**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **(Mark One)**                                                                                            |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |   |
| **ý**                                                                                                | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                      |   |
| **FOR THE QUARTERLY PERIOD ENDED JUNE  30, 2002**                                                         |
|                                                                                                      |
| **o**                                                                                                     | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                      |
| **FOR THE TRANSITION PERIOD FROM              TO** |

 

** **

 

**CommissionFile No. 0-26682**

 

| **TECHNOLOGY  FLAVORS & FRAGRANCES, INC.**                     |
|--------------------------------------------------------------------|
| (Exact Name of Small  Business Issuer as Specified in its Charter) |
|                                                               |   |   |
| **Delaware**                                                       |   | **11-3199437** |
| (State or other  Jurisdiction of Incorporation  or Organization)   |   | (IRS Employer  Identification No.) |
|                                                               |   |   |
| **10  Edison Street East, Amityville, New York 11701**             |
| (Address of Principal  Executive 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 July 30, 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**

 

**June 30, 2002**

 
| PART  I — FINANCIAL INFORMATION |
|--------------------------------------|
|                                 |   |   |
|                                 | Item 1 — Financial  Statements |
|                                 |   |   |
|                                 |   | Consolidated Balance Sheets  at June 30, 2002 (unaudited) and December 31, 2001 |
|                                 |   |   |
|                                 |   | Consolidated  Statements of Operations for the Three Months and Six Months Ended June 30,  2002 and June 30, 2001 (unaudited) |
|                                 |   |   |
|                                 |   | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30,  2001 (unaudited) |
|                                 |   |   |
|                                 |   | 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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**PART I**

**ITEM 1 - FINANCIAL STATEMENTS**

 

**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                      |   | **At  JUNE 30,  2002** |       | **At  DECEMBER 31,  2001** |       |
|-------------------------------------------------------------------------------------------|--------|------------------------|------------|----------------------------|------------|
|                                                                                      |   | **(Unaudited)**        |       |                       |       |
| **ASSETS**                                                                                |   |                   | ** ** |                       | ** ** |
|                                                                                      |   |                   | ** ** |                       | ** ** |
| Current assets:                                                                           |   |                   |       |                       |       |
| Cash and cash  equivalents                                                                |   | $                      | 169,822    |                       | $          | 260,010 |   |
| Cash held in  escrow                                                                      |   | 430,967                |       | —                     |       |
| Receivables,  less allowance for doubtful accounts of $280,000 and $265,000, respectively |   | 3,487,525              |       | 3,030,667                  |       |
| Inventories                                                                               |   | 2,915,470              |       | 2,979,015                  |       |
| Prepaid expenses  and other current assets                                                |   | 209,362                |       | 133,617                    |       |
|                                                                                      |   |                   |       |                       |       |
| Total current  assets                                                                     |   | 7,213,146              |       | 6,403,309                  |       |
|                                                                                      |   |                   |       |                       |       |
| Fixed assets,  net                                                                        |   | 2,061,603              |       | 678,854                    |       |
| Intangible  assets, net                                                                   |   | 527,003                |       | 608,080                    |       |
| Other assets                                                                              |   | 468,677                |       | 158,768                    |       |
| Notes receivable  from related parties                                                    |   | 103,635                |       | 103,635                    |       |
|                                                                                      |   |                   |       |                       |       |
| Total assets                                                                              |   | $                      | 10,374,064 |                       | $          | 7,952,646 |   |
|                                                                                      |   |                   |       |                       |       |
| **LIABILITIES**                                                                           |   |                   |       |                       |       |
|                                                                                      |   |                   |       |                       |       |
| Current  liabilities:                                                                     |   |                   |       |                       |       |
| Accounts payable                                                                          |   | $                      | 1,914,306  |                       | $          | 1,946,085 |   |
| Accrued expenses                                                                          |   | 241,706                |       | 502,463                    |       |
| Revolving credit  facility                                                                |   | 995,946                |       | 1,115,199                  |       |
| Current portion  of long-term debt                                                        |   | 70,000                 |       | —                     |       |
| Current portion  of capital lease obligations                                             |   | 65,334                 |       | 57,175                     |       |
|                                                                                      |   |                   |       |                       |       |
| Total current  liabilities                                                                |   | 3,287,292              |       | 3,620,922                  |       |
|                                                                                      |   |                   |       |                       |       |
| Long-term debt                                                                            |   | 2,130,000              |       | —                     |       |
| Capital lease  obligations                                                                |   | 180,922                |       | 211,068                    |       |
| Deferred credits                                                                          |   | —                 |       | 65,487                     |       |
|                                                                                      |   | 5,598,214              |       | 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                                                                      |   | (5,649,141             | )          | (6,359,609                 | )          |
| Foreign currency  translation                                                             |   | (70,326                | )          | (73,039                    | )          |
|                                                                                      |   |                   |       |                       |       |
| Total  stockholders’ equity                                                          |   | 4,775,850              |       | 4,055,169                  |       |
|                                                                                      |   |                   |       |                       |       |
| Total  liabilities and stockholders’ equity                                          |   | $                      | 10,374,064 |                       | $          | 7,952,646 |   |

