** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| ** ** | **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES  EXCHANGE ACT OF 1934** |                                                                                                                                                                                   |
|------------|------------|------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | ** ** | ** **                                                                                     | ** **                                                                                                                                                                             |
|       |       |                                                                                           | **For the fiscal year ended December 31, 2004**                                                                                                                                        |
|       |       |                                                                                           |                                                                                                                                                                                   |
|       | ** ** | **o**                                                                                          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE**

**SECURITIES  EXCHANGE ACT OF 1934**                                                                                    |
|       | ** ** | ** **                                                                                     | ** **                                                                                                                                                                             |
|       | ** ** |                                                                                           | **For the transition period  from            to            .** |
|            |            |                                                                                                |                                                                                                                                                                                        |  |  |  |

 

**Commission File Number1-12599**

 

**VITA FOOD PRODUCTS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Nevada** | ** **                                                       | **36-3171548** |                                  |
|------------|------------------------------------------------------------------|----------------|---------------------------------------|
|       | (State or other  jurisdiction of  incorporation or organization) |           | (I.R.S. Employer  Identification No.) |
|            |                                                                  |                |                                       |  |  |  |

 

## **2222 West Lake Street, Chicago, Illinois     60612**

(Addressof principal executive offices)       (Zip code)

 

Registrant’stelephone number, including area code:   **(312) 738-4500**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 
| **Title of each class**                    | ** ** | **Name of each exchange on which registered**             |
|--------------------------------------------|------------|-----------------------------------------------------------|
| **Common Stock, par value $.01 per share** | ** ** | **American  Stock Exchange & Chicago Stock Exchange** |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).

Yes o   No ý

 

The aggregate market value of common stock held bynon-affiliates of the registrant as of June 30, 2004 was $8,898,711.

 

The number of shares outstanding of the registrant’scommon stock as of February 28, 2005 was 3,858,738.

 

# **DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the definitive Proxy Statement to bedelivered to stockholders in connection with the Annual Meeting of Stockholdersto be held May 18, 2005 are incorporated by reference in Part III.

 

 

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**PART I**

 

**Item 1.Business.**

 

**Introduction**

 

Vita Food Products, Inc. (the “Company”) has been engagedin the sale of specialty food products under the **Vita**brand name for over 70 years.  The Company believes that its long history ofproducing and marketing quality products has created a strong recognition ofthe **Vita** brand name amongconsumers and has enabled the Company to build an extensive nationaldistribution network of established food brokers for the sale of its productsto supermarket chains and wholesale clubs (collectively “Supermarkets”) and toinstitutional/food service operations, such as restaurant chains, hotels,country clubs, cruise lines and other bulk purchasers (collectively“Institutional Purchasers”).  The Companybelieves that “**Vita**”, with its accompanyinglogo, is the most widely recognized, and the only nationally recognized, brandname in herring products and cured and smoked salmon products.  The Company is one of the leading processorsof herring products and cured and smoked salmon products in the United Statesand has been producing and selling herring products for over 70 years and curedand smoked salmon products for over 30 years. The Company’s products include a variety of cuts of pickled herring incream and wine based sauces, and lox and nova salmon.  The Company markets other complementaryspecialty food products, such as cream cheese with salmon, shrimp cocktail,horseradish, cocktail, tartar sauces and salad dressings, all of which itpurchases from third party food producers and markets under the **Vita** brand name pursuant to co-packingarrangements, with the exception of the salad dressing products, which are nowproduced by the Company’s subsidiary. Historically, the Company has increased its sales through acquisitionsthat have enabled the Company to add new product lines and expand its existingproduct lines.  The Company markets and,in some cases, also produces related specialty food products under other brandnames, some of which are recognized regional brand names, in certain regions ofthe country, that have been licensed to the Company.

 

TheCompany significantly expanded its line of specialty food products in 2002 and2001 with the acquisitions of The Halifax Group, Inc. (“Halifax”) and theVirginia Honey Company, Inc. (“Virginia Honey”), respectively.  The Company has formed Vita Specialty Foods,Inc. (“VSF”) as a wholly owned subsidiary and a separate business unit (the“Vita Specialty Foods Segment”) to consolidate the operations of Virginia Honeyand Halifax (the Company’s operations conducted separately from the operationsof the Vita Specialty Foods Segment are referred to herein as the “Vita SeafoodSegment” and references to the Company include the acquired operationssubsequent to their respective acquisition dates).  Virginia Honey specializes in processing andmarketing, under the **Virginia Brand**name,honey, salad dressings, sauces, jams and jellies and gift basket products.  Halifax produces and markets, under its **Oak Hill Farms**® brand name a line of saladdressings, gourmet sauces, and beverages and, under its **Scorned Woman**® brand name, a line of hotsauce based products.  In addition,through its acquisition of Halifax, the Company has brand name productlicensing agreements with **Jim Beam**®,**Drambuie**®, **HBO**® and **AlliedDomecq** for the brand names **Kahl****úa**® and **Courvoisier**®, underwhich the Company produces and markets various cooking sauces, pasta sauces,steak sauces, marinades and other gourmet related products.  As a result of these acquisitions, theCompany is leveraging its sales and distribution network to provide nationalexposure to the products of the Vita Specialty Foods Segment.  The Company also expects to introduce newproducts with a goal of enhancing the aforementioned brand names under **Vita** and the Vita Specialty Foods Segment.

 

# **CompanyBackground**

 

The Company was originally incorporated as Vita FoodProducts, Inc. in 1928.  In 1968, Brownand Williamson Tobacco Company, a British company, purchased the Company.  The Company was then acquired by Dean FoodsCompany in 1978.  In 1982, Mr. Stephen D.Rubin and Mr. Clark L. Feldman, on behalf of an investor group (the“Investors”), negotiated the acquisition of the Company from Dean Foods Companyand became the Company’s largest shareholders. On September 20, 1996, theCompany reincorporated in the State of Nevada through a merger of Vita FoodProducts, Inc., an Illinois corporation (“Vita-Illinois”), and V-F Acquisition,Inc., an Illinois corporation that was the largest shareholder ofVita-Illinois, into the Company, a Nevada corporation formed for the purpose ofeffecting the reincorporation.  OnJanuary 23, 1997, the Company completed an initial public offering of shares ofits common stock, par value $.01 per share (“Common Stock”), and redeemablecommon stock purchase warrants, which expired in 2002, resulting in netproceeds before expenses of approximately $4.1 million.

