Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 36-3171548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2222 WEST LAKE STREET, CHICAGO, ILLINOIS 60612
(Address of principal executive office) (Zip code)
Registrant's 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 [ ]
The number of shares outstanding of registrant's common stock as of
November 4, 2002 was 3,771,737.
VITA FOOD PRODUCTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Balance Sheets as of September 30, 2002 and December 31, 2001 3
b) Income Statements for the Three Months and Nine Months Ended September 30,
2002 and 2001 4
c) Shareholders' Equity Statements for the Nine Months Ended September 30, 2002 4
d) Cash Flows Statements for the Nine Months Ended September 30, 2002 and 2001 5
e) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 15
CERTIFICATION OF PERIODIC REPORT 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
===================================================================================================================================
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED) (AUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 78,031 $ 529,354
Accounts receivable-trade, net of allowance for discounts, returns, and doubtful
accounts of $120,000 in 2002 and $209,000 in 2001 2,664,678 4,859,224
Inventories
Raw material and supplies 4,085,438 2,553,473
Work in process 226,108 115,691
Finished goods 2,144,128 1,826,453
Prepaid expenses and other current assets 343,259 306,716
------------ -------------
Total Current Assets 9,541,642 10,190,911
Property, Plant and Equipment
Land 35,000 35,000
Building and improvements 2,406,511 2,041,304
Leasehold improvements 313,524 270,240
Machinery and office equipment 7,968,939 7,323,451
------------ ------------
10,723,974 9,669,995
Less accumulated depreciation and amortization (5,818,741) (5,295,437)
------------ ------------
Net Property, Plant & Equipment 4,905,233 4,374,558
Other Assets
Goodwill 5,244,702 5,238,895
Other assets 245,763 263,596
------------ ------------
Total Other Assets 5,490,465 5,502,491
------------ ------------
Total Assets $ 19,937,340 $ 20,067,960
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 793,067 $ 5,198,198
Accounts payable 2,815,890 2,477,282
Accrued other expenses 1,015,905 798,425
Deferred income taxes 52,304 52,304
------------ ------------
Total Current Liabilities 4,677,166 8,526,209
Long-term Obligations, Less Current Maturities 10,084,102 7,112,008
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued
Common stock, $.01 par value; authorized 10,000,000 shares; issued and
outstanding 3,769,737 shares in 2002 and 3,729,683 shares in 2001 37,696 37,296
Additional paid in capital 3,482,104 3,379,931
Retained earnings 1,656,272 1,012,516
------------ ------------
Total Shareholders' Equity 5,176,072 4,429,743
------------ ------------
Total Liabilities and Shareholders' Equity $ 19,937,340 $ 20,067,960
===================================================================================================================================
See accompanying notes to financial statements
3
CONSOLIDATED STATEMENTS OF INCOME VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
===============================================================================
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 9,292,104 $ 8,476,615 $ 28,144,464 $ 19,723,013
Cost of goods sold 6,498,043 5,835,539 19,458,658 14,043,077
------------ ------------ ------------ ------------
Gross margin 2,794,061 2,641,076 8,685,806 5,679,936
Selling and administrative expenses
Selling, marketing & distribution 1,449,524 1,409,714 4,454,130 3,303,197
Administrative 860,575 744,534 2,739,145 1,781,649
------------ ------------ ------------ ------------
Total 2,310,099 2,154,248 7,193,275 5,084,846
------------ ------------ ------------ ------------
Operating profit 483,962 486,828 1,492,531 595,090
Interest (income) 0 (657) 0 (657)
Interest expense 138,117 184,803 420,776 373,844
------------ ------------ ------------ ------------
Income before income taxes 345,845 302,682 1,071,755 221,903
Income tax expense (benefit) 138,000 7,855 428,000 (43,721)
------------ ------------ ------------ ------------
Net income $ 207,845 $ 294,827 $ 643,755 $ 265,624
Basic earnings per share $ 0.06 $ 0.08 $ 0.17 $ 0.07
Weighted average common shares outstanding 3,759,459 3,726,225 3,743,063 3,725,112
Diluted earnings per share $ 0.05 $ 0.08 $ 0.17 $ 0.07
Weighted average common shares outstanding 3,879,538 3,761,401 3,852,698 3,745,616
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
===============================================================================
COMMON STOCK ADDITIONAL RETAINED
---------------------------- PAID-IN EARNINGS/
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
- --------------------------------------------------------------------------------------------------------------------
Balance, at January 1, 2001 3,724,546 $ 37,244 $ 3,372,906 $ (143,613) $ 3,266,537
Proceeds from stock purchase
and stock option plans 1,679 17 1,681 1,698
Net income 265,624 265,624
----------- ----------- ----------- ----------- -----------
