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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 June 30, 2003
/ / 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 offices) (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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The number of shares outstanding of registrant's common stock as of
July 31, 2003 was 3,785,022.
VITA FOOD PRODUCTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
a) Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 3
b) Consolidated Income Statements for the Three
Months and Six Months Ended June 30, 2003 and
2002 4
c) Consolidated Shareholders' Equity Statements for
the Six Months Ended June 30, 2003 4
d) Consolidated Cash Flows Statements for the Six
Months Ended June 30, 2003 and 2002 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 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
===========================================================================================================================
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED) (AUDITED)
===========================================================================================================================
ASSETS
Current Assets
Cash $ 725,749 $ 46,097
Accounts receivable-trade, net of allowance for discounts, returns, and doubtful
accounts of $287,000 in 2003 and $277,000 in 2002 4,504,284 5,325,254
Inventories
Raw material and supplies 4,170,377 4,570,782
Work in process 36,322 162,325
Finished goods 3,211,288 2,006,554
Prepaid expenses and other current assets 471,830 337,278
Income taxes receivable 0 174,318
----------- -----------
Total Current Assets 13,119,850 12,622,608
Property, Plant and Equipment
Land 35,000 35,000
Building and improvements 2,472,354 2,452,260
Leasehold improvements 721,563 706,181
Machinery and office equipment 9,265,105 8,674,011
----------- -----------
12,494,022 11,867,452
Less accumulated depreciation and amortization (6,459,930) (6,030,037)
----------- -----------
Net Property, Plant & Equipment 6,034,092 5,837,415
Other Assets
Goodwill 7,566,094 7,565,821
Other assets 290,882 303,648
Deferred income tax 212,696 212,696
----------- -----------
Total Other Assets 8,069,672 8,082,165
----------- -----------
Total Assets $27,223,614 $26,542,188
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 1,341,542 $ 1,430,933
Accounts payable 3,262,387 3,583,391
Accrued other expenses 1,351,825 1,119,116
----------- -----------
Total Current Liabilities 5,955,754 6,133,440
Long-term Obligations, Less Current Maturities 14,608,953 14,415,776
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 3,785,022 shares in 2003 and 3,773,895 shares in 2002 37,849 37,738
Additional paid in capital 3,534,910 3,496,483
Retained earnings 3,086,148 2,458,751
----------- -----------
Total Shareholders' Equity 6,658,907 5,992,972
----------- -----------
Total Liabilities and Shareholders' Equity $27,223,614 $26,542,188
===========================================================================================================================
See accompanying notes to financial statements
3
CONSOLIDATED STATEMENTS OF INCOME VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
==============================================================================================================================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
==============================================================================================================================
Net sales $12,854,884 $8,784,872 $25,812,057 $18,852,362
Cost of goods sold 8,696,470 5,970,765 17,631,290 12,960,615
----------- ---------- ----------- -----------
Gross margin 4,158,414 2,814,107 8,180,767 5,891,747
Selling and administrative expenses
Selling, marketing & distribution 2,200,793 1,488,359 4,240,382 3,004,606
Administrative 1,231,846 968,480 2,514,113 1,878,571
----------- ---------- ----------- -----------
Total 3,432,639 2,456,839 6,754,495 4,883,177
----------- ---------- ----------- -----------
Operating profit 725,775 357,268 1,426,272 1,008,570
Interest expense 191,110 138,165 377,875 282,657
----------- ---------- ----------- -----------
Income before income taxes 534,665 219,103 1,048,397 725,913
Income tax expense 214,000 87,277 421,000 290,000
----------- ---------- ----------- -----------
Net income $320,665 $131,826 $627,397 $435,913
Basic earnings per share $0.08 $0.04 $0.17 $0.12
Weighted average common shares outstanding 3,777,895 3,739,721 3,777,232 3,734,730
Diluted earnings per share $0.08 $0.03 $0.16 $0.11
Weighted average common shares outstanding 3,872,585 3,858,071 3,862,159 3,840,961
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
===================================================================================================================================
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
