<PAGE>
TO ALL SHAREHOLDERS
FOOD TECHNOLOGY SERVICE, INC.
DEAR SHAREHOLDERS:
I am pleased to present you with a copy of our Annual Report. As you read
it, you will see why I believe we are on the threshold of a new era in Food
Safety.
Our enthusiasm for the future will hopefully match our late founders
enthusiasm, Mr. Sam Whitney, for us to succeed. Sam provided leadership and
vision in this industry during difficult times. His drive and determination is
an inspiration to all of us.
The coming year will prove to be exciting as we enjoy the support of the
Florida Department of Health, final approvals from the United States
Department of Agriculture on red meat and closer ties with poultry
processors and red meat distributors and processors.
The safety of the food supply in this country can be improved and your
company will be out front leading the charge!
Our Mission Statement is:
Food Technology Service, Inc. provides gamma irradiation services
to the food industry, to ensure safer foods for the American people.
I am pleased to have you with us as we work with the Food Industry, Public
Health Officials and the Government, to bring to the consumer a safer food
supply.
E.W. (Pete) Ellis
President and Chief Executive Officer
<PAGE>
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, 1998
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 No
X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Registrant's operating revenues for its most recent fiscal year were
$562,552.
As of December 31, 1998, 10,090,001 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of the voting stock held by
non-affiliates (3,976,282 shares) was approximately $9,197,140 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.........................................................8
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
<PAGE>
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 located in Mulberry, Florida, 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. Operations commenced in January 1992 upon completion
of it's facility.
Since 1992 numerous delays have been encountered in gaining the necessary
FDA and USDA approvals, and revenues to date have been nominal as a result.
Revenues for 1998 were $562,552 of which approximately 40% was for consumer
products, 18% was attributable to the processing of seasonings and spices, 20%
to packaging materials and 8%to testing products for others. A nominal amount
of poultry was also processed and shipped.
The benefits of irradiation 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; (iv) all fresh fruits and vegetables, for
insect disinfestation, and to delay maturation, which extends the shelf life
of many fresh fruits and vegetables; and uncooked meat to control pathogens and
extend shelf life.
The Company expects that its success will be dependent upon the processing
of poultry, meat and shellfish. Proposed rules for irradiation of meat and meat
products were released by the USDA on February 24, 1999. Comments must be
received on or before April 26, 1999. The Company believes these rules will
positively impact the company's business in the short term and long term, to
produce profitable results for the company's shareholders.
Management is working diligently with meat processors, food distributors
and with major retailers to get them to use this technology which can protect
consumers from dangerous pathogens. On February 16, 1999 the Company signed a
Distribution and Sale Agreement with Colorado Boxed Beef Company with the
purpose and intent to promote the marketing and sale of irradiated meat and
poultry. The Company presently irradiates meat for astronauts, which has been
approved by the FDA. 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 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.
<PAGE>
Processing Plant Operations
Procedures
Products to be irradiated are placed onto the conveying system. Some
products, because of their density and pallet size, may have to be depalletized
for radiation processing to ensure that the appropriate radiation dose is
applied to the product. The conveying system automatically moves the product
through the irradiation chamber at a predetermined rate specified by the
Company's personnel. The positioning of the product relative to the radiation
source and the distance of the product from the radiation source are fixed. The
proper radiation dose is determined by the duration of the exposure of the
product to the radiation source, which is carefully controlled to provide the
desired dose. The exposure time required to achieve the desired dose will
depend on the amount of Cobalt 60 in use and the density of the material
exposed. The Company's facility currently has approximately 1.4 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, 1998, the Company employed nine persons, made up of two
salesmen, four administration personnel and three 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 1.4 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. Nordion is the Company's 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. 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.
<PAGE>
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. In 1998, the Company processed a
significant amount of packaging and consumer products, making use of excess
capacity without interfering with its focus on food.
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.
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 microorganisms on December 2, 1997.
On February 24, 1999 the USDA/FSIS released the proposed rules for the
irradiation of meat and meat products. All comments on the proposed rules must
be received on or before April 26, 1999. After evaluating the comments, the
USDA/FSIS will publish the rules in the Federal Register.
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.
<PAGE>
Some states and countries require that certain foods be quarantined on
import to prevent the establishment or spread of insects commonly carried by
the food. The Company has had discussions with a number of parties regarding
the use of irradiation for fruit and vegetables for export and for shipment
between the southern states in the U.S.
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 finalizing 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.
