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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 September 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
October 31, 2003 was 3,809,022.
VITA FOOD PRODUCTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 3
b) Consolidated Statements of Income for the Nine Months
Ended September 30, 2003 and 2002 4
c) Consolidated Statements of Shareholders' Equity for
the Nine Months Ended September 30, 2003 and Year
Ended December 31, 2002 4
d) Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
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
==================================================================================================================================
SEPTEMBER 30, DECEMBER 31,
2003 2002
(UNAUDITED) (AUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 434,947 $ 46,097
Accounts receivable-trade, net of allowance for discounts, returns, and doubtful
accounts of $404,000 in 2003 and $277,000 in 2002 4,666,512 5,325,254
Inventories
Raw material and supplies 4,840,558 4,570,782
Work in process 217,887 162,325
Finished goods 2,595,402 2,006,554
Prepaid expenses and other current assets 527,658 337,278
Income taxes receivable 0 174,318
----------- -----------
Total Current Assets 13,282,964 12,622,608
Property, Plant and Equipment
Land 35,000 35,000
Building and improvements 2,482,371 2,452,260
Leasehold improvements 395,350 706,181
Machinery and office equipment 9,569,837 8,674,011
----------- -----------
12,482,558 11,867,452
Less accumulated depreciation and amortization (6,638,736) (6,030,037)
----------- -----------
Net Property, Plant & Equipment 5,843,822 5,837,415
Other Assets
Goodwill 8,256,250 7,565,821
Other assets 287,977 303,648
Deferred income tax 212,696 212,696
----------- -----------
Total Other Assets 8,756,923 8,082,165
----------- -----------
Total Assets $27,883,709 $26,542,188
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 775,019 $ 1,430,933
Accounts payable 3,846,736 3,583,391
Accrued other expenses 1,335,645 1,119,116
----------- -----------
Total Current Liabilities 5,957,400 6,133,440
Long-term Obligations, Less Current Maturities 15,070,139 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 3,803,422 shares in 2003 and 3,773,895 shares in 2002 38,034 37,738
Additional paid in capital 3,587,325 3,496,483
Retained earnings 3,230,811 2,458,751
----------- -----------
Total Shareholders' Equity 6,856,170 5,992,972
----------- -----------
Total Liabilities and Shareholders' Equity $27,883,709 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net sales $11,651,609 $9,292,104 $37,463,666 $28,144,464
Cost of goods sold 7,810,900 6,498,043 25,442,191 19,458,658
----------- ---------- ----------- -----------
Gross margin 3,840,709 2,794,061 12,021,475 8,685,806
Selling and administrative expenses
Selling, marketing & distribution 2,285,111 1,449,524 6,525,493 4,454,130
Administrative 1,126,206 860,575 3,640,319 2,739,145
----------- ---------- ----------- -----------
Total 3,411,317 2,310,099 10,165,812 7,193,275
----------- ---------- ----------- -----------
Operating profit 429,392 483,962 1,855,663 1,492,531
Interest expense 188,728 138,117 566,603 420,775
----------- ---------- ----------- -----------
Income before income taxes 240,664 345,845 1,289,060 1,071,756
Income tax expense 96,000 138,000 517,000 428,000
----------- ---------- ----------- -----------
Net income $ 144,664 $ 207,845 $ 772,060 $ 643,756
Basic earnings per share $ 0.04 $ 0.06 $ 0.20 $ 0.17
Weighted average common shares outstanding 3,792,993 3,759,459 3,782,543 3,743,063
Diluted earnings per share $ 0.04 $ 0.05 $ 0.20 $ 0.17
Weighted average common shares outstanding 3,948,284 3,879,538 3,895,456 3,852,698
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 29,527 296 90,842 91,138
Net income 772,060 772,060
---------- ---------- ---------- ---------- ----------
Balance, at September 30, 2003 3,803,422 $ 38,034 $3,587,325 $3,230,811 $6,856,170
========== ========== ========== ========== ==========
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,
2003 2002
(UNAUDITED) (UNAUDITED)
==================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 772,060 $ 643,756
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 707,721 577,718
Gain on sale of fixed asset 0 (3,949)
Changes in assets and liabilities:
Decrease in accounts receivable 658,742 2,194,546
Increase in inventories (924,186) (1,960,057)
Increase in prepaid expenses and other current assets (190,379) (36,543)
