**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10–KSB**

 

(Mark one)

ý         **ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for thefiscal year ended December 31, 2001**

 

o        **TRANSITIONREPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for thetransition period from            to**

 

Commission FileNo. 0–26682

 

**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

(Name of SmallBusiness Issuer in its Charter)

 
| **Delaware**
(State or other  Jurisdiction of

Incorporation or  Organization) | **10 Edison Street East**

**Amityville, New York 11701**

(Address of  Principal Executive Offices) | **11-3199437**

(I.R.S. Employer

Identification  Number) |
|--------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|

 
| **(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)                                             |
|                                                         |
| Name of each  exchange on which registered:                  |
| **American Stock Exchange**                                  |
| **Toronto Stock Exchange**                                   |
|                                                         |

Check whether theIssuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

                       YesýNo o

 

Check if there isno disclosure of delinquent filers in response to Item 405 of Regulation S–Bis not contained in this form, and no disclosure will be contained, to the bestof the Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10–KSB or anyamendment to this Form 10–KSB.  o

 

The Issuer’srevenues for the fiscal year ended December 31, 2001 were $15,476,437.

 

The aggregate marketvalue of Registrant’s voting stock (Common Stock) held by non–affiliateson March 15, 2002 was approximately $10,023,000 based on the closing sale priceof the Common Stock on such date of U.S. $1.05 per share, as reported by theAmerican Stock Exchange.

 

The number ofshares outstanding of each class of the issuer’s common equity as of  March 15, 2002 was:

 
| **Common Stock, $0.01 par value** | **13,004,473** |   |
|-----------------------------------|----------------|--------|
| **Class**                         |           |

 

DocumentsIncorporated by Reference:  None

 

Transitional SmallBusiness Disclosure Format:   Yes o    No ý

 

 

 

**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

**2001 Annual Report on Form 10-KSB**

**TABLE OF CONTENTS**

 

 
|                     |                                                                                                              |   |   |   |
|--------------------------|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                     |                                                                                                              |   |   |   |
| **PART I**               |                                                                                                              |   |   |   |
| ITEM  1                  | DESCRIPTION  OF BUSINESS                                                                                          |   |
| ITEM  2                  | DESCRIPTION  OF PROPERTY                                                                                          |   |
| ITEM 3                   | LEGAL PROCEEDINGS                                                                                                 |   |
| ITEM  4                  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                              |   |
|                     |                                                                                                              |   |   |   |
| **PART II**              |                                                                                                              |   |   |   |
| ITEM  5                  | MARKETS  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                        |   |
| ITEM  6                  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF  OPERATIONS                     |   |
| ITEM 7                   | FINANCIAL STATEMENTS                                                                                              |   |
| ITEM  8                  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |   |
|                     |                                                                                                              |   |   |   |
| **PART III**             |                                                                                                              |   |   |   |
| ITEM  9                  | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION  16(A) OF THE EXCHANGE ACT |   |
| ITEM 10                  | EXECUTIVE COMPENSATION                                                                                            |   |
| ITEM 11                  | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                   |   |
| ITEM 12                  | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                   |   |
| ITEM 13                  | EXHIBITS AND REPORTS ON FORM 8K                                                                                   |   |
|                     |                                                                                                              |   |   |   |
| **SIGNATURES**           |                                                                                                              |   |   |   |
|                     |                                                                                                              |   |   |   |
| **FINANCIAL STATEMENTS** |                                                                                                              |   |   |   |
|                     |                                                                                                              |   |   |   |

 

 

 

 

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**PART I**

 

**ITEM1                   DESCRIPTION OF BUSINESS**

 

**Introduction**

 

Technology Flavors& Fragrances, Inc. creates, develops, manufactures and markets flavors andfragrances that are incorporated by our customers into a wide variety ofconsumer and institutional products including natural and artificially flavoredbeverages, confections, foods, pharmaceuticals, aromatherapy essential oils,perfumes, and health and beauty products. We believe our proprietaryformulations are currently used in more than 1,200 products sold by more than500 companies worldwide, approximately 50 of which are Fortune 1,000 companies.Our executive offices, manufacturing, research and development, sales andmarketing, and distribution facilities are located in Amityville, NewYork.  We also have sales, marketing andwarehouse facilities located in Inglewood, California, Toronto, Canada andSantiago, Chile.

 

Unless the contextotherwise requires, (i) the terms “TFF”, “company”, “our”, “we” or “us”refer 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 wereincorporated in New York in 1989 under the name “Aroma Globe, Inc.” In May1991, we changed our name to “Technology Flavors & Fragrances, Inc.” whenwe acquired the assets and business of another company by that name. Since then,we have expanded our operations primarily through acquisitions of otherbusinesses and internal growth.  In July1993, we acquired most of the assets of the Fragrance Division of F&CInternational Inc. (“F&C Fragrance Division”). The F&C Fragrance Divisionwas engaged in the business of developing, manufacturing, marketing andselling, domestically and internationally, fragrance products for personalcare, cosmetic and toiletry, household, industrial and commercial products.

 

                In March 1994, we completedconcurrent offerings of a total of 5,000,000 shares of our Common Stock, ofwhich (i) 4,670,000 shares were sold to the public in the Canadian Provinces ofOntario and British Columbia at a price of Cdn. $2.00 per share and (ii)330,000 shares were sold privately in the United States for the equivalentprice of U.S. $1.44 per share.  Inaddition, our Common Stock was listed on the Toronto Stock Exchange in March1994.  The proceeds of these sales wereused to pay debt incurred to acquire the assets of the F&C FragranceDivision.

 

**Industry Overview**

 

                We believe that changes inconsumer buying habits and preferences over the past few years have impacted onthe industry as a whole and that these changes have contributed to a demand fornew and innovative products.  We believethat there is a trend toward more natural foods in the marketplace, requiringmanufacturers to produce more naturally flavored products.  Not only has this translated into a steadyshift from artificial to natural ingredients, but we believe it is also placinggreater emphasis on producing flavors that more effectively impart “natural”tastes in processed foods.  We believethat a growing desire among consumers to adopt a healthier lifestyle is increasingthe demand for lighter, healthier foods. This has posed new challenges for us to develop ways of replacing thetastes which are lost when sugar, salt, fat and cholesterol are reduced oreliminated from traditional food preparation.

 

                Another important trend in theindustry, we believe, is the growing consumption of processed foods.  We believe that more than 80% of the foodconsumed in the home today is in processed form, with over 1,000 natural andsynthetic flavoring agents being used to produce these foods.  We believe that as the demand formicrowaving products and prepared and frozen convenience foods continues torise, so, too, will the need for flavor products to counteract the adverseeffects of microwaving and freezing.

 

                We believe that the trendtowards natural, healthier products also includes soaps, shampoos, cosmetics,detergents, and other cleaning products, air fresheners, and numerous otherhousehold items.

 

**Products**

 

Our principalproduct categories include natural flavors, artificial flavors and fragrances.The five largest end–user categories of our products are beverages, bakedgoods, confections, cosmetics, and soaps and detergents. Our flavor products,produced from our proprietary formulations, are sold primarily to the beverageand food industries.  Examples ofconsumer products containing our flavor products include confections,toothpaste, chewing gums, prepared foods, ice creams, animal feeds, candy,alcoholic and non–alcoholic beverages, poultry, seafood and processedmeats.

 

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Areas which webelieve 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 theeffects of microwaving and freezing (i.e., convenience foods).

 

Our fragranceproducts, produced from our proprietary formulations, are sold primarily to thepersonal care, cosmetic and toiletry, and household and industrial productindustries. Fragrances are used by customers in the manufacture of a widevariety 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**

 

Our marketing strategyprincipally involves the utilization of direct sales and marketing personnelstrategically located in regions in the U.S., Canada and South America and, toa lesser extent, independent sales brokers. Typically, our research and development personnel accompany salespersonnel in making sales presentations to new and existing customers.  We believe that this strategy has workedeffectively to promote our products.

 

We work inassociation with existing and potential customers to develop a flavor or fragrancefor a new consumer product. During this process, which generally lasts betweensix and 12 months, we typically present the customer with several samples fromour proprietary formulations. Generally, a particular flavor or fragranceformulation is created and produced for one customer.

 

In the last twoyears, we have furnished over 10,000 samples to existing and potentialcustomers. The typical lag time between initial sample submissions and whencustomers place production orders has historically ranged from six to 18months.

 

**Researchand Development**

 

Our research anddevelopment activities are conducted principally at our Amityville, New Yorkfacility. We maintain research and development labs as well as applicationslabs, both of which we believe are necessary for the development of highquality flavor and fragrance compounds. Our processed flavor laboratoryutilizes amino acids and sugars in a water medium to produce meat, poultry androasted flavors and aromas. We currently offer new and innovative productsdeveloped in this laboratory.

 

We believe thatone of the most fundamental challenges in creating flavor and fragranceformulations, from a technical standpoint, is the development of flavors andfragrances which are able to (i) withstand the rigors of processing, storage,and final preparation, and (ii) maintain the integrity of the basic tasteand scent characteristics for the useful life of the final product. In the caseof certain products, such as perfumes, colognes and frozen foods, the potentialshelf life of the product may be a period of up to one year.

 

                During the past several years,the flavor industry has had to respond to new demands by consumers for:

 

•       products with little or no cholesterol,fat, sugar or salt,

 

•       products that withstand microwaving orfreezing, and

 

•       products that contain more naturalingredients.

 

                Each of these demands results intaste differences from what consumers have come to expect so that new flavorformulations are necessary to satisfy taste expectations. Consequently, webelieve our research and development abilities are increasingly important forflavor products.

 

We spent$1,383,000 and $1,366,000 in research and development during 2001 and 2000,respectively.  We expect our researchand development expenses to remain at this level during year 2002.

 

**RawMaterials**

 

We utilize asignificant number of different raw materials in the preparation of our flavorand fragrance formulations. We devote considerable effort to ensuring thatthese ingredients remain uniform and consistent over time - a critical processsince many of the raw materials we use are inherently unstable and/or arederived from plants that vary naturally with seasons and crop years.Accordingly, we routinely test and analyze shipments of raw materials forcompliance with specifications we set.

 

We purchase rawmaterials from numerous suppliers. For the year ended December 31, 2001,no single supplier provided us with more than approximately 15% of our rawmaterial requirements.  Our three largestsuppliers provided us with approximately 33%

 

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of our rawmaterial requirements.  Although therecan be no assurance, we believe that alternate sources of raw materials areavailable in the event of an interruption in the supply of raw materials from asingle supplier.

 

**Seasonality**

 

Historically, oursales tend to be higher in the calendar quarters ending June 30 andSeptember 30, primarily due to higher consumer demand from our beveragecustomers during those periods, however, our sales for the fourth quarter endedDecember 31, 2001 were slightly higher than the sales for the third quarterended September 30, 2001.  We cannotassure you that the seasonality of our business will not have a materialadverse effect on our operations.

 

**Competition**

 

                The flavor and fragranceindustry is highly fragmented with a few large companies, such as InternationalFlavors & Fragrances, Inc., Haarmann & Reimer Corporation andFirmenich, Inc., competing against many smaller companies. Certain of ourcompetitors have substantially greater financial, marketing and other resourcesthan us. Recently, there have been trends toward increased industryconsolidation as companies vertically integrate with suppliers and expandhorizontally through acquisitions.  Theflavor and fragrance industry sells primarily to manufacturers of consumerproducts.  The cost of the flavor orfragrance component of a consumer product typically represents a small portionof the total cost of the consumer product. As a result, in selling our products, we believe that price is not assignificant as product performance and customer service.  We believe that our competitiveness dependsupon our creativity, responsiveness and reliability, as well as the diversityof our customers and products.  We expectthat we will continue to sell our products to large companies that do notpurchase all of their flavor and fragrance products from a single supplier, andto smaller companies that our large competitors choose not to service.

 

**Customers**

 

We believe ourproducts are currently used in more than 1,200 products sold by more than 500companies worldwide, approximately 50 of which are Fortune 1,000 companies. Wework with our customers in the development of specific flavors or fragrancesfor a particular end product.  For theyears ended December 31, 2001 and 2000, no one customer accounted for more than10% of our sales, and our top ten customers accounted for approximately 44% and40% of our sales, respectively.

 

**Backlog**

 

Customers purchaseour products as required, and normally delivery can be made within two to fourweeks thereafter. Consequently, backlog is not a significant indicator of thevolume of our business over an extended period of time.

 

**GovernmentalRegulations**

 

Production of manyof our products involves the manufacturing of flavors for foods and beverages,the handling of alcohol and the generation, storage, transportation anddisposal of hazardous waste. Accordingly, our operations are subject to extensive Federal, state andlocal laws and regulations relating to such matters, and to the safety andhealth of our employees and others. Although there can be no assurance, we believe that we currently complyin all material respects with such applicable laws and regulations.  In the future, we could be subject to, amongother things, sanctions, penalties (including significant fines), andsuspension or revocation of required licenses or permits for failure to complywith applicable governmental laws or regulations.  Any of these actions could have a material adverse effect on ourresults of operations in any given year, or materially affect our liquidity orfinancial 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 andregulations may have on our business, financial condition or results ofoperations.

 

**Employees**

 

At March 15, 2002, we had 54 employees, of whom 53persons were employed full-time. Of our 53 full-time employees, five wereemployed in management, eight were employed in administrative and purchasing,eight were employed in sales and marketing, 16 were employed in production andwarehousing, 12 were employed in research and development and quality control,and four were employed in customer service. We consider our relationship withour employees to be satisfactory.  Noneof our employees is subject to a collective bargaining agreement.

 

**ProprietaryRights**

 

We consider ourflavor and fragrance formulas to be proprietary information and tradesecrets.  We do not, however, generallyrely on patents, copyrights or trademarks to protect our proprietary rights inour flavor and fragrance formulations. There can be no 

 

3

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assurance that ourcurrent protections will be adequate or that our competitors will notindependently develop flavors and fragrances that are substantially equivalentor superior to our flavors and fragrances.

 

A substantialportion of our technology and know-how are trade secrets.  We have a policy of requiring our employeesand contractors to protect our proprietary information through writtenagreements.  In addition, we have apolicy of requiring our prospective business partners to enter intonon-disclosure agreements with us before we reveal any of our proprietaryinformation to them.  We cannot assurethat the measures taken by us to protect our technology, products and otherproprietary information will be adequate. Further, we cannot assure that others will not independently developsubstantially equivalent proprietary information and technologies, or otherwisegain access to our trade secrets.

