10KSB 1 ftsi.txt FORM 10QSB 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, 2005 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 $1,703,556. As of March 1, 2006, 11,003,038 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates (7,671,356 shares) was approximately $6,443,939 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 22, 2006. 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 services to the medical device, food and consumer goods industries. The Company also irradiates packaging, spices and ingredients. The Company's revenue for 2005 (approximately $1,703,556) resulted primarily from the processing of medical items and food. The Company continues to diversify its customer base, however three customers accounted for approximately 60% of revenues in 2005. During the past two years, the Company has aggressively pursued sterilization of medical devices to increase its customer base. Medical device manufacturing is expanding rapidly due to improvements in medical technology and an aging population structure in the U.S. In 2005, the Company was certified to ISO standards for radiation sterilization of medical devices, which is especially important for potential customers exporting medical products to the EU and Canada. Medical device sterilization represented about 62% of revenues in 2005. Food irradiation is a proven technology that can prevent food-borne illness or prevent the spread of insect pests. The process is supported by the U.S. Department of Agriculture, the U.S. Food and Drug Administration, the World Health Organization, the American Medical Association, the American Dietetic Association and other governmental and scientific organizations. Food irradiation is a developing segment of the irradiation industry and the Company is well-positioned to take advantage of future growth in this area. Food irradiation was responsible for about 27% of revenues in 2005. Although the Company focuses on medical sterilization and food irradiation, the Company has and will continue to take advantage of profitable opportunities to irradiate other products. In particular, the Company irradiates packaging, cosmetic ingredients, horticultural items and consumer goods. Such items accounted for about 11% of 2005 revenues. Processing Plant Operations Procedures Products to be irradiated are placed on a conveying system that moves the items past the Cobalt 60 source at a rate that is dependent on the required dose. The dose is also related to the density of the product and the strength of the Cobalt 60 source. The actual dose received by a product is verified through dosimeters placed on the product. The Company produces a detailed record of the irradiation process for each product and maintains an extensive quality assurance program. The process cannot make products radioactive just as a dental x-ray does not make the patient's teeth radioactive. Personnel As of December 31, 2005, the Company had ten employees. Cobalt 60 Supply The level of radioactive energy of Cobalt 60 declines at approximately 1% per month, and new Cobalt 60 must be purchased at intervals to accommodate this decrease in energy as well as customer growth. MDS Nordion is the Company's supplier of Cobalt 60 and has agreed to accept the return of all Cobalt 60 that has reached the end of its useful life. Cobalt 60 is available from one other source. See "Agreements with MDS Nordion" below. Plant Safety and Regulatory Matters Although a radiation source does require special handling, the necessary precautions are implemented in regulations and practiced daily at the Company and numerous other irradiation plants worldwide. The Company's irradiation processing activities do not produce harmful solid, liquid or gas effluents or pollutants. 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 regulated by the U.S. Nuclear Regulatory Commission through the Florida Department of Health. The Florida Department of Health licenses the facility and inspects it on a regular basis. The facility is also inspected by the U.S. Department of Agriculture, the U.S. Food and Drug Administration and the Florida Department of Agriculture and Consumer Services. The notified body for certification to ISO standards also audits the facility regularly. 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 and interest at prime plus 1%, the Company and MDS Nordion executed a Convertible Debenture and Security Agreement, both dated January 15, 1992. The balance of the debt, including interest at December 31, 2005 was $733,741. On October 22, 1991 the Company entered into a Reimbursement and Indemnity Agreement with MDS Nordion whereby MDS 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 MDS Nordion for any liability and expense which MDS 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. MDS Nordion has waived its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2007. 