses or permits for failure to comply
with applicable governmental laws or regulations. Any of these actions could
have a material adverse effect on our results of operations in any given year,
or materially affect our liquidity or financial condition over a longer period
of time. At this time, we are unable to anticipate the impact, if any, that
subsequent changes or new interpretations to applicable laws and regulations may
have on our business, financial condition or results of operations.
Employees
At March 15, 2000, we had 60 employees, of which 58 persons were employed
full-time. Of our 58 full-time employees, 6 were employed in management, 8 were
employed in administrative and purchasing, 9 were employed in sales and
marketing, 18 were employed in production, 13 were employed in research and
development and quality control, and 4 were employed in customer service. We
consider our relationship with our employees to be satisfactory. None of our
employees is subject to a collective bargaining agreement.
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Proprietary Rights
We consider our flavor and fragrance formulas to be proprietary
information and trade secrets. We do not, however, generally rely on patents,
copyrights or trademarks to protect our proprietary rights in our flavor and
fragrance formulations. There can be no assurance that our current protections
will be adequate or that our competitors will not independently develop flavors
and fragrances that are substantially equivalent or superior to our flavors and
fragrances.
A substantial portion of our technology and know-how are trade secrets. We
have a policy of requiring our employees and contractors to protect our
proprietary information through written agreements. In addition, we have a
policy of requiring our prospective business partners to enter into
non-disclosure agreements with us before we reveal any of our proprietary
information to them. There can be no assurance that the measures taken by us to
protect our technology, products and other proprietary information will be
adequate. Further, there can be no assurance that others will not independently
develop substantially equivalent proprietary information and technologies, or
otherwise gain access to our trade secrets.
We may be required to take various forms of legal action, from time to
time, to protect our proprietary rights. Because of the rapid evolution of
technology and uncertainties in intellectual property laws both in the United
States and internationally, there can be no assurance that our current or future
products or technologies will not be subject to claims of infringement. Any
litigation regarding claims against us or claims made by us against others could
result in significant expense to us, divert the efforts of our technical and
management personnel and have a material adverse effect on us, whether or not
such litigation is ultimately resolved in our favor. In the event of an adverse
result in any such litigation, we may be required to expend significant
resources to develop non-infringing products or obtain licenses from third
parties. There can be no assurance that we would be successful in such
development or that any such licenses would be available on commercially
reasonable terms, if at all.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-KSB,
including, without limitation, statements containing the words "believes,"
"anticipates," "may," "intends," "expects" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of our company (or industry
results, performance or achievements) expressed or implied by such
forward-looking statements to be substantially different from those predicted.
Such factors might include, among others, the following: general economic and
business conditions, both nationally and in the regions in which we operate;
competition; changes in business strategy or development plans; the delays in
development or testing of our products; technological, manufacturing, quality
control or other problems which could delay the sale of our products; our
inability to obtain appropriate licenses from third parties, protect our trade
secrets, operate without infringing upon the proprietary rights of others and
prevent others from infringing on our proprietary rights; our inability to
obtain sufficient financing to continue operations; and changes in demand for
products of our customers. Certain of these factors are discussed in more detail
elsewhere in this Form 10-KSB, including, without limitation, under the caption
"Management's Discussion and Analysis or Plan of Operation".
ITEM 2-DESCRIPTION OF PROPERTY
Our principal properties are our 36,000 square foot headquarters and
production facility at 10 Edison Street East in Amityville, New York, and an
adjoining 9,000 square foot warehouse. Our lease for our principal executive
offices, production facilities and warehouse in Amityville, New York expires in
2006. We also lease marketing, warehouse and customer service facilities in
Inglewood, California, Toronto, Canada, and Santiago, Chile. We believe that we
can renegotiate existing leases as they expire or lease alternative properties
on acceptable terms. We believe our present facilities are adequate for our
current and anticipated operations.
ITEM 3-LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings which if adversely
determined would have a materially adverse effect on our business.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1999.
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PART II
ITEM 5-MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Toronto Stock Exchange. Our Common Stock has been listed on the Toronto
Stock Exchange, or TSE, since March 28, 1994 (Symbol: "TFF"). The following
table sets forth the reported high and low closing prices (as reported by the
TSE) for our Common Stock for each calendar quarter from January 1, 1998 through
March 15, 2000, in Canadian dollars and translated into U.S. dollars at the
exchange rates in effect on those dates.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
First Quarter ........................ Cdn. $2.75 (U.S. $1.93) Cdn. $1.75 (U.S. $1.23)
Second Quarter ....................... Cdn. 1.80 (U.S. 1.22) Cdn. 1.35 (U.S. 0.92)
Third Quarter ........................ Cdn. 1.55 (U.S. 1.01) Cdn. 0.55 (U.S. 0.36)
Fourth Quarter ....................... Cdn. 1.00 (U.S. 0.65) Cdn. 0.50 (U.S. 0.33)
1999
First Quarter ........................ Cdn. $1.41 (U.S. $0.94) Cdn. $0.80 (U.S. $0.53)
Second Quarter ....................... Cdn. 2.10 (U.S. 1.43) Cdn. 0.75 (U.S. 0.50)
Third Quarter ........................ Cdn. 2.30 (U.S. 1.52) Cdn. 1.45 (U.S. 0.97)
Fourth Quarter ....................... Cdn. 1.92 (U.S. 1.31) Cdn. 1.20 (U.S. 0.81)
2000
First Quarter (through March 15, 2000) Cdn. $3.75 (U.S. $2.56) Cdn. $1.75 (U.S. $1.20)
</TABLE>
The closing price of our Common Stock on the TSE on March 15, 2000 was
Cdn. $3.75 (U.S. $2.56).
OTC Bulletin Board. Information regarding our Common Stock is also
available through the OTC Bulletin Board (Symbol: "TFFI"). Our Common Stock was
first quoted on the OTC Bulletin Board on March 12, 1996. The following table
sets forth the range of high and low closing prices (as reported by the OTC
Bulletin Board) for our Common Stock for each calendar quarter from January 1,
1998 through March 15, 2000 in U.S. dollars.
High Low
---- ---
1998
First Quarter .......................... U.S. $ 2.00 U.S. $ 1.25
Second Quarter ......................... U.S. 1.313 U.S. 0.969
Third Quarter .......................... U.S. 1.094 U.S. 0.419
Fourth Quarter ......................... U.S. 0.70 U.S. 0.34
1999
First Quarter .......................... U.S. $ 1.00 U.S. $ 0.434
Second Quarter ......................... U.S. 1.562 U.S. 0.625
Third Quarter .......................... U.S. 1.562 U.S. 1.062
Fourth Quarter ......................... U.S. 1.438 U.S. 1.00
2000
First Quarter (through March 15, 2000).. U.S. $ 2.719 U.S. $ 1.25
The closing price of our Common Stock on the OTC Bulletin Board, on March
15, 2000, was U.S. $2.625.
American Stock Exchange. On March 24, 2000, our Common Stock was approved
for listing on the American Stock Exchange, or AMEX, under the symbol "TFF." We
expect our Common Stock to begin trading on the AMEX on or about March 29, 2000.
We expect that our Common Stock will continue to trade on the TSE.
Holders
At March 15, 2000, we had approximately 775 stockholders of record.
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Dividends
We have not paid any cash dividends on our Common Stock and we do not
anticipate paying any cash dividends for the foreseeable future. The declaration
and payment of dividends on the Common Stock is at the discretion of the Board
of Directors and will depend on, among other things, our operating results,
financial condition, capital requirements, contractual restrictions or
prohibitions and such other factors as the Board of Directors may deem relevant.
In addition, the terms of our $3.0 million revolving credit facility restrict
the payment of cash dividends.
Recent Sales of Unregistered Securities
The following information relates to unregistered securities sold by us
during the year ended December 31, 1999. The sales of securities described below
were made in reliance upon an exemption from the registration provisions of the
Securities Act of 1933, as amended, set forth in Section 4(2) thereof as
transactions by an issuer not involving any public offering.
Stock Option Conversions
On June 29, 1998, our then four outside directors were granted non-plan
options to purchase an aggregate of 500,000 shares of Common Stock, subject to
the approval of the stockholders and TSE, at an exercise price of $.9687 per
share, the market price of our Common Stock on the date of the grant . On April
26, 1999, the Board of Directors approved the conversion of such options to
non-qualified stock options under our 1996 and 1993 Stock Option Plans and, as a
result, the approval of the stockholders and TSE was not required. We call these
options the Converted Options. Upon their conversion, the Converted Options were
deemed to be granted on April 26, 1999. Notwithstanding the change in the grant
date, the exercise price of the Converted Options remains $.9687 per share,
which is higher than the market price of our Common Stock on April 26, 1999. The
Converted Options vest in equal increments over five years and expire ten years
from the date of the grant. The options are governed by the terms and provisions
of the option agreements previously issued and in accordance with the terms and
provisions of the 1993 and 1996 Stock Option Plans.
Stock Option Grants
During the year ended December 31, 1999, we granted options to purchase an
aggregate of 1,152,629 shares of Common Stock (including Converted Options)
under our 1999, 1996 and 1993 Stock Option Plans at prices ranging from $0.66 to
$1.62 per share. Of these options, options to purchase 1,077,629 shares of
Common Stock were granted to our directors and executive officers. Of the total
number of options granted, options to purchase 452,629 shares were granted at
exercise prices equal to the market prices of the Common Stock on the OTC
Bulletin Board on the grant dates, while options to purchase an aggregate of
200,000 shares were granted to two executive officers who beneficially own 10%
or more of our outstanding Common Stock at an exercise price equal to 110% of
the market price of the Common Stock on the grant dates. See Item 12 - Certain
Relationships and Related Transactions.
ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
During the third quarter of 1998, we implemented numerous corporate
changes which included: (a) the divestiture of our Seasoning Division, (b) a
significant reduction of our debt by applying the proceeds received from the
sale of our Seasoning Division, and (c) the implementation of additional cost
reduction efforts designed to achieve profitability based on our then current
base sales level relative to our continuing operations. In 1999, we focused our
efforts on achieving goals identified in our strategic business plan. Such goals
included expanding our sales and marketing activities and implementing cost
containment and operating efficiency improvements.
As a result of these corporate changes, our results of operations from our
flavor and fragrance businesses achieved profitability in 1999.
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Results of Operations
The following information for the years ended December 31, 1999, 1998 and
1997 has been derived from our 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. For information
regarding our export sales, backlog and foreign operations, see "Item 1 -
Description of Business."
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales ............................................... $14,769 100.0% $13,888 100.0% $18,022 100.0%
Gross profit ............................................ 6,318 42.8 5,600 40.3 7,008 38.9
Operating expenses:
Selling .............................................. 2,315 15.7 2,714 19.5 2,942 16.3
General and administrative ........................... 1,670 11.3 1,918 13.8 1,959 10.9
Research and development ............................. 1,307 8.9 1,396 10.1 1,604 8.9
Amortization ......................................... 181 1.2 354 2.5 566 3.2
Write-down of intangible assets and other charges .... -- -- 2,120 15.3 -- --
Income (loss) from operations ........................... 845 5.7 (2,902) 20.9 (62) .4
Interest expense, net ................................... 160 1.1 108 .8 231 1.3
Provision for income taxes .............................. 28 .2 2 -- 9 --
Income (loss) from continuing operations ................ 657 4.4 (3,012) 21.7 (301) 1.7
Discontinued operations:
Gain on disposal of discontinued operations ......... -- -- 1,080 7.8 -- --
Loss from discontinued operations ................... -- -- (105) .8 (347) 1.9
Net income (loss) ....................................... 657 4.4 (2,036) 14.7 (648) 3.6
</TABLE>
Net sales. Net sales increased 6.3% to $14,769,000 in 1999 from
$13,888,000 in 1998 due principally to the launching of new food and beverage
flavor products to new and existing customers. Net sales decreased 22.9% to
$13,888,000 in 1998 from $18,022,000 in 1997 due principally to a decrease in
demand for a new product line we offered to a significant customer, which
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 net sales, increased 2.5%
to 42.8% on net sales of $14,769,000 in 1999 from 40.3% on net sales of
$13,888,000 in 1998. Gross profit for 1999 was essentially the same as in 1998
before the 1998 write-down of inventories of $280,000. Gross profit, as a
percentage of net sales, increased 1.4% to 40.3% on net sales of $13,888,000 in
1998 from 38.9% on net sales of $18,022,000 in 1997. Higher gross margin
percentages generated on 1998 product shipments as compared to 1997 were
primarily due to a concentration of high gross margin sales on certain flavor
products, and higher margins on new flavor and fragrance products, which were
offset by an inventory write-down and the impact of lower sales volume.
Operating expenses:
Selling expenses. Selling expenses decreased by $399,000, or 15%, to
$2,315,000 in 1999 from $2,714,000 in 1998. The decrease was due principally to
reductions in personnel, and to a lesser extent, travel and entertainment, and
advertising costs under our cost reduction program implemented in the third
quarter of 1998. Selling expenses decreased by $228,000, or 8%, to $2,714,000 in
1998 from $2,942,000 in 1997. Included in selling expenses in 1998 were $150,000
of costs associated with our share of certain co-operative start-up marketing
and advertising costs with a customer in connection with the customer's future
product launches. Without giving effect to these co-operative costs, selling
expenses decreased by $378,000 in 1998 as a result of our cost reduction program
implemented during the third quarter of 1998 and lower sales commissions and
freight-out costs on decreased sales.
General and administrative expenses. General and administrative expenses
decreased by $248,000, or 13%, to $1,670,000 in 1999 from $1,918,000 in 1998.
The decrease was due principally to the incurrence in 1998 of a $194,000 bad
debt expense which was primarily attributable to a customer's bankruptcy, and
reductions in personnel and professional and consulting fees under our cost
reduction program implemented during the third quarter of 1998. General and
administrative expenses decreased by $41,000, or 2%, to $1,918,000 in 1998 from
$1,959,000 in 1997. Without giving effect to the 1998 bad debt expense, general
and administrative expenses decreased by $235,000, or 12%, in 1998 as compared
to 1997 as a result of our cost reduction program implemented during the third
quarter of 1998.
Research and development expenses. Research and development expenses
decreased by $89,000, or 6%, to $1,307,000 in 1999 from $1,396,000 in 1998. The
decrease was due principally to reductions in personnel under our cost reduction
program implemented during the third quarter of 1998, partially offset by
additional hirings of personnel and outside consulting services during 1999.
Research and development expenses decreased by $208,000, or 13%, to $1,396,000
in 1998 from $1,604,000 in 1997 as a result of our cost reduction program
implemented during the third quarter of 1998.
7
<PAGE>
Amortization expense. Amortization expense decreased by $173,000, or 49%,
to $181,000 in 1999 from $354,000 in 1998. The decrease was due principally to
the write-down of $1,723,000 in intangible assets during 1998. Amortization
expense decreased by $212,000, or 37%, to $354,000 in 1998 from $566,000 in 1997
due principally to the amortization of deferred charges in 1997 associated with
our $1.5 million convertible note financing, which notes were converted and
terminated in October 1997.
Write down of intangible assets and other charges. In 1998, we determined
that certain previously acquired product formulations, which historically have
been included in intangible assets, had been impaired due primarily to the
continued competitiveness of the flavor and fragrance industry and the relative
weakness of the market for flavors in 1998. We determined that the future
undiscounted cash flows estimated to be generated from certain purchased product
formulations was less than the balance sheet carrying amount of such
formulations. Accordingly, we 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 1998. Other charges in 1998 principally consisted of: (a) $186,000 in
severence costs related to the termination of certain employees resulting from
the implementation of our cost reduction program in the third quarter of 1998,
and (b) $124,950 for the settlement of litigation brought against us in February
1998 by a former investor relations consultant.
Total operating expenses. Total operating expenses decreased by
$3,028,000, or 36%, to $5,473,000 in 1999 from $8,502,000 in 1998 as a result of
our cost reduction program and the other factors as described above. Without
giving effect to the write-down of intangible assets and other charges of
$2,120,000 in 1998, total operating expenses decreased by $908,000, or 14%, in
1999. Total operating expenses decreased by $689,000, or 10%, to $6,382,000 in
1998, from $7,071,000 in 1997 without giving effect to the write-down of
intangible assets and other charges in 1998.
Interest expense, net. Interest expense, net increased by $52,000, or 48%,
to $160,000 in 1999 from $108,000 in 1998. The increase was due principally to
higher outstanding borrowings and higher interest rates on outstanding
borrowings during 1999. Interest expense decreased by $123,000, or 53%, to
$108,000 in 1998 from $231,000 in 1997 primarily due to the reduction of
long-term debt and lower interest rates as a result of our refinancing in 1997
of a bank credit facility and the partial repayment of certain indebtedness owed
under our 9% Convertible Subordinated Notes due October 17, 1998.
Provision for income taxes. Provision for income taxes principally
represents state franchise taxes and federal alternative minimum tax. There was
no federal income tax provision in 1999 since we had available net operating
loss carryforwards. There was no federal income tax provision in 1998 because we
had a loss during such year.
Discontinued operations. During 1998, we recorded a net gain of $1,080,000
on the disposal of discontinued operations after a loss from such discontinued
operations for 1998 of $(105,000). There was no income or loss from discontinued
operations in 1999.
Net income (loss). Net income for 1999 was $657,000 as compared to a net
loss of $(2,036,000) for 1998 and $(648,000) for 1997.
Liquidity And Capital Resources
Historically, our financing needs have been met through the issuances 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
lending rate. Additional 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. At December 31, 1999, we had borrowed approximately
$1,545,000 under the 1999 Credit Facility, and $1,236,000 was available for
additional borrowings in accordance with the terms of the 1999 Credit Facility.
The $1,545,000 outstanding under the 1999 Credit Facility at December 31, 1999
was classified as a current liability. At that date, outstanding borrowings bore
interest at 9.25% per annum.
At December 31, 1999, working capital increased by $865,000, or 48%, to
$2,664,000 from $1,799,000 at December 31, 1998.
Future minimum commitments under certain non-cancellable operating and
capital leases aggregate approximately $1,538,000 through year 2006, of which
$285,000 is payable in 2000. We believe that the existing cash balances together
with cash generated from operations and amounts available under the 1999 Credit
Facility will be sufficient to meet our projected working capital and other cash
flow requirements through 2000.
8
<PAGE>
Year 2000 Readiness
We believe we have achieved Year 2000 readiness for our internal systems.
In addition, we have been in contact with our major customers and suppliers to
determine the extent to which we are vulnerable to those third parties' failure
to remedy their own Year 2000 issues. We conducted an assessment of the Year
2000 readiness of our major customers and suppliers and no matters have come to
our attention which need remedial measures. We cannot currently predict the
future effect of third parties' Year 2000 issues on our business. As of the
filing date of this Form 10-KSB, there have been no indications of material
matters which have or could impact our business from third parties. The cost of
modifications to our existing software for the Year 2000 issues was not
material, and was expensed as incurred.
ITEM 7-FINANCIAL STATEMENTS
Our audited consolidated financial statements for the years ended December
31, 1999 and 1998 begin on page F-1 of this Annual Report on Form 10-KSB.