Decrease in income tax receivable 174,318 0
Increase in accounts payable 263,347 338,608
(Decrease) Increase in accrued expenses 132,933 217,480
----------- -----------
Net cash provided by operating activities 1,594,555 1,971,560
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,051,813) (1,083,935)
Payments for subsidiary net of cash acquired (179,247) (5,807)
Other assets (39,801) (2,677)
----------- -----------
Net cash used in investing activities (1,270,861) (1,092,419)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock purchase and stock options 91,138 102,573
Net borrowings (payments) under revolving loan facility 140,548 (481,963)
Proceeds from the new term loan 6,500,000 0
Net payments on term loan facility (1,014,865) (872,696)
Payoff of the prior term loan (5,520,625) 0
Net payments under capital lease obligations (131,040) (78,378)
----------- -----------
Net cash provided (used) in financing activities 65,156 (1,330,464)
----------- -----------
Net increase (decrease) in cash 388,850 (451,323)
Cash, at beginning of period 46,097 529,354
----------- -----------
Cash, at end of period $ 434,947 $ 78,031
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 552,851 $ 450,726
Income taxes paid $ 249,183 $ 182,012
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
products.
The aggregate purchase price, including direct costs of the acquisition, of
$4,884,437 for Virginia Honey was paid in
6
cash. The stock purchase agreement, including its amendments, 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 $2,831,000, would be due and
payable as contingent consideration in accordance with the provisions of the
Virginia Honey 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)
----------------------------------------------------------------
7
AT NOVEMBER 1, 2002
(in 000's)
- ----------------------------------------------------------------
Net assets acquired 244
Liabilities incurred (exit costs) 690
Liabilities assumed in excess of tangible assets
acquired, net 1,313
-------
Total purchase price to be allocated to
goodwill $ 2,247
================================================================
None of the amount of goodwill is expected to be deductible for tax purposes
(see ACQUISITION AND EXIT COSTS).
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):
Nine months ended September 30, 2002
-----------------------------------------
Net sales $34,959
Net income $ 168
Basic earnings per share $ 0.04
Diluted earnings per share $ 0.04
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.
ACQUISITION AND EXIT COSTS
In connection with the acquisition of Halifax, the Company's management
approved and initiated plans to restructure the operations of
pre-acquisition Halifax to eliminate redundant facilities and headcount,
reduce cost structure and better align the operating expenses with existing
economic conditions. Consequently, the Company recorded $690,000 of costs
primarily relating to activities of pre-acquisition Halifax such as
severance and related benefits, the cost of abandoned leaseholds, cost to
vacate the leased facilities and other pre-acquisition liabilities. These
costs were accounted for under EITF 95-3, "Recognition of Liabilities in
Connection with Purchase of Business Combinations". These costs were
recognized as a liability assumed in the acquisition and included in the
allocation of the purchase price.
The acquisition and exit costs consist of the following:
CLOSEDOWN EMPLOYEE
OF SEVERANCE
FACILITY & RELATED OTHER TOTAL
--------- --------- -------- --------
Exit costs incurred in acquisition $ 491,690 $ 111,699 $ 86,766 $690,155
Payments made during the nine
months ending September 30, 2003 452,719 61,422 86,766 600,907
--------- --------- -------- --------
Acquisition cost accrual, September 30,
2003 (all current obligations) $ 38,971 $ 50,277 $ - $ 89,248
========= ========= ======== ========
8
NEW BANK LOAN AGREEMENT
On September 9, 2003, the Company entered into a loan agreement (the "Loan
Agreement") with a new bank and paid off its existing credit facility. The
Loan Agreement provides for a two year $8,500,000 revolving line of credit
for working capital needs; a five year $6,500,000 term loan that represents
the Company's long term financing and a six year $3,000,000 term loan that is
currently not being utilized. The revolving loan facility matures August 31,
2005 and the term loan is payable in monthly installments of $54,000 through
July 31, 2008, with a balloon payment of $3,368,000 due on August 31, 2008.
