SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB/A
(AMENDMENT 2)
(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, 1996
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
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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
$196,647.
As of December 31, 1996, 5,750,284 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of the voting stock held by
non-affiliates (3,274,826 shares) was approximately $2,865,470 based on the
market price at that date.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
TABLE OF CONTENTS
PART I PAGE NO.
Item 1 Business ..........................................................1
Item 2 Properties.........................................................7
Item 3 Legal Proceedings..................................................7
Item 4 Submission of Matters to a Vote of Security Holders................7
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters................................................8
Item 6 Management's Discussion and Analysis...............................8
Item 7 Financial Statements...............................................9
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................9
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................10
Item 10 Executive Compensation...........................................11
Item 11 Security Ownership of Certain Beneficial Owners and Management...13
Item 12 Certain Relationships and Related Transactions...................14
Item 13 Exhibits and Report on Form 8-K..................................14
<PAGE>
PART I
Item 1. Business
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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 polystyrene foam tray 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 Company is unable to predict when the Federal
approvals will be finalized, however, the Company anticipates that the petition
for the irradiation of meat will be approved in 1997. The numerous problems
that have been encountered in gaining the FDA approvals have been very
discouraging for the Company, and revenues to date have been nominal as a
result thereof. Revenues for 1996 were $196,647, of which approximately 50%
<PAGE>
was attributable to the processing of seasonings and spices, 18% attributable
to packaging material 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 1.9
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, 1996, the Company employed seven persons, five of which are
office personnel and two 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.
<PAGE>
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 1.9 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.
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
<PAGE>
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. It is the Company's understanding, that this petition is in the
final stages of approval, and the Company expects the FDA to publish the
approval in 1997. The Company's facility is being used by both the meat and
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.
<PAGE>
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. The Company is unable to predict when the rules for the irradiation
of meat will be promulgated. During 1996, the Company submitted and received
approval for their Hazard Analysis Critical Control Point program.
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.
However, Nordion recently agreed to extend the date for repayment of the
indebtedness, and accrued interest, to January 4, 1998.
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
<PAGE>
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. At December 31, 1996 such
indebtedness amounted to $3,362,229. 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 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 Not
<PAGE>
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
1.9 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
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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 1.9
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
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None
Item 4. Submission of Matters to a Vote of Security Holders
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Non
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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(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
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1996 High Low
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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
1995
First Quarter 6-1/8 3-1/4
Second Quarter 4-1/4 2-3/4
Third Quarter 4-7/8 1-3/4
Fourth Quarter 2-1/4 3/4
(b) Approximate Number of Equity Security Holders.
----------------------------------------------
As of December 31, 1996, 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
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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
<PAGE>
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. It is hopeful that necessary approvals
for standard trays will be forthcoming in the near future. While awaiting action
by the FDA, the Company's revenue (approximately $200,000 for 1996) 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 supports a petition to irradiate all
meats that was submitted to the FDA on July 7, 1994. Experts expected that the
FDA's action to approve the irradiation of red meat would be approved in a
timely manner. However, to date, no such approval has been forthcoming. The
Company is unable to predict when all government approvals will be obtained.
Until such time, this Company will continue to process whatever items are
available and perform testing of products for others.
At December 31, 1996, the Company had negative working capital of
($34,813) and cash of approximately $26,104. The loss from operations for the
year ended December 31, 1996 was ($1,052,788) down from ($1,263,148) for the
year ended December 31, 1995. Operating costs in 1996 were approximately
$70,000 per month, down from $100,000 in 1995. 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, the decay of such
cobalt would have been charged to operations, resulting in an increased expense
of approximately $340,000, $300,000 and $260,000 for the years ended December
31, 1994, 1995 and 1996, respectively (approximately $1,400,000 through
December 31, 1996). At such time that the Company's operations increase to such
an extent that its plant is operating near full capacity, the Company will
acquire the Nordion cobalt and begin charging its decay to operations.
At December 31, 1996, the Company's outstanding debt amounted to
$3,362,229, which consisted of a financing agreement with Nordion ($2,507,229)
due January 4, 1998 plus interest at price plus 1% and as convertible debenture
payable to Nordion due January 4, 1998 plus interest at prime plus 1%.