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 2005, there were approximately 962,726 curies of Cobalt 60 both owned and stored at the Company's facility. Title in and to 193,923 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 962,726 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 and the current license from the State of Florida allows a maximum of 4,500,000 curies of Cobalt 60. As indicated in Item 1, substantially all of the assets of the Company are pledged as collateral against the obligation to MDS Nordion. Item 3. Legal Proceedings None 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 ---------- 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 2005 High Low ---- ---- --- First Quarter $1.45 $1.08 Second Quarter 1.20 .95 Third Quarter 1.20 .85 Fourth Quarter 1.20 .70 (b) As of December 31, 2005, 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 Food Technology Service, Inc. had revenue of $1,703,556 in 2005. This is an increase of 29% over 2004 revenue of $1,318,268. The Company had a profit of $138,849 in 2005 compared to a loss of ($105,731) in 2004. During the fourth quarter of 2005, the Company had revenues of $458,280 and a profit of $34,087. This compares to revenues of $350,471 and a loss of ($757) during the fourth quarter of 2004. Revenues increased by about 30% in the fourth quarter of 2005 compared to the same period in 2004. Management attributes increased revenue to a growing customer base made up of companies that regularly require irradiation of products. Prior to 2004, revenues were impacted by large intermittent customers that used the Company's services unpredictably. The Company has devoted significant effort to expanding the base of customers requiring service on a regular basis. No large intermittent customers have required services since the fourth quarter of 2003 and the company has been profitable in each of the four most recent quarters. Revenue from base customers grew by about $450,000 in 2004 and $385,000 in 2005 and management expects similar increases in 2006. Processing costs as a percentage of sales decreased from 27.3% during 2004 to 25.9% in 2005. This reflects the fact that processing costs are relatively fixed. General administrative and development costs are also relatively fixed within the current revenue range. During 2005, general administrative and development costs as a percentage of sales were 41.5% compared to 47.9% during 2004. The Company reduced its outstanding debt by $100,000 during 2005 and currently owes approximately $733,741 in total debt. At the end of 2005, the Company had cash on hand of $524,731. A large portion of that cash was used during the first quarter of 2006 to purchase additional Cobalt energy source needed to accommodate continuing customer growth. The Company did not incur any additional debt as a result of that Cobalt purchase. During 2005, the Company initiated several projects to enhance our capacity to attract customers. These included hiring a full-time quality assurance manager and installation of a new dosimetry system used to verify product dosages. In September, 2005 the Company was certified as meeting ISO 13485:2003 standards for the provision of radiation sterilization services of medical devices. Many potential customers export their medical products to Canada and the European Union where regulations require manufacturers and their suppliers to have quality systems certified to ISO 13485 standards. In December, 2005 the Company obtained a loan of $249,900 to construct an approximately 8000 square foot warehouse on Company-owned property adjacent to the irradiation facility. The total cost of the project is approximately $385,000. The Company has entered into a lease with a current customer that will allow that customer to store and ship their products from that warehouse and avoid shipping expenses to a remote warehouse after the products are sterilized. In addition to providing revenue to cover construction and loan costs, the arrangement will free space in the existing facility to devote to current and future customers. The new warehouse is expected to be completed during the second quarter of 2006. Liquidity and Capital Resources At December 31, 2005, the Company had cash on hand of approximately $524,731. At December 31, 2005, the Company's outstanding debt to MDS Nordion amounted to $733,741 which is evidenced by a Debenture and Security Agreement. The debt, which includes interest of $370,547, 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, 2005 (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, 2005 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 2006 Annual Shareholders Meeting scheduled to be held on May 22, 2006. Item 10. Executive Compensation Reference is made to the Company's Proxy Statement to be used in conjunction with the 2006 Annual Shareholders Meeting scheduled to be held on May 22, 2006. 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 2006 Annual Shareholders Meeting scheduled to be held on May 22, 2006. 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) 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 ------------------- On October 25, 2005, the Company filed Form 8-K announcing that it had received a letter from the Nasdaq Stock Market, dated October 20, 2005, notifying the Company of its failure to maintain a minimum bid price of $1.00 over the preceding thirty (30) consecutive trading days as required by Nasdaq Marketplace Rule 4310(c)(4). Item 14. Principle Accounting Fees and Services Reference is made to the Company's Proxy Statement to be used in conjunction with the 2006 Annual Shareholders Meeting scheduled to be held on May 22, 2006. 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 29th of March 2006. 