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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Vita Food Products, | AMEX:VSF | AMEX | Ordinary Share |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.00 | - |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended September 30, 2007 |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period From to |
Commission File Number 1-12599
VITA FOOD PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Nevada |
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36-3171548 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (312) 738-4500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of registrants common stock as of September 30, 2007 was 7,367,198.
VITA FOOD PRODUCTS, INC.
FORM 10-Q
2
Vita Food Products, Inc. |
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And Subsidiary |
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September 30, |
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December 31, |
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2007 |
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2006 |
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||
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ASSETS |
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|
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Current Assets |
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|
|
|
|
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Cash |
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$ |
24,340 |
|
$ |
54,194 |
|
Accounts receivable-trade, net of allowance for discounts, returns, and doubtful accounts of $814,253 in 2007 and $947,729 in 2006 |
|
4,955,434 |
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6,468,669 |
|
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Inventories |
|
|
|
|
|
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Raw material and supplies |
|
4,350,587 |
|
5,562,243 |
|
||
Work in process |
|
268,812 |
|
170,167 |
|
||
Finished goods |
|
3,506,838 |
|
2,178,575 |
|
||
Prepaid expenses and other current assets |
|
370,916 |
|
446,516 |
|
||
Deferred income tax |
|
1,012,571 |
|
610,714 |
|
||
|
|
|
|
|
|
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Total Current Assets |
|
14,489,498 |
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15,491,078 |
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||
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|
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Property, Plant and Equipment |
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|
|
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|
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Land |
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35,000 |
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35,000 |
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Building and improvements |
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3,110,560 |
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3,105,339 |
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||
Leasehold improvements |
|
502,776 |
|
582,620 |
|
||
Machinery and office equipment |
|
11,719,734 |
|
11,970,640 |
|
||
|
|
|
|
|
|
||
|
|
15,368,070 |
|
15,693,599 |
|
||
Less accumulated depreciation and amortization |
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(10,095,322 |
) |
(9,950,781 |
) |
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|
|
|
|
|
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Net Property, Plant and Equipment |
|
5,272,748 |
|
5,742,818 |
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||
|
|
|
|
|
|
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Goodwill |
|
5,571,012 |
|
5,571,012 |
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Other Assets |
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187,752 |
|
403,572 |
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Deferred income tax |
|
325,304 |
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325,304 |
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||
|
|
|
|
|
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Total Other Assets |
|
6,084,068 |
|
6,299,888 |
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||
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Total Assets |
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$ |
25,846,314 |
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$ |
27,533,784 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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|
|
|
|
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Current maturities of long-term obligations |
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$ |
12,677,548 |
|
$ |
1,513,783 |
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Accounts payable |
|
3,660,381 |
|
6,520,166 |
|
||
Accrued other expenses |
|
1,075,619 |
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1,260,308 |
|
||
|
|
|
|
|
|
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Total Current Liabilities |
|
17,413,548 |
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9,294,257 |
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||
|
|
|
|
|
|
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Long-term Obligations, Less Current Maturities |
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2,306,941 |
|
14,373,490 |
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||
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|
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Shareholders Equity |
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|
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Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued |
|
|
|
|
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Common stock, $.01 par value; authorized 10,000,000 shares; outstanding 7,373,714 shares in 2007 and 4,941,763 in 2006 |
|
73,737 |
|
49,417 |
|
||
Treasury stock, at cost 6,516 shares |
|
(50,043 |
) |
(50,043 |
) |
||
Additional paid-in capital |
|
9,191,085 |
|
6,357,093 |
|
||
Retained earnings |
|
(3,088,954 |
) |
(2,490,430 |
) |
||
|
|
|
|
|
|
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Total Shareholders Equity |
|
6,125,825 |
|
3,866,037 |
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||
|
|
|
|
|
|
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Total Liabilities and Shareholders Equity |
|
$ |
25,846,314 |
|
$ |
27,533,784 |
|
See accompanying notes to the consolidated financial statements.
3
Vita Food Products, Inc. |
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And Subsidiary |
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For the three months ended |
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For the Nine months ended |
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September 30 |
|
September 30 |
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||||||||
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2007 |
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2006 |
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2007 |
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2006 |
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||||
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|
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Net sales |
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$ |
11,834,394 |
|
$ |
12,417,606 |
|
$ |
36,352,555 |
|
$ |
36,915,258 |
|
Cost of goods sold |
|
9,676,562 |
|
10,010,867 |
|
26,635,016 |
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27,359,109 |
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Gross margin |
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2,157,832 |
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2,406,739 |
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9,717,539 |
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9,556,149 |
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Selling and administrative expenses |
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|
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Selling, marketing & distribution |
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2,275,148 |
|
2,361,765 |
|
6,805,788 |
|
6,665,254 |
|
||||
Administrative |
|
927,314 |
|
922,648 |
|
2,983,459 |
|
3,007,880 |
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||||
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|
|
|
|
|
|
|
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|
||||
Total selling and administrative expenses |
|
3,202,462 |
|
3,284,413 |
|
9,789,247 |
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9,673,134 |
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||||
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|
|
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|
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Operating loss |
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(1,044,630 |
) |
(877,674 |
) |
(71,708 |
) |
(116,985 |
) |
||||
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|
|
|
|
|
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Interest expense |
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307,618 |
|
330,917 |
|
925,816 |
|
970,573 |
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||||
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|
|
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Income before income taxes |
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(1,352,248 |
) |
(1,208,591 |
) |
(997,524 |
) |
(1,087,558 |
) |
||||
Income tax benefit |
|
(540,000 |
) |
(484,000 |
) |
(399,000 |
) |
(435,000 |
) |
||||
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|
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Net loss |
|
$ |
(812,248 |
) |
$ |
(724,591 |
) |
$ |
(598,524 |
) |
$ |
(652,558 |
) |
|
|
|
|
|
|
|
|
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|
||||
Basic loss per share |
|
$ |
(0.11 |
) |
$ |
(0.15 |
) |
$ |
(0.10 |
) |
$ |
(0.14 |
) |
Weighted average common shares outstanding |
|
7,367,198 |
|
4,904,086 |
|
5,766,493 |
|
4,597,966 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted loss per share |
|
$ |
(0.11 |
) |
$ |
(0.15 |
) |
$ |
(0.10 |
) |
$ |
(0.14 |
) |
Weighted average common shares outstanding |
|
7,367,198 |
|
4,904,086 |
|
5,766,493 |
|
4,597,966 |
|
Vita Food Products, Inc. |
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|
And Subsidiary |
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|
|
|
|
|
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Additional |
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||||||
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|
Common Stock |
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Treasury |
|
Paid-in |
|
Retained |
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|
||||||||
|
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Shares |
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Amount |
|
Stock |
|
Capital |
|
Earnings |
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Total |
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||||||
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|
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||||||
Balance, at January 1, 2007 |
|
4,941,763 |
|
$ |
49,417 |
|
$ |
(50,043 |
) |
$ |
6,357,093 |
|
$ |
(2,490,430 |
) |
$ |
3,866,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Common stock issuance net |
|
2,400,000 |
|
24,000 |
|
|
|
2,976,000 |
|
|
|
3,000,000 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Stock based compensation expense |
|
21,369 |
|
214 |
|
|
|
5,045 |
|
|
|
5,259 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Proceeds from stock purchase and stock option plans |
|
10,582 |
|
106 |
|
|
|
16,547 |
|
|
|
16,653 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||||
Cost of Capital infusion |
|
|
|
|
|
|
|
(163,600 |
) |
|
|
(163,600 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net loss |
|
|
|
|
|
|
|
|
|
(598,524 |
) |
(598,524 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, at September 30, 2007 |
|
$ |
7,373,714 |
|
$ |
73,737 |
|
$ |
(50,043 |
) |
$ |
9,191,085 |
|
$ |
(3,088,954 |
) |
$ |
6,125,825 |
|
See accompanying notes to the consolidated financial statements.