===================================================================================================================================
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 44,212 442 116,552 116,994
Net income 1,446,235 1,446,235
--------- ------- ---------- ---------- ----------
Balance, at December 31, 2002 3,773,895 $37,738 $3,496,483 $2,458,751 $5,992,972
===================================================================================================================================
Balance, at January 1, 2003 3,773,895 $37,738 $3,496,483 $2,458,751 $5,992,972
Proceeds from stock purchase
and stock option plans 11,127 111 38,427 38,538
Net income 627,397 627,397
--------- ------- ---------- ---------- ----------
Balance, at June 30, 2003 3,785,022 $37,849 $3,534,910 $3,086,148 $6,658,907
===================================================================================================================================
See accompanying notes to financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
================================================================================================================================
FOR THE SIX MONTHS ENDED
JUNE 30,
2003 2002
(UNAUDITED) (UNAUDITED)
================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 627,397 $ 435,913
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 446,327 381,656
Gain on sale of fixed asset 0 (3,949)
Changes in assets and liabilities:
Decrease in accounts receivable 820,969 1,950,024
Increase in inventories (678,326) (449,325)
Increase in prepaid expenses and other current assets (134,552) (32,054)
Decrease in income tax receivable 174,318 0
Decrease in accounts payable (321,004) (335,762)
Increase in accrued expenses 232,709 79,779
--------- -----------
Net cash provided by operating activities 1,167,838 2,026,282
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (626,568) (823,059)
Proceeds from sale of fixed asset 0 14,000
Other assets and liabilities 12,258 (11,881)
--------- -----------
Net cash used in investing activities (614,310) (820,940)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock purchase and stock options 38,538 50,086
Net borrowings (payments) under revolving loan facility 833,211 (1,116,133)
Net payments on term loan facility (652,009) (574,483)
Net payments under capital lease obligations (93,616) (52,299)
--------- -----------
Net cash provided by (used in) financing activities 126,124 (1,692,829)
--------- -----------
Net increase (decrease) in cash 679,652 (487,487)
Cash, at beginning of period 46,097 529,354
--------- -----------
Cash, at end of period $ 725,749 $ 41,867
================================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 369,000 $ 301,026
Income taxes paid $ 178,000 $ 104,600
See accompanying notes to financial statements
5
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
2002 Form 10-K of Vita Food Products, Inc. (Vita Food Products, Inc. ("Vita")
together with its wholly owned subsidiary, Vita Specialty Foods, Inc. ("Vita
Specialty Foods"), hereinafter referred to as the "Company").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vita and
Vita Specialty Foods. Vita Specialty Foods includes the former operations of
Virginia Honey Company, Inc. ("Virginia Honey") and The Halifax Group, Inc.
("Halifax"), which were acquired by the company effective July 1, 2001 and
November 1, 2002, respectively. 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 January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities,
an interpretation of ARB 51. The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or "VIEs")
and how to determine when and which business enterprise should consolidate the
VIE (the "primary beneficiary"). This new model for consolidation applies to an
entity in which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. The adoption of this
Interpretation did not have an effect on the Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS 150 establishes standards
for how entities classify and measure in their statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS 150 are effective for financial instruments
entered into or modified after May 31, 2003, and otherwise shall be effective at
the beginning of the first fiscal interim period beginning after June 15, 2003.
The Company does not expect adoption of this statement to have a material impact
on its results of operations or financial position.
ACQUISITIONS
VIRGINIA HONEY COMPANY, INC.
Effective July 1, 2001 Vita acquired 100% 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 was a
manufacturer and distributor of honey, salad dressings, sauces, jams and
jellies and gift baskets. The Company is leveraging its sales and
distribution network to provide national exposure to the products of
Virginia Honey. The Company also has introduced products that were jointly
developed, thereby increasing the market presence of Vita and Virginia Brand
6
products.
