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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 March 31, 2004
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 1-12599
VITA FOOD PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 36-3171548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2222 WEST LAKE STREET, CHICAGO, ILLINOIS 60612
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (312) 738-4500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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 April 30,
2004 was 3,836,100.
VITA FOOD PRODUCTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 3
b) Consolidated Statements of Operations for the Three Months Ended March 31,
2004 and 2003 4
c) Consolidated Statements of Shareholders' Equity for the Three Months Ended
March 31, 2004 4
d) Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2004 and 2003 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 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS VITA FOOD PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS AND SUBSIDIARY
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED) (AUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 53,083 $ 125,457
Accounts receivable-trade, net of allowance for discounts, returns, and doubtful
accounts of $470,000 in 2004 and $301,000 in 2003 4,365,317 6,544,521
Inventories
Raw material and supplies 4,464,007 5,007,237
Work in process 198,763 235,862
Finished goods 2,711,904 1,975,413
Prepaid expenses and other current assets 475,670 481,369
Income taxes receivable 551,245 347,684
-------------- --------------
Total Current Assets 12,819,989 14,717,543
Property, Plant and Equipment
Land 35,000 35,000
Building and improvements 2,507,888 2,489,828
Leasehold improvements 319,866 308,646
Machinery and office equipment 10,065,462 9,733,439
-------------- --------------
12,928,216 12,566,913
Less accumulated depreciation and amortization (7,084,751) (6,864,222)
-------------- --------------
Net Property, Plant & Equipment 5,843,465 5,702,691
Other Assets
Goodwill 8,310,659 8,310,659
Other assets 369,381 353,461
-------------- --------------
Total Other Assets 8,680,040 8,664,120
-------------- --------------
Total Assets $ 27,343,494 $ 29,084,354
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 782,695 $ 780,390
Accounts payable 2,149,993 2,299,580
Accrued other expenses 902,518 900,891
Deferred income taxes 376,304 226,304
-------------- --------------
Total Current Liabilities 4,211,510 4,207,165
Long-term Obligations, less current maturities 15,971,111 17,684,931
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
3,842,616 shares in 2004 and 3,819,116 shares in 2003 38,425 38,190
Treasury stock, at cost 6,516 shares (50,043) 0
Additional paid in capital 3,704,090 3,647,263
Retained earnings 3,468,401 3,506,805
-------------- --------------
Total Shareholders' Equity 7,160,873 7,192,258
-------------- --------------
Total Liabilities and Shareholders' Equity $ 27,343,494 $ 29,084,354
===========================================================================================================================
See accompanying notes to financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
(UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 12,611,925 $ 12,957,173
Cost of Goods Sold 8,776,610 8,934,821
-------------- --------------
Gross Margin 3,835,315 4,022,352
Selling and Administrative Expenses
Selling, Marketing & Distribution 2,528,556 2,039,590
Administrative 1,190,551 1,282,267
-------------- --------------
Total 3,719,107 3,321,857
-------------- --------------
Operating Profit 116,208 700,495
Interest Expense 179,612 186,765
-------------- --------------
Income (Loss) Before Income Tax (Benefit) Expense (63,404) 513,730
Income Tax (Benefit) Expense (25,000) 207,000
-------------- --------------
Net Income (Loss) $ (38,404) $ 306,730
Basic Earnings (Loss) Per Share $ (0.01) $ 0.08
Weighted Average Common Shares Outstanding 3,833,319 3,776,562
Diluted Earnings (Loss) Per Share $ (0.01) $ 0.08
Weighted Average Common Shares Outstanding 3,833,319 3,846,987
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
COMMON STOCK ADDITIONAL
------------------------ TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Balance, at January 1, 2004 3,819,116 $ 38,190 $ 0 $ 3,647,263 $ 3,506,805 $ 7,192,258
Proceeds from stock issuance
and exercise of stock option plans 23,500 235 56,827 57,062
Treasury stock (50,043) (50,043)
Net loss (38,404) (38,404)
------------ ------------ ------------ ------------ ------------ ------------
Balance, at March 31, 2004 3,842,616 $ 38,425 $ (50,043) $ 3,704,090 $ 3,468,401 $ 7,160,873
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS VITA FOOD PRODUCTS, INC.
