-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BnvZA+relKHZXOcZHBkdytvzaVK6OvZVOTPtwqSadn1zLaR9FutDdwFIoIz9P09K nli7iq5A7o5GAtF7KkQ4lw== 0000868267-02-000005.txt : 20020415 0000868267-02-000005.hdr.sgml : 20020415 ACCESSION NUMBER: 0000868267-02-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD TECHNOLOGY SERVICE INC CENTRAL INDEX KEY: 0000868267 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 592618503 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19047 FILM NUMBER: 02597699 BUSINESS ADDRESS: STREET 1: 502 PRARIE MINE RD CITY: MULBERRY STATE: FL ZIP: 33860 BUSINESS PHONE: 8634250039 MAIL ADDRESS: STREET 1: 502 PRARIE MINE RD CITY: MULBERRY STATE: FL ZIP: 33860 FORMER COMPANY: FORMER CONFORMED NAME: VINDICATOR INC /FL/ DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: VINDICATOR OF FLORIDA INC /FL/ DATE OF NAME CHANGE: 19600201 10KSB 1 form10ksb2001.txt FORM 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2001 Commission File No. 0-19047 FOOD TECHNOLOGY SERVICE, INC. (Exact name of Registrant as specified in its charter) FLORIDA 59-2618503 (State of incorporation or organization) (Employer Identification Number) 502 Prairie Mine Road, Mulberry, FL 33860 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (863)425-0039 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Registrant's operating revenues for its most recent fiscal year were $1,509,895. As of December 31, 2001, 10,496,837 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates (6,378,436 shares) was approximately $9,248,000 based on the market price at that date. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the annual meeting of shareholders scheduled to be held May 14, 2002. TABLE OF CONTENTS PART I Item 1 Business 1 Item 2 Properties 6 Item 3 Legal Proceedings 7 Item 4 Submission of Matters to a Vote of Security Holders 7 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6 Management's Discussion and Analysis 8 Item 7 Financial Statements 8 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 8 Item 10 Executive Compensation 9 Item 11 Security Ownership of Certain Beneficial Owners and Management 9 Item 12 Certain Relationships and Related Transactions 9 Item 13 Exhibits and Report on Form 8-K 9 PART I Item 1. Business of the Company Food Technology Service, Inc., (the "Company") was organized as a Florida corporation on December 11, 1985. The Company owns and operates an irradiation facility located in Mulberry, Florida, that uses Gamma radiation produced by Cobalt 60 to treat or process various foods for insect disinfestations, shelf life extension and control of certain disease causing microorganisms. Additionally, the Company provides contract sterilization service to the food packaging, medical device and food ingredient industries. The Company completed construction of its irradiation facility in Mulberry, Florida in December 1991 and the facility became operational on January 24, 1992. The plant was constructed mainly to irradiate fruits and vegetables for the primary purpose of extending shelf life and poultry to control Salmonella and other illness causing bacteria. Soon after the commencement of operations, it was recognized that the success of the Company would be dependent on the irradiation of poultry and red meats. This was due to the fact that most of the fresh fruits and vegetables are pre-sold in the Florida area where the extension of shelf life is not necessarily beneficial for the fruit and vegetable growers. In addition, although the FDA has approved the use of irradiation for the extension of shelf life, the USDA Animal and Plant Health Inspection Service (APHIS) has not completed its approval for the use of irradiation for post harvest quarantine treatment. The rules for the irradiation of poultry were finalized by the U. S. Department of Agriculture and published in the Federal Register on September 22, 1992. However, to date only a limited amount of packaging materials for meat and poultry have been approved for use with irradiation. A food industry consortium, led by a major packaging material company, is working to gain additional approvals. The red meat industry, which has been faced with pathogen problems such as E. coli 0157:H7, supported a petition to allow irradiation of all meats that was approved by the FDA on December 7, 1997. However, the final regulation allowing the irradiation of red meat was not published by USDA/FSIS until February 22, 2000. Sales of poultry and red meat have been nominal to date, mainly because of slow consumer acceptance of irradiated foods. Although the Company is dedicated to the irradiation of poultry, meats and other food products, until acceptance by the public, the Company has and will continue to irradiate other products. The Company's revenue for 2001 (approximately $1,509,895) resulted primarily from the processing of packaging materials, consumer goods, food ingredients, seasonings and spices and from testing of various other food commodities. The benefits of irradiation in preventing food-borne illness are well known. Food irradiation is supported by the United States Department of Agriculture ("USDA"), the World Health Organization, the United States Public Health Service, the American Medical Association, the Institute of Food Technologists, and reputable scientific and medical organizations throughout America. In addition, more than forty countries have approved the irradiation of food products. The United States Food & Drug Administration ("FDA") has approved irradiation as a safe and effective means of processing a variety of foods. To date, the FDA has approved the irradiation of (i) pork, to control trichinosis; (ii) poultry and shell eggs, for the control of disease causing pathogens; (iii) spices, for sterilization; (iv) fresh fruits and vegetables for insect disinfestation, and to delay maturation, which extends the shelf Page(1) life of many fresh fruits and vegetables; and (v) some meat to control pathogens and extend