 

EffectiveJuly 1, 2001, the Company acquired 100% of the outstanding shares of capitalstock of Virginia Honey.  The results ofVirginia Honey have been included in the Company’s consolidated financial 

 

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statements since theeffective date.  Virginia Honey wasestablished in 1962 as a small beekeeping business.  Since then, Virginia Honey has expanded itsproduct offerings to include salad dressings and by 1998 the company had grownto include two production facilities, with one used to pack honey products andthe second to process and pack salad dressings, sauces and marinades.

 

EffectiveNovember 1, 2002, the Company acquired 100% of the outstanding shares ofcapital stock of Halifax.  The results ofHalifax have been included in the Company’s consolidated financial statementssince the effective date as part of the Vita Specialty Foods Segment.  Halifax specialized in product developmentand marketing of its wide range of food products.  The product list includes salad dressings,barbeque sauce, steak sauce, gourmet sauces, hot sauces and gift basket relateditems.  In addition, Halifax developedand marketed food products through licensing agreements with well-recognizedbrands such as **Jim Beam**®, **HBO**® (based on the restaurateur **Artie Bucco**TM in ***The Sopranos®***), and **Drambuie**®. Halifax operations were run in a production facility and warehouse inGeorgia, until late in 2003 when operations were moved to the Company’sMartinsburg, West Virginia plant.

 

**Strategy**

 

The Company’s long-term strategy is to (i) focus onacquisitions; (ii) capitalize on the goodwill associated with the **Vita** brand name; and (iii) capitalize onthe strength of the Company’s national distribution network to increase itsmarket share for its existing products and introduce and market new specialtyfood products, which will be sold under the **Vita**,**Virginia Brand**,**Oak Hill Farms** and other brand names owned, purchased orlicensed from third parties.  The Companyintends to implement its growth strategy through acquiring, or entering intojoint ventures with companies producing complementary specialty food products,introducing and developing new products and increasing its marketing efforts.

 

**Products**

 

The Company’s products include herring products, curedand smoked salmon products, complementary products, honey products, saladdressing products and a variety of related ready to eat specialty foodproducts. The Company’s refrigerated products can be located in the dairydepartment, meat and fish department or deli department of Supermarkets.  The Company also sells products in thegrocery sections of Supermarkets.  Manyof the Company’s products are also sold in bulk to Institutional Purchasers.The Company believes that, although the market for herring products has beenand is expected to remain constant, the market for salmon products and certainother specialty products is increasing. Consumption of fresh and frozen seafood in the United States has beenincreasing, especially consumption of salmon. All of the Company’s salmon, herring and honey products, and most of itssalad dressings, complementary and other specialty food products are kosher andreceive the symbol of certification from the Orthodox Union.  The Company also receives the symbol ofcertification for the use of many of its products for Passover from theOrthodox Union. The Company believes that the market for kosher foods willcontinue to grow and that this represents a significant opportunity for theCompany. The increase in consumption of kosher food products is at leastpartially the result of (i) the perception by certain consumers who are notbound by Judaism’s religious dietary restrictions that kosher certificationindicates a superior product, and (ii) an increase in the U.S. population ofmembers of other religious groups such as Islam, Hinduism and some branches ofChristianity that observe dietary restrictions similar to many Jewish people.

 

**CertainFinancial Information**

 

See Note 2 in “Item 8. Financial Statements” forinformation regarding revenues from external customers, profit and total assetsof each of the Company’s business segments.

 

**Vita Seafood SegmentProducts**

 

***Herring***

 

The Company, generally using the best available grade ofocean herring, cures the herring and mixes the cured herring with a variety ofhigh quality spices, wines and other ingredients according to the Company’sproprietary formulations to produce a number of herring products.  These products are then either packaged invacuum-sealed glass jars to preserve flavor for sale to Supermarkets orpackaged in bulk containers for sale to Institutional Purchasers. Herring is atraditional Eastern European and Scandinavian staple, being one of the mostwidely consumed fish in the world.  Inthe United States, however, herring is more of a specialty product that isserved at parties or holiday gatherings. Herring products are often served 

 

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asappetizers, part of a buffet, between-meal snacks or an ingredient insalads.  The Company’s most popularherring products are its “**Vita**Herring Party Snacks” and “**Vita**Herring in Sour Cream.”  The Company alsosells a variety of other herring products under the **Vita**and **Elf**brandnames.  Sales of herring productsrepresented 29%, 28% and 32% of total consolidated sales revenues for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

***Salmon***

 

The Company, using only premium and quality grades ofsalmon from Southeastern Alaska, Canada, Chile, and other regions, cures,smokes, and slices the salmon for most of its salmon products.  The Company’s retail salmon products arepackaged and sold either refrigerated or frozen to Supermarkets.  The institutional cured and smoked salmonproducts are packaged in bulk containers, including three-pound trays, and soldrefrigerated or frozen to Institutional Purchasers.  The Company introduced a new line of premiumsmoked Atlantic Salmon products, under the “**AtlanticBay Classic**” name with the **Vita**logo, in the fourth quarter of 2001. This product line is processed in Chile by a third party pursuant to aco-packing arrangement.  Salmonconsumption has been increasing over the past five years and salmon nowrepresents one of the most popular types of seafood consumed in the UnitedStates.  The Company’s salmon productsare generally served as part of buffets at parties, particularly during theChristmas holiday season, or as a traditional brunch item with bagels.  The salmon products are also served asappetizers at formal parties and are being more frequently used as light meals.****The Company’s salmon products include “**Vita** Lox Salmon,” “**Vita** Nova Salmon,” and “**Vita** Peppered Salmon,” “Atlantic BayClassic Salmon,” “**Vita**SalmonBurger,” “**Vita** Marinated Salmon,”and “**Vita** Salmon Spread”.  Sales of salmon products represented 24%, 24%and 30% of total consolidated sales revenues for the years ended December 31,2004, 2003 and 2002, respectively.