<PAGE>
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 of the debt in 1997. The balance of this
debt including accrued interest at December 31, 1998 is $850,201. Nordion has
agreed to extend the date for repayment of the balance of this indebtedness,
and accrued interest, to January 4, 2000. This indebtedness is convertible
into common stock with a conversion rate of $.80 per share for the balance of
the original loans ($353,200). For all cash advances and interest accrued after
August 1, 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.
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 Canadian Imperial
Bank of Commerce 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. This surety bond and associated guarantees
continue to be in effect.
In addition to the 1 million curies of Cobalt 60, which were supplied the
Company in 1990 and 1991, Nordion, has stored an additional 1.1 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
1.4 million curies both owned and stored. 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.
In 1998 Nordion agreed to guarantee a line of credit of $300,000 from a bank. On
December 31, 1998 $225,000 of this amount is available to fund 1999 operations.
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.
<PAGE>
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 1.4
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
<PAGE>
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, markdown, or commissions and do
not necessarily represent actual transactions.
BID PRICES
----------
1998 High Low
---- ---
First Quarter 6.00 2.56
Second Quarter 6.00 3.50
Third Quarter 4.18 2.50
Fourth Quarter 4.62 2.00
1997
First Quarter 1.75 .75
Second Quarter 1.375 .94
Third Quarter 6.375 .62
Fourth Quarter 13.125 4.40
(b) Approximate Number of Equity Security Holders.
----------------------------------------------
As of December 31, 1998, the approximate number of beneficial holders of
Common Stock of the Company was approximately 3,500.
(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.
<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. During 1997 the FDA approved the use
of a white tray for meat products. While awaiting action by the FDA, the
Company's revenue (approximately $562,552 for 1998) 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. On February 24, 1999 the
USDA/FSIS published the proposed rules. After a comment period and time for
evaluation the rules will become part of the Federal Register. Until such time,
this Company will continue to process whatever items are available and perform
testing of products for others.
At December 31, 1998, the Company had negative working capital of
($95,303) and cash of approximately $6,050. The loss from operations for the
year ended December 31, 1998 was ($650,573). Operating costs in 1998 were
approximately $323,918 per year, up from $241,597 in 1997. The increase in
operating costs resulted primarily from an increase in personnel, which
affected both Processing costs and General, Administrative and Development
costs, and an increase in marketing and promotion. The increase in personnel
was due primarily to an attempt by the Company to increase contact with
potential customers whereas the increase in marketing and promotion supported
the additional personnel. 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, $230,000 and $200,000 for the years ended December 31,
1995, 1996, 1997 and 1998, respectively (approximately $1,830,000 from
inception through December 31, 1998). The net losses for such periods would
have been $1,627,867, $1,330,400, $1,236,981 and $821,456 respectively
($10,046,342 from inception through December 31, 1998). 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, 1998, the Company's outstanding debt amounted to $925,201,
which consisted of a financing agreement with Nordion due January 4, 1999 plus
interest at prime plus 1% and as convertible debenture payable to Nordion
due January 4, 2000 plus interest at prime plus 1%.
To fund its operations during 1998, the Company received $30,000 from the
private sale of 23,333 shares of Common Stock and from increases in notes
payable. 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.
<PAGE>
The Company has completed it's evaluation of potential year 2000 problems
and has replaced all imbedded electronics that may have caused errors after the
end of 1999. The computer hardware and software used to maintain records have
all been updated. The Company is confident there will be no interruption of
business due to failures of systems from y2k errors within the Company. The
Company can not predict the failures of outside systems such as the power grid
or the telecommunications system but public assurances have been made by the
local providers of these services.
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, 1998, the directors and executive officers of the
Company are as follows:
Name Age Position with the Company
- ---- --- -------------------------
E. W. (Pete) Ellis 57 President/Chief Executive Officer/
Director
Harley W. Everett 50 Chief Financial Officer
Frank M. Fraser 65 Director
R. Craig Hunter 47 Board Chairman/Director
David Nicholds 51 Director
Paul O'Neill 60 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.
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. In June 1964,
Mr. Fraser joined Atomic Energy of Canada Limited (now MDS Nordion) as a
project engineer. He was Vice President of Market Development at Nordion prior
to his retirement in 1998. He is past Chairman of the Association of
Industrial Irradiators International and has Chaired the International Meeting
on Radiation Processing.
R. Craig Hunter served as a director of the Company since September 1998.
He is Vice President of Business Development of MDS Nordion's Industrial
Irradiation Business Unit. Previously he was Vice President International at
Kolmar Laboratories Inc.