 

We may be requiredto take various forms of legal action, from time to time, to protect ourproprietary rights.  Because of therapid evolution of technology and uncertainties in intellectual property lawsboth in the United States and internationally, we cannot assure that ourcurrent or future products or technologies will not be subject to claims ofinfringement.  Any litigation regardingclaims against us or claims made by us against others could result insignificant expense to us, divert the efforts of our technical and managementpersonnel and have a material adverse effect on us, whether or not suchlitigation is ultimately resolved in our favor.  In the event of an adverse result in any such litigation, we maybe required to expend significant resources to develop non-infringing productsor obtain licenses from third parties. We cannot assure you that we would be successful in such development orthat any such licenses would be available on commercially reasonable terms, ifat all.

 

**Forward-LookingStatements**

 

**Certain statements made herein,including without limitation, statements containing the words “believes,”“anticipates,” “may,” “intends,” “expects,” and words of similar importconstitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, andother factors, which may cause actual company results to differ materially fromexpectations.  Such factors include thefollowing: (i) technological, manufacturing, quality control or othercircumstances which could delay the sale or shipment of products; (ii)economic, business, and competitive conditions in the industry andtechnological innovations which could affect the company’s business; and (iii)the company’s ability to protect its trade secrets or other proprietary rights,operate without infringing upon the proprietary rights of others and preventothers from infringing on the proprietary rights of the company.  Certain of these factors are discussed inmore detail elsewhere in this Form 10-KSB, including, without limitation, underthe caption “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”  Ourforward-looking statements speak only as to the date hereof and we do notundertake any obligation to update any forward-looking statements for anyreason, even if new information becomes available or other events occur in thefuture.**

 

**ITEM2                   DESCRIPTION OF PROPERTY**

 

Our principalfacility is a 35,000-square-foot headquarters and production facility locatedat 10 Edison Street East, Amityville, New York.  In January 2002, the Company purchased the facility (which it hadpreviously leased), transferred it to the Town of Babylon IndustrialDevelopment Agency, and then leased the facility from such agency for a termwhich expires on December 1, 2021.  Uponexpiration of the lease term, we are entitled to repurchase the facility for anominal sum.  We also occupy a6,000-square-foot warehouse, which adjoins our headquarters and productionfacility, under a lease which expires in 2006. We also lease sales, warehouse and customer service facilities inInglewood, California, Toronto, Canada, and Santiago, Chile. We believe that wecan renegotiate existing leases as they expire or lease alternative propertieson acceptable terms. We believe our present facilities are adequate for ourcurrent and anticipated operations.

 

**ITEM3                   LEGAL PROCEEDINGS**

 

We are not a partyto any pending legal proceedings which if adversely determined would reasonablybe expected to have a materially adverse effect on our business.

 

**ITEM4                   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

There were nomatters submitted to a vote of security holders during the quarter endedDecember 31, 2001.

 

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**PART II**

 

 

 

**ITEM5                   MARKETS FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

*TorontoStock Exchange.*   Our Common Stock has been listed on theToronto Stock Exchange, or TSE, since March 28, 1994 (Symbol: “TFF”).  The following table sets forth the reportedhigh and low closing prices (as reported by the TSE) for our Common Stock foreach calendar quarter from January 1, 2000 through December 31, 2001, inCanadian dollars and translated into U.S. dollars at the exchange rates ineffect on the last day of such period.

 

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2000**       |   |     |   |    |   |
| First Quarter  |   |     | Cdn.   | $       | 3.75   | (U.S. | $ | 2.56 | ) |   | Cdn. | $ | 1.75 | (U.S. | $ | 1.20 | ) |
| Second Quarter |   |     | Cdn.   | 3.25    | (U.S.  | 2.22 | ) |   | Cdn. | 2.45 | (U.S. | 1.64 | ) |
| Third Quarter  |   |     | Cdn.   | 3.00    | (U.S.  | 2.02 | ) |   | Cdn. | 2.00 | (U.S. | 1.34 | ) |
| Fourth Quarter |   |     | Cdn.   | 2.00    | (U.S.  | 1.32 | ) |   | Cdn. | 2.00 | (U.S. | 0.80 | ) |
|           |   |     |   |    |   |   |   |   |   |   |   |   |   |
| **2001**       |   |     |   |    |   |   |   |   |   |   |   |   |   |
| First Quarter  |   |     | Cdn.   | $1.85   | (U.S.  | $ | 1.21 | )  |   | Cdn. | $ | 1.31 | (U.S. | $ | 0.87 | ) |
| Second Quarter |   |     | Cdn.   | 1.64    | (U.S.  | 1.05 | ) |   | Cdn. | 1.25 | (U.S. | 0.79 | ) |
| Third Quarter  |   |     | Cdn.   | 1.45    | (U.S.  | 0.94 | ) |   | Cdn.  | 1.45 | (U.S. | 0.94 | ) |
| Fourth Quarter |   |     | Cdn.   | 2.50    | (U.S.  | 1.58 | ) |   | Cdn. | 1.45 | (U.S. | 0.92 | ) |
|                |        |          |        |         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*AmericanStock Exchange and OTC Bulletin Board.*  Our CommonStock has been listed on the American Stock Exchange, or AMEX, since March 29,2000 (Symbol: “TFF”).  Prior to that,our Common Stock traded on the OTC Bulletin Board (Symbol: “TFFI”) from March12, 1996 through March 28, 2000.  Thefollowing table sets forth the range of high and low closing prices (asreported by the OTC Bulletin Board) for our Common Stock for each calendarquarter from January 1, 2000 through March 28, 2000 in U.S. Dollars and (asreported by the AMEX) from March 29, 2000 through December 31, 2001.

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2000**       |   |     |   |    |   |   |   |   |   |   |   |
| First Quarter  |   | U.S.     |   | $       | 2.75   |   | U.S. |   | $ | 1.25 |   |
| Second Quarter |   | U.S.     |   | 2.312   |   | U.S. |   | 1.00 |   |
| Third Quarter  |   | U.S.     |   | 2.062   |   | U.S. |   | 1.50 |   |
| Fourth Quarter |   | U.S.     |   | 1.50    |   | U.S. |   | 0.875 |   |
|           |   |     |   |    |   |   |   |   |   |   |   |
| **2001**       |   |     |   |    |   |   |   |   |   |   |   |
| First Quarter  |   | U.S.     |   | $       | 1.375  |   | U.S. |   | $ | 0.88 |   |
| Second Quarter |   | U.S.     |   | 1.22    |   | U.S. |   | 0.99 |   |
| Third Quarter  |   | U.S.     |   | 1.28    |   | U.S. |   | 0.75 |   |
| Fourth Quarter |   | U.S.     |   | 1.75    |   | U.S. |   | 0.70 |   |
|                |        |          |        |         |        |  |  |  |  |  |  |  |  |

 

 

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**Holders**

 

                At March 15, 2002,we had approximately 750 stockholders of record.

 

**Dividends**

 

We have not paidany cash dividends on our Common Stock and we do not anticipate paying any cashdividends in the foreseeable future. The declaration and payment of dividends on our Common Stock is at thediscretion of the Board of Directors and will depend on, among other things,our operating results, financial condition, capital requirements, contractualrestrictions or prohibitions and such other factors as our Board of Directorsmay deem relevant.  In addition, theterms of our $3.0 million revolving credit facility prohibit the payment ofcash dividends.

 

**RecentSales of Unregistered Securities**

 

The followinginformation relates to unregistered securities sold by us during the year endedDecember 31, 2001.** **The sales of securities described below were made inreliance upon an exemption from the registration provisions set forth inSection 4(2) of the Securities Act of 1933, as amended, as transactions by anissuer not involving a public offering.

 

*StockOption Grants*

 

During the yearended December 31, 2001, we granted options to purchase an aggregate of 655,000shares of our Common Stock under our 1999 and 1996 Stock Option Plans.  Of these options, we granted options topurchase 350,000 shares to two executive officers at exercise prices of $.88and $1.10 per share which were equal to 110% of the market price of our CommonStock on the AMEX on the dates of the grants. Two other Company officers were each granted options to purchase 50,000shares of our Common Stock at an exercise price of $1.00 per share which wasequal to the market price of our Common Stock on the AMEX on the date of thegrants.  Options to purchase 100,000shares were granted to Mercado Capital (“Mercado”) and 100,000 of option shareswere granted to Thomas Hanlon (“Hanlon”) pursuant to their respectiveconsulting agreements.  The exerciseprices for such options to Mercado and Hanlon were set at the market price ofour Common Stock on  the AMEX on thegrant dates ($1.15 and $.80, respectively). The options granted to Mercado and Hanlon vested in equal monthlyinstallments over a 20-month period.  OnOctober 4, 2001, we terminated the consulting agreement with Mercado and wecancelled Mercado’s unvested options to purchase 85,000 shares.  Mercado’s remaining vested options expiredon January 4, 2002.

 

 

 

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**ITEM6                   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION****AND**

**                                RESULTS OFOPERATIONS**

 

**Resultsof Operations**

 

The following information for the years ended December 31,2001 and 2000 has been derived from our audited consolidated financialstatements and should be read in conjunction with such statements and the notesthereto included elsewhere in this Annual Report on Form 10–KSB.  The information for the year ended December31, 1999 are derived from the audited consolidated financial statements whichare not included in this Annual Report on Form 10-KSB.

 
|                                                       |   | **Years  ended December 31,**     |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **2001**                          |   | **2000** |   | **1999** |   |
|                                                       |   | **(dollar amounts in thousands)** |   |
| Net sales                                                  |   | $                                 | 15,476 |   | 100.0 | % | $ | 15,334 |   | 100.0 | % | $ | 14,769 |   | 100.0 | % |
| Gross profit                                               |   | 6,324                             |   | 40.9 |   | 6,322 |   | 41.2 |   | 6,318 |   | 42.8 |   |
| Operating expenses:                                        |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Selling                                                    |   | 2,742                             |   | 17.7 |   | 2,530 |   | 16.5 |   | 2,315 |   | 15.7 |   |
| General and administrative                                 |   | 2,114                             |   | 13.7 |   | 1,948 |   | 12.7 |   | 1,670 |   | 11.3 |   |
| Research and development                                   |   | 1,383                             |   | 8.9 |   | 1,366 |   | 8.9 |   | 1,307 |   | 8.9 |   |
| Amortization                                               |   | 215                               |   | 1.4 |   | 220 |   | 1.4 |   | 181 |   | 1.2 |   |
| Severance,  restructuring costs and abandoned merger costs |   | 451                               |   | 2.9 |   | 38 |   | 0.3 |   | — |   | — |   |
| (Loss) income from operations                              |   | (581                              | )      | 3.7 |   | 220 |   | 1.4 |   | 845 |   | 5.7 |   |
| Loss on investment                                         |   | (50                               | )      | 0.3 |   | — |   | — |   | — |   | — |   |
| Interest expense, net                                      |   | 135                               |   | 0.9 |   | 170 |   | 1.1 |   | 160 |   | 1.1 |   |
| Provision for income taxes                                 |   | 10                                |   | 0.1 |   | 27 |   | 0.2 |   | 28 |   | 0.2 |   |
| (Loss) income from continuing operations                   |   | (776                              | )      | 5.0 |   | 23 |   | 0.1 |   | 657 |   | 4.4 |   |
| Gain on disposal of discontinued operations                |   | —                            |   | — |   | 248 |   | 1.6 |   | — |   | — |   |
| Net (loss) income                                          |   | (776                              | )      | 5.0 |   | 271 |   | 1.7 |   | 657 |   | 4.4 |   |
|                                                            |        |                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

*Netsales*.  Net salesincreased 0.9% to $15,476,000 in 2001 from $15,334,000 in 2000.  Net sales for the fourth quarter endedDecember 31, 2001 increased 36% from last year’s comparable period dueprincipally to increased volume of business for existing customers of our foodand beverage products.  However,offsetting the fourth quarter sales increase was a decline of 16% in net salesfor the nine-month period ended September 30, 2001 compared to last year’scomparable period due principally to the downturn in the flavor and fragranceindustry, the general economy and delays in new product launches.  Net sales increased 3.8% to $15,334,000 in2000 from $14,769,000 in 1999. Net sales during the first nine months of 2000increased 12.0% from 1999's comparable period due principally to the launchingof new food and beverage flavor products, however, for the three-month periodended December 31, 2000 net sales declined by 23.1% compared to 1999'scomparable period primarily attributable to the downturn in the flavor andfragrance industry and general economy and, to a lesser extent, delays in newproduct launches.

 

*Grossprofit. *Gross profit in 2001, as a percentage of net sales, of40.9% was consistent with the gross profit percentage in 2000 of 41.2%.  Gross profit in 2000, as a percentage of netsales, decreased 1.6% to 41.2% on net sales of $15,334,000 in 2000 from 42.8%on net sales of $14,769,000 in 1999 due principally to a lower gross profitmargin on a new food flavor product and differences in product mix attributableto a higher concentration of export sales where gross margins are generallylower.

 

*Operatingexpenses:*

 

*Sellingexpenses*.  Selling expenses increased by $212,000, or8.4%, to $2,742,000 in 2001 from $2,530,000 in 2000 due principally toincreases in travel expenses, marketing and media advertising expenses.  Selling expenses increased by $215,000, or9.3%, to $2,530,000 in 2000 from $2,315,000 in 1999 due principally to thehiring of additional sales personnel.

 

*Generaland administrative expenses.*  General andadministrative expenses increased by $166,000, or 8.5%, to $2,114,000 in 2001from $1,948,000 in 2000 due principally to certain customer bankruptcies andother bad debt write-offs totalling $236,000, partially offset by operatingcost reductions relative to our cost reduction program implemented during thefourth quarter of 2001. General and administrative expenses increased by$278,000, or 16.7%, to $1,948,000 in 2000 from $1,670,000 in 1999 dueprincipally to increases in professional and investor relations fees andrelated activities, new listing fees on the American Stock Exchange, the hiringof our new President (who was terminated in the fourth quarter of 2001), and toa lesser extent, a 3% general wage increase.

