-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KETCGAqET9AeZqfgekUK0UpwgQFvOPpTh4X40g/1sfBNm2NYSrL1ionlVMX0trkj 82lSh/1QeVJOKXSGrUncaQ== 0000868267-98-000003.txt : 19980317 0000868267-98-000003.hdr.sgml : 19980317 ACCESSION NUMBER: 0000868267-98-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOD TECHNOLOGY SERVICE INC CENTRAL INDEX KEY: 0000868267 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 592618503 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19047 FILM NUMBER: 98565805 BUSINESS ADDRESS: STREET 1: 1801 THONOTOSASSA RD STREET 2: SUITE 3 CITY: PLANT CITY STATE: FL ZIP: 33566 BUSINESS PHONE: 8137523364 MAIL ADDRESS: STREET 1: 1801 THONOTOSASSA RD STREET 2: SUITE 3 CITY: PLANT CITY STATE: FL ZIP: 33566 FORMER COMPANY: FORMER CONFORMED NAME: VINDICATOR INC /FL/ DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: VINDICATOR OF FLORIDA INC /FL/ DATE OF NAME CHANGE: 19600201 10KSB 1 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, 1997 Commission File No. 0-27864 FOOD TECHNOLOGY SERVICE, INC. (Formerly Vindicator, 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: (941) 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 X No ----- ----- 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 $191,291. As of December 31, 1997, 10,052,216 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the voting stock held by non-affiliates (3,994,626 shares) was approximately $17,601,320 based on the market price at that date. DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS PART I PAGE NO. Item 1 Business ..........................................................1 Item 2 Properties.........................................................7 Item 3 Legal Proceedings..................................................8 Item 4 Submission of Matters to a Vote of Security Holders................8 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................................................9 Item 6 Management's Discussion and Analysis...............................9 Item 7 Financial Statements..............................................11 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............................11 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act................12 Item 10 Executive Compensation...........................................13 Item 11 Security Ownership of Certain Beneficial Owners and Management...15 Item 12 Certain Relationships and Related Transactions...................16 Item 13 Exhibits and Report on Form 8-K..................................16 PART I Item 1. Business - ---------------- Food Technology Service, Inc., formerly Vindicator, Inc., (the "Company"), was organized as a Florida corporation on December 11, 1985. The Company owns and operates an irradiation facility, that uses gamma radiation produced by Cobalt 60, to treat or process various foods for insect disinfestation, shelf life extension and control of certain disease causing microorganisms. In April 1991, the Company completed its initial public offering, and the proceeds therefrom, approximately $2,000,000, were used primarily to pay for a portion of the cost of building the Company's irradiation facility in Mulberry, Florida. Construction of the facility was completed in December, 1991 and it became operational in January 1992. The benefits of radiation in preventing food-borne illness are well known. Food irradiation is supported by the United States Department of Agriculture ("USDA"), the World Health Organization, the United States Public Health Service, the American Medical Association, the Institute of Food Technologists, and reputable scientific and medical organizations throughout America. In addition, more than forty countries have approved the irradiation of food products. The United States Food & Drug Administration ("FDA") has approved irradiation as a safe and effective means of processing a variety of foods. To date, the FDA has approved the irradiation of (i) pork, to control trichinosis; (ii) poultry, for the control of disease-causing pathogens; (iii) spices, for sterilization; and (iv) all fresh fruits and vegetables, for insect disinfestation, and to delay maturation, which extends the shelf life of many fresh fruits and vegetables. The Company expects that its success will be dependent upon the processing of poultry, meat and shellfish. However, the FDA has not yet approved the irradiation of fish, shellfish, or meat, nor has it approved a standard polystyrene foam tray for the packaging of poultry. The delays at the federal level are preventing the Company from implementing the technology for the irradiation of meat and shellfish which has been proven to be effective in controlling E. coli, listeria and other pathogens in meat, and in eliminating vibrio, including cholera, found in raw shellfish. The petition to irradiate meats was submitted to the FDA in July 1994. A petition for the approval of the irradiation of fish and shellfish has been pending more than eight (8) years, yet no final FDA action has been taken. The information necessary to approve the standard yellow polystyrene foam tray for poultry has been at the FDA for nearly two years, but it has not yet acted to approve the use of this material for packaging. Management is working diligently with some meat processors and with a major retailer to gain the necessary approvals, so that the technology which can protect consumers from dangerous pathogens will be implemented. The Company presently irradiates meat for astronauts, which has been approved by the FDA, but it cannot, as yet, offer its services to processors to irradiate meat for the American people. Many harvesters of shrimp and oysters have been forced into bankruptcy, as a result of the warnings to the public about the dangers of enjoying raw shellfish, while the technology of irradiation, which has been proven to be an effective method of making shellfish safe for human consumption, awaits FDA approval. The FDA approved irradiation of meat products for controlling disease-causing micro-organisms on December 2, 1997. The USDA must publish regulations for the inspection and operation of an irradiator before we can begin processing these meat products. We expect this to be completed by late 1998. The numerous problems that have been encountered in gaining the FDA and USDA approvals have been very discouraging for the Company, and revenues to date have been nominal as a result thereof. Revenues for 1997 were $191,291, of which approximately 50% was attributable to the processing of seasonings and spices, 18% attributable to fruits and vegetables and 18% to testing products for others. A nominal amount of poultry was also processed and shipped. In February of 1997, the Company and the Marcre Sales Corporation ("Marcre"), based in Forest Park, Georgia, signed an agreement in principle for Marcre to handle sales and distribution of food products processed by the Company. Additional partners in this initiative include MDS Nordion ("Nordion") and Nations Pride of Mulberry, Florida. Marcre specializes in fresh and frozen poultry and operates two processing plants in the Atlanta, Georgia area. The Company does not now, nor does it intend to produce or sell foods. The Company will market its irradiation process to growers and producers, as a substitute for and/or a complement to other food processing methods, such as canning, freezing, heat pasteurization and fumigation. The cost to a customer of the Company's irradiation services will vary depending on such factors as the amount of time the customer's food products occupy the radiation chamber, the costs and availability of competing methods of food processing, and general supply and demand and other economic factors. 