To fund its operations during 1996, the Company received $414,025 from the
private sale of 517,531 shares of Common Stock to Nordion. In addition, the
Company reduced its outstanding obligations by converting accrued interest
due Nordion ($336,505) into 420,630 shares of Common Stock. Nordion converted
a portion ($330,000) of the debt owed to it into 412,500 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
<PAGE>
has indicated that it will continue to fund operations, pending approvals from
the FDA, 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.
<PAGE>
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, 1996, 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 55 President/Chief Executive Officer/
Director
Harley W. Everett 48 Chief Financial Officer
Frank M. Fraser 61 Director
Paul O'Neill 58 Director
Sam Whitney 73 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 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
<PAGE>
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.
Sam R. Whitney, a founder of the Company, was Chairman of the Board and
Chief Executive Officer of the Company from its inception in 1985 until
December, 1996, when, because of recurring medical problems, he retired as
Chairman of the Board and Chief Executive Officer. He will remain active in
the Company as a director. For over 25 years prior to 1985, Mr. Whitney was
involved in the transportation of Florida agriculture, fertilizer and
phosphate products. He was also involved in the construction and operation
of pipelines for Florida agriculture and industry. Mr. Whitney is currently
and has been since 1973 Chairman of the Board of Trans-Phos., Inc., a motor
transportation carrier. From 1982 through 1986 Mr. Whitney was Chairman of
the Board of Tampa Pipeline Company, which transported aviation fuel to Tampa
International Airport.
Each of the following directors failed to file, on a timely basis, with
the Securities and Exchange Commission pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, initial ownership reports on
Form 3: Frank M. Fraser and Paul O'Neill.
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)...1996 $2,692 10,000 shs 100,000 shs
Sam W. Whitney
President and
Chief Executive Officer (2) 1996 -0- --- ---
..............................1995 -0- --- 30,000
..............................1994 -0- --- ---
___________
<FN1>
(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
<PAGE>
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 $1.00 per share, the fair market value of the Company's Common
Stock on the date of grant. The option terminates December 9, 2006.
<FN2>
(2) Mr. Whitney resigned as President and Chief Executive Officer on December
9, 1996. From the Company's inception until December 1996, Mr. Whitney
served full-time, without compensation, as the Chief Executive Officer
of the Company.
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants(1) For Option Term(2)
------------------------------------------ --------------------
% of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted (#) in Year ($/Share) Date 5%($) 10%($)
- ---- ----------- ------- --------- ---- ----- ------
E.W. (Pete) Ellis 100,000 100.0 1.00 12/6/02 28,000 65,000
<FN1>
(1) The option was granted at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant. Options are
exercisable 20% per year for each of the first five years from the
date of grant and terminate ten years from the date of grant.
<FN2>
(2) The assumed annual rates of appreciation of 5% and 10% would result
in the price of the Company's stock increasing to $1.28 and $1.65,
respectively.
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) 104,300 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
<PAGE>
The market price of the Company's Common Stock December 31, 1996 was $7/8
per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth as of December 31, 1996, 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, 1996
--------------------
Name and Address Number Percent
- ---------------------------- ------ -------
MDS Nordion 6,038,445 <F1> 59.4
447 March Road-Kanata Ontario
Canada K2K 1X8
Sam R. Whitney 631,000 <F2> 6.2
1801 Thonotosassa Road
Plant City, Florida 33566
E.W. (Pete) Ellis 20,000 <F3>
Harley W. Everett 8,000 <F4> (*)
Frank M. Fraser <F1>
Paul O'Neill <F1>
Gordon H. Shirah, II 50,000 *
All Directors and Officers 6,747,445 <F5> 65.9
as a group (6 persons)
* Less than 1%
<FN1>
(1) Includes 4,202,787 shares of Common Stock which are issuable upon
conversion of $3,362,229 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.
<FN2>
(2) Includes 35,000 shares underlying options which are currently exercisable.
<FN3>
(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
<PAGE>
<FN4>
(4) Includes 4,200 shares underlying options which are currently exercisable or
exercisable within the next sixty (60) days.
<FN5>
(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, 1996.
<PAGE>
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
eighteenth day of June, 1997.