ITEM 8-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
9
<PAGE>
PART III
ITEM 9-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Concerning our Board of Directors and Executive Officers
The following table sets forth certain information, as of March 15, 2000,
concerning our directors and executive officers:
Name Age Positions with the Company
- ---- --- --------------------------------------------------
Philip Rosner ........ 64 Chairman of the Board of Directors and President
A. Gary Frumberg ..... 66 Director and Executive Vice President
Joseph A. Gemmo ...... 54 Vice President, Chief Financial Officer, Secretary
and Treasurer
Ronald J. Dintemann .. 56 Vice President-Operations
Harvey Farber ........ 59 Senior Vice President-Flavor Division
Sean Deson ........... 36 Director
Werner F. Hiller ..... 63 Director
Irwin D. Simon ....... 41 Director
The business experience of each of the persons listed above for at least
the last five years is as follows:
Philip Rosner has been the Chairman of the Board of Directors and
President of our company since 1989. Mr Rosner has been engaged in the flavor
and fragrance industry for over 46 years. Prior to 1989, Mr. Rosner was the
President of Globe Extracts, Inc. and for 15 years before that, was President of
Felton Worldwide, Inc., both of which produced and marketed flavors and
fragrances.
A. Gary Frumberg has been a Director and an Executive Vice President of
our company since 1989. Prior to 1989, Mr. Frumberg served as Vice
President-International Sales of Felton Worldwide, Inc.
Joseph A. Gemmo has been Vice President and Chief Financial Officer of our
company since August 1996 and Secretary and Treasurer since June 1998. From
January 1994 to April 1996, Mr. Gemmo was the Chief Financial Officer of
Bio-Botanica, Inc., a developer and manufacturer of herbal extracts. From 1989
to 1994, Mr. Gemmo was Chief Financial Officer of General Aerospace Materials
Corp.
Ronald J. Dintemann has been Vice President-Operations of our company
since May 1989 after serving as Vice President-Operations of Globe Extracts,
Inc. for two years.
Harvey Farber has been Senior Vice President-Flavor Division of our
company since October 1997. From October 1995 through October 1997, Mr. Farber
was Senior Vice President-Flavor Development of our company. Before Mr. Farber
joined our company, he was the Vice President-Flavor Development at J. Manheimer
Inc. for 12 years.
Sean Deson has been a Director of our company since June 1998. Mr. Deson
is currently the Managing Partner of Deson & Co., a private equity investment
firm. Prior thereto, Mr. Deson was a Senior Vice President in the Investment
Banking Division of Donaldson, Lufkin & Jenrette Securities Corporation, or DLJ.
Mr. Deson served in various capacities at DLJ since 1990, primarily as an
advisor, financier and investor. Mr. Deson also serves as a member of the Board
of Directors of SpecChem International Holdings, L.L.C., Versity.com,
SystemsFusion Inc., and ActiveWorlds.com, Inc.
Werner F. Hiller has been a Director of our company since June 1998. Since
1996, Mr. Hiller has been a consultant to General Spice Companies, a division of
ConAgra, and previously served as the President of General Spice Companies from
1990 to 1996. Mr. Hiller also was the co-founder of General Spice Companies, and
from 1965 to 1990, he served as its Executive Vice President and Treasurer.
Irwin D. Simon has been a Director of our company since June 1998. Mr.
Simon has been the President and Chief Executive Officer of The Hain Food Group,
Inc., a natural and specialty foods company listed on Nasdaq, since 1993. Prior
to 1993, Mr. Simon spent 15 years in various sales and marketing positions,
including Vice President of Marketing of Slim-Fast Foods Company, and Eastern
Regional Director of Haagen-Dazs Shops, a division of Grand Metropolitan, PLC.
All of our directors serve for a one year term ending at the next annual
meeting of stockholders or until their respective successors are duly elected
and qualified. Officers serve at the discretion of the Board of Directors,
subject to rights, if any, under their contracts of employment. There are no
family relationships among our directors and executive officers. See "- Director
Compensation" and "- Executive Compensation."
10
<PAGE>
Meetings of the Board of Directors and Committees
Our business affairs are managed under the direction of the Board of
Directors. Members of the Board of Directors are informed about our affairs
through presentations, reports and documents distributed to them, through
operating and financial reports routinely presented at meetings of the Board of
Directors and committee meetings and through other means. In addition, our
directors discharge their duties throughout the year not only by attending
meetings of the Board of Directors but also through personal meetings and other
communications, including telephone contact with management and others of our
company.
Board Committees
Our Board of Directors has an Executive Committee, an Audit Committee and
a Compensation Committee. The members of these Committees are appointed by the
Board of Directors.
Executive Committee. The Executive Committee of the Board of Directors may
exercise, except when the Board of Directors is in session and to the extent
permitted by the General Corporation Law of the State of Delaware, all of the
powers of the Board of Directors in the management of the affairs of the
Company. The current members of the Executive Committee are Messrs. Rosner,
Deson and Hiller.
Audit Committee. The Audit Committee recommends to the Board of Directors
the firm to be selected each year as independent auditors of our financial
statements and to perform services related to such audit. The Audit Committee
also has responsibility for (i) reviewing the scope and results of the audit
with the independent auditors, (ii) reviewing our financial condition and
results of operations with management, (iii) considering the adequacy of the
internal accounting, bookkeeping and control procedures, and (iv) reviewing any
non-audit services and special engagements to be performed by the independent
auditors and considering the effect of such performance on the auditors'
independence. The current members of the Audit Committee are Messrs. Deson and
Hiller.
Compensation Committee. The Compensation Committee recommends to the Board
of Directors the compensation to be paid to our executive officers and other key
personnel, reviews new or existing employee compensation programs and
periodically reviews management perquisites and other benefits. The current
members of the Compensation Committee are Messrs. Hiller and Simon.
We have not established a nominating committee and/or a corporate
governance committee as recommended by the TSE Report (as defined herein),
however, we believe that the nomination of directors and other issues normally
considered by these committees can be effectively managed by the Board of
Directors due to its composition, or by the Audit Committee. See "- Statement of
Corporate Governance Practices."
Director Compensation
Each of our outside directors is paid a $10,000 annual fee plus $500 for
each formal meeting attended. Alternatively, an outside director may, at his
option and in lieu of such cash remuneration, elect to receive a non-qualified
stock option grant for such earned fees. In addition, directors are reimbursed
for reasonable expenses actually incurred in connection with attending each
formal meeting of the Board of Directors or any committee thereof. Our outside
directors currently are Messrs. Deson, Hiller and Simon. See "Item 5 - Markets
for Common Equity and Related Stockholder Matters - Recent Sales of Unregistered
Securities," and "Item 12 - Certain Relationships and Related Transactions."
Statement of Corporate Governance Practices
Our Common Stock is listed on the Toronto Stock Exchange. The by-laws of
the TSE require listed companies to disclose their approach to corporate
governance on an annual basis and within the context of certain guidelines
proposed in the December 1994 report issued by The Toronto Stock Exchange
Committee on Corporate Governance in Canada (the "TSE Report"). The report
focuses on the importance of each company addressing the governance issue in its
own context and the receipt by the company's stockholders of an explanation for
each company's approach to governance. There is no requirement for us to comply
with the guidelines in the TSE Report, and the report itself recognizes that
each company should have the flexibility to develop its own approach to
corporate governance.
Of particular significance is the fact that we are organized under the
laws of the State of Delaware, and therefore subject to that State's laws and
principles of corporate governance. We are of the opinion that our approach to
corporate governance is in compliance in all material respects with Delaware law
and the principles of the TSE Report.
11
<PAGE>
Unrelated Directors
Much of the discussion in the TSE Report focuses on the composition of a
company's board of directors and, in particular, the number of "unrelated
directors." In the TSE Report, an "unrelated director" is a director who is free
from any interest and any business or other relationship which could, or could
reasonably be perceived to, materially interfere with that director's ability to
act with a view to the best interests of the company, other than an interest
arising from such director's status as a stockholder. The TSE Report also
focuses on the importance of having an appropriate portion of the board of
directors which is free from any interest or relationship with a "significant
shareholder" of the company (i.e., a shareholder controlling more than 50% of a
company's common stock). We do not have a "significant shareholder" within the
meaning of the TSE Report.
We believe that three of our five directors (i.e., Messrs. Deson, Hiller
and Simon) are "unrelated" within the meaning of the TSE Report. We believe that
the number of unrelated directors is appropriate for the effective operations of
the Company.
The Board of Directors has no formal policy setting out which specific
matters must be brought by the President and management to the Board of
Directors for approval, although generally all material transactions are
presented by management for approval by the Board of Directors.
Response to Stockholders
Management is available to stockholders to respond to questions and
concerns on a prompt basis. The Board of Directors believes that management is
generally responsive to the inquiries of stockholders and others interested in
our company.
Expectations of Management
The Board of Directors works closely with members of management. The
Board's access to information relating to our operations, through membership on
the Board of several key members of management and, as necessary, attendance by
other members of management at the request of the Board, are important elements
to the effective and informed functioning of the Board of Directors.
The Board of Directors expects our management to take the initiative in
identifying opportunities and risks affecting our business and finding means to
deal with such opportunities and risks for our benefit.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that our directors and executive officers and persons who benefically own more
than 10% of our Common Stock (collectively, the "Reporting Persons") file with
the Securities and Exchange Commission (the "Commission") (and, if such security
is listed on a national securities exchange, with such exchange) various reports
as to their ownership of and activities relating to such Common Stock. Such
Reporting Persons are required by Commission regulations to furnish us with
copies of all Section 16 (a) reports they file. Based solely upon a review of
copies of Section 16(a) reports and representations received by us from
Reporting Persons, and without conducting any independent investigation of our
own, in 1999, all Forms 3, 4 and 5 were timely filed with the Commission by such
Reporting Person.