shelf life. Management is working diligently with meat processors, food distributors and with major retailers to gain consumer acceptance for irradiated products. The Company continues to introduce marketing programs that would allow irradiated beef/poultry to be sold in the marketplace. Food Technology Service presently irradiates meat under a special FDA approval for the NASA Astronauts. There are currently several petitions awaiting FDA approval. The shellfish industry is waiting for FDA approval for shellfish. The USDA and the Food Irradiation Processing Alliance, of which the Company is a member, has petitioned the FDA to allow the irradiation of processed meats to control Listeria. The USDA has also petitioned the FDA to raise the maximum dose allowed for poultry and remove the requirement for non-barrier packaging for poultry. The Company markets its irradiation process as a substitute for and/or a complement to other food processing methods such as canning, freezing, heat pasteurization and fumigation. Processing Plant Operations Procedures Products to be irradiated are placed onto the conveying system. Some products, because of their density and pallet size, may have to be depalletized for radiation processing to ensure that the appropriate radiation dose is applied to the product. The conveying system automatically moves the product through the irradiation chamber at a predetermined rate specified by the Company's personnel. The positioning of the product relative to the radiation source and the distance of the product from the radiation source are fixed. The proper radiation dose is determined by the duration of the exposure of the product to the radiation source, which is carefully controlled to provide the desired dose. The exposure time required to achieve the desired dose will depend on the amount of Cobalt 60 in use and the density of the material exposed. Like an airport x-ray system, the irradiation process does not make the food radioactive. The food is safe to eat immediately after processing. The total time required to process different products varies, primarily reflecting (i) the different radiation doses required for different purposes (e.g., insect disinfestations requires a lower dose than does elimination of microorganisms), and (ii) the density of the product being irradiated (e.g., irradiation of relatively dense bulk poultry takes longer than irradiation of less dense retail packaged poultry). A higher or lower dose (but always within the range approved) can be applied by increasing or decreasing the time of exposure of the food to the radioactive source. Dosimeters, which measure the level of irradiation, are placed in and around the product being irradiated, and they allow the Company's personnel to ensure that proper levels have been achieved. With the addition of refrigeration inside the facility, and the current supply of Cobalt 60, the plant can handle any and all products in an efficient manner. Page(2) Personnel As of December 31, 2001, the Company had ten employees. Cobalt 60 Supply The Company has in place approximately 954,323 curies of Cobalt 60. The level of radioactivity of Cobalt 60 declines at approximately 12% per year, and new Cobalt 60 must, from time to time, be purchased to maintain an appropriate radiation level. Nordion is the Company's supplier of Cobalt 60 and has agreed to sell to the Company all of its requirements for Cobalt 60, and to accept the return of all used Cobalt 60 that have reached the end of its useful life. Cobalt 60 is available from several sources. See "Agreements with MDS Nordion" below. Additional Uses for Irradiation Research Services The Company currently has agreements with industries, universities and government agencies to provide research and testing. Medical and Consumer Products The Company provides irradiation services for the sterilization of medical products and devices. In 2001, the Company processed a significant amount of packaging materials, making use of its capacity without interfering with its focus on food. Plant Safety Safety to Surrounding Community While a radiation source does require special handling, the necessary precautions are well understood and practiced daily at numerous medical supply irradiation plants already in operation. An irradiator is not a nuclear reactor. The process does not involve any nuclear reaction. It is simply a processing plant containing a shielded area where foods are exposed to a source of ionizing radiation. The Company's irradiation processing activities will not produce harmful solid, liquid or gas effluents or pollutants. Safety to Plant Workers As a result of long experience in designing and operating similar types of irradiation facilities, the necessary precautions for worker safety in an irradiation facility are well understood. These precautions are enforced by several federal and state agencies in the United States. The Bureau of Radiation Control, Radioactive Materials Section of the Florida Department of Health inspects the facility on an annual basis. The USDA inspects the premises whenever the Company is processing meats or poultry. Page(3) Regulatory Matters Regulation of Irradiated Foods In the United States, primary responsibility for approval of food irradiation rests with the FDA. No irradiated food can be sold, unless the FDA has found that irradiation of a particular food, at specified doses, is both safe and generally effective for the intended purpose. To date, the FDA has approved the irradiation of poultry and shell eggs for the control of Salmonella and certain other disease-causing microorganisms, the irradiation of all fresh fruits and vegetables for insect disinfestation and shelf life extension, the irradiation of spices for sterilization, and the irradiation of pork for the control of trichinosis. Petitions for the approval of the irradiation of shellfish are presently pending. On July 7, 1994, a petition was submitted to the FDA by the meat industry to