10KSB/A 1 ftsi.txt 10KSB/A 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, 2006 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 $1,771,914. As of March 15, 2007, 2,756,303 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates (1,922,969 shares) was approximately $5,018,949 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, 2007. 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 Registrant's 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 to remove harmful pathogens and spoilage organisms from customer-owned products. 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 2006 ($1,771,914) resulted primarily from the processing of medical items and food. The Company continues to diversify its customer base, however three customers accounted for approximately 64% of revenues in 2006. 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 International Standards Organization (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 64% of revenues in 2006. 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 23% of revenues in 2006. 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 13% of 2006 revenues. Processing Plant Operations Procedures Products to be irradiated are placed on a conveying system that moves the items past a 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, 2006, the Company had twelve 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 sell irradiation equipment and Cobalt 60 to the Company to operate its irradiation facility. To secure payment of the purchase price, 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, 2006 was $801,576. 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, 2008. 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 2006, there were approximately 1,000,733 curies of Cobalt 60 both owned and stored at the Company's facility. Title in and to 170,652 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 2.17 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. The Company's irradiation facility and executive office comprise approximately 28,800 square feet, including a 22,600 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 facility is designed to operate 24 hours per day, seven days per week. As of December 31, 2006, the Company had in use approximately 1,000,733 curies of Cobalt 60. The facility is licensed for a maximum of 4,500,000 curies of Cobalt 60 which allows production to be increased significantly, if needed. During the fourth quarter of 2006, the Company completed construction of an approximately 8,000 square foot warehouse on 2.17 acres of Company- owned land adjacent to the processing facility. The Company commenced leasing the facility in December to an existing customer under the terms of a 5-year lease. As indicated in Item 1, substantially all of the assets of the Company are pledged as collateral against the obligation to MDS Nordion or as collateral to Community First Credit Union for the warehouse loan. 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 Small Cap 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* ----------- 2005 High Low ---- ---- --- First Quarter $5.80 $4.32 Second Quarter 4.80 3.80 Third Quarter 4.80 3.40 Fourth Quarter 4.80 2.80 2006 High Low ---- ---- --- First Quarter $4.16 $3.00 Second Quarter 3.84 2.92 Third Quarter 3.94 2.96 Fourth Quarter 3.46 1.96 *Reflects 1:4 Reverse Stock Split on July 3, 2006 (b) As of December 31, 2006, 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 On July 3, 2006, the Company completed a reverse-split of common stock so that every four shares of stock were exchanged for one share. This was done to comply with a NASDAQ rule that require companies to maintain a stock price of at least $1.00. The stock has continuously complied with this rule since the reverse-split. In order to comply with SFAS 123R, the Company is reporting the value of stock-options granted in 2006 as an item of expense. These options have been issued to Company employees, certain service providers and Board members and were valued using the Black-Scholes option-pricing model. This action increased expenses in 2006 by $21,693. The Company is now reflecting the value of tax-loss carry-forward credits on its financial statements as required by Generally Accepted Accounting Principles (GAAP). To the extent that future revenues are anticipated to allow their use, these credits represent an asset of the Company. Past revenues have not warranted designating these credits as an asset. However, Management now believes a portion of these credits will be used. The value of these credits was estimated at $650,000 and as required by GAAP, that value will be adjusted quarterly based on actual profits. Assigning a value to these credits increased after-tax net income in 2006 and stockholders equity at December 31, 2006 by $650,000. Food Technology Service, Inc. had revenue of $1,771,914 in 2006. This is an increase of 4% over 2005 revenue of $1,703,556. Discounting the impact of valuing the tax-loss carry-forward credits, the Company had a net income before taxes of $88,667 in 2006 compared to a net income before taxes of $138,849 in 2005. This is a decrease of about 36% and was largely due to the costs of the reverse stock split and valuing stock options, granted in 2006. Management attributes increased revenue to a growing customer base made up of companies that regularly require irradiation of products. The Company has devoted significant effort to expanding the base of customers requiring service on a regular basis. The Company has been profitable in each of the eight most recent quarters. Processing costs as a percentage of sales increased from 25.9% during 2005 to 26.5% in 2006. 