Amounts outstanding under the revolving facility and the term facilities at
September 30, 2003 were $5,500,000 and $6,446,000, respectively. According to
the terms of the Loan Agreement the interest rates on these facilities are
subject to adjustment at certain predetermined dates based upon the Funded
Debt to EBITDA ratio as each such term is defined in the Loan Agreement. As
of September 30, 2003 the revolving line of credit bears interest at 3.50%
which is equal to prime rate minus 0.50% and the term loan at 3.37% which is
equal to LIBOR plus 2.25%. The Loan Agreement contains customary
representations, warranties and covenants; at September 30, 2003 the Company
was in compliance with all loan covenants.
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 2002 information
presented below 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 NINE MONTHS
For the Period Ending September 30, -------------------- --------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------
NET SALES
Vita $ 6,053 $ 6,193 $ 18,352 $ 18,439
Vita Specialty Foods 5,599 3,099 19,112 9,705
- ---------------------------------------------------------------------------------
Total Net Sales $ 11,652 $ 9,292 $ 37,464 $ 28,144
=================================================================================
OPERATING PROFIT (LOSS)
Vita $ (223) $ 218 $ (93) $ 501
Vita Specialty Foods 653 266 1,949 992
- ---------------------------------------------------------------------------------
Total Operating Profit $ 430 $ 484 $ 1,856 $ 1,493
=================================================================================
NET INCOME (LOSS)
Vita $ (189) $ 78 $ (218) $ 134
Vita Specialty Foods 334 130 990 510
- ---------------------------------------------------------------------------------
Total Net Income $ 145 $ 208 $ 772 $ 644
=================================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 182 $ 125 $ 420 $ 364
Vita Specialty Foods 80 72 288 214
- ---------------------------------------------------------------------------------
Total Depreciation and Amortization $ 262 $ 197 $ 708 $ 578
=================================================================================
CAPITAL EXPENDITURES
Vita $ 172 $ 223 $ 377 $ 966
Vita Specialty Foods 253 38 675 118
- ---------------------------------------------------------------------------------
Total Capital Expenditures $ 425 $ 261 $ 1,052 $ 1,084
=================================================================================
9
THREE MONTHS NINE MONTHS
For the Period Ending September 30, ------------------- --------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------
GOODWILL
Vita $ -- --
Vita Specialty Foods 8,256 $ 5,245
- ---------------------------------------------------------------------------------
Total Goodwill $ 8,256 $ 5,245
=================================================================================
TOTAL ASSETS
Vita $ 18,605 $ 15,258
Vita Specialty Foods 9,279 4,679
- ---------------------------------------------------------------------------------
Total Assets $ 27,884 $ 19,937
=================================================================================
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:
THREE NINE
FOR THE PERIOD ENDING SEPTEMBER 30, 2003 MONTHS MONTHS
- -----------------------------------------------------------------------------
Weighted average fair value per options granted $ 3.21 $ 2.71
Significant assumptions (weighted average)
Risk-free interest rate at grant date 4.3% 3.7%
Expected stock price volatility 0.72 0.72
Expected dividend payout - -
Expected option life (years) 5 5
Net Income
As reported $ 144,664 $ 772,060
Deduct total stock based compensation expense
determined under the fair value method (9,630) (56,844)
----------- -----------
Pro forma $ 135,034 $ 715,216
=========== ===========
Basic earnings per share
As reported $ 0.04 $ 0.20
Pro forma $ 0.04 $ 0.19
Diluted earnings per share
As reported $ 0.04 $ 0.20
Pro forma $ 0.03 $ 0.18
10
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.