gain approvals to irradiate all meats, so that E. coli 0157:H7 and other pathogens can be removed from meat products. The FDA approved irradiation of meat products for controlling disease-causing microorganisms on December 2, 1997. On February 22, 2000 the USDA/FSIS released the final rule for the irradiation of meat and meat products. In general, no further approvals are necessary for the sale of irradiated fresh fruits and vegetables for shelf life-extension or quarantine treatment in the United States. However, the shipment of any irradiated food for export will be subject to the rules of the country of destination. There have been illnesses caused by certain bacteria and parasites in fresh foods and the dose level required for irradiation to provide safety from these organisms is higher than currently allowed and will require an additional approval from the FDA. Some states and countries require that certain foods be quarantined on import to prevent the establishment or spread of insects commonly carried by the food. The Company has had discussions with a number of parties regarding the use of irradiation for fruit and vegetables for export and for shipment between the southern states in the United States and has successfully irradiated products for quarantine treatment that have been accepted by California and Texas. Quarantine restrictions also apply to certain foods imported into the United States. The USDA has established rules approving irradiation, at the point of shipping, in satisfaction of the quarantine requirements for papayas. The Company is currently working with the USDA Animal and Plant Inspection Service to allow the USDA to approve irradiation at the point of import as satisfying such requirements, but the Company cannot predict whether such approvals will be forthcoming. The port facility in Tampa is a major point of import of produce, much of which is subject to USDA quarantine requirements. The USDA also regulates any processing of meat and poultry, whether for irradiation, packaging or otherwise. The USDA has promulgated rules relating to such processing to ensure that the food remains safe and wholesome. In general, such rules establish standards for the implementation of the approval established by the FDA, and relate to such matters as good handling and processing practices. These rules deal with such matters as (i) minimum irradiation levels to assure effective treatment; (ii) temperature standards Page(4) to prevent thawing of frozen foods; (iii) requirements for the separation of processed from non-processed foods; and (iv) labeling requirements. The USDA has already adopted rules relating to irradiation processing of pork, poultry and has now finalized the regulations for the processing of red meat products. Regulation of the Facility and the Irradiation Process The Company has obtained a license for the operation of its facility from the Bureau of Radiation Control, Florida Department of Health, which regulates the ownership and operation of all irradiation facilities and equipment in the State of Florida (including, for example, hospital x-ray equipment). The agency monitors the facility's operations to make certain that all safety regulations are being met. Other Considerations The Company recognizes that it is seeking to extend the commercial irradiation industry into new fields in the United States, and governmental bodies may seek to impose on the Company and its business regulatory requirements not now anticipated. Currently, the transportation and sale of irradiated foods is flow permitted in all 50 states. Although the Company is not aware of any significant regulatory requirements applicable to its proposed business, there can be no assurance that the Company will not encounter unanticipated regulatory requirements. Agreements with MDS Nordion The Company, in September 1990, entered into an agreement with MDS Nordion whereby MDS Nordion agreed to provide irradiation equipment and cobalt-60 to the Company necessary to operate its irradiation facility. In order to secure payment of the purchase price, additional loans and future advances by MDS Nordion to the Company, the Company and MDS Nordion executed a Convertible Debenture and Mortgage and Security Agreement, both dated January 15, 1992. The balance of the debt at December 31, 2001 was $963,194 US (the "Debt"), plus interest accruing at prime plus 1% to December 31, 2001 in the amount of $158,700, accruing at the rate of Bank of America's prime rate in effect from time to time plus 1%. On October 22, 1991 the Company entered into a Reimbursement and Indemnity agreement with Nordion whereby Nordion assisted the Company in obtaining a surety bond in the sum of $600,000 in order to meet State of Florida facility permit bonding requirements. In connection therewith the Company agreed to reimburse Nordion for any liability and expense which Nordion may sustain as a result of its commitments to the bond issuer and secured such obligation under a Mortgage and Security Agreement dated October 22, 1991. The bond continues to be in effect. By agreements dated March 6, 2000, April 17, 2000, May 18, 2000 and November 20, 2000, the Company and MDS Nordion agreed and further confirmed that the Debt and any future advances, including payment of guarantees or indemnities to third parties made by MDS Nordion for the Company's benefit, Page(5) shall be convertible at MDS Nordion's option, at any time, into Common Stock of the Company. The applicable conversion rate is determined based on 70% of the closing price of the Company's shares of Common Stock listed on NASDAQ, on the last trade date prior to the exercise of the conversion right. Further, by MDS Nordion's letter dated November 26, 2001, MDS Nordion's right of conversion of interest accruing on the Debt from January 1, 2000 to January 1, 2003 into shares of the Company has been waived by MDS Nordion. On February 4, 2000, in order to simplify and consolidate the existing security