Item 1. Description of Business
Food Technology Service, Inc., (the "Company") was organized as a Florida corporation on December 11, 1985. The Company owns and operates an irradiation facility located in Mulberry, Florida that uses gamma radiation to provide contract sterilization services to the medical device, food and consumer goods industries. The Company also irradiates packaging, spices and ingredients. The Company's revenue for 2008 ($2,507,078) resulted primarily from the processing of medical items and food. The Company continues to diversify its customer base, however three customers accounted for approximately 67% of revenues in 2008.
During the past few years, the Company has aggressively pursued sterilization of medical devices to increase its customer base. Medical device manufacturing is expanding rapidly due to improvements in medical technology and an aging population structure in the U.S. The Company is certified to International Organization for Standardization (ISO) standards for radiation sterilization of medical devices, which is especially important for potential customers exporting medical products to the EU and Canada. Medical device sterilization represented approximately 70% of revenues in 2008. The State of Florida is now the second leading state in the U.S. for FDA registered medical device companies.
Food irradiation is a proven technology that can prevent food-borne illness or prevent the spread of insect pests. The process is supported by the U.S. Department of Agriculture, the U.S. Food and Drug Administration, the World Health Organization, the American Medical Association, the American Dietetic Association and other governmental and scientific organizations. Food irradiation is a developing segment of the irradiation industry and the Company is well-positioned to take advantage of future growth in this area. Food irradiation was responsible for approximately 18% of revenues in 2008.
Although the Company focuses on medical sterilization and food irradiation, the Company has and will continue to take advantage of profitable opportunities to irradiate other products. In particular, the Company irradiates packaging, cosmetic ingredients, horticultural items and consumer goods. Such items accounted for approximately 12% of 2008 revenues.
Processing Plant Operations
Procedures - ----------
Products to be irradiated are placed in a conveying system that moves the items past a Cobalt 60 source at a rate that is dependent on the required dose. The dose is also related to the density of the product and the strength of the Cobalt 60 source. The actual dose received by a product is verified through dosimeters placed on the product. The Company produces a detailed record of the irradiation process for each product and maintains an extensive quality assurance program. The process cannot make products radioactive just as a dental x-ray does not make the patient's teeth radioactive.
Personnel - ---------
As of December 31, 2008, the Company had thirteen employees.
Cobalt 60 Supply - ----------------
The level of radioactive energy of Cobalt 60 declines at approximately 1% per month, and new Cobalt 60 must be purchased at intervals to accommodate this decrease in energy as well as customer growth. MDS Nordion is the Company's supplier of Cobalt 60 and has agreed to accept the return of all Cobalt 60 that has reached the end of its useful life. Cobalt 60 is available from one other source. See "Agreements with MDS Nordion" below.
Plant Safety and Regulatory Matters
Although a radiation source does require special handling, the necessary precautions are implemented in regulations and practiced daily at the Company and numerous other irradiation plants worldwide. The Company's irradiation processing activities do not produce harmful solid, liquid or gas effluents or pollutants. As a result of long experience in designing and operating similar types of irradiation facilities, the necessary precautions for worker safety in an irradiation facility are well regulated by the U.S. Nuclear Regulatory Commission through the Florida Department of Health. The Florida Department of Health licenses the facility and inspects it on a regular basis. The facility is also inspected by the U.S. Department of Agriculture, the U.S. Food and Drug Administration and the Florida Department of Agriculture and Consumer Services. The notified body for certification to ISO standards also audits the facility regularly.
Agreements with MDS Nordion
The Company, in September 1990, entered into an agreement with MDS Nordion whereby MDS Nordion agreed to sell irradiation equipment and Cobalt 60 to the Company to operate its irradiation facility. To secure payment of the purchase price, the Company and MDS Nordion executed a Convertible Debenture and Security Agreement both dated January 15, 1992. The balance of the debt, including interest at December 31, 2008 was $628,629.
On October 22, 1991 the Company entered into a Reimbursement and Indemnity Agreement with MDS Nordion whereby MDS Nordion assisted the Company in obtaining a surety bond in the sum of $600,000 in order to meet State of Florida facility permit bonding requirements. In connection therewith, the Company agreed to reimburse MDS Nordion for any liability and expense which MDS Nordion may sustain as a result of its commitments to the bond issuer and secured such obligation under a Mortgage and Security Agreement dated October 22, 1991. The bond continues to be in effect.