David Nicholds served as a director of the Company since September 1998. He
is the Vice President, General Counsel and Corporate Secretary of MDS Nordion.
He joined MDS Nordion in 1989.
John Hammond was appointed on February 9, 1999 to serve as a director of
the Company until the next annual stockholders meeting. Mr. Hammond has 29
years of food business experience with Central Soya, Inc., ConAgra and, for the
last 9 years, with Hillandale Farms.
<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. From September 1978 to January
1985 he was Chief Financial Officer of Atomic Energy Canada Limited and
Corporate Executive Vice President from February 1982 to 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)...1998 $ 70,000 10,000 shs
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.
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. In 1998 he was granted 10,000 shares under
the incentive stock option plan.
Stock Option Plan
The Company has an Incentive and Non-Statutory Stock Option Plan covering
300,000 shares of Common Stock (the "Plan"). There are currently outstanding
five-year options to purchase an aggregate of (i) 123,000 shares of Common
Stock of the Company, exercisable at $2.75 per share (granted in 1998) and (ii)
100,000 shares at $1.00 per share (granted in 1996). The options are
exercisable 20% per year with the first 20% available on August 7, 1998.
(a year is defined as the period between Annual Stockholders meetings).
ISO's and NQO's granted to an optionee terminate, 30 to 90 days after
termination of employment or other relationship, except that ISO's and NQO's
terminate the earlier of the expiration date of the option or 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 50,000 shares of Common
Stock. Such warrants expire in 1999 and are exercisable at $8.25 per share.
The market price of the Company's Common Stock at December 31, 1998 was
$2.313 per share.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth as of December 31, 1998, 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, 1998
--------------------
Name and Address Number Percent
- ---------------------------- ------ -------
MDS Nordion 6,863,049 <F1> 63
447 March Road-Kanata Ontario
Canada K2K 1X8
E. W. (Pete) Ellis 24,000 <F2> (*)
Harley W. Everett 9,200 <F3> (*)
Frank M. Fraser 0
Craig Hunter <F1>
David Nicholds <F1>
Paul O'Neill 0
All Directors and Officers 6,896,249 <F4> 63.56
as a group (6 persons)
* Less than 1%
<FN1>
(1) Includes 759,330 shares of Common Stock which are issuable upon
conversion of $850,201 of indebtedness owed Nordion by the Company.
See "Business - Agreements with MDS Nordion." Messrs. Hunter and Nicholds
are designees of Nordion to serve on the Companies Board of Directors.
Messers. Hunter and Nicholds 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 100%
of the outstanding shares of Nordion's common stock is owned by MDS Inc.
a Canadian Corporation, whose shares are traded on the Toronto Stock
Exchange and MDS Laboratories Inc, a subsidiary of MDS Inc.
<FN2>
(2) On November 11, 1996, the Company agreed to issue Mr. Ellis 10,000 shares
of Common Stock. 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. In 1998 he was granted 10,000
shares under the incentive stock option plan
<FN3>
(3) Includes 7,200 shares underlying options which are currently exercisable or
exercisable within the next sixty (60) days.
<FN4>
(4) Includes shares underlying options which are currently exercisable or
exercisable within the next sixty (60) days and shares underlying
convertible debt.
<PAGE>
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 MDS Nordion
*(a) Reimbursement and Indemnity Agreement dated October 22, 1991
*(b) Agreement dated December 11, 1991
*(c) Debenture dated January 15, 1992
*(d) Copy of Security & Mortgage Agreement dated January 15, 1992
*(e) Financing Agreement dated February 21, 1992
*(f) Security Agreement dated February 21, 1992
**(g) Letter Agreement dated March 31, 1994 and April 13, 1994.
* 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, 1998.
<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
thirteenth day of March 31, 1999.