4
Vita Food Products, Inc. |
|
|
And Subsidiary |
|
|
For the Nine months ended |
|
||||
|
|
September 30, |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Cash Flows From Operating Activities |
|
|
|
|
|
||
Net loss |
|
$ |
(598,524 |
) |
$ |
(652,558 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
|
|
|
|
|
||
Depreciation and amortization |
|
724,800 |
|
732,920 |
|
||
Deferred income tax benefit |
|
(399,000 |
) |
(435,000 |
) |
||
Non-cash compensation expense |
|
21,912 |
|
42,304 |
|
||
Gain on sale of fixed assets |
|
(3,762 |
) |
(500 |
) |
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
1,513,235 |
|
(708,859 |
) |
||
Inventories |
|
(215,255 |
) |
(45,186 |
) |
||
Prepaid expenses and other current assets |
|
72,742 |
|
(80,906 |
) |
||
Income taxes receivable |
|
|
|
302,060 |
|
||
Accounts payable |
|
(2,859,785 |
) |
2,094,010 |
|
||
Accrued expenses and other long-term obligations |
|
(407,944 |
) |
(128,310 |
) |
||
|
|
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
(2,151,581 |
) |
1,119,976 |
|
||
|
|
|
|
|
|
||
Cash Flows From Investing Activities |
|
|
|
|
|
||
Capital expenditures |
|
(282,682 |
) |
(866,132 |
) |
||
Proceeds from sale of fixed asset |
|
74,447 |
|
500 |
|
||
Change in other assets |
|
173,087 |
|
(27,460 |
) |
||
|
|
|
|
|
|
||
Net cash used in investing activities |
|
(35,148 |
) |
(893,092 |
) |
||
|
|
|
|
|
|
||
Cash Flows From Financing Activities |
|
|
|
|
|
||
Proceeds from issuance of stock and warrants, net of costs |
|
2,836,400 |
|
2,409,833 |
|
||
Payments under revolving loan facility |
|
(675,993 |
) |
(1,290,679 |
) |
||
Payments on term loan facility |
|
(1,003,533 |
) |
(632,513 |
) |
||
Proceeds from new term loan |
|
1,000,000 |
|
|
|
||
Payments on other debt |
|
|
|
(700,000 |
) |
||
|
|
|
|
|
|
||
Net cash provided by (used in) financing activities |
|
2,156,874 |
|
(213,359 |
) |
||
|
|
|
|
|
|
||
Net increase (decrease) in cash |
|
(29,854 |
) |
13,525 |
|
||
|
|
|
|
|
|
||
Cash, at beginning of period |
|
54,194 |
|
25,133 |
|
||
|
|
|
|
|
|
||
Cash, at end of period |
|
$ |
24,340 |
|
$ |
38,658 |
|
|
|
|
|
|
|
||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
927,636 |
|
$ |
955,611 |
|
Income taxes paid (received) |
|
$ |
2,670 |
|
$ |
(302,061 |
) |
See accompanying notes to the consolidated financial statements.
5
(Unaudited)
In the opinion of management, the accompanying balance sheets and related interim statements of operations, cash flows, and shareholders equity include all adjustments, consisting only of normal recurring items necessary for their fair presentation in conformity with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples include provisions for returns, deductions, bad debts, and length of building and equipment lives. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto included in the Form 10-K for the fiscal year ended December 31, 2006 of Vita Food Products, Inc. (Vita Seafood) together with its wholly owned subsidiary, Vita Specialty Foods, Inc. (Vita Specialty Foods), hereinafter collectively referred to as the Company.
For the third quarter and nine month periods ended September 30, 2007 and 2006, diluted earnings per share computations exclude 2,742,100 and 2,834,600 shares for 2007 and 1,192,600 and 1,225,100 shares for 2006, respectively, issueable upon exercise of stock options and warrants because the assumed exercise of these options and warrants would be anti-dilutive.
Starting January 1, 2007, the Company changed the classification of In-Store Advertising (Roto Ads) expense, which had previously been included in the Selling, Marketing, and Distribution category of operating expenses, to be treated as a sales deduction and thus classify these expenses as a reduction to arrive at the Net Sales total. Additionally, the 2006 operating results, as presented above, have been adjusted to consider this change and thus make these results more comparable with the 2007 results. The results of this reclassification, which had no affect on Operating Profit or Net Income (Loss), was to reduce both Net Sales and Selling, Marketing and Distribution expenses, in an offsetting fashion, for the nine months ended September 30, 2007 and 2006 by $226,840 and $152,852, respectively and for the three months ended September 30, 2007 and 2006 by $49,060 and $33,954, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Vita Seafood and Vita Specialty Foods. Vita Specialty Foods includes the integrated results of its two subsidiaries, Virginia Honey Company, Inc. (Virginia Honey) acquired in 2001 and The Halifax Group, Inc. (Halifax), acquired in 2002. All significant inter-company transactions and balances have been eliminated.