The aggregate purchase price, including direct costs of the acquisition, of
$4,884,437 was paid in cash. The Stock Purchase Agreement, including its
Amendments, for Virginia Honey provides for future payments to Mr. Hess, the
former owner, based upon 20% of five times the average quarterly EBITDA less
certain debt obligations of Virginia Honey, for the period from January 2001
through December 31, 2002. The present value of this calculation resulted in
$780,996 and has been recorded as a liability at June 30, 2003 and is
payable on April 1, 2005. The remaining payments under the Stock Purchase
Agreement to Mr. Hess and the payments per the merger agreement to the
former majority owner of Halifax (see below) will be based on the earnings
of Vita Specialty Foods, reflecting the combined earnings of Virginia Honey
and Halifax. There are two periods of measurement remaining, the first
covering January 1, 2003 until December 31, 2005 and the second covering
January 1, 2006 until December 31, 2007.
As a result of the Halifax merger agreement discussed below, the operations
of Virginia Honey and Halifax were merged effective November 1, 2002.
Accordingly, EBITDA applicable to the future contingent payments due to Mr.
Hess will be determined based upon a formula included as part of the Halifax
merger agreement. Should Vita Specialty Foods maintain its current
profitability levels, the Company estimates that total remaining payments,
with a net present value of approximately $2,787,000, would be due and
payable as contingent consideration in accordance with the provisions of the
Stock Purchase Agreement.
THE HALIFAX GROUP, INC.
Effective November 1, 2002, the Company acquired all of the issued and
outstanding shares of capital stock of Halifax, a Georgia corporation, from
Robert J. Budd and certain affiliates or associates of Mr. Budd. Since the
effective date, the results of Halifax have been fully integrated with the
results of Virginia Honey in Vita Specialty Foods, which was formed in
connection with the Halifax acquisition. Halifax was a manufacturer and
distributor of licensed brand-named sauces, marinades, salad dressings,
various gourmet products and branded gift items, many of which are similar
to those of Virginia Honey. The Company expects to enjoy both market
synergies and production efficiencies as a result of this merger.
On the November 6, 2002 closing date of the Halifax acquisition, as a direct
cost of the acquisition, the Company paid $450,000 in cash to Mr. Budd in
partial payment of the $795,781 preexisting debt owed to him by Halifax. The
discounted value of the remaining debt has been recorded by the Company as a
long-term obligation. The Company also assigned to Mr. Budd any potential
rights or exposure associated with an unresolved legal case involving
Halifax, the actual dollar amount of which is indeterminable at this time.
The merger agreement further provides for two future contingent payments to
Mr. Budd. The first will be based upon 45% of five times the Halifax portion
of Vita Specialty Food's average quarterly EBITDA. The agreement includes a
formula that allocates EBITDA between Halifax and Virginia Honey, based on
the proportion of each unit's products sold.
This EBITDA will be averaged quarterly for calendar years 2003 through 2005.
This first contingent payment will be reduced by the remaining balance of
the preexisting debt discussed above. The second contingent payment will be
determined the same way except the percent will be reduced from 45% to 30%
and will be based upon the calendar years 2006 and 2007. If payable, the
first payment will be paid on or before April 1, 2006 and the second will be
paid on or before April 1, 2008 and both will be recorded as additional
acquisition costs. Should Vita Specialty Foods maintain its current
profitability levels, the Company estimates that there would be no remaining
payments due as contingent consideration in accordance with the provisions
of the merger agreement. The following table summarizes the fair values of
the assets acquired and the liabilities assumed at the date of acquisition:
AT NOVEMBER 1, 2002
(in 000's)
--------------------------------------------------------------------------------
Current assets $ 1,815
Property, plant and equipment 982
Other assets 560
Goodwill 1,562
--------------------------------------------------------------------------------
Total assets acquired 4,919
Current liabilities (3,670)
Long-term debt (1,005)
--------------------------------------------------------------------------------
Total liabilities assumed ( 4,675)
--------------------------------------------------------------------------------
Net assets acquired $ 244
================================================================================
7
None of the amount of goodwill is expected to be deductible for tax
purposes.
