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

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**(MarkOne)**

 

**ý        QUARTERLY REPORT UNDER SECTION 13 OR15(d) OF THE**

**            SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2002**

 

**o        TRANSITION REPORT UNDER SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THETRANSITION PERIOD FROM ___________ TO ___________**

** **

**CommissionFile No. 0-26682**

 

 

**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

(Name of Small BusinessIssuer in its Charter)

 

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

 

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

(Address of PrincipalExecutive Offices)

 

**(631)842-7600**

(Issuer’s TelephoneNumber, 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)has been 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 April  29,2002, was 13,004,473.

 

Transitional Small Business Disclosure Format (check one):

 

YES  o                NO  ý

 

 

 

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**TECHNOLOGY FLAVORS & FRAGRANCES,INC.**

 

**INDEX TO FORM 10-QSB**

 

**March 31, 2002**

 

 
| PART I - FINANCIAL INFORMATION |
|--------------------------------|
|                           |   |   |
|                           | Item 1. - | Financial Statements (Unaudited) |
|                           |   |   |
|                           |   | Consolidated Balance Sheets  at March 31, 2002 and December 31, 2001 |
|                           |   |   |
|                           |   | Consolidated  Statements of Operations for the Three Months Ended March 31, 2002and March 31,  2001 |
|                           |   |   |
|                           |   | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2002 and March  31, 2001 |
|                           |   |   |
|                           |   | Notes to  Consolidated Financial Statements |
|                           |   |   |
|                           | Item  2. - | Management's  Discussion and Analysis of Financial Condition and Results of Operations |
|                           |   |   |
|                           |   |   |
| PART II - OTHER INFORMATION    |
|                           |   |   |
| SIGNATURES                     |
|                                |  |  |  |  |

 

 

-i-

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**PARTI**

 

**ITEM1 — FINANCIAL STATEMENTS**

 

**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InU.S. Dollars)**

** **
|                                                                                     |   | **At**          |       | **At**           |       |
|------------------------------------------------------------------------------------------|--------|-----------------|------------|------------------|------------|
|                                                                                     |   | **MARCH 31,**   |       | **DECEMBER 31,** |       |
|                                                                                     |   | **2002**        |       | **2001**         |       |
|                                                                                     |   | **(Unaudited)** |       | **(Note)**       |       |
| **ASSETS**                                                                               |   |            | ** ** |             | ** ** |
|                                                                                     |   |            | ** ** |             | ** ** |
| Current assets:                                                                          |   |            |       |             |       |
| Cash and cash  equivalents                                                               |   | $               | 517,167    |             | $          | 260,010 |   |
| Receivables, net                                                                         |   | 3,581,848       |       | 3,030,667        |       |
| Inventories                                                                              |   | 2,871,945       |       | 2,979,015        |       |
| Prepaid expenses  and other current assets                                               |   | 152,832         |       | 133,617          |       |
|                                                                                     |   |            |       |             |       |
| Total current  assets                                                                    |   | 7,123,792       |       | 6,403,309        |       |
|                                                                                     |   |            |       |             |       |
| Fixed assets,  net                                                                       |   | 2,128,761       |       | 678,854          |       |
| Intangible  assets, net                                                                  |   | 567,542         |       | 608,080          |       |
| Other assets                                                                             |   | 541,828         |       | 262,403          |       |
|                                                                                     |   |            |       |             |       |
| Total assets                                                                             |   | $               | 10,361,923 |             | $          | 7,952,646 |   |
|                                                                                     |   |            |       |             |       |
| **LIABILITIES**                                                                          |   |            |       |             |       |
|                                                                                     |   |            |       |             |       |
| Current  liabilities:                                                                    |   |            |       |             |       |
| Accounts payable                                                                         |   | $               | 1,818,915  |             | $          | 1,946,085 |   |
| Accrued expenses                                                                         |   | 346,657         |       | 502,463          |       |
| Revolving credit  facility                                                               |   | 1,329,703       |       | 1,115,199        |       |
| Current portion  of long-term debt                                                       |   | 135,334         |       | 57,175           |       |
|                                                                                     |   |            |       |             |       |
| Total current  liabilities                                                               |   | 3,630,609       |       | 3,620,922        |       |
|                                                                                     |   |            |       |             |       |
| Long-term debt                                                                           |   | 2,321,696       |       | 211,068          |       |
| Deferred credits                                                                         |   | —          |       | 65,487           |       |
|                                                                                     |   | 5,952,305       |       | 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                                                                     |   | (6,006,726      | )          | (6,359,609       | )          |
| Foreign currency  translation                                                            |   | (78,973         | )          | (73,039          | )          |
|                                                                                     |   |            |       |             |       |
| Total  stockholders’ equity                                                         |   | 4,409,618       |       | 4,055,169        |       |
|                                                                                     |   |            |       |             |       |
| Total  liabilities and stockholders’ equity                                         |   | $               | 10,361,923 |             | $          | 7,952,646 |   |