By agreements dated March 6, 2001, April 17, 2001, May 18, 2001 and November 20, 2001, the Company and MDS Nordion agreed and further confirmed that the Debt and any future advances, including payment of guarantees or indemnities to third parties made by MDS Nordion for the Company's benefit, shall be convertible at MDS Nordion's option, at any time, into Common Stock of the Company. The applicable conversion rate is determined based on 70% of the closing price of the Company's shares of Common Stock listed on NASDAQ, on the last trade date prior to the exercise of the conversion right. MDS Nordion has waived its rights to convert interest accruing on the indebtedness through January 1, 2010.
In addition to Cobalt 60 purchased from MDS Nordion, MDS Nordion has stored an additional amount of Cobalt 60 at the Company's facility in anticipation of the Company's future needs. At the end of 2008, there were approximately 1.2 million curies of Cobalt 60 both owned and stored at the Company's facility. Title in and to 132,153 curies of Cobalt 60 located at the facility remains the property of MDS Nordion and may be removed by MDS Nordion at any time.
Item 2.
Item 2. Description of Properties
The Company's irradiation facility and executive office are located on an approximately 2.17 acre site owned by the Company in Mulberry, Polk County, Florida. The Company purchased the site because of its convenient access to State Road 60, a major transportation artery between Central Florida near the major interstate systems. The Company's irradiation facility and executive office comprise approximately 28,800 square feet, including a 22,600 square foot warehouse and loading and unloading area, a 3,200 square foot office area, and a 3,000 square foot irradiation chamber and Cobalt 60 storage cell. The Company's facility is designed to operate 24 hours per day, seven days per week. As of December 31, 2008, the Company had in use approximately 1.2 million curies of Cobalt 60. The facility is licensed for a maximum of 4,500,000 curies of Cobalt 60 which allows production to be increased significantly, if needed.
During the fourth quarter of 2006, the Company completed construction of an approximately 8,000 square foot warehouse on 2.17 acres of Company-owned land adjacent to the processing facility. The Company commenced leasing the facility in December of 2006 to an existing customer under the terms of a 5- year lease.
As indicated in Item 1, substantially all of the assets of the Company are pledged as collateral against the obligation to MDS Nordion.
Item 3.
Item 3. Legal Proceedings
None
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The following table shows the range of closing bid prices for the Company's Common Stock in the NASDAQ Small Cap market for the calendar quarters indicated. The quotations represent prices in the over-the-counter market between dealers in securities, do not include retail mark-up, markdown, or commissions and do not necessarily represent actual transactions. BID PRICES ----------
2007 High Low ---- ---- --- First Quarter $3.23 $2.14 Second Quarter 2.80 2.40 Third Quarter 2.86 2.05 Fourth Quarter 4.00 2.48
2008 High Low ---- ---- --- First Quarter $2.85 $1.82 Second Quarter 2.58 1.62 Third Quarter 3.08 1.22 Fourth Quarter 1.32 .80
(a) As of December 31, 2008 the approximate number of beneficial holders of Common Stock of the Company was 3,500.
(b) The Company has paid no dividends to date and does not anticipate paying any for the foreseeable future.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management's Discussion and Analysis
Plan of Operations - ------------------
Food Technology Service, Inc. had revenue of $2,507,078 in 2008. This is an increase of 19.9% over 2007 revenue of $2,092,084. In 2006, the Company reflected a portion of the value of tax-loss carry-forward credits on its financial statements as required by Generally Accepted Accounting Principles. Based on increased profitability in 2008 and potential future profitability, the Company has increased the value of the tax-loss carry-forward credits which increased net income in 2008 and stockholders equity at December 31, 2008 by $525,000. To facilitate comparison to 2007, profit for 2008 is being expressed as net income (with increased tax credit benefit) and income before taxes (without increased tax credit benefit). The Company had net income (with increased tax credit benefit) of $1,030,387 in 2008 compared to $234,752 in 2007. This is an increase of approximately 339% over 2007. Net income per share was $0.375 for 2008 compared to $0.085 for 2007. The Company had income before taxes of $505,387 in 2008 compared to $234,752 in 2007, an increase of about 115%. Income per share before taxes was $0.183 for 2008 compared to $0.085 for 2007.
Revenue for the fourth quarter of 2008 was $641,731 compared to $497,723 during the same period in 2007. This is an increase of about 29%.