Revenue is recognized upon shipment of product to customers in
fulfillment of customer orders. In accordance with industry practices, product
is sold to customers often with the right to return or dispose if the
merchandise is not resold 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. Sales are reduced by a provision for these estimated
future returns, disposals and promotional expenses. 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.
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.
11
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
REVENUES. Net sales for the three months ended September 30, 2003 were
$11,652,000, compared to $9,292,000 for the same period in 2002, an increase of
$2,360,000 or 25.4%. This increase is attributable to a gain by Vita Specialty
Foods of $2,500,000, 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 $620,000; honey/molasses $855,000; hot filled sauces and
resale products $1,238,000; partially offset by higher returns and allowances of
$213,000. The increase from Vita Specialty Foods was partially offset by a
decline of $140,000, or 2.3%, for the Vita seafood business, which was primarily
the result of a 3.4% decrease in gross sales of salmon products. The salmon
sales decrease was primarily attributable to one specific product. Vita
seafood's largest customer discontinued a Vita product that resulted in a
material impact to the Vita seafood results for the quarter of $102,000, net of
related income taxes. The impact is expected to continue through the fourth
quarter. The Company, in an effort to regain the business, has re-introduced the
product to the customer. It is not known if this will result in the customer
accepting the product back into its stores. However, the Company is pursuing
other opportunities as well to increase its salmon product sales.
GROSS MARGIN. Gross margin for the three months ended September 30, 2003 was
$3,841,000, compared to $2,794,000 for the same period in 2002, an increase of
$1,047,000 or 37.5%. The Vita Specialty Foods business accounted for $1,324,000
of this increase with a decline of $277,000 attributable to the Vita seafood
business. As a percent of net sales, gross margin totaled 33.0%, up from 30.1%
for the same period in 2002. For the Vita Specialty Foods business, gross margin
as a percentage of net sales increased to 42.0% from 33.2% for the same period
in 2002, due largely to the lower cost of raw honey and as a result of a
favorable adjustment for the Halifax products. For the Vita seafood business,
gross margin decreased to 24.6% for the current quarter versus 28.5% for the
same period in 2002. This change was primarily attributable to the higher cost
of raw salmon. These higher costs have stabilized and the Company feels that no
further increases will be seen in the near future.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the three months ended September 30, 2003 were $3,411,000, compared to
$2,310,000 for the same period in 2002, an increase of $1,101,000 or 47.7%. The
majority of this increase is attributable to expenses directly associated with
the increase in sales volume such as commissions, royalties, freight and
promotion. However, $48,000 of this increase is a write-off of fees associated
with the previous bank agreement that were being amortized over the terms of the
loans.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2003
was $189,000, compared to $138,000 for the same period in 2002, an increase of
$51,000 or 37.0%. This increase was attributable to the additional borrowing
primarily related to the Halifax acquisition. The average debt increased to
$15,132,000 from $10,559,000 or 43% for the current quarter compared to the same
period of the prior year.
INCOME TAXES. The Company provided $96,000 and $138,000 for the quarters ending
September 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 September 30, 2003 decreased to $145,000 from $208,000 for
the same period in 2002, a decrease of $63,000 or 30.3%. Net income for the 2003
period represented $0.04 per share on both a basic and a fully diluted basis,
compared with $0.06 per share basic and $0.05 per share on a fully diluted basis
for the same period in 2002.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
REVENUES. Net sales for the nine months ended September 30, 2003 were
$37,464,000, compared to $28,144,000 for the same period in 2002, an increase of
$9,320,000 or 33.1%. Of this increase, $9,407,000 is attributable to Vita
Specialty Foods, and is 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 which included: salad
dressing/marinades $2,879,000; honey/molasses $2,419,000; hot filled sauces
$4,463,000 and resale products $259,000; partially offset by higher returns and
allowances of $613,000. These results point to the successful diversification of
the Company's business as the Vita Specialty Foods products now account for 51%
of the Company's total revenues compared to 35% during the prior year period.
Net sales for the Vita seafood business decreased 0.5%, or $87,000, during this
same time period.