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. The Company's facility is currently rated at approximately 1.7 million curies of Cobalt 60. See "Cobalt 60 Supply," below. Like an airport x-ray system, the process does not make the food radioactive. The food is safe to eat immediately after processing. The total time required to process different products will vary, primarily reflecting (i) the different radiation doses required for different purposes (e.g., insect disinfestation requires a lower dose than does elimination of microorganisms), and (ii) the density of the product being irradiated (e.g., irradiation of relatively dense bulk poultry takes longer than irradiation of less dense retail packaged poultry). A higher or lower dose (but always within the range approved) can be applied by increasing or decreasing the time of exposure of the food to the radioactive source. Devices 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 At December 31, 1997, the Company employed nine persons, six of which are office personnel and three are plant employees. If and when the facility becomes fully operational, the Company anticipates that it will need to hire approximately seven additional employees for each shift the facility operates. Required personnel will included a shift supervisor, a controller/ scheduler, a quality assurance supervisor, a plant operator, and three loaders/unloaders. All handling of the Cobalt 60 source, which occurs periodically for the purpose of adding or removing Cobalt 60, is done by Nordion. See "Agreements with MDS Nordion" below. Cobalt 60 Supply The Company has in place approximately 1.7 million curies of Cobalt 60. The level of radioactivity of Cobalt 60 declines at approximately 12% per year, and new Cobalt 60 must from time to time be purchased to maintain an appropriate radiation level. The price of Cobalt 60 ranges from $1.35 to $1.75 per curie. Nordion is the sole supplier of Cobalt 60 and has agreed to sell the Company all its requirements for Cobalt 60, and to accept the return of all used Cobalt 60 that has reached the end of its useful life. The amount of Cobalt 60 in place is sufficient to satisfy the Company's needs for the next three to four years. Cobalt 60 is readily available from several sources. See "Agreements with MDS Nordion" below. Additional Uses for Irradiation Research Services The Company uses its facility to irradiate various products as required in research activities being conducted by others, including state and federal government agencies and academia. Medical and Consumer Products The Company does not expect to provide irradiation treatment for medical products, because under the terms of its agreement with Nordion the Company will under some circumstances be prohibited from processing any product other than food and related products. However, if the Company's facility does not operate successfully as a food irradiation facility, it could be converted at little or no cost to a medical and consumer products irradiation facility. 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 numerous medical supply irradiation plants already in operation. Unlike a nuclear power plant, the process does not involve any nuclear reaction. An irradiator is not a nuclear reactor. It is simply a processing plant containing a shielded area where foods are exposed to a source of ionizing radiation. The Company's irradiation activities will produce no harmful solid, liquid or gas effluents or pollutants. The Company uses Cobalt 60 as its irradiation source, which is a manufactured product and not a byproduct from a nuclear reactor or otherwise. 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 as does the U.S. Food and Drug Administration. The USDA inspects the premises whenever the Company is processing meats or poultry. Regulatory Matters Regulation of Irradiated Foods In the United States, primary responsibility for approval of food irradiation rests with the FDA. No irradiated food can be sold, unless the FDA has found that irradiation of a particular food, at specified doses, is both safe and generally effective for the intended purpose. To date, the FDA has approved the irradiation of poultry for the control of Salmonella and certain other disease causing microorganisms, the irradiation of all fresh fruits and vegetables for insect disinfestation and shelf life extension, the irradiation of spices for sterilization, and the irradiation of pork for the control of trichinosis. A petition for the approval of the irradiation of fish and shellfish is presently pending. On July 7, 1994, a petition was submitted to the FDA by the meat industry to gain approvals to irradiate all meats, so that the risk of E. coli: 0157 H7 and other pathogens can be removed from meat products. The FDA approved irradiation of meat products for controlling disease-causing micro-organisms on December 2, 1997. The USDA must publish regulations for the inspection and operation of an irradiator that will process meat products. We expect this to be completed by late 1998. The Company's facility is being used by the shellfish industry for research services to gain the approvals from the FDA. In general, no further approvals are necessary for the sale of irradiated fresh fruits and vegetables in the United States. However, the shipment of any irradiated food for export will be subject to the rules of the country of destination. 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. Among the foods anticipated to be processed by the Company, Florida grapefruit, which sometimes carries fruit fly larvae, is subject to quarantine requirements in other citrus producing states and countries, most notably Japan. As of yet, no such state or country, including Japan, has approved irradiation as effective in insect disinfestation of grapefruit. The Company believes that this is largely due to the fact that to date there has been no plant proposing to irradiate grapefruit for export into countries and states that quarantine grapefruit. The Company is currently working with the USDA Animal and Plant Inspection Service to allow its irradiation process to satisfy those quarantine requirements. The principal issue as to approval of the irradiation of grapefruit is not the safety of the irradiated grapefruit, but rather the effectiveness of the process. The USDA has found that irradiation is an effective means of satisfying such quarantine requirements and is making the results of its research available to interested states and foreign countries. The Company knows of no reason why the USDA's research should not be accepted. Quarantine restrictions also apply to certain foods imported into the United States. The USDA has established rules approving irradiation, at the point of shipping, in satisfaction of the quarantine requirements for papayas. The Company is currently working with the USDA Animal and Plant Inspection Service to allow the USDA to approve irradiation at the point of import as satisfying such requirements, but the Company cannot predict whether such approvals will be forthcoming. The Port facility at Tampa is a major point of import of produce, much of which is subject to USDA quarantine requirements. Any processing of meat and poultry, whether for irradiation, packaging or otherwise, is also regulated by the USDA. 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 and poultry and are now writing the required regulations for the recently approved meat products. Regulation of the Facility and the Irradiation Process The Company has obtained a license for the operation of its facility from the Office 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 operation 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. In addition, the long-term course of regulatory policy cannot be predicted and, although regulatory approvals have been forthcoming, there can be no assurance that laws and regulations will not be applied in a manner that adversely affects the Company. 