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 2006, general administrative and development costs as a percentage of sales were 42.9% compared to 41.5% during 2005. At the end of 2006, the Company had cash on hand of $425,110. A large portion of that cash was used during the first quarter of 2007 to purchase additional Cobalt 60 needed to accommodate continuing customer growth. Beginning in 2005, the Company has increasingly focused on irradiation of medical products, although food irradiation is still an important component of the business. During the past two years, FTSI has hired a full-time quality assurance manager, installed a new dosimetry system used to verify product dosages and has been certified as meeting ISO 13485:2003 standards for the provision of radiation sterilization services of medical devices. All these improvements were intended to attract additional medical customers. Due to the longer processing times required for medical products, these efforts have been somewhat constrained by a lack of Cobalt. The installation of additional Cobalt during the first quarter of 2007 will resolve this constraint and will significantly increase revenues from medical sterilization. Liquidity and Capital Resources At December 31, 2006, the Company had cash on hand of approximately $425,110. At December 31, 2006, the Company's outstanding debt to MDS Nordion amounted to $801,576 which is evidenced by a Debenture and Security Agreement. The debt, which includes interest of $438,382, 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, 2006 (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, 2006 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 2007 Annual Shareholders Meeting scheduled to be held on May 14, 2007. Item 10. Executive Compensation Reference is made to the Company's Proxy Statement to be used in conjunction with the 2007 Annual Shareholders Meeting scheduled to be held on May 14, 2007. 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 2007 Annual Shareholders Meeting scheduled to be held on May 14, 2007. 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 January 19, 2006, the Company filed Form 8-K announcing that it had received a letter from the Nasdaq Stock Market, dated January 18, 2006, 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 2007 Annual Shareholders Meeting scheduled to be held on May 14, 2007. 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 2007. 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, 2007 --------------------------- Richard G. Hunter, Ph.D. /S/ Samuel Bell Director March 29, 2007 --------------------------- Samuel Bell /S/ John Corley Director March 29, 2007 --------------------------- John Corley /S/ David Nicholds Director March 29, 2007 --------------------------- David Nicholds /S/ John Santarpia Director March 29, 2007 --------------------------- John Santarpia /S/ John T. Sinnott Director March 29, 2007 --------------------------- John T. Sinnott, M.D., F.A.C.P. /S/ Ronald Thomas Director March 29,2007 --------------------------- Ronald Thomas FOOD TECHNOLOGY SERVICE, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Financial Statements: Balance Sheets - December 31, 2006 and 2005 Statement of Operations - Years Ended December 31, 2006, 2005 and 2004 Statement of Stockholders' Equity - Years Ended December 31, 2006, 2005 and 2004 Statement of Cash Flows - Years Ended December 31, 2006, 2005 and 2004 Notes to Financial Statements PENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2006 and 2005 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. All common stock per share amounts have been adjusted for a one-for-four reverse split effective July 3, 2006. FAIRCLOTH & ASSOCIATES, P.A. Tampa, Florida February 20, 2007 FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2006 2005 ---- ---- ASSETS Current Assets: Cash $425,110 $524,731 Accounts Receivable, Less Allowance For Doubtful Accounts of $2,500 in 2006 362,684 286,951 Prepaid Expenses 27,852 20,949 -------- -------- Total Current Assets 815,646 832,631 -------- -------- Property and Equipment: Building 3,277,209 2,883,675 Cobalt 3,100,973 2,675,756 Furniture and Equipment 1,792,601 1,764,623 Less: Accumulated Depreciation (4,868,623) (4,479,056) --------- --------- 3,302,160 2,844,998 Land 171,654 171,654 --------- --------- Total Property and Equipment 3,473,814 3,016,652 --------- --------- Other Assets: Deferred Income Tax 650,000 0 Utility Deposit 5,000 5,000 Loan Costs 11,429 11,429 ---------- --------- Total Other Assets 666,429 16,429 ---------- ---------- Total Assets $4,955,889 $3,865,712 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEETS December 31, 2006 2005 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Portion of Note Payable $ 3,113 $ 0 Accounts Payable and Accrued Liabilities 80,855 28,589 Financing Agreement Payable 801,576 733,741 ---------- -------- Total Current Liabilities 885,544 762,330 ---------- -------- Note Payable After One Year 246,787 0 ---------- -------- Total Liabilities 1,132,331 762,330 Stockholders' Equity: Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,756,458 shares in 2006 and 2005 27,565 27,565 Paid-In Capital 12,059,122 12,059,122 Deficit (8,244,638) (8,983,305) ---------- ---------- 3,842,049 3,103,382 Less, 5,155 Treasury Shares at Cost (18,491) (0) ---------- --------- Total Stockholders' Equity 3,823,558 3,103,382 Commitments and Contingencies (Note H) - - ---------- --------- Total Liabilities and Stockholders' Equity $4,955,889 $3,865,712 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF OPERATIONS Year Ended December 31, 2004 2005 2006 ---- ---- ---- Net Sales $1,318,268 $1,703,556 $1,771,914 ---------- ---------- ---------- Processing Costs 359,286 441,897 469,443 Selling, General and Administrative 631,258 707,539 