 
| Note: | The balance sheet at December 31, 2001 has been  derived from the audited financial statements at that date but does not  include all of the information and footnotes required by generally accepted  accounting principles for complete financial statements. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

See accompanyingnotes.

 

 

1

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inU.S. Dollars) (Unaudited)**

** **
|                                                  |   | **For the three months ended** |      |
|-------------------------------------------------------|--------|--------------------------------|-----------|
|                                                  |   | **March  31,**            |      |
|                                                  |   | **2002**                       |      | **2001** |   |
| Net sales                                             |   | $                              | 4,211,477 |   | $ | 4,186,995 |   |
| Cost of sales                                         |   | 2,295,609                      |      | 2,356,748 |   |
| Gross profit                                          |   | 1,915,868                      |      | 1,830,247 |   |
|                                                  |   |                           |      |   |   |
| Operating  expenses:                                  |   |                           |      |   |   |
| Selling                                               |   | 640,895                        |      | 682,883 |   |
| General and  administrative                           |   | 465,418                        |      | 491,142 |   |
| Research and  development                             |   | 364,577                        |      | 349,193 |   |
| Amortization                                          |   | 48,967                         |      | 49,322 |   |
| Total operating  expenses                             |   | 1,519,857                      |      | 1,572,540 |   |
|                                                  |   |                           |      |   |   |
| Income from  operations                               |   | 396,011                        |      | 257,707 |   |
| Interest  expense, net                                |   | (25,546                        | )         | (34,998 | ) |
|                                                  |   |                           |      |   |   |
| Income before  provision for income taxes             |   | 370,465                        |      | 222,709 |   |
| Provision for  income taxes                           |   | (17,582                        | )         | (16,746 | ) |
|                                                  |   |                           |      |   |   |
| Net income                                            |   | $                              | 352,883   |   | $ | 205,963 |   |
|                                                  |   |                           |      |   |   |
| Net income per  common share — basic and diluted |   | $                              | .03       |   | $ | .02 |   |
|                                                  |   |                           |      |   |   |
| Weighted average  common shares outstanding:          |   |                           |      |   |   |
| Basic                                                 |   | 13,004,473                     |      | 13,021,056 |   |
| Diluted                                               |   | 13,143,442                     |      | 13,143,372 |   |

 

 

See accompanyingnotes.

 

 

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InU.S. Dollars)  (Unaudited)**