The Company's unaudited consolidated results of operation on a pro forma
basis as though Halifax had been acquired as of the beginning of 2002 are as
follows ($000's except earnings per share data):
Six months ended June 30, 2002
-----------------------------------------------------------------------
Net sales $ 23,933
Net income $ 336
Basic earnings per share $ 0.09
Diluted earnings per share $ 0.09
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Halifax acquisition been
consummated as of the above date, nor is it indicative of future operating
results.
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, 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. The information
presented below for 2002 for Vita Specialty Foods includes only the results
of Virginia Honey. Management uses operating profit as the measure of profit
or loss by business segment.
BUSINESS SEGMENT INFORMATION IS AS FOLLOWS ($000'S):
Three months ended June 30, 2003 2002
========================================================================================
NET SALES
Vita $ 5,071 $ 5,468
Vita Specialty Foods 7,784 3,317
----------------------------------------------------------------------------------------
Total Net Sales $ 12,855 $ 8,785
========================================================================================
OPERATING PROFIT (LOSS)
Vita $ (264) $ 26
Vita Specialty Foods 990 331
----------------------------------------------------------------------------------------
Total Operating Profit $ 726 $ 357
========================================================================================
NET INCOME (LOSS)
Vita $ (212) $ (41)
Vita Specialty Foods 533 173
----------------------------------------------------------------------------------------
Total Net Income $ 321 $ 132
========================================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 119 $ 123
Vita Specialty Foods 104 72
----------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 223 $ 195
========================================================================================
8
Three months ended June 30, 2003 2002
----------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Vita $ 107 $ 491
Vita Specialty Foods 244 38
----------------------------------------------------------------------------------------
Total Capital Expenditures $ 351 $ 5294
========================================================================================
Six months ended June 30, 2003 2002
----------------------------------------------------------------------------------------
GOODWILL
Vita $ - $ -
Vita Specialty Foods 7,566 5,245
----------------------------------------------------------------------------------------
Total Goodwill $ 7,566 $ 5,245
========================================================================================
TOTAL ASSETS
Vita $ 17,346 $ 14,499
Vita Specialty Foods 9,878 4,056
----------------------------------------------------------------------------------------
Total Assets $ 27,224 $ 18,555
========================================================================================
NET SALES
Vita $ 12,299 $ 12,247
Vita Specialty Foods 13,513 6,605
----------------------------------------------------------------------------------------
Total Net Sales $ 25,812 $ 18,852
========================================================================================
OPERATING PROFIT
Vita $ 130 $ 283
Vita Specialty Foods 1,296 725
----------------------------------------------------------------------------------------
Total Operating Profit $ 1,426 $ 1,008
========================================================================================
NET INCOME (LOSS)
Vita $ (29) $ 57
Vita Specialty Foods 656 379
----------------------------------------------------------------------------------------
Total Net Income $ 627 $ 436
========================================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 238 $ 239
Vita Specialty Foods 208 142
----------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 446 $ 381
========================================================================================
CAPITAL EXPENDITURES
Vita $ 205 $ 743
Vita Specialty Foods 422 80
----------------------------------------------------------------------------------------
Total Capital Expenditures $ 627 $ 8234
========================================================================================
9
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies the intrinsic value method under APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its 1996 Stock Option Plan, 1996 Stock
Option Plan for Non-Employee Directors and 1996 Employee Stock Purchase Plan, as
the market price of the stock did not exceed the exercise price of the options
on the measurement date.