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 31, 1999
- --------------------------- and Director
E.W. (Pete) Ellis
/S/ Harley W. Everett Chief Financial and March 31, 1999
- --------------------------- Accounting Officer
Harley W. Everett
/S/ Frank M. Fraser Director March 31, 1999
- ---------------------------
Frank M. Fraser
/S/ R. Craig Hunter Board Chairman/Director March 31, 1999
- ---------------------------
R. Craig Hunter
/S/ David Nicholds Director March 31, 1999
- ---------------------------
David Nicholds
/S/ Paul O'Neill Director March 31, 1999
- ---------------------------
Paul O'Neill
/S/ John Hammond Director March 31, 1999
- ---------------------------
John Hammond
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountant
Financial Statements
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - Years Ended December 31, 1998,
1997 and 1996 and from December 11, 1985 (Inception)
through December 31, 1998
Statement of Stockholder's Equity - December 11, 1985 (Inception)
through December 31, 1998
Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996 and from December 11, 1985 (Inception) through
December 31, 1998
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
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, 1998 and 1997 and the related
statements of operations, Stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
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 1995 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, 1998 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 18, 1998
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31,
1998 1997
---------- -----------
ASSETS
Current Assets:
Cash $6,046 $12,231
Accounts Receivable 22,824 34,745
Inventory 8,452
---------- ----------
Total Current Assets 37,322 46,976
Property and Equipment:
Building 2,883,675 2,883,675
Cobalt 1,310,272 1,310,272
Furniture and Equipment 1,659,149 1,654,880
Less Accumulated Depreciation <2,216,725> <1,942,276>
---------- ----------
3,636,371 3,906,551
Land 171,654 171,654
---------- ----------
Total Property and Equipment 3,808,025 4,078,205
Other Assets: 5,000 5,000
---------- ----------
Total Assets $3,850,347 $4,130,181
========== ==========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31,
1998 1997
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 57,625 115,611
Revolving Credit Line 75,000
---------- ----------
Total Current Liabilities 132,625 115,611
Financing Agreement and
Debenture Payable 850,201 585,595
Stockholders' Equity:
Common Stock $.01 Par Value Authorized
20,000,000 Shares, Outstanding
10,052,216 Shares in 1997
and 10,090,001 in 1998 100,900 100,522
Paid-In Capital 10,982,963 10,923,339
Deficit Accumulated During
Development Stage <8,216,342> <7,594,886>
---------- ----------
2,867,521 3,428,975
Commitments and Contingencies
(Notes B and I)
Total Liabilities and
Stockholders' Equity $3,850,347 $4,130,181
========== ==========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
December 11,
1985
(Inception)
Year Ended Through
December 31, December 31,
1996 1997 1998 1998
----------- ----------- ----------- ----------
Net Sales $196,647 $191,291 $562,552 $1,772,911
----------- ----------- ----------- -----------
Processing Costs 276,788 241,597 323,918 2,080,753
General, Administrative
and Development 321,786 435,871 539,421 4,608,105
Depreciation 307,927 284,856 274,449 2,222,299
Interest Expense 342,934 291,336 75,337 1,637,021
----------- ----------- ----------- -----------
1,249,435 1,253,660 1,213,125 10,548,178
----------- ----------- ----------- -----------
Loss from Operation <1,052,788> <1,062,369> <650,573> <8,775,267>
Other Income (Loss):
Interest Income 5 3 188,897
Miscellaneous 14,400
Foreign Exchange 5,497 99,913 29,117 460,117
Equity in Net Loss
of Affiliate <23,114> <44,527> <104,489>
----------- ----------- ----------- -----------
Loss Before Income
Taxes <1,070,400> <1,006,980> <621,456> <8,216,342>
Income Taxes 0 0 0 0
----------- ----------- ----------- -----------
Net Loss <$1,070,400><$1,006,980> <$621,456><$8,216,342>
=========== =========== =========== ===========
Net Loss Per
Share Common <$0.22> <$0.16> <$0.06> <$0.82>
=========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
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, 1994:
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>
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, December 11, 1985
(Inception) to December 31, 1994 <4,189,639>
---------- --------- ----------
Balance, December 31, 1994 30,530 5,029,597 <4,189,639>
========== ========= ==========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(CONTINUED)
Common Paid-In
Stock Capital Deficit
----------------------------------
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>
Sale of 37,785 Shares of Stock
for $60,000 in Cash and Services 378 59,624
Net Loss for Year <621,456>
----------- ----------- ----------
Balance, December 31, 1998 $100,900 $10,982,963<$8,216,342>
=========== =========== ==========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
December 11,
1985
(Inception)
Year Ended Through
December 31, December 31,
1996 1997 1998 1998
------------ ----------- ----------- -----------
Cash Flows from Operations:
Cash Received from Customers $201,548 $193,698 $566,234 $1,744,920
Interest Received 5 3 188,897
Interest Paid <6,429> <793> <2,346> <17,393>
Cash Paid for Operating