Subsequent Events
On November 2, 2007, after consulting with management, the Companys Board of Directors determined to delist the Companys common stock from the American Stock Exchange (the AMEX) and deregister its common stock under the Securities Exchange Act of 1934, as amended (the Exchange Act), after carefully considering the advantages and disadvantages of continuing registration and listing. The costs and administrative burdens associated with being a public company have significantly increased, particularly in light of the adoption of the Sarbanes-Oxley Act and the adoption of new rules by the Securities and Exchange Commission (the SEC) and the AMEX. The Board determined that the rising costs of compliance, as well as the substantial demands on management time and resources compelled by the compliance requirements, outweigh the benefits the Company receives from maintaining its registered and listed status. The Board believes that deregistering will result in significant reductions in the Companys accounting, legal and administrative expenses, avoid even higher future expenses and enable management to focus all of its time and resources on operating the Company and enhancing shareholder value. The Company furnished notification of delisting and deregistration to the AMEX and issued a public press release on November 5, 2007. The Company will file a Form 25, delisting its shares, on November 16, 2007 and a Form 15, deregistering them, on November 26, 2007, the effective date of delisting.
6
The Company is eligible to deregister under the Exchange Act by filing a Form 15 because it has fewer than 300 holders of record of its common stock. Upon the filing of the Form 15, the Companys obligation to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will immediately be suspended. The Company expects that the deregistration of its common stock will become effective 90 days after the date of filing of the Form 15 with the SEC. The Company expects, but cannot guaranty, that its common stock will be quoted on the Pink Sheets after it delists from the AMEX. There can also be no assurance that any brokerage firms will continue to make a market in the common stock after the delisting. The Pink Sheets is a provider of pricing and financial information for the over-the-counter securities markets. It is a centralized quotation service that collects and publishes market maker quotes in real time primarily through its website, www.pinksheets.com, which provides stock and bond price quotes, financial news, and information about securities.
The Vita Seafood business segment guarantees the sale of most of its products sold in supermarket chains and wholesale clubs (Supermarkets). This guarantee helps ensure that consumers receive fresh products. Under the guarantee, the majority of customers are issued an allowance off-invoice to cover products not sold before the expiration date. Other customers with product not sold before the expiration date have the right to return unsold product to the Company through its food brokers or dispose of the unsold product themselves or through a food distributor. A credit is then issued to the Supermarket or food distributor. The Company provides a reserve that is recorded concurrently with the sale. The Company believes, based on its historical return rates, which have been fairly consistent over the past several years, that this reserve is adequate to recognize the cost of all foreseeable future product return credits associated with previously recognized revenues.
On February 16, 2007, the Company voluntarily recalled certain products because the labels did not disclose that the products contained a flavor ingredient derived from milk. No illnesses or adverse reactions have been reported to date in connection with this label disclosure issue. Existing procedures have been reviewed and corrected where necessary. The recall resulted in the establishment of a reserve of approximately $444,000 in the fourth quarter of 2006, all of which was paid by June 30, 2007.
Earnout Provisions Under Acquisition Agreement
Pursuant to the Companys acquisition of Virginia Honey in 2001, Terry Hess, the previous owner of Virginia Honey (Hess), was subject to earnout provisions that resulted in additional payments by the Company for Virginia Honey. As amended, the earnout provisions for Mr. Hess resulted in an additional amount of $840,000 paid to Mr. Hess in April 2005 based on specific Vita Specialty Foods operating results from January 1, 2001 to December 31, 2002. In addition, a second earnout payment to Mr. Hess in the amount of $700,000 was paid in April 2006 based on the operating results of Vita Specialty Foods for the period from January 1, 2003 to December 31, 2005. Provisions for a third earnout payment were cancelled as described below.
Effective December 2006, the Company entered into certain agreements (the Hess Agreements) with Mr. Hess, who had resigned as Vice Chairman and a member of the Companys Board of Directors effective November 20, 2006 and retired from his position as Chief Executive Officer of Vita Specialty Foods effective August 25, 2006. The Hess Agreements include (i) an Earnout Agreement, (ii) a Termination Agreement and (iii) first amendments to the leases between Virginia Honey and an affiliate of Mr. Hess with respect to the Killer Bee Packaging Plant located in Martinsburg, West Virginia and the facility located in Berryville, Virginia (the Lease Amendments).
The Earnout Agreement provides that all earnouts under the Stock Purchase Agreement dated June 29, 2001, as amended, between the parties (the Stock Purchase Agreement) pursuant to which the Company purchased the stock of Virginia Honey from Mr. Hess are satisfied in full and that no further amounts are owed by the Company to Mr. Hess. The Earnout Agreement also provides for the release of the shares of Virginia Honeys capital stock from the Companys
7
pledge to Mr. Hess to secure the earnout payments under the Stock Purchase Agreement. The Earnout Agreement includes mutual non-disparagement provisions and releases between the Company and Virginia Honey, on the one hand, and Mr. Hess, on the other, except for the performance of obligations under the Hess Agreements and the Stock Purchase Agreement.
The Termination Agreement formalizes the termination of Mr. Hess Employment Agreement with the Company, including reaffirming Mr. Hess five-year non-competition agreement with the Company. Pursuant to the Lease Amendments, the Company has given up its option to purchase the Berryville, Virginia and Martinsburg, West Virginia properties owned by Mr. Hess affiliate. In addition, the Lease Amendments provided the Company with an option to terminate the Berryville lease upon 60 days notice until December 31, 2007, which the Company exercised on February 26, 2007 effective April 30, 2007, and an option to terminate the Martinsburg lease upon 12 months notice at the end of five and nine years from the date of the applicable Amendment. In connection with these agreements, Mr. Hess also resigned as a director and officer of the Company and each of its subsidiaries.
On September 8, 2003, the Company entered into a loan agreement with a bank (the Loan Agreement) and paid off its existing credit facility with initial borrowings under this new Loan Agreement. The Loan Agreement was subsequently amended several times to, among other things, extend the maturity dates of the revolver, change available borrowings and amend financial covenants. As of the April 13, 2007 amendment, the Loan Agreement provides for a $9,500,000 revolver which is scheduled to terminate April 1, 2008; a $7,750,000 Term A Loan due in monthly installments of $80,000 through July 31, 2008 with a balloon payment of $3,682,000 due on August 31, 2008; a $150,000 capital expenditure Term B Loan due in monthly installments of $2,500 from August 2006 through May 31, 2010 and the remainder due on September 30, 2010; and a $1,000,000 Term C Loan due April 1, 2008. Outstanding borrowings under the Loan Agreement are secured by substantially all assets of the Company.