The Company has elected to continue to utilize the accounting
provisions of APB 25 for stock options, and is required to provide pro forma
disclosures of net income and earnings per share had the Company adopted the
fair value method under SFAS No. 123. The weighted-average, grant date fair
value of stock options granted to employees during the period and the
weighted-average significant assumptions used to determine those fair values,
using a modified Black-Scholes option pricing model, and the pro forma effect on
earnings of the fair value accounting for stock options under Statement of
Financial Accounting Standards No. 123, are as follows:
FOR THE PERIOD ENDING JUNE 30, 2003 THREE SIX
MONTHS MONTHS
- -----------------------------------------------------------------------------------------
Weighted average fair value per options granted $ 2.87 $ 2.62
Significant assumptions (weighted average)
Risk-free interest rate at grant date 3.6% 3.6%
Expected stock price volatility 0.72 0.73
Expected dividend payout - -
Expected option life (years) 5 5
Net Income
As reported $ 320,665 $ 627,397
Deduct total stock based compensation expense
determined under the fair value method (18,081) (47,214)
------------------------------
Pro forma $ 302,584 $ 580,183
==============================
Basic earnings per share
As reported $ 0.08 $ 0.17
Pro forma $ 0.08 $ 0.15
Diluted earnings per share
As reported $ 0.08 $ 0.16
Pro forma $ 0.08 $ 0.15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's 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 Company's 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.
10
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. In order to
support the Company's products, various marketing programs are offered to
customers which reimburse them for a portion or all of their promotional
activities related to the Company's products. The Company regularly reviews and
revises, when it deems necessary, estimates of costs to the Company for these
marketing and merchandising programs based on estimates of what has been
incurred by customers. Actual costs incurred by the Company may differ
significantly if factors such as the level and success of the customers'
programs or other conditions differ from expectations. Sales are reduced by a
provision for estimated future returns, disposals and promotional expenses.
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.
In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets" became
effective and as a result, the Company assesses the impairment of identifiable
intangibles, and related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. 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 Company's use of the acquired
assets or the strategy for the Company's overall business;
- Significant negative industry or economic trends;
- Significant decline in the Company's stock price for a sustained period;
and
- The Company's market capitalization relative to net book value.
When the Company determines that the carrying value of intangibles,
long-lived assets and related goodwill 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 provisions of SFAS 142 also required the completion of transitional
impairment test for goodwill and indefinite lived assets within 12 months of
adoption, with any impairment treated as a cumulative effect of change in
accounting principle. During the second quarter of 2002, the Company completed
the transitional impairment test, which did not result in impairment of recorded
goodwill.
During the fourth quarter of 2002, the Company completed its annual
impairment test, which did not result in impairment of recorded goodwill.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
REVENUES. Net sales for the three months ended June 30, 2003 were $12,855,000,
compared to $8,785,000 for the same period in 2002, an increase of $4,070,000 or
46.3%. This increase is attributable to a gain by Vita Specialty Foods of
$4,467,000, which was largely due to the inclusion of sales from the newly
acquired Halifax business. This large increase was reflected in all of the Vita
Specialty Foods business unit's major product lines including: salad
dressings/marinades $1,328,000; honey/molasses $806,000; hot filled sauces
$2,416,000 and resale products $154,000; partially offset by higher returns and
allowances of $237,000. The increase from Vita Specialty Foods was partially
offset by a decline of $397,000, or 7.3%, for the Vita seafood business, which
was primarily the result of an 11% decrease in gross sales of salmon products.
The salmon sales decrease was primarily due to a non-retail customer reducing
its purchasing volume and some reductions in sales volume in the retail sector.
Herring, salmon, and specialty product sales represented 45%, 50%, and 5%,
respectively, of the Vita business unit's total gross sales during the period.
Vita Specialty Food's salad dressings/sauces, honey products and specialty
items, represented 75%, 23% and 2%, respectively, of the Vita Specialty Foods
business unit's total gross sales.
GROSS MARGIN. Gross margin for the three months ended June 30, 2003 was
$4,158,000, compared to $2,814,000 for the same period in 2002, an increase of
$1,344,000 or 47.8%. The Vita Specialty Foods business accounted for $1,612,000
of this increase with a decline of $268,000 attributable to the Vita seafood
business. As a percent of net
11
sales, gross margin totaled 32.3%, up from 32.0% for the same period in 2002.
