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

**Washington, D.C. 20549**

** **

**FORM 10-QSB**

** **

**(MarkOne)**

** **

**ý****                                 QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2002**

** **

**o****                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FORTHE TRANSITION PERIOD FROM               TO               **

** **

**Commission File No. 0-26682**

 

**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

(Exact Name of SmallBusiness Issuer as Specified in its Charter)

 

| **Delaware**                     |   | **11-3199437**                     |
|----------------------------------|--------|------------------------------------|
| (State or other  Jurisdiction of |   | (IRS Employer  Identification No.) |
| Incorporation or  Organization)  |   |                               |

 

**10 Edison Street East, Amityville, New York 11701**

(Address of PrincipalExecutive Offices)

 

**(631)842-7600**

(Issuer’s Telephone Number,Including Area Code)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES  ý            NO  o

 

APPLICABLE ONLY TOCORPORATE ISSUERS

 

The number of outstanding shares of the issuer’s common stock, parvalue $.01 per share,

as of October 23, 2002, was 13,004,473.

 

Transitional Small Business Disclosure Format (check one):

 

YES  o            NO  ý

 

 

 

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

 

**INDEX TOFORM 10-QSB**

 

**September 30, 2002**

 

 

 
| PART I — FINANCIAL INFORMATION |                                                                                                                                      |                                                                                        |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Item 1 —                                                                                                                             | Financial Statements                                                                        |   |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Consolidated Balance Sheets  at September 30, 2002 (unaudited) and December 31, 2001                                                      |                                                                                        |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Consolidated  Statements of Operations for the Three Months and Nine Months Ended September  30, 2002 and September 30, 2001  (unaudited) |                                                                                        |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2002 and  September 30, 2001 (unaudited)                   |                                                                                        |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Notes to  Consolidated Financial Statements                                                                                               |                                                                                        |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Item  2 —                                                                                                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
|                                |                                                                                                                                      |                                                                                        |   |
|                                | Item 3 —                                                                                                                             | Controls and  Procedures                                                                    |   |   |
|                                |                                                                                                                                      |                                                                                        |   |
| PART II — OTHER INFORMATION    |                                                                                                                                      |                                                                                        |
|                                |                                                                                                                                      |                                                                                        |   |
| SIGNATURES                          |                                                                                                                                      |                                                                                        |   |
|                                |                                                                                                                                      |                                                                                        |   |
| CERTIFICATIONS                      |                                                                                                                                      |                                                                                        |   |
|                                     |                                                                                                                                           |                                                                                             |  |  |  |

 

 

 