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, a corporation located in Kanata, Ontario, Canada ("Nordion"), whereby Nordion agreed to supply the Company with all of the equipment necessary to operate its irradiation facility, including 400,000 curies of Cobalt 60. The total purchase price for the equipment and cobalt was approximately $2,400,000, of which $400,000 was paid and the balance of approximately $2,000,000 was scheduled to become due and payable, without interest, on September 4, 1994. Nordion has converted all but $585,595 and recently agreed to extend the date for repayment of the balance of this indebtedness, and accrued interest, to January 4, 1999. Nordion also assisted the Company in the construction of its facility, providing the Company, its architects and engineers, with construction drawings of the irradiation cell, plans and specifications and assisted the Company in connection with the Company's applying for and obtaining all necessary licenses and permits for the facility. On July 1, 1991, MDS Health Group, Inc., a Delaware corporation ("MDS Health") then an affiliate of Nordion, loaned the Company $300,000. Such loan was evidenced by a Debenture due and payable, without interest, on July 1, 1993. The Debenture was convertible into shares of Common Stock at the conversion rate of $4.50 per share. In connection with the loan, the Company agreed that in the event MDS Health acquired a controlling interest in Nordion, it would grant to MDS Health or Nordion the right to convert the $2,000,000 of indebtedness to Nordion referred to in the preceding paragraph into Common Stock of the Company at a conversion rate of $4.50 per share. MDS Health acquired Nordion in November, 1991. 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 connection therewith the Company agreed to reimburse Nordion for any and all liabilities, costs, damages, attorney fees and other expenses which Nordion may sustain as a consequence of the Indemnity Agreement from Nordion to the insurer or payments made by the Bank of Montreal on a letter of credit in the amount of $450,000 furnished by the Bank to the insurer on behalf of Nordion, each in connection with the issuance of the surety bond. On December 11, 1991 the Company entered into a further Agreement with Nordion whereby Nordion agreed to make available to the Company over a period of time an additional $850,000 for working capital purposes and an additional $900,000 in the form of additional curies of Cobalt 60 (approximately 600,000 curies). In addition, as part of the Agreement, (a) The Company reduced the conversion rate of the above mentioned $2,000,000 of indebtedness to Nordion from $4.50 to $4.05 per share. (b) The $300,000 debenture payable to MDS Health was assigned by MDS Health to Nordion and canceled. A new Debenture, in the amount of $900,000 payable to Nordion was issued (this included the $300,000 prior Debenture payable to MDS Health and $600,000 of the additional $850,000 that Nordion agreed to lend to the Company). The Debenture is due and payable September 4, 1994 and was convertible at any time prior thereto into shares of Common Stock at the conversion rate of $4.05 per share. In addition, the Debenture is secured by a first mortgage on the property on which the plant is located. (c) The Company agreed to pay the $900,000 due Nordion for the additional 600,000 curies of Cobalt 60 on September 4, 1994 without interest. Such indebtedness is secured by the irradiation equipment and other personal property and the 1,000,000 curies of cobalt supplied by Nordion. In addition, the indebtedness was convertible at any time on or before September 4, 1994 into shares of Common Stock of the Company at the conversion rate of $4.05 per share. (d) The Company granted Nordion the right to designate two members to the Board of Directors. On November 23, 1994, Nordion extended the due date on all indebtedness as well as accrued interest from September 4, 1994, to January 4, 1996 and in early 1996, further extended the due date to January 4, 1997. In early 1997, Nordion again extended the due date to January 4, 1998. In 1998, Nordion extended the due dated to January 4, 1999. At December 31, 1997 such indebtedness amounted to $585,595. The indebtedness continues to be secured by substantially all of the assets of the Company. As part of such extensions, the conversion rate was reduced from $4.05 to $.80 per share. For the balance of the original loans ($382,317). For all cash advances and interest accrued in 1997 the conversion option is at 70% of the closing price the day prior to the execution of the option. For terms of the Agreement, reference is made to Note D of the Notes to Financial Statements. In addition to the 1 million curies of Cobalt 60, which were supplied the Company in 1990 and 1991, Nordion, in 1992, stored an additional 2.4 million curies at the Company's facility. In anticipation that it would be needed in the Company's operations. See Item 6 Management's Discussion and Analysis and Note H of the Notes to Financial Statements. Due to the decline in level of radioactivity as a result of decay, there is currently available approximately 1.2 million curies. Although the additional Cobalt-60 is located on the Company's premises and available to it for use in processing, title to this Cobalt-60 continues to be held by Nordion and may be removed by Nordion in its discretion at any time. The agreements with Nordion provide that, until the Company pays its debt to Nordion in full, the Company may not compete with Nordion's existing customers in their irradiation of non-food products, unless the Company obtains Nordion's prior consent. This provision could make it difficult for the Company to succeed in the event that irradiation of food and related products is not sufficient to allow the Company to become profitable. Item 2. Properties - ------------------ The Company's irradiation facility and executive office are located on an approximately 4.33 acre site owned by the Company in Mulberry, Polk County, Florida. The Company purchased the site because of its convenient access to State Road 60, a major transportation artery between central Florida produce growers and the port facility at Tampa. Should the Company's first facility prove successful, the site is sufficiently large to add one or two additional irradiation chambers, thereby increasing the capacity of the facility. The Company's irradiation facility and executive office comprises 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 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" position, 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 foods to and from the processing chamber. The Company's facility is designed to operate 24 hours a day, seven days a week. Although the Company currently has available approximately 1.7 million 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 under Item 1 Business - Agreements with MDS Nordion" substantially all of the assets of the Company are pledged as collateral against the obligation to 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 over-the-counter 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, mark-down, or commissions and do not necessarily represent actual transactions. BID PRICES ---------- 1997 High Low ---- --- First Quarter 1.75 .75 Second Quarter 1.375 .94 Third Quarter 6.375 .62 Fourth Quarter 13.125 4.40 1996 First Quarter 2-3/8 21/32 Second Quarter 2-1/8 1 Third Quarter 1-15/16 1 Fourth Quarter 1-9/16 11/16 (b) Approximate Number of Equity Security Holders. ---------------------------------------------- As of December 31, 1997, the approximate number of beneficial holders of Common Stock of the Company was approximately 3,000. (c) Dividend History and Policy --------------------------- 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 completed construction of its irradiation facility in Mulberry, Florida in December 1991 and the facility became operational on January 24, 1992. The Company is still in the developmental stage. The plant was constructed to irradiate fruits and vegetables for the primary