Management attributes increased revenue to continuing growth of base customers requiring irradiation of products on a regular basis. The majority of revenue growth is occurring in medical sterilization but the Company remains well-positioned for any increased interest in food irradiation.
During 2008, processing costs as a percentage of sales were 22.6 percent compared to 25 percent in 2007. This decrease was due primarily to the increase in sales as such costs are relatively fixed. General administrative and development costs as a percentage of sales during 2008 were 39.3 percent compared to 40.9 percent in 2007. Again, the decline in general administrative and development expenses, as a percentage of sales, is attributed primarily to the increase in sales.
In order to comply with SFAS 123R, the Company continues to report the value of stock-options granted as an item of expense. These options have been issued to Company employees and Board members and are valued using the Black-Scholes pricing method. This action increased expenses in 2008 by $33,094.
Although there is no assurance, management anticipates continued profitability during 2009. Management does not anticipate any significant increases in actual processing costs or general and administrative expenses during 2009.
Liquidity and Capital Resources -------------------------------
During June of 2008, the Company purchased and installed Cobalt to replace Cobalt lost to normal deterioration and to expand production capacity. That purchase was paid from cash on hand.
The Company made substantial progress towards reducing debt in 2008. The $239,000 note on a warehouse completed in late 2006 was paid in full and payment of $200,000 was made on long-term debt owed to MDS Nordion.
At December 31, 2008, the Company had cash on hand of approximately $216,978. At December 31, 2008, the Company's outstanding debt to MDS Nordion amounted to $628,629 which is evidenced by a Debenture and Security Agreement. The debt, which includes interest of $565,435, bears interest at prime plus 1%. Such debt is due and payable on demand.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Company's Financial Statements included herewith.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T)
Item 9A(T) Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer who also acts as the Company's Chief Financial Officer. Based upon that evaluation, our Chief Executive and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)). The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on this assessment, management believes that, as of December 31, 2008, the Company's internal control over financial reporting is effective.
There have been no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
Reference is made to the Company's Proxy Statement to be used in conjunction with the 2009 Annual Shareholders Meeting scheduled to be held on May 14, 2009.
Item 11.
Item 11. Executive Compensation
Reference is made to the Company's Proxy Statement to be used in conjunction with the 2009 Annual Shareholders Meeting scheduled to be held on May 14, 2009.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Reference is made to the Company's Proxy Statement to be used in conjunction with the 2009 Annual Shareholders Meeting scheduled to be held on May 14, 2009.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
See Item 1 Business -"Agreements with MDS Nordion."
Item 14.
Item 14. Principle Accounting Fees and Services
Reference is made to the Company's Proxy Statement to be used in conjunction with the 2009 Annual Shareholders Meeting scheduled to be held on May 14, 2009.
Item 15.
Item 15. Exhibits
(1) Articles of Incorporation. Reference is made to Exhibit 3.1 included in the Company's Registration Statement on Form S-18 (File No. 33-36838-A). (2) By-Laws. Reference is made to Exhibit 3.2 included in the Company's Registration Statement on Form S-18 (File No. 33-36838-A). (10) Agreements entered into by the Company with MDS Nordion *(a) Reimbursement and Indemnity Agreement dated October 22, 1991 *(b) Agreement dated December 11, 1991 *(c) Debenture dated January 15, 1992 *(d) Copy of Security & Mortgage Agreement dated January 15, 1992 *(e) Financing Agreement dated February 21, 1992 *(f) Security Agreement dated February 21, 1992 **(g) Letter Agreement dated March 31, 1994 and April 13, 1994 ***(h) Modification Agreement (14) Code of Ethics**** (31) Rule 13a-14(a)/15d-14(a) Certifications***** (32) Section 1350 Certification*****
* Reference is made to Exhibit (c)(3) included in the Company's Form 10-KSB Report filed for the year ended December 31, 1991.
** Reference is made to Exhibit 10(g) included in the Company's Form 10-KSB Report filed for the year ended December 31, 1994.
*** Reference is made to Exhibit 10(h) included in the Company's Form 10-KSB Report filed for the year ended December 31, 2000.
**** Reference is made to Exhibit 14 included in the Company's Form 10-KSB Report filed for the year ended December 31, 2003.
*****Filed herewith.
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 30th of March 2009.
FOOD TECHNOLOGY SERVICE, INC.
