U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission File No. 0-26682
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
-------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 11-3199437
--------------------------------------------------------------------------------
(State or other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
10 Edison Street East, Amityville, New York 11701
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(Address of Principal Executive Offices)
(631) 842-7600
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the issuer's common stock, par value $.01
per share, as of November 1, 2000, was 12,531,491.
Transitional Small Business Disclosure Format (check one):
YES NO X
---- ---
<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
INDEX TO FORM 10-QSB
SEPTEMBER 30, 2000
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999...................................... 1
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2000 and September 30, 1999.................. 2
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000
and September 30, 1999..................................... 3
Notes to Consolidated Financial Statements................. 4
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 5
PART II - OTHER INFORMATION.................................................. 8
SIGNATURES................................................................... 9
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<PAGE>
PART I
ITEM 1. - FINANCIAL STATEMENTS
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
<TABLE>
<CAPTION>
At At
September 30, December 31,
2000 1999
(Unaudited) (Note)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 182,666 $ 154,535
Receivables, net 3,862,939 3,270,571
Inventories 2,801,708 2,634,997
Prepaid expenses and other current assets 116,034 54,995
------------ ------------
Total current assets 6,963,347 6,115,098
Fixed assets, net 532,055 577,482
Intangible assets, net 824,287 945,903
Other assets 162,688 382,708
Notes receivable from related parties 144,319 292,101
------------ ------------
Total assets $ 8,626,696 $ 8,313,292
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $ 1,720,485 $ 1,565,575
Accrued expenses 296,989 301,775
Revolving credit facility 1,132,717 1,544,607
Current portion of capital lease obligations 16,824 39,354
------------ ------------
Total current liabilities 3,167,015 3,451,311
Capital lease obligations 24,935 35,359
Deferred credits 94,098 334,087
------------ ------------
3,286,048 3,820,757
STOCKHOLDERS' EQUITY
Common stock:
$ .01 par value, issued and outstanding 12,531,491
and 12,549,223 shares, respectively 125,315 125,492
Paid-in capital 10,114,753 10,222,544
Accumulated deficit (4,899,420) (5,855,501)
------------ ------------
Total stockholders' equity 5,340,648 4,492,535
------------ ------------
Total liabilities and stockholders' equity $ 8,626,696 $ 8,313,292
============ ===========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
----------------------------- -----------------------------
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,011,680 $ 3,907,784 $12,699,635 $11,342,759
Cost of sales 2,418,323 2,266,122 7,373,299 6,414,574
----------- ----------- ----------- -----------
Gross profit 1,593,357 1,641,662 5,326,336 4,928,185
----------- ----------- ----------- -----------
Operating expenses:
Selling 618,207 597,269 1,861,818 1,744,416
General and administrative 488,270 442,766 1,397,778 1,252,110
Research and development 342,417 283,911 1,040,102 959,789
Amortization 49,322 55,981 146,750 137,059
----------- ----------- ----------- -----------
Total operating expenses 1,498,216 1,379,927 4,446,448 4,093,374
----------- ----------- ----------- -----------
Income from operations 95,141 261,735 879,888 834,811
Interest expense, net 48,484 47,098 136,711 132,661
----------- ----------- ----------- -----------
Income before provision for income taxes 46,657 214,637 743,177 702,150
Provision for income taxes 13,000 4,052 36,355 12,110
----------- ----------- ----------- -----------
Income from continuing operations 33,657 210,585 706,822 690,040