12
<PAGE>
ITEM 10-EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid to or earned by our Chairman of the Board and President and
the other four most highly compensated executive officers of our company (other
than the Chairman of the Board and President) whose total annual salaries and
bonuses exceeded $100,000 for the year ended December 31, 1999 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Awards
Annual Annual ------ Payouts
Compensation Compensation Securities -------
------------ ------------ Underlying All Other
Name and Principal Position Year Salary Bonus Options/SARs Compensation (1)
- --------------------------- ---- ------ ----- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Philip Rosner............................... 1999 $225,000 $4,327 100,000(2) $10,923
Chairman of the Board and President 1998 225,930 -- -- 11,545
1997 235,000 -- -- 11,603
A. Gary Frumberg............................ 1999 208,000 4,000 100,000(2) 13,089
Director and Executive Vice President 1998 208,000 -- -- 12,514
1997 192,308 -- -- 12,710
Harvey Farber............................... 1999 150,000 2,885 20,000(3) 3,544
Senior Vice President-Flavor Division 1998 172,415 -- -- 3,446
1997 163,461 -- 50,000(4) 26,555(5)
Ronald J. Dintemann......................... 1999 140,400 2,700 20,000(3) 12,345
Vice President-Operations 1998 140,400 -- -- 12,330
1997 129,808 -- 25,000(6) 12,306
Joseph A. Gemmo............................. 1999 135,200 2,600 20,000(3) 6,541
Vice President, Chief Financial Officer, 1998 135,200 -- -- 5,565
Secretary and Treasurer 1997 116,346 -- 150,000(7) 3,509
</TABLE>
- ----------
(1) Represents personal use of automobile expenses and life insurance of such
executive.
(2) Represents five-year stock options to purchase 100,000 shares of Common
Stock granted in June 1999 under the 1999 Stock Option Plan at an exercise
price of $1.62 per share.
(3) Represents ten-year stock options to purchase 20,000 shares of Common
Stock granted in April 1999 under the 1993 Stock Option Plan at an
exercise price of $.875 per share.
(4) Represents ten-year stock options to purchase 50,000 shares of Common
Stock granted in February 1997 under the 1996 Stock Option Plan at an
exercise price of $1.31 per share. See "- Employment Agreements."
(5) Includes the value of 25,000 shares of Common Stock valued at $1.00 per
share issued to Mr. Farber as additional compensation pursuant to his
amended employment agreement.
(6) Represents ten-year stock options to purchase 25,000 shares of Common
Stock granted in June 1997 under the 1996 Stock Option Plan at an exercise
price of $1.6875 per share.
(7) Represents ten-year stock options to purchase: (i) 100,000 shares of
Common Stock granted in August 1996 under the 1996 Stock Option Plan at an
exercise price of $2.0625 per share; and (ii) 50,000 shares of Common
Stock granted in February 1997 at an exercise price of $1.31 per share.
The options to purchase 100,000 shares were repriced from $2.0625 to $1.31
on December 1, 1997, the current market price at the time of repricing.
13
<PAGE>
Option Grants in 1999
The following table sets forth certain information concerning individual
option grants during the year ended December 31, 1999 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARS
Underlying Granted to
Options/SARs Employees in Exercise Price Expiration
Name Granted Fiscal Year Per Share Date
- ---- ------------ ------------ -------------- ----------
<S> <C> <C> <C> <C>
Philip Rosner ............... 100,000 29.9% $1.62 6/24/04
A. Gary Frumberg ............ 100,000 29.9 1.62 6/24/04
Harvey Farber ............... 20,000 6.0 0.875 4/28/09
Ronald J. Dintemann ......... 20,000 6.0 0.875 4/28/09
Joseph A. Gemmo ............. 20,000 6.0 0.875 4/28/09
</TABLE>
Aggregate Option Exercises in 1999 and 1999 Year-End Option Values
The following table provides certain information concerning each exercise
of stock options during the year ended December 31, 1999 by each of the Named
Executive Officers and the year-end value of unexercised options. The stock
options listed below were granted without tandem stock appreciation rights. We
have no freestanding stock appreciation rights outstanding.
<TABLE>
<CAPTION>
Number of Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value December 31, 1999 December 31, 1999($)
Name Exercise Realized($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- -------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Philip Rosner................ -- -- 0/100,000 $ -/-(2)
A. Gary Frumberg............. -- -- 0/100,000 -/-(2)
Harvey Farber................ -- -- 44,000/36,000 1,660/5,040
Ronald J. Dintemann.......... -- -- 89,000/31,000 47,010/5,040
Joseph A. Gemmo.............. -- -- 134,000/36,000 1,260/5,040
</TABLE>
- ----------
(1) Value of unexercised "in-the-money" options is equal to the difference
between the closing per share price of our Common Stock on the TSE at
December 31,1999 (U.S. $1.21) and the option exercise price per share
multiplied by the number of shares subject to options.
(2) None of these options were "in the money" at December 31, 1999.
Employment Agreements
In October 1995, we entered into a five-year employment agreement with Mr.
Rosner which provides that he will serve as the President of our company. The
agreement provides for an annual base salary (adjustable in accordance with the
Consumer Price Index) of $235,000. Effective January 1, 1998, we increased Mr.
Rosner's annual base salary to $244,400 per year. Effective May 1, 1998, Mr.
Rosner voluntarily reduced his annual salary from $244,400 to $200,000 for the
remainder of 1998. Effective January 1, 1999, Mr. Rosner's annual base salary
was increased to $225,000. The agreement contains, among other things, customary
termination and confidentiality provisions. See "- Certain Relationships and
Related Transactions - Transactions with Directors and Executive Officers."
In October 1995, we entered into a five-year employment agreement with Mr.
Frumberg which provides that he will serve as Executive Vice President of our
company. The agreement provides for an annual base salary (adjustable in
accordance with the Consumer Price Index) of $200,000. Effective January 1,
1998, we increased Mr. Frumberg's annual base salary to $208,000. The agreement
contains, among other things, customary termination and confidentiality
provisions. See "- Certain Relationships and Related Transactions - Transactions
with Directors and Executive Officers."
14
<PAGE>
In January 1996, we entered into a five-year employment agreement with
Ronald J. Dintemann to serve as Vice President-Operations of our company.
Pursuant to his employment agreement, Mr. Dintemann is entitled to receive an
annual base salary (adjustable in accordance with the Consumer Price Index) of
$135,000. Effective January 1, 1998, we increased Mr. Dintemann's annual base
salary to $140,400. Mr. Dintemann's employment agreement contains, among other
things, customary termination and confidentiality provisions.
In August 1996, we entered into a three-year employment agreement with
Joseph A. Gemmo to serve as Vice President and Chief Financial Officer of our
company. Pursuant to his employment agreement, Mr. Gemmo is entitled to receive
an annual base salary of $115,000. Effective August 1997, we increased Mr.
Gemmo's annual base salary to $130,000. Effective January 1, 1998, we increased
Mr. Gemmo's annual base salary to $135,200. In addition, pursuant to his
employment agreement, on August 2, 1996, Mr. Gemmo received options to purchase
100,000 shares of our Common Stock. Mr. Gemmo's employment agreement also
provides that Mr. Gemmo may receive an annual bonus, payable at our sole
discretion. On December 1, 1997, our Board of Directors authorized us to reprice
the options granted to Mr. Gemmo in August 1996 to purchase 100,000 shares of
our Common Stock from $2.0625 to $1.28 per share, the market price of our Common
Stock at the time of repricing and to pay Mr. Gemmo a minimum cash bonus of
$50,000 in the event our company undergoes a "change of control." On August 2,
1999, Mr. Gemmo's employment agreement was renewed under the same terms and
conditions for an additional three-year term.
1993 Stock Option Plan
In November 1993, we adopted, and the stockholders approved, the 1993
Stock Option Plan pursuant to which we may grant to our employees options to
purchase up to 500,000 shares of our Common Stock. The options granted under the
1993 Stock Option Plan may be exercised during the ten-year period after they
are granted, at an exercise price equal to the mean between the high and low
selling prices of our Common Stock on the TSE on the date of the grant. Options
granted to any person who beneficially owns ten percent (10%) or more of our
Common Stock may not be exercised after the fifth anniversary of the date of the
grant and must be granted at an exercise price equal to 110% of the market price
at the date of the grant. In May 1999, our Board of Directors terminated the
1993 Stock Option Plan for the purpose of granting additional stock options.
Termination of the 1993 Stock Option Plan will not affect options that were
granted prior to the termination date.
As of March 15, 2000, options to purchase an aggregate of 423,000 shares
of our Common Stock were outstanding under the 1993 Stock Option Plan.
1996 and 1999 Stock Option Plans
In 1996, our then existing Board of Directors adopted, and the
stockholders approved, the 1996 Stock Option Plan.
In May 1999, our Board of Directors adopted, and in June 1999, the
stockholders approved, the 1999 Stock Option Plan.
The maximum number of shares of Common Stock that may be subject to
options under each of the 1996 and 1999 Stock Option Plans, may not exceed an
aggregate of 1,000,000 shares. This number may be adjusted in certain events,
such as a stock split, reorganization or recapitalization. Our employees
(including officers and directors who are employees) and employees of our
company's subsidiaries are eligible for the grant of incentive options under the
1996 and 1999 Stock Option Plans. Directors who are not employees are not
eligible to receive incentive stock options, but may receive non-qualified
options. Options may also be granted to other persons, provided that such
options are non-qualified options. In the event of incentive options, the
aggregate fair market value of our Common Stock with respect to which such
options become first exercisable by the holder during any calendar year cannot
exceed $100,000. This limit does not apply to non-qualified options. To the
extent an option that otherwise would be an incentive option exceeds this
$100,000 threshold, it will be treated as a non-qualified option.
In the case of an incentive option, the exercise price cannot be less than
the fair market value (as defined in the 1996 and 1999 Stock Option Plans) of
our Common Stock on the date the option is granted and, if an optionee is a
stockholder who beneficially owns 10% or more of our outstanding Common Stock,
the exercise price of incentive options may not be less than 110% of the fair
market value of our Common Stock. The term of an option cannot exceed ten years
and, in the case of an optionee who owns 10% or more of the outstanding Common
Stock, cannot exceed five years.