AND SUBSIDIARY
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
(UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (38,404) $ 306,730
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 229,990 223,166
Deferred income tax asset provision 150,000 0
Changes in assets and liabilities:
Decrease in accounts receivable 2,179,204 831,354
Increase in inventories (156,162) (97,966)
Decrease (increase) in prepaid expenses and other current assets 5,699 (25,956)
(Increase) decrease in income tax receivable (203,561) 174,318
Decrease in accounts payable (149,585) (820,245)
Increase in accrued other expenses 1,626 38,979
------------- -------------
Net cash provided by operating activities 2,018,807 630,380
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (361,305) (275,507)
Other assets (16,977) 583
------------- -------------
Net cash used in investing activities (378,282) (274,924)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and exercise of stock options 57,062 14,000
Purchase of treasury stock (50,043) 0
Net (payments) borrowing under revolving loan facility (1,525,670) 307,166
Net payments on term loan facility (194,248) (321,253)
Net payments under capital lease obligations 0 (66,195)
------------- -------------
Net cash used in financing activities (1,712,899) (66,281)
------------- -------------
Net (decrease) increase in cash (72,374) 289,175
Cash, at beginning of period 125,457 46,097
------------- -------------
Cash, at end of period $ 53,083 $ 335,272
===========================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 141,000 $ 184,000
Income taxes paid $ 28,000 $ 6,000
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 operations, cash flows, and shareholders' equity include
all adjustments, consisting only of normal recurring items, necessary for their
fair presentation in conformity with U.S. generally accepted accounting
principles. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. Examples include provisions for returns, deductions, bad
debts, and length of building and equipment lives. Actual results may differ
from these estimates. Interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and financial statements and notes thereto included in the
2003 Form 10-K of Vita Food Products, Inc. (Vita Food Products, Inc., together
with its wholly owned subsidiary, Vita Specialty Foods, Inc., hereinafter
referred to as the "Company")
The first quarter of 2004 diluted loss per share computation excludes
144,434 shares issuable upon exercise of the stock options because the assumed
exercise of these options would be antidilutive.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vita Food
Products, Inc. ("Vita") and its wholly owned subsidiary, Vita Specialty Foods,
Inc. ("Vita Specialty Foods"). Vita Specialty Foods includes Virginia Honey
Company, Inc. ("Virginia Honey") and The Halifax Group, Inc. ("Halifax"). 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.
EARNOUT PROVISIONS UNDER ACQUISITIONS AGREEMENTS
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. Virginia Honey is a manufacturer and distributor
of honey, salad dressings, sauces, jams and jellies and gift baskets. As a
result of the acquisition, the Company is leveraging its sales and
distribution network to provide national exposure to the products of
Virginia Honey. The Company also expects to introduce products that will be
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 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
$805,915 and is reflected as a liability at March 31, 2004 and is payable on
April 1, 2005. The remaining payments under the Stock Purchase Agreement to
the former owner of Virginia Honey and the payments per the merger agreement
to the former owner of Halifax (see below) will be based on the earnings of
Vita Specialty Foods, reflecting the combined earnings of Halifax and
Virginia Honey. 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.
6
As a result of the Halifax merger agreement discussed below, the operations
of Virginia Honey and Halifax have been 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 that 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 $1,608,000, 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 a new subsidiary named Vita Specialty Foods.
Halifax is 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, as a direct cost of the acquisition,
the Company paid cash of $450,000 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.
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
March 31, 2004 were $6,766,000 and $6,122,000, respectively. 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. The loan agreement contains customary representations,
warranties and covenants. At March 31, 2004 and December 31, 2003, the
Company was in compliance with these covenants.
7
BUSINESS SEGMENTS
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Following the provisions of SFAS No. 131, the Company is
reporting two operating business segments in the same format as reviewed by
the Company's senior management. Segment one, Vita, processes and sells
various herring, and cured and smoked salmon products throughout the United
States. Segment two, 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. 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 MARCH 31, 2004 2003
----------------------------------------------------------------------
GOODWILL
Vita $ - $ -
Vita Specialty Foods 8,311 7,566
----------------------------------------------------------------------
Total Goodwill $ 8,311 $ 7,566
======================================================================
TOTAL ASSETS
Vita $ 18,307 $ 17,508
Vita Specialty Foods 9,036 8,496
----------------------------------------------------------------------
Total Assets $ 27,343 $ 26,004
======================================================================
NET SALES
Vita $ 6,623 $ 7,228