i

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**PART    I**

**ITEM 1 — FINANCIAL STATEMENTS**

**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(In U.S. Dollars) **

 
|                                                                                     |   | **At**             |       | **At**            |   |
|------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|--------|
|                                                                                     |   | **SEPTEMBER  30,** |       | **DECEMBER  31,** |   |
|                                                                                     |   | **2002**           |       | **2001**          |   |
|                                                                                     |   | **(Unaudited)**    |       |              |   |
| **ASSETS**                                                                               |   |               |       |              |   |
|                                                                                     |   |               |       |              |   |
| Current assets:                                                                          |   |               |       |              |   |
| Cash and cash  equivalents                                                               |   | $                  | 205,573    |              | $      | 260,010 |   |
| Cash held in  escrow                                                                     |   | 303,515            |       | —            |   |
| Receivables,  less allowance for doubtful accounts of$205,000 and $265,000, respectively |   | 3,168,892          |       | 3,030,667         |   |
| Inventories                                                                              |   | 3,062,626          |       | 2,979,015         |   |
| Prepaid expenses  and other current assets                                               |   | 207,484            |       | 133,617           |   |
|                                                                                     |   |               |       |              |   |
| Total current  assets                                                                    |   | 6,948,090          |       | 6,403,309         |   |
|                                                                                     |   |               |       |              |   |
| Fixed assets,  net                                                                       |   | 2,165,427          |       | 678,854           |   |
| Intangible  assets, net                                                                  |   | 486,464            |       | 608,080           |   |
| Other assets                                                                             |   | 440,482            |       | 158,768           |   |
| Notes receivable  from related parties                                                   |   | 77,520             |       | 103,635           |   |
|                                                                                     |   |               |       |              |   |
| Total assets                                                                             |   | $                  | 10,117,983 |              | $      | 7,952,646 |   |
|                                                                                     |   |               |       |              |   |
| **LIABILITIES**                                                                          |   |               |       |              |   |
|                                                                                     |   |               |       |              |   |
| Current  liabilities:                                                                    |   |               |       |              |   |
| Accounts payable                                                                         |   | $                  | 1,723,746  |              | $      | 1,946,085 |   |
| Accrued expenses                                                                         |   | 323,770            |       | 502,463           |   |
| Revolving credit  facility                                                               |   | 654,161            |       | 1,115,199         |   |
| Current portion  of long-term debt                                                       |   | 70,000             |       | —            |   |
| Current portion  of capital lease obligations                                            |   | 65,334             |       | 57,175            |   |
|                                                                                     |   |               |       |              |   |
| Total current  liabilities                                                               |   | 2,837,011          |       | 3,620,922         |   |
|                                                                                     |   |               |       |              |   |
| Long-term debt                                                                           |   | 2,130,000          |       | —            |   |
| Capital lease  obligations                                                               |   | 179,942            |       | 211,068           |   |
| Deferred credits                                                                         |   | —             |       | 65,487            |   |
|                                                                                     |   | 5,146,953          |       | 3,897,477         |   |
| **STOCKHOLDERS’  EQUITY**                                                           |   |               |       |              |   |
|                                                                                     |   |               |       |              |   |
| Common stock:                                                                            |   |               |       |              |   |
| $.01 par value, authorized 20,000,000 shares, issued and  outstanding 13,004,473 shares  |   | 130,045            |       | 130,045           |   |
| Paid-in capital                                                                          |   | 10,365,272         |       | 10,357,772        |   |
| Accumulated  deficit                                                                     |   | (5,441,526         | )          | (6,359,609        | )      |
| Foreign currency  translation                                                            |   | (82,761            | )          | (73,039           | )      |
|                                                                                     |   |               |       |              |   |
| Total  stockholders’ equity                                                         |   | 4,971,030          |       | 4,055,169         |   |
|                                                                                     |   |               |       |              |   |
| Total  liabilities and stockholders’ equity                                         |   | $                  | 10,117,983 |              | $      | 7,952,646 |   |

 

Note:                   The balance sheet at December 31, 2001has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.

 

See accompanying notes.

 

 

1

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**TECHNOLOGY FLAVORS & FRAGRANCES,INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in U.S. Dollars) (Unaudited)**