 

----

Note:          The balance sheet atDecember 31, 2001 has been derived from the audited financial statements  at that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

See accompanying notes.

 

1

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**TECHNOLOGYFLAVORS & FRAGRANCES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                             |   | **For the three months ended  June 30,** |       | **For the six months ended  June 30,** |       |
|--------------------------------------------------|--------|------------------------------------------|------------|----------------------------------------|------------|
|                                             |   | **2002**                                 |       | **2001**                               |       | **2002** |   | **2001** |   |
|                                             |   |                                     | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Net sales                                        |   | $                                        | 4,525,311  |                                   | $          | 4,126,438 |   | $ | 8,736,788 |   | $ | 8,313,433 |   |
| Cost of sales                                    |   | 2,602,788                                |       | 2,423,001                              |       | 4,898,397 |   | 4,779,749 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Gross profit                                     |   | 1,922,523                                |       | 1,703,437                              |       | 3,838,391 |   | 3,533,684 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Operating  expenses:                             |   |                                     |       |                                   |       |   |   |   |   |
| Selling                                          |   | 700,906                                  |       | 697,208                                |       | 1,341,801 |   | 1,380,091 |   |
| General and  administrative                      |   | 378,596                                  |       | 490,150                                |       | 844,014 |   | 981,292 |   |
| Research and  development                        |   | 365,455                                  |       | 360,607                                |       | 730,032 |   | 709,800 |   |
| Amortization                                     |   | 49,839                                   |       | 49,323                                 |       | 98,806 |   | 98,645 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Total operating  expenses                        |   | 1,494,796                                |       | 1,597,288                              |       | 3,014,653 |   | 3,169,828 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Income from  operations                          |   | 427,727                                  |       | 106,149                                |       | 823,738 |   | 363,856 |   |
| Interest  expense, net                           |   | (69,288                                  | )          | (33,679                                | )          | (94,834 | ) | (68,677 | ) |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Income before  provision for income taxes        |   | 358,439                                  |       | 72,470                                 |       | 728,904 |   | 295,179 |   |
| Provision for  income taxes                      |   | (854                                     | )          | (668                                   | )          | (18,436 | ) | (17,414 | ) |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Net income                                       |   | $                                        | 357,585    |                                   | $          | 71,802 |   | $ | 710,468 |   | $ | 277,765 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Net income per  common share - basic and diluted |   | $                                        | .03        |                                   | $          | .01 |   | $ | .05 |   | $ | .02 |   |
|                                             |   |                                     |       |                                   |       |   |   |   |   |
| Weighted average  common shares outstanding:     |   |                                     |       |                                   |       |   |   |   |   |
| Basic                                            |   | 13,004,473                               |       | 13,017,806                             |       | 13,004,473 |   | 13,019,431 |   |
| Diluted                                          |   | 13,207,977                               |       | 13,152,809                             |       | 13,175,710 |   | 13,148,091 |   |

 

See accompanying notes.

