10KSB 1 ftsi.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, 2004 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 $1,318,268. As of December 31, 2004, 11,001,038 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates (7,234,455 shares) was approximately $9,187,750 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 25, 2005. TABLE OF CONTENTS PART I Item 1 Description of Business Item 2 Description of Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders PART II Item 5 Market for Common Equity and Related Stockholder Matters Item 6 Management's Discussion and Analysis Item 7 Financial Statements Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 8(a) Controls and Procedures PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10 Executive Compensation Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12 Certain Relationships and Related Transactions Item 13 Exhibits and Reports on Form 8-K Item 14 Principle Accounting Fees and Services PART I Item 1. Description of Business 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. The Company provides contract sterilization service to the medical device, food and pharmaceutical industries. The Company also processes packaging, spices and ingredients. The benefits of irradiation in preventing food-borne illness are well known. Food irradiation is supported by the 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 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 life of many fresh fruits and vegetables; and (v) some meat to control pathogens and extend shelf life. 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 2004 (approximately $1,318,268) resulted primarily from the processing of packaging, medical products and consumer goods. Although the Company continues to diversify its customer base three customers accounted for approximately 56% of revenues in 2004. Management is working diligently with the food industry to gain consumer acceptance for irradiated products. The Company also continues to work with the medical device and product industry in Florida to offer its gamma irradiation technology as a means of sterilization. The Company 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 Food Processors Association (FPA) has petitioned the FDA to allow the irradiation of processed meats to control Listeria. The FPA 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 provides research and development and offers testing to find new applications for gamma irradiation technology. 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. Similar to an airport x-ray system or a microwave oven, the irradiation process does not make products radioactive. Food is safe to eat immediately after processing. Likewise, medical products can be shipped immediately without having to wait for dissipation of potentially dangerous gases that are produced by other methods of sterilization. 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. 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. Personnel As of December 31, 2004, the Company had ten employees. Cobalt 60 Supply The Company has in place approximately 1,098,729 curies of Cobalt 60. The level of radioactivity of Cobalt 60 declines at approximately 1% per month, and new Cobalt 60 must, from time to time, be purchased to maintain an appropriate radiation level. The amount of Cobalt 60 maintained is determined by the business needs of the Company. 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. Plant Safety Safety to Surrounding Community While a radiation source does require special handling, the necessary precautions are well understood and practiced daily at the Company and numerous other irradiation plants already in operation. 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 and the U.S. FDA inspects operations relating to both food and medical items. Regulatory Matters 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 red meats, poultry and shell eggs for the control of 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 and Ready-to-Eat luncheon meats are presently pending. 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. The USDA also regulates any processing of meat and poultry, whether for irradiation, packaging or otherwise; and the Company is an USDA inspected facility. 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 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 red meat products. The FDA regulates the irradiation of medical devices and similar products. The Company is regulated as a contract sterilizer with the FDA. Customers having medical products sterilized by the Company must verify and document that the irradiation process sufficiently sterilizes their products. 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 now 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, 2004 was $782,899. This balance consists of $463,194 US (the "Debt"), plus interest accruing at prime plus 1% to December 31, 2004 in the amount of $319,705. 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, 2001, April 17, 2001, May 18, 2001 and November 20, 2001, 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, 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. Nordion has waived its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2006. 