 
|                                                        |   | **For the three months ended** |      | **For the nine months ended** |   |
|-------------------------------------------------------------|--------|--------------------------------|-----------|-------------------------------|--------|
|                                                        |   | **September 30,**              |      | **September 30,**             |   |
|                                                        |   | **2002**                       |      | **2001**                      |   | **2002** |   | **2001** |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Net sales                                                   |   | $                              | 4,068,313 |                          | $      | 3,579,662 |   | $ | 12,805,101 |   | $ | 11,893,095 |   |
| Cost of sales                                               |   | 2,313,275                      |      | 2,096,083                     |   | 7,211,672 |   | 6,875,832 |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Gross profit                                                |   | 1,755,038                      |      | 1,483,579                     |   | 5,593,429 |   | 5,017,263 |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Operating expenses:                                         |   |                           |      |                          |   |   |   |   |   |
| Selling                                                     |   | 644,446                        |      | 666,841                       |   | 1,986,247 |   | 2,046,932 |   |
| General and administrative                                  |   | 447,816                        |      | 479,031                       |   | 1,291,830 |   | 1,460,323 |   |
| Research and development                                    |   | 390,158                        |      | 336,969                       |   | 1,120,190 |   | 1,046,769 |   |
| Amortization                                                |   | 49,839                         |      | 49,322                        |   | 148,645 |   | 147,967 |   |
| Total operating expenses                                    |   | 1,532,259                      |      | 1,532,163                     |   | 4,546,912 |   | 4,701,991 |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Income (loss) from operations                               |   | 222,779                        |      | (48,584                       | )      | 1,046,517 |   | 315,272 |   |
| Interest expense, net                                       |   | (45,164                        | )         | (45,242                       | )      | (139,998 | ) | (113,919 | ) |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Income (loss) before income taxes                           |   | 177,615                        |      | (93,826                       | )      | 906,519 |   | 201,353 |   |
| Tax benefit (provision)                                     |   | 30,000                         |      | —                        |   | 11,564 |   | (17,414 | ) |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Net income (loss)                                           |   | $                              | 207,615   |                          | $      | (93,826 | ) | $ | 918,083 |   | $ | 183,939 |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Net income (loss) per common share — basic and diluted |   | $                              | .02       |                          | $      | (.01 | ) | $ | .07 |   | $ | .01 |   |
|                                                        |   |                           |      |                          |   |   |   |   |   |
| Weighted average common shares outstanding:                 |   |                           |      |                          |   |   |   |   |   |
| Basic                                                       |   | 13,004,473                     |      | 13,004,473                    |   | 13,004,473 |   | 13,014,445 |   |
| Diluted                                                     |   | 13,124,527                     |      | 13,004,473                    |   | 13,158,649 |   | 13,133,019 |   |

 

See accompanying notes.

 

 

2

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**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In U.S. Dollars) (Unaudited)**

 
|                                                                                         |   | **For the nine months ended September 30,** |    |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                         |   | **2002**                                    |    | **2001** |   |
|                                                                                         |   |                                        |    |   |   |
| Cash flows from operating activities:                                                        |   |                                        |    |   |   |
| Net income                                                                                   |   | $                                           | 918,083 |   | $ | 183,939 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                                        |    |   |   |
| Depreciation and amortization                                                                |   | 377,245                                     |    | 283,193 |   |
| Stock option grant for consulting services                                                   |   | 7,500                                       |    | 7,500 |   |
| Provision for bad debts                                                                      |   | 60,000                                      |    | — |   |
| Deferred rent                                                                                |   | (65,487                                     | )       | (2,180 | ) |
| Changes in assets and liabilities:                                                           |   |                                        |    |   |   |
| Accounts receivables                                                                         |   | (198,225                                    | )       | (470,785 | ) |
| Inventories                                                                                  |   | (83,611                                     | )       | 7,139 |   |
| Prepaid expenses and other current assets                                                    |   | (73,867                                     | )       | (62,650 | ) |
| Other assets                                                                                 |   | (308,742                                    | )       | (18,146 | ) |
| Accounts payable                                                                             |   | (222,339                                    | )       | (33,199 | ) |
| Accrued expenses                                                                             |   | (178,693                                    | )       | 92,187 |   |
|                                                                                         |   |                                        |    |   |   |
| Net cash provided by (used in) operating activities                                          |   | 231,864                                     |    | (13,002 | ) |
|                                                                                         |   |                                        |    |   |   |
| Cash flows from investing activities:                                                        |   |                                        |    |   |   |
| Purchase of fixed assets                                                                     |   | (1,703,495                                  | )       | (79,859 | ) |
| Restricted cash                                                                              |   | (303,515                                    | )       | — |   |
| Notes receivable                                                                             |   | 26,115                                      |    | — |   |
|                                                                                         |   |                                        |    |   |   |
| Net cash used in investing activities                                                        |   | (1,980,895                                  | )       | (79,859 | ) |
|                                                                                         |   |                                        |    |   |   |
| Cash flows from financing activities:                                                        |   |                                        |    |   |   |
| Proceeds from issuance of long-term debt                                                     |   | 2,200,000                                   |    | — |   |
| Proceeds from revolving credit facility                                                      |   | 11,900,000                                  |    | 11,075,000 |   |
| Repayment of revolving credit facility                                                       |   | (12,361,038                                 | )       | (11,036,061 | ) |
| Issuance of common stock                                                                     |   | —                                      |    | 2,982 |   |
| Payment of capital lease obligations                                                         |   | (34,646                                     | )       | (30,835 | ) |
| Net cash provided by financing activities                                                    |   | 1,704,316                                   |    | 11,086 |   |
|                                                                                         |   |                                        |    |   |   |
| Effect of exchange rate changes on cash                                                      |   | (9,722                                      | )       | — |   |
|                                                                                         |   |                                        |    |   |   |
| Decrease in cash and equivalents                                                             |   | (54,437                                     | )       | (81,775 | ) |
| Cash and cash equivalents — beginning of period                                         |   | 260,010                                     |    | 195,387 |   |
|                                                                                         |   |                                        |    |   |   |
| Cash and cash equivalents — end of period                                               |   | $                                           | 205,573 |   | $ | 113,612 |   |