759,982 Depreciation 384,713 366,241 389,568 Interest Expense, Net 48,742 49,030 64,254 ---------- ---------- ---------- 1,423,999 1,564,707 1,683,247 ---------- ---------- ---------- Income (Loss) before Income Taxes (105,731) 138,849 88,667 Income Taxes Current 0 41,700 31,800 Deferred 0 0 (650,000) ---------- ---------- ---------- Income (Loss) before Benefit of Tax Loss Carryovers (105,731) 97,149 706,867 Benefit of Tax Loss Carryovers 0 41,700 31,800 ---------- ---------- ---------- Net Income (Loss) $(105,731) $ 138,849 $738,667 ========== ========== ========== Net Income (Loss) Per Common Share $(0.038) $ .050 $0.269 ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF STOCKHOLDERS' EQUITY Common Paid-In Treasury Stock Capital Deficit Shares ------ ------- ------- ------- Balance,December 31, 2003 $ 27,560 $12,058,027 $(9,016,423) Net Income for Year (105,731) -------- ---------- ---------- Balance,December 31, 2004 27,560 12,058,027 (9,122,154) Issuance of 500 shares Upon Exercise of Stock Options 5 1,095 Net Income for Year 138,849 -------- ---------- ---------- Balance,December 31, 2005 27,565 12,059,122 (8,983,305) Purchase of 5,155 Treasury Shares $18,491 Net Income for Year 738,667 -------- ---------- ---------- ------- Balance,December 31, 2006 $27,565 $12,059,122 $(8,244,638) $18,491 ======== ========== ========== ====== 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 $1,334,732 $1,552,551 $1,693,681 Interest Paid (3,314) Cash Paid for Operating Expenses ( 981,365) (1,124,462) (1,174,668) ---------- ---------- --------- 353,367 428,089 515,699 Cash Flows from Investing: Purchase of Equipment and Cobalt (10,900) (24,906) (846,729) ---------- ---------- ---------- (10,900) (24,906) (846,729) Cash Flows from Financing Activities: Proceeds from Borrowing 249,900 Loan Costs Paid (11,429) Proceeds from Sale of Common Stock 1,100 Purchase of Treasury Stock (18,491) Payment of Loans (200,000) (100,000) ---------- ---------- ---------- (200,000) (110,329) 231,409 Net Increase (Decrease) in Cash 142,467 292,854 (99,621) Cash at Beginning of Year 89,410 231,877 524,731 ---------- ---------- ---------- Cash at End of Year $231,877 $524,731 $425,110 ========== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Reconciliation of Net Income/(Loss) to Net Cash Provided (Used) by Operations: Net Income (Loss) $(105,731) $138,849 $738,667 Adjustments to Reconcile Net Income (Loss) to Cash Provided or Used: Deferred Income Taxes (650,000) Depreciation 384,713 366,241 389,568 Non Cash Payments of Interest and Salaries 76,742 78,842 67,834 (Increase)Decrease in Receivables 16,674 (151,005) (75,733) (Increase)Decrease in Prepaids (2,867) (15,392) (6,903) Increase(Decrease) in Payables and Accruals (16,164) 10,554 52,266 ---------- ---------- ---------- Net Cash Provided (Used) by Operating Activities $353,367 $428,089 $515,699 ========== ========= ========== Supplemental schedule of non-cash investing and financing activities. The Company converted $48,742, $50,842 and $67,834 of interest expense to debt in 2004, 2005, and 2006 respectively. Also, receivables of $28,000 per year were forgiven for services in 2004 and 2005. SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2006 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 for the sterilization of medical, surgical, pharmaceutical and packaging materials. It also disinfects fruits, vegetables and meat products which extends their shelf life. 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 The primary source of revenue is from treating products with Cobalt. Net Revenue is the gross income from such processing less returns and allowances, if any. Revenues are recorded after the Company's performance obligation is completed and product has been processed in accordance with the customer's specifications and collection of the resulting receivable is probable. A provision is made for doubtful accounts which historically have not been significant. 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 The total cost basis of 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. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Note A - Summary of Significant Accounting Policies (continued): 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) Prior to 2006 the Company accounted for these plans under the recognition and measurement principles of APB No. 25, and related interpretations. Accordingly, compensation expense was recognized only when options were granted at an exercise price below the market price at date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the prospective transition method and therefore has not restated prior periods. Under this transition method , stock-based compensation expense in 2006 included compensation expense for all share-based payment awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of the SFAS. The Company recognizes these compensation costs for shares expected to vest on a straight-line basis over the requisite service period of the award using the Black-Scholes option-pricing model. Note B - Financing Agreement: Convertible Financing Agreement to Nordion due on demand plus interest at 1% over prime $ 363,194 Non-convertible accrued interest 438,382 ------------ $ 801,576 ============ 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, 2006 Note B - 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, 2008. All assets of the Company (except for the warehouse and land mentioned in Note C) collateralize all sums advanced by the supplier including accrued interest. Note C - Note Payable and Related Lease Agreement: On November 18, 2005 the Company entered into a loan agreement to borrow $249,900 from a Credit Union. Such loan was funded during 2006 and the proceeds