For the Vita Specialty Foods business, gross margin as a percentage of net sales
increased to 35.1% from 33.7% for the same period in 2002, due largely to the
lower cost of raw honey and as a result of management steps taken to integrate
the Halifax production in a way which has enhanced efficiencies. For the Vita
seafood business, gross margin decreased to 28.2% for the current quarter versus
31.0% for the same period in 2002. This change was primarily attributable to the
higher cost of raw salmon
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the three months ended June 30, 2003 were $3,433,000, compared to $2,457,000
for the same period in 2002, an increase of $976,000 or 39.7%. The majority of
this increase is attributable to expenses directly associated with the increase
in sales volume such as commissions, royalties, freight, and promotion. Although
steps continue to be taken toward eliminating any redundancies resulting from
the Halifax acquisition, as a percentage of net sales, these expenses have
already decreased during the second quarter to 26.7% from 28.0% in 2002.
INTEREST EXPENSE. Interest expense for the three months ended June 30, 2003 was
$191,000, compared to $138,000 for the same period in 2002, an increase of
$53,000 or 38.5%. This increase was attributable to the additional borrowing
primarily related to the Halifax acquisition. The average debt increased to
$14,891,000 from $10,473,000 or 42% compared to the second quarter of the prior
year.
INCOME TAXES. The Company provided $214,000 and $87,000 for the quarters ending
June 30, 2003 and 2002 respectively. The income tax provided represents
approximately 40% of pretax income for both periods.
NET INCOME. Reflecting the operating results discussed above, net income for the
three months ended June 30, 2003 increased to $321,000 compared to $132,000 for
the same period in 2002, an improvement of $189,000 or 143.2%. Net income for
the 2003 period represented $0.08 per share on both a basic and a fully diluted
basis compared with $0.04 per share basic and $0.03 per share on a fully diluted
basis for the same period in 2002.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
REVENUES. Net sales for the six months ended June 30, 2003 were $25,812,000,
compared to $18,852,000 for the same period in 2002, an increase of $6,960,000
or 36.9%. The vast majority of this increase, in the amount of $6,908,000, is
attributable to Vita Specialty Foods, and is largely due to the inclusion of
sales for the newly acquired Halifax business. This large increase was reflected
in all of the Vita Specialty Foods business unit's major product lines which
included: salad dressing/marinades $2,261,000; honey/molasses $1,563,000; hot
filled sauces $3,037,000 and resale products $446,000; partially offset by
higher returns and allowances of $399,000. These results point to the successful
diversification of the Company's business as the Vita Specialty Foods products
now account for 52% of the Company's total revenues compared to 30% during the
prior year period. Net sales for the Vita seafood business increased 0.4%, or
$52,000, during this same time period. Herring, salmon, and specialty product
sales, represented 47%, 48%, and 5%, respectively, of the Vita business unit's
total gross sales during the period. Vita Specialty Food's salad
dressings/sauces, honey products and specialty items, represented 68%, 28% and
4%, respectively, of the Vita Specialty Foods business unit's total gross sales.