Balance, at September 30, 2001 3,726,225 $ 37,261 $ 3,374,587 $ 122,011 $ 3,533,859
=====================================================================================================================
Balance, at January 1, 2002 3,729,683 $ 37,296 $ 3,379,931 $ 1,012,516 $ 4,429,743
Proceeds from stock purchase
and stock option plans 40,054 400 102,173 102,573
Net income 643,756 643,756
----------- ----------- ----------- ----------- -----------
Balance, at September 30, 2002 3,769,737 $ 37,696 $ 3,482,104 $ 1,656,272 $ 5,176,072
=====================================================================================================================
See accompanying notes to financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
========================================================================================================================
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2002 2001
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 643,757 $ 265,624
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 577,718 430,882
Gain on sale of fixed asset (3,949)
Changes in assets and liabilities:
Increase in accounts receivable 2,194,546 1,496,725
(Increase) decrease in inventories (1,960,057) 606,103
(Increase) decrease in prepaid expenses and other current assets (36,543) 34,405
(Increase) in deferred income tax asset 0 (43,721)
Increase (decrease) in accounts payable 338,608 (855,387)
Increase (decrease) in accrued expenses 217,480 (359,492)
----------- -----------
Net cash provided by operating activities 1,971,560 1,575,139
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,083,935) (548,332)
Proceeds from the sale of fixed asset 14,000 0
Payments for subsidiary net of cash acquired 0 (4,638,687)
Other assets (22,484) (96,859)
----------- -----------
Net cash used in investing activities (1,092,419) (5,283,878)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock purchase and stock options 102,573 1,698
Net payments under revolving loan facility (481,963) (515,921)
Net (payments) borrowings on term loan facility (872,696) 4,378,272
Payments under capital lease obligations (78,378) (86,655)
----------- -----------
Net cash (used) provided in financing activities (1,330,464) 3,777,394
----------- -----------
Net (decrease) increase in cash (451,323) 68,655
Cash, at beginning of period 529,354 14,474
----------- -----------
Cash, at end of period $ 78,031 $ 83,129
========================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 450,726 $ 353,488
Income taxes paid $ 182,012 $ 0
See accompanying notes to financial statements
5
VITA FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of income, 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations and financial statements and notes thereto included in the
2001 Form 10-KSB of Vita Food Products, Inc. (Vita Food Products, Inc., together
with its wholly owned subsidiary, Virginia Honey Company, Inc., hereinafter
referred to as the "Company")
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vita Food
Products, Inc. ("Vita") and its wholly owned subsidiary, Virginia Honey Company,
Inc. ("Virginia Honey"), commencing on July 1, 2001, the effective date of
Vita's acquisition of Virginia Honey. All significant intercompany transactions
and balances have been eliminated.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product to customers in
fulfillment of customer orders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The Company has adopted SFAS 142 effective January 1, 2002 and has determined
that there is no material impact of adopting its provisions.
6
As of September 30, 2002, the net carrying amount of goodwill was
$5,244,702 related to the acquisition of Virginia Honey. This acquisition was
accounted for under the provisions of SFAS 141 and 142.
In October 2001, the Financial Accounting Standards Board issued SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). This statement addresses financial accounting and reporting for the
impairment and disposal of long-lived assets. This Statement supercedes FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations --
"Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a segment of a business. The provisions of FAS 144 are effective for fiscal
years beginning after December 15, 2001. The Company has adopted FAS 144 and has
determined that there is no material impact of adopting its provisions.
ACQUISITIONS
Effective July 1, 2001 Vita acquired 100 percent of the outstanding
shares of capital stock of Virginia Honey from Terry W. Hess. The results of
Virginia Honey have been included in the Company's consolidated financial
statements since the effective date of the acquisition. Virginia Honey is a
manufacturer and distributor of honey, salad dressings, sauces, jams and jellies
and gift baskets. As a result of the acquisition, the Company is leveraging its
sales and distribution network to provide national exposure to the products of
Virginia Honey. The Company also has begun, and expects to continue, to
introduce products that are jointly developed, thereby increasing the market
presence of Vita and Virginia Honey.