interests securing repayment of the (i) Debt and interest; (ii) indemnity and reimbursement obligations arising from guarantees or indemnities provided by MDS Nordion to third parties for the Company's benefit; and (iii) fixture loans or advances, the Company and MDS Nordion, entered into a new Mortgage and Security Agreement. Substantially all of the assets of the Company continue to be pledged as collateral against the obligations of the Company to MDS Nordion. In addition to cobalt-60 purchased from MDS Nordion, MDS Nordion has storedan additional amount of cobalt-60 at the Company's facility in anticipation of the Company's future needs. At the end of 2001, there were approximately 954,323 curies of cobalt-60 both owned and stored at the Company's facility. Title in and to 327,147 curies of cobalt-60 located at the facility remains the property of MDS Nordion and may be removed by MDS Nordion at any time. Item 2. Properties The Company's irradiation facility and executive office are located on an approximately 4.33 acre site owned by the Company in Mulberry, Polk County, Florida. The Company purchased the site because of its convenient access to State Road 60, a major transportation artery between central Florida produce growers and the port facility in Tampa. Should the Company's first facility prove successful, the site is sufficiently large to add one or two additional irradiation chambers, thereby increasing the capacity of the facility. The Company's irradiation facility and executive office comprise approximately 28,800 square feet, including a 2,600 square foot warehouse and loading and unloading area, a 3,200 square foot office area, and a 3,000 square foot irradiation chamber and Cobalt 60 storage cell. The Company's irradiation processing plant consists of a radiation source, an automated conveying system and operating safety controls. The heart of the plant is the radiation source. Within the processing chamber, a water-filled pool, approximately 28 feet deep, is used to shield and store the radiation source in the "off" position. The pool is enclosed in a radiation proof chamber, a double safeguard against the escape of any radiant energy. The concrete walls and roof of the processing chamber are approximately 6 feet thick and, during the times that the source is out of the pool in the "on" positions will provide safe shielding of adjacent areas such as the control room, work floor, offices and outdoor grounds. The control room contains operating and safety controls. The conveying system is used to transport products to and from the processing chamber. The Company's facility is designed to operate Page(6) 24 hours per day, seven days per week. Although the Company currently has available approximately 954,323 curies of Cobalt 60, the facility is designed to meet international standards of radiation protection with an installed source of 7,000,000 curies. The capacity of the source racks, however, will only permit a maximum of 5,000,000 curies of Cobalt 60 to be installed. As indicated in Item I, substantially all of the assets of the Company are pledged as collateral against the obligation to Nordion. Item 3. Legal Proceedings On March 24, 2000, Pegasus Foods Canada, Inc. filed a lawsuit against the Company alleging that certain seafood products irradiated by the Company were adversely affected by the process. This lawsuit has been inactive since early 2001. There is no other litigation pending against the Company. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) The following table shows the range of closing bid prices for the Company's Common Stock in the NASDAQ SmallCap market for the calendar quarters indicated. The quotations represent prices in the over-the-counter market between dealers in securities, do not include retail mark-up, markdown, or commissions and do not necessarily represent actual transactions. BID PRICES ---------- 2001 High Low ---- ---- --- First Quarter $2.0625 $1.00 Second Quarter 3.20 1.0938 Third Quarter 2.89 1.10 Fourth Quarter 5.40 1.10 2000 High Low ---- ---- --- First Quarter $9.125 $4.00 Second Quarter 4.50 2.50 Third Quarter 5.438 2.50 Fourth Quarter 3.094 .875 (b) Approximate Number of Equity Security Holders. As of December 31, 2001,the approximate number of beneficial holders of Common Stock of the Company was 3,500. (c) Dividend History and Policy. The Company has paid no dividends to date and does not anticipate paying any for the foreseeable future. Page(7) Item 6. Management's Discussion and Analysis Plan of Operations Since 1992 Nordion has stored varying amounts of cobalt at the Company's plant with the amount being approximately 327,147 curies at the end of 2001. Such cobalt was stored in anticipation that it would be needed in the Company's operations. Due to physical layout of the Company's plant, all products processed were exposed to Nordion's cobalt. If Nordion's cobalt had been owned by the Company, or had been required for increased processing volume or speed, the decay of such cobalt would have been charged to operations, resulting in an increased expense of approximately $150,000, $75,000 and $65,000 for the years ended December 31, 1999, 2000 and 2001, respectively. The net losses for the years 1999 and 2000 would have been $1,038,029 and $229,009, respectively, and the profit for 2001 would have been $41,000. At December 31, 2001, the Company had cash of approximately $104,946. Revenues for the year 2001 enabled the Company to realize a profit of $106,251. Operating costs in 2001 were approximately $1,403,644, down from $1,566,306 in 2000. The Company believes that increased revenues will have a significant positive impact since processing costs and General, Administrative and Developmental costs will not increase significantly as a result of an increase in revenue. At December 31, 2001, the Company's outstanding debt to Nordion amounted to $1,121,894, which is evidenced by a Note and Mortgage and Security Agreement. The debt, which includes interest of $158,700, bears interest at prime plus 1%. Such debt is due and payable on demand. Item 7. Financial Statements Reference is made to the Company's Financial Statements included herewith. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors and Executive Officers of the Company. Reference is made to the Company's Proxy Statement to be used in conjunction with the 2002 annual Shareholders meeting scheduled to be held on Page(8) May 14, 2002. Item 10. Executive Compensation Reference is made to the Company's Proxy Statement to be used in conjunction with the 2002 annual Shareholders meeting scheduled to be held on May 14, 2002. Item 11. Security Ownership of Certain Beneficial Owners and Management Reference is made to the Company's Proxy Statement to be used in conjunction with the 2002 annual Shareholders meeting scheduled to be held on May 14, 2002. Item 12. Certain Relationships and Related Transactions See Item 1 Business-"Agreements with MDS Nordion." Item 13. Exhibits and Report on Form 8-K (a) Exhibits -------- (1) Articles of Incorporation. Reference is made to Exhibit 3.1 included in the Company's Registration Statement on Form S-18 (File No. 33-36838-A). (2) By-Laws. Reference is made to Exhibit 3.2 included in the Company's Registration Statement on Form S-18 (File No. 33-36838-A). (3) Agreements entered into by the Company with MDS Nordion *(a) Reimbursement and Indemnity Agreement dated October 22, 1991 *(b) Agreement dated December 11, 1991 *(c) Debenture dated January 15, 1992 *(d) Copy of Security & Mortgage Agreement dated January 15, 1992 *(e) Financing Agreement dated February 21, 1992 *(f) Security Agreement dated February 21, 1992 **(g) Letter Agreement dated March 31, 1994 and April 13, 1994 ***(h) Modification Agreement * Reference is made to Exhibit (c)(3)included in the Company's Form 10-K Report filed for the year ended December 31, 1991. ** Reference is made to Exhibit 3(g) included in the Company's Form 10-KSB Report filed for the year ended December 31, 1993. *** Filed herewith. Page(9) (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2001. Page(10) SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 28th day of March 2002. FOOD TECHNOLOGY SERVICE, INC. By: /S/ Richard G. Hunter, Ph.D --------------------------- Richard G. Hunter, Ph.D, President And Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: Name Title Date ---- ----- ---- /S/ Richard G. Hunter Director March 28, 2002 - --------------------------- Richard G. Hunter, Ph.D. /S/ Thomas J. Daw Director March 28, 2002 - --------------------------- Thomas J. Daw /S/ Director March __, 2002 - --------------------------- E.W.(Pete) Ellis /S/ Frank M. Fraser Director March 28, 2002 - --------------------------- Frank M. Fraser /S Director March __, 2002 - --------------------------- R. Craig Hunter /S/ David Nicholds Director March 28, 2002 - --------------------------- David Nicholds Page(11) FOOD TECHNOLOGY SERVICE, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants Financial Statements Balance Sheets - December 31, 2001 and 2000 Statements of Operations - Years Ended December 31, 2001, 2000 and 1999 Statement of Stockholder's Equity - Years Ended December 31, 2001, 2000 and 199 Statements of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 Notes to Financial Statements Page(12) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Food Technology Service, Inc. We have audited the accompanying balance sheets of Food Technology Service, Inc. as of December 31, 2001 and 2000 and the related statements of operations, Stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Food Technology Service, Inc. as of December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has not received significant revenues and has accumulated losses since inception. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include adjustments that might result from the outcome of this uncertainty. FAIRCLOTH & ASSOCIATES, P.A. /S/ FAIRCLOTH & ASSOCIATES, P.A. Tampa, Florida March 14, 2002 Page(13) FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2001 2000 ---------- ---------- ASSETS ------ Current Assets: Cash $104,946 $108,104 Accounts Receivable 179,793 79,975 Inventory 8,070 - --------- ---------- Total Current Assets 292,809 188,079 --------- ---------- Property and Equipment: Building 2,883,675 2,883,675 Cobalt 1,825,000 1,310,272 Furniture and Equipment 1,709,881 1,686,630 Less Accumulated Depreciation (3,033,768) (2,743,785) ---------- ---------- 3,384,788 3,136,792 Land 171,654 171,654 ---------- ---------- Total Property and Equipment 3,556,442 3,308,446 --------- ---------- Other Assets: 5,000 5,000 ---------- ---------- Total Assets $3,854,251 $3,501,525 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS Page(14) FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2001 2000 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts Payable $54,359 $55,113 Revolving Credit Line 250,000 100,000 Financing Agreement and Debenture Payable 1,121,894 1,055,164 ---------- ---------- Total Current Liabilities 1,426,253 1,210,277 --------- ---------- Stockholders' Equity: Common Stock $.01 Par Value, Authorized 20,000,000 Shares, Outstanding 10,496,837 Shares in 2001 and 10,333,201 in 2000 104,968 103,332 Paid-In Capital 11,680,619 11,469,671 Deficit (9,152,129) (9,258,380) ---------- ---------- 2,633,458 2,314,623 Less-Common Stock Issued for Receivables (205,460) (23,375) ---------- ---------- Total Stockholders' Equity 2,427,998 2,291,248 ---------- ---------- Commitments and Contingencies (Notes B and I) Total Liabilities and Stockholders' Equity $3,854,251 $3,501,525 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS Page(15) FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF OPERATIONS Year Ended December 31, 1999 2000 2001 ---------- ---------- ---------- Net Sales $387,966 $1,412,297 $1,509,895 ---------- ---------- --------- Processing Costs 304,028 374,043 369,218 Selling, General and Administrative 