 

***Complementary Products***

 

The Company sells a number of spreads and condiments,including horseradish products, cream cheese with smoked salmon, cocktail andtartar sauces, and shrimp cocktail products. These products are used asappetizers, snacks, and condiments to accompany light meals and holidaytrays.  These products are marketed bythe Company under the **Vita** brandname, but produced by third parties pursuant to co-packing arrangements.  Sales of complementary products represented2%, 2% and 4% of total consolidated sales revenues for the years ended December31, 2004, 2003 and 2002, respectively.

 

**Vita Specialty Foods SegmentProducts**

** **

***Salad Dressings***

 

The Company manufactures and markets three premium linesof salad dressings.  One line is underthe **Virginia Brand**name and issold in the grocery section.  The secondline is under the **Oak Hill Farms**nameand is also sold in the grocery section. The third line, which has been developed since the acquisition ofVirginia Honey, is under the **Vita**brand name and is sold as refrigerated. All salad dressing flavors feature the finest ingredients available andmost contain the ingredient Vidalia® Onion. While all of the dressings boast premium quality and taste, some alsofeature no cholesterol, low fat, low carbohydrates, and low calories.  The Company’s customers are mainlySupermarkets.  Sales of salad dressingsrepresented 25%, 21% and 19% of total consolidated sales revenues for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

***Honey***

 

Virginia Honey, followed by the Company, has been packingand marketing Pure, Grade “A” honey under the **VirginiaBrand** name since 1962.  Thehoney is available in several varieties and blends, including Clover,Wildflower, Orange Blossom, and Acacia. Each variety is available in many sizes ranging from 6oz mugs to55-gallon drums used for food service. The Company’s customers include Supermarkets, Institutional Purchasers,bakeries and major food processors. Sales of honey products represented 13%, 15% and 13% of totalconsolidated sales revenues for the years ended December 31, 2004, 2003 and2002, respectively.

 

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***Specialty Products***

 

The Company manufactures and sells marinades, steaksauce, hot sauces, pasta sauce and other gourmet cooking sauces.  These products are marketed by the Companyunder the **Oak Hill Farms** and **Scorned Woman** brand names and underlicensing agreements from **Jim Beam®**,**Drambuie®,****HBO®**,**Kahlúa**® and **Courvoisier**®.

 

In addition, the Company sells a wide array of otherproducts including marinades, steak sauce, hot sauces, molasses, baking mixes,syrups, condiments, cider, mustard, jams, jellies, and preserves.  These products are marketed by the Companyunder the **Virginia Brand** name, butproduced by third parties pursuant to co-packing arrangements.  Sales of specialty products represented 7%,10% and 2% of total consolidated sales revenues for the years ended December31, 2004, 2003 and 2002, respectively.

 

***Newer Products***

 

The Company’s newer products are those being introducedcurrently and during the past year and are developed by the Company, acquiredthrough acquisitions of other companies, or marketed under co-packingarrangements or distribution agreements.

 

The Company has expanded the **Artie BuccoTM** line of products, based on the restaurateur inthe **HBO®** television series, ***The Sopranos***®, byadding a spicy marinara sauce, barbeque and steak sauces and the **Jim Beam®**line of products toinclude four additional flavored marinades. The products were made available during 2003 and are being distributedto Supermarkets and other outlets.

 

The Company signed a licensing agreement in 2003 withAllied Domecq to manufacture and distribute a new line of **Kahl****úa**® and **Courvoisier**®brandedsauces and flavored beverage concentrates. The flavored beverage concentrateswere made available during the third quarter of 2004 to gourmet stores andother specialty outlets.

 

The Company has capitalized on its national distributionnetwork and the strong recognition of the **Vita**brand name to generate sales of these products. In order to introduce theseproducts, the Company has incurred costs for development and distribution,which are significant relative to sales levels at the time ofintroduction.  It is expected that assales of these products grow, the development and distribution costs willdecline on a relative basis.

 

**Product Distribution and Sales**

** **

The Company’s products, under both segments, arecurrently sold through a national distribution network of approximately 60established retail and institutional/food service brokers. The Company believesthat it is the only processor of herring products and cured and smoked salmonproducts that has established such an extensive national distributionnetwork.  The Company believes it hasbeen successful in developing this network for a number of reasons, includingthe recognition of the **Vita** brandname and the Company’s reputation for producing quality products. The Companyhas also been able to develop and strengthen its distribution network byproviding adequate shelf space for its products. The Company’s currentmarketing efforts and its long-term relationship with many of the food brokershas also contributed to the strength of this network. The Company, through itsmarketing efforts, attempts to maintain good relationships with theSupermarkets and Institutional Purchasers that purchase its products.  The Company believes that its nationaldistribution network has, in turn, helped strengthen the **Vita** brand name and has been an importantfactor in the Company’s ability to introduce new products into the marketplaceand is an important component of its acquisition strategy.

 

The Company’s regional sales managers oversee itsnational distribution network.  TheCompany employs full-time regional sales managers who maintain contact with thefood brokers in their region and monitor their performance.  The regional sales managers also assist thefood brokers in their selling efforts by, among other things, accompanying thefood brokers on local sales calls.  TheCompany believes that it is one of the few companies in its market niche toemploy regional sales managers and that the presence of the regional salesmanagers has solidified the Company’s relationship with its nationaldistribution network.

 

The Company enters into an agreement with each foodbroker, which grants the food broker an exclusive territory in which to sellits products and sets forth the amount of commissions to be paid on such salesby the Company. Such agreements do not permit the Company to make salesdirectly to Supermarkets located in a food broker’s exclusive territory unlessthe Company pays the food broker the commission, which the food broker wouldhave earned. The agreements are terminable by either party upon 30 days’

 

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notice.  The Company believes such terms are standardin the Company’s industry. The food brokers sell the Company’s products in boththe retail and institutional/food service markets. The retail market,consisting of Supermarkets, has generally accounted for approximately 91% ofthe Company’s net sales while Institutional Purchasers have accounted for theremaining 9% of net sales.