 

Supplementaldisclosure of non-cash investing activities: equipment acquired under capitallease obligations amounted to $11,679 in 2002 and $230,512 in 2001.

 

See accompanying notes.

 

 

3

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**September30, 2002**

 

1.     BASISOF PRESENTATION

 

Technology Flavors & Fragrances, Inc. (the“Company,” “us,” “we” or “our”) creates, develops and manufactures flavor andfragrance products used to provide or enhance flavors or fragrances in a widevariety of consumer and industrial products.

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-QSB.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion of ourmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the three-month andnine-month periods ended September 30, 2002 are not necessarily indicative ofthe results that may be expected for the full year ending December 31,2002.  These unaudited consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and footnotes thereto included in our Annual Report onForm 10-KSB for the year ended December 31, 2001.

 

2.     INVENTORIES

 

Components of inventories are summarized as follows:

 
|           |   | **September  30, 2002** |      | **December  31, 2001** |   |
|----------------|--------|-------------------------|-----------|------------------------|--------|
|           |   |                    |      |                   |   |
| Raw Materials  |   | $                       | 1,960,081 |                   | $      | 1,744,928 |   |
| Finished Goods |   | 1,102,545               |      | 1,234,087              |   |
|           |   | $                       | 3,062,626 |                   | $      | 2,979,015 |   |

 

3.     INTANGIBLEASSETS

 

In June 2001, the Financial Accounting Standards Boardissued Statements of Financial Accounting Standards No. 141, BusinessCombinations (“FAS 141”), and No. 142, Goodwill and Other Intangible Assets(“FAS 142”), effective for fiscal years beginning after December 15, 2001.  Under the new standards, goodwill andintangible assets deemed to have indefinite lives, of which we have none, areno longer amortized but are subject to annual impairment tests in accordancewith FAS 142.  Other intangible assetscontinue to be amortized over their estimated useful lives.

 

We adopted the new standards beginning in the firstquarter of fiscal 2002 and reassessed the estimated useful lives of our intangibleassets, which primarily consist of product formulations and customer lists, andno changes have been deemed necessary.