 

7

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*Researchand development expenses. *Research and development expensesincreased by $17,000, or 1.2%, to $1,383,000 in 2001 from $1,366,000 in 2000due principally to an increase in outside contract services.  Research and development expenses increasedby $59,000, or 4.5%, to $1,366,000 in 2000 from $1,307,000 in 1999 dueprincipally to an increase in outside contract services and the hiring of anadditional laboratory technician.

 

*Amortizationexpense.*  Amortization expense of $215,000 in 2001 wascomparable to last year’s expense of $220,000. Amortization expense increased by $39,000, or 21.5%, to $220,000 in 2000from $181,000 in 1999 due principally to the increase in deferred financingcosts associated with our 1999 revolving credit facility which we entered intoin June 1999.

 

*Severance,restructuring costs and abandoned merger costs. *Duringthe fourth quarter of 2001, we implemented a company-wide cost reduction andrestructuring program which resulted in the elimination of our President,Controller and other personnel and the reduction of certain other operatingcosts.  Severance costs relative to suchterminations amounted to $281,000. In addition, we incurred $170,000 of costsassociated with an abandoned merger opportunity.  During 2000, we incurred $38,000 of costs associated with ourevaluation of a potential strategic business opportunity.

 

*Totaloperating expenses.*  Total operating expenses increased by$803,000, or 13.2%, to $6,905,000 in 2001 from $6,102,000 in 2000 as a resultof the factors described above.  Withoutgiving effect to the write-offs of severance, restructuring costs, abandonedmerger costs and bad debts aggregating $687,000 in 2001 and such costsaggregating $46,000 in 2000, total operating expenses increased by $162,000, or2.7%, in 2001.  Total operating expensesincreased by $629,000, or 11.5%, to $6,102,000 in 2000 from $5,473,000 in 1999as a result of the factors described above.

 

*Loss oninvestment.*  In 2001,the Company wrote-off an investment of $50,000 which was determined notrecoverable.  No such investment lossesoccurred in prior years.

 

*Interestexpense, net*.  Interest expense, net decreased by $35,000,or 20.6%, to $135,000 in 2001 from $170,000 in 2000 due principally to lowerlevels of borrowings under our 1999 credit facility and lower interest rates in2001.  Interest expense, net increasedby $10,000, or 6.3%, to $170,000 in 2000 from $160,000 in 1999 due principallyto higher interest rates on outstanding borrowings in 2000.

 

*Provisionfor income taxes.*  Provision for income taxes principallyrepresents state franchise taxes and Federal alternative minimum tax.  There were no Federal income tax provisionsin 2001 and 2000 since we had available net operating loss carryforwards.

 

*Gainon disposal of discontinued operations.*  In 2000, werecorded a gain of $248,000 representing $261,000 of cash received fromescrowed funds net of $13,000 of related income taxes which became available tous in connection with the disposal of discontinued operations in 1998.  There was no income or loss fromdiscontinued operations in 2001 or 1999.

 

*Net(loss) income.*  Net loss for 2001 was $776,000 (includingseverance, restructuring costs, abandoned merger costs and bad debtsaggregating $687,000 as described above) as compared to net income for 2000 of$271,000 (including the one-time gain of $248,000 as described above) and netincome of $657,000 for 1999.

 

**Foreign Operations**

 

Approximately 5%and 6% of our net sales for the years ended December 31, 2001 and 2000,respectively, were derived from sales denominated in foreign currencies,principally in Canada.  The effect of foreigncurrency exchange rate fluctuations on such sales is largely offset to theextent expenses of our international operations are incurred and paid for inthe same currencies as those of our sales.

 

**Export Sales**

 

For the yearsended December 31, 2001 and 2000, export sales were approximately 26% and 28%,respectively, of total net sales. Our export sales are made to entities locatedprimarily in Canada and Central and South America.  Receivables from such foreign sales at December 31, 2001 and 2000amounted to approximately 37% and 42%, respectively, of total accountsreceivable.

 

**Critical Accounting Policies**

 

*General:* Our discussion and analysis of the Company’s financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses.  On an on-going basis,management evaluates its estimates and judgments, including those related tobad debts, inventories and intangible assets. Management bases its estimates and judgments on historical experienceand on various other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these

 

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estimates underdifferent assumptions or conditions. The Company considers certain accounting policies related to thevaluation of inventories, the allowance for doubtful accounts and theimpairment of intangible assets to be critical policies due to the estimationprocesses involved in each.

 

*InventoryValuation:*  Inventories are stated at the lower of cost(first-in, first-out method) or market. We evaluate the need to record adjustments for impairment of inventoryon a quarterly basis.  Obsoleteinventory or inventory in excess of management’s estimated usage requirementsis written-down to its estimated market value, if less than its cost.  Inherent in the estimates of market valueare management’s estimates related to our future manufacturing schedules,customer demand, and possible alternative uses and ultimate realization ofexcess inventory.

 

*Allowancefor Doubtful Accounts: *We evaluate the need to recordadjustments to the allowance for doubtful accounts on a quarterly basis.  We make estimates of the recoverability ofaccounts receivable based on customer specific factors as well as our pastexperience.

 

*IntangibleAsset Impairment:*  In assessing the recoverability of ourintangible assets, we must make assumptions regarding estimated future cashflows and other factors to determine the fair value of the respectiveassets.  If it is determined thatimpairment indicators are present and that the assets will not be fullyrecoverable, their carrying values are reduced to estimated fair value.  Impairment indicators include, among otherconditions, cash flow deficits, an historic or anticipated decline in revenueor operating profit, adverse legal or regulatory developments, accumulation ofcosts significantly in excess of amounts originally expected to acquire theasset, and a material decrease in the fair value of some or all of theassets.  Changes in strategy and/ormarket conditions could significantly impact these assumptions, and thus we maybe required to record impairment charges for these assets.  The Company will adopt SFAS No. 142effective January 1, 2002 and it does not expect that the adoption of theStatement will have a significant impact on the Company ‘s consolidated financialposition or results of operations.

 

**Liquidity And Capital Resources**

 

Historically, ourfinancing needs have been met through the issuance of equity and debtsecurities and commercial bank loans. In June 1999, we entered into a Loan andSecurity Agreement with a lender which provided for a three year $3,000,000revolving credit facility.  We call thisrevolving credit facility the 1999 Credit Facility.  Outstanding borrowings under the 1999 Credit Facility for years2001 and 2000 bore interest at a rate equal to a prime lending rate plus one-quarterof a percentage point, and is subject to certain adjustments based upon ourfinancial performance.  Borrowings underthe 1999 Credit Facility are subject to certain eligibility requirementsrelating to our receivables and inventories and the discretion of thelender.  Outstanding borrowings aresecured by substantially all of our assets, including our productformulations.  We must comply withcertain financial and other covenants contained in the Loan and SecurityAgreement including maintaining tangible net worth of at least $1,750,000,achieving not less than 75% of our projected pre-tax income for the upcomingyear, and incurring expenditures for capital assets of not more than $450,000for the year.  For the year endedDecember 31, 2001, our financial covenant relative to the attainment ofprojected pre-tax income was amended under the 1999 Credit Facility to requireus to attain for 2001 at least $1.00 of adjusted cash flow, as defined,excluding any write-offs relative to severance and restructuring costs andother charges as described above.  Wewere in compliance with the covenant, as amended.

 

Our subsidiarieshave guaranteed our obligations under the 1999 and 2002 Credit Facilities.  At December 31, 2001, we had borrowings ofapproximately $1,115,000 under the 1999 Credit Facility, and $1,885,000 wasavailable for additional borrowings in accordance with the terms of the 1999Credit Facility.  The outstandingborrowings under the 1999 Credit Facility at December 31, 2001 was classifiedas a current liability.  At that date,outstanding borrowings bore interest at 5.0% per annum.

 

On January 14,2002, we purchased the facility (which we had previously leased) for$1,500,000, transferred it to the Town of Babylon Industrial Development Agency,and then leased the facility from such agency for a term which expires onDecember 1, 2021.  Upon expiration ofthe lease term, we are entitled to repurchase the facility for a nominal sum.  The purchase was financed through theissuance of Town of Babylon Industrial Development Agency Variable Rate RevenueBonds (“IDA Bonds”).  The principalamount of the bonds, $2,200,000, was used to finance the purchase of thebuilding plus closing costs and future expenditures for building improvementsand capital equipment.  The financing isstructured as a monthly variable rate demand revenue bond secured by a letterof credit with Wells Fargo Bank NA.  Theinitial month’s interest rate is 3.875% per annum.  The bond’s interest rate is reset monthly based on market conditionsand matures in January 2022.

 

 

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At December 31,2001, working capital decreased by $653,000, or 19.0%, to $2,782,000 from$3,435,000 at December 31, 2000.

 

At December 31,2001, our contractual cash obligations and commitments relating to our debtobligations and lease payments are as follows:

 
| **Contractual  Obligations** |   | **Less than 1-year** |    | **1-3 years** |   | **4-5 years** |   | **Total** |   |
|------------------------------|--------|----------------------|---------|---------------|--------|---------------|--------|-----------|--------|
| Operating leases             |   | $                    | 87,746  |          | $      | 127,245       |   | $         | 8,200  |   | $ | 223,191 |   |
| Capital leases               |   | 83,882               |    | 220,426       |   | 27,595        |   | 331,903   |   |
| Total                        |   | $                    | 171,628 |          | $      | 347,671       |   | $         | 35,795 |   | $ | 555,094 |   |

 

We believe thatthe existing cash balances together with cash generated from operations andamounts available under the 2002 Credit Facility will be sufficient to meet ourprojected working capital and other cash flow requirements for the foreseeablefuture.

 

**ITEM7                   FINANCIAL STATEMENTS**

 

Our auditedconsolidated financial statements for the years ended December 31, 2001and 2000 begin on page F–1 of this Annual Report on Form 10–KSB.

 

**ITEM8                   CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING**

**                AND FINANCIAL DISCLOSURE**

 

None.

### ** **

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### **PARTIII**

 

**ITEM9                   DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;**

**                COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT**

 

**InformationConcerning our Board of Directors and Executive Officers**

 

The followingtable sets forth certain information, as of March 15, 2002, concerning ourdirectors and executive officers:

 
| **Name**            |   | **Age** |   | **Positions with the Company**                                    |   |
|---------------------|--------|---------|--------|-------------------------------------------------------------------|--------|
| Philip Rosner       |   | 66      |   | Chairman of the Board  of Directors and Chief Executive Officer   |   |
| A. Gary Frumberg    |   | 68      |   | Director and Executive  Vice President                            |   |
| Joseph A. Gemmo     |   | 56      |   | Vice President, Chief  Financial Officer, Secretary and Treasurer |   |
| Ronald J. Dintemann |   | 58      |   | Vice President  Operations                                        |   |
| Harvey Farber       |   | 61      |   | Senior Vice  President-Flavor Division                            |   |
| Sean Deson          |   | 38      |   | Director                                                          |   |
| Werner F. Hiller    |   | 65      |   | Director                                                          |   |
| Irwin D. Simon      |   | 43      |   | Director                                                          |   |

 

The businessexperience of each of the persons listed above for at least the last five yearsis as follows:

 

*Philip**Rosner*has been the Chairman of the Board of Directors, President and Chief ExecutiveOfficer of our company from its inception 1989 to August 2000 and Chairman andChief Executive Officer since August 2000. Mr. Rosner has been engaged in theflavor and fragrance industry for over 48 years. Prior to 1989, Mr. Rosner wasthe President of Globe Extracts, Inc. and for 15 years before that, wasPresident of Felton Worldwide, Inc., both of which produced and marketedflavors and fragrances.

 

*A*. *Gary**Frumberg* has been a Director andan Executive Vice President of our company since 1989. Prior to 1989,Mr. Frumberg served as Vice President–International Sales of FeltonWorldwide, Inc.

 

*Joseph**A*.*Gemmo* has been Vice President andChief Financial Officer of our company since August 1996 and  Secretary and Treasurer since June1998.  From January 1994 toApril 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 ChiefFinancial Officer of General Aerospace Materials Corp.

 

*Ronald**J*.*Dintemann* has been Vice President–Operationsof our company since 1989 after serving as Vice President–Operations ofGlobe Extracts, Inc. for two years.

 

                *Harvey**Farber*has been Senior Vice President–Flavor Division of our company sinceOctober 1997.   From October 1995through October 1997, Mr. Farber was Senior Vice President-Flavor Developmentof our company. Before Mr. Farber joined our company, he was the Vice President–Flavor Developmentat J. Manheimer Inc. for 12 years.

 

*SeanDe*s*on* has been a Director of our companysince June 1998.  Mr. Deson is currentlythe Managing Partner of Deson & Co., a private equity investment firm.  Prior thereto, Mr. Deson was a Senior VicePresident in the Investment Banking Division of Donaldson, Lufkin &Jenrette Securities Corporation, or DLJ. Mr. Deson served in various capacities at DLJ since 1990, primarily asan advisor, financier and investor.  Mr.Deson also serves as a member of the Board of Directors of Volant Technologies,SystemsFusion, Inc., ActiveWorlds, Inc., Fastxchange and Liquidxs.

 

*Werner**F.Hiller* has been a Director of our company since June 1998. Since1996, Mr. Hiller has been a consultant to General Spice Companies, a divisionof ConAgra,  and previously served asthe President of General Spice Companies from 1990 to 1996.  Mr. Hilleralso was the co-founder of General Spice Companies, and from 1965 to 1990, heserved 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 Chairman, Presidentand Chief Executive Officer of The Hain Celestial Group, Inc., a natural andspecialty foods company listed on NASDAQ, since May 2000, and President andChief Executive Officer of The Hain Food Group, Inc. from 1993 to May2000.  Prior to 1993, Mr. Simon spent 15years in various sales and marketing positions, including Vice President ofMarketing of Slim-Fast Foods Company, and Eastern Regional Director of Haagen-DazsShops, a division of Grand Metropolitan, PLC.

 

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All of ourdirectors serve for a one year term ending at the next annual meeting of stockholders or until their respectivesuccessors are duly elected and qualified. Officers serve at the discretion ofthe Board of Directors, subject to rights, if any, under their contracts ofemployment. There are no family relationships among our directors and executiveofficers.