The aggregate purchase price of acquiring Virginia Honey, including
direct costs of the acquisition, of $4,890,244 was paid in cash. The stock
purchase agreement with respect to the acquisition (the "Stock Purchase
Agreement") also provides for future contingent payments to Mr. Hess based on
forty percent of five times the average quarterly EBITDA less certain debt
obligations of Virginia Honey, for the period from April 1, 2001 through
December 31, 2004 and twenty percent for the period from January 1, 2005 through
December 31, 2006. In the event any such amount becomes payable, the Company
will record the payment as an additional cost of the acquisition. As of
September 30, 2002, there was no amount due as calculated under the Stock
Purchase Agreement. However, should Virginia Honey maintain its current
profitability levels, the Company estimates that payments with a net present
value of approximately $2.3 million would be due and payable as contingent
consideration in accordance with the provisions of the Stock Purchase Agreement.
The unaudited consolidated results of operation on a pro forma basis as
though Virginia Honey had been acquired as of the beginning of 2001 are as
follows ($000's except earnings per share data):
Nine Months ended September 30, 2001
- -----------------------------------------------
Net sales $ 26,193
Net income $ 830
Basic earnings per share $ 0.22
Diluted earnings per share $ 0.22
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Virginia Honey acquisition
been consummated as of the beginning of 2001, nor are they indicative of future
operating results.
7
BUSINESS SEGMENTS
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Following the provisions of SFAS No. 131, the Company is reporting
two operating business segments in the same format as reviewed by the Company's
senior management. Segment one, Vita, processes and sells various herring, and
cured and smoked salmon products throughout the United States. Segment two,
Virginia Honey, manufactures and distributes honey, salad dressings, sauces,
jams and jellies and gift baskets. Management uses operating income as the
measure of profit or loss by business segment.
BUSINESS SEGMENT INFORMATION IS AS FOLLOWS ($000'S):
Three months ended September 30, 2002 2001
- ----------------------------------------------------------------
GOODWILL
Vita $ -- $ --
Virginia Honey 5,245 5,253
- ----------------------------------------------------------------
Total Goodwill $ 5,245 $ 5,253
================================================================
TOTAL ASSETS
Vita $10,013 $11,113
Virginia Honey 9,924 9,278
- ----------------------------------------------------------------
Total Assets $19,937 $20,391
================================================================
NET SALES
Vita $ 6,193 $ 5,840
Virginia Honey 3,099 2,637
- ----------------------------------------------------------------
Total Net Sales $ 9,292 $ 8,477
================================================================
OPERATING PROFIT
Vita $ 218 $ 284
Virginia Honey 266 203
- ----------------------------------------------------------------
Total Operating Profit $ 484 $ 487
================================================================
NET INCOME
Vita $ 78 $ 215
Virginia Honey 130 80
- ----------------------------------------------------------------
Total Net Income $ 208 $ 295
================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 125 $ 134
Virginia Honey 72 81
- ----------------------------------------------------------------
Total Depreciation and Amortization $ 197 $ 215
================================================================
8
Nine months ended September 30, 2002 2001
- ----------------------------------------------------------------
GOODWILL
Vita $ -- $ --
Virginia Honey 5,245 5,253
- ----------------------------------------------------------------
Total Goodwill $ 5,245 $ 5,253
================================================================
TOTAL ASSETS
Vita $10,013 $11,113
Virginia Honey 9,924 9,278
- ----------------------------------------------------------------
Total Assets $19,937 $20,391
================================================================
NET SALES
Vita $18,439 $17,086
Virginia Honey 9,705 2,637
- ----------------------------------------------------------------
Total Net Sales $28,144 $19,723
================================================================
OPERATING PROFIT
Vita $ 501 $ 392
Virginia Honey 992 203
- ----------------------------------------------------------------
Total Operating Profit $ 1,493 $ 595
================================================================
NET INCOME
Vita $ 134 $ 185
Virginia Honey 510 81
- ----------------------------------------------------------------
Total Net Income $ 644 $ 266
================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 364 $ 350
Virginia Honey 214 81
- ----------------------------------------------------------------
Total Depreciation and Amortization $ 578 $ 431
================================================================
HALIFAX ACQUISITION
On November 6, 2002, the Company completed its acquisition of The
Halifax Group, Inc. in accordance with a merger agreement the Company signed on
October 17, 2002. The Company expects to fully integrate Halifax's operations
with the Company's wholly owned subsidiary, Virginia Honey. Earnings for Halifax
will be included in Virginia Honey's results as of the effective date of the
transaction, November 1, 2002, one month into the Company's fourth quarter.
