The
Company is eligible to deregister under the Exchange Act by filing a
Form 15 because it has fewer than 300 holders of record of its common
stock. Upon the filing of the Form 15, the Company’s obligation to file
certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will immediately
be suspended. The Company expects that the deregistration of its common stock
will become effective 90 days after the date of filing of the Form 15
with the SEC. The Company expects, but cannot guaranty, that its common stock
will be quoted on the Pink Sheets after it delists from the AMEX. There can
also be no assurance that any brokerage firms will continue to make a market in
the common stock after the delisting. The Pink Sheets is a provider of pricing
and financial information for the over-the-counter securities markets. It is a
centralized quotation service that collects and publishes market maker quotes
in real time primarily through its website, www.pinksheets.com, which provides
stock and bond price quotes, financial news, and information about securities.
Revenue Recognition
Revenue is recognized upon the passing of title to
the customers, which occurs upon shipment of product to customers, including
brokers, in fulfillment of customer orders. 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 expense.
The
Vita Seafood business segment guarantees the sale of most of its products sold
in supermarket chains and wholesale clubs (“Supermarkets”). This guarantee
helps ensure that consumers receive fresh products. Under the guarantee, the
majority of customers are issued an allowance off-invoice to cover products not
sold before the expiration date. Other customers
with product not sold before the expiration date have the right to return
unsold product to the Company through its food brokers or dispose of the unsold
product themselves or through a food distributor. A credit is then issued to
the Supermarket or food distributor. The Company provides a reserve that is
recorded concurrently with the sale. The Company believes, based on its
historical return rates, which have been fairly consistent over the past
several years, that this reserve is adequate to recognize the cost of all
foreseeable future product return credits associated with previously recognized
revenues.
On February 16, 2007, the Company voluntarily recalled
certain products because the labels did not disclose that the products
contained a flavor ingredient derived from milk. No illnesses or adverse
reactions have been reported to date in connection with this label disclosure
issue. Existing procedures have been reviewed and corrected where necessary. The
recall resulted in the establishment of a reserve of approximately $444,000 in
the fourth quarter of 2006, all of which was paid by June 30, 2007.
Earnout
Provisions Under Acquisition Agreement
Pursuant to the Company’s acquisition of Virginia
Honey in 2001, Terry Hess, the previous owner of Virginia Honey (“Hess”), was
subject to earnout provisions that resulted in additional payments by the
Company for Virginia Honey. As amended, the earnout provisions for Mr. Hess
resulted in an additional amount of $840,000 paid to Mr. Hess in April 2005
based on specific Vita Specialty Foods operating results from January 1, 2001
to December 31, 2002. In addition, a second earnout payment to Mr. Hess in the
amount of $700,000 was paid in April 2006 based on the operating results of
Vita Specialty Foods for the period from January 1, 2003 to December 31, 2005. Provisions
for a third earnout payment were cancelled as described below.
Effective December 2006, the Company entered into
certain agreements (the “Hess Agreements”) with Mr. Hess, who had resigned as
Vice Chairman and a member of the Company’s Board of Directors effective
November 20, 2006 and retired from his position as Chief Executive Officer of
Vita Specialty Foods effective August 25, 2006. The Hess Agreements include (i)
an Earnout Agreement, (ii) a Termination Agreement and (iii) first amendments
to the leases between Virginia Honey and an affiliate of Mr. Hess with respect
to the Killer Bee Packaging Plant located in Martinsburg, West Virginia and the
facility located in Berryville, Virginia (the “Lease Amendments”).
The Earnout Agreement provides that all earnouts under
the Stock Purchase Agreement dated June 29, 2001, as amended, between the
parties (the “Stock Purchase Agreement”) pursuant to which the Company
purchased the stock of Virginia Honey from Mr. Hess are satisfied in full and
that no further amounts are owed by the Company to Mr. Hess. The Earnout
Agreement also provides for the release of the shares of Virginia Honey’s
capital stock from the Company’s
7
pledge to Mr. Hess to secure the earnout payments under the Stock
Purchase Agreement. The Earnout Agreement includes mutual non-disparagement
provisions and releases between the Company and Virginia Honey, on the one
hand, and Mr. Hess, on the other, except for the performance of obligations
under the Hess Agreements and the Stock Purchase Agreement.