 

We maintain a$1,000,000 key man life insurance policy on the life of Philip Rosner, ourChairman and Chief Executive Officer, in which we are the beneficiary.

 

**Meetingsof the Board of Directors and Committees**

 

Our businessaffairs are managed under the direction of the Board of Directors. Members ofthe Board of Directors are informed about our affairs through presentations,reports and documents distributed to them, through operating and financialreports routinely presented at meetings of the Board of Directors and committeemeetings and through other means.  Ourdirectors not only attend meetings of the Board of Directors but also havepersonal meetings and other communications, including telephone contact, withmanagement.

 

**BoardCommittees**

 

Our Board ofDirectors has an Executive Committee, an Audit Committee and a Compensation Committee.  Members of these Committees are appointed bythe Board of Directors each year.

 

*ExecutiveCommittee. *The Executive Committee of the Board ofDirectors may exercise, except when the Board of Directors is in session and tothe 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 ofour Company.  The current members of theExecutive Committee are Messrs. Rosner, Deson and Hiller.

 

*AuditCommittee.*  The Audit Committee recommends to the Boardof Directors the firm to be selected each year as independent auditors of ourfinancial statements and to perform services related to such audit. The AuditCommittee also has responsibility for:

 

•       reviewing the scope and results of theaudit with the independent auditors,

 

•       reviewing our financial condition andresults of operations with management,

 

•       considering the adequacy of the internalaccounting, bookkeeping and control procedures, and

 

•       reviewing any non–audit servicesand special engagements to be performed by the independent auditors andconsidering the effect of such performance on the auditors’ independence.

 

                The current members of the AuditCommittee are Messrs. Deson and Hiller.

 

*CompensationCommittee.* TheCompensation Committee recommends to the Board of Directors the compensation tobe paid to our executive officers and other key personnel, reviews new orexisting employee compensation programs and periodically reviews managementperquisites and other benefits.  Thecurrent members of the Compensation Committee are Messrs. Hiller and Simon.

 

We have notestablished a nominating committee and/or a corporate governance committee asrecommended by the TSE Report (as discussed below), however, we believe thatthe nomination of directors and other issues normally considered by thesecommittees can be effectively managed by the Board of Directors due to itscomposition, or by the Audit Committee.

 

**DirectorCompensation**

 

Each of ouroutside directors is paid a $10,000 annual fee plus $500 for each formalmeeting attended.  Alternatively, anoutside 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 forreasonable expenses actually incurred in connection with attending each formalmeeting of the Board of Directors or any committee thereof.  Our outside directors currently are Messrs.Deson, Hiller and Simon.

 

**Statementof Corporate Governance Practices**

 

Our Common Stockis listed on the Toronto Stock Exchange. The by–laws of the TSE requirelisted companies to disclose their approach to corporate governance on anannual basis and within the context of certain guidelines proposed in theDecember 1994 report issued by The Toronto Stock Exchange Committee onCorporate Governance in Canada (the “TSE Report”). The report focuses

 

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on the importanceof each company addressing the governance issue in its own context and thereceipt by the company’s stockholders of an explanation for each company’sapproach to governance. There is no requirement for us to comply with theguidelines in the TSE Report, and the report itself recognizes that eachcompany should have the flexibility to develop its own approach to corporategovernance.

 

Of particularsignificance is the fact that we are organized under the laws of the State ofDelaware, and therefore subject to that State’s laws and principles ofcorporate governance. We are of the opinion that our approach to corporategovernance is in compliance in all material respects with Delaware law and theprinciples of the TSE Report.

 

**UnrelatedDirectors**

 

Much of thediscussion in the TSE Report focuses on the composition of a company’s board ofdirectors and, in particular, the number of “unrelated directors.” In the TSEReport, an “unrelated director” is a director who is free from any interest andany business or other relationship which could, or could reasonably beperceived to, materially interfere with that director’s ability to act with aview to the best interests of the company, other than an interest arising fromsuch director’s status as a stockholder. The TSE Report also focuses on theimportance of having an appropriate portion of the board of directors which isfree from any interest or relationship with a “significant shareholder” of thecompany (i.e., a shareholder controlling more than 50% of a company’s commonstock). We do not have a “significant shareholder” within the meaning of the TSEReport.

 

We believe thatthree 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 appropriatefor the effective operations of the company.

 

The Board ofDirectors has no formal policy setting out which specific matters must bebrought by the Chief Executive Officer or management to the Board of Directorsfor approval, although generally all material transactions are presented bymanagement for approval by the Board of Directors.

 

**Responseto Stockholders**

 

Management isavailable to stockholders to respond to questions and concerns. The Board ofDirectors believes that management is generally responsive to the inquiriesof  stockholders and others interestedin our company.

 

**Expectationsof Management**

 

The Board ofDirectors works closely with members of management. The Board’s  access to information relating to ouroperations,  through membership on theBoard of several key members of management and, as necessary, attendance byother members of management at the request of the Board, are important elementsto the effective and informed functioning of the Board of Directors.

 

The Board ofDirectors expects our management to take the initiative in identifyingopportunities and risks affecting our business and finding means to deal withsuch opportunities and risks for the benefit of our stockholders.

 

**ComplianceWith Section 16(a) of the Securities Exchange Act of 1934**

 

Section 16(a) ofthe Securities Exchange Act of 1934, as amended, requires that our directorsand executive officers and persons who beneficially own more than 10% of ourCommon Stock (collectively, the “Reporting Persons”) file with the Securitiesand Exchange Commission (the “Commission”) (and, if such security is listed ona national securities exchange, with such exchange) various reports as to theirownership of and activities relating to such Common Stock.  Such Reporting Persons are required byCommission regulations to furnish us with copies of all Section 16 (a) reportsthey file.  Based solely upon a reviewof copies of Section 16(a) reports and representations received by us fromReporting Persons, and without conducting any independent investigation of ourown, in 2001, all Forms 3, 4 and 5 were timely filed with the Commission bysuch Reporting Person except that Messrs. Rosner, Frumberg and Gemmo failed totimely report one transaction on Form 4.

 

 

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**ITEM10                EXECUTIVE COMPENSATION**

 

The followingsummary compensation table sets forth the aggregate compensation paid to orearned by our Chairman of the Board and Chief Executive Officer and the otherfour most highly compensated executive officers of our company (other than theChairman of the Board and Chief Executive Officer) whose total annual salariesand bonuses exceeded $100,000 for the year ended December 31, 2001 (the“Named Executive Officers”):

 

**SUMMARYCOMPENSATION TABLE**

|                                                        |   |                       |       |                                                   |       |      |       |                               |   |       |   |
|-------------------------------------------------------------|--------|----------------------------|------------|--------------------------------------------------------|------------|-----------|------------|------------------------------------|--------|------------|--------|
|                                                        |   | **Annual  Compensation :** |       | **Awards****Securities****Underlying****Options/SARs** |       |
| **Name and Principal Position**                             |   | **Year**                   | ** ** | **Salary**                                             | ** ** | **Bonus** | ** ** | **Other  Annual Compensation (1)** |   | ** ** |
| Philip Rosner                                               |   | 2001                       |       | $                                                      | 231,750    |      | $          | 4,457                              |   | $8,424     |   | 200,000(2 | ) |
| Chairman of the Board and Chief Executive Officer           |   | 2000                       |       | 231,750                                                |       | 13,111    |       | 8,424                              |   | —     |   |
|                                                        |   | 1999                       |       | 225,000                                                |       | 4,327     |       | 10,923                             |   | 100,000(3  | )      |
|                                                        |   |                       |       |                                                   |       |      |       |                               |   |       |   |
| A. Gary Frumberg                                            |   | 2001                       |       | 214,240                                                |       | 4,120     |       | 10,692                             |   | 150,000(4  | )      |
| Director and Executive Vice President                       |   | 2000                       |       | 214,240                                                |       | 12,120    |       | 10,692                             |   | —     |   |
|                                                        |   | 1999                       |       | 208,000                                                |       | 4,000     |       | 13,089                             |   | 100,000(3  | )      |
|                                                        |   |                       |       |                                                   |       |      |       |                               |   |       |   |
| Harvey Farber                                               |   | 2001                       |       | 160,500                                                |       | 3,202     |       | 3,437                              |   | —     |   |
| Senior Vice President-Flavor Division                       |   | 2000                       |       | 160,500                                                |       | 8,971     |       | 3,437                              |   | —     |   |
|                                                        |   | 1999                       |       | 150,000                                                |       | 2,885     |       | 3,544                              |   | 20,000(5   | )      |
|                                                        |   |                       |       |                                                   |       |      |       |                               |   |       |   |
| Ronald J. Dintemann                                         |   | 2001                       |       | 144,612                                                |       | 2,781     |       | 12,329                             |   | —     |   |
|  Vice President-Operations                             |   | 2000                       |       | 144,612                                                |       | 8,181     |       | 12,329                             |   | —     |   |
|                                                        |   | 1999                       |       | 140,400                                                |       | 2,700     |       | 12,345                             |   | 20,000(5   | )      |
|                                                        |   |                       |       |                                                   |       |      |       |                               |   |       |   |
| Joseph A. Gemmo Vice                                        |   | 2001                       |       | 139,256                                                |       | 2,678     |       | 6,313                              |   | 50,000(6   | )      |
| President, Chief Financial Officer, Secretary and Treasurer |   | 2000                       |       | 139,256                                                |       | 7,878     |       | 6,313                              |   | —     |   |
|                                                        |   | 1999                       |       | 135,200                                                |       | 2,600     |       | 6,541                              |   | 20,000(5   | )      |
|                                                             |        |                            |            |                                                        |            |           |            |                                    |        |            |        |  |  |

 

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(1)           Represents expenses in connectionwith the personal use of company automobiles and life insurance policies on thelife of such executive.

 

(2)           Represents five-year stock options topurchase 100,000 shares of our Common Stock granted in May 2001 under our 1999Stock Option Plan at an exercise price of $1.10 per share and 100,000 shares ofour Common Stock granted in October 2001 under our 1999 Stock Option Plan at anexercise price of $.88 per share.

 

(3)           Represents five-year stock options topurchase 100,000 shares of our Common Stock granted in June 1999 under our 1999Stock Option Plan at an exercise price of $1.62 per share.

 

(4)           Represents five-year stock options topurchase 50,000 shares of our Common Stock granted in May 2001 under our 1999Stock Option Plan at an exercise price of $1.10 per share and 100,000 shares ofour Common Stock granted in October 2001 under our 1999 Stock Option Plan at anexercise price of $.88 per share.

 

(5)           Represents ten-year stock options topurchase 20,000 shares of our Common Stock granted in April 1999 under our 1993Stock Option Plan at an exercise price of $.875 per share.

 

(6)           Represents ten-year stock options topurchase 50,000 shares of our Common Stock granted in May 2001 under our 1996Stock Option Plan at an exercise price of $1.00 per share.

 

 

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**StockOption Grants in 2001**

 

The followingtable sets forth certain information concerning individual stock option grantsduring the year ended December 31, 2001 to the Named Executive Officers.

** **
| **Name**         |   | **Number of Securities Underlying Options/SARs Granted** |   | **% of Total Options/SARs Granted to Employees in  Fiscal Year** |   | **Exercise Price****Per Share** |   | **Expiration Date**  |
|------------------|--------|----------------------------------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------|--------|----------------------|
| Philip Rosner    |   | 200,000                                                  |   | 44.4%                                                            |   | $.88 and $1.10                  |   | 5/30/06 and 10/16/06 |
| A. Gary Frumberg |   | 150,000                                                  |   | 33.3                                                             |   | .88 and 1.10                    |   | 5/30/06 and 10/16/06 |
| Joseph A. Gemmo  |   |   50,000                                            |   | 11.1                                                             |   | 1.00                            |   | 5/30/11              |

 

**AggregateStock Option Exercises in 2001 and 2001 Year–End Stock Option Values**

 

The followingtable provides certain information concerning each exercise of stock optionsduring the year ended December 31, 2001 by each of the Named Executive Officersand the year-end value of unexercised stock options.  The stock options listed below were granted without tandem stockappreciation rights.  We have nofreestanding stock appreciation rights outstanding.

** **
| **Name**             |   | **Number of****Shares Acquired on Exercise** |   | **Value****Realized ($)** |   | **Number of Unexercised****Options at December 31, 2001 Exercisable/Unexercisable** |   | **Number of Unexercised****In-the-Money  Options at December 31, 2001Exercisable/Unexercisable (1)** |   |
|----------------------|--------|----------------------------------------------|--------|---------------------------|--------|-------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|
| Philip Rosner        |   | —                                       |   | —                    |   | 66,667/233,333                                                                      |   | $0/42,000                                                                                            |   |
| A. Gary Frumberg     |   | —                                       |   | —                    |   | 66,667/183,333                                                                      |   | 0/37,000                                                                                             |   |
| Harvey Farber        |   | —                                       |   | —                    |   | 68,000/12,000                                                                       |   | 3,100/3,900                                                                                          |   |
| Ronald J.  Dintemann |   | —                                       |   | —                    |   | 103,000/17,000                                                                      |   | 49,100/3,900                                                                                         |   |
| Joseph A. Gemmo      |   | —                                       |   | —                    |   | 158,000/62,000                                                                      |   | 2,600/13,900                                                                                         |   |

 

----

(1) Value of unexercised“in-the-money” options is equal to the difference between the closing per shareprice of our Common Stock on the AMEX at December 31, 2001 ($1.20) and theoption exercise price per share multiplied by the number of shares subject tooptions.

 

**EmploymentAgreements**

 

In October 1995, we entered into a five-yearemployment agreement with Mr. Rosner which provides that he will serve as theChief Executive Officer of our company. The agreement provides for an annual base salary (adjustable inaccordance 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 annualsalary from $244,400 to $200,000 for the remainder of 1998.  Effective January 1, 1999 and January 1,2000, Mr. Rosner’s annual base salary was increased to $225,000 and $231,750,respectively.  In October 2000 andOctober 2001, the agreement was automatically extended for an additionalone-year term, and contains, among other things, customary termination andconfidentiality provisions.

 

In October 1995, we entered into a five-yearemployment agreement with Mr. Frumberg which provides that he will serve asExecutive Vice President of our company. The agreement provides for an annual base salary (adjustable inaccordance with the Consumer Price Index) of $200,000.  Effective January 1, 2000, we increased Mr.Frumberg’s annual base salary to $214,240. In October 2000 and October 2001 the agreement was automaticallyextended for an additional one-year term, and contains, among other things,customary termination and confidentiality provisions.