Interest under each piece of the amended Loan Agreement is at a floating rate per annum equal to the prime rate plus 0.5%, other than the $1,000,000 Term C Loan which bears an interest rate of prime plus 2.0%. The prime rate was 7.75% as of September 30, 2007.
The Loan Agreement imposes certain restrictions on the Company, including its ability to complete significant asset sales, merge or acquire businesses and pay dividends. Additionally, the Company had been required to meet certain financial covenants at each quarter end during the term of the Loan Agreement, including a Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage ratio, all as defined in the Loan Agreement. During 2005 and 2006, the Company had violated certain of these covenants and had obtained permanent waivers from the bank for such violations. The March 24, 2006 amendment to the Loan Agreement retroactively amended these financial covenants, and, as amended, the Company was in compliance with those covenants as of December 31, 2005 and June 30, 2006. During the third and fourth quarter of 2006, the Company was not in compliance with certain of the revised covenants. The March 30, 2007 amendment to the Loan Agreement waived these 2006 covenant violations and the April 13, 2007 amendment, reset the covenants to start with the six months ending June 30, 2007 and to only include a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio. At September 30, 2007, the Company was out of compliance with the new covenants and has received a waiver from the bank.
The Company is currently in discussions with the bank regarding refinancing its Loan Agreement.
The Company reports two operating business segments in the same format as reviewed by the Companys senior management. Segment one, Vita Seafood, processes and sells various herring, and cured and smoked salmon products throughout the United States and Mexico. Segment two, Vita Specialty Foods, combines the products of Virginia Honey and Halifax and manufactures and distributes honey, salad dressings, sauces, marinades, jams and jellies and gift baskets throughout North America. Management predominately uses operating profit as the measure of profit or loss by business segment.
8
Business segment information is as follows ($000s):
Three months ended September 30, |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Net Sales |
|
|
|
|
|
||
Vita Seafood |
|
$ |
5,849 |
|
$ |
6,503 |
|
Vita Specialty Foods |
|
5,985 |
|
5,915 |
|
||
|
|
|
|
|
|
||
Total Net Sales |
|
$ |
11,834 |
|
$ |
12,418 |
|
|
|
|
|
|
|
||
Operating Loss |
|
|
|
|
|
||
Vita Seafood |
|
$ |
(343 |
) |
$ |
(287 |
) |
Vita Specialty Foods |
|
(702 |
) |
(591 |
) |
||
|
|
|
|
|
|
||
Total Operating Loss |
|
$ |
(1,045 |
) |
$ |
(878 |
) |
|
|
|
|
|
|
||
Net Loss |
|
|
|
|
|
||
Vita Seafood |
|
$ |
(296 |
) |
$ |
(291 |
) |
Vita Specialty Foods |
|
(516 |
) |
(434 |
) |
||
|
|
|
|
|
|
||
Total Net Loss |
|
$ |
(812 |
) |
$ |
(725 |
) |
|
|
|
|
|
|
||
Depreciation and Amortization |
|
|
|
|
|
||
Vita Seafood |
|
$ |
133 |
|
$ |
129 |
|
Vita Specialty Foods |
|
100 |
|
133 |
|
||
|
|
|
|
|
|
||
Total Depreciation and Amortization |
|
$ |
233 |
|
$ |
262 |
|
|
|
|
|
|
|
||
Capital Expenditures |
|
|
|
|
|
||
Vita Seafood |
|
$ |
39 |
|
$ |
230 |
|
Vita Specialty Foods |
|
92 |
|
108 |
|
||
|
|
|
|
|
|
||
Total Capital Expenditures |
|
$ |
131 |
|
$ |
338 |
|
Nine months ended September 30, |
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
||
Vita Seafood |
|
$ |
|
|
$ |
|
|
Vita Specialty Foods |
|
5,571 |
|
6,697 |
|
||
|
|
|
|
|
|
||
Total Goodwill |
|
$ |
5,571 |
|
$ |
6,697 |
|
|
|
|
|
|
|
||
Total Assets |
|
|
|
|
|
||
Vita Seafood |
|
$ |
17,779 |
|
$ |
17,855 |
|
Vita Specialty Foods |
|
8,067 |
|
10,075 |
|
||
|
|
|
|
|
|
||
Total Assets |
|
$ |
25,846 |
|
$ |
27,930 |
|
|
|
|
|
|
|
||
Net Sales |
|
|
|
|
|
||
Vita Seafood |
|
$ |
17,809 |
|
$ |
19,657 |
|
Vita Specialty Foods |
|
18,544 |
|
17,258 |
|
||
|
|
|
|
|
|
||
Total Net Sales |
|
$ |
36,353 |
|
$ |
36,915 |
|
|
|
|
|
|
|
||
Operating Profit (Loss) |
|
|
|
|
|
||
Vita Seafood |
|
$ |
70 |
|
$ |
(221 |
) |
Vita Specialty Foods |
|
(142 |
) |
104 |
|
||
|
|
|
|
|
|
||
Total Operating Loss |
|
$ |
(72 |
) |
$ |
(117 |
) |
|
|
|
|
|
|
||
Net Income Loss |
|
|
|
|
|
||
Vita Seafood |
|
$ |
(277 |
) |
$ |
(481 |
) |
Vita Specialty Foods |
|
(322 |
) |
(172 |
) |
||
|
|
|
|
|
|
||
Total Net Loss |
|
$ |
(599 |
) |
$ |
(653 |
) |
|
|
|
|
|
|
||
Depreciation and Amortization |
|
|
|
|
|
||
Vita Seafood |
|
$ |
399 |
|
$ |
376 |
|
Vita Specialty Foods |
|
326 |
|
357 |
|
||
|
|
|
|
|
|
||
Total Depreciation and Amortization |
|
$ |
725 |
|
$ |
733 |
|
|
|
|
|
|
|
||
Capital Expenditures |
|
|
|
|
|
||
Vita Seafood |
|
$ |
97 |
|
$ |
506 |
|
Vita Specialty Foods |
|
186 |
|
360 |
|
||
|
|
|
|
|
|
||
Total Capital Expenditures |
|
$ |
283 |
|
$ |
866 |
|
9
Equity Issuance
On June 29, 2007, the Company issued to MDB Alternative Investments L.L.C. (MDB), an entity controlled by Howard Bedford, a member of the Companys Board of Directors (Bedford), 2,400,000 shares of its common stock, par value $.01 per share, and warrants to purchase a total of 2,000,000 additional shares of common stock in consideration for an initial $1,000,000 advance and subsequent $2,000,000 loan to the Company pursuant to the Securities Purchase Agreement between the Company and Bedford dated May 14, 2007. The warrants issued to MDB consist of the following: two year warrants to purchase 500,000 shares of common stock at an exercise price of $1.25 per share; three-year warrants to purchase 500,000 shares of common stock at an exercise price of $1.50 per share; four-year warrants to purchase 500,000 shares of common stock at an exercise price of $1.50 per share; and five-year warrants to purchase 500,000 shares of common stock at an exercise price of $1.75 per share. This transaction cancelled the $2,000,000 6% promissory note, dated June 15, 2007, issued to MDB by the Company and secured by a second mortgage on the Companys facility in Chicago, Illinois. All of the shares issued to MDB, as well as the shares underlying the warrants issued to MDB, have been approved for listing on the American Stock Exchange.