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 stored an additional amount of Cobalt 60 at the Company's facility in anticipation of the Company's future needs. At the end of 2004, there were approximately 1,098,729 curies of Cobalt 60 both owned and stored at the Company's facility. Title in and to 220,367 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. Description of 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 near the major interstate systems. 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 24 hours per day, seven days per week. Although the Company currently has available approximately 1,098,729 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 1, 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. The lawsuit alleged damages in excess of $2,000,000 and lost profits in excess of $6,000,000. The Company denied the allegations and has vigorously defended the lawsuit. On February 23, 2004, the Company executed a confidential settlement agreement with the plaintiff, which in the opinion of counsel, concludes the litigation and protects the Company against any significant financial exposure. 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 ---------- 2003 High Low ---- ---- --- First Quarter $1.19 $ .80 Second Quarter 1.20 .95 Third Quarter 1.24 .80 Fourth Quarter 1.40 .93 2004 High Low ---- ---- --- First Quarter $2.65 $1.05 Second Quarter 2.90 1.03 Third Quarter 1.18 .71 Fourth Quarter 2.70 .81 (b) As of December 31, 2004, the approximate number of beneficial holders of Common Stock of the Company was 3,500. (c) The Company has paid no dividends to date and does not anticipate paying any for the foreseeable future. Item 6. Management's Discussion and Analysis Plan of Operations The Company had revenues of $1,318,268 during 2004. This compares to revenues of $1,875,994 for the same period in 2003 and reflects a decrease of approximately 30% between the two years. As a result of this decrease in revenues, the Company's operations reflected a loss of ($105,731) for 2004 compared to a profit of $397,480 for 2003. The Company has some customers that require irradiation intermittently rather than incorporating irradiation into their production process. All other customers use the facility regularly and are considered base customers. No intermittent customers required services during 2004, but one such customer was responsible for revenue of $939,324 in 2003. The absence of that intermittent customer was responsible for the decreased revenues in 2004 as compared to 2003. The Company increased revenues from base customers in 2004 by $381,598. This increase was reflected over all product categories. Processing costs decreased slightly from $385,177 in 2003 to $359,286 in 2004 due to lower labor costs associated with decreased production. General and administrative expenses also decreased slightly from $650,335 in 2003 to $631,258 in 2004. However, as a percentage of revenue, processing costs and general and administrative expenses increased in 2004 from 20% to 27% and 35% to 48%, respectively. This was due to the decline in revenue in 2004 compared to 2003. Although there was some small variation of costs within individual categories of expenses, overall processing costs and general and administrative expenses are relatively fixed. Depreciation increased slightly from $380,446 in 2003 to $384,713 in 2004 because of the purchase of Cobalt in March, 2003. As a percent of revenue, depreciation increased from 20% in 2003 to 29% due primarily to the decrease in revenue. Interest expense in 2004 was $48,742 versus $62,556 in 2003. The decrease was due to debt incurred and repaid in 2003 associated with the purchase of Cobalt. Although there is no assurance, management anticipates a return to profitability during 2005. Management does not anticipate any intermittent customers requiring services in 2005. However, several ground beef producers became base customers during the second quarter of 2004 and 2005 revenues from those customers should reflect a full year of service. Similarly, demand for irradiation of medical products and other items is increasing. Management does not anticipate any significant increases in actual processing costs, general and administrative expenses or depreciation during 2005. Interest expense should decline in 2005 because the Company paid $200,000 in principal during the fourth quarter of 2004 and anticipates additional payments on debt owed to MDS Nordion during 2005. Liquidity and Capital Resources ------------------------------- At December 31, 2004, the Company had cash on hand of approximately $231,877 and accounts receivable of approximately $135,946. At December 31, 2004, the Company's outstanding debt to MDS Nordion amounted to $782,899 which is evidenced by a Note and Mortgage and Security Agreement. The debt, which includes interest of $319,705, 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. Item 8(a) Controls and Procedures The Company's principal executive officer and principal financial officer evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of December 31, 2004 (the "Evaluation