The Termination Agreement formalizes the termination
of Mr. Hess’ Employment Agreement with the Company, including reaffirming Mr.
Hess’ five-year non-competition agreement with the Company. Pursuant to the
Lease Amendments, the Company has given up its option to purchase the
Berryville, Virginia and Martinsburg, West Virginia properties owned by Mr.
Hess’ affiliate. In addition, the Lease Amendments provided the Company with an
option to terminate the Berryville lease upon 60 days notice until December 31,
2007, which the Company exercised on February 26, 2007 effective April 30,
2007, and an option to terminate the Martinsburg lease upon 12 months notice at
the end of five and nine years from the date of the applicable Amendment. In
connection with these agreements, Mr. Hess also resigned as a director and
officer of the Company and each of its subsidiaries.
Bank Loan Agreement
On September 8, 2003, the Company entered into a loan
agreement with a bank (the “Loan Agreement”) and paid off its existing credit
facility with initial borrowings under this new Loan Agreement. The Loan
Agreement was subsequently amended several times to, among other things, extend
the maturity dates of the revolver, change available borrowings and amend
financial covenants. As of the April 13, 2007 amendment, the Loan Agreement
provides for a $9,500,000 revolver which is scheduled to terminate April 1,
2008; a $7,750,000 Term A Loan due in monthly installments of $80,000 through
July 31, 2008 with a balloon payment of $3,682,000 due on August 31, 2008; a
$150,000 capital expenditure Term B Loan due in monthly installments of $2,500
from August 2006 through May 31, 2010 and the remainder due on September 30,
2010; and a $1,000,000 Term C Loan due April 1, 2008. Outstanding borrowings
under the Loan Agreement are secured by substantially all assets of the
Company.
Interest under each piece of the amended Loan
Agreement is at a floating rate per annum equal to the prime rate plus 0.5%,
other than the $1,000,000 Term C Loan which bears an interest rate of prime
plus 2.0%. The prime rate was 7.75% as of September 30, 2007.
The Loan Agreement imposes certain restrictions on the
Company, including its ability to complete significant asset sales, merge or
acquire businesses and pay dividends. Additionally, the Company had been
required to meet certain financial covenants at each quarter end during the
term of the Loan Agreement, including a Minimum Tangible Net Worth, a Minimum
EBITDA and a Minimum Cash Flow Coverage Leverage ratio, all as defined in the
Loan Agreement. During 2005 and 2006, the Company had violated certain of these
covenants and had obtained permanent waivers from the bank for such violations.
The March 24, 2006 amendment to the Loan Agreement retroactively amended these
financial covenants, and, as amended, the Company was in compliance with those
covenants as of December 31, 2005 and June 30, 2006. During the third and fourth
quarter of 2006, the Company was not in compliance with certain of the revised
covenants. The March 30, 2007 amendment to the Loan Agreement waived these 2006
covenant violations and the April 13, 2007 amendment, reset the covenants to
start with the six months ending June 30, 2007 and to only include a Minimum
EBITDA and a Minimum Cash Flow Coverage Leverage Ratio. At September 30, 2007,
the Company was out of compliance with the new covenants and has received a
waiver from the bank.
The Company is currently in discussions with the bank
regarding refinancing its Loan Agreement.
Business Segments
The Company reports two
operating business segments in the same format as reviewed by the Company’s
senior management. Segment one, Vita Seafood, processes and sells various
herring, and cured and smoked salmon products throughout the United States and
Mexico. Segment two, Vita Specialty Foods, combines the products of Virginia
Honey and Halifax and manufactures and distributes honey, salad dressings,
sauces, marinades, jams and jellies and gift baskets throughout North America. Management
predominately uses operating profit as the measure of profit or loss by
business segment.