In February 2006, the Company entered into agreements pursuant to which five individuals or their affiliated entities invested a total of $2,500,000 in the Company. Substantially all of these funds were used to reduce funded debt. The investors received units consisting of an aggregate of 1,000,000 shares of common stock; three-year warrants to purchase 500,000 shares of common stock at an exercise price of $5.00 per share; and five-year warrants to purchase an additional 500,000 shares of common stock at an exercise price of $7.50 per share. The investors include the following: (i) Stephen D. Rubin, then president and Chairman of the Board of Directors of the Company, and as of May 24, 2007, Chairman Emeritus of the Board of Directors, (ii) Clifford K. Bolen, then Senior Vice President, Chief Operating Officer and Chief Financial Officer of the Company, and, as of August 18, 2006, President and Chief Executive Officer, (iii) Delphi Casualty Co., of which Glen S. Morris, then a director of the Company, owns a 44% equity interest, (iv) a trust of which John C. Seramur, a director of the Company, serves as trustee, as well as (v) Howard Bedford, then an unrelated third-party investor and, as of May 18, 2006, a director of the Company.
Financial Accounting Standards Board Interpretation No. 48
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes as of January 1, 2007. The Company has reviewed the status of possible tax uncertainties through the third quarter of 2007. The Companys review did not result in any uncertain tax positions requiring disclosure. The last Federal Tax examination was completed in February 2006 for the year 2003. The result of the examination was a no change letter. Should the Company need to record interest and/or penalties related to uncertain tax positions or other tax authority assessments, it would classify such expenses as part of the income tax provision. The Company has not changed any of its tax policies nor adopted any new tax positions during the first nine months of 2007 and believes it has filed appropriate tax returns in all jurisdictions for which it has nexus. This review included the Companys net deferred income tax assets which management believes will be realized over future profitable years.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Recent Event
On November 2, 2007, after consulting with management, the Companys Board of Directors determined to delist the Companys common stock from the American Stock Exchange (the AMEX) and deregister its common stock under the Securities Exchange Act of 1934, as amended (the Exchange Act), after carefully considering the advantages and disadvantages of continuing registration and listing. The costs and administrative burdens associated with being a public company have significantly increased, particularly in light of the adoption of the Sarbanes-Oxley Act and the adoption of new rules by the Securities and Exchange Commission (the SEC) and the AMEX. The Board determined that the rising costs of compliance, as well as the substantial demands on management time and resources compelled by the compliance requirements, outweigh the benefits the Company receives from maintaining its registered and listed status. The Board believes that deregistering will result in significant reductions in the Companys accounting, legal and administrative expenses, avoid even higher future expenses and enable management to focus all of its time and resources on operating the Company and enhancing shareholder value. The Company furnished notification of delisting and deregistration to the AMEX and issued a public press release on November 5, 2007. The Company will file a Form 25, delisting its shares, on November 16, 2007 and a Form 15, deregistering them, on November 26, 2007, the effective date of delisting.
The Company is eligible to deregister under the Exchange Act by filing a Form 15 because it has fewer than 300 holders of record of its common stock. Upon the filing of the Form 15, the Companys obligation to file certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will immediately be suspended. The Company expects that the deregistration of its common stock will become effective 90 days after the date of filing of the Form 15 with the SEC. The Company expects, but cannot guaranty, that its common stock will be quoted on the Pink Sheets after it delists from the AMEX. There can also be no assurance that any brokerage firms will continue to make a market in the common stock after the delisting. The Pink Sheets is a provider of pricing and financial information for the over-the-counter securities markets. It is a centralized quotation service that collects and publishes market maker quotes in real time primarily through its website, www.pinksheets.com, which provides stock and bond price quotes, financial news, and information about securities.
Comparison of the Three Months Ended September 30, 2007 and September 30, 2006
Revenues. Net sales for the three months ended September 30, 2007 were approximately $11,834,000, compared to approximately $12,418,000 for the same period in 2006, a decrease of approximately $(584,000) or approximately (4.7)%. Vita Seafood experienced a decrease of approximately $(654,000), or approximately (10.1)% which was mainly attributable to the decline in salmon gross sales of approximately $(661,000) or (16.8) %, and a decrease in specialty product gross sales of approximately $(32,000) or (16.5)%, from the third quarter of 2006. Herring gross sales experienced a slight decrease of approximately $(18,000) or (0.6) % as compared to the third quarter of 2006. Vita Specialty Foods sales increased in the 2007 third quarter by approximately $70,000 or 1.2% as compared to the 2006 third quarter. This improvement was mainly the result of increased gross sales of sauces of approximately $543,000 or 23.2% combined with reduced spending on sales deductions of $262,000. This favorable performance in sales is the result of a new sauce product line introduced in June 2006. The increase was offset by reduced salad dressing gross sales of approximately $(579,000) or (20.0) %, reduced honey sales of approximately $(145,000) or (10.9) % and a $(10,000) or (31.8) % reduction in other Halifax products as compared to the 2006 third quarter. Both business segments were negatively impacted by price increases that reduced sales volume as compared to the 2006 third quarter. For Vita Seafood, sales allowances were reduced in the third quarter 2007 by $(57,000) or (10.9)%. The decreases are the result of reductions in the allowance and coupon programs designed to support volume. Herring, salmon, and specialty product sales represented approximately 46%, 51%, 3% respectively, of Vita Seafoods total gross sales during the 2007 third quarter as compared to approximately 42%, 55% and 3%, respectively, during the 2006 third quarter. Salad dressings, sauces, honey products and specialty items represented approximately 36%, 45%, 18% and less than 1%, respectively, of Vita Specialty Foods 2007 third quarter total gross sales compared to approximately 44%, 35%, 20% and less than 1%, respectively, during the 2006 third quarter.