GROSS MARGIN. Gross margin for the six months ended June 30, 2003 was
$8,181,000, compared to $5,892,000 for the same period in 2002, an increase of
$2,289,000 or 38.9%. The Vita Specialty Foods business accounted for $2,286,000
of this increase with the remaining $3,000 attributable to the Vita seafood
business. As a percent of net sales, gross margin increased to 31.7%, from 31.3%
for the same period in 2002. This consolidated improvement occurred as a result
of the shift in sales in favor of the higher margin Vita Specialty Foods
products and despite reductions in the gross margin as a percentage of net sales
at each of the Vita and Vita Specialty Foods separate operating units. For the
Vita Specialty Foods business, gross margin as a percent of net sales decreased
to 33.6% from 34.0% for the same period in 2002, due largely to first quarter
issues associated with the integration of the new Halifax business; partially
offset in the second quarter by the benefits from the lower raw honey cost. For
the Vita seafood business, gross margin remained relatively constant at 29.6%
versus 29.7% for the same period in 2002 as factory efficiencies were able to
offset the higher raw salmon costs for the six month period.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the six months ended June 30, 2003 were $6,754,000, compared to $4,883,000
for the same period in 2002, an increase of $1,871,000 or 38.3%. Largely due to
the inclusion of Halifax, the Vita Specialty Foods business accounted for
$1,715,000 of this increase. As a percentage of net sales, these expenses were
26.2% compared with 25.9% in 2002. The majority of
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this increase was attributable to expenditures directly associated with the
anticipated continuing increase in sales volume. However, a program is underway
to identify and eliminate any residual duplication of functional activities
resulting from the Halifax acquisition.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 2003 was
$378,000, compared to $283,000 for the same period in 2002, an increase of
$95,000 or 33.8%. This increase was attributable to the additional borrowing
primarily related to the Halifax acquisition. The average debt increased to
$14,684,000 from $10,812,000 or 35.8% compared to the same period of the prior
year.
INCOME TAXES. The Company provided $421,000 and $290,000 for the six-month
periods ending June 30, 2003 and 2002 respectively. The income tax provided
represents approximately 40% of pretax income for both periods.
NET INCOME. Reflecting the operating results discussed above, net income for the
six months ended June 30, 2003 increased to $627,000 compared to $436,000 for
the same period in 2002, an improvement of $191,000 or 43.8%. Net income for
2003 represented $0.17 per share on a basic basis and $0.16 on a fully diluted
basis; compared with $0.12 per share and $0.11 per share respectively for the
same period in 2002.
FINANCIAL CONDITION
At June 30, 2003, the Company had $7,164,000 in working capital, versus
$6,489,000 at December 31, 2002, an increase of $675,000 or 10.4%. As a result,
the current ratio improved to 2.2 to 1.0 from 2.1 to 1.0. Typically there is a
reduction in net working capital during the first six months of each year
reflecting the liquidation in current assets following the busiest part of the
year. This was also the result for the first six months of 2003 except for a
$680,000 increase in the cash balance. All non-cash items of net working capital
decreased $4,000 in the aggregate. This year, the reduction in net current
assets, excluding cash, totaled $182,000 as the reduction of $821,000 in net
collections of accounts receivable was partially offset by a $639,000 increase
in inventory and prepaid expenses. The net decrease in current liabilities was
$178,000, reflecting a $410,000 decrease in accounts payable and current debt,
net of a $233,000 increase in accrued expenses.
At June 30, 2003, the Company had $726,000 in cash, a revolving credit facility
of $7,500,000 and a term facility of $7,855,000. The revolving loan facility
matures July 31, 2004 and the term loans are payable in monthly installments of
$98,375 through November 30, 2005, $40,042 from December 1, 2005 through July
31, 2006 and balloon payments of $258,333 due on November 11, 2005 and
$2,443,000 due on July 31, 2006. Amounts outstanding under the revolving
facility and the term facilities at June 30, 2003 were $6,193,000 and
$5,816,000, respectively. The interest rates on these facilities fluctuate based
on the Funded Debt to Adjusted EBITDA ratio as each such term as defined in the
loan agreement. The loan agreement contains customary representations,
warranties and covenants. At June 30, 2003 and December 31, 2002, the Company
was in compliance with these covenants.
The ratio of long-term debt to total capitalization improved slightly to 69% at
June 30, 2003 from 71% at December 31, 2002. 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 $1,168,000 for the six months ended June 30, 2003 compared to $2,026,000 for
the same period in 2002 a reduction of $858,000 or 42%. As discussed above, due
to the normal business cycle there has been a reduction in net working capital
and especially accounts receivable during the first six months of each year.
During this period of the prior year, the result was a $1,950,000 reduction of
receivables and a corresponding collection of cash. However, during the current
year, as discussed in the preceding section, sales have remained stronger into
the seasonably slow second quarter and as a result, the receivable reduction,
although still high at $821,000 was $1,129,000 less than that of the prior year.