 

2

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**TECHNOLOGYFLAVORS &FRAGRANCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 
|                                                                                         |   | **For the six months ended June 30,** |    |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                         |   | **2002**                              |    | **2001** |   |
| Cash flows from operating activities:                                                        |   |                                  |    |   |   |
| Net income                                                                                   |   | $                                     | 710,468 |   | $ | 277,765 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |                                  |    |   |   |
| Depreciation and amortization                                                                |   | 252,149                               |    | 189,847 |   |
| Stock option grant for consulting services                                                   |   | 7,500                                 |    | — |   |
| Provision for bad debts                                                                      |   | 40,000                                |    | — |   |
| Deferred rent                                                                                |   | (65,487                               | )       | 1,600 |   |
| Changes in assets and liabilities:                                                           |   |                                  |    |   |   |
| Accounts receivable                                                                          |   | (496,858                              | )       | (683,075 | ) |
| Inventories                                                                                  |   | 63,545                                |    | (14,042 | ) |
| Prepaid expenses and other current assets                                                    |   | (75,745                               | )       | (92,346 | ) |
| Other assets                                                                                 |   | (326,767                              | )       | 4,567 |   |
| Accounts payable                                                                             |   | (31,779                               | )       | 392,335 |   |
| Accrued expenses                                                                             |   | (260,757                              | )       | (33,398 | ) |
|                                                                                         |   |                                  |    |   |   |
| Net cash (used in) provided by operating activities                                          |   | (183,731                              | )       | 43,253 |   |
|                                                                                         |   |                                  |    |   |   |
| Cash flows from investing activities:                                                        |   |                                  |    |   |   |
| Purchase of fixed assets                                                                     |   | (1,536,963                            | )       | (49,185 | ) |
| Restricted cash                                                                              |   | (430,967                              | )       | — |   |
|                                                                                         |   |                                  |    |   |   |
| Net cash used in investing activities                                                        |   | (1,967,930                            | )       | (49,185 | ) |
|                                                                                         |   |                                  |    |   |   |
| Cash flows from financing activities:                                                        |   |                                  |    |   |   |
| Proceeds from issuance of long-term debt                                                     |   | 2,200,000                             |    | — |   |
| Proceeds from revolving credit facility                                                      |   | 8,100,231                             |    | 7,625,000 |   |
| Repayment of revolving credit facility                                                       |   | (8,219,484                            | )       | (7,610,437 | ) |
| Payment of capital lease obligations                                                         |   | (21,987                               | )       | (21,027 | ) |
| Proceeds from exercise of stock options                                                      |   | —                                |    | 2,982 |   |
|                                                                                         |   |                                  |    |   |   |
| Net cash provided by (used in) financing activities                                          |   | 2,058,760                             |    | (3,482 | ) |
|                                                                                         |   |                                  |    |   |   |
| Effect of exchange rate changes on cash                                                      |   | 2,713                                 |    | — |   |
|                                                                                         |   |                                  |    |   |   |
| Decrease in cash                                                                             |   | (90,188                               | )       | (9,414 | ) |
|                                                                                         |   |                                  |    |   |   |
| Cash and cash equivalents - beginning of period                                              |   | 260,010                               |    | 195,387 |   |
|                                                                                         |   |                                  |    |   |   |
| Cash and cash equivalents - end of period                                                    |   | $                                     | 169,822 |   | $ | 185,973 |   |

 

See accompanying notes.

 

3

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**TECHNOLOGY FLAVORS & FRAGRANCES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 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 not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of our management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. Operating results for the three-month and six-month periods ended June30, 2002 are not necessarily indicative of the results that may be expected forthe full year ending December 31, 2002. These unaudited consolidated financial statements should be read inconjunction with the consolidated financial statements and footnotes theretoincluded in our Annual Report on Form 10-KSB for the year ended December 31,2001.

 

2.        INVENTORIES

 

Components of inventories are summarized as follows:

 
|           |   | **June 30,  2002** |      | **December  31, 2001** |   |
|----------------|--------|--------------------|-----------|------------------------|--------|
|           |   |               |      |                   |   |
| Raw Materials  |   | $                  | 1,909,951 |                   | $      | 1,744,928 |   |
| Finished Goods |   | 1,005,519          |      | 1,234,087              |   |
|           |   | $                  | 2,915,470 |                   | $      | 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 and intangibleassets deemed to have indefinite lives, of which we have none, are no longeramortized but are subject to annual impairment tests in accordance with FAS142.  Other intangible assets continueto 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 ourintangible assets, which primarily consist of product formulations and customerlists, and no changes have been deemed necessary.