11
Gross Margin. Gross margin for the third quarter ended September 30, 2007 was approximately $2,158,000, compared to $2,407,000 for the 2006 third quarter, a decrease of approximately $(249,000) or approximately (10.3)% This decrease was attributed to Vita Specialty Foods gross margin, which decreased approximately $(211,000) or (18.2)%, despite a small increase in sales. The Vita Seafood gross margin decreased approximately $(38,000) or (3.1)%. As a percent of net sales, the 2007 third quarter gross margin was approximately 18.2% a decrease from the approximately 19.4% for the 2006 third quarter. Gross margin for the Vita Seafood business, as a percentage of net sales, increased to approximately 20.7% for the 2007 third quarter from approximately 19.2% for the 2006 third quarter as a result of cost cutting programs, which substantially offset the impact of lower sales. As a percent of net sales, Vita Specialty Foods 2007 third quarter gross margin percentage was approximately 15.9% compared to approximately 19.6% for the 2006 third quarter. The Company recorded a $500,000 reserve for obsolete and slow moving inventory, which lowered the gross margin. The extra reserves resulted from a robust review of this segments products and management decisions to discontinue certain low performing business products.
Operating Expenses . Selling, marketing, distribution and administrative expenses for the three months ended September 30, 2007 were approximately $3,202,000, compared to approximately $3,284,000 for the same period in 2006, a decrease of approximately $(82,000) or approximately (2.5)%. These expenses represented approximately 27.1% of net sales for the quarter ended September 30, 2007 compared to 26.4% for the 2006 third quarter. The dollar decrease resulted from an increase of approximately $5,000 in administration expenses and a decrease in selling, marketing and distribution expenses of approximately $(87,000) .
Interest Expense. Interest expense for the three months ended September 30, 2007 was approximately $308,000, compared to approximately $331,000 for the 2006 third quarter, a decrease of approximately $(23,000) or (7.0)%.
Income Taxes. The Company had an income tax benefit of approximately $540,000 for the 2007 third quarter as compared to an income tax benefit of approximately $484,000 for the 2006 third quarter. Both represented approximately 40% of the pretax loss for those periods.
Net Income. Reflecting the operating results described above, the net loss for the quarter ended September 30, 2007 was approximately $(812,000) or approximately $(0.11) per share on both a basic and diluted basis. This compares to a net loss of approximately $(725,000) for the quarter ended September 30, 2006, or approximately $(0.15) per share on both bases. Weighted average outstanding shares increased due to the Companys June 29, 2007 issuance of 2,400,000 shares of common stock.
Comparison of the Nine Months Ended September 30, 2007 and September 30, 2006
Revenues. Net sales for the nine months ended September 30, 2007 were approximately $36,353,000, compared to approximately $36,915,000 for the comparable period in 2006, a decrease of approximately $(562,000) or (1.5)%. Vita Seafoods net sales decreased by approximately $(1,847,000), or (9.4) %. Salmon gross sales for the nine months ended September 30, 2007 were lower than the 2006 comparable nine month period by approximately $(1,684,000) or (14.6)%. Herring gross sales increased by approximately $1,000 or 0.0% for the first nine months of 2007 as compared to the first nine months in 2006. Vita Specialty Foods net sales increased for the first nine months of 2007 by approximately $1,285,000 or 7.4% as compared to the first nine months of 2006. This increase was driven by the introduction of a new sauce product line in 2006 that generated an expansion in sauces gross sales of approximately $ 3,016,000 or 76.1% for the first nine months of 2007 as compared to the first nine months of 2006. Offsetting this increase was a decline in salad dressing gross sales for the first nine month period of 2007 of approximately $(1,457,000) or (14.5)% compared to the first nine month period of 2006. The salad dressing gross sales decline was attributable to lost distribution. Sales allowances decreased for the nine months ended September 30, 2007 by approximately $(85,000) or (5.2)% for Vita Seafood and increased approximately $85,000 or 6.3% for Vita Specialty Foods as compared to the nine months ended September 30, 2006. The changes in both businesses were driven by seasonal coupons and promotional activity with customers and consumers. Herring, salmon, and specialty product sales represented approximately 47%, 51% and 2%, respectively, of Vita Seafoods total gross sales during the first nine month period of 2007 compared to approximately 43%, 54%, and 3%, respectively, during the first nine month period of 2006. Salad dressings, sauces, honey products and specialty items, represented approximately 43%, 35%, 22% and 0%, respectively, of Vita Specialty Foods 2007 first nine month periods total gross sales compared to approximately 54%, 21%, 24% and 0%, respectively,
12
during the 2006 comparable nine month period.
Gross Margin. Gross margin for the nine months ended September 30, 2007 was approximately $9,718,000, compared to $9,556,000 for the nine months ended September 30, 2006, representing an increase of approximately $162,000 or 1.7%. This increase was attributed to the Vita Specialty Foods gross margin, which increased approximately $368,000 or 7.7% in line with the sales increase. The Vita Seafood gross margin results declined approximately $(206,000) or (4.3) %. As a percent of net sales, gross margin totaled approximately 26.7%, an increase from approximately 25.9% for the same period in 2006. The gross margin, as a percentage of net sales, for Vita Specialty Foods remained the same at approximately 27.8% for the nine months ended September 30, 2007 from approximately 27.8% for the comparable nine month period in 2006. The Company recorded a $500,000 reserve for obsolete and slow moving inventory, which lowered the gross margin. The extra reserves resulted from a robust review of this segments products and management decisions to discontinue certain low performing business products. The gross margin for the Vita Seafood business, as a percentage of net sales increased slightly, to approximately 25.6% for the first nine months in 2007 compared to approximately 24.2% for the first nine months of 2006. This improvement as a percent of sales was largely the result of price increases and manufacturing cost controls.