Robert J. Budd, the former owner of Halifax, has entered into an employment
agreement to serve as the President of Halifax and report to Terry W. Hess,
Virginia Honey's President, who was also named Chairman and Chief Executive
Officer of the combined Halifax/Virginia Honey operations.
Halifax is a manufacturer and distributor of licensed brand-named
products including the Jim Beam(R) brand of steak sauce, barbeque sauce,
marinade and related products and The Drambuie(R) Gourmet Collection. Halifax
also manufactures and distributes the Artie Bucco(TM) line of products based on
the HBO(R) series The Sopranos(R), the Scorned Woman(R) gourmet food line, the
Oak Hill Farms(R) line of salad dressings and various gourmet products and
branded gift items. Halifax is based in Atlanta, Georgia where it has a
packaging facility and a warehouse/distribution facility.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements reflect the selection and application of
accounting policies that require management to make significant estimates and
assumptions. We believe that the following are some of the more critical
judgment area in the application of our accounting policies that currently
affect our 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.
Revenue is recognized upon shipment of product to customers in
fulfillment of customer orders. In accordance with industry practices, inventory
is sold to customers often with the right to return or dispose if the
merchandise is not sold prior to the expiration of its shelf life. Sales are
reduced by a provision for estimated future returns and disposals.
The Company recognizes deferred 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 based upon
currently enacted tax rates expected to be in effect when such amounts are
realized or settled.
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Any long-lived assets held for disposal are reported at the
lower of their carrying amounts or fair value less cost to sell. As of September
30, 2002 there has been no impairment of long-lived assets.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
REVENUES. Net sales for the three months ended September 30, 2002 were
$9,292,000, compared to $8,477,000 for the same period in 2001, an increase of
$815,000 or 9.6%. Of this increase, $462,000 represents a 17.5% increase for the
Virginia Honey business. This increase reflects a 40.4% increase for the salad
dressing product line, net of an 8.2% decline for honey products. The balance of
the increase, totaling $353,000, represents a 6.0% increase for the Vita
business. This increase in Vita's net sales was the result of a 6% increase in
gross sales of herring products and a 12% increase for salmon products, net of a
21% decrease for other specialty products and higher sales allowances. Herring,
salmon, and specialty product sales respectively, represented 46%, 49%, and 5%
of this business unit's total gross sales during the period. Virginia Honey's
salad dressings, honey products and specialty items respectively, represented
64%, 33% and 3% of this business unit's total gross sales.
GROSS MARGIN. Gross margin for the three months ended September 30, 2002 was
$2,794,000, compared to $2,641,000 for the same period in 2001, an increase of
$153,000 or 5.8%. The Virginia Honey business accounted for substantially all of
this increase as Vita's gross margin dollars remained constant between periods.
As a percent of net sales, gross margin totaled 30.1%, down from 31.2% for the
same period in 2001. For the Vita business unit, gross margin was 28.5% for the
current quarter versus 30.2% for the same period in 2001. This change was
primarily attributable to increased levels of selling price discounting which
allowed increased promotional activities at the customers' retail outlets and
10
addressed aggressive competitive pricing especially for the herring product
line. As a percentage of net sales, the gross margin of Virginia Honey remained
steady at 33.2% for both 2002 and 2001.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the three months ended September 30, 2002 were $2,310,000, compared to
$2,154,000 for the same period in 2001, an increase of $156,000 or 7.2%. As a
percentage of net sales, these expenses decreased to 24.9% from 25.4% in 2001.
The Virginia Honey business accounted for $92,000 of the increased operating
expenses, an increase of 13.7% versus the prior period. The remaining $64,000,
representing a 4.3% increase versus the prior period, was attributable to Vita's
operation. Of the total operating expense increase, $40,000 was due to selling,
marketing and distribution expenses ($29,000 for Virginia Honey and $11,000 for
Vita) and $116,000 resulted from higher administrative expenses primarily
$53,000 of higher employment -related expenses (of which Virginia Honey
accounted for $32,000) and $48,000 of higher professional fees (of which Vita
accounted for $39,000).