 

4

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Intangible assets as of June 30, 2002 and December 31,2001 are as follows:

 
|                      |   | **June 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 |   | (608, 081          | )         | (527,004               | )      |
|                      |   | $                  | 527,003   |                   | $      | 608,080 |   |

 

Amortization of intangible assets for the six monthsended June 30, 2002 and 2001 was $81,077 for each period.  The annual amortization expense expected forthe years 2002 through 2006 is $162,154.

 

4.        REVOLVINGCREDIT 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 June 30, 2002). Borrowings under the 2002 Credit Facility are subject to certain eligibilityrequirements 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, including maintainingtangible net worth of at least $3,200,000, achieving annual cash flow, asdefined, of at least $1.00 and incurring expenditures for capital assets of notmore than $400,000 for year 2002 and $500,000 for each year thereafter,excluding capital expenditures made from proceeds received from our IDA Bondfinancing described below.  Oursubsidiaries have guaranteed our obligations under the 2002 CreditFacility.  Borrowings under the 2002Credit Facility at June 30, 2002 were $996,000 and $2,004,000 was available foradditional borrowings in accordance with the terms of the 2002 Credit Facility.

 

5.        PURCHASEOF 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 June 2002 was 3.8% per annum including the letter of credit fee.

 

5

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6.        EARNINGSPER 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 and six-month periods ended June 30, 2002 and June 30, 2001was calculated using the weighted average common shares and common equivalentshares for the assumed exercise of stock options that were outstanding duringthe periods.  The effect of common stockequivalents for the three-month and six-month periods ended June 30, 2002 andJune 30, 2001 was not material and, thus, diluted net income per share was notpresented.

 

**ITEM 2 –MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**Resultsof Operations**

 

The following information for the three-month andsix-month periods ended June 30, 2002 and June 30, 2001 have been derived fromour unaudited consolidated financial statements and should be read inconjunction with our Annual Report on Form 10-KSB for the year ended December31, 2001.

 
|                        |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-----------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                        |   | **2002**                        |   | **2001**                      |   | **2002** |   | **2001** |   |
|                        |   | **(amounts in dollars)**        |   |
|                        |   |                            |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                   |   | $                               | 4,525  |                          | 100.0  | % | $ | 4,126 |   | 100.0 | % | $ | 8,737 |   | 100.0 | % | $ | 8,313 |   | 100.0 | % |
| Gross profit                |   | 1,923                           |   | 42.5                          |   | 1,703 |   | 41.3 |   | 3,838 |   | 43.9 |   | 3,534 |   | 42.5 |   |
| Operating  expenses:        |   |                            |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling                     |   | 701                             |   | 15.5                          |   | 697 |   | 16.9 |   | 1,341 |   | 15.4 |   | 1,380 |   | 16.6 |   |
| General and  administrative |   | 379                             |   | 8.3                           |   | 490 |   | 11.9 |   | 844 |   | 9.6 |   | 981 |   | 11.8 |   |
| Research and  development   |   | 365                             |   | 8.1                           |   | 361 |   | 8.7 |   | 730 |   | 8.4 |   | 710 |   | 8.5 |   |
| Amortization                |   | 50                              |   | 1.1                           |   | 49 |   | 1.2 |   | 99 |   | 1.1 |   | 99 |   | 1.2 |   |
| Income from  operations     |   | 428                             |   | 9.5                           |   | 106 |   | 2.6 |   | 824 |   | 9.4 |   | 364 |   | 4.4 |   |
| Interest  expense, net      |   | 69                              |   | 1.6                           |   | 33 |   | 0.8 |   | 95 |   | 1.1 |   | 69 |   | 0.9 |   |
| Provision for  income taxes |   | 1                               |   | —                        |   | 1 |   | — |   | 19 |   | 0.2 |   | 17 |   | 0.2 |   |
| Net income                  |   | 358                             |   | 7.9                           |   | 72 |   | 1.8 |   | 710 |   | 8.1 |   | 278 |   | 3.3 |   |
|                             |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*Netsales*.  Net sales increasedby $399,000, or 9.7%, to $4,525,000 for the three months ended June 30, 2002from $4,126,000 for the same period last year and increased by $424,000, or5.1%, to $8,737,000 for the six months ended June 30, 2002 from $8,313,000 forthe comparable six-month period of 2001. The increases were principally attributable to higher volume food andbeverage flavor product sales to existing customers, and to a lesser extent,the introduction and sale of new beverage flavor products.