The 1996 and 1999 Stock Option Plans will terminate automatically and no
options may be granted more than ten years after the dates the 1996 and 1999
Stock Option Plans, respectively, were approved by our Board of Directors. The
1996 and 1999 Stock Option Plans may be terminated at any prior time by the
Board of Directors. Termination of the 1996 and 1999 Stock Option Plans will not
affect options that were granted prior to the termination date.
As of March 15, 2000, options to purchase an aggregate of 951,462 and
300,000 shares of our Common Stock were outstanding under the 1996 and 1999
Stock Option Plans, respectively.
15
<PAGE>
ITEM 11-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15, 2000
regarding the beneficial ownership of our Common Stock by (A) each person known
by us to own beneficially more than 5% of our Common Stock, (B) each of our
directors, (C) each of our Named Executive Officers, and (D) all of our
executive officers and directors as a group (8 persons):
<TABLE>
<CAPTION>
Number of Shares Percentage
Name Beneficially Owned(1) Beneficially Owned
- ---- --------------------- ------------------
<S> <C> <C>
Philip Rosner(2) ............................................................... 2,182,509(3)(4) 17.4%
A. Gary Frumberg(2) ............................................................ 1,292,199(3) 10.3%
Richard R. Higgins ............................................................. 889,000 7.1%
Stanley Altschuler ............................................................. 956,000(5) 7.3%
Richard E. Cooper .............................................................. 595,000(6) 4.5%
Sean Deson (2) ................................................................. 150,898(7)(8) 1.2%
Werner F. Hiller(2) ............................................................ 147,351(7)(9)(10) 1.2%
Irwin D. Simon (2) ............................................................. 120,000(7)(9) *
Ronald J. Dintemann (2) ........................................................ 158,111(11) 1.3%
Harvey Farber(2) ............................................................... 51,600(12) *
Joseph A. Gemmo(2) ............................................................. 136,000(13) 1.1%
All directors and executive officers as a group (8 persons) .................... 4,238,668 32.1%
</TABLE>
- ----------
* Less than 1%
(1) As used in this table, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship or otherwise has or shares (i) the power to
vote, or direct the voting of, such security or (ii) investment power
which includes the power to dispose or to direct the disposition of such
security. In addition, a person is deemed to be the beneficial owner of a
security if that person has the right to acquire beneficial ownership of
such security within 60 days of the date shown above.
(2) The business address of each of Messrs. Rosner, Frumberg, Dintemann,
Farber and Gemmo is c/o Technology Flavors & Fragrances, Inc., 10 Edison
Street East, Amityville, New York 11701. The business address of Mr. Deson
is c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172. The business address of Mr. Hiller is 55
Dugway, Watchung, New Jersey 07060. The business address of Mr. Simon is
c/o The Hain Food Group, Inc., 50 Charles Lindbergh Boulevard, Uniondale,
New York 11553.
(3) Excludes 100,000 shares of Common Stock issuable upon the exercise of
options granted in June 1999 at an exercise price of $1.62 per share to
each of Messrs. Rosner and Frumberg under the 1999 Stock Option Plan. Such
options vest in three equal annual installments commencing one year from
the date of the grant.
(4) Includes 36,438 shares of Common Stock owned by Mr. Rosner's wife. Mr.
Rosner disclaims beneficial ownership of the shares owned by his wife.
(5) Includes 361,000 shares of Common Stock personally owned by Mr. Altschuler
and 595,000 shares of Common Stock issuable upon the exercise of warrants
held by Strategic Growth International, or SGI, of which Mr. Altschuler
and Mr. Richard E. Cooper are each 50% stockholders. We call these
warrants the SGI Warrants. See"- Note 6." Accordingly, Mr. Altschuler may
be deemed to own the 595,000 shares of Common Stock underlying the SGI
Warrants, which are currently exercisable. Mr. Altschuler may therefore be
deemed to beneficially own an aggregate of 956,000 shares of Common Stock.
Mr. Altschuler has sole voting and dispositive power over the 361,000
shares of Common Stock which he personally owns. Mr Altschuler shares
dispositive power over the SGI Warrants and, upon the exercise of such
warrants, would share voting power over the shares of Common Stock
underlying such warrants.
(6) Represents 595,000 shares of Common Stock issuable upon the exercise of
the SGI Warrants by SGI, of which Mr. Cooper and Mr. Altschuler are each
50% stockholders. See "-Note 5." Accordingly, Mr. Cooper may be deemed to
own the 595,000 shares of Common Stock underlying the SGI Warrants, which
are currently exercisable. Mr. Cooper shares dispositive power over the
SGI Warrants and, upon exercise of such warrants, would share voting power
over the shares of Common Stock underlying such warrants.
(7) Includes ten-year options to purchase 100,000 shares of our Common Stock
granted to each of Messrs. Deson, Hiller and Simon in June 1999 under the
1996 and 1999 Stock Option Plans. Such options are fully vested and have
an exercise price equal to $1.47 per share, the closing price of our
Common Stock on the OTC Bulletin Board on the date of the grant.
16
<PAGE>
(8) Includes ten-year options to purchase 40,000 shares of our Common Stock
granted to Mr. Deson on June 29, 1998 and 10,898 shares granted on April
28, 1999 and October 27, 1999 which are fully vested and excludes options
to purchase 160,000 shares of our Common Stock that have not yet vested.
Such options vest in equal increments of 40,000 shares in each of 2000
through 2003.
(9) Includes ten-year options to purchase 20,000 shares of our Common Stock
granted to each of Messrs. Hiller and Simon which are fully vested and
excludes options to purchase 80,000 shares of our Common Stock that have
not yet vested . All of such options were granted to Messrs. Hiller and
Simon on June 29, 1998. Such unvested options vest in equal increments of
20,000 shares to each of Messrs. Hiller and Simon in each of 2000 through
2003.
(10) Includes ten-year options to purchase 6,731 shares of our Common Stock
granted to Mr. Hiller on April 28, 1999 which are fully vested.
(11) Includes ten-year options to purchase 89,000 shares of our Common Stock
granted to Mr. Dintemann and excludes options to purchase an additional
31,000 shares that have not yet vested. Of such unvested options, options
to purchase 9,000 shares will vest in each of 2001, 2002 and 2003, and
options to purchase 4,000 shares will vest in 2004.
(l2) Includes ten-year options to purchase 44,000 shares of our Common Stock
granted to Mr. Farber on January 23, 1996, February 27, 1997 and April 28,
1999, and excludes options to purchase an additional 36,000 shares that
have not yet vested. Of such unvested options, options to purchase 14,000
shares will vest in each of 2001 and 2002, and options to purchase 4,000
shares will vest in 2003 and 2004.
(13) Includes ten-year options to purchase 134,000 shares of our Common Stock
granted to Mr. Gemmo on February 27, 1997, December 1, 1997 and April 28,
1999, and excludes options to purchase an additional 36,000 shares that
have not yet vested. Of such unvested options, options to purchase 14,000
shares will vest in each of 2001 and 2002, and options to purchase 4,000
shares will vest in 2003 and 2004
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Principal Shareholders
None
Transactions with Directors
In October 1999, we began selling flavor products to The Hain Food Group,
Inc., a Delaware corporation. Irwin D. Simon, a director of our company, is a
director and Chief Executive Officer and President of The Hain Food Group. Our
sales to The Hain Food Group totaled approximately $213,000 for the three month
period of 1999, which we believe were competitive with other available sources
for such flavor products. We sold no products to The Hain Food Group during 1998
or 1997.
In 1999, we granted ten-year options to purchase an aggregate of 717,629
shares of Common Stock, including the Converted Options, to Sean Deson, Werner
F. Hiller and Irwin D. Simon, our outside directors and 100,000 shares of
Converted Options to Bruce S. Foerster, a former director of our company. These
options were granted at exercise prices ranging from $.875 to $1.47 per share.
317,629 shares of such grants are fully vested, and 400,000 shares vest over
five years from the date of the grant. The 100,000 shares granted to Mr.
Foerster were canceled on June 24, 1999, the date he resigned from the board.
For a description of the Converted Options, see "Item 5-Markets for Common
Equity and Related Stockholder Matters-Recent Sales of Unregistered Securities."
Transactions with Executive Officers
In 1999, we granted five-year and ten-year options to purchase an
aggregate of 260,000 shares of Common Stock to Philip Rosner, A. Gary Frumberg,
Harvey Farber, Ronald J. Dintemann and Joseph A. Gemmo, each of whom is an
executive officer of our company. These options were granted at exercise prices
ranging from $.875 to $1.62, and vest ratably over periods ranging from three to
five years.
The following table sets forth certain information regarding loans made by
us to our directors and executive officers which were outstanding as of December
31, 1999. On March 15, 1999, the loans were amended to change the maturity date
from December 31, 1999 to March 15, 2002. As of March 15, 2000, the aggregate
indebtedness owed to us under these loans was $256,289, including accrued
interest thereon. These loans are secured by shares of our Common Stock that are
owned by Messrs. Rosner and Frumberg, and bear interest at a bank's prime rate
and are due in equal annual installments of principal and interest through March
15, 2002.
17
<PAGE>
On February 1, 2000, Mr. Frumberg surrendered to us 25,000 shares of
Common Stock owned by him which resulted in a partial reduction of his
outstanding loan to us of $40,250. Mr. Rosner's loan was amended to provide that
the annual installment of principal and interest due on March 15, 2000 of
$70,450 would become payable on June 1, 2000.
Transactions with Related Parties
In 1999 and 1998, we sold fragrance products to Scent-A-Vision, Inc., a
company owned by Ms. Sharon Christie who is the spouse of Mr. Philip Rosner, our
Chairman and President. Our sales to Scent-A-Vision for years 1999 and 1998 were
approximately $342,000 and $244,000, respectively, which we believe were
competitive with other available sources for such fragrance products.