Expenses <591,336> <624,924> <891,536> <6,302,852>
----------- ---------- ----------- -----------
<396,212> <432,016> <327,648> <4,386,428>
Cash Flows from Investing:
Land Acquisition <171,654>
Construction in Progress <2,663,116>
Deposits <5,000>
Collection of Notes
Receivable 489,300
Purchase of Equipment <4,638> <4,269> <3,208,932>
Sale of Equipment 10,500
----------- ---------- ----------- -----------
<4,638> <4,269> <5,548,902>
Cash Flows from Financing
Activities:
Proceeds from Sale of
Common Stock 414,025 267,781 30,000 5,988,135
Offering Costs <483,959>
Proceeds from Borrowing 155,000 295,732 4,509,650
Payment of Loans <52,450>
Purchase of Common Stock <20,000>
----------- ---------- ----------- -----------
414,025 422,781 325,732 9,941,376
Net Increase (Decrease) in
Cash 17,813 <13,873> <6,185> 6,046
Cash at Beginning of Year 8,291 26,104 12,231
----------- ---------- ----------- -----------
Cash at End of Year $26,104 $12,231 $6,046 $6,046
=========== ========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
December 11,
1985
(Inception)
Year Ended Through
December 31, December 31,
1996 1997 1998 1998
----------- ----------- ----------- -----------
Reconciliation of Net Loss to
Net Cash Used by Operations:
Net Loss <$1,070,400><1,006,980> <$621,456><$8,216,342>
Adjustments to Reconcile
Net Loss to Cash Used:
Depreciation 307,927 284,856 274,449 2,222,299
Loss on Sale of Equipment 2,877
Imputed Interest on
Financing Agreement 432,199
Foreign Exchange (Gain) Loss <5,497> <99,913> <29,117> <460,117>
(Increase) Decrease in
Receivables 13,051 5,586 11,921 <22,823>
Increase in Inventory <8,452> <8,452>
Increase (Decrease) in
Payables and Accrual <912> 62,643 15,007 178,897
Value Ascribed to Stock
Issued for Services 336,505 277,265 30,000 1,380,545
Equity in Net Loss of 23,114 44,527 104,489
----------- ----------- ----------- -----------
Net Cash Used by Operating
Activities <$396,212> <$432,016> <$327,648><$4,386,428>
=========== =========== =========== ===========
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).
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998
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, 1997 or 1998 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.
10. Comprehensive Income
The only component of comprehensive income the Company has is net Income.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 1999 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, 1999 based on the following plans and events:
The Company's supplier (Notes C and D) and major creditor, MDS Nordion Inc.,
has guaranteed a line of credit of $300,000 from a bank. At December 31, 1998
$225,000 of this amount is available to fund 1999 operations.
In February, 1999 the Company entered into an agreement with a beef and
poultry distributor in an attempt to increase sales. The impact of this
contract cannot be determined at this time. Pursuant to this agreement on
December 1, 1998 the Company granted options to purchase 150,000 shares of the
Company's common stock to the distributor's shareholders. On February 26, 1999
such options were exercised for $286,125 in cash. (See Note I)
Management believes that the above proceeds from stock sales and draws on the
credit line, if necessary, will fund operations through December 31, 1999.
However, there is no assurance that such funds will be sufficient.
Note C - Equipment and Cobalt Purchase:
As of December 31, 1991, the Company had purchased necessary equipment and
Cobalt 60 from MDS Nordion Inc. to commence plant operations for $400,000 in
cash and a noninterest bearing note for $1,932,604 from MDS Nordion Inc. On
January 15, 1992, an additional supply of Cobalt 60 was shipped for a
noninterest 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, 1998
Note D - Financing Agreement:
Financing agreement to supplier for $546,791 (Canadian)
$353,20 (U.S.) due January 4, 2000 plus interest at
1% over prime. $353,200
Cash advances from supplier made during 1997 and 1998 375,732
Accrued interest 121,269
--------
$850,201
========
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. Subsequently the supplier agreed to further extend the due date
of the debt to January 4, 2000.
The cash advances are convertible into common stock of the Company at 70% of
the market value at 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,
1998 of $8,185,358 for tax purposes and $8,205,215 for financial reporting
purposes. The loss carryforwards expire as follows:
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 1,297,455 945,703
2009 1,239,590 1,239,696
2010 1,262,386 1,327,385
2011 1,048,800 1,066,986
2012 688,497 1,006,131
2018 647,342 618,226
---------- ----------
$8,185,358 $8,205,415
========== ==========
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, 1997 and 1998 were as follows:
1997 1998
------- -------
Net operating loss carryforwards $2,843,730 $3,087,698
Foreign exchange <21,818> <32,775>
Equity in loss of affiliate 39,319 39,319
---------- ----------
Net deferred tax assets 2,861,231 3,094,242
Less - Reserve <2,861,231> <3,094,242>
---------- ----------
$ -0- $ -0-
========== ==========
The net deferred tax assets have been fully reserved because there is
less than a 50% chance that they will be utilized.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note F - Stock Offerings:
During 1996 the Company issued 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.