 

*Grossprofit*.  Gross profit,as a percentage of sales, increased to 42.5% for the three months ended June30, 2002 as compared to 41.3% for the same period last year and increased to43.9% for the six months ended June 30, 2002 as compared to 42.5% for thesix-month period of 2001.  The increasesin gross profit for the 2002 periods were due primarily to higher gross marginson new flavor products sold in 2002 and favorable differences in product mixattributable to a lower concentration of sales to certain export customerswhere gross margins are generally lower.

 

6

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*Operatingexpenses:*

 

*Sellingexpenses*.  Sellingexpenses for the three months ended June 30, 2002 of $701,000 were consistentwith the comparable quarter of 2001 of $697,000.  Selling expenses for the six months ended June 30, 2002 decreasedby $39,000, or 2.8%, to $1,341,000 from $1,380,000 for the same period lastyear due principally to reductions in sales personnel wages and promotionalexpenses during the first quarter of 2002.

 

*Generaland administrative expenses*. General and administrative expenses decreased by $111,000, or 22.7%, to$379,000 for the three months ended June 30, 2002 from $490,000 for thecomparable 2001 period and decreased by $137,000, or 14.0%, to $844,000 for thesix months ended June 30, 2002 from $981,000 for the comparable six-monthperiod of 2001.  The decreases were dueprincipally to reductions in personnel and other cost savings measuresimplemented during the fourth quarter of 2001, and lower professional fees.

 

*Researchand development expenses*. Research and development expenses for the three months and six monthsended June 30, 2002 of $365,000 and $730,000, respectively, were consistentwith such expenses in the comparable 2001 periods of $361,000 and $710,000,respectively.

 

*Amortizationexpense*.  Amortizationexpense for the three months and six months ended June 30, 2002 of $50,000 and$99,000 respectively, was consistent with such expenses in the comparable 2001periods of $49,000 and $99,000, respectively.

 

*Totaloperating expenses.* Total operating expenses decreased by $102,000, or 6.4%, to $1,495,000for the three months ended June 30, 2002 from $1,597,000 for the comparableperiod in 2001 and decreased by $156,000, or 4.9%, to $3,014,000 for the sixmonths ended June 30, 2002 from $3,170,000 for the comparable six-month periodof 2001.

 

*Interestexpense, net*. Interest expense increased by $36,000, or 109.1%, to $69,000 for thethree months ended June 30, 2002 from $33,000 for the comparable 2001 periodand increased by $26,000, or 37.7%, to $95,000 for the six months ended June30, 2002 from $69,000 for the comparable six-month period of 2001 dueprincipally to the issuance of IDA Bonds in January 2002 as described in “*Liquidityand Capital Resources*,” and the payment of a commitment fee on ournew revolving credit facility entered into in April 2002.

 

*Provisionfor income taxes.* Provision for income taxes principally represents state franchise taxesand Federal alternative minimum tax. There were no Federal income taxprovisions for 2002 and 2001 since we had available net operating losscarryforwards for which valuation allowances have been recorded.

 

*NetIncome.*  Net incomewas $358,000 and $710,000 for the three-month and six-month periods ended June30, 2002 as compared to net income for the comparable 2001 periods of $72,000and $278,000, respectively.