Operating Expenses . Selling, marketing, distribution and administrative expenses for the nine months ended September 30, 2007 were approximately $9,789,000, compared to approximately $9,673,000 for the same period in 2006, an increase of approximately $116,000 or 1.2%. As a percentage of net sales, these expenses were approximately 26.9% for the first nine months of 2007 compared with approximately 26.2% for the first nine months of 2006. This increase in 2007 is mainly attributable to rising marketing expenses for free standing inserts related to the new sauce product line and corresponding promotional spending.
Interest Expense. Interest expense for the nine months ended September 30, 2007 was approximately $926,000, compared to approximately $971,000 for the nine months ended September 30, 2006, a decrease of approximately $(45,000) or (4.6)%.
Income Taxes. The Company provided expense of approximately $(399,000) for the nine months ended September 30, 2007 and approximately $(435,000) for the nine months ended ending September 30, 2006. Both represented approximately 40% of the pretax results for those periods.
Net Income. Reflecting the operating results described above, the net loss for the nine months ended September 30, 2007 was approximately $(599,000) or $(0.10) per share on both a basic and diluted basis. This result is net of an inventory adjustment of $500,000 at Vita Specialty Foods. This compares to a net loss of approximately $(653,000) for the nine months ended September 30, 2006 or $(0.14) per share on both bases. Weighted average outstanding shares increased due to the Companys June 29, 2007 issuance of 2,400,000 shares of common stock.
On June 29, 2007, the Company issued to MDB Alternative Investments L.L.C. (MDB), an entity controlled by Howard Bedford, a member of the Companys Board of Directors (Bedford), 2,400,000 shares of its Common Stock and warrants to purchase a total of 2,000,000 additional shares of Common Stock in consideration for an initial $1,000,000 advance and subsequent $2,000,000 loan to the Company pursuant to the Securities Purchase Agreement, dated May 14, 2007, between the Company and Bedford. This transaction cancelled the $2,000,000 6% promissory note, dated June 15, 2007, issued by the Company to MDB and secured by a second mortgage on the Companys facility in Chicago, Illinois. All of the shares issued to MDB, as well as the shares underlying the warrants issued to MDB, have been approved for listing on the American Stock Exchange. These funds were primarily used for working capital requirements.
In February 2006, the Company entered into agreements pursuant to which five individuals or their affiliated entities invested a total of $2,500,000 in the Company. Substantially all of these funds were used to reduce funded debt. The investors received units consisting of an aggregate of 1,000,000 shares of common stock; three-year warrants to purchase 500,000 shares of common stock at an exercise price of $5.00 per share; and five-year warrants to purchase an additional 500,000 shares of common stock at an exercise price of $7.50 per share. The investors include the following: (i) Stephen D. Rubin, then president and Chairman of the Board of Directors of the Company, and as of May 24, 2007, Chairman Emeritus of the Board of Directors, (ii) Clifford K. Bolen, then Senior Vice President, Chief Operating Officer and Chief Financial Officer of the Company, and, as of August 18, 2006, President and Chief Executive Officer, (iii) Delphi
13
Casualty Co., of which Glen S. Morris, then a director of the Company, owns a 44% equity interest, (iv) a trust of which John C. Seramur, a director of the Company, serves as trustee, as well as (v) Howard Bedford, then an unrelated third-party investor and, as of May 18, 2006, a director of the Company.
At September 30, 2007, the Company had approximately $(2,924,000) in working capital, versus approximately $6,197,000 at December 31, 2006, and approximately $(234,000) at September 30, 2006. The current ratio at September 30, 2007 was .8 to 1.0 compared to 1.7 to 1.0 at December 31, 2006 and 1.0 to 1.0 at September 30, 2006. Current assets decreased from December 31, 2006 approximately $(1,001,000) mainly as a result of collections of accounts receivable partially offset by an increase of inventory levels. Current liabilities increased from December 31, 2006 by approximately $8,119,000 as a result of the reclassification of the bank debt from long term debt to current debt. The bank debt primarily matures in 2008 requiring classification as a current obligation.
On September 8, 2003, the Company entered into a loan agreement with a bank (the Loan Agreement) and paid off its existing credit facility with initial borrowings under this new Loan Agreement. The Loan Agreement was subsequently amended several times to, among other things, extend the maturity dates of the revolver, change available borrowings and amend financial covenants. As of the April 13, 2007 amendment, the Loan Agreement provides for a $9,500,000 revolver which is scheduled to terminate April 1, 2008; a $7,750,000 Term A Loan due in monthly installments of $80,000 through July 31, 2008 with a balloon payment of $3,682,000 due on August 31, 2008; a $150,000 capital expenditure Term B Loan due in monthly installments of $2,500 from August 2006 through May 31, 2010 and the remainder due on June 30, 2010; and a $1,000,000 Term C Loan due April 1, 2008. Outstanding borrowings under the Loan Agreement are secured by substantially all assets of the Company.
Interest under each piece of the amended Loan Agreement is at a floating rate per annum equal to the prime rate plus 0.5%, other than the $1,000,000 Term C Loan which bears an interest rate of prime plus 2.0%. The prime rate was 7.75% as of September 30, 2007.
The Loan Agreement imposes certain restrictions on the Company, including its ability to complete significant asset sales, merge or acquire businesses and pay dividends. Additionally, the Company had been required to meet certain financial covenants at each quarter end during the term of the Loan Agreement, including a Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage ratio, all as defined in the Loan Agreement. During 2005 and 2006, the Company had violated certain of these covenants and had obtained permanent waivers from the bank for such violations. The March 24, 2006 amendment to the Loan Agreement retroactively amended these financial covenants, and, as amended, the Company was in compliance with those covenants as of December 31, 2005 and September 30, 2006. During the third and fourth quarter of 2006, the Company was not in compliance with certain of the revised covenants. The March 30, 2007 amendment to the Loan Agreement waived these 2006 covenant violations and the April 13, 2007 amendment, reset the covenants to start with the six months ending June 30, 2007, and to only include a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio. The Company was not in compliance with the new covenants at September 30, 2007 and has received a waiver from the bank.
The Company is currently in discussions with the bank regarding refinancing its Loan Agreement.