Vita Specialty Foods 5,989 5,729
----------------------------------------------------------------------
Total Net Sales $ 12,612 $ 12,957
======================================================================
OPERATING PROFIT (LOSS)
Vita $ (100) $ 395
Vita Specialty Foods 216 305
----------------------------------------------------------------------
Total Operating Profit $ 116 $ 700
======================================================================
NET INCOME (LOSS)
Vita $ (107) $ 184
Vita Specialty Foods 69 123
----------------------------------------------------------------------
Total Net Income (Loss) $ (38) $ 307
======================================================================
DEPRECIATION AND AMORTIZATION
Vita $ 119 $ 119
Vita Specialty Foods 111 104
----------------------------------------------------------------------
Total Depreciation and Amortization $ 230 $ 223
======================================================================
CAPITAL EXPENDITURES
Vita $ 221 $ 98
Vita Specialty Foods 140 178
----------------------------------------------------------------------
Total Capital Expenditures $ 361 $ 276
======================================================================
8
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 year and the weighted-average significant
assumptions used to determine those fair values, using a modified Black-Sholes
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 THREE MONTHS ENDING MARCH 31, 2004 2003
- ----------------------------------------------------------------------------------
Weighted average fair value per options granted $ 4.61 $ 2.48
Significant assumptions (weighted average)
Risk-free interest rate at grant date 4.1% 3.7%
Expected stock price volatility 0.71 0.73
Expected dividend payout - -
Expected option life (years) 5 5
Net Income (Loss)
As reported $ (38,404) $ 306,730
Deduct total stock based compensation expense
determined under the fair value method (124,470) (29,133)
------------------------------
Pro forma $ (162,874) $ 277,597
==============================
Basic earnings (loss) per share
As reported $ (0.01) $ 0.08
Pro forma $ (0.04) $ 0.07
Diluted earnings (loss) per share
As reported $ (0.01) $ 0.08
Pro forma $ (0.04) $ 0.07
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
REVENUES. Net sales for the three months ended March 31, 2004 were $12,612,000,
compared to $12,957,000 for the same period in 2003, a decrease of $345,000 or
2.7%. This net decrease is the result of a $605,000 decrease for the Vita
seafood business and a $260,000 increase for Vita Specialty Foods. The decrease
in Vita's net sales was the result of a $609,000 decrease in gross sales of
salmon products, a $102,000 decrease for specialty products and a $13,000
increase in sales deductions, all partially offset by a $119,000 increase for
herring products. The large decrease in salmon sales was primarily attributed to
one specific product. During the third quarter of 2003, Vita seafood's largest
customer discontinued this product, resulting in a material impact to the Vita
seafood results. The Company, in an effort to regain this business, has
reintroduced the product to the customer. It is not know if this will result in
the customer accepting the product back into its stores. However, the Company is
pursuing other opportunities to increase its salmon business. Vita Specialty
Food's sales increase is reflected in salad dressings/marinades which increased
$477,000 and honey products which increased $111,000, partially offset by hot
fill and resale products which were down $160,000 and $116,000 respectively and
$52,000 of higher sales deductions.
GROSS MARGIN. Gross margin for the three months ended March 31, 2004 was
$3,835,000, compared to $4,022,000 for the same period in 2003, a decrease of
$187,000 or 4.6%. As a percent of net sales, gross margin totaled 30.4%,
compared to 31.0% for the same period in 2003. The Vita seafood business
accounted for all of this decrease with a $410,000 reduction; this was partially
offset by a $223,000 increase attributable to Vita Specialty Foods. Vita
seafood's gross margin was 27.3% for the current quarter versus 30.7% for the
same period in 2003. This change was primarily attributable to the sales
decrease discussed above and higher raw material costs. As a percentage of net
sales, the gross margin of Vita Specialty Foods rose to 33.8% versus 31.5% for
the same period in 2003, due largely manufacturing efficiencies gained from
consolidating all production at the Martinsburg, West Virginia facility upon the
termination of manufacturing operations in Atlanta, Georgia.
OPERATING EXPENSES. Selling, marketing, distribution and administrative expenses
for the three months ended March 31, 2004 were $3,719,000, compared to
$3,322,000 for the same period in 2003, an increase of $397,000 or 12.0%. As a
percentage of net sales, these expenses increased to 29.5% from 25.6% in 2003.
The Vita Specialty Foods business accounted for $312,000 of this increase
including $101,000 attributable to higher slotting expenses and $191,000 to
higher distribution and freight cost. The remaining $85,000 of this increase was
attributable to the Vita seafood operation and largely reflected higher selling
and distribution costs.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2004 was
$180,000, compared to $187,000 for the same period in 2003, a decrease of $7,000
or 3.7%. This decrease was primarily attributable to the lower rates more than
offsetting the higher loan balances, which increased to $16,253,000 from
$14,556,000 or 12%, compared to the average debt outstanding during the first
quarter of the prior year.
INCOME TAXES. The Company recognized a tax benefit of $25,000 and a provision of
$207,000 at March 31, 2004 and 2003, respectively. These amounts represent
approximately 40% of pretax income or loss for both periods.