 

 

4

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Intangible assets as of September 30, 2002 andDecember 31, 2001 are as follows:

 
|                      |   | **September  30, 2002** |      | **December  31, 2001** |   |
|---------------------------|--------|-------------------------|-----------|------------------------|--------|
|                      |   |                    |      |                   |   |
| Formulations              |   | $                       | 1,048,979 |                   | $      | 1,048,979 |   |
| Customer lists            |   | 86,105                  |      | 86,105                 |   |
|                      |   | 1,135,084               |      | 1,135,084              |   |
| Accumulated  amortization |   | (648,620                | )         | (527,004               | )      |
|                      |   | $                       | 486,464   |                   | $      | 608,080 |   |

 

Amortization of intangible assets for the nine monthsended September 30, 2002 and 2001 was $121,620 for each period.  The annual amortization expense expected forthe years 2002 through 2006 is $162,154.

 

4.               REVOLVING CREDIT FACILITY

 

On April 25, 2002, we entered into a Loan and SecurityAgreement with a lender which replaced the revolving credit facility enteredinto in June 1999.  We call this newrevolving credit facility the 2002 Credit Facility.  The maximum line of credit under the 2002 Credit Facility wasinitially set at $3,000,000 but may be increased at our option to $4,000,000 atany time during the period January 1, 2003 through June 30, 2004.

 

Outstanding borrowings under the 2002 Credit Facilitybear interest at a rate equal to a prime lending rate plus one-quarter of apercentage point (5% at September 30, 2002). Borrowings under the 2002 Credit Facility are subject to certaineligibility requirements relating to our receivables and inventories.  Outstanding borrowings are secured bysubstantially all of our assets, including our product formulations.  We must comply with certain financial andother covenants contained in the Loan and Security Agreement, includingmaintaining tangible net worth of at least $3,200,000, achieving annual cashflow, as defined, of at least $1.00 and incurring expenditures for capitalassets of not more than $400,000 for year 2002 and $500,000 for each yearthereafter, excluding capital expenditures made from proceeds received from ourIDA Bond financing described below.  Oursubsidiaries have guaranteed our obligations under the 2002 CreditFacility.  Borrowings under the 2002Credit Facility at September 30, 2002 were $654,000 and $2,346,000 wasavailable for additional borrowings in accordance with the terms of the 2002Credit Facility.

 

5.               PURCHASE OF AMITYVILLE, NEW YORK FACILITY

 

In January 2002, we purchased the facility (which wehad previously leased) for $1,500,000, transferred it to the Town of BabylonIndustrial Development Agency, and then leased the facility from such agencyfor a term which expires on December 1, 2021. Upon expiration of the lease term, we are entitled to repurchase thefacility for a nominal sum.  Thepurchase was financed through the issuance of Town of Babylon IndustrialDevelopment Agency Variable Rate Revenue Bonds (“IDA Bonds”).  The principal amount of the IDA 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 interest rate forthe month of September 2002 was 3.7% per annum including the letter of creditfee.

 

 

5

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6.     EARNINGS PER SHARE

 

Basic net income pershare is calculated using the weighted average number of shares of our commonstock outstanding during the period. Diluted net income per share for the three-month and nine-month periodsended September 30, 2002 and nine-month period ended September 30, 2001 wascalculated using the weighted average common shares and common equivalentshares for the assumed exercise of stock options that were outstanding duringthe periods.

 

 

**ITEM 2 — MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

The following informationfor the three-month and nine-month periods ended September 30, 2002 andSeptember 30, 2001 have been derived from our unaudited consolidated financialstatements and should be read in conjunction with our Annual Report on Form10-KSB for the year ended December 31, 2001.