Cash flows from operating activities. Net cash used in operating activities was approximately $(2,152,000) for the nine months ended September 30, 2007, primarily reflecting the reduction of approximately $(2,860,000) in accounts payable, primarily due to the working capital infusion plus an increase in inventory of approximately $(215,000) and offset by a decrease in accounts receivable of approximately $1,513,000 since December 31, 2006. Cash provided by operating activities for the nine months ended September 30, 2006 was approximately $1,120,000. This change between periods was primarily the result of a 2007 reduction of accounts payable by approximately $(2,860,000) partially offset by a decrease in 2007 of accounts receivable of approximately $1,513,000 compared to an increase in accounts payable in 2006 of approximately $2,094,000 and an increase in accounts receivable in 2006 of approximately $(709,000).
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Cash flows from investing activities. Net cash used in investing activities was approximately $(35,000) for the nine months ended September 30, 2007, which was approximately $862,000 less than the $(893,000) used during the same period of the prior year primarily for capital expenditures. The major contributor in 2007 was the reduction of capital expenditures and the realization of approximately $183,000, representing the cash surrender value under certain key man life insurance policies.
Cash flows from financing activities. Net cash provided by financing activities was approximately $2,157,000 for the nine months ended September 30, 2007 primarily due to the 2007 equity infusion described above, net of debt repayments. The cash provided by financing activities for the current year compares to the approximately $(213,000) used during the first nine months of 2006 when debt repayments more than offset the 2006 equity infusion described above.
The Vita Seafood segment of the Companys business is highly seasonal in nature, primarily resulting from the effect of the timing of certain holidays on the demand for certain products. Historically, the segments sales and profits have been substantially higher in the fourth quarter of each year.
Critical Accounting Policies and Estimates
The Companys financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that currently affect the Companys financial condition and results of operations.
Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, returns, bad debts, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The Vita Seafood business segment guarantees the sale of most of its products sold in supermarket chains and wholesale clubs (Supermarkets). This guarantee helps ensure that consumers receive fresh products. Under the guarantee, the majority of customers are issued an allowance off-invoice to cover products not sold before the expiration date. Other customers with product not sold before the expiration date have the right to return unsold product to the Company through its food brokers or dispose of the unsold product themselves or through a food distributor. A credit is then issued to the Supermarket or food distributor. The Company provides a reserve that is recorded concurrently with the sale. The Company believes, based on its historical return rates, which have been fairly consistent over the past several years, that this reserve is adequate to recognize the cost of all foreseeable future product return credits associated with previously recognized revenues.
The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the tax basis and financial reporting basis of certain assets and liabilities and certain income tax credit carry-forwards. In estimating future tax consequences, the Company considers expected future events other than enactments of changes in tax laws or rates. A valuation reserve is recognized based on the evidence available if it is more likely than not that some portion or the entire deferred income tax asset will not be realized.
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The Company assesses the impairment of its identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable and at least annually. Factors the Company considers important, which could trigger an impairment review include the following:
Significant underperformance relative to expected historical or projected future operating results;
Significant changes in the manner of the Companys use of the acquired assets or the strategy for the Companys overall business;
Significant negative industry or economic trends;
Significant decline in the Companys stock price for a sustained period; and
The Companys market capitalization relative to net book value.
When the Company determines that the carrying value of its intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company will review for impairment under the provisions of SFAS 142.
The Companys goodwill resulted from the acquisitions of Virginia Honey and Halifax. Annually, effective as of December 31, the Company engages an independent appraiser to assist in managements assessment as to whether the recorded goodwill is impaired. The independent appraisals are made using customary valuation methodologies, including discounted cash flow and other fundamental analysis and comparisons. In its 2004 and 2006 assessments, management determined that the Companys recorded goodwill was in excess of its fair value and accordingly, the Company recorded goodwill impairment charges of $2,313,954 and $1,125,693 in 2004 and 2006, respectively. The impairments were principally due to the decline in the sales volume of Halifax products in 2004 and overall performance issues in 2006.
Certain statements in this report, including statements in Managements Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements as defined by the Federal securities laws. Such statements are based on managements current expectations and involve known and unknown risks and uncertainties which may cause the Companys actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied in this report. By way of example and not limitation and in no particular order, known risks and uncertainties include the Companys future growth and profitability, the potential loss of large customers or accounts, downward product price movements, availability of raw materials, changes in raw material procurement costs, fluctuations in the market cost of major commodities such as honey, changes in energy costs, the introduction and success of new products, changes in economic and market conditions, integration and management of acquired businesses, the seasonality of Vita Seafoods business, the Companys ability to attract and retain key personnel, the Companys ability to maintain its relationships with key vendors and retailers, consolidation of the Companys customer and supplier base, the potential impact of claims and litigation, the effects of competition in the Companys markets, the success of the Companys quality control procedures, the impact of the Companys substantial indebtedness, the adequacy of the Companys reserves and the dietary habits and trends of the general public. In light of these and other risks and uncertainties, the Company makes no representation that any future results, performance or achievements expressed or implied in this report will be attained. The Companys actual results may differ materially from any results expressed or implied by the forward-looking statements, especially when measured on a quarterly basis.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate fluctuations, primarily as a result of its $18.4 million Loan Agreement with interest rates based on prime rate plus 0.5%, or 8.25% as of September 30, 2007 for all loans covered by the Loan Agreement other than the new $1,000,000 term loan which bears interest at the prime rate plus 2.0%. The Company does not currently use derivative instruments to alter the interest rate characteristics of any of the debt.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Companys management team, the principal executive officer and principal financial officer have evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act, as of September 30, 2007 and, based on their evaluation, have concluded that these controls and procedures are effective. There were no changes in the Companys internal control over financial reporting during the fiscal quarter ended
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September 30, 2007 that have materially affected, or are reasonable likely to materially affect, the Companys internal control over financial reporting .
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
The risk factors included in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 have not materially changed
31.1 |
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Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Principal Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Principal Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements 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.
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VITA FOOD PRODUCTS, INC. |
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Date: November 9, 2007 |
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By: |
/s/ Clifford K. Bolen |
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Clifford K. Bolen |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 9, 2007 |
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By: |
/s/ R. Anthony Nelson |
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R. Anthony Nelson |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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Exhibit Index
Number |
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Exhibit Title |
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31.1 |
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Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
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31.2 |
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Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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|
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32.1 |
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Principal Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Principal Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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