Gain on disposal of discontinued operations 249,259 -- 249,259 --
----------- ----------- ----------- -----------
Net income $ 282,916 $ 210,585 $ 956,081 $ 690,040
=========== =========== =========== ===========
Net income per common share:
Continuing operations:
Basic $ .00 $ .02 $ .06 $ .06
Diluted .00 .02 .05 .05
Discontinued operations - basic and diluted .02 .00 .02 .00
----------- ----------- ----------- -----------
Net income per common share:
Basic $ .02 $ .02 $ .08 $ .06
=========== =========== =========== ===========
Diluted $ .02 $ .02 $ .07 $ .05
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 12,531,491 12,549,623 12,524,056 12,482,956
=========== =========== =========== ===========
Diluted 13,398,520 13,111,617 13,373,466 12,855,052
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars) (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 956,081 $ 690,040
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on disposal of discontinued operations (249,259) -
Stock option grants for outside services 13,500 -
Depreciation and amortization 278,752 251,088
Deferred rent 9,270 9,270
Changes in assets and liabilities:
Accounts receivable (592,368) (926,641)
Inventories (166,711) 206,189
Prepaid expenses and other current assets (61,039) (22,624)
Other assets 194,885 (95,112)
Accounts payable 154,910 (61,805)
Accrued expenses (4,786) (125,048)
------------ -----------
Net cash provided by (used in) operating activities: 533,235 (74,643)
------------ -----------
Cash flows from investing activities:
Purchase of fixed assets (86,574) (74,335)
Notes receivable (33,769) (16,575)
------------ -----------
Net cash used in investing activities: (120,343) (90,910)
------------ -----------
Cash flows from financing activities:
Proceeds from revolving credit 11,540,000 3,185,412
Repayment of revolving credit facility (11,951,890) (3,042,804)
Issuance of common stock 60,083 58,000
Payment of capital lease obligations (32,954) (28,810)
------------ -----------
Net cash (used in) provided by financing activities: (384,761) 171,798
------------ -----------
Increase in cash and cash equivalents 28,131 6,245
Cash and cash equivalents - beginning of period 154,535 317,034
------------ -----------
Cash and cash equivalents - end of period $ 182,666 $ 323,279
============ ===========
</TABLE>
See accompanying notes.
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<PAGE>
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
Technology Flavors & Fragrances, Inc. (the "company," "us," "we" or
"our") develops, manufactures, and markets flavor and fragrance products used to
provide or enhance flavors or fragrances in a wide variety of consumer and
industrial products.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of our management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 2000 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2000. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-KSB for the year
ended December 31, 1999.
2. INVENTORIES
Components of inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials $1,770,133 $1,427,698
Finished goods 1,031,575 1,207,299
---------- ----------
$2,801,708 $2,634,997
========== ==========
</TABLE>
3. EARNINGS PER SHARE
------------------
Basic net income per share is calculated using the weighted average
number of shares of our common stock outstanding during the period. Diluted net
income per share for the three-month and nine-month periods ended September 30,
2000 and 1999 was calculated using the weighted average common and common
equivalent shares that were outstanding during the periods.
4. GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
-------------------------------------------
At the time of the sale of our Seasoning Division in August 1998,
$275,000 of the selling price was escrowed and, pending conclusion of certain
contingencies, not recognized as part of the gain on sale. In August 2000,
$249,259 of such escrowed funds was released to the company from escrow and was
recorded as a gain on disposal of discontinued operations for the third quarter.