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 June 18, 1997
- --------------------------- and Director
E.W. (Pete) Ellis
/S/ Harley W. Everett Chief Financial and June 18, 1997
- --------------------------- Accounting Officer
Harley W. Everett
/S/ Gordon H. Shirah, II Director June 18, 1997
- ---------------------------
Gordon H. Shirah, II
/S/ Frank M. Fraser Director June 18, 1997
- ---------------------------
Frank M. Fraser
/S/ Paul O'Neill Director June 18, 1997
- ---------------------------
Paul O'Neill
Director
- ---------------------------
Sam R. Whitney
Director
- ---------------------------
Geoff Marott
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Financial Statements
Balance Sheets - December 31, 1996 and 1995
Statements of Operations - Years Ended December 31, 1996,
1995 and 1994 and from December 11, 1985 (Inception)
through December 31, 1996
Statement of Stockholder's Equity - December 11, 1985 (Inception)
through December 31, 1996
Statements of Cash Flows - Years ended December 31, 1996, 1995
and 1994 and from December 11, 1985 (Inception) through
December 31, 1996
Notes to Financial Statements
<PAGE>
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, 1996 and 1995 and the related
statements of operations, Stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, 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.
<PAGE>
Food Technology Service, Inc.
Page 2
I previously audited the balance sheets at years ended December 31, 1985
through 1993 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, 1996 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 24, 1997
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<CAPTION>
December 31,
1995 1996
---------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash $8,291 $26,104
Accounts Receivable 53,381 40,331
------ ------
Total Current Assets 61,672 66,435
Property and Equipment:
Building 2,883,675 2,883,675
Cobalt 1,310,272 1,310,272
Furniture and Equipment 1,650,242 1,650,242
Less Accumulated Depreciation 1,349,493 1,657,420
----------- -----------
4,494,696 4,186,769
Land 171,654 171,654
--------- ---------
Total Property and Equipment 4,666,350 4,358,423
Other Assets:
Deposits 5,000 5,000
Investment in Affiliate (Note F) 67,642 44,528
--------- ---------
Total Other Assets 72,642 49,528
--------- ---------
Total Assets $4,800,664 $4,474,386
========== ==========
<FN> SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<CAPTION>
December 31,
1995 1996
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts Payable 102,159 101,248
--------- ---------
Total Current Liabilities 102,159 101,248
Financing Agreement and
Debenture Payable 3,697,726 3,362,229
Stockholders' Equity:
Common Stock $.01 Par Value
Authorized 10,000,000 Shares,
Outstanding 4,399,623
Shares in 1995 and 5,750,284 43,996 57,503
Paid-In Capital 6,474,289 7,541,312
Deficit Accumulated During
Development Stage 5,517,506 6,587,906
--------- ---------
1,000,779 1,010,909
Commitments and Contingencies
(Notes B and H )
Total Liabilities and
Stockholders' Equity $4,800,664 $4,474,386
<FN> SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<CAPTION>
December 11, 1985
(INCEPTION)
Year Ended December 31, Through
December 31,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $329,821 $272,315 $196,647 $1,019,068
------------ ------------ ------------ ------------
Processing Costs 384,899 318,357 276,788 1,515,238
General,
Administrative
and Development 620,985 507,867 321,786 3,632,813
Depreciation 346,802 328,939 307,927 1,662,994
Interest Expense $219,237 $380,300 $342,934 $1,270,348
------------ ------------ ------------ ------------
$1,571,923 $1,535,463 $1,249,435 $8,081,393
------------ ------------ ------------ ------------
Loss from
Operations (1,242,102) (1,263,148) (1,052,788) (7,062,325)
Other Income
(Loss):
Interest Income 1,145 280 5 188,894
Miscellaneous 14,400
Foreign Exchange 34,965 (63,222) 5,497 331,087
Equity in
Net Loss
of Affiliate (35,071) (1,777) (23,114) (59,962)
------------ ------------ ------------ ------------
Loss before
Income Taxes (1,241,063) (1,327,867) (1,070,400) (6,587,906)
Income Taxes 0 0 0 0
------------ ------------ ------------ ------------
Net Loss ($1,241,063) ($1,327,867) ($1,070,400) ($6,587,906)
------------ ------------ ------------ ------------
Net Loss Per
Common Share ($0.41) ($0.38) ($0.22) ($1.33)
-------- -------- -------- --------
<FN> SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Paid-In
Stock Capital Deficit
---------- ---------- ----------
December 11, 1985 (Inception)
to December 31, 1993):
<S> <C> <C> <C>
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)