By: /S/ Richard G. Hunter, Ph.D. -------------------------------- Richard G. Hunter, Ph.D. Chief Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
Name Title Date ---- ----- ----
/S/ Richard G. Hunter, Ph.D. Director March 30, 2009 - ------------------------------- Richard G. Hunter, Ph.D. Chief Executive Officer and Chief Financial Officer
/S/ Samuel Bell Director March 30, 2009 - ------------------------------- Samuel Bell
/S/ John Corley Director March 30, 2009 - ------------------------------- John Corley
/S/ Gary Lifshin Director March 30, 2009 - ------------------------------- Gary Lifshin
/S/ David Nicholds Director March 30, 2009 - ------------------------------- David Nicholds
/S/ John T. Sinnott Director March 30, 2009 - ------------------------------- John T. Sinnott, M.D., F.A.C.P
/S/ Ronald Thomas Director March 30, 2009 - ------------------------------- Ronald Thomas
FOOD TECHNOLOGY SERVICE, INC.
Report of Independent Registered Public Accounting Firm 1
Financial Statements
Balance Sheet - December 31, 2008 and 2007 2 - 3
Statement of Operations - Years Ended December 31, 2008, 2007 and 2006 4
Statement of Stockholders' Equity - Years Ended December 31, 2008, 2007 and 2006 5
Statement of Cash Flows - Years Ended December 31, 2008, 2007 and 2006 6
Notes to Financial Statements 7 - 14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Food Technology Service, Inc.
We have audited the accompanying balance sheet of Food Technology Service, Inc. as of December 31, 2008 and 2007 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Food Technology Service, Inc. as of December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
FAIRCLOTH & ASSOCIATES, P.A.
Tampa, Florida February 10, 2009
FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEET December 31, 2008 2007 ---- ----
ASSETS ------
Current Assets: Cash $ 216,978 $ 257,286 Accounts Receivable, Less Allowance for Doubtful Accounts of $2,500 268,305 337,414 Prepaid Expenses 33,329 28,269 ------------ ------------
Total Current Assets 518,612 622,969 ------------ ------------
Property and Equipment: Buildings 3,282,029 3,282,029 Cobalt 4,404,543 3,900,496 Furniture and Equipment 1,899,887 1,799,621 Less: Accumulated Depreciation (5,619,783) (5,236,601) ------------ ------------ 3,966,676 3,745,545
Land 171,654 171,654 ------------ ------------
Total Property and Equipment 4,138,330 3,917,199 ------------ ------------
Other Assets: Deferred Income Taxes 1,175,000 650,000 Utility Deposit 5,000 5,000 Loan Costs 9,143 ------------ ------------
Total Other Assets 1,180,000 664,143 ------------- ------------
Total Assets $ 5,836,942 $ 5,204,311 ------------- ------------ ------------- ------------
SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. BALANCE SHEET December 31, 2008 2007 ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
Current Liabilities: Current Portion of Note Payable $ $ 9,033 Accounts Payable and Accrued Liabilities 31,295 68,334 Financing Agreement Payable 628,629 777,726 ------------ ------------
Total Current Liabilities 659,924 855,093 ------------ ------------
Note Payable After One Year 235,681 ------------ ------------ Total Liabilities 659,924 1,090,774 ------------ ------------
Stockholders' Equity: Common Stock $.01 Par Value, Authorized 5,000,000 Shares, Issued 2,756,364 Shares in 2008 and in 2007 27,564 27,564 Paid-In Capital 12,147,444 12,114,350 Deficit (6,979,499) (8,009,886) ------------ ------------ 5,195,509 4,132,028 Less, 5,154 Treasury Shares at Cost (18,491) (18,491) ------------ ------------
Total Stockholders' Equity 5,177,018 4,113,537 ------------ ------------
Commitments and Contingencies (Note H) -- --
Total Liabilities and Stockholders' Equity $ 5,836,942 $ 5,204,311 ------------ ------------ ------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF OPERATIONS
Year Ended December 31, 2006 2007 2008 ---- ---- ----
Net Revenues $ 1,771,914 $ 2,092,826 $ 2,507,078 ------------ ----------- -----------
Processing Costs 469,443 524,256 567,734
Selling, General and Administrative 759,982 856,676 986,425
Depreciation 389,568 368,152 383,182
Interest Expense 64,254 108,990 64,350 ----------- ----------- ----------- 1,683,247 1,858,074 2,001,691 ----------- ----------- ----------- ----------- ----------- -----------