** **
|                                                                                         |   | **For the three months ended March 31,** |    |
|----------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                         |   | **2002**                                 |    | **2001** |   |
| Cash flows from  operating activities:                                                       |   |                                     |    |   |   |
| Net income                                                                                   |   | $                                        | 352,883 |   | $ | 205,963 |   |
| Adjustments to  reconcile net income to net cashprovided by (used in) operating  activities: |   |                                     |    |   |   |
| Depreciation and  amortization                                                               |   | 117,206                                  |    | 92,418 |   |
| Stock option  grant for consulting services                                                  |   | 7,500                                    |    | — |   |
| Provision for  bad debts                                                                     |   | 20,000                                   |    | — |   |
| Deferred rent                                                                                |   | (65,487                                  | )       | 3,090 |   |
| Changes in  assets and liabilities:                                                          |   |                                     |    |   |   |
| Accounts  receivable                                                                         |   | (571,181                                 | )       | (668,855 | ) |
| Inventories                                                                                  |   | 107,070                                  |    | (65,965 | ) |
| Prepaid expenses  and other current assets                                                   |   | (19,215                                  | )       | (12,229 | ) |
| Other assets                                                                                 |   | (287,854                                 | )       | (2,052 | ) |
| Accounts payable                                                                             |   | (127,170                                 | )       | 466,410 |   |
| Accrued expenses                                                                             |   | (155,806                                 | )       | (98 | ) |
|                                                                                         |   |                                     |    |   |   |
| Net cash (used  in) provided by operating activities                                         |   | (622,054                                 | )       | 18,682 |   |
|                                                                                         |   |                                     |    |   |   |
| Cash flows from  investing activities:                                                       |   |                                     |    |   |   |
| Purchase of  fixed assets                                                                    |   | (1,518,146                               | )       | (29,065 | ) |
|                                                                                         |   |                                     |    |   |   |
| Net cash used in  investing activities                                                       |   | (1,518,146                               | )       | (29,065 | ) |
|                                                                                         |   |                                     |    |   |   |
| Cash flows from  financing activities:                                                       |   |                                     |    |   |   |
| Proceeds from  issuance of long-term debt                                                    |   | 2,200,000                                |    | — |   |
| Proceeds from  revolving credit facility                                                     |   | 3,825,000                                |    | 3,415,000 |   |
| Repayment of  revolving credit facility                                                      |   | (3,610,496                               | )       | (3,461,949 | ) |
| Repayment of  capital leases                                                                 |   | (11,213                                  | )       | (6,655 | ) |
| Proceeds from  exercise of stock options                                                     |   | —                                   |    | 2,982 |   |
|                                                                                         |   |                                     |    |   |   |
| Net cash  provided by (used in) financing activities                                         |   | 2,403,291                                |    | (50,622 | ) |
|                                                                                         |   |                                     |    |   |   |
| Effect of  exchange rate changes on cash                                                     |   | (5,934                                   | )       | — |   |
|                                                                                         |   |                                     |    |   |   |
| Increase  (decrease) in cash and cash equivalents                                            |   | 257,157                                  |    | (61,005 | ) |
|                                                                                         |   |                                     |    |   |   |
| Cash and cash  equivalents — beginning of period                                        |   | 260,010                                  |    | 195,387 |   |
|                                                                                         |   |                                     |    |   |   |
| Cash and cash  equivalents — end of period                                              |   | $                                        | 517,167 |   | $ | 134,382 |   |

 

See accompanyingnotes.

 

 

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**March31, 2002**

**(Unaudited)**

 

1.  BASIS OF 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 accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  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 periodended March 31, 2002 are not necessarily indicative of the results that may beexpected for the full year ending December 31, 2002.  These unaudited consolidated financial statements should be readin conjunction with the consolidated financial statements and footnotes theretoincluded in our Annual Report on Form 10-KSB for the year ended December 31,2001 and our consolidated audited financial statements and footnotes containedtherein.

 

2.  INVENTORIES

 

Components of inventoriesare summarized as follows:

 
|           |   | **March 31,  2002** |      | **December  31, 2001** |   |
|----------------|--------|---------------------|-----------|------------------------|--------|
| Raw Materials  |   | $                   | 1,749,179 |                   | $      | 1,744,928 |   |
| Finished Goods |   | 1,122,766           |      | 1,234,087              |   |
|           |   | $                   | 2,871,945 |                   | $      | 2,979,015 |   |

 

3.  EARNINGS PER SHARE

 

Basic net  income per share is calculated using theweighted average number of shares of our common stock outstanding during theperiod.   Diluted net income per sharefor the three month periods ended March 31, 2002 and 2001 was calculated usingthe weighted average common stock and common stock equivalents that wereoutstanding during the period.  Theeffect of common stock equivalents for the three month periods ended March 31,2002 and 2001 was not material and, thus, diluted net income per share was notpresented.