</TABLE>
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(CONTINUED)
<CAPTION>
Common Paid-In
Stock Capital Deficit
<S> <C> <C> <C>
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 ------------------------------------
Balance, December 31, 1996 $57,503 $7,541,312 ($5,517,506)
=====================================
</TABLE>
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<CAPTION>
December 11,
1985
(Inception)
Year Ended Through
December 31, December 31,
1994 1995 1996 1996
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Cash Flows from
Operations:
Cash Received from
Customers $304,734 $289,021 $201,548 $984,988
Interest Received 1,145 280 5 188,894
Interest Paid (7,825) (6,429) (14,254)
Cash Paid for
Operating Expenses (838,332) (912,582) (591,336) (4,786,392)
------------ --------- --------- ---------
(532,453) (631,106) (396,212) (3,626,764)
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) (799,642)
Sale of Equipment 10,500 10,500
----------- ------------
13,221 (3,139,612)
Cash Flows from
Financing Activities:
Proceeds from Sale
of Common Stock 71,000 562,021 414,025 5,690,354
Offering Costs (11,250) (483,959)
Proceeds from
Borrowing 228,000 121,500 1,658,535
Payment of Loans (52,450) (52,450)
Purchase of Common
Stock (20,000)
------------ --------- --------- ---------
299,000 619,821 414,025 6,792,480
Net Increase
(Decrease) in Cash (233,453) 1,936 17,813 26,104
Cash at Beginning
of Year 239,808 6,355 8,291
------------ -------- --------- --------
Cash at End of Year $6,355 $8,291 $26,104 $26,104
============ ======== ========= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
<TABLE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<CAPTION>
December 11,
1985
(Inception)
Year Ended Through
December 31, December 31,
1994 1995 1996 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Reconciliation of
Net Loss to Net
Cash Used by
Operations:
Net Loss ($1,241,063)($1,327,867)($1,070,400)($6,587,906)
Adjustments to
Reconcile Net Loss
to Cash Used:
Depreciation 346,802 328,939 307,927 1,662,994
Loss on Sale
of Equipment 2,877 2,877
Imputed Interest
on Financing
Agreement 105,986 432,199
Foreign Exchange
(Gain) Loss (34,965) 63,222 (5,497) (331,087)
(Increase)
Decrease in
Receivables (25,087) 16,706 13,051 (40,330)
Increase
(Decrease) in
Payables and
Accruals 136,953 (208,800) (912) 101,247
Value Ascribed to
Stock Issued for
Services and
Interest 143,850 492,040 336,505 1,073,280
Equity in Net Loss
of Affiliate 35,071 1,777 23,114 59,962
------- ------- ------- ---------
Net Cash Used by
Operating Activities ($532,453) ($631,106) ($396,212)($3,626,764)
========== ========= ======== ===========
</TABLE>
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 and 1996 the Company issued common stock for debt in the
amounts of $65,000 and $330,000 respectively (Note F).
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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
Net loss per share is computed using the weighted average number of common
shares outstanding. Common stock equivalents were not used because the result
is antidilutive.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 1997 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, 1997 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 the United States Food &
Drug Administration. 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.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note D - Financing Agreement and Debenture Payable:
Financing agreement to supplier for $3,435,972 (Canadian)
$2,507,229 (U.S.) due January 4, 1998 plus interest at
1% over prime. $2,507,229
Convertible debenture payable to supplier due
January 4, 1998 plus interest at 1% over prime 855,000
----------
$3,362,229
==========
All interest accrued through December 31, 1996 has been converted into common
stock of the Company (Note F).
The financing agreement is collateralized by the irradiator and Cobalt and 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.
The debenture is collateralized by the Company's land, building, furniture and
equipment and any future accounts receivable.
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 March 13, 1997 the supplier agreed to further extend the due
date of the debt to January 4, 1998.
The Company currently does not have sufficient common stock authorized to
support conversion of all of its debt. Accordingly, on February 11, 1997 the
Board of Directors authorized soliciting shareholder approval for increasing
the number of authorized shares from 10 to 20 million shares and such amendment
will be voted on at the next meeting of shareholders.