 

In January 1996, we entered into a five-yearemployment agreement with Ronald J. Dintemann to serve as VicePresident-Operations of our company. Pursuant to his employment agreement, Mr. Dintemann is entitled toreceive an annual base salary (adjustable in accordance with the Consumer PriceIndex) of $135,000.  Effective January1,2000 we increased Mr. Dintemann’s annual base salary to $144,612.  In January 2001 and January 2002, Mr.Dintemann’s employment agreement was extended for an additional one-year term,and contains, among other things, customary termination and confidentialityprovisions.

 

15

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In August 1996, we entered into a three-yearemployment agreement with Joseph A. Gemmo to serve as Vice President and ChiefFinancial Officer of our company. Pursuant to his employment agreement, Mr. Gemmo is entitled to receivean initial annual base salary of $115,000. Effective August 1997, we increased Mr. Gemmo’s annual base salary to$130,000.  Effective January 1, 2000, weincreased Mr. Gemmo’s annual base salary to $139,256.  In August 1999, Mr. Gemmo’s employment agreement was renewed foran additional three-year term.

 

On October 5, 2001, we eliminated the position of thePresident and Chief Operating Officer and in connection therewith, weterminated the employment of Joseph Raimondo who had served in thatposition.  We entered into a terminationand severance agreement with Mr. Raimondo which provided, among other things,for the continuance of his base salary and benefits for a six-month period throughApril 5, 2002.  In the event employmenthad not been obtained as of that date, his base salary and benefits wouldcontinue for up to an additional six-month period unless new employment isobtained earlier, in which event our additional salary and benefits paymentobligation would cease.

 

**1993Stock Option Plan**

 

InNovember 1993, we adopted, and the stockholders approved, the 1993 StockOption Plan  pursuant to which we maygrant to our employees options to purchase up to 500,000 shares of our CommonStock. The options granted under the 1993 Stock Option Plan may be exercisedduring the ten-year period after they are granted at an exercise price equal tothe mean between the high and low selling prices of our Common Stock on the TSEon the date of the grant. Options granted to any person who beneficially ownsten percent (10%) or more of our Common Stock may not be exercised after thefifth anniversary of the date of the grant and must be granted at an exerciseprice equal to 110% of the market price at the date of the grant.  In May 1999, our Board of Directorsterminated the 1993 Stock Option Plan for the purpose of granting additionalstock options.  Termination of the 1993Stock Option Plan will not affect options that were granted prior to the terminationdate.

 

As of March 15,2002, options to purchase an aggregate of 416,000 shares of our Common Stockwere outstanding under the 1993 Stock Option Plan.

 

**1996and 1999 Stock Option Plans**

 

In October 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 inJune 1999, the stockholders approved, the 1999 Stock Option Plan.

 

The maximum numberof shares of our Common Stock that may be subject to options under each of  the 1996 and 1999 Stock Option Plans may notexceed 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 anddirectors who are employees) and employees of our company’s subsidiaries areeligible for the grant of incentive options under the 1996 and 1999 StockOption Plans. Directors who are not employees are not eligible to receiveincentive stock options, but may receive non-qualified options. Options may alsobe granted to other persons, provided that such options are non–qualifiedoptions. In the event of incentive options, the aggregate fair market value ofour Common Stock with respect to which such options become first exercisable bythe holder during any calendar year cannot exceed $100,000. This limit does notapply to non–qualified options. To the extent an option that otherwisewould be an incentive option exceeds this $100,000 threshold, it will betreated as a non–qualified option.

 

In the case of anincentive 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 thedate the option is granted and, if an optionee is a stockholder whobeneficially owns 10% or more of our outstanding Common Stock, the exerciseprice of incentive options may not be less than 110% of the fair market valueof our Common Stock. The term of an option cannot exceed ten years and, in thecase of an optionee who owns 10% or more of the outstanding Common Stock,cannot exceed five years.

 

The 1996 and 1999Stock Option Plans will terminate automatically and no options may be grantedmore 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 StockOption 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 optionsthat were granted prior to the termination date.

 

As of March 15,2002, options to purchase an aggregate of 969,629 and 900,000 shares of ourCommon Stock were outstanding under the 1996 and 1999 Stock Option Plans,respectively, and an aggregate of 104,288 shares were reserved for the futureissuance of stock options.

 

16

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**Management Incentive Plan**

 

                In 2000, weadopted a management incentive plan for corporate officers and key managementemployees for the purpose of awarding cash and stock bonuses based on theachievement of certain predetermined goals. These goals are established for each participant in the plan and are setby our Compensation Committee prior to the beginning of the year. These goalsare based on a participant’s performance and may relate to a variety of factorsreflecting our objectives and performance and a participant’s ability tocontribute to the overall success of our company within the context of thepurposes of the plan, our business plan and the aspects of our business whichthe participant’s duties involve.

 

Bonuses awarded pursuant to the plan are based on apercentage of each participant’s base salary and the overall performance of ourcompany during the year. However, the amount of any award to a participant forany year shall not exceed 50% of the participant’s base salary, in the case ofa participant who is a corporate officer of our Company, or 25% of base salary,in the case of a participant who is a key management employee. Further, if theaggregate amount of all awards under the plan exceeds 10% of our net income fora particular year, each award shall be proportionately reduced so that theaggregate amount of all such awards does not exceed 10% of our net income forthe year.

 

Such goals were not met during 2001 and 2000 and,accordingly, no bonuses were awarded under this plan.

 

 

 

 

**ITEM11                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The followingtable sets forth certain information as of March 15, 2002 regarding thebeneficial ownership of our Common Stock by (a) each person known by us toown beneficially more than 5% of our Common Stock, (b) each of ourdirectors, (c) each of our Named Executive Officers, and (d) all ofour executive officers and directors as a group (8 persons):

 

 

| **Name**                                                    |   | **Number of Shares Beneficially Owned (1)** |   | **Percentage Beneficially Owned** |   |
|-------------------------------------------------------------|--------|---------------------------------------------|--------|-----------------------------------|--------|
| Philip Rosner (2)                                           |   | 2,163,676                                   |   | (3)(4)                            |   | 16.6 | % |
| A. Gary Frumberg (2)                                        |   | 1,351,341                                   |   | (5)                               |   | 10.3 | % |
| Richard R. Higgins                                          |   | 750,000                                     |   |                              |   | 5.8 | % |
| Sean Deson (2)                                              |   | 230,898                                     |   | (6)(7)                            |   | 1.7 | % |
| Werner F. Hiller (2)                                        |   | 209,751                                     |   | (6)(8)(9)                         |   | 1.6 | % |
| Irwin D. Simon (2)                                          |   | 160,000                                     |   | (6)(8)                            |   | 1.2 | % |
| Ronald J. Dintemann (2)                                     |   | 126,111                                     |   | (10)                              |   | (* | ) |
| Harvey F. Farber (2)                                        |   | 84,600                                      |   | (11)                              |   | (* | ) |
| Joseph A. Gemmo (2)                                         |   | 164,100                                     |   | (12)                              |   | 1.3 | % |
| All directors and executive officers as a group (8 persons) |   | 4,490,477                                   |   |                              |   | 32.0 | %  |

----

(*)           Less than 1%

 

(1)           As used in this table, a beneficialowner of a security includes any person who, directly or indirectly, throughcontract, 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 thedisposition of such security.  Inaddition, a person is deemed to be the beneficial owner of a security if thatperson has the right to acquire beneficial ownership of such security within 60days of the date shown above.

 

(2)           The business address of each ofMessrs. 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/oDeson & Co., 112 Baypoint Drive, San Raphael, CA 94901.  Thebusiness address of Mr. Hiller is 248 Locha Drive, Jupiter, Fl 33458. Thebusiness address of Mr. Simon is c/o The Hain Celestial Group, Inc., 58 SouthService Road, Melville, NY 11747.

 

(3)           Includes five-year options topurchase an aggregate of 66,667 shares of our Common Stock granted to Mr.Rosner in June 1999, May 2001 and October 2001 which are fully vested andexcludes options to purchase 233,333 shares of our Common Stock that have notyet vested.  Of such unvested options,options to purchase 100,000 shares will vest in 2002, options to purchase66,667 shares will vest in 2003, and options to purchase 66,666 shares will vestin 2004.

 

 

17

----

 

 

 

 

(4)           Includes 36,438 shares of our CommonStock owned by Mr. Rosner’s wife. Mr. Rosner disclaims beneficialownership of the shares owned by his wife.

 

(5)           Includes five-year options topurchase an aggregate of 66,667 shares of our Common Stock granted to Mr.Frumberg in June 1999, May 2001 and October 2001 which are fully vested andexcludes options to purchase 183,333 shares of our Common Stock that have notyet vested.  Of such unvested options,options to purchase 83,333 shares will vest in 2002, and options to purchase 50,000shares will vest in each of 2003 and 2004.

 

(6)           Includes ten-year options to purchase100,000 shares of our Common Stock granted to each of Messrs. Deson, Hiller andSimon in June 1999 which are fully vested.

 

(7)           Includes ten-year options to purchase120,000 shares of our Common Stock granted to Mr. Deson in June 1998 and anaggregate of 10,898 shares granted in 1999 which are fully vested and excludesoptions to purchase 80,000 shares of our Common Stock that have not yet vested.  Of such unvested options, options topurchase 40,000 shares will vest in each of 2002 through 2003.

 

(8)           Includes ten-year options to purchase60,000 shares of our Common Stock granted to each of Messrs. Hiller and Simonin January 1998 which are fully vested and excludes options to purchase 40,000shares of our Common Stock that have not yet vested .  Of such unvested options, options to purchase 20,000 shares willvest to each of Messrs. Hiller and Simon in each of 2002 and 2003.

 

(9)           Includes ten-year options to purchase6,731 shares of our Common Stock granted to Mr. Hiller in April 1999 which arefully vested.

 

(10)         Includes ten–year options topurchase an aggregate of 107,000 shares of our Common Stock granted toMr. Dintemann in April 1994, June 1997 and April 1999 which are fullyvested and excludes options to purchase 13,000 shares that have not yetvested.  Of such unvested options,  options to purchase 5,000 shares will vestin 2002, and options to purchase 4,000 shares will vest in each of 2003 and2004.

 

(11)         Includes ten-year options to purchasean aggregate of 72,000 shares of our Common Stock granted to Mr. Farber inJanuary 1996, February 1997 and April 1999 which are fully vested and excludesoptions to purchase 8,000 shares that have not yet vested. Of such unvestedoptions, options to purchase 4,000 shares will vest in each of 2003 and 2004.

 

(12)         Includes ten-year options to purchasean aggregate of 162,000 shares of our Common Stock granted to Mr. Gemmo inFebruary 1997, December 1997, April 1999 and May 2001 which are fully vestedand excludes options to purchase 58,000 shares that have not yet vested. Ofsuch unvested options, options to purchase 16,667 shares will vest in 2002, andoptions to purchase 20,667 shares will vest in 2003 and options to purchase20,666 shares will vest in 2004.

 

 

18

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**ITEM12                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

In October 1999,we began selling flavor products to The Hain Food Group, Inc., which changedits name to The Hain Celestial Group, Inc. (“Hain”) in May 2000.  Irwin D. Simon, a director of our company,is the Chairman, President and Chief Executive Officer of Hain.  Our sales to Hain totaled approximately$536,000 for 2001 and $594,000 for 2000. We believe such sales were made at arms-length and at competitiveprices.

 

During 2001, weengaged Deson & Co., an entity wholly owned by Sean Deson, a Director ofour Company, to render certain advisory and consulting services to the Companyin connection with the evaluation of a potential merger opportunity.  In connection with those services, Deson& Co. was paid a fee of $25,000.

 

The followingtable sets forth certain information regarding loans made by us to ourdirectors and executive officers which were outstanding as of December 31,2001.   The notes bore interest based ata bank’s prime rate through December 31, 2000. On January 23, 2001, the notes were amended to change the maturity datefrom March 15, 2002 to April 1, 2002, and the interest component on the principalbalance of the loans was eliminated effective January 1, 2001.  On March 1, 2001, the installment due onApril 1, 2001 with respect to Mr. Frumberg’s note was extended to June 1, 2001at which time Mr. Frumberg surrendered to us 20,000 shares of our Common Stockowned by him which resulted in a partial repayment of his outstanding loan tous of  $21,400.  In March 2002, the notes were furtheramended to change the final installment date from April 1, 2002 to two equalannual installments on April 1, 2003 and April 1, 2004.  As of March 15, 2002, the aggregateindebtedness owed to us under these loans was $103,625, including accruedinterest through December 31, 2000. These loans are secured by shares of our Common Stock that are owned byMessrs. Rosner and Frumberg.

 

**Tableof Indebtedness of Directors**

**andExecutive Officers of Company**

 
| **Name and Principal Position**                                  |   | **Involvement********of Issuer** |   | **Amount****Outstanding****as of********December 31, 2001(1)** |   | **Amount****Outstanding********as of********March 15, 2002(1)** |   |
|------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
| Philip Rosner, Chairman of the Board and Chief Executive Officer |   | Lender                           |   | $                                                              | 77,153 |                                                            | $      | 77,153 |   |
| A.Gary Frumberg, Director and Executive Vice President           |   | Lender                           |   | 26,482                                                         |   | 26,482                                                          |   |
|                                                                  |        |                                  |        |                                                                |        |                                                                 |        |  |  |

----

(1)  Includes accrued interest through December31, 2000.

 

**Transactionswith Related Parties**

 

In 2001 and 2000,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 ChiefExecutive Officer.  Our sales toScent-A-Vision for years 2001 and 2000 were approximately $94,000 and $64,000,respectively, which we believe were competitive with other available sourcesfor such fragrance products.