 

In addition to the Company’s three facilities, theCompany also stores and distributes its products through over 15 warehousefacilities owned by third parties, which are located throughout the UnitedStates.

** **

**Customers**

** **

The Company’s customers include large regionalsupermarket chains, wholesale clubs and gourmet shops throughout the countryand in Canada and Mexico.  The Company’sproducts sold under the **Vita** and **Virginia Brand** names are particularly wellknown on the eastern seaboard.

 

The Company’s two largest customers represented 21% and14% of its net sales in 2004, 19% and 13% in 2003 and 19% and 12% in 2002,respectively.  The Company does not havea long-term contractual relationship with either customer. The Company believesthe loss of either of these customers would have a material adverse affect onthe Company’s business, financial condition and results of operations.  To this point, during 2003, Vita seafood’slargest customer discontinued a Vita seafood product resulting in a materialimpact to the Company’s financial results for 2004.  However, in 2004 the Company replaced much ofthis business through sales to other customers. The Company believes that its present working relationships with thesecustomers that have been built up over time are likely to continue.

 

The Company is aware that its customers are continuallyreviewing their purchasing decisions which may result in such customerschanging their current orders from higher margin to lower margin products orreducing the amount of a product or products purchased.  Any material change in orders or reduction inthe amount of a product or products purchased by one or more significantcustomers could adversely affect the Company’s business, financial conditionand results of operations.

 

**Foreign Sales**

** **

The Company had sales to foreign countries totaling$2,076,000, $1,658,000 and $1,250,000 during 2004, 2003 and 2002, respectively.

 

**Product Return Policy**

** **

The Vita seafood segment of the Company guarantees thesale of most of its products sold in Supermarkets, excluding warehouse clubs,which sales represent approximately 72% of that segment’s sales. This guaranteehelps ensure that consumers receive fresh products. Under the guarantee,products not sold before the expiration date are either returned to the Companythrough its food brokers or are disposed of by the Supermarkets or fooddistributor. A credit is then issued to the Supermarket or food distributor.The Company provides a reserve that is recorded concurrently with thesale.  The Company believes, based on itshistorical return rates, which have been fairly consistent over the pastseveral years, that this reserve is adequate to recognize the cost of allforeseeable future product return credits associated with previously recognizedrevenues.

 

**Production**

** **

***Suppliers***

 

TheCompany relies on outside suppliers for its requirements in producing itsherring, salmon, honey, salad dressings, cooking sauces and otherproducts.  The Company previouslypurchased most of its herring from one specialty herring harvester andprocessor (the “Supplier”) located in Canada, pursuant to a supply agreement.  Under the agreement, the Supplier had theoption to supply 90% of the Company’s annual requirements for herring, providedit sold the herring at the same prices which the Company would pay if itpurchased herring elsewhere.  TheSupplier guaranteed the first priority of supply of herring to the Company, inan amount necessary to satisfy the Company’s requirements.  The agreement was terminated in 2002, but hasnot changed the Company’s decades-long relationship with the Supplier, as theCompany has been purchasing herring from the Supplier since the Company beganoperations over 70 years ago.  Theabsence of an agreement has not impacted the Company, since the Companycontinues to buy from the Supplier at competitive prices and the Company hasestablished other sources of supply it believes will be 

 

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adequate in the eventthe Supplier ceases to offer herring at competitive prices.  The Company currently purchases its other rawmaterials and co-packed products from a number of sources and the Companybelieves that there are other suppliers from which the Company could meet itsrequirements, if necessary.

 

***Quality Control***

 

The Company believes that it was one of the firstprocessors of herring products and cured and smoked salmon products toinstitute quality control procedures and that its quality control proceduresare among the most stringent in this market. The Company has six full-time employees in its Quality ControlDepartments.  The primary responsibilityof these employees is to ensure the quality of all its products by overseeingthe production process and by frequently testing the consistency of theproducts as they are produced.  Inaddition, the Company is using certain high-tech equipment in its productionprocess dedicated solely to quality control purposes that the Company believesgives it a competitive advantage.  Theproducts produced through co-packing arrangements are subject to both thequality control procedures of the co-packing company and the same frequentproduct testing that is required of the Company’s products under its qualitycontrol procedures.

 

# **Competition**

# ** **

The market for the Company’s products is highlycompetitive.  The Company believes thatconsumers choose herring products, salmon products, honey products, saladdressing products as well as its other specialty products based primarily onproduct quality and price. Although the Company’s competitors for herring andsalmon products are generally small regional food processors and producers,certain of the Company’s competitors may have greater financial and otherresources than the Company and may offer lower prices on comparable products.Since a key competitive factor among producers of cured and smoked salmonproducts and herring products is price, even smaller regional companies may beable to compete effectively against the Company due to reduced shipping costs.While the Company believes its prices are competitive for the quality level ofits products, the Company relies primarily on the recognition of the **Vita** brand name, its reputation for sellingquality products, and the strength of its distribution network. The Company’smain competitors in the herring product and cured and smoked salmon productmarket are Lascco, Mama’s and Nathan’s, among others.  The Company believes it is the only independentcompany with national distribution capabilities in this market.  In the honey products market, the Company’smain competitors are Dutch Gold Honey and Sioux Bee Honey.  The Company recognizes that the saladdressing market is very competitive and there are large companies such as KraftFoods, Inc. in this market.  However, theCompany believes that there is a niche with the salad dressing products theCompany offers.  Most of the saladdressings are based on the Vidalia® Onion as an ingredient.  The Vidalia® Onion ingredient, coupled withthe Company’s proprietary formulations, have created what the Company believesare unique products.