8
Equity Issuance
On June 29, 2007, the Company issued to MDB
Alternative Investments L.L.C. (“MDB”), an entity controlled by Howard Bedford,
a member of the Company’s Board of Directors (“Bedford”), 2,400,000 shares of
its common stock, par value $.01 per share, and warrants to purchase a total of
2,000,000 additional shares of common stock in consideration for an initial
$1,000,000 advance and subsequent $2,000,000 loan to the Company pursuant to
the Securities Purchase Agreement between the Company and Bedford dated May 14,
2007. The warrants issued to MDB consist of the following:
two year warrants to purchase 500,000 shares of common stock at an
exercise price of $1.25 per share; three-year warrants to purchase 500,000
shares of common stock at an exercise price of $1.50 per share; four-year
warrants to purchase 500,000 shares of common stock at an exercise price of
$1.50 per share; and five-year warrants to purchase 500,000 shares of common
stock at an exercise price of $1.75 per share. This transaction
cancelled the $2,000,000 6% promissory note, dated June 15, 2007, issued to MDB
by the Company and secured by a second mortgage on the Company’s facility in
Chicago, Illinois. All of the shares
issued to MDB, as well as the shares underlying the warrants issued to MDB,
have been approved for listing on the American Stock Exchange.
In February 2006, the Company entered into agreements
pursuant to which five individuals or their affiliated entities invested a
total of $2,500,000 in the Company. Substantially all of these funds were used
to reduce funded debt. The investors received units consisting of an aggregate
of 1,000,000 shares of common stock; three-year warrants to purchase 500,000
shares of common stock at an exercise price of $5.00 per share; and five-year
warrants to purchase an additional 500,000 shares of common stock at an
exercise price of $7.50 per share. The investors include the following: (i)
Stephen D. Rubin, then president and Chairman of the Board of Directors of the
Company, and as of May 24, 2007, Chairman Emeritus of the Board of Directors,
(ii) Clifford K. Bolen, then Senior Vice
President, Chief Operating Officer and Chief Financial Officer of the Company,
and, as of August 18, 2006, President and Chief Executive Officer, (iii) Delphi
Casualty Co., of which Glen S. Morris, then a director of the Company, owns a
44% equity interest, (iv) a trust of which John C. Seramur, a director of the
Company, serves as trustee, as well as (v) Howard Bedford, then an unrelated
third-party investor and, as of May 18, 2006, a director of the Company.
Financial Accounting Standards Board
Interpretation No. 48
The Company adopted FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” as of January 1, 2007. The Company has
reviewed the status of possible tax uncertainties through the third quarter of
2007. The Company’s review did not result in any uncertain tax positions
requiring disclosure. The last Federal Tax examination was completed in
February 2006 for the year 2003. The result of the examination was a no change
letter. Should the Company need to record interest and/or penalties related to
uncertain tax positions or other tax authority assessments, it would classify
such expenses as part of the income tax provision. The Company has not changed
any of its tax policies nor adopted any new tax positions during the first nine
months of 2007 and believes it has filed appropriate tax returns in all
jurisdictions for which it has nexus. This review included the Company’s net
deferred income tax assets which management believes will be realized over
future profitable years.
10
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Recent
Event
On
November 2, 2007, after consulting with management, the Company’s Board of
Directors determined to delist the Company’s common stock from the American
Stock Exchange (the “AMEX”) and deregister its common stock under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), after
carefully considering the advantages and disadvantages of continuing
registration and listing. The costs and administrative burdens associated with
being a public company have significantly increased, particularly in light of
the adoption of the Sarbanes-Oxley Act and the adoption of new rules by the
Securities and Exchange Commission (the “SEC”) and the AMEX. The Board
determined that the rising costs of compliance, as well as the substantial
demands on management time and resources compelled by the compliance
requirements, outweigh the benefits the Company receives from maintaining its
registered and listed status. The Board believes that deregistering will result
in significant reductions in the Company’s accounting, legal and administrative
expenses, avoid even higher future expenses and enable management to focus all
of its time and resources on operating the Company and enhancing shareholder
value. The Company furnished notification of delisting and deregistration to
the AMEX and issued a public press release on November 5, 2007. The Company
will file a Form 25, delisting its shares, on November 16, 2007 and a Form 15,
deregistering them, on November 26, 2007, the effective date of delisting.
The
Company is eligible to deregister under the Exchange Act by filing a
Form 15 because it has fewer than 300 holders of record of its common
stock. Upon the filing of the Form 15, the Company’s obligation to file
certain reports with the SEC, including Forms 10-K, 10-Q and 8-K, will
immediately be suspended. The Company expects that the deregistration of its
common stock will become effective 90 days after the date of filing of the
Form 15 with the SEC. The Company expects, but cannot guaranty, that its
common stock will be quoted on the Pink Sheets after it delists from the AMEX.