588,724 802,640 641,572 Depreciation 265,442 261,618 289,983 Interest Expense 92,403 128,005 102,871 ---------- ---------- --------- 1,250,597 1,566,306 1,403,644 ---------- ---------- --------- Income /(Loss) from Operations (862,631) (154,009) 106,251 Other Income (Loss): Foreign Exchange (25,398) - - ---------- ---------- ----------- Income/(Loss)before Income Taxes (888,029) (154,009) 106,251 Income Taxes - - 32,293 ---------- ---------- ----------- Income/(Loss)before Benefit of Tax Loss Carryovers (888,029) (154,009) 73,958 Benefit of Tax Loss Carryovers - - 32,293 ---------- ---------- ----------- Net Income/(Loss) ($888,029) ($154,009) $106,251 ========== ========== ========== Net Income/(Loss)Per Common Share ($0.09) ($0.01) $.01 ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS Page(16) FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Common Paid-In Stock Capital Deficit ---------- ---------- ---------- Balance, December 31,1998 $100,900 $10,982,963 $(8,216,342) Sale of 226,200 Shares of Stock for $438,725 in Cash and Services 2,262 436,463 - Directors Stock Option Compensation 19,205 Net Loss for Year - - (888,029) ---------- ---------- ---------- Balance, December 31,1999 103,162 11,438,631 (9,104,371) Sale of 17,000 Shares of Stock for $31,210 in Cash 170 31,040 - Net Loss for Year - - (154,009) ---------- ---------- ---------- Balance, December 31,2000 $103,332 $11,469,671 ($9,258,380) Issuance of 163,636 Shares of Stock for $212,584 in Receivables and Services 1,636 210,948 - Net Income for Year - - 106,251 ---------- ---------- ---------- Balance, December 31,2001 $104,968 $11,680,619 ($9,152,129) ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS Page(17) FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 2000 2001 ---------- ---------- ---------- Cash Flows from Operations: Cash Received from Customers $358,341 $1,382,317 $1,409,409 Interest Paid (13,526) (27,318) (36,141) Cash Paid for Operating Expenses (872,219) (1,265,754) (1,055,177) -------- -------- --------- (527,404) 89,245 318,091 Cash Flows from Investing: Purchase of Equipment and Cobalt (705) (26,776) (537,979) -------- -------- -------- (705) (26,776) (537,979) Cash Flows from Financing Activities: Proceeds from Sale of Common Stock 368,000 31,210 - Proceeds from Borrowing 175,000 100,688 216,730 Payment of Loans - (150,000) - Repayment of Employee Advances - 42,800 - -------- -------- -------- 543,000 24,698 216,730 Net Increase (Decrease) in Cash 14,891 87,167 (3,158) Cash at Beginning of Year 6,046 20,937 108,104 -------- -------- -------- Cash at End of Year $20,937 $108,104 $104,946 ======== ======== ======== SEE NOTES TO FINANCIAL STATEMENTS Page(18) FOOD TECHNOLOGY SERVICE, INC. STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 2000 2001 ---------- ---------- ---------- Reconciliation of Net Loss to Net Cash Provided/(Used) by Operations: Net Income/(Loss) ($888,029) ($154,009) $106,251 Adjustments to Reconcile Net Loss to Cash Used: Depreciation 265,442 261,618 289,983 Foreign Exchange Loss 25,398 - - (Increase) Decrease in Receivables (28,301) (28,850) (99,818) (Increase) Decrease in Inventory 4,566 3,886 (8,070) Increase (Decrease) in Payables and Accruals (9,112) 6,600 (754) Value Ascribed to Stock Issued for Services and Interest 102,632 - 30,499 ----------- ---------- --------- Net Cash Provided/(Used) by Operating Activities ($527,404) $89,245 $318,091 =========== ========== ========= Supplemental schedule of noncash investing and financing activities. The Company issued Common Stock for receivables of $66,175 in 1999 and $182,085 in 2001. SEE NOTES TO FINANCIAL STATEMENTS Page(19) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note A - Summary of Significant Accounting Policies: A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Nature of Business The Company was organized in December 1985 to engage in the business of operating a gamma irradiation facility using Cobalt 60 to extend the shelf life of and/or disinfect fruits, vegetables and meat products and for the sterilization of medical, surgical, pharmaceutical and packaging materials. Since its inception, the Company has been devoting its efforts to research and development, planning for and construction of facilities, planning for operations, raising capital and informing agricultural interests and other potential users of the Company's intentions and progress. During 1992, the plant was completed and commenced operations. 2. Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. 3. Fair Value of Financial Instruments The fair value of financial instruments has been valued at the prevailing prime interest rate plus 1%. The fair value approximates the carrying amount of debt. 4. Revenue Recognition Sales are recorded by the Company when the customer's product has been processed. Page(20) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note A - Summary of Significant Accounting Policies (continued): 5. Research and Development Costs Research and development costs are charged to expense as incurred. Such costs have not been significant to date. 6. Depreciation Assets other than Cobalt have been depreciated using the straight-line method over the following lives for both financial statement and tax purposes: Building 31.5 Years Furniture and Equipment 5-15 Years Cobalt has been depreciated using engineering estimates from published tables under which one-half of the remaining value is written off over 5.26 year periods. Estimated useful lives are periodically reviewed and if warranted, changes will be made resulting in acceleration of depreciation. 7. Net Loss Per Share Basic net loss per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share are not presented because the result of using Common Stock equivalents in the computation is antidilutive. 