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 29, 2006 --------------------------- Richard G. Hunter, Ph.D. /S/ Samuel Bell Director March 29, 2006 --------------------------- Samuel Bell /S/ John Corley Director March 29, 2006 --------------------------- John Corley /S/ David Nicholds Director March 29, 2006 --------------------------- David Nicholds /S/ John T. Sinnott Director March 29, 2006 --------------------------- John T. Sinnott, M.D., F.A.C.P /S/ Ronald Thomas Director March 29, 2006 --------------------------- Ronald Thomas FOOD TECHNOLOGY SERVICE, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants Financial Statements: Balance Sheet - December 31, 2005 and 2004 Statement of Operations - Years Ended December 31, 2005, 2004 and 2003 Statement of Stockholders' Equity - Years Ended December 31, 2005, 2004 and 2003 Statement of Cash Flows - Years Ended December 31, 2005, 2004 and 2003 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, 2005 and 2004 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. FAIRCLOTH & ASSOCIATES, P.A. Tampa, Florida February 14, 2006, Except for the second paragraph of Note B for which the date is March 11, 2006 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2005 2004 ---- ---- ASSETS Current Assets: Cash $524,731 $231,877 Accounts Receivable 286,951 135,946 Prepaid expenses 20,949 5,557 -------- -------- Total Current Assets 832,631 373,380 -------- -------- Property and Equipment: Building 2,883,675 2,883,675 Cobalt 2,675,756 2,675,756 Furniture and Equipment 1,764,623 1,739,717 Less: Accumulated Depreciation (4,479,056) (4,112,815) --------- --------- 2,844,998 3,186,333 Land 171,654 171,654 --------- --------- Total Property and Equipment 3,016,652 3,357,987 --------- --------- Other Assets: Utility Deposit 5,000 5,000 Loan Costs 11,429 - ---------- --------- Total Other Assets 16,429 5,000 ---------- ---------- Total Assets $3,865,712 $3,736,367 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2005 2004 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities $ 28,589 $ 18,035 Financing Agreement Payable 733,741 782,899 ---------- -------- Total Current Liabilities 762,330 800,934 ---------- -------- Stockholders' Equity: Common Stock $.01 Par Value, Authorized 20,000,000 Shares, Outstanding 11,003,038 Shares in 2005 and 11,001,038 in 2004 110,030 110,010 Paid-In Capital 11,976,657 11,975,577 Deficit (8,983,305) (9,122,154) ---------- ---------- 3,103,382 2,963,433 Less-Common Stock Issued for Receivables - (28,000) ---------- --------- Total Stockholders' Equity 3,103,382 2,935,433 Commitments and Contingencies (Notes B, G and H) - - ---------- --------- Total Liabilities and Stockholders' Equity $3,865,712 $3,736,367 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF OPERATIONS Year Ended December 31, 2003 2004 2005 ---- ---- ---- Net Sales $1,875,994 $1,318,268 $1,703,556 ---------- ---------- ---------- Processing Costs 385,177 359,286 441,897 Selling, General and Administrative 650,335 631,258 707,539 Depreciation 380,446 384,713 366,241 Interest Expense, Net 62,556 48,742 49,030 ---------- ---------- ---------- 1,478,514 1,423,999 1,564,707 ---------- ---------- ---------- Income (Loss) before Income Taxes 397,480 (105,731) 138,849 Income Taxes 151,000 41,700 ---------- ---------- ---------- Income (Loss) before Benefit of Tax Loss Carryovers 246,480 (105,731) 97,149 Benefit of Tax Loss Carryovers 151,000 41,700 ---------- ---------- ---------- Net Income (Loss) $397,480 ($105,731) $138,849 ========== ========== ========== Net Income (Loss) Per Common Share $0.036 $(0.010) $0.013 ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF STOCKHOLDERS' EQUITY Common Paid-In Stock Capital Deficit ------ ------- ------- 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) Issuance of 2,000 Shares Upon exercise of stock options 20 1,080 Net Income for Year 138,849 -------- ---------- ---------- Balance, December 31, 2005 $110,030 $11,976,657 ($8,983,305) ======== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Year Ended December 31, 2003 2004 2005 ---- ---- ---- Cash Flows from Operations: Cash Received from Customers $1,927,395 $1,334,732 $1,552,551 Interest Paid (15,983) Cash Paid for Operating Expenses (1,034,605) ( 981,365) (1,124,462) ---------- ---------- ---------- 876,807 353,367 428,089 Cash Flows from Investing: Purchase of Equipment and Cobalt (861,155) (10,900) (24,906) ---------- ---------- ---------- (861,155) (10,900) (24,906) Cash Flows from Financing Activities: Loan Costs Paid (11,429) Proceeds from Sale of Common Stock 1,100 Payment of Loans (200,000) (100,000) ---------- ---------- ---------- (200,000) (110,329) Net Increase (Decrease) in Cash 15,652 142,467 292,854 Cash at Beginning of Year 73,758 89,410 231,877 ---------- ---------- ---------- Cash at End of Year $ 89,410 $231,877 $524,731 ========== ========== ========== Reconciliation of Net Loss to Net Cash Provided (Used) by Operations: Net Income (Loss) $397,480 ($105,731) $138,849 Adjustments to Reconcile Net Income (Loss) to Cash Provided or Used: Depreciation 380,446 384,713 366,241 Non Cash Payments of Interest and Salaries 74,573 76,742 78,842 (Increase)Decrease in Receivables 51,400 16,674 (151,005) (Increase) Decrease in Prepaids 16,070 (2,867) (15,392) Increase (Decrease) in Payables and Accruals (43,162) (16,164) 10,554 ---------- ---------- ---------- Net Cash Provided (Used) by Operating Activities $876,807 $353,367 $428,089 ========== ========= ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities. The Company converted $46,573, $48,742 and $50,842 of interest expense to debt in 2003, 2004, and 2005 respectively. Also receivables of $28,000 per year were forgiven for services in 2003, 2004 and 2005 (See Note B). SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2005 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 and is engaged 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 Revenues are recorded after the Company's performance obligation is completed and product has been processed in accordance with the customer's specifications. 