There can also be no assurance that any brokerage firms will continue to make a
market in the common stock after the delisting. The Pink Sheets is a provider
of pricing and financial information for the over-the-counter securities markets.
It is a centralized quotation service that collects and publishes market maker
quotes in real time primarily through its website, www.pinksheets.com, which
provides stock and bond price quotes, financial news, and information about
securities.
Comparison of the Three Months Ended September 30,
2007 and September 30, 2006
Revenues.
Net
sales for the three months ended September 30, 2007 were approximately
$11,834,000, compared to approximately $12,418,000 for the same period in 2006,
a decrease of approximately $(584,000) or approximately (4.7)%. Vita Seafood
experienced a decrease of approximately $(654,000), or approximately (10.1)%
which was mainly attributable to the decline in salmon gross sales of
approximately $(661,000) or (16.8) %, and a decrease in specialty product gross
sales of approximately $(32,000) or (16.5)%, from the third quarter of 2006.
Herring gross sales experienced a slight decrease of approximately $(18,000) or
(0.6) % as compared to the third quarter of 2006. Vita Specialty Foods’ sales
increased in the 2007 third quarter by approximately $70,000 or 1.2% as
compared to the 2006 third quarter. This improvement was mainly the result of
increased gross sales of sauces of approximately $543,000 or 23.2% combined
with reduced spending on sales deductions of $262,000. This favorable
performance in sales is the result of a new sauce product line introduced in
June 2006. The increase was offset by reduced salad dressing gross sales of
approximately $(579,000) or (20.0) %, reduced honey sales of approximately
$(145,000) or (10.9) % and a $(10,000) or (31.8) % reduction in other Halifax
products as compared to the 2006 third quarter. Both business segments were
negatively impacted by price increases that reduced sales volume as compared to
the 2006 third quarter. For Vita Seafood, sales allowances were reduced in the
third quarter 2007 by $(57,000) or (10.9)%. The decreases are the result of
reductions in the allowance and coupon programs designed to support volume. Herring,
salmon, and specialty product sales represented approximately 46%, 51%, 3%
respectively, of Vita Seafood’s total gross sales during the 2007 third quarter
as compared to approximately 42%, 55% and 3%, respectively, during the 2006
third quarter. Salad dressings, sauces, honey products and specialty items
represented approximately 36%, 45%, 18% and less than 1%, respectively, of Vita
Specialty Foods 2007 third quarter total gross sales compared to approximately
44%, 35%, 20% and less than 1%, respectively, during the 2006 third quarter.
11
Gross
Margin.
Gross margin for the third
quarter ended September 30, 2007 was approximately $2,158,000, compared to
$2,407,000 for the 2006 third quarter, a decrease of approximately $(249,000)
or approximately (10.3)% This decrease
was attributed to Vita Specialty Foods’ gross margin, which decreased
approximately $(211,000) or (18.2)%, despite a small increase in sales. The
Vita Seafood gross margin decreased approximately $(38,000) or (3.1)%. As a
percent of net sales, the 2007 third quarter gross margin was approximately
18.2% a decrease from the approximately 19.4% for the 2006 third quarter. Gross
margin for the Vita Seafood business, as a percentage of net sales, increased
to approximately 20.7% for the 2007 third quarter from approximately 19.2% for
the 2006 third quarter as a result of cost cutting programs, which
substantially offset the impact of lower sales. As a percent of net sales, Vita
Specialty Foods’ 2007 third quarter gross margin percentage was approximately
15.9% compared to approximately 19.6% for the 2006 third quarter. The Company
recorded a $500,000 reserve for obsolete and slow moving inventory, which
lowered the gross margin. The extra reserves resulted from a robust review of
this segment’s products and management decisions to discontinue certain low
performing business products.
Operating
Expenses
.
Selling,
marketing, distribution and administrative expenses for the three months ended
September 30, 2007 were approximately $3,202,000, compared to approximately
$3,284,000 for the same period in 2006, a decrease of approximately $(82,000)
or approximately (2.5)%. These expenses represented approximately 27.1% of net
sales for the quarter ended September 30, 2007 compared to 26.4% for the 2006
third quarter. The dollar decrease resulted from an increase of approximately
$5,000 in administration expenses and a decrease in selling, marketing and
distribution expenses of approximately $(87,000)
.
Interest
Expense.