 

**Liquidityand Capital Resources**

 

Historically, our financing needs have been metthrough issuance of equity and debt securities and commercial bank loans.  In April 2002, we entered into a Loan andSecurity Agreement with a lender which replaced the revolving credit facilityentered into in June 1999.  We call thisnew revolving credit facility the 2002 Credit Facility.  The maximum line of credit under the 2002Credit Facility was initially set at $3,000,000 but may be increased at ouroption to $4,000,000 at any time during the period January 1, 2003 through June30, 2004.

 

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Outstanding borrowings under the 2002 Credit Facility bear interest ata rate equal to a prime lending rate plus one-quarter of a percentage point (5%at June 30, 2002).  Borrowings under the2002 Credit Facility are subject to certain eligibility requirements relatingto our receivables and inventories. Outstanding borrowings are secured by substantially all of our assets,including our product formulations.  Wemust comply with certain financial and other covenants contained in the Loanand Security Agreement, including maintaining tangible net worth of at least$3,200,000, achieving annual cash flow, as defined, of at least $1.00 andincurring expenditures for capital assets of not more than $400,000 for year2002 and $500,000 for each year thereafter, excluding those capitalexpenditures made from proceeds of the IDA Bonds financing described below.

 

Our subsidiaries have guaranteed our obligations underthe 2002 Credit Facility.  Borrowingsunder the 2002 Credit Facility at June 30, 2002 were $996,000 and $2,004,000was available for additional borrowings in accordance with the terms of the2002 Credit 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 Industrial Development AgencyRevenue Bonds (“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 securedby a letter of credit with Wells Fargo Bank NA.  The interest rate for the month of June 2002 was 3.8% per annumincluding the letter of credit fee.  Theinterest rate is reset monthly based on market conditions and the IDA Bondsmature in January 2022.

 

At June 30, 2002, our working capital increased by$1,144,000, or 41.1%, to $3,926,000 from $2,782,000 at December 31, 2001.  We are committed under non-cancellableoperating and capital leases for the upcoming year of approximately $172,000.

 

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**PARTII - OTHER INFORMATION**

 
| Item 1. | Legal Proceedings                                   |
|---------|-----------------------------------------------------|
|    | Not Applicable                                      |
|    |                                                |
| Item 2. | Changes in Securities and Use of Proceeds           |
|    | Not Applicable                                      |
|    |                                                |
| Item 3. | Defaults Upon Senior Securities                     |
|    | Not Applicable                                      |
|    |                                                |
| Item 4. | Submission of Matters to a Vote of Security Holders |
|    | Not Applicable                                      |
|    |                                                |
| Item 5. | Other Information                                   |
|    | None                                                |
|    |                                                |
| Item 6. | Exhibits and Reports on Form 8-K                    |

 

a)  Exhibits:

 
| Exhibit 11.1 – Amended and Restated Loan and  Security Agreement, dated April 25, 2002, between us and Wells Fargo Credit,  Inc.                     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                      |
| Exhibit 11.2 – Executive Employment Agreement, dated  May 17, 2002, between us and Philip Rosner, our Chairman and Chief Executive  Officer.         |
|                                                                                                                                                      |
| Exhibit 11.3 – Executive Employment Agreement, dated  May 17, 2002, between us and A. Gary Frumberg, our Executive Vice President.                   |
|                                                                                                                                                      |
| Exhibit 11.4 – Executive Employment Agreement, dated  May 17, 2002, between us and Joseph A. Gemmo, our Vice President and Chief  Financial Officer. |
|                                                                                                                                                      |
| Exhibit 11.5 – Executive Employment Agreement, dated  May 17, 2002, between us and Ronald J. Dintemann, our Vice President of  Operations.           |
|                                                                                                                                                      |
| Exhibit 11.6 – Executive Employment Agreement, dated  May 17, 2002, between us and Harvey Farber, our Senior Vice President of  Flavor Division.     |

 

b)  Reports on Form 8-K:

 

The Company filed acurrent report on Form 8-K with the Securities and Exchange Commission on June24, 2002 with respect to Item 4, Changes in Registrant’s CertifyingAccountants.

 

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**SIGNATURES**

 

In accordance with the requirements of the SecuritiesExchange Act of 1934, the registrant has caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| Dated:   July  31, 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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