purpose of extending shelf life and poultry to control salmonella and other illness causing bacteria. Soon after the commencement of operations, it was recognized that the success of the Company would be dependent on the irradiation of poultry and red meats. This was due to the fact that most of the fresh fruits and vegetables are pre-sold in the Florida area where the extension of shelf life is not necessarily a help for the fruit and vegetable growers. In addition, although the FDA has approved the use of irradiation for the extension of shelf life, the USDA Animal and Plant Health Inspection Service (APHIS) has not completed their approval for the use of irradiation for post harvest quarantine treatment. As a result, Japan, a large importer of grapefruit, has declined to consider irradiation as a quarantine treatment until approval is obtained from the USDA Although the rules for the irradiation of poultry were finalized by the U. S. Department of Agriculture and published in the Federal Register on September 22, 1992, the Company is still awaiting FDA approval for standard packaging material for retail poultry. During 1997 the FDA approved the use of a white tray for meat products. It is hopeful that necessary approvals for standard yellow trays will be forthcoming in the near future. While awaiting action by the FDA, the Company's revenue (approximately $200,000 for 1997) has been realized primarily from the processing of food ingredients, seasonings and spices, food packaging materials and from testing the processing of various other food commodities. The red meat industry, which has been faced with pathogen problems such as E. Coli:0157 H7 supported a petition to irradiate all meats that was approved by the FDA on December 7, 1997. The USDA must publish regulations for the inspection and operation of an irradiator that will process meat products. We expect this to be completed by late 1998. Until such time, this Company will continue to process whatever items are available and perform testing of products for others. At December 31, 1997, the Company had negative working capital of ($68,635) and cash of approximately $12,231. The loss from operations for the year ended December 31, 1997 was ($1,062,369). Operating costs in 1997 were approximately $56,000 per month, down from $70,000 in 1996. The decline in operating costs resulted primarily from a reduction in personnel, which effected both Processing costs and General, Administrative and Development costs, and a reduction in interest. The reduction in personnel was due primarily to the decrease in revenues and an attempt by the Company to limit expenses whereas the reduction in interest was due to the conversion by Nordion of a portion of the debt owed it. The Company believes that increased revenues will have a positive impact on the negative gross margins since Processing costs and General, Administrative and Developmental costs will not increase significantly as a result of an increase in revenue. On September 25, 1992 Nordion stored approximately 2,600,000 curies of cobalt at the Company's plant. Subsequently 200,000 curies were returned, leaving approximately 2,400,000 curies at the Company's plant. Such cobalt was stored in anticipation that it would be needed in the Company's operations, however, such cobalt has not been needed because of low processing volume due to the lack of necessary FDA approvals and marketing demand. Due to physical layout of the Company's plant, all product processed was exposed to Nordion's cobalt. If Nordion's cobalt had been owned by the Company, or had been required for increased processing volume or speed, the decay of such cobalt would have been charged to operations, resulting in an increased expense of approximately $300,000, $260,000 and $230,000 for the years ended December 31, 1995, 1996 and 1997, respectively (approximately $1,630,000 from inception through December 31, 1997). The net losses for such periods would have been $1,627,867, $1,330,400 and $1,236,981 respectively ($9,224,887 from inception through December 31, 1997). At such time that the Company's operations increase to such an extent that the Nordion cobalt is required for increased processing volume or speed, the Company will begin charging its decay to operations. At December 31, 1997, the Company's outstanding debt amounted to $585,595, which consisted of a financing agreement with Nordion January 4, 1999 plus interest at prime plus 1% and as convertible debenture payable to Nordion due January 4, 1999 plus interest at prime plus 1%. To fund its operations during 1997, the Company received $255,282 from the private sale of 319,102 shares of Common Stock to Nordion. In addition, the Company reduced its outstanding obligations by converting accrued interest due Nordion ($242,265) into 302,830 shares of Common Stock. Nordion converted a majority (------) of the debt owed to it into 3,600,000 shares of Common Stock. It is not expected that income from operations will be sufficient in the foreseeable future to cover the Company's operating costs. Although Nordion has indicated that it will continue to fund operations, there is no assurance that it will continue to do so. In the event Nordion discontinues funding the Company's operations or the Company is not successful in raising additional capital, the Company will have to curtail a portion or all of its operations. Item 7. Financial Statements - ---------------------------- Reference is made to the Company's Financial Statements included herewith. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------- None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act - -------------------------------------------------------------------------------- Directors and Executive Officers of the Company. As of December 31, 1997, the directors and executive officers of the Company are as follows: Name Age Position with the Company *Gordon H. Shirah, II 61 Board Chairman/Director E.W. (Pete) Ellis 56 President/Chief Executive Officer/ Director Harley W. Everett 49 Chief Financial Officer Frank M. Fraser 62 Director Geoff Marott 48 Director Paul O'Neill 59 Director All directors of the Company hold office until the next annual meeting of shareholders or until their successors have been duly elected and qualified. Officers are elected annually by the Board of Directors to hold office until their successors are duly elected and qualified. Gordon H. Shirah II (*Deceased 2/18/98) was a director of the Company since its inception in 1985 through July 1993. In July 1996, he was reelected as a Director and Board Chairman. From 1968 until his retirement in 1995, he worked as a Certified Public Accountant with Bella Hermida & Co. E.W (Pete) Ellis has been President, Chief Executive Officer and Director since December 1996. He has been in the food business for the past 33 years, ten years of which were spent with Oscar Mayer & Co., and fifteen years with ConAgra. He was employed in sales and marketing with both companies. He was President and owner of Ellis, Harris, and Associates, Inc., a food brokerage company, from 1986 to 1988. Harley W. Everett has been Executive Vice President of the Company since May 1990. He was President of Harley Williamson Software from 1988 until joining the Company in 1990. Mr. Everett was Chief Executive Officer of Micro Resources Corporation of America from 1986 through 1988, and was Product Development Manager for National Computer Systems, Inc. from 1983 through 1986. Frank M. Fraser served as a director of the Company from May 1992 through September 1993. He was reelected as a director in July 1996. He is presently Vice President of Market Development at Nordion. In June 1964, Mr. Fraser joined Atomic Energy of Canada Limited (now MDS Nordion) as a project engineer. He is a Director of the Canadian Irradiation Centre Laval, Quebec. He is also the Canadian delegate to the International Consultative Group on Food Irradiation and