Interest expense for the three
months ended September 30, 2007 was approximately $308,000, compared to
approximately $331,000 for the 2006 third quarter, a decrease of approximately
$(23,000) or (7.0)%.
Income
Taxes.
The Company had an income tax
benefit of approximately $540,000 for the 2007 third quarter as compared to an
income tax benefit of approximately $484,000 for the 2006 third quarter. Both
represented approximately 40% of the pretax loss for those periods.
Net
Income.
Reflecting the operating results
described above, the net loss for the quarter ended September 30, 2007 was
approximately $(812,000) or approximately $(0.11) per share on both a basic and
diluted basis. This compares to a net loss of approximately $(725,000) for the
quarter ended September 30, 2006, or approximately $(0.15) per share on both
bases. Weighted average outstanding shares increased due to the Company’s June
29, 2007 issuance of 2,400,000 shares of common stock.
Comparison of the Nine Months Ended September
30, 2007 and September 30, 2006
Revenues.
Net sales for the nine
months ended September 30, 2007 were approximately $36,353,000, compared to
approximately $36,915,000 for the comparable period in 2006, a decrease of
approximately $(562,000) or (1.5)%. Vita Seafood’s net sales decreased by
approximately $(1,847,000), or (9.4) %. Salmon gross sales for the nine months
ended September 30, 2007 were lower than the 2006 comparable nine month period
by approximately $(1,684,000) or (14.6)%. Herring gross sales increased by
approximately $1,000 or 0.0% for the first nine months of 2007 as compared to
the first nine months in 2006. Vita Specialty Foods net sales increased for the
first nine months of 2007 by approximately $1,285,000 or 7.4% as compared to
the first nine months of 2006. This increase was driven by the introduction of
a new sauce product line in 2006 that generated an expansion in sauces gross
sales of approximately $ 3,016,000 or 76.1% for the first nine months of 2007
as compared to the first nine months of 2006. Offsetting this increase was a
decline in salad dressing gross sales for the first nine month period of 2007
of approximately $(1,457,000) or (14.5)% compared to the first nine month
period of 2006. The salad dressing gross sales decline was attributable to lost
distribution. Sales allowances decreased for the nine months ended September
30, 2007 by approximately $(85,000) or (5.2)% for Vita Seafood and increased
approximately $85,000 or 6.3% for Vita Specialty Foods as compared to the nine
months ended September 30, 2006. The changes in both businesses were driven by
seasonal coupons and promotional activity with customers and consumers.
Herring, salmon, and specialty product sales represented approximately 47%, 51%
and 2%, respectively, of Vita Seafood’s total gross sales during the first nine
month period of 2007 compared to approximately 43%, 54%, and 3%, respectively,
during the first nine month period of 2006. Salad dressings, sauces, honey
products and specialty items, represented approximately 43%, 35%, 22% and 0%,
respectively, of Vita Specialty Foods’ 2007 first nine month period’s total
gross sales compared to approximately 54%, 21%, 24% and 0%, respectively,
12
during the 2006 comparable nine month period.
Gross
Margin.
Gross margin for the nine months
ended September 30, 2007 was approximately $9,718,000, compared to $9,556,000
for the nine months ended September 30, 2006, representing an increase of
approximately $162,000 or 1.7%. This increase was attributed to the Vita
Specialty Foods’ gross margin, which increased approximately $368,000 or 7.7%
in line with the sales increase. The Vita Seafood gross margin results declined
approximately $(206,000) or (4.3) %. As a percent of net sales, gross margin
totaled approximately 26.7%, an increase from approximately 25.9% for the same
period in 2006. The gross margin, as a percentage of net sales, for Vita
Specialty Foods remained the same at approximately 27.8% for the nine months
ended September 30, 2007 from approximately 27.8% for the comparable nine month
period in 2006. The Company recorded a $500,000 reserve for obsolete and slow
moving inventory, which lowered the gross margin. The extra reserves resulted
from a robust review of this segment’s products and management decisions to
discontinue certain low performing business products. The gross margin for the
Vita Seafood business, as a percentage of net sales increased slightly, to
approximately 25.6% for the first nine months in 2007 compared to approximately
24.2% for the first nine months of 2006. This improvement as a percent of sales
was largely the result of price increases and manufacturing cost controls.
Operating
Expenses
.