8. Comprehensive Income The only component of comprehensive income the Company has is net income. Page(21) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note B - The Company as a Going Concern: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has not received significant revenues and has accumulated significant losses since inception. Management is of the opinion that the Company will continue operations through December 31, 2001 based on the following plans and events: The Company's supplier (Note D) and major creditor, MDS Nordion, Inc., has guaranteed a line of credit of $500,000 from a bank. Any future draws against this line must be approved by Nordion. At December 31, 2001, $250,000 of this amount is available to fund 2002 operations. The Company is processing poultry and meat products under the provisions of USDA regulations. However, revenues to date from such products have been nominal. The Company anticipates that revenue from processing packaging materials and other products, together with its unused credit line of $250,000, will be sufficient to cover operating costs through December 31, 2002. However, there is no assurance that the anticipated revenues will be received. Note C - Receivables from Directors and Employees: Pursuant to an employment agreement and stock option plans the Company has issued to Directors and employees 142,500 shares of Common Stock for receivables of $182,085. Of this amount $112,000 is due from the President under the provisions of an employment contract. Such amount will be forgiven $28,000 per year and charged to expense over a four year period commencing September 1, 2001. The total receivables have been recorded as a reduction to equity pending collection or expensing. As of March 14, 2002 all receivables for Common Stock had been collected except for the amount due from the President which is scheduled to be forgiven. Note D - Financing Agreement: Financing agreement to supplier due on demand plus interest at 1% over prime $963,194 Accrued interest 158,700 ---------- $1,121,894 ========== Page(22) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note D - Financing Agreement (continued): At December 31, 1999 the Company owed MDS Nordion, Inc. $378,598 (payable in Canadian currency), $375,732 in cash advances and $200,146 in accrued interest totaling $954,476. Such debt was all due January 5, 2001. On March 6, 2000, as amended on May 18, 2000 the parties agreed to simplify and consolidate the debt as follows. The total amount of the indebtedness at February 4, 2000 was $963,194 payable in U. S. dollars, which included $22,114 accrued interest. The parties further agreed that the debt, interest accruing thereon, and any future advances remain, at Nordion's option, convertible at any time into common shares of the Company at 70% of the market value at date of conversion. On November 26, 2001 Nordion agreed to waive its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2003 On January 23, 2001 Nordion agreed to change the due date of the debt from January 5, 2001 to a due on demand basis. All assets of the Company collateralize all sums advanced by the supplier, including accrued interest. Note E - Income Taxes: The Company has unused operating loss carry-forwards available at December 31, 2001 of $9,105,355 for tax purposes and financial reporting purposes. The loss carry-forwards expire as follows: Amount Year Tax Book ---- --------- ------------ 2003 $37,045 $17,840 2004 23,345 23,345 2005 77,909 77,909 2006 400,332 400,332 2007 1,352,015 1,352,015 2008 1,297,455 945,703 2009 1,239,590 1,239,696 2010 1,262,386 1,327,385 2011 1,048,800 1,066,986 2012 688,497 1,006,131 2018 647,342 618,226 2019 840,712 881,875 2020 189,927 147,912 ---------- ---------- $9,105,355 $9,105,355 ========== ========== Page(23) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note E - Income Taxes (continued): Deferred income taxes reflect the estimated tax effect of temporary differences between assets and liabilities for financial reporting purposes and those amounts as measured by tax laws and net operating losses. The components of deferred income tax assets and liabilities at December 31, 2000 and 2001 were as follows: 2000 2001 ---------- ---------- Net operating loss carryforwards $3,467,980 $3,426,345 Stock option compensation 5,932 ---------- ---------- Net deferred tax assets 3,473,912 3,426,345 Less- Reserve (3,473,912) (3,426,345) ---------- ---------- $ -0- $ -0- ========== ========== The net deferred tax assets have been fully reserved because there is less than a 50% chance that they will be utilized. Note F - Stock Offerings: During 1999 the Company sold 150,000 shares for $286,125 in cash to a beef and poultry distributor. In addition 74,200 shares were sold for $148,050 in cash and receivables pursuant to stock option plans. Also 2,275 shares with an ascribed value of $4,550 were donated to an educational institution. During 2000 the Company sold 17,000 shares for $31,210 in cash and receivables pursuant to stock option plans. During 2001 the Company issued 20,000 shares to its President pursuant to an employment agreement and 1,136 shares to an individual for public relations services. In addition 142,500 shares were issued for $182,085 in receivables pursuant to stock option plans. Such receivables plus $23,375 remaining from 2000 have been recorded as a reduction to Stockholders' Equity pending collection. (See Note C) Page(24) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note F - Stock Offerings(continued): All shares issued for services have been ascribed the market value on the dates they were earned. Note G - Stock Purchase Warrants and Stock Options: The Company's policy is to issue warrants and options at or above the market value on the issue date, except for non-employee Directors in 1999. Accordingly, compensation has been recorded for warrants or options granted only to such Directors. On November 11, 1996 the Company agreed to issue its President 10,000 shares for services. The Company also granted to him options to purchase up to 20,000 shares of stock per year at $1 per share during the five-year period ending