Table of Indebtedness of Directors
and Executive Officers of Company
<TABLE>
<CAPTION>
Amount Amount
Outstanding Outstanding
Involvement as of as of
Name and Principal Position of Issuer December 31, 1999(1) March 15, 2000(1)
- --------------------------- --------- -------------------- -----------------
<S> <C> <C> <C>
Philip Rosner, Chairman of the Board and President ..... Lender $207,910 $211,346
A. Gary Frumberg, Director and Executive Vice
President ........................................... Lender 84,191 44,943
</TABLE>
- ----------
(1) Includes accrued interest.
18
<PAGE>
ITEM 13-EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed below are filed as part of this Annual Report on
Form 10-KSB.
Exhibit
Number Document
------- --------
3.1 Certificate of Incorporation and By-Laws (A).
4.1 Form of Certificate Representing Share of Common Stock (A).
10.1 Lease for Property in Amityville, New York (A).
10.2 1993 Stock Option Plan (A).
10.3 1996 Stock Option Plan (incorporated by reference from our 1996
definitive proxy statement with respect to our 1996 Annual Meeting
of Stockholders, held October 30, 1996, as filed with the Commission
on September 25, 1996).
10.4 1999 Stock Option Plan (incorporated by reference from our 1999
definitive proxy statement with respect to the 1999 Annual Meeting
of Stockholders, held June 24, 1999, as filed with the Commission on
May 28, 1999).
10.5 Promissory Note of Philip Rosner issued to us, dated March 15, 1999
(filed as Exhibit 10.25 to Form 10-KSB, Annual Report of our company
for the year ended December 31, 1998 and incorporated herein by
reference).
10.6 Stock Pledge Agreement, dated March 15, 1999, between us and Philip
Rosner (filed as Exhibit 10.26 to Form 10-KSB, Annual Report of our
company for the year ended December 31, 1998 and incorporated herein
by reference).
10.7 Promissory Note of A. Gary Frumberg issued to us, dated March 15,
1999 (filed as Exhibit 10.27 to Form 10-KSB, Annual Report of our
company for the year ended December 31, 1998 and incorporated herein
by reference).
10.8 Stock Pledge Agreement, dated March 15, 1999, between us and A. Gary
Frumberg (filed as Exhibit 10.28 to Form 10-KSB, Annual Report of
our company for the year ended December 31, 1998 and incorporated
herein by reference).
10.9 Asset Purchase Agreement, dated August 25, 1998, between us,
Mane-Seafla, Inc. and Mane USA, Inc. (filed as Exhibit 2.1 to Form
8-K, Current Report of our company, filed with the Commission on
September 9, 1998).
10.10 Loan and Security Agreement, dated June 29, 1999, between us and
Foothill Capital Corporation (filed as Exhibit 10.1 to Form 8-K,
Current Report of our company, filed with the Commission on July 16,
1999).
10.11 Unconditional Guaranty, dated June 29, 1999 between us and Foothill
Capital Corporation (filed as Exhibit 10.2 to Form 8-K, Current
Report of our company, filed with the Commission on July 16, 1999).
10.12 Unconditional Guaranty, dated June 29, 1999 between Technology
Flavors & Fragrances S.A. and Foothill Capital Corporation (filed as
Exhibit 10.3 to Form 8-K, Current Report of our company, filed with
the Commission on July 16, 1999).
*21.1 Our subsidiaries.
*23.1 Consent of Ernst & Young LLP.
*27.1 Financial Data Schedule.
(A) Incorporated by reference to our Registration Statement on Form 10-SB
(File No. 0-26682) filed with the Commission on August 28, 1995.
* Filed herewith.
(b) Reports on Form 8-K.
None
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, we have caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized.
Technology Flavors & Fragrances, Inc.
Dated: March 29, 2000 By: /s/ JOSEPH A. GEMMO
-----------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ PHILIP ROSNER Chairman of the Board, March 29, 2000
- --------------------------- President and Director
Philip Rosner (Principal Executive Officer)
/s/ A.GARY FRUMBERG Executive Vice President March 29, 2000
- --------------------------- and Director
A. Gary Frumberg
/s/ JOSEPH A. GEMMO Vice President, Chief Financial March 29, 2000
- --------------------------- Officer, Secretary and Treasurer
Joseph A. Gemmo (Principal Financial and
Accounting Officer)
/s/ SEAN DESON Director March 29, 2000
- ---------------------------
Sean Deson
/s/ WERNER F. HILLER Director March 29, 2000
- ---------------------------
Werner F. Hiller
/s/ IRWIN D. SIMON Director March 29, 2000
- ---------------------------
Irwin D. Simon
20
<PAGE>
Exhibit Index
Exhibit
Number Description
- ------ -----------
21.1 Our subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
21
<PAGE>
Index to Financial Statements
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999 and 1998 F-7
F-1
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors of
Technology Flavors & Fragrances, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Technology
Flavors & Fragrances, Inc. and Subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Technology Flavors
& Fragrances, Inc. and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Melville, New York
February 28, 2000
F-2
<PAGE>
Technology Flavors & Fragrances, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 154,535 $ 317,034
Receivables (less allowance for doubtful accounts of $115,000 in 1999 and
$235,000 in 1998 (Note 3) ................................................... 3,270,571 2,526,729
Inventories (Note 4) ........................................................... 2,634,997 2,802,284
Prepaid expenses and other current assets ...................................... 54,995 32,757
------------ ------------
Total current assets ........................................................ 6,115,098 5,678,804
Fixed assets, net (Note 5) ........................................................ 577,482 604,511
Intangible assets, net (Notes 6 and 10) ........................................... 945,903 1,108,058
Other assets ...................................................................... 382,708 371,656
Notes receivable from related parties (Note 7) .................................... 292,101 269,732
------------ ------------
Total assets ................................................................ $ 8,313,292 $ 8,032,761
============ ============
LIABILITIES
Current liabilities:
Accounts payable ............................................................... $ 1,565,575 $ 1,621,887
Accrued expenses ............................................................... 301,775 611,150
Revolving credit facility (Note 8) ............................................. 1,544,607 1,612,634
Current portion of long-term debt (Note 8) ..................................... 39,354 34,562
------------ ------------
Total current liabilities ................................................... 3,451,311 3,880,233
Long-term debt (Note 8) ........................................................... 35,359 40,616
Deferred credits .................................................................. 334,087 321,727
------------ ------------
3,820,757 4,242,576
Commitments (Note 12)
STOCKHOLDERS' EQUITY
Common stock:
$.01 par value, authorized 20,000,000 shares, issued 12,549,223 and 12,449,223,
respectively ................................................................ 125,492 124,492
Paid-in capital ................................................................... 10,222,544 10,178,015
Accumulated deficit ............................................................... (5,855,501) (6,512,322)
------------ ------------
Total stockholders' equity .................................................. 4,492,535 3,790,185
------------ ------------
Total liabilities and stockholders' equity .................................. $ 8,313,292 $ 8,032,761
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Technology Flavors & Fragrances, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------
1999 1998
------------ ------------
(Note9)
<S> <C> <C>
Net sales ............................................. $ 14,769,130 $ 13,888,242
Cost of sales ......................................... 8,450,923 8,288,245
------------ ------------
Gross profit .................................. 6,318,207 5,599,997
------------ ------------
Operating expenses:
Selling ............................................ 2,315,251 2,713,869
General and administrative ......................... 1,670,492 1,917,868
Research and development ........................... 1,306,695 1,396,158
Amortization ....................................... 181,006 354,375
Write-down of intangible assets and other charges .. -- 2,119,760
------------ ------------
Total operating expenses ...................... 5,473,444 8,502,030
------------ ------------
Income (loss) from operations ......................... 844,763 (2,902,033)
Interest expense, net ................................. (160,383) (107,787)
------------ ------------
Income (loss) before provision for income taxes ....... 684,380 (3,009,820)
Provision for income taxes ............................ (27,559) (1,730)
------------ ------------
Income (loss) from continuing operations .............. 656,821 (3,011,550)
Discontinued operations:
Gain on disposal of discontinued operations......... -- 1,080,157
Loss from discontinued operations .................. -- (104,881)
------------ ------------
-- 975,276
------------ ------------
Net income (loss) ..................................... $ 656,821 $ (2,036,274)
============ ============
Net income (loss) per common share - basic and diluted:
Continuing operations .............................. $ .05 $ (.24)
Discontinued operations ............................ -- .08
------------ ------------
Net income (loss) per common share - basic and diluted $ .05 $ (.16)
============ ============
Weighted average shares outstanding ................... 12,499,223 12,399,623
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Technology Flavors & Fragrances, Inc.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Unearned
Common Stock Compensation
---------------------- Paid-In (Accumulated Arising from
Shares Amount Capital Deficit) Stock Awards Total
---------- -------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ........... 12,374,223 $123,742 $10,138,165 $(4,476,048) $(236,284) $5,549,575
Shares issued in connection with
exercise of stock options ........... 75,000 750 42,750 43,500
Redemption of warrants ................. (20,000) (20,000)
Options issued for consulting
services ........................... 17,100 17,100
Amortization of unearned
compensation ........................ 48,505 48,505
Write-off of unearned compensation
associated with discontinued
operations .......................... 187,779 187,779
Net loss ............................... (2,036,274) (2,036,274)
---------- -------- ----------- ----------- --------- ----------
Balance at December 31, 1998 ........... 12,449,223 124,492 10,178,015 (6,512,322) -- 3,790,185
Shares issued in connection with
exercise of stock options ........... 100,000 1,000 44,529 45,529
Net income ............................. 656,821 656,821
---------- -------- ----------- ----------- --------- ----------
Balance at December 31, 1999 ........... 12,549,223 $125,492 $10,222,544 $(5,855,501) $ -- $4,492,535
========== ======== =========== =========== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Technology Flavors & Fragrances, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 656,821 $(2,036,274)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Net gain on sale of Seasoning Division ......................... -- (1,080,157)
Depreciation and amortization .................................. 338,166 507,106
Write-down of intangible assets ................................ -- 1,723,000
Provision for bad debts ........................................ -- 195,710
Deferred rent .................................................. 12,360 12,360
Loss on disposal of fixed assets ............................... -- 15,697
Non-cash consulting charge ..................................... -- 17,100
Changes in assets and liabilities:
Accounts receivable .......................................... (743,842) (524,853)
Inventories .................................................. 167,287 545,155
Prepaid expenses and other current assets .................... (22,238) 26,122
Other assets ................................................. (42,374) (146,147)
Accounts payable ............................................. (56,312) 699,890
Accrued expenses ............................................. (309,375) 192,498
----------- -----------
Net cash provided by operating activities 493 147,207
----------- -----------
Cash flows from investing activities:
Net proceeds from sale of Seasoning Division ..................... -- 3,911,656
Purchase of fixed assets ......................................... (130,131) (45,617)
(Increase) decrease in notes receivable .......................... (22,369) 9,788
----------- -----------
Net cash (used in) provided by investing activities ............ (152,500) 3,875,827
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility .......................... 3,185,412 700,000
Repayment of revolving credit facility ........................... (3,253,904) (5,005,675)
Proceeds from exercise of stock options .......................... 58,000 43,500
Payment for cancellation of warrants ............................. -- (20,000)
----------- -----------
Net cash used in financing activities ......................... (10,492) (4,282,175)
----------- -----------
Decrease in cash ................................................... (162,499) (259,141)
Cash-beginning of year ............................................. 317,034 576,175
----------- -----------
Cash-end of year ................................................... $ 154,535 $ 317,034
=========== ===========
Supplemental information:
Cash paid during the year for interest ........................... $ 201,000 $ 447,000
=========== ===========
Cash paid during the year for income taxes ....................... $ 35,000 $ 8,800
=========== ===========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
Equipment acquired under a capital lease obligation amounted to $35,000 in
1999.