 

 

 

19

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**ITEM13                EXHIBITS AND REPORTS ON FORM 8–K.**

 

(a) The exhibitslisted 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).                                                                                                                                                                                                                                                               |
| 10.2                  |   | 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).                                                                                          |
| 10.10                 |   | 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).                                                                           |
| 10.13                 |   | Agreement of Purchase  and Sale, dated as of November 16, 2001, between us and First Industrial,  L.P. (filed as Exhibit 2.1 to form 8-K, Current Report of our company, filed  with the Commission on January 15, 2002).                                                                                                  |
| 10.14                 |   | Lease Agreement, dated  as of January 1, 2002, between us and Town of Babylon Industrial Development  Agency (filed as Exhibit 10.2 to Form 8-K, Current Report of our company,  filed with the Commission on January 15, 2002).                                                                                           |
| 10.15                 |   | Reimbursement  Agreement, dated as of January 1, 2002, between us and Wells Fargo Bank, Inc.  (filed as Exhibit 10.3 to Form 8-K, Current Report of our company, filed with  the Commission on January 15, 2002).                                                                                                          |
| 10.16                 |   | Irrevocable Letter of  Credit, dated January 15, 2002, issued by Wells Fargo Bank, National  Association, in favor of the Bank of New York (filed as Exhibit 10.4 to Form  8-K, Current Report of our company, filed with the Commission on January 15,  2002).                                                            |
| 10.17                 |   | Guaranty Agreement  dated as of January 1, 2002 from us to Wells Fargo Credit, Inc., Wells Fargo  Bank, National Association and the Bank of New York (filed as Exhibit 10.5 to  Form 8-K, Current Report of our company, filed with the Commission on January  15, 2002).                                                 |
| 10.18                 |   | Mortgage, Security  Agreement, Fixture Filing and Assignment of Leases and Rents, dated as of  January 1, 2002, from us and Town of Babylon Industrial Development Agency to  Wells Fargo Credit, Inc. (filed as Exhibit 10.6 to Form 8-K, Current Report  of our company, filed with the Commission on January 15, 2002). |
| 10.19                 |   | Indenture of Trust  dated as of January 1, 2002, from Town of Babylon Industrial Development  Agency to the Bank of New York (filed as Exhibit 10.7 to Form 8-K, Current  Report of our company, filed with the Commission on January 15, 2002).                                                                           |
| 10.20                 |   | Press release dated  January 24, 2002 (filed as Exhibit 99.1 to Form 8-K, Current Report of our  company, filed with the Commission on January 15, 2002).                                                                                                                                                                  |
| 21.1                  |   | Subsidiaries (filed as  Exhibit 21.1 to Form 10-KSB, Annual Report of our company for the year ended  December 31, 2000 and incorporated herein by reference).                                                                                                                                                             |
| *23.1                 |   | Consent of Ernst &  Young LLP.                                                                                                                                                                                                                                                                                         |

----

(A) Incorporatedby reference to our Registration Statement on Form 10–SB (File No. 0–26682)filed with the Commission on August 28, 1995.

 

* Filed in thisAnnual Report on Form 10-KSB.

 

(b) Reports onForm 8–K.

Letter of Intent,dated November 19, 2001, between us and Belmay Holding Corp. with respect to aproposed merger.

 

20

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**SIGNATURES**

 

                In accordance withSection 13 or 15(d) of the Exchange Act, we have caused this report to besigned on our behalf by the undersigned, thereunto duly authorized.

 
|                   | TECHNOLOGY  FLAVORS & FRAGRANCES, INC. |
|------------------------|--------------------------------------------|
| Dated:  March 27, 2002 | By:                                        | /s/  JOSEPH A. GEMMO |
|                   |                                       |   Joseph A. Gemmo |
|                   |                                       | Vice  President and Chief Financial Officer |

 

                In accordance withthe Exchange Act, this report has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**        |   | **Title**                                               |   | **Date**       |
|----------------------|--------|---------------------------------------------------------|--------|----------------|
|                 |   |                                                    |   |           |
| /s/ PHILIP ROSNER    |   | Chairman of the Board,  Chief Executive Officer and     |   | March 27, 2002 |
| Philip Rosner        |   | Director (Principal  Executive Officer)                 |   |           |
|                 |   |                                                    |   |           |
| /s/ A.GARY FRUMBERG  |   | Executive Vice  President and Director                  |   | March 27, 2002 |
| A. Gary Frumberg     |   |                                                    |   |           |
|                 |   |                                                    |   |           |
| /s/ JOSEPH A. GEMMO  |   | Vice President, Chief  Financial Officer, Secretary and |   | March 27, 2002 |
| Joseph A. Gemmo      |   | Treasurer  (Principal Financial and Accounting Officer) |   |           |
|                 |   |                                                    |   |           |
| /s/ SEAN DESON       |   | Director                                                |   | March 27, 2002 |
| Sean Deson           |   |                                                    |   |           |
|                 |   |                                                    |   |           |
| /s/ WERNER F. HILLER |   | Director                                                |   | March 27, 2002 |
| Werner F. Hiller     |   |                                                    |   |           |
|                 |   |                                                    |   |           |
| /s/ IRWIN D. SIMON   |   | Director                                                |   | March 27, 2002 |
| Irwin D. Simon       |   |                                                    |   |           |

 

 

 

21

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**INDEX TO FINANCIAL STATEMENTS**

 

 

 

 
| Report of Independent  Auditors                                                                       |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Consolidated Balance  Sheets as of December 31, 2001 and 2000                                         |   |
|                                                                                                  |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001 and 2000                 |   |
|                                                                                                  |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2001 and  2000 |   |
|                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001 and 2000                 |   |
|                                                                                                  |   |
| Notes to  Consolidated Financial Statements for the Years Ended December 31, 2001 and  2000           |   |

 

 

F-1

----

 

**REPORTOF INDEPENDENT AUDITORS**

 

 

 

 

 

To theStockholders and Board of Directors of

Technology Flavors& Fragrances, Inc. and Subsidiaries

 

We have auditedthe accompanying consolidated balance sheets of Technology Flavors &Fragrances, Inc. and Subsidiaries as of December 31, 2001 and 2000 and therelated consolidated statements of operations, stockholders’ equity, and cashflows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Technology Flavors &Fragrances, Inc. and Subsidiaries at December 31, 2001 and 2000, and theconsolidated results of their operations and their cash flows for the yearsthen ended in conformity with accounting principles generally accepted in theUnited States.

 

 

 
|               | /s/ ERNST & YOUNG  LLP |
|--------------------|----------------------------|
|               |
| Melville, New York |
| March 19, 2002     |

 

 

F-2

**TechnologyFlavors & Fragrances, Inc.**

**Consolidated  Balance Sheets**

 
|                                                                                                   |   | **At  December 31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                                                   |   | **2001**             |   | **2000** |   |
| **ASSETS**                                                                                             |   |                 |   |   |   |
| Current assets:                                                                                        |   |                 |   |   |   |
| Cash and cash equivalents                                                                              |   | $260,010             |   | $195,387 |   |
| Receivables, (less allowance for doubtful accounts  of $265,000 in 2001 and $103,000 in 2000) (Note 3) |   | 3,030,667            |   | 2,953,620 |   |
| Inventories (Note 4)                                                                                   |   | 2,979,015            |   | 2,829,974 |   |
| Prepaid expenses and other current assets                                                              |   | 133,617              |   | 92,750 |   |
| Total current assets                                                                                   |   | 6,403,309            |   | 6,071,731 |   |
| Fixed assets, net (Note 5)                                                                             |   | 678,854              |   | 547,441 |   |
| Intangible assets, net (Note 6)                                                                        |   | 608,080              |   | 770,235 |   |
| Other assets                                                                                           |   | 158,768              |   | 145,346 |   |
| Notes receivable from related parties (Note 7)                                                         |   | 103,635              |   | 125,035 |   |
| Total assets                                                                                           |   | $7,952,646           |   | $7,659,788 |   |
| **LIABILITIES**                                                                                        |   |                 |   |   |   |
| Current liabilities:                                                                                   |   |                 |   |   |   |
| Accounts payable                                                                                       |   | $1,946,085           |   | $1,180,905 |   |
| Accrued expenses                                                                                       |   | 502,463              |   | 77,053 |   |
| Revolving credit facility (Note 8)                                                                     |   | 1,115,199            |   | 1,340,499 |   |
| Current portion of capital lease obligations (Note  12)                                                |   | 57,175               |   | 22,066 |   |
| Total current liabilities                                                                              |   | 3,620,922            |   | 2,620,523 |   |
| Capital lease obligations (Note 12)                                                                    |   | 211,068              |   | 58,107 |   |
| Deferred credits                                                                                       |   | 65,487               |   | 71,447 |   |
|                                                                                                   |   | 3,897,477            |   | 2,750,077 |   |
| Commitments (Note 12)                                                                                  |   |                 |   |   |   |
|                                                                                                   |   |                 |   |   |   |
| **STOCKHOLDERS'  EQUITY**                                                                              |   |                 |   |   |   |
| Common stock:                                                                                          |   |                 |   |   |   |
| $.01 par value, authorized 20,000,000 shares, issued  13,004,473 and 13,019,348 shares, respectively   |   | 130,045              |   | 130,193 |   |
| Paid-in capital                                                                                        |   | 10,357,772           |   | 10,363,542 |   |
| Accumulated deficit                                                                                    |   | (6,359,609           | )      | (5,584,024 | ) |
| Foreign currency translation                                                                           |   | (73,039              | )      | - |   |
| Total stockholders' equity                                                                             |   | 4,055,169            |   | 4,909,711 |   |
|                                                                                                   |   |                 |   |   |   |
| Total liabilities and stockholders' equity                                                             |   | $7,952,646           |   | $7,659,788 |   |

 

See accompanying notes.

 

F-3

----

 

**Technology Flavors & Fragrances,Inc.**

**Consolidated Statements of Operations**

 
|                                                                |   | **For the  years ended December 31,** |       |
|---------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                |   | **2001**                              |       | **2000** |   |
| Net sales                                                           |   | $                                     | 15,476,437 |   | $ | 15,333,888 |   |
| Cost of sales                                                       |   | 9,151,922                             |       | 9,011,486 |   |
| Gross profit                                                        |   | 6,324,515                             |       | 6,322,402 |   |
| Operating expenses:                                                 |   |                                  |       |   |   |
| Selling                                                             |   | 2,741,525                             |       | 2,529,733 |   |
| General and administrative                                          |   | 2,113,846                             |       | 1,948,112 |   |
| Research and development                                            |   | 1,383,347                             |       | 1,365,891 |   |
| Amortization                                                        |   | 215,289                               |       | 219,886 |   |
| Severance, restructuring costs and abandoned merger  costs (Note 9) |   | 451,015                               |       | 38,779 |   |
| Total operating expenses                                            |   | 6,905,022                             |       | 6,102,401 |   |
| (Loss) income from operations                                       |   | (580,507                              | )          | 220,001 |   |
| Loss on investment                                                  |   | (50,000                               | )          | - |   |
| Interest expense, net                                               |   | (134,755                              | )          | (170,010 | ) |
| (Loss) income before provision for income taxes                     |   | (765,262                              | )          | 49,991 |   |
| Provision for income taxes                                          |   | (10,323                               | )          | (26,884 | ) |
| (Loss) income from continuing operations                            |   | (775,585                              | )          | 23,107 |   |
| Gain on disposal of discontinued operations,                        |   |                                  |       |   |   |
| net of income taxes (Note 10)                                       |   | -                                     |       | 248,370 |   |
| Net (loss) income                                                   |   | $                                     | (775,585   | ) | $ | 271,477 |   |
| Net (loss) income per common share - basic and  diluted:            |   |                                  |       |   |   |
| Continuing operations                                               |   | $                                     | (.06       | ) | $ | .00 |   |
| Discontinued operations                                             |   | -                                     |       | .02 |   |
| Net (loss) income per common share - basic and  diluted             |   | $                                     | (.06       | ) | $ | .02 |   |
| Weighted average common shares outstanding                          |   | 13,011,952                            |       | 12,607,224 |   |

 

See accompanying notes.

 

 

F-4

----

 

**Technology Flavors & Fragrances, Inc. Consolidated Statements ofStockholders' EquityFor the years ended December 31, 2001 and 2000**

|                                                                                                     |   |              |   |                 |          |                          |   |             |      | **Foreign****Currency****Translation** |              |      |   | **Comprehensive  Income (Loss)** |          |
|----------------------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------|---------------|-------------------------------|--------|------------------|-----------|----------------------------------------|-------------------|-----------|--------|----------------------------------|---------------|
|                                                                                                     |   | **Common  Stock** |   | **Paid-In  Capital** |          | **Accumulated  Deficit** |   |             | **Total** |                                   |              |
|                                                                                                     |   | **Shares**        |   | **Amount**           |          |                          |   |             |      |                                   |
| Balance at December 31, 1999                                                                             |   | 12,549,223        |   | $                    |  125,492 |                          | $      |  10,222,544 |      | $                                      |  (5,855,501) |      | -      |                             | $             |  4,492,535 |   |   |   |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Exercise of stock options                                                                                |   | 25,958            |   | 259                  |          | 25,657                        |   |             |      |                                   |              | 25,916    |   |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Repurchase of common stock  by the Company and retired                                                   |   | (25,833           | )      | (258                 | )             | (25,575                       | )      |             |      |                                   |              | (25,833   | )      |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Options issued for  consulting services                                                                  |   |              |   |                 |          | 13,500                        |   |             |      |                                   |              | 13,500    |   |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Common stock surrendered by  officer in connection with partial repayment of officers loans and retired  |   | (125,000          | )      | (1,250               | )             | (180,300                      | )      |             |      |                                   |              | (181,550  | )      |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Exercise of stock warrants,  net of expenses                                                             |   | 595,000           |   | 5,950                |          | 307,716                       |   |             |      |                                   |              | 313,666   |   |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Net income                                                                                               |   |              |   |                 |          |                          |   | 271,477          |      |                                   |              | 271,477   |   | 271,477                          |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Balance at December 31, 2000                                                                             |   | 13,019,348        |   | 130,193              |          | 10,363,542                    |   | (5,584,024       | )         | -                                      |              | 4,909,711 |   | $                                |  271,477 |   |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Common stock surrendered by  officer in connection with partial repayment of officer's loans and retired |   | (20,000           | )      | (200                 | )             | (21,200                       | )      |             |      |                                   |              | (21,400   | )      |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Options issued for  consulting services                                                                  |   |              |   |                 |          | 12,500                        |   |             |      |                                   |              | 12,500    |   |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Exercise of stock options                                                                                |   | 5,125             |   | 52                   |          | 2,930                         |   |             |      |                                   |              | 2,982     |   |                             |          |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Foreign currency translation  loss                                                                       |   |              |   |                 |          |                          |   |             |      | (73,039                                | )                 | (73,039   | )      | (73,039                          | )             |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Net loss                                                                                                 |   |              |   |                 |          |                          |   | (775,585         | )         |                                   |              | (775,585  | )      | (775,585                         | )             |
|                                                                                                     |   |              |   |                 |          |                          |   |             |      |                                   |              |      |   |                             |          |
| Balance at December 31, 2001                                                                             |   | 13,004,473        |   | $                    |  130,045 |                          | $      |  10,357,772 |      | $                                      |  (6,359,609  | )         | $      |  (73,039                    | )             | $ |  4,055,169 |   | $ |  (848,624 | ) |
|                                                                                                          |        |                   |        |                      |               |                               |        |                  |           |                                        |                   |           |        |                                  |               |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