 

**Environmental Matters**

** **

In the ordinary course of the Company’s productionprocess, at the Chicago Illinois facility, spillage and cleaning results in ahigh concentration of sugars and vinegars, which create Biological OxygenDemands (“BODs”) as well as fats, oils and greases (“FOGs”), both of whichenter the waste water treatment system. The Company is assessed a user chargeby the Metropolitan Water Reclamation District (the “District”), based in parton the costs of treating this waste water. If the level of FOGs entering the wastewater treatment system exceeds aspecified level over a specified period of time, the District, followingcertain procedural requirements, has the authority to fine the Company or totemporarily close the Company’s production facility. The District has notinitiated or threatened to initiate proceedings against the Company for violatingspecified levels for FOGs.

 

**Intellectual Property**

** **

Trademarks and trade names are of critical importance toproducers of food products. A recognized trademark or trade name allows theconsumer to immediately identify the source of a product, even if the productis new to the marketplace.

 

# ***Vita Seafood Segment***

# ** **

The Company owns the federally registered trademark “**Vita**” (with accompanying design).  The Company believes that this mark is widelyrecognized, and provides immediate identification of the source of its productsto consumers.  This recognition is thebasis for the Company’s ability to maintain a significant 

 

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share of the national market for refrigerated herringproducts and cured and smoked salmon products. The Company believes the “**Vita**”brand name and trademark has a substantial amount of goodwill associated withit.  The Company believes the **Vita** trademark and its accompanying designare critical to its ability to market new products and to its marketingstrategy in general.

 

The Company has also licensed the “**Elf**” brand name, of herring products, whichthe Company believes has widespread consumer recognition in the Midwest regionof the country. The Company obtained all of Lyon Food Product Inc.’s rights tothe “**Elf**” trademark in connectionwith herring products from Food Marketing Corp. pursuant to a letter agreement(the “Letter Agreement”).  Ownership ofthe “**Elf**” trademark originallybelonged to Food Marketing Corp. and was transferred to SuperValu, Inc., whichaffirmed Lyon Food’s right to use the mark as set forth in the Letter Agreementand consented to the Company’s right to use the trademark in connection withsmoked fish products.  The Letter Agreementis terminable upon six months notice to the Company.  The Company also sells, under a new productline of smoked Atlantic Salmon, “**Atlantic BayClassic.**”  The Company appliedfor and received a registered federal trademark for “**Atlantic Bay Classic**.”

 

***Vita Specialty FoodsSegment***

 

Through its acquisitions of Virginia Honey and Halifax,the Company also acquired the federally registered trademarks “**Virginia Brand**”, “**Oak Hill Farms**” and “**Scorned Woman**”.  In addition, the Company is now producing andmarketing products under various third-party licensing agreements.  The Company believes that the brand names of **Jim Beam®**, **Drambuie®**,**Kahl****úa**®, **Courvoisier**®and therecognition brought to the **Artie BuccoTM**food product line from the **HBO®**television series ***TheSopranos®*** can attract consumer attention in a highly competitivemarketplace.  The Company believes theselicensing agreements can provide opportunities within the Company’s nationalsales and distribution network to add significant sales growth.  The Company plans to explore the use ofadditional brand names through third-party licensing agreements as part of itsoverall strategy.  The Company is notaware of any names or marks, which infringe any of those the Company uses.  Although the Company sells products under anumber of other brand and trade names, such other brand or trade names are notmaterial to the Company’s marketing strategy. The Company also uses variousrecipes and proprietary formulations in its products, which it maintains astrade secrets. The Company does not believe its business is otherwise dependentupon any patent, license, trademark, service mark or copyright.

 

**Product Liability Insurance**

** **

The Company currently maintains product liabilityinsurance for its products with limits of $10,000,000 per occurrence and$11,000,000 in the aggregate, per annum for its operations.  There can be no assurance that the Company’sinsurance will be adequate to cover future product liability claims, or thatthe Company will be able to maintain adequate product liability insurance atcommercially reasonable rates.

 

**Employees**

** **

At December 31, 2004, the Company had 163 full-timeemployees.  Additionally, up to 40workers are hired on a temporary basis each year to meet seasonal productiondemands.  At the Chicago Illinois plant,except for supervisors, all production employees are represented by the Local546 United Food & Commercial Workers, International Union and maintenanceemployees are represented by the Local 399 International Union of OperatingEngineers. The Company has not experienced any work stoppages since the Companywas acquired by the Investors in 1982. The Company considers its relations with its employees to be good.

 

# **GovernmentRegulation**

# ** **

Themanufacture, processing, packaging, storage, distribution and labeling of foodproducts are subject to extensive federal and state laws and regulations.  In the United States, the Company’s businessis subject to regulation by the Food and Drug Administration (the “**FDA**”). Applicable statutes and regulations governing food products include“standards of identity” for the content of specific types of foods, nutritionallabeling and serving size requirements. The Company believes that its current products satisfy, and its newproducts will satisfy, all applicable regulations and that all of theingredients used in its 

 

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products are “generallyrecognized as safe” by the **FDA** forthe intended purposes for which they will be used.

 

VSF’s operations and theproduction facility from which such operations are conducted are under licenseby the Department of Alcohol, Tobacco and Firearms (the “ATF”), subject toextensive federal laws and regulations based on VSF’s use of alcohol as aningredient in a number of its food products. The Company believes that its current products and processes andreporting requirements satisfy all applicable regulations set forth by the ATFand its licensing provisions.

 

**Seasonality**

** **

See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Seasonality;Quarterly Results.”

 

# **Item 2.  Properties.**

# ** **

The Company produces,packages, stores, and distributes its Vita Seafood herring and salmon productsat the Company-owned facility located in Chicago, Illinois.  The Company’s facility is located on 125,600square feet of land. The facility contains approximately 82,200 square feet ofspace, including approximately 65,000 square feet of production space,approximately 13,900 square feet of refrigerated storage space, andapproximately 3,300 square feet of office space.  LaSalle National Bank of Chicago has amortgage on this facility.