 

4.  PURCHASEOF AMITYVILLE, NEW YORK FACILITY

 

In January 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 thenleased the facility from such agency for a term which expires on December 1,2021.  Upon expiration of the lease term,we are entitled

 

4

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to repurchase 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 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 initial month’s interest rate is 3.875% per annum.  The interest rate is reset monthly based onmarket conditions and the IDA Bonds mature in January 2022.

 

 

**ITEM2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

The following informationfor the three month periods ended March 31, 2002  and March 31, 2001 has been derived from our unauditedconsolidated financial statements and should be read in conjunction with ourAnnual Report on Form 10-KSB for the year ended December 31, 2001 and theconsolidated audited financial statements included therein.

 
|                        |   | **Three months ended March 31,** |   |
|-----------------------------|--------|----------------------------------|--------|
|                        |   | **2002**                         |   | **2001** |   |
|                        |   | **(amounts  in thousands)**      |   |
| Net sales                   |   | $                                | 4,211  |   | 100.0 | % | $ | 4,187 |   | 100.0 | % |
| Gross profit                |   | 1,916                            |   | 45.5 |   | 1,830 |   | 43.7 |   |
| Operating  expenses:        |   |                             |   |   |   |   |   |   |   |
| Selling                     |   | 641                              |   | 15.2 |   | 683 |   | 16.3 |   |
| General and  administrative |   | 465                              |   | 11.0 |   | 491 |   | 11.7 |   |
| Research and  development   |   | 365                              |   | 8.7 |   | 349 |   | 8.3 |   |
| Amortization                |   | 49                               |   | 1.2 |   | 49 |   | 1.2 |   |
| Income from  operations     |   | 396                              |   | 9.4 |   | 258 |   | 6.2 |   |
| Interest  expense, net      |   | 26                               |   | 0.6 |   | 35 |   | 0.9 |   |
| Provision for  income taxes |   | 17                               |   | 0.4 |   | 17 |   | 0.4 |   |
| Net income                  |   | 353                              |   | 8.4 |   | 206 |   | 4.9 |   |

 

*Net sales*. Net sales for the three months ended March 31, 2002 was $4,211,000 ascompared to net sales of $4,187,000 for the three months ended March 31, 2001.

 

*Gross profit*. Gross profit, as a percentage of sales, increased 1.8% to 45.5% on netsales of $4,211,000 for the three months ended March 31, 2002 from 43.7% on netsales of $4,187,000 for the same period last year due principally to highergross margins on new flavor products sold in 2002 and favorable differences inproduct mix attributable to lower concentration of export sales where grossmargins are generally lower.

 

5

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*Operating expenses:*

 

*Selling expenses*. Selling expenses decreased by $42,000, or 6.2%, to $641,000 for thethree months ended March 31, 2002 from $683,000 for the same period last yeardue principally to reductions in sales personnel wages and promotionalexpenses.

 

*General and administrative expenses*. General and administrative expensesdecreased by $26,000, or 5.3%, to $465,000 for the three months ended March 31,2002 from $491,000 for the same period last year due principally to reductionsin personnel wages.

 

*Research and development expenses*. Research and development expenses increased by $16,000, or 4.6%, to$365,000 for the three months ended March 31, 2002 from $349,000 for the sameperiod last year due principally to increases in outside contract services.

 

*Amortization expense*. Amortization expense for the three months ended March 31, 2002 and March31, 2001 was $49,000 for both periods.

 

*                Total operating expenses.* Total operating expenses decreased by $52,000, or 3.3%, to $1,520,000for the three months ended March 31, 2002 from $1,572,000 for the same periodlast year as a result of the factors described above.