 
|                           |   | **Three  months ended September 30,** |   | **Nine  months ended September 30,** |   |
|--------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                           |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                           |   | **(dollar  amounts in thousands)**    |   |
|                           |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                      |   | $                                     | 4,068  |                                 | 100.0  | % | $ | 3,580 |   | 100.0 | % | $ | 12,805 |   | 100.0 | % | $ | 11,893 |   | 100.0 | % |
| Gross profit                   |   | 1,755                                 |   | 43.1                                 |   | 1,484 |   | 41.5 |   | 5,593 |   | 43.7 |   | 5,017 |   | 42.2 |   |
| Operating  expenses:           |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling                        |   | 644                                   |   | 15.8                                 |   | 667 |   | 18.7 |   | 1,986 |   | 15.5 |   | 2,047 |   | 17.2 |   |
| General and  administrative    |   | 448                                   |   | 11.0                                 |   | 479 |   | 13.4 |   | 1,292 |   | 10.1 |   | 1,460 |   | 12.3 |   |
| Research and  development      |   | 390                                   |   | 9.6                                  |   | 337 |   | 9.4 |   | 1,120 |   | 8.7 |   | 1,047 |   | 8.8 |   |
| Amortization                   |   | 50                                    |   | 1.2                                  |   | 50 |   | 1.4 |   | 149 |   | 1.2 |   | 148 |   | 1.2 |   |
| Income (loss)  from operations |   | 223                                   |   | 5.5                                  |   | (49 | ) | (1.4 | ) | 1,046 |   | 8.2 |   | 315 |   | 2.7 |   |
| Interest  expense, net         |   | (45                                   | )      | (1.1                                 | )      | (45 | ) | (1.2 | ) | (140 | ) | (1.1 | ) | (114 | ) | (1.0 | ) |
| Tax benefit  (provision)       |   | 30                                    |   | 0.7                                  |   | — |   | — |   | 12 |   | 0.1 |   | (17 | ) | (0.1 | ) |
| Net income  (loss)             |   | 208                                   |   | 5.1                                  |   | (94 | ) | (2.6 | ) | 918 |   | 7.2 |   | 184 |   | 1.6 |   |
|                                |        |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Net sales*. Net sales increased by $488,000, or 13.6%, to $4,068,000 for the threemonths ended September 30, 2002 from $3,580,000 for the same period last yearand increased by $912,000, or 7.7%, to $12,805,000 for the nine months endedSeptember 30, 2002 from $11,893,000 for the comparable nine-month period of2001.  The increases were principallyattributable to higher volume food and beverage flavor product sales toexisting customers, and to a lesser extent, the introduction and sale of newbeverage flavor products.

 

*Grossprofit*.  Gross profit, as a percentage of sales,increased to 43.1% for the three months ended September 30, 2002 as compared to41.5% for the same period last year and increased to 43.7% for the nine monthsended September 30, 2002 as compared to 42.2% for the nine-month period of2001.  The increases in gross profit forthe 2002 periods were due primarily to higher gross margins on new flavorproducts sold in 2002 and favorable differences in product mix attributable toa lower concentration of sales to certain export customers where gross marginsare generally lower.

 

 

6

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*Operatingexpenses:*

 

*                Sellingexpenses*.  Selling expenses for the three months endedSeptember 30, 2002 decreased by $23,000, or 3.4%, to $644,000 from $667,000 forthe comparable 2001 period and decreased by $61,000, or 3.0%, to $1,986,000from $2,047,000 for the comparable nine-month period of 2001 due principally toreductions in sales promotional expenses.

 

*General and administrative expenses*. General and administrative expenses decreased by $31,000, or 6.5%, to$448,000 for the three months ended September 30, 2002 from $479,000 for thecomparable 2001 period and decreased by $168,000, or 11.5%, to $1,292,000 forthe nine months ended September 30, 2002 from $1,460,000 for the comparablenine-month period of 2001 due principally to cost savings measures andefficiency improvements implemented during the fourth quarter of 2001 and lowerprofessional fees during the first half of 2002.

 

*Research and development expenses*. Research and development expenses for the three months ended September30, 2002 increased by $53,000, or 15.7%, to $390,000 for the three months endedSeptember 30, 2002 from $337,000 for the comparable 2001 period and increasedby $73,000, or 7.0%, to $1,120,000 for the nine months ended September 30, 2002from $1,047,000 for the comparable nine-month period of 2001 due principally toa higher level of outside laboratory contract services and higher wages for thethird quarter of 2002.