 

F-5

----

 

**TechnologyFlavors & Fragrances, Inc. Consolidated Statements of Cash Flows**

 
|                                                                                         |   | **For the  years ended** |     |
|----------------------------------------------------------------------------------------------|--------|--------------------------|----------|
|                                                                                         |   | **December 31,**         |     |
|                                                                                         |   | **2001**                 |     | **2000** |   |
| Cash flows from operating activities:                                                        |   |                     |     |   |   |
| Net (loss) income                                                                            |   | $                        | (775,585 | ) | $ | 271,477 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |                     |     |   |   |
| Gain on disposal of discontinued operations                                                  |   | -                        |     | (261,370 | ) |
| Depreciation and amortization                                                                |   | 404,296                  |     | 398,388 |   |
| Accrued interest on notes receivable                                                         |   | -                        |     | (14,484 | ) |
| Provision for bad debts                                                                      |   | 236,000                  |     | 24,232 |   |
| Deferred rent                                                                                |   | (5,960                   | )        | 12,360 |   |
| Loss on investment                                                                           |   | 50,000                   |     | - |   |
| Stock option grants for consulting services                                                  |   | 12,500                   |     | 13,500 |   |
| Changes in assets and liabilities:                                                           |   |                     |     |   |   |
| Accounts receivable                                                                          |   | (313,047                 | )        | 292,719 |   |
| Inventories                                                                                  |   | (149,041                 | )        | (194,977 | ) |
| Prepaid expenses and other current assets                                                    |   | (40,867                  | )        | (37,755 | ) |
| Other assets                                                                                 |   | (98,558                  | )        | 179,514 |   |
| Accounts payable                                                                             |   | 765,180                  |     | (384,670 | ) |
| Accrued expenses                                                                             |   | 409,052                  |     | (224,722 | ) |
| Net cash provided by operating activities                                                    |   | 493,970                  |     | 74,212 |   |
| Cash flows from investing activities:                                                        |   |                     |     |   |   |
| Purchase of fixed assets                                                                     |   | (107,906                 | )        | (102,157 | ) |
| Net cash used in investing activities                                                        |   | (107,906                 | )        | (102,157 | ) |
| Cash flows from financing activities:                                                        |   |                     |     |   |   |
| Proceeds from revolving credit facility                                                      |   | 14,845,000               |     | 15,330,000 |   |
| Repayment of revolving credit facility                                                       |   | (15,070,300              | )        | (15,534,108 | ) |
| Proceeds from exercise of stock options and  warrants, net of expenses                       |   | 2,982                    |     | 339,582 |   |
| Repurchase of common stock                                                                   |   | -                        |     | (25,883 | ) |
| Payment of capital lease obligations                                                         |   | (42,442                  | )        | (40,844 | ) |
| Net cash (used in) provided by**** financing activities                                 |   | (264,760                 | )        | 68,797 |   |
| Effect of exchange rate changes on cash                                                      |   | (56,681                  | )        | - |   |
| Increase in cash                                                                             |   | 64,623                   |     | 40,852 |   |
| Cash-beginning of period                                                                     |   | 195,387                  |     | 154,535 |   |
| Cash-end of year                                                                             |   | $                        | 260,010  |   | $ | 195,387 |   |
| Supplemental information:                                                                    |   |                     |     |   |   |
| Cash paid during the year for interest                                                       |   | $                        | 136,000  |   | $ | 200,000 |   |
| Cash paid during the year for income taxes                                                   |   | $                        | 84,000   |   | $ | 51,000 |   |

 

Supplemental disclosures of non-cash investing andfinancing activities:

Equipment acquired under capital lease obligationsamounted to $230,512 in 2001 and $46,304 in 2000.

Surrender of Company Common Stock owned by officers aspartial paydown of notes receivable amounted to $21,400 in 2001 and $181,550 in2000.

 

See accompanying notes.

 

 

F-6

 

----

 

**Technology Flavors & Fragrances,Inc.**

**Notesto Consolidated Financial Statements**

**For the years ended December 31, 2001and 2000**

 

 

**1. Descriptionof Business**

 

Technology Flavors& Fragrances, Inc. (the “Company”, “us”, “we” or “our”) is a manufacturerof flavor and fragrance products used to provide or enhance flavors orfragrances in a wide variety of consumer and industrial products.

 

**2. Summary of Significant Accounting Policies**

 

**Consolidation**

 

The accompanyingconsolidated financial statements include the accounts of the Company and ourwholly–owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Inventories**

 

Inventories arestated at the lower of cost, determined using the first–in, first–outmethod, or market. The cost of raw materials is determined using the specificidentification method.

 

**Shipping and Handling Costs**

 

Shipping andhandling costs are included in cost of sales.

 

**Fixed Assets**

 

Machinery andequipment, including assets acquired under capital leases, are recorded at costand depreciated over their estimated useful lives ranging from 5 to 10 years,using the straight–line method. Leasehold improvements are amortized overthe shorter of the lease term or estimated useful life of the assets.Maintenance and repairs are charged to expense as incurred and renewals andimprovements, which extend the life of the assets, are capitalized.

 

**Long-Lived Assets**

 

Amortization ofintangible assets is provided using the straight–line method over theestimated useful lives of the assets of seven years. The carrying values ofintangible and other long-lived assets are periodically reviewed to determineif any impairment indicators are present. If it is determined that such indicators are present and the reviewindicates that the assets will not be fully recoverable, based on undiscountedestimated cash flows over the remaining amortization and depreciation period,their carrying values are reduced to estimated fair value.  Impairment indicators include, among otherconditions, cash flow deficits, an historic or anticipated decline in revenueor operating profit, adverse legal or regulatory developments, accumulation ofcosts significantly in excess of amounts originally expected to acquire theasset and a material decrease in the fair value of some or all of theassets.  Assets are grouped at thelowest level for which there are identifiable cash flows that are largelyindependent of the cash flows generated by other asset groups.  No such impairment existed at December 31,2001.

 

**Research and Development Costs**

 

Research anddevelopment costs are expensed as incurred.

 

**Income Taxes**

 

We recognizedeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements or tax returns.Under this method, deferred tax assets and liabilities are determined based onthe difference between the financial statement and tax bases of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount currently estimated to berealized.

F-7

----

 

**2. Summaryof Significant Accounting Policies (Continued)**

 

**Foreign Currency Translation**

 

The financial positionand results of operations of our subsidiaries are measured using local currencyas the functional currency. Balance sheet accounts are translated at theexchange rate in effect at the end of the year, and income statement accountsare translated at the average rate of exchange prevailing during the year.

 

**Earnings Per Share**

 

Basic net (loss)income per share for years 2001 and 2000 was calculated using the weightedaverage number of shares of common stock outstanding during the year. Dilutednet (loss) income per share for 2001 and 2000 was calculated using the weightedaverage common and common stock equivalents that were outstanding during theyear.  The effect of common stockequivalents for 2001 (137,769 shares) was anti-dilutive and for 2000 was notmaterial and, thus, diluted net (loss) income per share for 2001 and 2000 isthe same as basic earnings per share.

 

**Revenue Recognition**

 

We recognizerevenue when inventory is shipped and title legally transfers to the purchaser.

 

**Advertising Costs**

 

We expenseadvertising costs as incurred. Advertising costs were approximately $ 39,000 in2001 and $11,000 in 2000.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.

 

**Fair Value of Financial Instruments**

 

Cash and cashequivalents, notes receivable and long–term debt are reflected in theaccompanying consolidated balance sheets at amounts considered by management toreasonably approximate fair value. We estimate the fair value of our fixed ratenote receivable and long–term debt by using a discounted cash flowanalysis.

 

**Recent Accounting Pronouncements**

 

In June 2001, theFASB issued SFAS No. 142, *Goodwill and Other Intangible Assets*.  Statement 142 prohibits the amortization ofgoodwill and intangible assets with indefinite useful lives and requires thatthese assets be reviewed for impairment at least annually. Intangible assetswith finite lives will continue to be amortized over their estimated usefullives.  The Company will adopt Statement142 effective January 1, 2002 and it does not expect that the adoption of theStatement will have a significant impact on the Company’s consolidatedfinancial position or results of operations.

 

In August 2001,the FASB issued SFAS No. 144, *Accounting for the Impairment of Disposal of LongLived Assets*, which addresses financial accounting and reporting forthe impairment or disposal of long-lived assets and supersedes SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed O*f,and the accounting and reporting provisions of APB Opinion No. 30, *Reportingthe Results of Operations for a Disposal of a Segment of a Business*.  Statement 144 is effective for fiscal yearsbeginning after December 15, 2001.  TheCompany will adopt Statement 144 effective January 1, 2002 and it does notexpect that the adoption of the Statement will have a significant impact on theCompany’s consolidated financial position or results of operations.

 

F-8

----

 

**3.Receivables**

** **
|              |   | **December  31, 2001** |      | **December  31, 2000** |   |
|-------------------|--------|------------------------|-----------|------------------------|--------|
| Trade             |   | $                      | 2,899,059 |                   | $      | 2,749,735 |   |
| Alcohol drawbacks |   | 113,781                |      | 177,827                |   |
| Other             |   | 17,827                 |      | 26,058                 |   |
|              |   | $                      | 3,030,667 |                   | $      | 2,953,620 |   |

 

Included within trade receivables at December 31, 2001 and 2000 is anamount due from a party related to our executive and principal shareholder inthe amount of approximately $114,000 and $215,000, respectively.

 

 

**4.     Inventories**

** **
|           |   | **December  31, 2001** |      | **December  31, 2000** |   |
|----------------|--------|------------------------|-----------|------------------------|--------|
| Raw materials  |   | $                      | 1,744,928 |                   | $      | 1,582,272 |   |
| Finished goods |   | 1,234,087              |      | 1,247,702              |   |
|           |   | $                      | 2,979,015 |                   | $      | 2,829,974 |   |

 

 

**5.     FixedAssets**

** **
|                                            |   | **December  31, 2001** |      | **December  31, 2000** |   |
|-------------------------------------------------|--------|------------------------|-----------|------------------------|--------|
| Machinery and equipment                         |   | $                      | 1,456,987 |                   | $      | 1,269,051 |   |
| Leasehold improvements                          |   | 713,565                |      | 686,773                |   |
| Furniture and fixtures                          |   | 668,051                |      | 544,361                |   |
|                                            |   | 2,838,603              |      | 2,500,185              |   |
| Less: accumulated depreciation and amortization |   | (2,159,749             | )         | (1,952,744             | )      |
|                                            |   | $                      | 678,854   |                   | $      | 547,441 |   |

 

Depreciation andamortization expense relating to fixed assets for the years endedDecember 31, 2001 and 2000 was approximately $207,000 and $179,000,respectively.

 

 

**6.     IntangibleAssets**

** **
|                           |   | **December  31, 2001** |      | **December  31, 2000** |   |      |
|--------------------------------|--------|------------------------|-----------|------------------------|--------|-----------|
| Formulations                   |   | $                      | 1,048,979 |                   | $      | 1,048,979 |   |
| Customer lists                 |   | 86,105                 |      | 86,105                 |   |
|                           |   | 1,135,084              |      | 1,135,084              |   |
| Less: accumulated amortization |   | (527,004               | )         | (364,849               | )      |
|                           |   | $                      | 608,080   |                   | $      | 770,235   |   |
|                                |        |                        |           |                        |        |           |  |  |  |  |  |

 

 

Amortizationexpense relating to intangible assets for the years ended December 31, 2001 and2000 was approximately $162,000 and $176,000, respectively.

 

F-9

----

 

 

**7.     NotesReceivable From Related Parties**

 

Notes receivablefrom related parties consist of amounts owed by two executives and principalshareholders and are secured by shares of our Common Stock owned by them. Thenotes bore interest at a bank’s prime rate through December 31, 2000 and aredue in annual installments through April 1, 2002.  On January 23, 2001, the notes were amended to change thematurity date from March 15, 2002 to April 1, 2002, and cease interest on theprincipal balance effective January 1, 2001. On March 1, 2001, the installment due on April 1, 2001 with respect toMr. Frumberg’s note was extended to June 1, 2001 at which time Mr. Frumbergsurrendered to us 20,000 shares of our Common Stock owned by him which resultedin a partial repayment of his outstanding loan to us of $21,400.  In March 2002, the notes were furtheramended to change the final installment date from April 1, 2002 to two equalannual installments on April 1, 2003 and April 1, 2004.

 

 

**8.     RevolvingCredit Facility**

 

We have a Loan andSecurity Agreement (the “Loan Agreement”) with a lender providing for athree-year $3,000,000 revolving credit facility (the “1999 CreditFacility”).  Outstanding borrowingsunder the 1999 Credit Facility bear interest at a rate equal to a prime or“reference” lending rate plus one-quarter of a percentage point (5% at December31, 2001), and is subject to certain adjustments based upon our financialperformance.  Borrowings under the 1999Credit Facility are subject to certain eligibility requirements relating to ourreceivables and inventories and the discretion of the lender.  Outstanding borrowings are secured bysubstantially 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 LoanAgreement including maintaining tangible net worth of at least $1,750,000,achieving not less than 75% of our projected pre-tax income for the upcomingyear, and incurring expenditures for capital assets of not more than $450,000for the year.  At December 31, 2001, approximately$1,115,000 was outstanding and $1,885,000 was available for additionalborrowings under the 1999 Credit Facility. For the year ended December 31, 2001, our financial covenant relative tothe attainment of projected pre-tax income was amended under the 1999 CreditFacility to require us to attain for 2001 at least $1.00 of adjusted cash flow,as defined, excluding any write-offs relative to severance, restructuringcosts, abandoned merger costs and other unusual charges as defined.  We were in compliance with the covenant, asamended.