Selling,
marketing, distribution and administrative expenses for the nine months ended
September 30, 2007 were approximately $9,789,000, compared to approximately
$9,673,000 for the same period in 2006, an increase of approximately $116,000
or 1.2%. As a percentage of net sales, these expenses were approximately 26.9%
for the first nine months of 2007 compared with approximately 26.2% for the
first nine months of 2006. This increase in 2007 is mainly attributable to
rising marketing expenses for free standing inserts related to the new sauce
product line and corresponding promotional spending.
Interest
Expense.
Interest expense for the nine
months ended September 30, 2007 was approximately $926,000, compared to
approximately $971,000 for the nine months ended September 30, 2006, a decrease
of approximately $(45,000) or (4.6)%.
Income
Taxes.
The Company provided expense of
approximately $(399,000) for the nine months ended September 30, 2007 and
approximately $(435,000) for the nine months ended ending September 30, 2006. Both
represented approximately 40% of the pretax results for those periods.
Net
Income.
Reflecting the operating results
described above, the net loss for the nine months ended September 30, 2007 was
approximately $(599,000) or $(0.10) per share on both a basic and diluted
basis. This result is net of an inventory adjustment of $500,000 at Vita
Specialty Foods. This compares to a net loss of approximately $(653,000) for
the nine months ended September 30, 2006 or $(0.14) per share on both bases. Weighted
average outstanding shares increased due to the Company’s June 29, 2007
issuance of 2,400,000 shares of common stock.
Financial
Condition
On June 29, 2007, the Company issued to MDB
Alternative Investments L.L.C. (“MDB”), an entity controlled by Howard Bedford,
a member of the Company’s Board of Directors (“Bedford”), 2,400,000 shares of
its Common Stock and warrants to purchase a total of 2,000,000 additional
shares of Common Stock in consideration for an initial $1,000,000 advance and
subsequent $2,000,000 loan to the Company pursuant to the Securities Purchase
Agreement, dated May 14, 2007, between the Company and Bedford. This
transaction cancelled the $2,000,000 6% promissory note, dated June 15, 2007,
issued by the Company to MDB and secured by a second mortgage on the Company’s
facility in Chicago, Illinois.
All of the shares issued to MDB, as well as the shares underlying the
warrants issued to MDB, have been approved for listing on the American Stock
Exchange. These funds were primarily used for working capital requirements.
In February 2006, the Company entered into agreements
pursuant to which five individuals or their affiliated entities invested a
total of $2,500,000 in the Company. Substantially all of these funds were used
to reduce funded debt. The investors received units consisting of an aggregate
of 1,000,000 shares of common stock; three-year warrants to purchase 500,000
shares of common stock at an exercise price of $5.00 per share; and five-year
warrants to purchase an additional 500,000 shares of common stock at an exercise
price of $7.50 per share. The investors include the following: (i) Stephen D.
Rubin, then president and Chairman of the Board of Directors of the Company,
and as of May 24, 2007, Chairman Emeritus of the Board of Directors, (ii) Clifford K. Bolen, then Senior Vice
President, Chief Operating Officer and Chief Financial Officer of the Company,
and, as of August 18, 2006, President and Chief Executive Officer, (iii) Delphi
13
Casualty Co., of which Glen S. Morris, then a director of the Company,
owns a 44% equity interest, (iv) a trust of which John C. Seramur, a director
of the Company, serves as trustee, as well as (v) Howard Bedford, then an
unrelated third-party investor and, as of May 18, 2006, a director of the
Company.
At September 30, 2007, the Company had approximately
$(2,924,000) in working capital, versus approximately $6,197,000 at December
31, 2006, and approximately $(234,000) at September 30, 2006. The current ratio
at September 30, 2007 was .8 to 1.0 compared to 1.7 to 1.0 at December 31, 2006
and 1.0 to 1.0 at September 30, 2006. Current assets decreased from December
31, 2006 approximately $(1,001,000) mainly as a result of collections of
accounts receivable partially offset by an increase of inventory levels. Current
liabilities increased from December 31, 2006 by approximately $8,119,000 as a
result of the reclassification of the bank debt from long term debt to current
debt. The bank debt primarily matures in 2008 requiring classification as a
current obligation.