Date"). Based on that evaluation, the principal executive officer and principal financial officer of the Company concluded that, as of the Evaluation Date, the disclosure controls and procedures, established by the Company, were adequate to ensure that information required to be disclosed by the Company in reports that the Company files under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations. There were no changes in the internal controls over financial reporting during the fourth quarter ended December 31, 2004 that have materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 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 2005 Annual Shareholders Meeting scheduled to be held on May 25, 2005. Item 10. Executive Compensation Reference is made to the Company's Proxy Statement to be used in conjunction with the 2005 Annual Shareholders Meeting scheduled to be held on May 25, 2005. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Reference is made to the Company's Proxy Statement to be used in conjunction with the 2005 Annual Shareholders Meeting scheduled to be held on May 25, 2005. 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). (10) 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 (14) Draft Code of Ethics****. (31) Rule 13a-14(a)/15d-14(a) Certifications***** (32) Section 1350 Certification***** * Reference is made to Exhibit (c)(3)included in the Company's Form 10-KSB Report filed for the year ended December 31, 1991. ** Reference is made to Exhibit 10(g) included in the Company's Form 10-KSB Report filed for the year ended December 31, 1994. *** Reference is made to Exhibit 10(h) included in the Company's Form 10-KSB Report filed for the year ended December 31, 2000 **** Reference is made to Exhibit 14 included in the Company's Form 10-KSB Report filed for the year ended December 31, 2003 ***** Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 2004. Item 14. Principle Accounting Fees and Services Reference is made to the Company's Proxy Statement to be used in conjunction with the 2005 Annual Shareholders Meeting scheduled to be held on May 25, 2005. 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 of March 2005. FOOD TECHNOLOGY SERVICE, INC. By: /S/Richard G. Hunter, Ph.D. --------------------------- Richard G. Hunter, Ph.D. Chief Executive Officer and Chief Financial 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, Ph.D. Director March 28, 2005 --------------------------- Richard G. Hunter, Ph.D. /S/ Samuel Bell Director March 28, 2005 --------------------------- Samuel Bell /S/ David Nicholds Director March 28, 2005 --------------------------- David Nicholds /S/ John T. Sinnott Director March 28, 2005 --------------------------- John T. Sinnott, M.D., F.A.C.P Director March 28, 2005 --------------------------- Michael W. Thomas /S/ Ronald Thomas Director March 28, 2005 --------------------------- Ronald Thomas FOOD TECHNOLOGY SERVICE, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants Financial Statements: Balance Sheet - December 31, 2004 and 2003 Statement of Operations - Years Ended December 31, 2004, 2003 and 2002 Statement of Stockholders' Equity - Years Ended December 31, 2004, 2003 and 2002 Statement of Cash Flows - Years Ended December 31, 2004, 2003 and 2002 Notes to Financial Statements REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Food Technology Service, Inc. We have audited the accompanying balance sheet of Food Technology Service, Inc. as of December 31, 2004 and 2003 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. FAIRCLOTH & ASSOCIATES, P.A. Tampa, Florida February 1, 2005 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2004 2003 ---- ---- ASSETS Current Assets: Cash $231,877 $ 89,410 Accounts Receivable 135,946 152,620 Inventory 5,557 2,690 -------- -------- Total Current Assets 373,380 244,720 -------- -------- Property and Equipment: Building 2,883,675 2,883,675 Cobalt 2,675,756 2,675,756 Furniture and Equipment 1,739,717 1,728,817 Less: Accumulated Depreciation (4,112,815) (3,728,102) --------- --------- 3,186,333 3,560,146 Land 171,654 171,654 --------- --------- Total Property and Equipment 3,357,987 3,731,800 --------- --------- Other Assets: 5,000 5,000 ---------- --------- Total Assets $3,736,367 $3,981,520 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2004 2003 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities $ 18,035 $ 34,199 Financing Agreement Payable 782,899 934,157 ---------- -------- Total Current Liabilities 800,934 968,356 ---------- -------- Stockholders' Equity: Common Stock $.01 Par Value, Authorized 20,000,000 Shares, Outstanding 11,001,038 Shares in 2004 and in 2003 110,010 110,010 Paid-In Capital 11,975,577 11,975,577 Deficit (9,122,154) (9,016,423) ---------- ---------- 2,963,433 3,069,164 Less-Common Stock Issued for Receivables (28,000) (56,000) ---------- --------- Total Stockholders' Equity 2,935,433 3,013,164 Commitments and Contingencies (Notes B, H and I) - - ---------- --------- Total Liabilities and Stockholders' Equity $3,736,367 $3,981,520 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF OPERATIONS Year Ended December 31, 2002 2003 2004 ---- ---- ---- Net Sales $1,198,151 $1,875,994 $1,318,268 ---------- ---------- ---------- Processing Costs 369,399 385,177 359,286 Selling, General and Administrative 707,904 650,335 631,258 Depreciation 313,888 380,446 384,713 Interest Expense 68,734 62,556 48,742 ---------- ---------- ---------- 1,459,925 1,478,514 1,423,999 ---------- ---------- ---------- Income (Loss) before Income Taxes (261,774) 397,480 (105,731) Income Taxes 151,000 ---------- ---------- ---------- Income (Loss) before Benefit of Tax Loss Carryovers (261,774) 246,480 (105,731) Benefit of Tax Loss Carryovers 151,000 ---------- ---------- ---------- Net Income (Loss) ($261,774) $397,480 ($105,731) ========== ========== ========== Net Income (Loss) Per Common Share ($0.025) $0.036 ($0.010) ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF STOCKHOLDERS' EQUITY Common Paid-In Stock Capital Deficit ------ ------- ------- Balance, December 31, 2001 $104,968 $11,680,619 ($9,152,129) Issuance of 504,201 Shares of Stock for $300,000 of Debt 5,042 294,958 Net Loss for Year (261,774) -------- ---------- ---------- Balance, December 31, 2002 110,010 11,975,577 (9,413,903) Net Income for Year 397,480 -------- ---------- ---------- Balance, December 31, 2003 110,010 11,975,577 (9,016,423) Net Loss for Year (105,731) -------- ---------- ---------- Balance, December 31, 2004 $110,010 $11,975,577 ($9,122,154) ======== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Year Ended December 31, 2002 2003 2004 ---- ---- ---- Cash Flows from Operations: Cash Received from Customers $1,173,925 $1,927,395 $1,334,732 Interest Paid (3,044) (15,983) Cash Paid for Operating Expenses (1,036,993) (1,034,605) (981,365) ---------- ---------- ---------- 133,888 876,807 353,367 Cash Flows from Investing: Purchase of Equipment and Cobalt (8,536) (861,155) (10,900) ---------- ---------- ---------- (8,536) (861,155) (10,900) Cash Flows from Financing Activities: Proceeds from Sale of Common Stock 93,460 Payment of Loans (250,000) (200,000) ---------- ---------- ---------- (156,540) (200,000) Net Increase (Decrease) in Cash (31,188) 15,652 142,467 Cash at Beginning of Year 104,946 73,758 89,410 ---------- ---------- ---------- Cash at End of Year $ 73,758 $89,410 $231,877 ========== ========== ========== Reconciliation of Net Loss to Net Cash Provided (Used) by Operations: Net Income (Loss) ($261,774) $397,480 ($105,731) Adjustments to Reconcile Net Income (Loss) to Cash Provided or Used: Depreciation 313,888 380,446 384,713 Non Cash Payments of Interest and Salaries 93,690 74,573 76,742 (Increase)Decrease in Receivables (24,227) 51,400 16,674 (Increase) Decrease in Inventory (10,691) 16,070 (2,867) Increase (Decrease) in Payables and Accruals 23,002 (43,162) (16,164) ---------- ---------- ---------- Net Cash Provided (Used) by Operating Activities $133,888 $876,807 $353,367 ========== ========= ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities. The Company issued 504,201 shares of common stock for debt of $300,000 in 2002. The Company also converted $65,690, $46,573 and $48,742 of interest expense to debt in 2002, 2003, and 2004 respectively. Also receivables of $28,000 per year were forgiven for services in 2002, 2003 and 2004 (See Note C). SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 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. 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. 5. Research and Development Costs Research and development costs are charged to expense as incurred. Such costs have not been significant to date. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note A - Summary of Significant Accounting Policies (continued): 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. 9. Stock Option Plans The Company has various stock option plans for employees and other individuals providing services to or serving as Directors of the Company. (See Note G ) The Company accounts for these plans under the recognition and measurement principles of APB No. 25, and related interpretations. Accordingly, compensation expense is recognized only when options are granted at an exercise price below the market price at date of grant. If the fair value method described in SFAS No. 123 (R) had been adopted, the net impact on the 2002, 2003, and 2004 net income would not have been material. As required by FASB 123 (R) the Company plans to apply the Statement in December 2005. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note B - The Company as a Going Concern: Management is of the opinion that the Company will continue operations through December 31, 2005 based on the following: The Company's cash flows from operations have been $133,888, $876,707, and $353,357 for 2002, 2003, and 2004, respectively. The Company's supplier (Note D) and major creditor, MDS Nordion (Nordion), 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, 2004, $500,000 of this amount is available to fund 2005 operations. The Company anticipates that revenue from processing food, packaging materials, medical supplies and other products, together with its unused credit line of $500,000, will be sufficient to cover operating costs through December 31, 2005. Note C - Receivables from Directors and Employees: Pursuant to an employment agreement the Company issued 80,000 shares of common stock to its President for a receivable of $112,000. Such amount is being forgiven $28,000 a year and being charged to expense over a four year period, which commenced September 1, 2001. The receivable has been recorded as a reduction to equity pending collection or expensing. Note D Financing Agreement: Financing agreement to Nordion due on demand plus interest at 1% over prime $ 463,194 Accrued interest 319,705 ---------- $ 782,899 =========== At December 31, 1999 the Company owed Nordion, $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. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note D Financing Agreement (continued): 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 in U.S. dollars, which included $22,114 accrued interest. The parties further agreed that the payable 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. Nordion has agreed to waive its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2006. Effective December 17, 2002 Nordion converted $300,000 of debt for 504,201 shares of stock. Such amount was 70% of the closing market price on December 16, 2002. 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, 2004 of $8,977,189 for tax and financial reporting purposes. The loss carry forwards expire as follows: Amount Year Tax Book ---- --- ----- 2006 $ 156,162 $ 137,432 2007 1,352,015 1,352,015 2008 1,297,455 945,703 2009 1,239,590 1,239,696 2010 1,262,386 1,292,314 2011 1,048,800 1,065,209 2012 688,497 983,017 2018 647,342 573,699 2019 840,410 881,875 2020 86,215 147,912 2022 256,356 256,356 2024 101,961 101,961 ------------- ------------- $ 8,977,189 $ 8,977,189 ============= ============= 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, 2004 and 2003 were as follows: FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note E Income Taxes (continued): 2004 2003 ---- ---- Net operating loss carry forwards $3,378,116 $3,339,748 ---------- ---------- Net deferred tax assets 3,378,116 3,339,748 ---------- ---------- Less - Reserve (3,378,116) (3,339,748) ---------- ---------- $ 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 Purchase Warrants and Stock Options: On June 23, 2000 the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the 2000 Plan). The Plan is 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. The maximum number of shares of the Companys Stock that may be issued under the 2000 Plan is 500,000 shares of which options to purchase 202,000 shares were granted in 2001, 20,000 were granted in 2002 and 60,000 were granted in 2003. Under this plan, no shares were issued in 2004. 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 a NQO. 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. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note F Stock Purchase Warrants and Stock Options (continued): Such plan, as amended on May 18, 2000, grants options to Directors on the date a Director is elected at the average quoted market price for the five days preceding the date of grant. Such options may be exercised after one year and no more than 10,000 shares may be granted to each Director per year. The plan was further amended on March 1, 2001 to grant each non-employee Director options to purchase 6,000 shares annually at the market value on the date of grant. On May 2, 2002 and May 21, 2003 options to purchase 18,000 shares at $.91 and $1.02 per share, respectively, were granted to three Directors and on May 26, 2004 an option to purchase 6,000 shares at $1.24 per share was granted to a Director. Changes that occurred in options and warrants outstanding are summarized below: 2004 2003 2002 ---- ---- ---- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 293,056 $1.90 216,556 $1.90 182,556 $2.11 Granted 6,000 $1.24 78,000 $0.99 38,000 $0.99 Exercised - - - - - - Expired/canceled (48,200) $2.43 (1,500) $0.55 (4,000) $2.75 Outstanding at end of year 250,085 $1.45 293,056 $1.90 216,556 $1.90 Exercisable at end of year 174,856 $1.54 124,556 $1.81 71,156 $2.91 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 Note G - Related Party Transactions: The Company's supplier of Cobalt and major creditor, Nordion owns approximately 32.4% of the Company's outstanding common stock (see Note D for financing arrangements). During 2003 the Company purchased 600,000 curies of Cobalt 60 from Nordion for $861,155 in cash. Note H - Concentration and Credit Risk: Although the Company continues to diversify its customer base three customers accounted for approximately 56% of revenues in 2004. The Company's cash and accounts receivable are subject to potential credit risk. Management continuously monitors the credit standing of the financial institutions and customers with which the Company deals. 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 alleged damages in excess of $2,000,000 and lost profits in excess of $6,000,000. The Company denied the allegations and has vigorously defended the lawsuit. On February 23, 2004, the Company executed a confidential settlement agreement with the plaintiff, which in the opinion of counsel, concludes the litigation and protects the Company against any significant financial exposure.