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2002
was $138,000, compared to $184,000 for the same period in 2001, a decrease of
$46,000 or 25.0%. This decrease was attributable to the lower average interest
rates, which more than offset the increase in the average borrowings necessary
to finance the acquisition of Virginia Honey, which was effective for the entire
quarter in 2002 but for only half of the quarter during 2001. The $10,559,000
average debt balance for the third quarter represented an increase of $695,000
or 7.0%, compared to the $9,864,000 for the same quarter of the previous year.
The effect of this increased borrowing on the interest expense was offset by
lower interest rates provided under the terms of the Company's Amended and
Restated Loan and Security Agreement.
PRETAX INCOME. The Company's pre-tax income for the three months ended September
30, 2002 was $346,000, compared to $303,000 for the same period in 2001, an
increase of 14.2%. Vita provided $129,000 of pretax income and Virginia Honey
provided $217,000 of pretax income compared to $169,000 and $134,000
respectively, for the third quarter of 2001.
INCOME TAXES. The Company provided $138,000 or 40% of pretax income as income
tax expense during the three months ended September 30, 2002. This is $130,000
more than the $8,000 or 3% of pretax income that was provided for in the third
quarter of 2001. The prior period provision was recorded net of the anticipated
utilization of net loss carryforwards. These carryforwards were fully utilized
during 2001.
NET INCOME. Net income for the three months ended September 30, 2002 was
$208,000 or $0.06 per share compared to $295,000 or $0.08 per share for the same
period in 2001, a decrease of $87,000. The $208,000 of net income is comprised
of $130,000 of income from Virginia Honey and $78,000 from the Vita business.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
REVENUES. Net sales for the nine months ended September 30, 2002 were
$28,144,000, compared to $19,723,000 for the same period in 2001, an increase of
$8,421,000 or 42.7%. Of this increase, $7,068,000 was attributable to Virginia
Honey and, of this amount, $6,605,000 represents Virginia Honey's net sales
through June 30, 2002 (which was effectively acquired on July 1, 2001) and
$463,000 represents the higher third quarter sales by Virginia Honey. The
balance of the increase, totaling $1,353,000, represents a 7.9% increase for the
Vita business. This increase in Vita's net sales was the result of a 5% increase
in gross sales of herring products, and a 14% increase for salmon products, net
of a 14% decrease for other specialty products. Herring, salmon, and specialty
product sales respectively, represented 45%, 49%, and 6% of this business unit's
total gross sales during the period. Virginia Honey's salad dressings, honey
products and specialty items respectively, represented 64%, 35% and 1% of this
business unit's total gross sales.
11
GROSS MARGIN. Gross margin for the nine months ended September 30, 2002 was
$8,686,000, compared to $5,680,000 for the same period in 2001, an increase of
$3,006,000 or 52.9%. Of this increase, $2,403,000 was attributable to Virginia
Honey, and of this, $2,248,000 reflects results through June 30, 2002 and
another $155,000 represents the higher third quarter margin discussed in the
previous section. The balance of this increase, totaling $603,000, represents a
12.5% increase for the Vita business. Gross margin as a percent of net sales
increased to 30.9% from 28.8% during this time, an increase of 2.1 percentage
points. For the Vita business unit, gross margin was 29.3% versus 28.1% during
the same period in 2001. This improvement was attributable to a combination of
factors; most notably a sales mix shift toward the higher margin salmon products
and volume related processing efficiencies. As a percentage of net sales, the
gross margin of Virginia Honey totaled 33.8%, notably higher than that of the
Vita business; thus contributing to the improved consolidated result.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the nine months ended September 30, 2002 were $7,193,000, compared to
$5,085,000 for the same period in 2001, an increase of $2,108,000 or 41.5%. As a
percentage of net sales, these expenses decreased slightly to 25.6% from 25.8%
during the prior year. The inclusion of Virginia Honey's results accounted for
$1,614,000 of the increase and, of this amount, $1,523,000 reflects the
inclusion of results through June 30, 2002. Another $494,000 of the increase
reflects 11.2% higher expenses for the Vita operation. Of the Vita increase,
$212,000 was due to selling, marketing and distribution expenses, primarily as a
result of increased levels of in-store advertising, and brokerage fees, with
another $282,000 resulting from higher administrative expenses primarily for
employment-related matters and professional fees.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2002
was $421,000, compared to $373,000 for the same period in 2001, an increase of
$48,000 or 12.9%. This increase was attributable to the higher average
borrowings necessary to finance the acquisition of Virginia Honey, which was
effective for the full nine-month period in 2002 but for only half of the third
quarter in 2001. The $10,735,000 average debt balance for the nine-month period
represented an increase of $3,944,000 or 58.1%, compared to the $6,791,000 for
the same period of the previous year. The effect of this increased borrowing on
the interest expense was largely offset by lower interest rates provided under
the terms of the Company's Amended and Restated Loan and Security Agreement.