On September 8, 2003, the Company entered into a loan
agreement with a bank (the “Loan Agreement”) and paid off its existing credit
facility with initial borrowings under this new Loan Agreement. The Loan
Agreement was subsequently amended several times to, among other things, extend
the maturity dates of the revolver, change available borrowings and amend
financial covenants. As of the April 13, 2007 amendment, the Loan Agreement
provides for a $9,500,000 revolver which is scheduled to terminate April 1,
2008; a $7,750,000 Term A Loan due in monthly installments of $80,000 through
July 31, 2008 with a balloon payment of $3,682,000 due on August 31, 2008; a
$150,000 capital expenditure Term B Loan due in monthly installments of $2,500
from August 2006 through May 31, 2010 and the remainder due on June 30, 2010;
and a $1,000,000 Term C Loan due April 1, 2008. Outstanding borrowings under
the Loan Agreement are secured by substantially all assets of the Company.
Interest under each piece of the amended Loan
Agreement is at a floating rate per annum equal to the prime rate plus 0.5%,
other than the $1,000,000 Term C Loan which bears an interest rate of prime
plus 2.0%. The prime rate was 7.75% as of September 30, 2007.
The Loan Agreement imposes certain restrictions on the
Company, including its ability to complete significant asset sales, merge or
acquire businesses and pay dividends. Additionally, the Company had been
required to meet certain financial covenants at each quarter end during the
term of the Loan Agreement, including a Minimum Tangible Net Worth, a Minimum
EBITDA and a Minimum Cash Flow Coverage Leverage ratio, all as defined in the
Loan Agreement. During 2005 and 2006, the Company had violated certain of these
covenants and had obtained permanent waivers from the bank for such violations.
The March 24, 2006 amendment to the Loan Agreement retroactively amended these
financial covenants, and, as amended, the Company was in compliance with those
covenants as of December 31, 2005 and September 30, 2006. During the third and
fourth quarter of 2006, the Company was not in compliance with certain of the
revised covenants. The March 30, 2007 amendment to the Loan Agreement waived
these 2006 covenant violations and the April 13, 2007 amendment, reset the
covenants to start with the six months ending June 30, 2007, and to only
include a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio. The
Company was not in compliance with the new covenants at September 30, 2007 and
has received a waiver from the bank.
The Company is currently in discussions with the bank
regarding refinancing its Loan Agreement.
Cash
flows from operating activities.
Net cash used in
operating activities was approximately $(2,152,000) for the nine months ended
September 30, 2007, primarily reflecting the reduction of approximately
$(2,860,000) in accounts payable, primarily due to the working capital infusion
plus an increase in inventory of approximately $(215,000) and offset by a
decrease in accounts receivable of approximately $1,513,000 since December 31,
2006. Cash provided by operating activities for the nine months ended September
30, 2006 was approximately $1,120,000. This change between periods was
primarily the result of a 2007 reduction of accounts payable by approximately
$(2,860,000) partially offset by a decrease in 2007 of accounts receivable of
approximately $1,513,000 compared to an increase in accounts payable in 2006 of
approximately $2,094,000 and an increase in accounts receivable in 2006 of
approximately $(709,000).
14
Cash
flows from investing activities.
Net cash
used in investing activities was approximately $(35,000) for the nine months
ended September 30, 2007, which was approximately $862,000 less than the
$(893,000) used during the same period of the prior year primarily for capital
expenditures. The major contributor in 2007 was the reduction of capital
expenditures and the realization of approximately $183,000, representing the
cash surrender value under certain key man life insurance policies.
Cash
flows from financing activities.
Net
cash provided by financing activities was approximately $2,157,000 for the nine
months ended September 30, 2007 primarily due to the 2007 equity infusion
described above, net of debt repayments. The cash provided by financing
activities for the current year compares to the approximately $(213,000) used
during the first nine months of 2006 when debt repayments more than offset the
2006 equity infusion described above.
Seasonality
The Vita Seafood segment
of the Company’s business is highly seasonal in nature, primarily resulting
from the effect of the timing of certain holidays on the demand for certain
products. Historically, the segment’s sales and profits have been substantially
higher in the fourth quarter of each year.
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 the passing of title to
the customers, which occurs upon shipment of product to customers, including
brokers, 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 resold prior to the expiration of its shelf
life. In order to support the Company’s products, various marketing programs
are offered to customers, who 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 expense.