At September 30, 2000, $25,741 remained in escrow and is included in deferred
credits.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following information for the three-month and nine-month periods
ended September 30, 2000 and 1999 has been derived from the company's unaudited
consolidated financial statements and should be read in conjunction with the
company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,012 100.0% $3,908 100.0% $ 12,700 100.0% $ 11,343 100.0%
Gross profit 1,593 39.7 1,642 42.0 5,326 41.9 4,928 43.4
Operating expenses
Selling 618 15.4 597 15.3 1,862 14.7 1,744 15.4
General and administrative 488 12.2 443 11.3 1,397 11.0 1,252 11.0
Research and development 343 8.6 284 7.3 1,040 8.2 960 8.4
Amortization 49 1.2 56 1.4 147 1.1 137 1.2
Income from operations 95 2.3 262 6.7 880 6.9 835 7.4
Interest expense, net 48 1.2 47 1.3 137 1.1 133 1.2
Provision for income taxes 13 0.3 4 - 36 0.2 12 0.1
Income from continuing
operations 34 0.8 211 5.4 707 5.6 690 6.1
Gain on disposal of
discontinued operations 249 6.2 - - 249 1.9 - -
Net income 283 7.0 211 5.4 956 7.5 690 6.1
</TABLE>
NET SALES. Net sales increased by $104,000, or 2.7%, to $4,012,000 for
the three months ended September 30, 2000 from $3,908,000 for the same period
last year and increased by $1,357,000, or 12.0%, to $12,700,000 for the nine
months ended September 30, 2000 from $11,343,000 for the comparable nine-month
period of 1999. Net sales for the three months ended September 30, 2000
reflected new flavor product sales of approximately $300,000 and a decrease in
beverage flavor sales due primarily to the colder than expected summer season
which adversely affected the beverage industry generally. The increase in net
sales for the nine months ended September 30, 2000 were principally attributable
to the launching of new food and beverage flavor products to new and existing
customers primarily during the first half of 2000.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to
39.7% on sales of $4,012,000 for the three months ended September 30, 2000 as
compared to 42.0% on sales of $3,908,000 for the same period last year and
decreased to 41.9% on sales of $12,700,000 for the nine months ended September
30, 2000 as compared to 43.4% on sales of $11,343,000 for the comparable
nine-month period of 1999. The decreases in gross profit for the 2000 periods
were due principally to a lower gross margin on a new food flavor product and
differences in product mix attributable to a higher concentration of export
sales where gross margins are generally lower.
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<PAGE>
OPERATING EXPENSES:
SELLING EXPENSES. Selling expenses increased by $21,000 to $618,000
for the three months ended September 30, 2000 from $597,000 for the same period
last year and increased by $118,000 to $1,862,000 for the nine months ended
September 30, 2000 from $1,744,000 for the comparable nine-month period of 2000.
The increases were due principally to the hiring of an additional sales person
during the fourth quarter of 1999 to support expected growth in sales during
2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $45,000 to $488,000 for the three months ended September
30, 2000 from $443,000 for the comparable 1999 period and increased by $145,000
to $1,397,000 for the nine months ended September 30, 2000 from $1,252,000 for
the comparable nine-month period of 1999. The increases during the three months
ended September 30, 2000 were due principally to increases in audit fees and
professional fees associated with the company's evaluation of potential
strategic business opportunities, while the increases during the nine months
ended September 30, 2000 were due principally to accrued bonuses of
approximately $75,000 relative to the implementation of a management incentive
plan, increases in audit and professional fees of approximately $45,000 and to a
lesser extent, a 3% general wage increase.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $59,000 to $343,000 for the three months ended September 30, 2000
from $284,000 for the comparable 1999 period and increased by $80,000 to
$1,040,000 for the nine-month period ended September 30, 2000 from $960,000 for
the comparable nine-month period of 1999. The increases during the three months
ended September 30, 2000 were due principally to increases in outside contract
services and the hiring of an additional laboratory professional, while
increases during the nine months ended September 30, 2000 were due principally
to increases in outside contract services, the hiring of an additional
laboratory professional, accrued bonuses relative to the implementation of a
management incentive plan, and a 3% general wage increase.
AMORTIZATION EXPENSE. Amortization expense for the three months and
nine months ended September 30, 2000 of $49,000 and $147,000, respectively, were
consistent with the comparable 1999 periods of $56,000 and $137,000,
respectively.
TOTAL OPERATING EXPENSES. Total operating expenses increased by
$118,000 to $1,498,000 for the three months ended September 30, 2000 from
$1,380,000 for the comparable period in 1999 and increased by $353,000 to
$4,446,000 for the nine months ended September 30, 2000 from $4,093,000 for the
comparable nine-month period of 1999.