PRETAX INCOME. The Company's pre-tax income for the nine months ended September
30, 2002 was $1,072,000, compared to $222,000 for the same period in 2001, an
increase of 383%. The pretax increase of $850,000 is comprised of $715,000 for
Virginia Honey and $135,000 for Vita.
INCOME TAXES. The Company provided $428,000 of income tax expense, or 40% of
pretax income during the nine months ended September 30, 2002 versus an income
tax benefit of $44,000 in 2001. The prior year benefit was recorded for the
anticipated utilization of net loss carryforwards. These carryforwards were
fully utilized during 2001, thus the increase in expense for 2002.
NET INCOME. Net income for the nine months ended September 30, 2002 was $644,000
or $0.17 per share compared to $266,000 or $0.07 per share for the same period
in 2001, a 142% increase totaling $378,000 or $0.10 per share.
FINANCIAL CONDITION
At September 30, 2002, the Company had $4,864,000 in working capital, versus
$1,665,000 at December 31, 2001, an increase of $3,199,000 or 192%. As a result,
the current ratio improved to 2.0 from 1.2. However, of this increase,
$4,405,000 is attributable to a decrease in the current portion of debt, the
majority of which is due to the July 31, 2002 amendment to the Company's Loan
and Security Agreement. This amendment extended the revolving loan termination
date to 2004 from 2002. Excluding the effect of this extension, the working
capital would have decreased $1,206,000. This is a result of a current asset
reduction for the nine month period of $649,000, which reflects seasonal
reductions to accounts receivable of $2,195,000 and to cash of $451,000, net of
inventory increases, in anticipation of the
12
upcoming busy season, totaling $1,960,000. Contributing to reduce working
capital were increases in accrued income tax of $428,000 and in combined
accounts payable and accrued expenses of $128,000.
At September 30, 2002, the Company had $78,000 in cash, a revolving credit
facility of $7,000,000 and a term facility of $7,250,000. On July 31, 2002 the
Company and its bank entered into a new agreement to amend and re-state its Loan
and Security Agreement dated August 15,2001. Changes in the Company's revolving
line of credit provisions include a new two-year term expiring on July 31, 2004.
The term loan is payable in monthly installments of $90,042 through November 30,
2002, and $40,042 from December 1, 2002 through July 31, 2006 with a balloon
payment of $2,443,000 due July 31, 2006. Amounts outstanding under the revolving
facility and the term facility at September 30, 2002 were $3,473,000 and
$4,384,000, respectively. The rate of interest on $3,000,000 of the revolver was
4.21%, which equals LIBOR plus 2.40%; the rate on $4,200,000 of the term loan
was 4.56%, which equals LIBOR plus 2.75%; the balance of the revolver was 4.40%,
which equals Prime minus 0.35% and the balance of the term loan was 4.70%, which
equals Prime minus 0.05%. At September 30, 2002, the Company was in compliance
with the covenants, representations and warranties contained in the loan
agreement.
The Company's Amended and Restated Loan Agreement includes, among other
covenants, restrictions on the Company's ability to engage in mergers and
acquisitions, make investments and related loans, redeem or purchase the
Company's stock, make distributions to shareholders, engage in certain
affiliated transactions, guarantee other's obligations or liabilities, pledge or
sell the Company's assets, incur indebtedness for borrowed money, amend or
prepay certain of the Company's debt obligations, or engage in certain
change-of-control transactions. The Amended and Restated Loan Agreement also
contains certain financial covenants the Company is required to observe,
including without limitation minimum tangible net worth, minimum ratio of
earnings before interest, taxes, depreciation and amortization (net of certain
adjustments) to total debt service, and a limit on annual capital expenditures.