The
Vita Seafood business segment guarantees the sale of most of its products sold
in supermarket chains and wholesale clubs (“Supermarkets”). This guarantee
helps ensure that consumers receive fresh products. Under the guarantee, the
majority of customers are issued an allowance off-invoice to cover products not
sold before the expiration date. Other
customers with product not sold before the expiration date have the
right to return unsold product to the Company through its food brokers or
dispose of the unsold product themselves or through a food distributor. A
credit is then issued to the Supermarket or food distributor. The Company
provides a reserve that is recorded concurrently with the sale. The Company
believes, based on its historical return rates, which have been fairly
consistent over the past several years, that this reserve is adequate to
recognize the cost of all foreseeable future product return credits associated
with previously recognized revenues.
The Company recognizes deferred income tax assets and
liabilities for the expected future tax consequences of temporary differences
between the tax basis and financial reporting basis of certain assets and
liabilities and certain income tax credit carry-forwards. In estimating future
tax consequences, the Company considers expected future events other than
enactments of changes in tax laws or rates. A valuation reserve is recognized
based on the evidence available if it is more likely than not that some portion
or the entire deferred income tax asset will not be realized.
15
The Company assesses the impairment of its
identifiable intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable and at
least annually. Factors the Company considers important, which could trigger an
impairment review include the following:
•
Significant underperformance relative to expected
historical or projected future operating results;
•
Significant changes in the manner of the 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
its intangible assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, the Company will review for
impairment under the provisions of SFAS 142.
The Company’s goodwill resulted from the
acquisitions of Virginia Honey and Halifax. Annually, effective as of December
31, the Company engages an independent appraiser to assist in management’s
assessment as to whether the recorded goodwill is impaired. The independent
appraisals are made using customary valuation methodologies, including
discounted cash flow and other fundamental analysis and comparisons. In its
2004 and 2006 assessments, management determined that the Company’s recorded
goodwill was in excess of its fair value and accordingly, the Company recorded
goodwill impairment charges of $2,313,954 and $1,125,693 in 2004 and 2006,
respectively. The impairments were principally due to the decline in the sales
volume of Halifax products in 2004 and overall performance issues in 2006.
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 potential loss of large customers or
accounts, downward product price movements, availability of raw materials,
changes in raw material procurement costs, fluctuations in the market cost of
major commodities such as honey, changes in energy costs, the introduction and
success of new products, changes in economic and market conditions, integration
and management of acquired businesses, the seasonality of Vita Seafood’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 customer and supplier base, the potential impact
of claims and litigation, the effects of competition in the Company’s markets,
the success of the Company’s quality control procedures, the impact of the
Company’s substantial indebtedness, the adequacy of the Company’s reserves and
the dietary habits and trends of the general public. In light of these and
other risks and uncertainties, the Company makes no representation that any future
results, performance or achievements expressed or implied in this report will
be attained. The 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 $18.4 million Loan
Agreement with interest rates based on prime rate plus 0.5%, or 8.25% as of
September 30, 2007 for all loans covered by the Loan Agreement other than the
new $1,000,000 term loan which bears interest at the prime rate plus 2.0%. The
Company does not currently use derivative instruments to alter the interest
rate characteristics of any of the debt.
Item 4. Controls
and Procedures
Under the supervision and with the participation of
the 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 –
15(e) and 15d – 15(e) under the Exchange Act, as of September 30, 2007 and,
based on their evaluation, have concluded that these controls and procedures
are effective. There were no changes in the Company’s internal control over
financial reporting during the fiscal quarter ended
16
September 30, 2007 that have materially affected, or are reasonable
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.
PART II - OTHER INFORMATION
Item
1A. Risk Factors
The risk factors included in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended December
31, 2006 have not materially changed
Item
6. 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.
|
17
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 9, 2007
|
|
By:
|
/s/
Clifford K. Bolen
|
|
|
|
|
Clifford K. Bolen
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: November 9, 2007
|
|
By:
|
/s/
R. Anthony Nelson
|
|
|
|
|
R. Anthony
Nelson
|
|
|
|
|
Chief Financial
Officer
|
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
18
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.
|
19
Vita FD Products (AMEX:VSF)
과거 데이터 주식 차트
부터 5월(5) 2024 으로 6월(6) 2024
Vita FD Products (AMEX:VSF)
과거 데이터 주식 차트
부터 6월(6) 2023 으로 6월(6) 2024