Income (Loss) before Income Taxes 88,667 234,752 505,387
Income Taxes Current 31,800 97,700 204,000 Deferred Income Tax (Benefit) (650,000) (525,000) ----------- ----------- ----------- Total (618,200) 97,700 (321,000)
Income (Loss) before Benefit of Tax Loss Carryovers 706,867 137,052 826,387
Benefit of Tax Loss Carryovers 31,800 97,700 204,000 ----------- ----------- -----------
Net Income $ 738,667 $ 234,752 $ 1,030,387 ----------- ----------- ----------- ----------- ----------- -----------
Net Income Per Common Share $ 0.268 $ 0.085 $ 0.375 ----------- ----------- ----------- ----------- ----------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF STOCKHOLDERS' EQUITY
Common Paid-In Treasury Stock Capital Deficit Stock ------ ------- ------- -------
Balance, December 31, 2005 $ 27,564 $ 12,059,123 $(8,983,305)
Purchase of 5,154 Treasury Shares $ 18,491
Net Income for Year 738,667 ---------- ------------ ----------- ---------
Balance, December 31, 2006 27,564 12,059,123 (8,244,638) 18,491
Stock Option Expense 55,227
Net Income for Year 234,752 ---------- ------------ ----------- ---------
Balance, December 31, 2007 27,564 12,114,350 (8,009,886) 18,491
Stock Option Expense 33,094
Net Income for Year 1,030,387 ---------- ------------ ----------- --------- Balance, December 31, 2008 $ 27,564 $ 12,147,444 $(6,979,499) $ 18,491 ---------- ------------ ----------- --------- ---------- ------------ ----------- ---------
SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC. STATEMENT OF CASH FLOWS Year Ended December 31, 2006 2007 2008 --- ---- ---- Cash Flows from Operations: Cash Received from Customers $ 1,693,681 $ 2,116,497 $ 2,575,521 Interest Paid (3,314) (32,839) (13,448) Cash Paid for Operating Expenses (1,174,668) (1,334,934) (1,552,831) ---------- ---------- ---------- 515,699 748,724 1,009,242 Cash Flows from Investing: Purchase of Building, Equipment and Cobalt (846,729) (811,363) (604,313) ---------- ---------- ---------- (846,729) (811,363) (604,313) Cash Flows from Financing Activities: Proceeds from Borrowing 249,900 Purchase of Treasury Stock (18,491) Payment of Loans (105,185) (445,237) ---------- --------- ---------- 231,409 (105,185) (445,237)
Net Increase (Decrease) in Cash (99,621) (167,824) (40,308)
Cash at Beginning of Year 524,731 425,110 257,286 ---------- --------- -----------
Cash at End of Year $ 425,110 $ 257,286 $ 216,978 ---------- --------- ----------- ---------- --------- ----------- Reconciliation of Net Loss to Net Cash Provided (Used) by Operations: Net Income (Loss) $ 738,667 $ 234,752 $1,030,387
Adjustments to Reconcile Net Income (Loss) to Cash Provided or Used: Loan Cost Amortization 2,286 9,668 Deferred Income Taxes (650,000) (525,000) Depreciation 389,568 368,152 383,182 Non Cash Payments of Interest and Salaries 67,834 131,203 83,995 (Increase)Decrease in Receivables (75,733) 25,270 69,109 (Increase)Decrease in Prepaid Expenses (6,903) (417) (5,060) Increase(Decrease) in Payables and Accruals 52,266 (12,522) (37,039) ---------- --------- ---------- Net Cash Provided (Used) by Operating Activities $ 515,699 $ 748,724 $1,009,242 ---------- --------- ---------- ---------- --------- ---------- Supplemental schedule of non-cash investing and financing activities.
The Company converted $67,834, $76,151 and $50,903 of interest expense to debt in 2006, 2007, and 2008 respectively.
SEE NOTES TO FINANCIAL STATEMENTS
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note A - Summary of Significant Accounting Policies:
A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
1. Nature of Business
The Company was organized in December 1985 and is engaged in the business of operating a gamma irradiation facility using Cobalt 60 for the sterilization of medical, surgical, pharmaceutical and packaging materials. It also disinfects fruits, vegetables and meat products which extends their shelf life.
2. Use of Estimates
Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements.
3. Fair Value of Financial Instruments
The fair value of financial instruments has been valued at the prevailing prime interest rate plus 1%. The fair value approximates the carrying amount of debt.