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, 2005 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 Income (Loss) Per Share Basic net income (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 E). 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 2003, 2004, and 2005 net income would not have been material. As required by FASB 123 (R) the Company plans to apply the Statement in December 2006. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2005 Note B - Receivable from President and Employment Contract: 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 was forgiven and charged to expense over a four year period from September 1, 2001 through August 31, 2005. The receivable was recorded as a reduction to equity prior to being expensed as earned. On March 11, 2006 the Board of Directors extended the President's employment contract for five years commencing September 1, 2006 at an annual salary of $110,000 plus options to purchase 400,000 shares of the Company's common stock at $.81 per share over such period. Note C Financing Agreement: Convertible Financing agreement to MDS Nordion due on demand plus interest at 1% over prime $ 363,194 Non-convertible accrued interest 370,547 ---------- $ 733,741 =========== At December 31, 1999 the Company owed MDS 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, 2005 Note C 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 MDS Nordion's option, convertible at any time into common shares of the Company at 70% of the market value at date of conversion. MDS Nordion has agreed to waive its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2007. All assets of the Company collateralize all sums advanced by the supplier, including accrued interest. Note D - Income Taxes: The Company has unused operating loss carry forwards available at December 31, 2005 of $8,841,961 for tax and financial reporting purposes. The loss carry forwards expire as follows: Amount Year Tax Book ---- --- ----- 2006 $ 20,934 $ 2,204 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 ------------- ------------- $ 8,841,961 $ 8,841,961 ============= ============= 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, 2005 and 2004 were as follows: FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2005 Note D Income Taxes (continued): 2005 2004 ---- ---- Net operating loss carry forwards $3,327,230 $3,378,116 ---------- ---------- Net deferred tax assets 3,327,230 3,378,116 ---------- ---------- Less - Reserve (3,327,230) (3,378,116) ---------- ---------- $ 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 E - 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 Company's Stock that may be issued under the 2000 Plan is 500,000 shares. Options under this plan were granted as follows: 2001 202,000 2002 20,000 2003 60,000 2004 None 2005 47,000 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. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2005 Note E - Stock Purchase Warrants and Stock Options (continued): On February 9, 1999 the Board of Directors approved an option plan for non- employee Directors. 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. 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. On May 25, 2005 options to purchase 28,000 shares at $1.03 per share were granted to three directors. Changes that occurred in options and warrants outstanding are summarized below: 2005 2004 2003 ---- ---- ---- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 250,856 $1.45 293,056 $1.90 216,556 $1.90 Granted 47,000 $1.03 6,000 $1.24 78,000 $0.99 Exercised (2,000) $0.55 - - - - Expired/canceled (50,856) $2.16 (48,200) $2.43 (1,500) $0.55 -------- ----- -------- ----- ------- ----- Outstanding at end of year 245,000 $1.08 250,856 $1.45 293,056 $1.90 ======== ===== ======= ===== ======= ===== Exercisable at end of year 158,000 $1.30 174,856 $1.54 124,556 $1.81 FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2005 Note F - Related Party Transactions: The Company's supplier of Cobalt and major creditor, MDS Nordion owns approximately 29.32% of the Company's outstanding common stock (see Note C for financing arrangements). During 2003 the Company purchased 600,000 curies of Cobalt 60 from MDS Nordion for $861,155 in cash and on February 8, 2006 the Company purchased an additional 195,139 curies for $394,839 in cash. Note G - Concentration and Credit Risk: Although the Company continues to diversify its customer base three customers accounted for approximately 60% of revenues in 2005. 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 H - Commitments and Contingencies: On November 18, 2005 the Company entered into a loan agreement to borrow $249,900 from a Credit Union. Such loan will be funded during 2006 and the proceeds will be used to construct a warehouse at the Company's existing facility. The loan will bear interest at 6.75% payable interest only through November 2006 at which time the loan will become payable in 60 installments plus interest at the five year Treasury index rate plus 2.75%. The loan will be collateralized by a mortgage on the property and assignment of rental payments from a lease to be entered into with a major customer. 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.