 

*Amortization expense*. Amortization expense for the three months and nine months endedSeptember 30, 2002 of $50,000 and $149,000, respectively, was consistent withsuch expenses in the comparable 2001 periods of $50,000 and $148,000,respectively.

 

*Total operating expenses.* Total operating expenses remained approximately the same at $1,532,000for the three months ended September 30, 2002 and September 30, 2001 anddecreased by $155,000, or 3.3%, to $4,547,000 for the nine months endedSeptember 30, 2002 from $4,702,000 for the comparable period in 2001.

 

*Interestexpense, net*.  Interest expense remained approximately thesame at $45,000 for the three months ended September 30, 2002 as compared tolast year’s comparable period and increased by $26,000, or 22.8%, to $140,000for the nine months ended September 30, 2002 from $114,000 for the comparablenine-month period of 2001.  During thethree months ended September 30, 2002, the reduction in interest expense on ourRevolving Credit Facility attributable to prevailing lower interest rates andlower borrowings was offset by interest costs relative to the issuance of IDABonds in January 2002 as described in “*Liquidity and Capital Resources*.”  During the six months ended June 30, 2002,the interest costs attributable to the IDA Bonds was partially offset by lowerinterest rates on our Revolving Credit Facility borrowings.

 

*Taxbenefit (provision).*  The benefit for income taxes in 2002principally represents overpayments of state franchise taxes and Federalalternative minimum tax in 2001 which will be refunded to us, while (provision)for income taxes in 2001 principally represents state franchise taxes andFederal alternative minimum tax.  Therewere no Federal income tax provisions for 2002 and 2001 since we had availablenet operating loss carryforwards for which valuation allowances have beenrecorded.

 

*NetIncome.*  Net income was $208,000 and $918,000,respectively, for the three-month and nine-month periods ended September 30,2002 as compared to net (loss) income for the comparable 2001 periods of$(94,000) and $184,000, respectively.

 

 

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**Liquidity and Capital Resources**

 

Historically, ourfinancing needs have been met through issuance of equity and debt securitiesand commercial bank loans.  In April2002, we entered into a Loan and Security Agreement with a lender whichreplaced the revolving credit facility entered into in June 1999.  We call this new revolving credit facilitythe 2002 Credit Facility.  The maximumline of credit under the 2002 Credit Facility was initially set at $3,000,000but may be increased at our option to $4,000,000 at any time during the periodJanuary 1, 2003 through June 30, 2004.

 

Outstanding borrowingsunder the 2002 Credit Facility bear interest at a rate equal to a prime lendingrate plus one-quarter of a percentage point (5% at September 30, 2002).  Borrowings under the 2002 Credit Facilityare subject to certain eligibility requirements relating to our receivables andinventories.  Outstanding borrowings aresecured by substantially all of our assets, including our product formulations.  We must comply with certain financial andother covenants contained in the Loan and Security Agreement, includingmaintaining tangible net worth of at least $3,200,000, achieving annual cashflow, as defined, of at least $1.00 and incurring expenditures for capitalassets of not more than $400,000 for year 2002 and $500,000 for each yearthereafter, excluding those capital expenditures made from proceeds of the IDABonds financing described below.  Oursubsidiaries have guaranteed our obligations under the 2002 CreditFacility.  Borrowings under the 2002Credit Facility at September 30, 2002 were $654,000 and $2,346,000 wasavailable for additional borrowings in accordance with the terms of the 2002Credit Facility.