4. Revenue Recognition
The primary source of revenue is from treating products with Cobalt. Net Revenue is the gross income from such processing less allowances, if any. Revenues are recorded after the Company's performance obligation is completed and product has been processed in accordance with the customer's specifications and collection of the resulting receivable is probable. A provision is made for doubtful accounts which historically have not been significant.
5. Research and Development Costs
Research and development costs are charged to expense as incurred. Such costs have not been significant to date.
6. Depreciation
Assets other than Cobalt have been depreciated using the straight-line method over the following lives for both financial statement and tax purposes:
Building 31.5 years Furniture and Equipment 5-15 Years
The total cost basis of Cobalt has been depreciated using engineering estimates from published tables under which one-half of the remaining value is written off over 5.26 year periods. FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note A - Summary of Significant Accounting Policies (continued):
Estimated useful lives are periodically reviewed and if warranted, changes will be made resulting in acceleration of depreciation. 7. Net Income Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share are not presented because the result of using common stock equivalents in the computation is antidilutive.
8. Comprehensive Income
The only component of comprehensive income the Company has is net income.
9. Stock Option Plans
The Company has various stock option plans for employees and other individuals providing services to or serving as Directors of the Company. (See Note E)
Compensation cost under the plans is recognized using the fair value recognition provisions of SFAS 123 R. Such cost is recognized for shares expected to vest on a straight-line basis over the requisite service period of the award using the Black-Scholes option-pricing model.
Note B - Financing Agreement:
Convertible Financing Agreement to Nordion due on demand plus interest at 1% over prime $ 63,194
Non-convertible accrued interest 565,435 ------- $628,629 -------- --------
At December 31, 1999 the Company owed MDS Nordion, $378,598 (payable in Canadian currency), $375,732 in cash advances and $200,146 in accrued interest totaling $954,476. Such debt was all due January 5, 2001.
On March 6, 2000, as amended on May 18, 2000 the parties agreed to simplify and consolidate the debt as follows. The total amount of the indebtedness at February 4, 2000 was $963,194 in U.S. dollars, which included $22,114 accrued interest. The parties further agreed that the payable debt, interest accruing thereon, and any future advances remain, at Nordion's option, convertible at any time into common shares of the Company at 70% of the market value at date of conversion. Nordion has agreed to waive its rights to convert interest accruing on the indebtedness from February 5, 2000 through January 1, 2010.
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note B - Financing Agreement (continued):
All assets of the Company collateralize all sums advanced by the supplier including accrued interest.
Note C - Note Payable and Related Lease Agreement:
On November 18, 2005 the Company entered into a loan agreement to borrow $249,900 from a Credit Union. Such loan was funded during 2006 and the proceeds were used to construct a warehouse at the Company's existing facility. The loan was paid in full in 2008.
The warehouse is leased to a major customer. Under the terms of the five year lease, monthly rental payments of $3,333 commenced in December 2006. The tenant has an option to renew the lease for five additional periods of one year each.
Note D - Income Taxes:
The Company has unused operating loss carry forwards available at December 31, 2008 of $6,171,557 for tax purposes and $6,542,039 for financial reporting purposes. The loss carry forwards expire as follows:
Amount ------ Year Tax Book ---- --- ---- 2009 1,239,590 1,239,696 2010 1,262,386 1,292,314 2011 1,048,800 1,065,209 2012 688,497 983,017 2018 647,342 573,699 2019 840,410 881,875 2020 86,215 147,912 2022 256,356 256,356 2024 101,961 101,961 --------- ---------- $ 6,171,557 $ 6,542,039 ---------- ---------- ---------- ----------
During 2008 $204,000 of loss carry forwards were used and $741,000 expired.
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008 Note D - Income Taxes (continued):
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, 2008, 2007 and 2006 were as follows:
2008 2007 2006 ---- ---- ----
Net operating loss carry forwards $ 2,460,000 $ 2,817,000 $ 3,284,484 ---------- ---------- ---------- Net deferred tax assets 2,460,000 2,817,000 3,284,484 Less - Reserve (1,285,000) (2,167,000) (2,634,484) ---------- ---------- ---------- Deferred Benefit $ 1,175,000 $ 650,000 $ 650,000 ---------- ---------- ---------- ---------- ---------- ----------
As of December 31, 2005, the Company fully reserved its deferred tax asset because it could not demonstrate that it would have the future taxable income necessary to realize that asset. During 2006, as a result of the continuing diversification and growth in customer base, ongoing profits from operations and the Company's revised estimate of future taxable income, it was concluded that it is more likely than not that future taxable income will be sufficient to realize a portion of the Company's deferred asset. Accordingly, $650,000 of the reserve was reversed as a credit to income tax expense during 2006. No adjustments were necessary in 2007. During 2008 profits from operations more than doubled and the diversification and growth in the customer base continued, accordingly, the Company revised its estimate of future taxable income and reversed an additional $525,000 of the reserve as a credit to income tax expense.