The receivable reduction was partially offset by $256,000 of additional cash
flow from higher net income plus depreciation.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities was
$614,000 for the six months ended June 30, 2003, which was $207,000 less than
the $821,000 used during the same period of the prior year. For both years these
funds were used primarily to purchase machinery and equipment for the Company's
manufacturing operations with the reduction mainly reflecting the completion of
two major projects at the Chicago facility.
CASH FLOWS FROM FINANCING ACTIVITIES. The majority of the activity in this
category represents payment of debt or borrowing resulting from cash surpluses
or deficits arising from the operating and investing activities. For the
six-month period ending June 30, 2003, net cash of $126,000 was provided through
$39,000 from the exercising of
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stock options and employee stock purchases and $833,000 borrowed against the
revolver, largely offset by $746,000 of net payments on the Company's term loans
and capital lease obligations. This compares to $1,693,000 of cash used,
primarily to pay down debt, for the same period in 2002, a difference of
$1,819,000.
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.
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 for the
first quarter of 2003 bore interest at the prime rate minus 0.35% or LIBOR plus
2.40%. This rate adjustment had remained constant from July 31, 2002, the date
of the First Amendment to the Amended and Restated Loan and Security Agreement,
until April 1, 2003. Commencing on April 1, 2003 the interest rates increased,
based upon certain financial ratios, to prime minus 0.10% (3.90% on June 30,
2003) or LIBOR plus 2.65% (3.79% on June 30, 2003). In addition, the Company has
two term loan facilities, which bore interest during the first quarter of 2003
at the prime rate minus 0.05% or LIBOR plus 2.75% until April 1, 2003.
Commencing on April 1, 2003 the interest rates increased, based on certain
financial ratios, to prime plus 0.20% (4.20% on June 30, 2003) or LIBOR plus
3.10% (4.27% on June 30, 2003). A 10% fluctuation in interest rates would not
have a material impact on the Company's financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management team, the principal executive officer and principal financial officer
have evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Rules 13a -- 14(c) and 15d --
14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of June 30, 2003 and based on their evaluation, have concluded that
these controls and procedures are effective. There were no significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation and up to the
date of this quarterly report on Form 10-Q. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken.
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
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 the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
14
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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The date of the Company's Annual Meeting of Stockholders was
May 14, 2003.
(b) At the Annual Meeting of Stockholders, the following matters
were submitted to a vote of the stockholders with the stated
results:
(1) The election of the following persons as directors of
the Company:
Director Votes For Votes Withheld Abstained Broker Non-Votes
- -------- --------- -------------- --------- ----------------
Stephen D. Rubin 3,408,553 803 500 -
Clark L. Feldman 3,408,553 803 500 -
Terry W. Hess 3,408,553 803 500 -
Robert J. Budd 3,408,553 803 500 -
Michael Horn 3,408,553 803 500 -
Neal Jansen 3,408,553 803 500 -
Steven A. Rothstein 3,408,553 803 500 -
Jeffrey C. Rubenstein 3,408,553 803 500 -
John C. Seramur 3,408,553 803 500 -
Paul R. Lederer 3,408,553 803 500 -
(2) Ratification of the selection of BDO Seidman, LLP as
independent accountants of the Company for the year
ending December 31, 2003
Votes For Votes Withheld Abstained Broker Non-Votes
--------- -------------- --------- ----------------
3,408,556 800 - -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Principal Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Principal Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the
Securities Exchange Commission on May 12, 2003, with respect
to its press release announcing its results of operations for
the quarter ended March 31, 2003.
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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: August 13, 2003 By: /s/ Stephen D. Rubin
-----------------------------------------
Stephen D. Rubin
President
(Principal Executive Officer)
Date: August 13, 2003 By: /s/ Clifford K. Bolen
-----------------------------------------
Clifford K. Bolen
Senior Vice President; Chief Financial Officer
(Principal Financial and Accounting Officer)
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