were used to construct a warehouse at the Company's existing facility. The loan bears interest at 6.75%, with interest only payable each month, through August 1, 2007 at which time principal and interest of $2,282 will be paid each month through July 2012 with a balloon payment of $196,606 in August 2012. The Note is collateralized by a mortgage on the property where the warehouse is located and assignment of rental payments from a lease agreement entered into with a major customer. Under the terms of the five year lease, monthly rental payments of $3,333 commenced in December 2006. The tenant has an option to renew the lease for five additional periods of one year each. The note principal is payable as follows: 2007 $ 3,113 2008 9,802 2009 10,537 2010 11,327 2011 12,177 2012 202,944 ------- $ 249,900 ======= FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Note D - Income Taxes: The Company has unused operating loss carry forwards available at December 31, 2006 of $8,728,367 for tax purposes and $8,725,867 for financial reporting purposes. The loss carry forwards expire as follows: Amount Year Tax Book 2007 $1,259,355 $1,238,125 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 $ 8,728,367 $8,725,867 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, 2006 and 2005 were as follows: 2006 2005 Net operating loss carry forwards $3,284,484 $ 3,378,116 ---------- ---------- Net deferred tax assets 3,284,484 3,378,116 Less - Reserve (2,634,484) (3,378,116) ---------- ---------- Deferred Benefit $ 650,000 $ 0 =========== ========== As of December 31, 2005, the Company fully reserved its deferred tax asset because it could not demonstrate that it would have the future taxable income necessary to realize that asset. During 2006, as a result of the continuing diversification and growth in customer base, ongoing profits from operations and the Company's revised estimate of future taxable income, it was concluded that it is more likely than not that future taxable income will be sufficient to realize a portion of the Company's deferred asset. Accordingly, $650,000 of the reserve was reversed as a credit to income tax expense during 2006. FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Note D - Income Taxes(continued): The Company believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. Accordingly, if future operations generate taxable income greater than the projections, further adjustments to reduce the reserve are possible. Conversely, if the Company realizes unforeseen material losses in the future and its future projections of income decrease, the reserve could be increased resulting in a charge to income. Note E - 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 is authorized to grant incentive stock options ("ISO's") or non-statutory options ("NSO'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 125,000 shares. Options under this plan were granted as follows: 2002 5,000 2003 15,000 2004 None 2005 4,750 2006 100,250 ------- 125,000 ======= 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 forgoing limitation shall be specifically designated as being a NSO. The options are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's and NSO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's and NSO'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, 2006 Note E -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. The plan was further amended on March 1, 2001 to grant each non-employee Director options to purchase 1,500 shares annually at the market value on the date of grant and the Chairman is awarded options for an additional 2,500 shares annually. Shares were granted to Directors under this plan as follows: Shares Per Share 2002 4,500 $ 3.36 2003 4,500 4.08 2004 1,500 4.96 2005 7,000 4.12 2006 10,000 3.28 Changes that occurred in options outstanding are summarized below: 2006 2005 2004 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 61,250 $4.88 62,714 $5.80 73,264 $7.60 Granted 112,500 $3.25 11,750 $4.12 1,500 $4.96 Exercised -- -- (500)$2.20 -- -- Expired/cancelled(26,250) $2.16 (12,714)$8.64 (12,050) $9.72 Outstanding at end of year 147,500 $3.20 61,250 $4.88 62,714 $5.80 Exercisable at end of year 30,750 $4.08 39,500 $5.20 43,714 $6.16 As mentioned in Note A, effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R. As a result, additional compensation expense of $21,693 was recorded in 2006 and an additional $91,129 could be recorded over the remaining vesting period of 56 months. The Company used the following assumptions in applying the Black-Scholes pricing method: Risk free interest rate 4.7% Expected Volatility 40% Expected Life 5 years Dividend Yield 0% FOOD TECHNOLOGY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2006 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 B for financing arrangements).The Company has recently purchased the following quantities of Cobalt from MDS Nordion: Curies Amount 2003 600,000 $ 861,155 2006 195,139 394,839 Feb-07 384,065 758,905 The President of the Credit Union which funded the Company's warehouse loan is A director of the Company. (see Note C) Note G - Concentration and Credit Risk: Although the Company continues to diversify its customer base, three customers accounted for approximately 64% of revenues in 2006. 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. A provision has been made for doubtful accounts which historically have not been significant. Note H - Commitments and Contingencies: On March 11, 2006 the Board of Directors extended the President's employment contract for an indefinite period commencing September 1, 2006 at an annual salary of $110,000 plus options to purchase 100,000 shares of the Company's common stock at $3.24 per share over a five year period.