The Company believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. Accordingly, if future operations generate taxable income greater than the projections further adjustments to reduce the reserve are possible. Conversely, if the Company realizes unforeseen material losses in the future and its future projections of income decrease the reserve could be increased resulting in a charge to income.
Note E - Stock Options:
On June 23, 2000 the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the "2000 Plan").
The Plan is administered by the Board of Directors who is authorized to grant incentive stock options ("ISO's") or non-statutory options ("NQO's"), to Officers and employees of the Company and for certain other individuals providing services to or serving as Directors of the Company.
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note E -Stock Options (continued):
The maximum number of shares of the Company's Stock that may be issued under the 2000 Plan is 125,000 shares. Options granted and outstanding under this plan were granted as follows:
2005 2,500 2006 100,000 2007 20,000 ------- 122,500 ------- -------
The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock with respect to which ISO's are exercisable for the first time by any person during any calendar year under the Plans shall not exceed $100,000. Any option granted in excess of the forgoing limitation shall be specifically designated as being a NQO.
The options are exercisable 20% of the authorized amount immediately and 20% in each of the following four years. ISO's and NQO's granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISO's and NQO's terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death and 180 days to one year in the event of disability.
On February 9, 1999 the Board of Directors approved an option plan for non- employee Directors.
The plan as amended on March 1, 2001 awards grants to each non-employee Director options to purchase 1,500 shares annually at the market value on the date of grant and effective May 2005 the Chairman is awarded options for an additional 2,500 shares annually.
Shares were granted to Directors under this plan as follows:
Year Shares Per Share ---- ------ --------- 2006 10,000 $3.28 2007 10,000 $2.52 2008 11,500 $2.18
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note E -Stock Options (continued):
Changes that occurred in options outstanding are summarized below:
2008 2007 2006 ---- ---- ---- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ----- ------- ----- ------ ----- Outstanding at beginning of year 171,250 $3.26 147,500 $3.20 61,250 $4.88
Granted 71,500 $1.15 30,000 $2.55 112,500 $3.25
Exercised -- -- -- -- -- --
Expired/canceled (10,500) $4.02 (6,250) $2.07 (26,250) $2.16
Outstanding at end of year 232,250 $2.57 171,250 $3.26 147,500 $3.20
Exercisable at end of year 83,250 $3.17 58,750 $3.62 30,750 $4.08
As mentioned in Note A, effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R. As a result, additional compensation expense of $21,693, $33,534 and $33,094 was recorded in 2006, 2007 and 2008 respectively. An additional $85,018 could be recorded over the remaining vesting period of 60 months. The Company used the following assumptions in applying the Black-Scholes pricing method:
2008 2007 2006 ---- ---- ---- Risk free interest rate 1.55% 4.95% 4.95% Expected Volatility 30 30 30 Expected Life 5 years 5 years 5 years Dividend Yield 0% 0% 0%
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2008
Note F - Related Party Transactions:
The Company's supplier of Cobalt and major creditor, MDS Nordion owns approximately 22.85% of the Company's outstanding common stock (see Note B for financing arrangements).
The Company has recently purchased the following Cobalt from MDS Nordion:
Year Curies Amount ---- ------ ------ 2006 195,139 394,839 2007 384,065 799,523 2008 200,000 470,688
Note G - Concentration and Credit Risk:
Although the Company continues to diversify its customer base, three customers accounted for approximately 67% of revenues in 2008.
The Company's cash and accounts receivable are subject to potential credit risk. Management continuously monitors the credit standing of the financial institutions and customers with which the Company deals. A provision has been made for doubtful accounts which historically have not been significant.
Note H - Commitments and Contingencies:
On March 11, 2006, the Board of Directors extended the President's employment contract for five years commencing September 1, 2006 at an annual salary of $110,000 ($115,000 as amended) plus options to purchase 100,000 shares of the Company's common stock at $3.24.