 

The Company produces, packages, stores, and distributesits **Vita** and **Virginia Brand** salad dressing products andits **Oak Hill Farms**, **Jim Beam**® Brand, **Drambuie**® Brand, **Artie Bucco**TMBrand and **Scorned Woman** Brand ofproducts ranging from salad dressing, cooking sauces, pasta sauces, hot saucesand beverage products at a leased facility located in Martinsburg, WestVirginia.  The Company’s facility islocated on 8.75 acres of land. The facility contains approximately 68,000square feet of space, including approximately 62,300 square feet of productionspace, and approximately 5,700 square feet of office space.

 

The Company processes, packages, stores, and distributes itsVSF honey products at a leased facility located in Berryville, Virginia.  The Company’s facility is located on 6.25acres of land. The facility contains approximately 24,000 square feet of space,including approximately 23,250 square feet of production space, andapproximately 750 square feet of office space.

 

The Company believes thatits current facilities provide sufficient capacity for its needs.

 

# **Item 3.  LegalProceedings.**

# ** **

The Company, pursuant to the Merger Agreement relating tothe acquisition of Halifax, assigned to Robert J. Budd, the seller of Halifax(“Budd”), any potential rights or exposure associated with an unresolved legalcase brought by Leonard Mountain, Inc. against Halifax prior to its acquisitionby the Company (the “Lawsuit”) relating to an option agreement between theparties.  The Company and its subsidiary,VSF, were named as co-defendants in the case in 2004.  The Company and its counsel believe that thepotential exposure from the case has been properly assigned to Budd and wouldnot be borne by the Company.  Moreover,the Merger Agreement provides that Budd will fully indemnify the Company fromall liability, fees and costs in conjunction with the Lawsuit.

 

On January 7, 2005, theCompany terminated the Employment Agreement (the “Budd Employment Agreement”),made as of November 1, 2002, between Halifax and Robert J. Budd (“Budd”) inconnection with the Company’s acquisition of Halifax.  Pursuant to the Budd Employment Agreement,Budd served as the president of Halifax. The Company alleged a for “cause” termination and, accordingly, filedsuit against Budd which was settled in accordance with the terms and conditionsof the Confidential Settlement Agreement and Mutual Release, entered into onMarch 28, 2005, among the Company, VSF, Virginia Honey, Halifax and Budd (the“Settlement Agreement”).

 

Pursuant to the SettlementAgreement, the Promissory Note, dated November 1, 2002, in the originalprincipal amount of $345,781 issued by Halifax to Budd, payable in a lump sumon April 1, 2006, which was assumed by the Company in connection with itsacquisition of Halifax, was amended to provide for payment in 78 bi-weeklyinstallments of $4,240.78, without interest (the “Budd Note”).  In addition, the 

 

9

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Budd Employment Agreement remained terminatedbut the Company agreed to reinstate Budd as an employee of the Company forthree years at a reduced annual salary of $51,500****plus health insurance coverage and participation in all otherCompany employee benefits programs on the same terms and conditions as otheremployees.  Budd will perform thoseduties specified by Mr. Hess from time to time, but such duties will be limitedso as to permit Budd to assume other responsibilities for other employers.  The Settlement Agreement also provides thatif, by April 30, 2005, the Lawsuit is not fully settled so as to preclude theCompany from having any liability or if the Company is not dismissed withprejudice from the Lawsuit as a defendant, Budd will pay the fees and costsincurred by the Company with respect to the Lawsuit as of the date hereof andprovide the Company with documentation reasonably sufficient to demonstrateBudd’s ability to indemnify the Company from any further expenditures that theCompany may incur in the Lawsuit.  In theevent that any such amounts are not paid by Budd, the Company will be entitledto offset such amounts against any payments due to Budd under the Budd Note.  The Settlement Agreement also amends theNon-Competition and Non-Solicitation Agreement dated November 2, 2002 among theCompany, VSF, Halifax and Budd such that the Agreement terminates on March 1,2010 and Budd may freely engage in any business that is not producing productscompetitive with the products of the Company as of February 28, 2005.  Finally, the Settlement Agreement contains amutual release by the parties.

 

**Item 4.  Submission ofMatters to a Vote of Security Holders.**

 

Nomatters were submitted to a vote of security holders during the fourth quarter2004.

 

10

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**PART II**

** **

### **Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer**

### ** **

**Purchases of Equity Securities.**

 

The Company’s Common Stock began trading on the ChicagoStock Exchange on January 17, 1997, and on the American Stock Exchange on May12, 1997, under the symbol “VSF”.  TheCompany believes that as of March 24, 2005 there were approximately 400beneficial holders of the Company’s Common Stock.

 

The Company has never paid a cash dividend on its CommonStock and currently anticipates that all of its earnings will be retained foruse in the operation and expansion of its business.  The Company’s revolving and term loanfacilities restrict the Company’s ability to pay dividends through requiringapproval from the lender.

 

The following table sets forth the high and low salesprices per share for the Common Stock of the Company for each quarter withinfiscal years 2004 and 2003.

 
| **Quarter**     | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
|            |       |     |       |    |       |
| 1st – 2004 |       | $        | 9.50       |    | $          | 5.55 |   |
| 2nd – 2004 |       | 5.64     |       | 4.37    |       |
| 3rd – 2004 |       | 4.74     |       | 3.10    |       |
| 4th – 2004 |       | 3.95     |       | 3.06    |       |
|            |       |     |       |    |       |
| 1st – 2003 |       | 4.30     |       | 3.86    |       |
| 2nd – 2003 |       | 5.75     |       | 3.99    |       |
| 3rd – 2003 |       | 8.25     |       | 5.00    |       |
| 4th – 2003 |       | 13.91    |       | 5.91    |       |
|                 |            |          |            |         |            |  |  |

 