The ratio of long-term debt to total capitalization increased to 66% at
September 30, 2002 from 62% at December 31, 2001. This is primarily due to the
reclassification to long-term debt of the revolving loan due to the extension
granted in the July 2002 loan amendment. The Company believes its financial
resources are adequate to fund its needs for the next twelve months.
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating activities
was $1,972,000 for the nine months ended September 30, 2002. As discussed above,
the primary source for this cash was the net collection of accounts receivable,
which totaled $2,195,000 during this period. Cash flows from operating
activities for the current period compare to $1,575,000 for the same period in
2001, an increase of $397,000, which was largely attributable to the $378,000
increase in net income.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities was
$1,092,000 for the nine months ended September 30, 2002. These funds were used
primarily to purchase machinery and equipment for the Company's manufacturing
operations. This amount compares to $5,284,000 used for the same period in 2001,
a decrease of $4,192,000, which is primarily attributable to the $4,639,000 used
in 2001 to acquire Virginia Honey.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used in financing activities was
$1,330,000 for the nine months ended September 30, 2002, compared to $3,777,000
provided for the same period in 2001, a decrease of $5,107,000. This decrease
was primarily attributable to the $5,555,000 of new bank borrowing necessary in
2001 to finance the acquisition of Virginia Honey.
SEASONALITY
The Vita segment of the Company's business is seasonal in nature, primarily
resulting from the effect of the timing of certain holidays on the demand for
certain products. Historically, the Company's sales and profits have been
substantially higher in the fourth quarter of each year.
13
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including statements in "Management's
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 management's current expectations and involve known and
unknown risks and uncertainties which may cause the Company's 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
Company's future growth and profitability, the introduction and success of new
products, the potential loss of large customers or accounts, changes in economic
and market conditions, integration and management of acquired businesses, the
seasonality of Vita's business, the Company's ability to attract and retain key
personnel, the Company's ability to maintain its relationships with key vendors
and retailers, consolidation of the Company's supplier base, the potential
impact of claims and litigation, changes in raw material costs, downward product
price movements, and the effects of competition in the Company's markets. 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 Company's 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 has a revolving line of credit with a bank, which bears
interest at the Prime rate minus .35% (4.40% at September 30, 2002) or interest
at the LIBOR rate plus 2.40% (4.22% at September 30, 2002). The Company also has
a term loan with the same bank, which bears interest at the Prime rate minus
..05% (4.70% at September 30, 2002) or interest at the LIBOR rate plus 2.75%
(4.57% at September 30, 2002). These rate adjustments will remain constant until
March 31, 2003. After March 31, 2003, the interest rate adjustments are based
upon certain financial covenants and with respect to the revolver may range from
LIBOR plus 2.65% to LIBOR plus 2.15% or Prime minus 0.10% to Prime minus 0.60%.
The term loan facility may range from LIBOR plus 3.10% to LIBOR plus 2.45% or
Prime plus 0.20% to Prime minus 0.30%.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
Procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material pending legal
proceedings and is not aware of any material legal proceedings threatened
against it.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
4.1 Amended and Restated Loan and Security Agreement dated
August 15, 2001
4.2 First Amendment to Amended and Restated Loan and
Security Agreement dated July 31, 2002
99.1 Sarbanes-Oxley Section 906 Certifications
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2002.
SIGNATURES
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.
VITA FOOD PRODUCTS, INC.
Date: November 14, 2002 By: /s/ Stephen D. Rubin
------------------------------------
Stephen D. Rubin
President
(Principal Executive Officer)
Date: November 14, 2002 By: /s/ Clifford K. Bolen
------------------------------------
Clifford K. Bolen
Vice President; Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
CERTIFICATION
I, Stephen D. Rubin, the President of Vita Food Products, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vita Food Products,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Stephen D. Rubin
-------------------------------
Stephen D. Rubin
President
(Principal Executive Officer)
16
CERTIFICATION
I, Clifford K. Bolen, the Vice President; Chief Financial Officer of
Vita Food Products, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vita Food Products,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ Clifford K. Bolen
--------------------------------------------
Clifford K. Bolen
Vice President; Chief Financial Officer
(Principal Financial and Accounting Officer)
17