December 8, 2001. Such options were exercised 20,000 shares in 1998, 32,000 shares in 1999, 8,000 shares in 2000 and 40,000 shares in 2001. On May 18, 1992, the Stockholders approved the 1992 Incentive and Non-Statutory Stock Option Plan (the "1992 Plan") and on June 23, 2000 the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the "2000 Plan"). The Plans are administered by the Board of Directors who are authorized to grant incentive stock options ("ISO's") or non-statutory options ("NQO's"), to Officers and employees of the Company and for certain other individuals providing services to or serving as Directors of the Company. Upon approval of the 2000 Plan no further options will be granted under the 1992 Plan. The maximum number of shares of the Company's Stock that may be issued under the 2000 Plan is 500,000 shares of which options to purchase 9,356 shares were granted in 2000 and 202,000 were granted in 2001. The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock with respect to which ISO's are exercisable for the first time by any person during any calendar year under the Plans shall not exceed $100,000. Any option granted in excess of the foregoing limitation shall be specifically designated as being an NQO. On August 25, 1992, the Board of Directors authorized and issued options to buy 122,000 shares at $8.75 per share. On August 7, 1998 the remaining 78,000 of these options were canceled and new options to purchase 105,000 shares at Page(25) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note G - Stock Purchase Warrants and Stock Options (continued): $2.75 per share were issued. Such price was the market value on August 7, 1998; accordingly, no compensation was charged to operations. The options are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's and NQO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's and NQO's terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death and 180 days to one year in the event of disability. On February 9, 1999 the Board of Directors approved an option plan for non-employee Directors. Under the plan, non-employee Directors receive options to purchase 3,000 shares per year plus 1,000 shares per meeting attended. Such options were granted in January of each year at the quoted market price at the beginning of the previous year and must be exercised on or before five years from the date of grant. The options are granted pro rata if a director terminates during the year. During 1999, 23,000 options accrued to three Directors. The difference between the option price and the market price of the shares on the dates earned was $19,205 and has been charged to income. Such plan was amended on May 18, 2000 to grant such options on the date a Director is elected rather than January at the average quoted market price for the five days preceding the date of grant. Also such options may be exercised after one year. No more than 10,000 shares may be granted to each Director per year. During 2000 options to purchase 25,356 shares at $3.38 per share were granted to four Directors. The plan was further amended on March 1, 2001 to grant each non-employee Director options to purchase 6,000 (16,000 for the chairman) shares annually at the market value on the date of grant. On March 1, 2001 options to purchase 22,000 shares at $1.375 were granted to two Directors. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" was implemented in January, 1996. As permitted by the Standard, the Company retained its prior method of accounting for stock compensation. If the accounting provisions of Statement No. 123 had been adopted, the net impact on the 2001, 2000 and 1999 net income would not have been material. Changes that occurred in options and warrants outstanding in 2001, 2000 and 1999 are summarized below: Page(26) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note G - Stock Purchase Warrants and Stock Options (continued): 2001 2000 1999 ---- ---- ---- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 157,156 $2.37 121,800 $2.02 403,000 $2.30 Granted 202,000 $1.43 53,356 $2.91 Exercised (149,000) $1.34 (17,000) $1.84 (218,200) $1.94 Expired/canceled (27,600) $2.75 (1,000) $2.53 (63,000) $7.12 ------- ------- ------- Outstanding at end of year 182,556 $2.11 157,156 $2.37 121,800 $2.02 ======= ======= ======= Exercisable at end of year 71,156 $2.91 47,600 $2.53 6,000 $2.75 Note H - Related Party Transactions: The Company's supplier of Cobalt and major creditor, MDS Nordion Inc. (Nordion) owns approximately 40% of the Company's outstanding Common Stock ( see Note D for financing arrangements). During 2001 the Company purchased 386,589 curies of Cobalt 60 from Nordion for $514,728. At December 31, 2001 Nordion had approximately 327,000 curies of cobalt in storage at the Company's plant. Due to the physical layout of the Company's plant, all product processed was exposed to Nordion's cobalt. The Company has not charged Nordion any cobalt storage fees, nor has Nordion charged the Company for any cobalt decay. The value of Nordion's cobalt decay is estimated to have been $150,000, $75,000 and $65,000 for the years ended December 31, 1999, 2000 and 2001, respectively. Page(27) FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 Note I - Commitments and Contingencies: On March 24, 2000, Pegasus Foods Canada, Inc. filed a lawsuit against the Company alleging that certain seafood products irradiated by the Company were adversely affected by the process. The lawsuit alleges damages in excess of $2,000,000 and lost profits of $6,000,000. The Company denies the allegations and intends to vigorously defend the lawsuit. The outcome of this litigation is uncertain at this time; accordingly, no provision has been made in the accompanying financial statements for this contingency. Approximately 69% of the Company's sales in 2001 were to one customer. The loss of this business could have a severe impact on future results of operations. Page(28) -----END PRIVACY-ENHANCED MESSAGE-----