## **Equity Compensation Plan Information**

 
| **Plan Category**                                          | ** ** | **Number  of securities to  be issued upon exercise  of outstanding options, warrants and rights** | ** ** | **Weighted-average  exercise price of   outstanding options,  warrants and rights** | ** ** | **Number  of securities remaining available for  future issuance under  equity compensation  plans (excluding   securities reflected in   column (a))** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(a)**                                                                                                 | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                                 | ** ** |
| Equity compensation plans approved by security holders     |       | 330,400                                                                                                 |       | $                                                                                   | 4.15       |                                                                                                                                                    | 354,346    |   |
| Equity compensation plans not approved by security holders |       | 0                                                                                                       |       | 0                                                                                   |       | 0                                                                                                                                                       |       |
| Total                                                      |       | 330,400                                                                                                 |       | $                                                                                   | 4.15       |                                                                                                                                                    | 354,346    |   |

 

11

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# **Item 6.  Selected Financial Data.**

 

In thousands, except pershare data

 
| **Year Ended December 31,**                  | ** ** | **2004(3)** | ** ** | **2003**   | ** ** | **2002(2)** | ** ** | **2001(1)** | ** ** | **2000**   | ** ** |
|----------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                   | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Net Sales**                                | ** ** | **$**       | **48,756** | ** ** | $          | 50,930      |       | $           | 42,863     |       | $          | 31,982 |   | $ | 25,127 |   |
| **Operating Income (Loss)**                  | ** ** | **(2,219**  | **)**      | 2,502      |       | 2,915       |       | 2,099       |       | 1,104      |       |
| **Operating Margin**                         | ** ** | **(4.60**   | **)%**     | 4.90       | %          | 6.80        | %          | 6.56        | %          | 4.39       | %          |
| **Net Income (Loss)**                        | ** ** | **(2,717**  | **)**      | 1,048      |       | 1,446       |       | 1,156       |       | 722        |       |
| **Basic Earnings (Loss) per Share**          | ** ** | **(0.71**   | **)**      | 0.28       |       | 0.39        |       | 0.31        |       | 0.19       |       |
| **Diluted Earnings (Loss) per Share**        | ** ** | **(0.71**   | **)**      | 0.27       |       | 0.38        |       | 0.31        |       | 0.19       |       |
| **Cash**                                     | ** ** | **56**      | ** ** | 125        |       | 46          |       | 529         |       | 14         |       |
| **Total Assets**                             | ** ** | **24,923**  | ** ** | 29,084     |       | 26,542      |       | 20,068      |       | 12,189     |       |
| **Long-Term Debt (less current Maturities)** | ** ** | **15,498**  | ** ** | 17,685     |       | 14,416      |       | 7,112       |       | 5,593      |       |
| **Shareholders’ Equity**                | ** ** | **4,564**   | ** ** | 7,192      |       | 5,993       |       | 4,430       |       | 3,267      |       |
|                                              |            |             |            |            |            |             |            |             |            |            |            |  |  |  |  |  |

 

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(1)     Includesthe results of Virginia Honey since the effective acquisition date of July 1,2001.

(2)     Includes the results ofHalifax since the effective acquisition date of November 1, 2002.

(3)     Operating results for 2004include a $2,314,000 goodwill impairment charge.

 

# **Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operation.**

# ** **

**Comparison of Year Ended December 31, 2004 and Year EndedDecember 31, 2003**

*** ***

***Revenues.***  Net sales for the year ended December 31,2004 were $48,756,000 compared to $50,930,000 for 2003, a decrease of$2,174,000 or 4.3%.  Of this decrease,$1,931,000 is attributable to Vita Specialty Foods representing a reduction of8.1% and $243,000 is attributable to Vita Seafood, representing a decrease of0.9%.  The decrease for the VitaSpecialty Foods business unit is a reflection, in part, of the sales of sauceproducts, which were down $1,376,000. Sales decreases were also reflected in the business unit’s honey productline of $977,000 and resale products of $407,000.  All decreases were primarily due to certain2003 sales that unexpectedly proved to be one-time transactions and thus werenot repeated in 2004.  In addition,returns and allowances increased by $353,000, primarily due to augmented salespromotions.  The decrease in sales ofcertain Vita Specialty Foods product lines was partially offset by a $1,182,000increase in the line of salad dressing products due to increased customerdemand.  Added to the decrease from VitaSpecialty Foods was a decline of $243,000, or 0.9% for the Vita seafoodbusiness, which was primarily the result of a $592,000 decrease in gross salesof salmon products and a $146,000 decrease in specialty products.  The salmon sales decrease is primarily theresult of Vita seafood’s largest customer discontinuing sales of a Vita salmonproduct starting in the fourth quarter of 2003. The decrease in sales of certain Vita seafood product lines waspartially offset by a $488,000 increase in the herring product line due toincreased customer demand.

 

***Gross Margin.***  Gross margin for the year ended December 31,2004 was $14,348,000 compared to $15,831,000 for 2003, a decrease of $1,483,000or 9.4%.  The Vita seafood businessaccounted for $771,000 of this decrease and $712,000 of the decline wasattributable to the Vita Specialty Foods business.  As a percentage of net sales, gross margintotaled 29.4%, which was 1.7 percentage points below the 31.1% prior yearresult.  Gross margin for the VitaSpecialty Foods business, as a percentage of net sales was 34.1%, compared tothe 34.3% prior year result, as volume efficiencies subsided.  Vita seafood’s gross margin, as a percentageof net sales, decreased to 25.6% in 2004 from 28.2% in 2003; this was primarilydue to the higher costs of raw salmon and higher factory expenses.

 

12

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***Operating Expenses.***  Selling, marketing, distribution and administrativeexpenses for the year ended December 31, 2004 were $14,253,000 compared to$13,328,000 for 2003, an increase of $925,000 or 6.9%.  As a percentage of net sales, these expensesincreased to 29.2% from 26.2% for 2003. Vita Specialty Foods accounted for $601,000 of the increase with theremaining $324,000 attributable to Vita seafood.  Of the total increase, $1,233,000 wasattributable to selling, marketing and distribution, reflecting higher freightout and other distribution related expenses of $687,000, higher salespersons’compensation of $357,000, largely as a result of hiring additional sales staff,and higher commission and royalties of $224,000.  The increase in selling, marketing anddistribution was partially offset by a $308,000 decrease in administrativespending.  This improvement inadministrative spending was largely a result of savings realized by combiningthe administrative function previously performed in Atlanta into theMartinsburg office.