See accompanying notes.
F-6
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 1999 and 1998
1. Description of Business
Technology Flavors & Fragrances, Inc. (the "Company", "us", "we" or "our")
is a manufacturer of flavor and fragrance 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 our wholly-owned subsidiaries. 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
using the specific identification method.
Long-Lived Assets
We periodically review the carrying value of our long-lived assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted cash flow analyses. Such a review resulted in an impairment loss
being recognized for the year ended December 31, 1998. No such impairment exists
at December 31, 1999. See Note 10.
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.
Intangible Assets
Amortization of intangible assets is provided using the straight-line
method over the estimated useful lives of the assets ranging from 10 to 13
years. Annually, we assess the realizability of our capitalized formulations
based upon the yearly level of product utilization and forecasted sales data. No
such impairment exists at December 31, 1999. See Note 10.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
We recognize 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-7
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
2. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The financial condition and results of operations of our subsidiaries are
measured using local currency as the functional currency. Balance sheet accounts
are translated at the exchange rate in effect at the end of the year, 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 have not been material.
Earnings Per Share
Basic net income (loss) per share was calculated using the weighted
average number of shares of common stock outstanding during the year. Diluted
net income per share was calculated using the weighted average common and common
stock equivalents that were outstanding during the year. The effect of common
stock equivalents for 1999 was not material and, thus, diluted net income per
share was not presented. For 1998, the effect of common stock equivalents was
anti-dilutive, and thus, diluted net loss per share was the same as basic.
Revenue Recognition
We recognize revenue when inventory is shipped and title legally transfers
to the purchaser.
Advertising Costs
We expense advertising costs as incurred. Advertising costs of continuing
operations were approximately $22,000 in 1999 and $155,000 in 1998.
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. We estimate the fair value
of our fixed rate note receivable and long-term debt by using a discounted cash
flow analysis.
3. Receivables
December 31, December 31,
1999 1998
---- ----
Trade .......................... $3,025,695 $2,451,905
Alcohol drawbacks .............. 213,267 61,574
Other .......................... 31,609 13,250
---------- ----------
$3,270,571 $2,526,729
========== ==========
Included within trade receivables at December 31, 1999 and 1998 is an
amount due from a party related to our executive and principal shareholder in
the amount of approximately $342,000 and $244,000, respectively.
F-8
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
4. Inventories
December 31, December 31,
1999 1998
---- ----
Raw materials ................ $1,427,698 $1,718,553
Finished goods ............... 1,207,299 1,083,731
---------- ----------
$2,634,997 $2,802,284
========== ==========
5. Fixed Assets
December 31, December 31,
1999 1998
---- ----
Machinery and equipment ....................... $ 1,202,101 $ 1,156,962
Leasehold improvements ........................ 621,252 576,188
Furniture and fixtures ........................ 528,371 488,443
----------- -----------
2,351,724 2,221,593
Less: accumulated depreciation and amortization (1,774,242) (1,617,082)
----------- -----------
$ 577,482 $ 604,511
=========== ===========
Depreciation and amortization expense of continuing operations relating to
fixed assets for the years ended December 31, 1999 and 1998 was approximately
$157,000 and $153,000, respectively.
6. Intangible Assets
December 31, December 31,
1999 1998
---- ----
Formulations ....................... $ 1,048,979 $ 1,048,979
Customer lists ..................... 86,105 86,105
----------- -----------
1,135,084 1,135,084
Less: accumulated amortization ..... (189,181) (27,026)
----------- -----------
$ 945,903 $ 1,108,058
=========== ===========
Amortization expense of continuing operations relating to intangible
assets for the years ended December 31, 1999 and 1998 was approximately $162,000
and $266,000, respectively. See Note 10.
F-9
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
7. Notes Receivable From Related Parties
Notes receivable from related parties consist of amounts owed by two
executives and principal shareholders and are secured by shares of our Common
Stock owned by them. The notes bear interest at a bank's prime rate and are due
in annual installments of principal and interest through March 15, 2002. On
March 15, 1999, the notes were amended to change the maturity date from December
31, 1999 to March 15, 2002. On February 1, 2000, one executive surrendered to us
25,000 shares of the Company's Common Stock owned by him which resulted in a
partial pay down of his loan to us of $40,250. The loan agreement with the other
executive was amended to provide that the annual installment of principal and
interest due on March 15, 2000 would become payable on June 1, 2000.
8. Debt
December 31, December 31,
1999 1998
---- ----
Revolving credit facility .......... $1,544,607 $1,612,634
Capital leases ..................... 74,713 75,178
---------- ----------
Total debt ...................... 1,619,320 1,687,812
Less: current maturities ........... 1,583,961 1,647,196
---------- ----------
Total long-term debt ............ $ 35,359 $ 40,616
========== ==========
In connection with the sale of our Seasoning Division on August 25, 1998
(see Note 9), the net cash proceeds from the sale of approximately $4,000,000
were used to pay down our then outstanding Term Loan Facility by $637,500 and a
portion of the then outstanding $6,000,000 Revolving Credit Facility. After the
sale of our Seasoning Division, the lender: (a) reduced the maximum borrowings
available to us under the Revolving Credit Facility from $6,750,000 to
$2,750,000, (b) eliminated two financial covenants and modified two other
financial covenants, and (c) increased the lending rate on outstanding
borrowings to LIBOR plus 375 basis points, or 1% above the bank's prime rate, at
our option.
On March 1, 1999, we and the lender entered into an amendment to our
agreement (the "1999 Amendment") which extended the maturity date of the
Revolving Credit Facility from March 31, 1999 to June 30, 1999. Pursuant to the
1999 Amendment, the lending rate on outstanding borrowings was increased to 2"%
above the bank's prime rate, and we were required to pay a $15,000 fee to the
bank.
On June 29, 1999, we entered into a Loan and Security Agreement (the "Loan
Agreement") with a new lender providing for a three year $3,000,000 revolving
credit facility (the "1999 Credit Facility"). Outstanding borrowings under the
1999 Credit Facility initially bear interest at a rate of three quarters of one
percent (0.75%) in excess of a prime or "reference" lending rate, and are
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%) above the bank's reference 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. During the term of the 1999 Credit Facility, we must comply with
certain financial and other covenants contained in the Loan Agreement. At
December 31, 1999, approximately $1,545,000 was outstanding and $1,236,000 was
available for additional borrowings under the 1999 Credit Facility. At that
date, outstanding borrowings bore interest at 9.25% per annum.
F-10
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
9. Discontinued Operations
In August 1998, we sold substantially all of the assets and certain
liabilities relating to our Seasoning Division, located in Milford, Ohio, to
Mane USA for $5,500,000 in cash, less an aggregate of $1,003,454 in principal
and interest assumed by Mane USA which was owed by us under a promissory note to
a former director and executive officer in connection with our acquisition of
the Seasoning Division in December 1995. Of the total purchase price paid,
$275,000 is being held in escrow until August 25, 2000 to secure certain of our
indemnification obligations. At December 31, 1999, this has been recorded in
"other assets" while the corresponding deferred gain was recorded in "deferred
credits". The results of operations of our Seasoning Division have been
accounted for as discontinued operations in the accompanying consolidated
financial statements.
We recognized a net gain of approximately $1,080,000 on the sale of our
Seasoning Division. Net losses attributable to the discontinued operations have
been shown separately in our consolidated statements of operations for year
ended December 31, 1998. Net sales of the discontinued operations were
approximately $3,412,000 for the year ended December 31, 1998. Interest expense
allocated to the discontinued operations amounted to $291,000 for 1998, and was
based on the reduction in long-term debt from the net proceeds received from the
sale of the discontinued operations.
10. 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, management
determined that certain previously acquired product formulations, which have
historically been included in intangible assets, had been impaired. In
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," we determined that the future undiscounted cash flows estimated to be
generated from certain purchased product formulations was less than the carrying
amount of such formulations. Accordingly, we recorded a write-down of such
intangible assets to their estimated fair values resulting in a $1,723,000
non-cash charge to earnings in 1998.