GROSS MARGIN. Gross margin for the nine months ended September 30, 2003 was
$12,021,000, compared to $8,686,000 for the same period in 2002, an increase of
$3,335,000 or 38.4%. The Vita Specialty Foods business accounted for $3,610,000
of this increase with a decrease of $275,000 attributable to the Vita seafood
business. As a percent of net sales, gross margin increased to 32.1%, from 30.9%
for the same period in 2002. For the Vita Specialty Foods business,
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gross margin as a percent of net sales increased to 36.0% from 33.8% for the
same period in 2002, due largely to the lower raw honey cost. The shift in sales
in favor of the higher margin Vita Specialty Foods products also contributed to
the improved consolidated results. For the Vita seafood business, gross margin
decreased to 28.0% versus 29.3% for the same period in 2002 due primarily to the
higher cost of raw materials, most noticeably in salmon. These higher costs have
stabilized and the Company feels that no further increases will be seen in the
near future.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the nine months ended September 30, 2003 were $10,166,000, compared to
$7,193,000 for the same period in 2002, an increase of $2,973,000 or 41.3%.
Largely due to the inclusion of Halifax, the Vita Specialty Foods business
accounted for $2,653,000 of this increase. As a percentage of net sales, these
expenses were 27.1% compared with 25.6% in 2002. The majority of this increase
was attributable to expenditures directly associated with the anticipated
continuing increase in sales volume such as commissions, royalties, freight and
promotion. However, $48,000 of this increase is a write-off of fees associated
with the previous bank agreement that were being amortized over the terms of the
loans.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2003
was $567,000, compared to $421,000 for the same period in 2002, an increase of
$146,000 or 34.7%. This increase was attributable to the additional borrowing
primarily related to the Halifax acquisition. The average debt increased to
$14,815,000 from $10,735,000 or 38.0% compared to the same period of the prior
year.
INCOME TAXES. The Company provided $517,000 and $428,000 for the nine-month
periods ending September 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
nine months ended September 30, 2003 increased to $772,000 compared to $644,000
for the same period in 2002, an improvement of $128,000 or 19.9%. Net income for
2003 represented $0.20 per share on both a basic and a fully diluted basis,
compared with $0.17 per share on both a basic and a fully diluted basis for the
same period in 2002.
FINANCIAL CONDITION
At September 30, 2003, the Company had $7,325,000 in working capital, versus
$6,489,000 at December 31, 2002, an increase of $836,000 or 12.9%. As a result,
the current ratio improved to 2.2 to 1.0 from 2.1 to 1.0. Of this increase,
$656,000 is attributed to the decrease in the current portion of the debt and
the majority of this decrease a result of refinancing the Company's debt with a
new bank. An additional $389,000 of working capital increase was a result of
providing a higher cash balance. All other changes in net working capital
reflect the effects of the annual business cycle with the high accounts
receivable balances which are typical at the beginning of each year, having been
substantially collected by the third quarter and inventory net of the associated
current liabilities, beginning to build in anticipation of the upcoming fourth
quarter business cycle peak. Following this pattern, for the first nine months
of 2003, the increase in inventory and prepaids, net of current liabilities
totaled $450,000 contributing this amount to the net working capital increase
and collections of accounts receivable totaled $659,000 reducing the net working
capital by that amount.
At September 30, 2003, the Company had $435,000 in cash and, under the terms of
the Loan Agreement discussed in "Item 1. Financial Statements--New Bank Loan
Agreement", a revolving credit facility of $8,500,000 and a term facility of
$6,500,000. The revolving loan facility matures August 31, 2005 and the term
loan is payable in monthly installments of $54,000 through July 31, 2008, with a
balloon payment of $3,368,000 due on August 31, 2008. Amounts outstanding under
the revolving facility and the term facilities at September 30, 2003 were
$5,500,000 and $6,446,000, respectively. The interest rates on these facilities
fluctuate based on the Funded Debt to EBITDA ratio as each such term is defined
in the loan agreement. The loan agreement contains customary representations,
warranties and covenants. At September 30, 2003 and December 31, 2002, the
Company was in compliance with all loan covenants.