NET INCOME. As a result of the operating results discussed above, the net loss
for the three months ended March 31, 2004 was $38,000 compared to net income of
$307,000 for the same period in 2003, a decrease of $345,000. This represents a
$0.01 loss per share for 2004 and earnings of $0.08 per share for 2003.
10
FINANCIAL CONDITION
At March 31, 2004, the Company had $8,608,000 in working capital, versus
$10,510,000 at December 31, 2003, a decrease of $1,902,000 or 18.1%. As a
result, the current ratio decreased to 3.0 to 1.0 from 3.5 to 1.0. Typically
there is a reduction in net working capital during the first quarter of each
year reflecting the liquidation in current assets following the busiest quarter
of the year. This was also applicable to the first quarter of 2004. This year,
the net current asset reduction during the first quarter, totaled $1,898,000 as
a direct result of $2,179,000 net collections of accounts receivable, partially
offset by a $204,000 increase in income tax receivable. The current liabilities
remained constant, decreasing only $4,000 during the quarter.
At March 31, 2004, the Company had $53,000 in cash, a revolving credit facility
of $8,500,000 and a term facility of $9,500,000 which consists of a $6,500,000
facility that represents the Company's long term borrowing and a six year
$3,000,000 facility that is not currently 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 March 31, 2004 were $6,766,000 and
$6,122,000 respectively. 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. The next such
predetermined date is December 31, 2004. The loan agreement contains customary
representations, warranties and covenants. At March 31, 2004 and December 31,
2003, the Company was in compliance with these covenants.
The ratio of long-term debt to total capitalization improved slightly to 69% at
March 31, 2004 from 71% at December 31, 2003. 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 $2,019,000 for the three months ended March 31, 2004. This was primarily a
reflection of the $2,179,000 contributed from net collections of accounts
receivable. These cash flows from operating activities for the current period
compare to $630,000 for the same period in 2003, an increase of $1,389,000 or
220%. Again, the increase was primarily attributable to the proceeds from
collections on receivables, which exceeded those of the first quarter of the
prior year by $1,348,000.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities was
$378,000 for the three months ended March 31, 2004, which was $103,000 more than
the $275,000 total for 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.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used in financing activities was
$1,713,000 for the three months ended March 31, 2004, which reflects the
$1,720,000 repayment of debt, primarily a repayment of the revolving loan. This
compares to $66,000 used in financing activities for the same period in 2003, a
difference of $1,647,000. This larger net repayment in the current period
primarily reflects the increased cash made available through operations, net of
the cash used in investing activities, as discussed above.
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.
11
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, 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 and at least annually.
Factors the Company considers important, which could trigger an impairment
review include the following:
- Significant underperformance relative to expected historical or projected
future operating results;
- Significant changes in the manner of the 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.
During the fourth quarter of 2003, the Company completed its annual
impairment test, which did not result in impairment of recorded goodwill.
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
12
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 is exposed to interest rate fluctuations, primarily as a result
of its $18 million credit agreement (the "Credit Agreement") with interest rates
subject to market fluctuations. The Company does not currently use derivative
instruments to alter the interest rate characteristics of any of its debt. The
Credit Agreement includes a revolving line of credit with a bank, which at March
31, 2004 bore interest at the prime rate minus 0.50% resulting in a 3.50% rate
for a portion of the debt and at LIBOR plus 2.00% resulting in a 3.09% rate for
another portion. This rate determination remains constant until December 31,
2004. On that date, the interest rate may be adjusted based upon certain
financial covenants and may range from prime minus 0.50% to LIBOR plus 1.75% or,
to LIBOR plus 2.25%. In addition, the Credit Agreement includes two term loan
facilities, one of which is active, and which at March 31, 2004 bore interest at
the prime rate minus 0.50% resulting in a 3.50% rate for a portion of the debt
and at LIBOR plus 2.25% resulting in a 3.34% rate for another portion. On
December 31, 2004 the interest rate may be adjusted based on certain financial
covenants, and may range from prime minus 0.50% to LIBOR plus 2.00% or, to LIBOR
plus 2.50%. 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 March 31, 2004 and, based on their evaluation, have concluded that
these controls and procedures are effective. There were no changes in the
Company's internal controls during the fiscal quarter ended March 31, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange 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.
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PART II - OTHER INFORMATION
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 February 26, 2004, with respect to its press
release announcing its results of operations for the quarter ended
December 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: May 14, 2004 By: /s/ Stephen D. Rubin
--------------------------------------
Stephen D. Rubin
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
Date: May 14, 2004 By: /s/ Clifford K. Bolen
--------------------------------------
Clifford K. Bolen
Senior VICE PRESIDENT; CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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EXHIBIT INDEX
NUMBER EXHIBIT TITLE
- ------ -------------
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.
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