Other charges in 1998 principally consisted of: (a) $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 (b) $124,950
for the settlement of litigation brought against us in February 1998 by our
former investor relations consultant.
11. Income Taxes
The income tax provision for the years ended December 31, 1999 and 1998
principally represents current state franchise taxes and federal alternative
minimum tax.
A reconciliation of the income tax provision (benefit) of continuing
operations at the statutory rate to income tax expense at the annualized
estimated effective tax rate for the years ended December 31, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed tax benefit at federal statutory rate ................ $ 232,689 $(1,023,927)
State and local income tax benefit net of federal tax benefit . 27,375 (120,462)
Discontinued operations ....................................... -- 371,929
Non-deductible officers' life insurance premiums and travel and
entertainment expenses ..................................... 9,175 13,202
Limitation on net operating loss carryforward ................. (241,680) 649,964
Other ......................................................... -- 111,024
----------- -----------
Provision for income taxes .................................... $ 27,559 $ 1,730
=========== ===========
</TABLE>
F-11
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
11. Income Taxes (Continued)
The components of deferred taxes as of December 31, 1999 and 1998 are as
follows:
1999 1998
---- ----
Deferred tax assets
Accounts receivable ..................... $ 39,900 $ 89,300
Capitalized inventory costs ............. 20,259 19,878
Depreciation ............................ 107,455 97,421
Intangibles ............................. 680,167 748,975
Net operating loss carryforward - U.S. .. 492,431 951,852
Net operating loss carryforward - Foreign 256,156 132,081
AMT credit .............................. 38,583 --
Other ................................... (3,439) 4,863
----------- -----------
1,631,512 2,044,370
Valuation allowance ........................ (1,631,512) (2,044,370)
----------- -----------
Net deferred tax asset ..................... $ -- $ --
=========== ===========
The Company has net operating loss carryforwards relating to U.S.
operations of approximately $1,300,000 which expire at various dates from 2007
through 2014.
12. Commitments
Lease Obligations
During 1994, we received a rent abatement of $150,000 relating to our
Amityville, New York facility. As a result of the abatement, we 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. We recorded rent expense using the straight-line method based on the
minimum rent payable over the 12-year period of the lease.
Future minimum commitments under noncancelable operating and capital
leases are as follows:
Year ended Operating Capital
December 31, leases leases
------------ --------- -------
2000 .......................... $236,173 $ 48,365
2001 .......................... 244,863 16,615
2002 .......................... 240,212 8,515
2003 .......................... 230,085 8,515
2004 .......................... 218,366 7,805
Thereafter .................... 278,442 --
Rental expense charged to continuing operations for the years ended
December 31, 1999 and 1998 was $307,000 and $375,000, respectively.
Employment Contracts
We are obligated under employment contracts, providing for annual
compensation, expiring on various dates through August 2002. Certain other
contracts call for us to pay additional compensation based on sales volumes.
F-12
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
12. Commitments (Continued)
Future fixed compensation under these contracts, not including commissions
based upon sales volume, as of December 31, 1999, is as follows:
Year ended
December 31,
------------
2000 ....................................................... $1,042,000
2001 ....................................................... 198,000
2002 ....................................................... 81,000
13. Stockholders' Equity
Non-employee Stock Option Grants
In December 1998, we issued stock options to purchase 30,000 shares of
Common Stock to an investor relations consulting firm. The 1998 expense related
to such options was not material.
Stock Option Plans
We granted stock options under three separate plans: the 1999 Stock Option
Plan, the 1996 Stock Option Plan and the 1993 Stock Option Plan.
Under the 1999, 1996 and 1993 Option Plans, our employees (including
officers and directors who are employees) and the employees of our subsidiaries
are eligible for the grant of incentive options to purchase up to a maximum of
1,000,000, 1,000,000 and 500,000 shares, respectively, which vest immediately or
ratably over periods ranging from one 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 our Board of Directors or the Committee appointed by the Board of
Directors. In May 1999, our Board of Directors terminated the 1993 Option Plan
and no further option grants may be made under such Plan provided, however, that
such termination will not affect options that were granted prior to the date of
termination.
The following table summarizes stock option activity for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 932,500 $ 1.00 1,201,000 $ 1.08
Granted ........................ 1,152,629 1.20 30,000 1.00
Exercised ...................... (100,000) .58 (75,000) .58
Canceled ....................... (310,667) .75 (223,500) 1.49
--------- -------- --------- --------
Outstanding at end of year ..... 1,674,462 $ 1.21 932,500 $ 1.00
========= ======== ========= ========
Exercisable at end of year ..... 786,962 $ .81 666,650 $ .87
========= ======== ========= ========
Weighted average fair value
of options granted during
the year .................... $ .71 $ .67
======== ========
</TABLE>
F-13
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
13. Stockholders' Equity (Continued)
The following table summarizes information on stock options outstanding at
December 31, 1999:
Weighted Average
Options Options Remaining Contractual Life
Exercise Price Outstanding Exercisable in Years
- -------------- ----------- ----------- --------------------------
$ .58 - .97 .... 654,462 207,962 7.8
1.00 - 1.37 .... 425,000 241,000 6.6
1.44 - 1.69 .... 595,000 338,000 9.2
--------- ------- -------
1,674,462 786,962 8.0
========= ======= =======
At December 31, 1999, 748,538 shares of our Common Stock were reserved for the
future issuance of stock options.
Warrants
The following table summarizes information on warrants outstanding at
December 31, 1999:
Warrants Exercise Warrants
Outstanding Price Exercisable Expiration
----------- ----- ----------- ----------
595,000 $ .56 595,000 October 2000
450,000 2.40 450,000 October 2001
156,250 2.70 156,250 October 2001
--------- ---------
1,201,250 1,201,250
========= =========
Stock Based Compensation Plans
We continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for our stock-based compensation plans. Under APB
25, because the exercise price of our stock options equals the market price of
the underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net income (loss) and net income (loss)
per share is determined as if we had accounted for our stock options granted
subsequent to December 31, 1994, using the fair value method estimated at the
date of the grant based upon a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.6 % and
5.5%; no dividend yield; volatility factor of the expected market price of our
Common Stock of 61% and 53%; and a weighted-average expected life of the options
of 7.5 and 8 years at December 31, 1999 and 1998, respectively.
The Black-Scholes 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 our 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 our 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. Our pro forma
information is as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Income (loss) from continuing operations as reported ................... $ 656,821 $ (3,011,550)
Pro forma income (loss) from continuing operations ..................... 216,899 (3,172,468)
Net income (loss) per share from continuing operations as reported -
basic and diluted ................................................... .05 (.24)
Pro forma net income (loss) per share from continuing operations - basic
and diluted ......................................................... .02 (.26)
</TABLE>
F-14
<PAGE>
Technology Flavors & Fragrances, Inc.
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 1999 and 1998
13. Stockholders' Equity (Continued)
FASB No. 123 method of accounting has not been applied to options granted
prior to January 1, 1996. As a result, the pro forma compensation cost may not
be representative of that to be expected in future years.
14. Employee Savings Plan
We have an employee savings and retirement 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 voluntary matching contribution by us which is one
half of the amount contributed by the participant up to a maximum of 3% per
annum. We temporarily discontinued our matching contribution from January 1998
through March 1998 at which time it was reinstated to a maximum of 1% per annum.
Matching contributions amounted to $18,000 and $23,000 for the years ended
December 31, 1999 and 1998, respectively. Employees vest in the employer
contribution at the rate of 25% per year.
15. Concentrations of Credit Risk
Financial instruments, which potent\ially subject us 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, 1999 and 1998, five customers accounted for approximately
36% and 42% of the accounts receivable balance, respectively. For the years
ended December 31, 1999 and 1998, no one customer accounted for more than 10% of
our net sales.
For the years ended December 31, 1999 and 1998, export sales were
approximately 27% and 33%, respectively, of total sales. Our export sales are
made to entities located primarily in Canada and South America. Receivables from
such foreign sales at December 31, 1999 and 1998 amounted to 41% and 50%,
respectively, of total accounts receivable.
Cash and cash equivalent balances are held primarily at one financial
institution and may, at times, exceed the amount insurable. We believe we
mitigate risk by investing in or through a major financial institution.
Recoverability of investment is dependent upon the performance of the issuer.
16. Reconciliation of Canadian and United States Generally Accepted Accounting
Principles
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. During 1999 and
1998, there were no material items which would be required to be recorded in
order for our financial statements to be in accordance with accounting
principles generally accepted in Canada.
F-15
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
Technology Flavors & Fragrances, Inc. (Canada) Ontario, Canada
Technology Flavors & Fragrances S.A. Santiago, Chile
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-87691) pertaining to the 1993 Incentive Stock Option Plan, the 1996
Stock Option Plan and the 1999 Stock Option Plan of Technology Flavors &
Fragrances, Inc. of our report dated February 28, 2000, with respect to the
consolidated financial statements of Technology Flavors & Fragrances, Inc.
included in the Annual Report (Form 10-KSB) for the year ended December 31,
1999.
/S/ ERNST & YOUNG LLP
Melville, New York
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 154,535
<SECURITIES> 0
<RECEIVABLES> 3,385,571
<ALLOWANCES> 115,000
<INVENTORY> 2,634,997
<CURRENT-ASSETS> 6,115,098
<PP&E> 2,351,724
<DEPRECIATION> 1,774,242
<TOTAL-ASSETS> 8,313,292
<CURRENT-LIABILITIES> 3,451,311
<BONDS> 35,359
0
0
<COMMON> 125,492
<OTHER-SE> 4,367,043
<TOTAL-LIABILITY-AND-EQUITY> 8,313,292
<SALES> 14,769,130
<TOTAL-REVENUES> 14,769,130
<CGS> 8,450,923
<TOTAL-COSTS> 5,473,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,383
<INCOME-PRETAX> 684,380
<INCOME-TAX> 27,559
<INCOME-CONTINUING> 656,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 656,821
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