The ratio of long-term debt to total capitalization improved slightly to 69% at
September 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 $1,595,000 for the nine months ended September 30, 2003 compared to
$1,972,000 for the same period in 2002 a reduction of $377,000 or 19.1%. As
discussed above, due to the normal business cycle during the first nine months
of each year, there has typically been cash provided by a reduction in accounts
receivable with a partially offsetting cash requirement to finance an increase
in inventory. During this period of the current year, the result was only a
$659,000 reduction of receivables due principally to the higher sales during the
first nine months of 2003, this large source of cash was $1,536,000 short of the
$2,195,000 provided from the collection of receivables during the same period of
2002. Partially offsetting the variance from accounts receivable and due
primarily to higher inventory balances at the beginning of 2003 compared to
2002, the cash required to finance the seasonal increase in inventory and
prepaids, net of current liabilities, totaled $718,000 or $723,000 less than the
requirements for the prior year period. The operating cash flow was also helped
by $262,000 of additional cash flow
13
resulting from higher net income plus depreciation and $174,000 reduction in the
income tax receivable balance.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities was
$1,268,000 for the nine months ended September 30, 2003, which was $176,000 more
than the $1,092,000 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 64% of this investment made at VSF
in support of the heightened sales. During the nine months ended September 30,
2003, $176,000 was used as an additional payment for the Halifax acquisition.
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
nine-month period ending September 30, 2003, net cash of $65,000 was provided
including $91,000 from the exercising of stock options and employee stock
purchases and $141,000 borrowed against the revolver, offset by $167,000 of net
payments on the Company's term loans and capital lease obligations. The
$6,500,000 provided from the new term loan was primarily used to payoff the
previous term loan. The cash provided through financing activities compares to
$1,330,000 of cash used, primarily to pay down debt, for the same period in
2002, a difference of $1,395,000.
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, changes in raw material costs, the
potential loss of large customers or accounts, the Company's ability to maintain
its relationships with key vendors and retailers, the introduction and success
of new products, 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, consolidation of the
Company's supplier base, the potential impact of claims and litigation, 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
On September 9, 2003, the Company entered into a loan agreement (the
"Loan Agreement") with a new bank and paid off its existing credit facility. The
Loan Agreement provides for a two year $8,500,000 revolving line of credit for
working capital needs; a five year $6,500,000 term loan that represents the
Company's long term financing and a six year $3,000,000 term loan that is
currently not being utilized. The revolving line of credit, as of inception and
until December 31, 2003 bears interest at the prime rate minus 0.50% (3.50% on
September 30, 2003) or LIBOR plus 2.00% (3.12% on September 30, 2003).
Commencing on December 31, 2003 the interest rates may change, based upon
certain financial ratios, to prime minus 0.50% (3.50% on September 30, 2003);
LIBOR plus 2.25% (3.37% on September 30, 2003) or LIBOR plus 1.75 (2.87% on
September 30, 2003). In addition, the term loan facility, as of inception and
until December 31, 2003, bears interest at the prime rate minus 0.50% or LIBOR
plus 2.25%. Commencing on December 31, 2003 the interest rates may change, based
on certain financial ratios, to prime minus 0.50% or LIBOR plus 2.50% (3.62% on
September 30, 2003) or to LIBOR plus 2.00%. A 10% fluctuation in interest rates
would not have a material impact on the Company's financial statements.
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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 September 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Loan and Security Agreement dated as of September 5,
2003 by and between the Company and LaSalle National
Bank, N.A.
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 August 1, 2003, with respect
to its press release announcing its results of operations for
the quarter ended June 30, 2003.
15
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, 2003 By: /s/ Stephen D. Rubin
----------------------------------------
Stephen D. Rubin
President
(Principal Executive Officer)
Date: November 14, 2003 By: /s/ Clifford K. Bolen
----------------------------------------
Clifford K. Bolen
Senior Vice President; Chief Financial Officer
(Principal Financial and Accounting Officer)
16