During 1998 the Company sold 3,333 unregistered shares for $10,000 in cash to
an individual and 20,000 shares for $20,000 in cash to its President pursuant
to an employment agreement. In addition 14,286 shares were issued for legal
services and $30,000 was charged to operations. Also 166 shares were exchanged
for 2,000 shares of an affiliate.
All shares issued for services have been ascribed the market value on the
dates they were earned.
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 and warrants to purchase 50,000
shares expired in 1998.
On November 11, 1996 the Company agreed to issue its President 10,000
shares for services. The Company also granted to him options to purchase up
to 20,000 shares of stock per year at $1 per share during the five year
period ending December 8, 2001. Options to purchase 20,000 shares were
exercised in 1998.
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-statutory options, 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 300,000 shares.
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 non-qualified options ("NQO's").
On August 25, 1992, the Board of Directors authorized and issued options to
buy 122,000 shares at $8.75 per share. On August 7, 1998 the remaining 18,000
of there options were canceled and new options to purchase 123,000 shares at
$2.75 per share were issued. Such price was the market value on August 7, 1998,
accordingly, no compensation was charged to operations.
The options are exercisable 20% of the authorized amount immediately and 20%
in each of the following four years. ISO's and NQO's granted to an optionee
terminate 30 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 180 days in the event of death or disability.
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 1998, 1997 and 1996 income would not have been material.
Changes that occurred in options and warrants outstanding in 1998, 1997 and
1996 are summarized below:
1998 1997 1996
---- ---- ----
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 273,000 $5.73 285,500 $5.86 193,000 $8.49
Granted 273,000 $2.29 100,000 $1.00
Exercised <20,000> $1.00
Expired/canceled <123,000> $8.55 <12,500> $8.75 <7,500> $8.75
-------- -------- -------
Outstanding at
end of year 403,000 $2.06 273,000 $5.73 285,500 $5.86
======== ======== =======
Exercisable at
end of year 248,600 $3.21 193,000 $7.69 176,950 $8.47
<PAGE>
FOOD TECHNOLOGY SERVICE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note H - Related Party Transactions:
The Company's supplier of Cobalt and holder of long-term debt, MDS Nordion
Inc. (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 Governmental 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 $260,000, $230,000 and $200,000 for the years ended December
31, 1996, 1997 and 1998, respectively (approximately $1,830,000 from inception
through December 31, 1998). The net losses for such periods would have been
$1,330,400, $1,236,981 and $821,456 respectively ($10,046,342 from inception
through December 31, 1998). 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's marketing agreement with a poultry distributor expired on
July 31, 1998 and was not renewed.
In February, 1999 the Company entered into an agreement with a beef and
poultry distributor to provide meat and poultry irradiation services. During
February 1999 under the terms of the agreement the Company sold 150,000 shares
of its common stock to the stockholders of the distributor for $286,125 in
cash. In addition the Company agreed to grant stock options of up to 105,000
shares at $2.75 per share. Such options will be granted in 10,000 share
increments based on certain sales objectives being met during the two year
period ending November 30, 2000. If the agreement is still in effect on
November 30, 2000 the Company agreed to grant to the stockholders of the
distributor additional stock options equal to the number of options they
exercised in the previous two years. The exercise price of such options will
be the average closing price of the Company's common stock for the previous 20
trading days.
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<MULTIPLIER> 1
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,046
<SECURITIES> 0
<RECEIVABLES> 22,824
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<INVENTORY> 8,452
<CURRENT-ASSETS> 37,322
<PP&E> 6,024,750
<DEPRECIATION> 2,216,725
<TOTAL-ASSETS> 3,850,347
<CURRENT-LIABILITIES> 132,625
<BONDS> 850,201
0
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<COMMON> 100,900
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<TOTAL-LIABILITY-AND-EQUITY> 3,850,347
<SALES> 562,552
<TOTAL-REVENUES> 562,552
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<TOTAL-COSTS> 863,339
<OTHER-EXPENSES> 274,449
<LOSS-PROVISION> 3,678
<INTEREST-EXPENSE> 75,337
<INCOME-PRETAX> (621,456)
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<NET-INCOME> (621,456)
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