has Chaired the International Meeting on Radiation Processing Geoff Marott served as a director of the Company since February 1997. He is the President and Chief Executive Officer of Marcre Sales Corporation, a sales and marketing company primarily focusing on proprietary items for national restaurant accounts. Mr. Marott formed Marcre Sales inn 1984 after serving as President of Filet of Chicken since 1980. He is also currently serving as Chairman of the Board of American Century Bank in Stockbridge, Georgia. Paul O'Neill served as a director of the Company from August 1992 through September 1993. He was reelected as a director in July 1996. He is currently retired. From January 1985 to March 1992, Mr. O'Neill was President, Chief Executive Officer and a director of Nordion and its predecessor company Atomic Energy of Canada Limited. He was Executive Vice President and Chief Financial Officer of Atomic Energy of Canada Limited from September 1978 until January 1985. Item 10. Executive Compensation - ------------------------------- The following tables set forth certain information relating to the compensation earned by the Chief Executive Officer of the Company for the years indicated. Summary Compensation Table Long-Term Compensation ------------ Awards ------ Securities Annual Compensation Restricted Underlying Year Salary($) Stock Options(#) ---- ------------------- ---------- ----------- E. W. (Pete) Ellis President and Chief Executive Officer(1)...1997 $ 70,000 1996 2,692 10,000 shs 100,000 shs ___________ (1) Mr. Ellis was appointed President and Chief Executive Officer on December 9, 1996. His compensation is set at $70,000 per year and he is eligible for a bonus for the year ending December 31, 1997, upon the attainment of certain sales targets. On November 11, 1996, the Company agreed to issue Mr. Ellis 10,000 shares of Common Stock in connection with his employment and granted to him options to purchase 100,000 shares of Common Stock. Such shares were issued subsequent to December 31, 1996. The options are exercisable for the purchase of 20,000 shares per year in each of the first five years of his employment at an exercise price of $1.00 per share, the fair market value of the Company's Common Stock on the date of grant. The option terminates December 9, 2006. Stock Option Plan The Company has an Incentive and Non-Statutory Stock Option Plan covering 150,000 shares of Common Stock (the "Plan"). There is currently outstanding five-year options to purchase an aggregate of (I) 75,500 shares of Common Stock of the Company, exercisable at $8.50 and $9.35 per share (granted in 1992) and (ii) 100,000 shares at $1.00 per share (granted in 1996). The options are exercisable 60% after one (1) year of continued employment after the date of grant and 10% in each of the following four years (a year is defined as the period between Annual Stockholders meetings). ISO's and NQO's granted to an optionee terminate 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 one year after termination in the event of disability, and 180 days in the event of death. A former officer also holds warrants to purchase 100,000 shares of Common Stock. Such warrants expire in 1998 and 1999 and are exercisable at $8.25 per share. The market price of the Company's Common Stock December 31, 1997 was $4.406 per share. Item 11. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The following table sets forth as of December 31, 1997, the ownership of Common Stock of the Company of (i) all persons known by the Company to own beneficially 5% or more of such Common Stock, (ii) each current director and officer of the Company and (iii) all current directors and officers as a group, together with their percentage holdings at such date. The addresses of all holders of 5% or more of the Common Stock are included in the table. Number and Percent Of Shares Beneficially Owned At December 31, 1997 -------------------- Name and Address Number Percent - ---------------------------- ------ ------- MDS Nordion 6,549,079 65.15 447 March Road-Kanata Ontario Canada K2K 1X8 E.W. (Pete) Ellis 30,000 (*) Harley W. Everett 7,000 (*) Frank M. Fraser Paul O'Neill All Directors and Officers 6,646,079 66.12 as a group (5 persons) * Less than 1% (1) Includes 543,896 shares of Common Stock which are issuable upon conversion of $585,595 of indebtedness owed Nordion by the Company. See "Business - Agreements with MDS Nordion." Messrs. Fraser and O'Neill are designees of Nordion to serve on the Companies Board of Directors. Messers. Fraser and O'Neill own less than 1% each of the Capital Stock of Nordion and they disclaim beneficial ownership of the Common Stock of the Company which Nordion owns or has the right to acquire. Approximately 99% of the outstanding shares of Nordion's common stock is owned by MDS, Inc., a Quebec Corporation, whose shares are traded on the Toronto Stock Exchange. (3) On November 11, 1996, the Company agreed to issue Mr. Ellis 10,000 shares of Common Stock. Such shares had not been issued as of December 31, 1996. The Company also granted to Mr. Ellis on November 11, 1996 options to purchase 100,000 shares of the Company's Common Stock. The options are exercisable 20,000 shares per year for a period of five years at an exercise price of $1.00 per share. (4) Includes 5,000 shares underlying options which are currently exercisable or exercisable within the next sixty (60) days. (5) Includes shares underlying options which are currently exercisable or exercisable within the next sixty (60) days and shares underlying convertible debt. Item 12. Certain Relationships and Related Transactions - -------------------------------------------------------- See "Business-Agreements with MDS Nordion." Item 13. Exhibits and Report on Form 8-K - ---------------------------------------- (a) Exhibits -------- (1) Articles of Incorporation. Reference is made to Exhibit 3.1 included in the Company's Registration Statement on Form S-18 (File No. 33- 36838-A). (2) By-Laws. Reference is made to Exhibit 3.2 included in the Company's Registration Statement on Form S-18 (File No. 33-36838-A). (3) Agreements entered into by the Company with Nordion International, Inc. *(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. * Reference is made to Exhibit (c)(3) included in the Company's Form 10-K Report filed for the year ended December 31, 1991. ** Reference is made to Exhibit 3(g) included in the Company's Form 10-KSB Report filed for the year ended December 31, 1993. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1997. 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 thirteenth day of March, 1998. FOOD TECHNOLOGY SERVICE, INC. By: /S/ E.W. (Pete) Ellis ------------------------- E.W. (Pete) Ellis, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: Name Title Date /S/ E.W. (Pete) Ellis Chief Executive Officer March 13, 1998 - --------------------------- and Director E.W. (Pete) Ellis /S/ Harley W. Everett Chief Financial and March 13, 1998 - --------------------------- Accounting Officer Harley W. Everett /S/ Frank M. Fraser Director March 13, 1998 - --------------------------- Frank M. Fraser /S/ Paul O'Neill Director March 13, 1998 - --------------------------- Paul O'Neill /S/ Geoff Marott Director March 13, 1998 - --------------------------- Geoff Marott FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants Financial Statements Balance Sheets - December 31, 1997 and 1996 Statements of Operations - Years Ended December 31, 1997, 1996 and 1995 and from December 11, 1985 (Inception) through December 31, 1997 Statement of Stockholder's Equity - December 11, 1985 (Inception) through December 31, 1997 Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 and from December 11, 1985 (Inception) through December 31, 1997 Notes to Financial Statements REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders Food Technology Service, Inc. I have audited the accompanying balance sheets of Food Technology Service, Inc. (a Development Stage Company) as of December 31, 1997 and 1996 and the related statements of operations, Stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted the audits in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audits provide a reasonable basis for my opinion. In my 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, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company is in the development stage and has not received significant revenue and has incurred losses since inception. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include adjustments that might result from the outcome of this uncertainty. Food Technology Service, Inc. Page 2 I previously audited the balance sheets at years ended December 31, 1985 through 1994 and the related statements of operations, Stockholders' equity, and cash flows for the years then ended (none of which are presented herein) and I expressed a qualified opinion because of the substantial doubt about the Company's ability to continue as a going concern. The cumulative data from December 11, 1985 (inception) through December 31, 1997 appearing on the statements of operations, Stockholders' equity and cash flows has been compiled from such financial statements and the statements presented herein. In my opinion, the cumulative data is fairly stated in all material respects in relation to the financial statements from which it was derived. JOHN J. FAIRCLOTH, C.P.A. Tampa, Florida March 10, 1998 FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, 1996 1997 ---------- ---------- ASSETS Current Assets: Cash $26,104 $12,231 Accounts Receivable 40,331 34,745 ------ ------ Total Current Assets 66,435 46,976 Property and Equipment: Building 2,883,675 2,883,675 Cobalt 1,310,272 1,310,272 Furniture and Equipment 1,650,242 1,654,880 Less Accumulated Depreciation (1,657,420) (1,942,276) ----------- ----------- 4,186,769 3,906,551 Land 171,654 171,654 --------- --------- Total Property and Equipment 4,358,423 4,078,205 Other Assets 49,528 5,000 --------- --------- Total Assets $4,474,386 $4,130,181 ========== ========== SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, 1996 1997 --------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable 101,248 115,611 --------- --------- Total Current Liabilities 101,248 115,611 Financing Agreement and Debenture Payable 3,362,229 585,595 Stockholders' Equity: Common Stock $.01 Par Value Authorized 20,000,000 Shares, Outstanding 5,750,284 Shares in 1996 and 10,052,216 in 1997 57,503 100,522 Paid-In Capital 7,541,312 10,923,339 Deficit Accumulated During Development Stage (6,587,906) (7,594,886) --------- --------- 1,010,909 3,428,975 Commitments and Contingencies (Notes B and I) Total Liabilities and Stockholders' Equity $4,474,386 $4,130,181 SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
December 11, 1985 (INCEPTION) Year Ended December 31, Through December 31, 1995 1996 1997 1997 ------------ ------------ ------------ ------------ Net Sales $272,315 $196,647 $191,291 $1,210,359 ------------ ------------ ------------ ------------ Processing Costs 318,357 276,788 241,597 1,776,519 General, Administrative and Development 507,867 321,786 435,871 4,049,000 Depreciation 328,939 307,927 284,856 1,947,850 Interest Expense $380,300 $342,934 $291,336 $1,561,684 ------------ ------------ ------------ ------------ $1,535,463 $1,249,435 $1,253,660 $9,335,053 ------------ ------------ ------------ ------------ Loss from Operations (1,263,148) (1,052,788) (1,062,369) (8,124,694) Other Income (Loss): Interest Income 280 5 3 188,897 Miscellaneous 14,400 Foreign Exchange (63,222) 5,497 99,913 431,000 Equity in Net Loss of Affiliate (1,777) (23,114) (44,527) (104,489) ------------ ------------ ------------ ------------ Loss before Income Taxes (1,327,867) (1,070,400) (1,006,980) (7,594,886) Income Taxes 0 0 0 0 ------------ ------------ ------------ ------------ Net Loss ($1,327,867) ($1,070,400) ($1,006,980) ($7,594,886) ------------ ------------ ------------ ------------ Net Loss Per Common Share ($0.38) ($0.22) ($0.16) ($1.23) ------------- ------------- ------------ ------------ SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY
Common Paid-In Stock Capital Deficit ---------- ---------- ---------- December 11, 1985 (Inception) to December 31, 1993): Sale of 2,035,000 Shares of Stock in January 1986 for $37,435 in Cash, $36,000 in Notes and for Services $20,350 $58,120 Sale of 77,000 Shares of Stock in January and February 1986 for $192,500 in Cash 770 191,730 Purchase of 8,000 Shares of Stock for $20,000 (80) (19,920) Sale of 69,000 Shares of Stock for $690 to Investors who Previously Purchased Stock for $2.50 per Share 690 Surrender of 338,500 Shares by Founding Shareholders for No Compensation (3,385) 3,385 Sale of 451,500 Shares of Stock for $1,354,500 in Cash and Notes in 1989 4,515 1,349,985 Sale of 483,321 Shares of Stock for $2,166,508 in Cash in 1990 4,833 2,161,675 Offering Cost to Sell Stock (422,460) Sale of 228,474 Shares of Stock for $1,440,825 in Cash and Services in 1992 and 1993 2,285 1,438,540 Offering Cost to Sell Stock (50,250) Net Loss, December 11, 1985 (Inception) to December 31, 1993 (2,948,576) ------------------------------------ Balance, December 31, 1993 $29,978 $4,710,805 ($2,948,576) SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Common Paid-In Stock Capital Deficit Sale of 37,808 Shares of Stock for $214,850 in Cash and Services 378 214,472 Issuance of 17,416 Shares of Stock for Stock in Nations Pride 174 104,320 Net Loss for Year (1,241,063) ------------------------------------ Balance, December 31, 1994 30,530 5,029,597 (4,189,639) Sale of 733,659 Shares of Stock for $591,401 in Cash and Services 7,337 584,064 Offering Cost to Sell Stock (25,500) Exchange of 612,945 shares for $892,257 of Debt and Accrued Interest 6,129 886,128 Net Loss for Year (1,327,867) ------------------------------------ Balance, December 31, 1995 43,996 6,474,289 (5,517,506) Sale of 517,531 Shares of Stock for $414,025 in Cash 5,175 408,850 Exchange of 833,130 shares for $666,505 of Debt and Accrued Interest 8,332 658,173 Net Loss for Year (1,070,400) ------------------------------------ Balance, December 31, 1996 $57,503 $7,541,312 ($6,587,906) Sale of 399,102 Shares of Stock for $302,781 in Cash and Services 3,991 298,790 Exchange of 3,902,830 shares for $3,122,265 of Debt and Accrued Interest 39,028 3,083,237 Net Loss for Year (1,006,980) ------------------------------------- Balance, December 31, 1997 $100,522 $10,923,339 ($7,594,886) ===================================== SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
December 11, 1985 (Inception) Year Ended Through December 31, December 31, 1995 1996 1997 1997 ---------- --------- --------- ---------- Cash Flows from Operations: Cash Received from Customers $289,021 $201,548 $193,698 $1,178,686 Interest Received 280 5 3 188,897 Interest Paid (7,825) (6,429) (793) (15,047) Cash Paid for Operating Expenses (912,582) (591,336) (624,924) (5,411,316) ------------ --------- --------- ---------- (631,106) (396,212) (432,016) (4,058,780) Cash Flows from Investing: Land Acquisition (171,654) Construction in Progress (2,663,116) Deposits 3,920 (5,000) Collection of Notes Receivable 489,300 Purchase of Equipment (1,199) (4,638) (3,204,663) Sale of Equipment 10,500 10,500 ----------- ---------- -------- ---------- 13,221 (4,638) (5,544,633) Cash Flows from Financing Activities: Proceeds from Sale of Common Stock 562,021 414,025 267,781 5,958,135 Offering Costs (11,250) (483,959) Proceeds from Borrowing 121,500 155,000 4,213,918 Payment of Loans (52,450) (52,450) Purchase of Common Stock (20,000) ------------ --------- --------- ---------- 619,821 414,025 422,781 9,615,644 Net Increase (Decrease) in Cash 1,936 17,813 (13,873) 12,231 Cash at Beginning of Year 6,355 8,291 26,104 ------------ -------- ---------- ---------- Cash at End of Year $8,291 $26,104 $12,231 $12,231 ============ ======== ========== ========== SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (CONTINUED)