 

*Interestexpense, net*.  Interest expense decreased by $9,000 or25.7%, to $26,000 for the three months ended March 31, 2002 from $35,000 forthe same period last year due principally to lower interest rates in 2002 onoutstanding borrowings under our revolving credit facility, partially offset bythe issuance of the IDA Bonds as described below.

 

*Provisionfor income taxes.*  Provision for income taxes represents statefranchise taxes and Federal alternative minimum tax.  There were no Federal income tax provisions for the 2002 and 2001periods since we had available net operating loss carryforwards for whichvaluation allowances have been recorded.

 

*Netincome.*  Net income for the three months ended March31, 2002 was $353,000 as compared to net income of $206,000 for the same periodlast year.

 

**Liquidity and Capital Resources**

 

Historically, ourfinancing needs have been met through issuance of equity and debt securitiesand commercial bank loans.  In June1999, we entered into a Loan and Security Agreement with a lender which providedfor a three-year $3,000,000 revolving credit facility.  We call this revolving credit facility the1999 Credit Facility.  Outstandingborrowings under the 1999 Credit Facility bear interest at a rate equal to aprime lending rate plus one-quarter of a percentage point, and is subject tocertain adjustments based upon our financial performance (5% at March 31,2002).  Borrowings under the 1999 CreditFacility 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.  We must comply with certain financial andother covenants contained in the Loan and Security Agreement, includingmaintaining tangible net worth of at least $1,750,000, achieving not less than75% of our projected pre-tax

 

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income for the upcoming year, and incurringexpenditures for capital assets of not more than $450,000 for the year.

 

Our subsidiaries haveguaranteed our obligations under the 1999 Credit Facility.  Borrowings under the 1999 Credit Facility atMarch 31, 2002 and at December 31, 2001 were $1,330,000 and $1,115,000,respectively.  At March 31, 2002, $1,670,000was available for additional borrowings in accordance with the terms of the1999 Credit Facility. The outstanding borrowings under the 1999 Credit Facilitywere classified as a current liability. At March 31, 2002, outstanding borrowings bore interest at 5.0% perannum.

 

                OnJanuary 15, 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 ofthe lease term, we are entitled to repurchase the facility for a nominalsum.  The purchase was financed throughthe issuance of the IDA Bonds.  Theprincipal amount of the IDA Bonds, $2,200,000, was used to finance the purchaseof the building plus closing costs and future expenditures for buildingimprovements and capital equipment.  Thefinancing is structured as a monthly variable rate demand revenue bond secured bya letter of credit with Wells Fargo Bank NA. The initial month’s interest is 3.875% per annum.  The interest rate is reset monthly based on market conditions and the IDABonds mature in January 2022.

 

At March 31, 2002, ourworking capital increased by $711,000, or 25.6%, to $3,493,000 from $2,782,000at December 31, 2001.  We are committedunder non-cancellable operating and capital leases for the upcoming year ofapproximately $172,000.

 

7

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**PART II - OTHER INFORMATION**

 

 

Item 1.    LegalProceedings

None

 

Item 2.    Changesin Securities

None

 

Item 3.    Defaults upon Senior Securities

None

 

Item 4.    Submission of Matters to a Vote of SecurityHolders

None

 

Item 5.    Other Information

None

 

Item 6.    Exhibits and Reports on Form 8-K

a) Exhibits

     None

b) Reports on Form8-K

The Company fileda current report on Form 8-K with the Securities and Exchange Commission onJanuary 22, 2002 with respect to Item 5. Other events and Regulation FDDisclosure and subsection (c) Exhibits of Item 7. Financial Statements andExhibits.

 

The Company fileda current report on Form 8-K with the Securities and Exchange Commission onJanuary 30, 2002 with respect to Item 2. Acquisition or Disposition of Assetsand subsection (c) Exhibits of Item 7. Financial Statements and Exhibits.

 

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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:  May 1,2002

 
|   | 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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