Note E - Income Taxes:
The Company has unused operating loss carry forwards available at December 31,
1996 of $6,853,502 for tax purposes and $6,582,306 for financial reporting
purposes. The loss carry-forwards expire as follows:
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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
$6,853,502 $6,582,306
========== ==========
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
were as follows:
Net operating loss carryforwards $2,435,453
Foreign exchange (123,482)
Equity in loss of affiliate 22,186
-----------
Net deferred tax assets 2,334,157
Less - Reserve (2,334,157)
-----------
$ -0-
===========
The net deferred tax assets have been fully reserved because there is less
than a 50% change that they will be utilized.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note F - Stock Offerings:
During 1994, the Company received $71,000 from the sale of 13,333 shares of
unregistered common stock for $5-$6 per share. In addition, 14,875 shares
were issued for services and $86,250 was charged to operations.
During 1995, the Company received $562,021 from the sale of 718,034 shares of
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 Agree-
ment 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 issued 1,350,661 of unregistered common shares at
$.80 per share to its Cobalt supplier for $414,025 cash, $336,505 accrued
interest and $330,000 debt.
All shares issued for services have been ascribed the market value on the
dates they were earned.
During 1994, the Company exchanged 17,416 shares of its common stock for
209,000 shares of Nations Pride, Inc. common stock. As a result, the Company
owned 41.8% of Nations Pride which is engaged in marketing irradiated poultry.
The Company's investment was recorded at $104,494 which was the market value
of the shares on the exchange date. The Company's share of Nations Pride
operations for the year ($35,071) has been changed to operations.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Note F - Stock Offerings: (continued)
During 1995, an investor acquired 127,000 unissued shares of Nations Pride
common stock for $168,000. Accordingly, the Company then owned 25.65% of
Nations Pride. The Company's net equity change for the year ($1,777) has been
charged to operations.
During 1996, the investor acquired 185,000 more unissued shares of Nations
Pride common stock for $92,500. Accordingly, the Company now owns 20.9% of
Nations Pride. The Company's net equity change for the year ($23,114) has been
changed to operations.
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.
In connection with the public offering of its common stock, the Company agreed
to grant the Underwriter a warrant to purchase one (1) share of common stock
for each ten (10) shares sold. Warrants to purchase 40,000 shares have been
issued. Such warrants were exercisable at a price of $5.40 per share for a
four-year period commencing November 15, 1991. During 1995, such options
expired.
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
for services during 1997. 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.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 1996 and 1995 income would not have been material.
Changes that occurred in options and warrants outstanding in 1996, 1995 and
1994 are summarized below:
1996 1995 1994
Avg Avg Avg
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 205,800 $8.51 251,300 $8.02 262,000 $8.05
Granted 20,000 $1.00
Exercised
Expired/canceled (1,500) $8.75 (45,500) $5.80 (10,700) $8.75
-------- -------- --------
Outstanding at
end of year 224,300 $7.84 205,800 $8.51 251,300 $8.02
Exercisable at
end of year 217,500 $7.81 188,700 $8.49 173,400 $7.83
======= ======= =======
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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
$340,000, $300,000 and $260,000 for the years ended December 31, 1994, 1995 and
1996, respectively (approximately $1,400,000 from inception through December 31
1996). The net losses for such periods would have been $1,581,063, $1,627,867
and $1,330,400, respectively ($7,987,906 from inception through December 31,
1996). 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.
The Company had no significant transactions with its affiliate, Nations Pride,
Inc. (Note F).
Note I - Commitments:
The Company leases office space for $585 per month. Such lease is on a year-
to-year basis.
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<MULTIPLIER> 1
<PERIOD-START> JAN-01-1996
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<CASH> 26,104
<SECURITIES> 0
<RECEIVABLES> 40,331
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,435
<PP&E> 6,015,843
<DEPRECIATION> 1,657,420
<TOTAL-ASSETS> 4,474,386
<CURRENT-LIABILITIES> 101,248
<BONDS> 3,362,229
0
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<COMMON> 57,503
<OTHER-SE> 953,406
<TOTAL-LIABILITY-AND-EQUITY> 4,474,386
<SALES> 196,647
<TOTAL-REVENUES> 196,647
<CGS> 0
<TOTAL-COSTS> 584,715
<OTHER-EXPENSES> 331,248
<LOSS-PROVISION> 8,150
<INTEREST-EXPENSE> 342,934
<INCOME-PRETAX> (1,070,400)
<INCOME-TAX> 0
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<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (1,070,400)
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