December 11, 1985 (Inception) Year Ended Through December 31, December 31, 1995 1996 1997 1997 --------- --------- ---------- ---------- Reconciliation of Net Loss to Net Cash Used by Operations: Net Loss ($1,327,867)($1,070,400)($1,006,980)($7,594,886) Adjustments to Reconcile Net Loss to Cash Used: Depreciation 328,939 307,927 284,856 1,947,850 Loss on Sale of Equipment 2,877 2,877 Imputed Interest on Financing Agreement 432,199 Foreign Exchange (Gain) Loss 63,222 (5,497) (99,913) (431,000) (Increase) Decrease in Receivables 16,706 13,051 5,586 (34,744) Increase (Decrease) in Payables and Accruals (208,800) (912) 62,643 163,890 Value Ascribed to Stock Issued for Services and Interest 492,040 336,505 277,265 1,350,545 Equity in Net Loss of Affiliate 1,777 23,114 44,527 104,489 ------- ------- ------- --------- Net Cash Used by Operating Activities ($631,106) ($396,212) ($432,016)($4,058,780) ========== ========= ======== ===========
Supplemental schedule of noncash investing and financing activities. In 1991 and 1992 the Company purchased $2,800,383 of equipment and cobalt under the terms of a financing agreement for $2,400,383 and $400,000 in cash (Notes C and D). During 1995, 1996 and 1997 the Company issued common stock for debt in the amounts of $65,000, $330,000 and $2,880,000 respectively (Note F). [FN] SEE NOTES TO FINANCIAL STATEMENTS FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note A - Summary of Significant Accounting Policies: A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Nature of Business The Company was organized in December 1985 to engage in the business of operating a gamma irradiation facility using Cobalt 60 to extend the shelf life of and/or disinfect fruits, vegetables and meat products and for the sterilization of medical, surgical, pharmaceutical and packaging materials. Since its inception, the Company has been devoting its efforts to research and development, planning for and construction of facilities, planning for operations, raising capital and informing agricultural interests and other potential users of the Company's intentions and progress. During 1992, the plant was completed and commenced operations. However, revenues to date have not been significant. Accordingly, the Company is considered to be a development stage Company. All operating costs have been expensed as incurred during the development stage. 2. Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those 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 have been valued at the prevailing prime interest rate plus 1%. The fair value approximates the carrying amount of long term debt. 4. Revenue Recognition Sales are recorded by the Company when the customer's product has been processed. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 5. Research and Development Costs Research and development costs are charged to expense as incurred. Such costs have not been significant to date. 6. Depreciation Assets other than Cobalt have been depreciated using the straight-line method over the following lives for both financial statement and tax purposes: Building 31.5 Years Furniture and Equipment 5-15 Years Cobalt has been depreciated using engineering estimates from published tables under which one-half of the remaining value is written off over 5.26 year periods. The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", as of January 1, 1996. This Statement had no impact on the Company's 1996 or 1997 results of operations or financial position. 7. Foreign Exchange Debt payable in Canadian currency has been translated at the Exchange Rates in effect at the Balance Sheet dates and any gain or loss has been included in results of operations. 8. Offering Costs Costs incurred with the offering of securities have been charged to equity. 9. 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. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note B - The Company as a Going Concern: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company is in the development stage and has not received significant revenues and has incurred significant expenses to further this development. Anticipated revenues from operations for 1998 are not expected to cover operating costs. Accordingly, additional funds must be raised to continue operations. Management is of the opinion that the Company will continue operations through December 31, 1998 based on the following plans: The Company's supplier (Notes C and D) and major creditor, MDS Nordion, has indicated that it will continue to fund operations and convert debt and interest to equity pending necessary approvals from Governmental agencies. However, there is no assurance that it will do so. In February, 1997 the Company entered into a marketing agreement with a major poultry distributor in an attempt to increase poultry sales. The impact of this contract cannot be determined at this time. Note C - Equipment and Cobalt Purchase: As of December 31, 1991, the Company had purchased necessary equipment and Cobalt 60 from MDS NORDION to commence plant operations for $400,000 in cash and a non-interest bearing note for $1,932,604. On January 15, 1992, an additional supply of Cobalt 60 was shipped for a non-interest bearing note for $899,978. For accounting purposes, these notes and the related equipment and Cobalt amounts were discounted by $432,199. Such discounts were amortized as interest expense over the original life of the notes as follows: 1992 $165,957 1993 160,256 1994 105,986 -------- $432,199 ======== On April 13, 1994 as partial consideration for extending the due date of the notes, the Company agreed to begin accruing interest at 1% over prime on September 4, 1994. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note D - Financing Agreement and Debenture Payable: Financing agreement to supplier for $546,791 (Canadian) $382,316 (U.S.) due January 4, 1999 plus interest at 1% over prime. $382,317 Cash advances from supplier made during 1997 over prime 155,000 Accrued interest 48,278 ---------- $585,595 ========== All interest accrued through September 30, 1997 has been converted into common stock of the Company (Note F). The financing agreement is payable in Canadian currency. Accordingly, future fluctuations in exchange rates will effect the balance due in U.S. dollars resulting in foreign exchange gains or losses. On November 23, 1994 the supplier agreed to extend the due date of the debt to January 4, 1996. As part of the consideration for extending the due date, the holder could, at any time, convert all or any portion of the debt at a lower of $4.05 per share, or the then current market price. In early 1996, the supplier further agreed to extend the due date of the debt to January 4, 1997 and the conversion price was changed to the lower of $.80 or the then current market price. On December 12, 1997 the supplier agreed to further extend the due date of the debt to January 4, 1999. Cash advances made during 1997 are convertible into common stock of the Company at 70% of the market value at the date of conversion. All sums advanced by the supplier, including accrued interest are collateralized by all assets of the Company. Note E - Income Taxes: The Company has unused operating loss carryforwards available at December 31, 1997 of $7,526,483 for tax purposes and $7,588,306 for financial reporting purposes. The loss carryforwards expire as follows: FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note E - Income Taxes (continued): Amount Year Tax Book ---- --------- -------- 2001 $28,141 $28,141 2002 45,859 45,859 2003 73,687 73,687 2004 23,345 23,345 2005 77,909 77,909 2006 400,332 400,332 2007 1,352,015 1,352,015 2008 1,297,455 943,455 2009 1,239,590 1,239,696 2010 1,262,386 1,327,867 2011 1,052,783 1,070,000 2012 672,931 1,006,000 --------- ---------- $7,526,433 $7,588,306 ========== ========== 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, 1996 and 1997 were as follows: 1996 1997 Net operating loss carry forwards $2,435,453 $2,843,730 Foreign exchange (123,482) (10,068) Equity in loss of affiliate 22,186 ----------- ---------- Net deferred tax assets 2,334,157 2,833,662 Less - Reserve (2,334,157) (2,833,662) ----------- ---------- $ -0- $ -0- =========== ========== The net deferred tax assets have been fully reserved because there is less than a 50% change that they will be utilized. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note F - Stock Offerings: During 1995, the Company received $562,021 from the sale of 718,034 shares of its unregistered common stock for $.45-$2.85 per share. In addition, 628,570 unregistered shares were issued for interest, debt, commissions and services as follows: Number Price Per Charged of Shares Share Amount To Loans from Officers and Directors 100,520 $2.85 $286,482 Loans Payable 79,835 $0.80 63,868 Loans Payable Supplier for Interest on Financing Agreement 351,340 $.80-$1.69 476,909 Accrued Interest Supplier for Principal on Financing Agreement 81,250 $0.80 65,000 Financing Agreement Payable President for Services 10,625 $.95-$2.75 15,130 Operations Stock Sale Commissions 5,000 $2.85 14,250 Equity ------- ------- Total 628,570 921,639 ======= ======= During 1996, the Company received 1,350,661 of its unregistered common shares at $.80 per share to its Cobalt supplier for $414,025 cash, $336,505 accrued interest and $330,000 debt. During 1997 the Company issued 4,221,932 of its unregistered common shares at $.80 per share to its Cobalt supplier for $255,281 cash, $242,265 accrued interest and $2,880,000 debt. In addition 70,000 shares were issued for services and $35,000 was charged to operations. Also the shareholders approved an increase in the number of authorized shares from 10 to 20 million to facilitate these transactions. All shares issued for services have been ascribed the market value on the dates they were earned. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note G - Stock Purchase Warrants and Stock Options: The Company's policy is to issue warrants and options at or above the market value on the issue date. Accordingly, no compensation has been recorded for warrants or options granted. On November 9, 1993 the Company granted its former President warrants to purchase 100,000 shares of stock at $8.25 per share. Such warrants vested 40,000 on November 9, 1993 and 10,000 shares per month through May 1994. The warrants expire five years after vesting. On November 11, 1996 the Company agreed to issue its President 10,000 shares. The Company also granted to him options to purchase up to 20,000 shares of stock per year at $1.00 per share during the five year period ending December 8 2001. On May 18, 1992, the Stockholders approved the 1992 Incentive and Non-Statutory Stock Option Plan (the "1992 Plan"). The 1992 Plan is administered by the Board of Directors who are authorized to grant incentive stock options ("ISO's") or non-qualified 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 Common Stock that may be issued under the 1992 Plan is 150,000 shares. FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note G - Stock Purchase Warrants and Stock Options (continued) 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 1992 Plan shall not exceed $100,000. Any option granted in excess of the foregoing limitation shall be specifically designated as being a NQO. On August 25, 1992, the Board of Directors authorized and issued options to buy 122,000 shares at $8.75 per share. Such price was the market value on August 25, 1992. Accordingly, no compensation was charged to operations. The options are exercisable 60% of the authorized amount after one year of continued employment after the date of grant and 10% in each of the following four years (for Directors, a year is defined as the period between annual Stockholders meetings). ISO's and NQO's granted to an optionee terminate 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 one year after termination in the event of disability and 180 days in the event of death. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" was implemented in January, 1996. As permitted by the Standard, the Company retained its prior method of accounting for stock compensation. If the accounting provisions of Statement No. 123 had been adopted, the net impact on the 1997, 1996 and 1995 income would not have been material. Changes that occurred in options and warrants outstanding in 1997, 1996, and 19954 are summarized below: 1997 1996 1995 Avg Avg Avg Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 285,500 $5.86 193,000 $8.49 235,000 $7.97 Granted 100,000 $1.00 Exercised Expired/canceled (12,500) $8.75 (7,500) $8.75 (42,000) $5.56 -------- -------- -------- Outstanding at end of year 273,000 $5.73 285,500 $5.86 193,000 $8.49 Exercisable at end of year 193,00 $7.69 176,950 $8.47 174,400 $8.46 ======= ======= ======= FOOD TECHNOLOGY SERVICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 Note H - Related Party Transactions: The Company's supplier of Cobalt and holder of long-term debt. MDS Nordion can significantly influence the Company's operating policies and is, therefore, considered a related party. See Notes C and D for purchases of Cobalt and related debt and financing. Also see Note F for stock offerings for debt, interest and cash. On September 25, 1992 Nordion stored approximately 2,600,000 curies of cobalt at the Company's plant. Subsequently 200,000 curies were returned, leaving approximately 2,400,000 curies at the Company's plant. Such cobalt was stored in anticipation that it would be needed in the Company's operations; however, such cobalt has not been needed because of low processing volume due to the lack of necessary FDA approvals and marketing demand. Due to the physical layout of the Company's plant, all product processed was exposed to Nordion's cobalt. If Nordion's cobalt had been owned by the Company or had been required for increased processing volume or speed, the decay of such cobalt would have been charged to operations, resulting in an increased expense of approximately $300,000, $260,000 and $230,000 for the years ended December 31, 1995, 1996 and 1997, respectively (approximately $1,630,000 from inception through December 31 1997). The net losses for such periods would have been $1,627,867, $1,330,400 and $1,236,981, respectively ($9,224,887 from inception through December 31, 1997). At such time that the Company's operations increase to such an extent that the Nordion cobalt is required for increased processing volume or speed, the Company will begin charging its decay to operations. Note I - Commitments and Contingencies The Company has entered into a marketing agreement with a poultry distributor to provide the function of procurement, distribution, marketing, sale and promotion of irradiated poultry for the period February 1, 1997 to July 31, 1998. During 1997, under the terms of the agreement the Company sold the distributor 10,000 shares of common stock for $12,500 cash and issued an additional 50,000 shares for services. The Company also agreed to issue an additional 100,000 shares for services and 100,000 shares for $1 per share if certain sales goals are met during the agreement period. Such goals have not been met to date. If the agreement is renewed the Company has agreed to issue the distributor an option to purchase 1,000,000 shares of common stock at a price not to exceed 60% of the July 31, 1998 market price. EX-27 2 ARTICLE 5 SCHEDULE YEAR ENDED DECEMBER 31, 1997 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1 JAN-01-1997 YEAR DEC-31-1997 12,231 0 34,745 0 0 46,976 6,020,481 1,942,276 4,130,181 115,611 585,595 0 0 100,522 3,328,453 4,130,181 191,291 191,291 0 677,462 329,383 3,179 291,336 (1,006,980) 0 0 0 0 0 (1,006,980) (.16) (.16)
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