INTEREST EXPENSE, NET. Interest expense, net for the three months and
nine months ended September 30, 2000 of $48,000 and $137,000, respectively, was
consistent with the comparable 1999 periods of $47,000 and $133,000,
respectively. Higher interest rates during the three months and nine months
ended September 30, 2000 as compared to the comparable periods of 1999
principally offset lower outstanding borrowings during the 2000 periods as
compared to the comparable periods of 1999.
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<PAGE>
PROVISION FOR INCOME TAXES. Provision for income taxes represents state
and franchise taxes and federal alternative minimum tax. There were no federal
income tax provisions for 2000 and 1999 since we had available net operating
loss carryforwards.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
was $34,000 and $707,000 for the three-month and nine-month periods ended
September 30, 2000 as compared to $211,000 and $690,000 for the comparable 1999
periods, respectively.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS. For the three months ended
September 30, 2000, a one-time, non-recurring gain of $249,000 was recorded
representing cash received from escrowed funds which became available to us in
connection with the sale of our Seasoning Division in August 1998. There were no
such gains recorded in 1999.
NET INCOME. Net income was $283,000 and $956,000 for the three-month
and nine-month periods ended September 30, 2000 as compared to net income for
the comparable 1999 periods of $211,000 and $690,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our financing needs have been met through the issuance of
equity and debt securities and commercial bank loans. On June 29, 1999, we
entered into a Loan and Security Agreement with a lender which provided for a
three year $3,000,000 revolving credit facility. We call this revolving credit
facility the "1999 Credit Facility." Outstanding borrowings under the 1999
Credit Facility initially bore interest at a rate of three quarters of one
percent (0.75%) in excess of a prime lending rate, and is subject to certain
adjustments based upon our financial performance. Effective January 1, 2000, the
interest rate was reduced to one quarter of one percent (0.25%) in excess of a
prime a lending rate. Borrowings under the 1999 Credit Facility are subject to
certain eligibility requirements relating to our receivables and inventories and
the discretion of the lender. Outstanding borrowings are secured by
substantially all of our assets, including our product formulations. We must
comply with certain financial and other covenants contained in the Loan and
Security Agreement. Our subsidiaries have guaranteed our obligations under the
1999 Credit Facility.
Borrowings under the 1999 Credit Facility at September 30, 2000 and
December 31, 1999 were $1,133,000 and $1,545,000, respectively. At September 30,
2000, $1,867,000 was available for additional borrowings in accordance with the
terms of the 1999 Credit Facility. The outstanding borrowings under the 1999
Credit Facility are classified as a current liability. At September 30, 2000,
the outstanding borrowings bore interest at 9.75% per annum.
At September 30, 2000, working capital increased by $1,132,000, or 42%,
to $3,796,000 from $2,664,000 at December 31,1999.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On August 8, 2000, we granted qualified stock options to an executive
officer under our 1999 Stock Option Plan for the purchase of 50,000
shares of our common stock at an exercise price of $1.875 per share,
the market price of the common stock on the date of the grant. Such
options vest commencing one year after the grant date in five equal
annual installments.
On October 23, 2000, a former investor relations consultant to our
company exercised warrants to purchase 487,857 shares of our common
stock at an exercise price of $0.56 per share. The sale of these shares
to the former investor relations consultant was made pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27.1 Financial Data Schedule
b) Reports on Form 8-K:
On August 8, 2000, we entered into an employment agreement with
Joseph Raimondo, pursuant to which Mr. Raimondo will serve as the
President and Chief Operating Officer of the company for a term of
two years commencing on August 14, 2000 at an annual salary of
$150,000, subject to the terms and conditions contained therein.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 8, 2000
TECHNOLOGY FLAVORS & FRAGRANCES, INC.
By /S/ JOSEPH A. GEMMO
-------------------------------------------------
Joseph A. Gemmo
Vice President and Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of Registrant)
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