 

 

**9. Severance, Restructuring Costs and Abandoned Merger Costs**

 

In October 2001,we implemented a company-wide cost reduction and restructuring program whichresulted in the elimination of the positions of President and Chief OperatingOfficer and Controller and other personnel and the reduction of certainoperating costs.  Severance costsrelative to such terminations amounted to $281,000, of which $104,000 was paidprior to December 31, 2001.  Inaddition, we incurred $170,000 of costs associated with our due diligenceevaluation on an abandoned merger opportunity.

 

 

**10. Discontinued Operations**

 

          In August 1998, we sold substantiallyall of the assets and certain liabilities relating to our SeasoningDivision.  Of the total purchase pricepaid, $275,000 was held in escrow to secure certain of our indemnificationobligations and was recorded in “other assets” while the corresponding deferredgain was recorded in “deferred credits.” During 2000, $261,370 of the escrowed funds was received by the Companyand recorded as a gain on disposal of discontinued operations, net of $13,000of income taxes.

 

 

 

F-10

----

** **

**11. Income Taxes**

 

The income taxprovision for the years ended December 31, 2001 and 2000 principallyrepresents current state franchise taxes and for 2000 also includes Federalalternative minimum tax.

 

A reconciliationof the income tax provision for continuing operations at the statutory rate toincome tax expense at the annualized effective tax rate for the years endedDecember 31, 2001 and 2000 is as follows:

 

 
|                                                                                         |   | **2001** |     | **2000** |   |
|----------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Computed tax provision at Federal statutory rate                                             |   | $        | (260,189 | )        | $      | 16,997 |   |
| State and local income tax provision net of Federal tax benefit                              |   | (22,500  | )        | 9,267    |   |
| Non-deductible officers’ life insurance premiums and travel and entertainment  expenses |   | 15,598   |     | 8,167    |   |
| Utilization of net operating loss carryforward                                               |   | —   |     | (17,026  | )      |
| Alternative Minimum Tax                                                                      |   | —   |     | 9,479    |   |
| Other                                                                                        |   | 23,048   |     | —   |   |
|                                                                                         |   | (244,043 | )        | 26,884   |   |
| Valuation allowance                                                                          |   | 254,366  |     | —   |   |
| Provision for income taxes                                                                   |   | $        | 10,323   |     | $      | 26,884 |   |

 

 

The components ofdeferred taxes as of December 31, 2001 and 2000 are as follows:

 

 
|                                           |   | **2001**   |    | **2000**   |   |
|------------------------------------------------|--------|------------|---------|------------|--------|
| Deferred tax assets:                           |   |       |    |       |   |
| Inventory reserves                             |   | $          | 162,640 |       | $      | 299,820 |   |
| Accounts receivable                            |   | 96,900     |    | 39,140     |   |
| Capitalized inventory costs                    |   | 20,013     |    | 23,002     |   |
| Depreciation                                   |   | 86,100     |    | 69,549     |   |
| Intangibles                                    |   | 570,297    |    | 610,603    |   |
| Net operating loss carryforward — U.S     |   | 618,676    |    | 190,920    |   |
| Net operating loss carryforward — Foreign |   | 314,946    |    | 388,197    |   |
| AMT credit                                     |   | 48,062     |    | 48,062     |   |
| Other                                          |   | 33,175     |    | 27,150     |   |
|                                           |   | 1,950,809  |    | 1,696,443  |   |
| Valuation allowance                            |   | (1,950,809 | )  | (1,696,443 | )      |
| Net deferred tax asset                         |   | $          | —  |       | $      | — |   |

 

 The Company has Federal net operating losscarryforwards relating to U.S. operations of approximately $1,800,000 whichexpire at various dates from 2008 through 2013.

 

 

F-11

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**12. Commitments**

 

**Lease Obligations**

 

Our facility leaseincludes a provision for annual increases in rental payments. We recorded rentexpense using the straight–line method based on the minimum rent payableover the 12–year period of the lease.

 

Future minimumcommitments under noncancelable operating and capital leases are as follows:

 
|                                                                                |   | **Operating  leases** |    | **Capital  leases** |    |
|-------------------------------------------------------------------------------------|--------|-----------------------|---------|---------------------|---------|
| 2002                                                                                |   | $                     | 87,746  |                | $       | 83,882 |   |
| 2003                                                                                |   | 62,231                |    | 83,882              |    |
| 2004                                                                                |   | 40,414                |    | 80,030              |    |
| 2005                                                                                |   | 24,600                |    | 56,514              |    |
| 2006                                                                                |   | 8,200                 |    | 27,595              |    |
| Total minimum lease payments                                                        |   | $                     | 223,191 |                | 331,903 |   |
| Amounts representing interest                                                       |   |                  |    | (63,660             | )       |
| Present value of net minimum lease payments (including current  portion of $57,175) |   |                  |    | $                   | 268,243 |   |

 

Rental expense forthe years ended December 31, 2001 and 2000 was $305,000 and  $311,000, respectively.

 

Refer to Note 17.“Subsequent Events” relative to purchase of our operating facility.

 

**Employment Contracts**

 

We are obligated under employment contracts providing for annualcompensation expiring on various dates through March 2003.  Certain other contracts call for us to payadditional compensation based on sales volumes.  Future fixed compensation under these contracts, not includingcommissions based upon sales volume, as of December 31, 2001, amounted to$816,000 in 2002 and $29,000 in 2003.

 

**13. Stockholders’ Equity**

 

**Non-employee Stock Option Grants**

 

In June 2001 and October2001, we issued stock options to purchase 100,000 shares of our Common Stock toeach of two investor relations consulting firms of which 25,000 option shareshad vested at December 31, 2001. The expense related to such options in 2001amounted to $12,500.  Of such issuedoptions, 85,000 were cancelled in October 2001 and 15,000 options expired inJanuary 2002.

 

F-12

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**Stock Option Plans**

 

We granted stock optionsunder three separate plans: the 1999 Stock Option Plan, the 1996 Stock OptionPlan and the 1993 Stock Option Plan.

 

Under the 1999, 1996 and1993 Option Plans, our employees (including officers and directors who areemployees) and the employees of our subsidiaries are eligible for the grant ofincentive options to purchase up to a maximum of 1,000,000, 1,000,000 and500,000 shares, respectively, which vest immediately or ratably over periodsranging from one to five years. Options may also be granted to other persons,provided that such options are non–qualified options. In the case of anincentive option, the exercise price cannot be less than the fair market valueof the shares on the date the option is granted, and if an optionee is ashareholder who beneficially owns 10% or more of our outstanding Common Stock,the exercise price of the incentive options cannot be less than 110% of suchfair market value. The exercise price of non–qualified options shall notbe less than the fair market value of our Common Stock at the date of grant andshall be determined by our Board of Directors or the Committee appointed by theBoard of Directors.  In May 1999, ourBoard of Directors terminated the 1993 Option Plan and no further option grantsmay be made under such Plan provided, however, that such termination will notaffect options that were granted prior to the date of termination.

 

The following tablesummarizes stock option activity for the years ended December 31, 2001 and2000:

 
|                                                           |   | **2001**    |   | **2000**                          |   |
|----------------------------------------------------------------|--------|-------------|--------|-----------------------------------|--------|
|                                                           |   | **Options** |   | **Weighted Avg. Exercise  Price** |   | **Options** |   | **Weighted Avg. Exercise  Price** |   |
| Outstanding at beginning of year                               |   | 1,777,962   |   | $                                 | 1.23   |   | 1,674,462 |   | $ | 1.21 |   |
| Granted                                                        |   | 655,000     |   | .98                               |   | 200,000 |   | 1.36 |   |
| Exercised                                                      |   | (5,125      | )      | .58                               |   | (25,958 | ) | 1.00 |   |
| Cancelled                                                      |   | (126,708    | )      | 1.16                              |   | (70,542 | ) | 1.23 |   |
| Outstanding at end of year                                     |   | 2,301,129   |   | $                                 | 1.16   |   | 1,777,962 |   | $ | 1.23 |   |
|                                                           |   |        |   |                              |   |   |   |   |   |
| Exercisable at end of year                                     |   | 1,364,430   |   | $                                 | 1.25   |   | 1,111,228 |   | $ | 1.24 |   |
|                                                           |   |        |   |                              |   |   |   |   |   |
| Weighted average fair value of options granted during the year |   |        |   | $                                 | .61    |   |   |   | $ | .82 |   |

 

 

The followingtable summarizes information on stock options outstanding at December 31,2001:

 
|                |          | **Options Outstanding** |    | **Options Exercisable**                                  |   |
|---------------------|---------------|-------------------------|---------|----------------------------------------------------------|--------|
| **Exercise  Price** |          | **Shares**              |    | **Weighted Average Remaining Contractual Life in Years** |   | **Weighted Average Exercise Price** |   | **Shares** |   | **Weighted Average Exercise Price** |   |
| $                   | .58 —.97 |                    | 943,962 |                                                     | 7.1    |   | $ | .87 |   | 433,062 |   | $ | .85 |   |
| 1.00 — 1.37    |          | 712,167                 |    | 9.0                                                      |   | 1.20 |   | 412,034 |   | 1.31 |   |
| 1.44 — 1.88    |          | 645,000                 |    | 7.3                                                      |   | 1.56 |   | 519,334 |   | 1.53 |   |
|                |          | 2,301,129               |    | 7.7                                                      |   | $ | 1.17 |   | 1,364,430 |   | $ | 1.25 |   |
|                     |               |                         |         |                                                          |        |  |  |  |  |  |  |  |  |  |

 

AtDecember 31, 2001, 2,389,917 shares of our Common Stock were reserved forthe future issuance of stock under the Plans.

 

F-13

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**Stock Based Compensation Plans**

 

We continue tofollow Accounting Principles Board Opinion No. 25, “*Accounting**for**Stock**Issued**to**Employees*”(“APB 25”) and related interpretations in accounting for our stock-basedcompensation plans.   Under APB 25,because the exercise price of our stock options equals the market price of theunderlying stock on the date of the grant, no compensation expense isrecognized.

 

Pro formainformation regarding net income and net income per share is determined as ifwe 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 aBlack–Scholes option pricing model with the following weighted–averageassumptions: risk–free interest rate of 4.5% and 6.2%; no dividend yield;volatility factor of the expected market price of our Common Stock of 65%; anda weighted–average expected life of the options of 7.5 years atDecember 31, 2001 and 2000, respectively.

 

The Black–Scholesoption valuation model was developed for use in estimating the fair value oftraded options which have no vesting restrictions and are fully transferable.In addition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because our stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of ouremployee stock options.

 

For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period. Our pro forma information is as follows:

 
|                                                                                                |   | **2001** |     | **2000** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| (Loss) income from continuing operations as reported                                                |   | $        | (775,585 | )        | $      | 23,107 |   |
| Pro forma (loss) income from continuing operations                                                  |   | (945,585 | )        | (128,098 | )      |
| Net (loss) income per common share from continuing operations as  reported — basic and diluted |   | (.06     | )        | .00      |   |
| Pro forma net (loss) income per common share from continuing  operations — basic and diluted   |   | (.07     | )        | (.01     | )      |
|                                                                                                     |        |          |          |          |        |  |  |

 

**14. Employee Savings Plan**

 

We have anemployee savings and retirement plan covering all non–union employeesmeeting certain age and length of service requirements, pursuant to Section401k of the Internal Revenue Code. Participants may contribute a percentage ofcompensation, but not in excess of the maximum allowable by law.

 

The Plan provides for avoluntary matching contribution by us which is one half of the amountcontributed by the participant up to a maximum of 3% per annum.  Matching contributions of 1% per annumamounted to $28,000 and $27,000 for the years ended December 31, 2001 and2000, respectively. Employees vest in the employer contribution at the rate of25% per year.

 

F-14

 

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**15.  Concentrations of Credit Risk**

 

Financial instruments,which potentially subject us to concentrations of credit risk, are primarilytrade accounts receivable. Ongoing credit evaluation of customers’ financialcondition is performed and generally no collateral is required. Credit losseshave typically been within management’s expectations.

 

For the years endedDecember 31, 2001 and 2000, no one customer accounted for more than 10% ofour net sales.  At December 31,2001 and 2000, five customers accounted for approximately 34% and 37% of theaccounts receivable balance, respectively.

 

For the years endedDecember 31, 2001 and 2000, export sales were approximately 26% and 28%,respectively, of total sales. Our export sales are made to entities locatedprimarily in Canada and in Central and South America.  Receivables from such foreign sales at December 31, 2001 and 2000amounted to 37% and 42%, respectively, of total accounts receivable.

 

Cash and cash equivalentbalances are held primarily at one financial institution and may, at times,exceed the amount insurable. We believe we mitigate risk by investing in orthrough a major financial institution.

 

**16. Reconciliation of Canadian and United States Generally AcceptedAccounting Principles**

 

These financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States. During 2001 and 2000, there were nomaterial items which would be required to be recorded in order for ourfinancial statements to be in accordance with accounting principles generallyaccepted in Canada.

 

**17.  SubsequentEvents**

 

**Purchaseof Amityville, New York Facility**

 

On January 14,2002, we purchased the facility (which we had previously leased) for$1,500,000, transferred it to the Town of Babylon Industrial DevelopmentAgency, and then leased the facility from such agency for a term which expireson December 1, 2021. Upon expiration of the lease term, we are entitled torepurchase the facility for a nominal sum. The purchase was financed through the issuance of Town of BabylonIndustrial Development Agency Variable Rate Revenue Bonds (“IDA Bonds”).  The principal amount of the bonds,$2,200,000, was used to finance the purchase of the building plus closing costsand future expenditures for building improvements and capital equipment.  The financing is structured as a monthly IDAvariable rate demand revenue bond secured by a letter of credit with WellsFargo Bank NA.  The initial month’sinterest rate is 3.875% per annum.  Thebond’s interest rate is reset monthly based on market conditions and matures inJanuary 2022.

 

 

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