 

In January 2002, wepurchased the facility (which we had previously leased) for $1,500,000,transferred it to the Town of Babylon Industrial Development Agency, and thenleased the facility from such agency for a term which expires on December 1,2021.  Upon expiration of the leaseterm, we are entitled to repurchase the facility for a nominal sum.  The purchase was financed through theissuance of Industrial Development Agency Revenue Bonds (“IDA Bonds”).  The principal amount of the IDA Bonds, $2,200,000,was used to finance the purchase of the building plus closing costs and futureexpenditures for building improvements and capital equipment.  The financing is structured as a monthlyvariable rate demand revenue bond secured by a letter of credit with WellsFargo Bank NA.  The interest rate forthe month of September 2002 was 3.7% per annum including the letter of creditfee.  The interest rate is reset monthlybased on market conditions and the IDA Bonds mature in January 2022.

 

At September 30, 2002,our working capital increased by $1,329,000, or 48%, to $4,111,000 from $2,782,000at December 31, 2001 due principally to the addition of escrowed cash from ourIDA Bond financing and positive cash flow from operations which contributed toreductions in our Revolving Credit Facility and reductions in payables andaccrued expenses.  We are committedunder non-cancellable operating and capital leases for the upcoming year ofapproximately $172,000.

 

 

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**ITEM 3. — CONTROLS AND PROCEDURES**

** **

(a)       Evaluationof Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Financial Officer,after evaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)and 15d-14(c) as of a date within 90 days of the filing date of thisquarterly report on Form 10-QSB (the “Evaluation Date”)), have concluded thatas of the Evaluation Date, the Company’s disclosure controls and procedureswere adequate and effective to ensure that material information relating to theCompany and its consolidated subsidiaries would be made known to them by otherswithin those entities, particularly during the period in which this quarterlyreport on Form 10-QSB was being prepared.

 

(b)       Changes in Internal Controls.There were no significant changes in the Company’s internal controls or inother factors that could significantly affect the Company’s disclosure controlsand procedures subsequent to the Evaluation Date, nor any significantdeficiencies or material weaknesses in such disclosure controls and proceduresrequiring corrective actions.  As aresult, no corrective actions were taken.

 

 

 

 

**PART II – OTHER INFORMATION**

 

Item 1.        Legal Proceedings

                    Not Applicable

 

Item 2.        Changes in Securities and Use ofProceeds

                    Not Applicable

 

Item 3.        Defaults Upon Senior Securities

                    Not Applicable

 

Item 4.        Submission of Matters to a Vote ofSecurity Holders

                    Not Applicable

 

Item 5.        Other Information

                    None

 

Item 6.        Exhibits and Reports on Form 8-K

                    Exhibit 99.1 — WrittenStatement of Chief Executive Officer and Chief Financial Officer.

 

 

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**SIGNATURES**

 

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant has causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

Dated:   October 23, 2002

 
|   | TECHNOLOGY FLAVORS  & FRAGRANCES, INC. |
|--------|--------------------------------------------|
|   |                                       |   |
|   | By                                         | /s/ Joseph A. Gemmo |
|   |                                       | Joseph A. Gemmo |
|   |                                       | Vice President and Chief Financial Officer |
|   |                                       | (Principal Financial Officer and Officer Duly |
|   |                                       | Authorized to  Sign on Behalf of Registrant) |

 

 

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**CERTIFICATIONS**

I, Philip Rosner, certifythat:

1.  I have reviewed this quarterly report onForm 10-QSB of Technology Flavors & Fragrances, Inc.;

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarter report (the “Evaluation Date”); and

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

Date:  October 23, 2002

 
|   | /s/ Philip Rosner                    |
|--------|--------------------------------------|
|   | Philip Rosner                        |
|   | Chairman and Chief Executive Officer |

 

 

 

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I, Joseph A. Gemmo,certify that:

1.  I have reviewed this quarterly report onForm 10-QSB of Technology Flavors & Fragrances, Inc.;

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to theperiod covered by this quarterly report;

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

b)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarter report (the “Evaluation Date”); and

c)  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

Date:  October 23, 2002

 
|   | /s/ Joseph A. Gemmo                        |
|--------|--------------------------------------------|
|   | Joseph A. Gemmo                            |
|   | Vice President and Chief Financial Officer |

 

 

 

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