 

***Goodwill Impairment Charge.***  During the fourth quarters of 2003 and 2002,the Company completed its annual assessment of impairment regarding thegoodwill recorded as a result of the Virginia Honey acquisition ($6,004,000)and the Halifax acquisition ($2,307,000). Those assessments, supported by independent appraisals of the fair valueof VSF, did not identify any impairment. However, the 2004 independent appraisal – made using customary valuationmethodologies including discounted cash flows and fundamental analysis, didreveal impairment issues.  The revisedappraisal reflects a decreased fair value of VSF, principally caused by thedecline in operating income of VSF during 2004. That decline was primarily a result of a substantial decline in thesales of Halifax products – which were down $1,600,000 or 21% in 2004.  Based on the appraised value of VSF, theresulting impairment charge of approximately $2,314,000 was recorded in thefourth quarter of 2004.

 

***Interest Expense.***  Interestexpense for the year ended December 31, 2004 was $767,000 compared to $753,000for the same period in 2003, an increase of $14,000 or 1.9%.  This increase was primarily attributable toadditional borrowing as detailed in Note 4 of “Item 8. Financial Statements”,partially offset by lower effective interest rates.

 

***Income Taxes.***  A tax credit for the year ended December 31,2004 of $269,000 or 40% of pretax loss, excluding the goodwill impairment, wasrecognized, compared to an expense of $702,000 or 40% of pretax income during2003.

 

***Net Income.***  As a result of the operating resultsdescribed above, net loss for the year ended December 31, 2004 was $(2,717,000)or $(0.71) per share on both a basic and diluted per share basis; this comparesto net income of $1,048,000 or $0.28 per basic share and $0.27 per diluted sharefor 2003, a 359% decrease totaling $3,765,000 or $(0.99) per share, on a basicand $(0.98) on a diluted basis.

 

**Comparison of Year Ended December 31, 2003 and Year EndedDecember 31, 2002**

*** ***

***Revenues.***  Net sales for the year ended December 31,2003 were $50,930,000 compared to $42,863,000 for 2002, an increase of$8,067,000 or 18.8%.  This increase isattributable to an increase at Vita Specialty Foods of $8,947,000 or 60.1%,which is largely due to the first full year inclusion of sales resulting fromthe Halifax business acquisition.  Thislarge increase was reflected in all the Vita Specialty Foods segment’s majorproduct lines including salad dressings/marinades ($2,898,000); honey/molasses($2,146,000); hot filled sauces and resale items ($4,674,000); partially offsetby higher returns and allowances of $771,000. This increase from Vita Specialty Foods was partially offset by a salesdecline of $880,000 or 3.1% for the Vita seafood business, which was primarilythe result of a 4.9% decrease in gross sales of salmon products.  This salmon sales decrease was primarilyattributable to one specific product. During the third quarter, Vita seafood’s largest customer discontinued aVita salmon product that resulted in a material impact to the Vita seafoodresults.

 

*** Gross Margin.***  Gross margin for the year ended December 31,2003 was $15,831,000 compared to $13,332,000 for 2002, an increase of$2,499,000 or 18.7%.  This increase isattributable to an increase at Vita Specialty Food of $3,599,000 or 79.2% witha decline of $1,100,000 or 12.5% attributable to Vita seafood.   As a percentage of net sales, gross margintotaled 31.1%, which equaled the prior year result.  The Vita Specialty Foods gross margin as apercentage of net sales was 34.3%, up from the 30.8% prior year result due tolower raw honey cost and the volume efficiencies resulting from the highersales.  Vita seafood’s gross margin as apercentage of net sales decreased to 28.2% in 2003 from 31.3% in 2002, primarilydue to the higher cost of raw salmon and due to $210,000 of reduced grossprofit, after tax, as a direct result of the product discontinuation describedin the above section.

 

13

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***Operating Expenses.***  Selling, marketing, distribution and administrativeexpenses for the year ended December 31, 2003 were $13,328,000 compared to$10,417,000 for 2002, an increase of $2,911,000 or 27.9%.  As a percentage of net sales, these expensesincreased to 26.2% from 24.3% for 2002. Vita Specialty Foods accounted for $2,737,000 of the increase with theremaining $174,000 attributable to Vita seafood.  Of the total increase, $2,255,000 wasattributable to selling and marketing reflecting higher brokers’ commissionsand royalties of $405,000, higher salespersons’ compensation of $656,000,largely as a result of hiring additional sales staff, travel and corporateshows of $321,000 along with higher advertising and promotion expenses of$469,000 and higher freight and distribution of $404,000.  The remaining $656,000 of the increasereflects higher administrative spending, primarily for employment relatedexpenses of $254,000; professional expenses of $132,000 and higher supplies,rent and utilities associated with the addition of an office in Atlantatotaling $185,000.

 

***Interest Expense.***  Interestexpense for the year ended December 31, 2003 was $752,000 compared to $602,000for 2002, an increase of $150,000 or 24.9%. This increase was primarily attributable to the additional borrowings asdetailed in Note 4 of “Item 8. Financial Statements”, partially offset by lowereffective interest rates.

 

***Income Taxes.***  A tax expense for the year ended December 31,2003 of $702,000 or 40% of pretax income was recognized, compared to $867,000or 38% of pretax income during 2002.  Themajority of this tax expense is deferred.

 

***Net Income****. *As a result of the operating results describedabove, net income for the year ended December 31, 2003 was $1,048,000 or $0.28per share on a basic per share basis and $0.27 per share on a diluted basis;this compares to net income of $1,446,000 or $0.39 per basic share and $0.38per diluted share for 2002, a 27.5% decrease totaling  $398,000 or $0.11 per share, on both a basicand diluted basis.

 

### **Seasonality; Quarterly Results**

### ** **

The following tables set forth net sales and net income(loss) information for each of the Company’s last 20 quarters.  This unaudited information has been preparedon the same basis as the annual information presented elsewhere in this Form10-K and, in the opinion of management, reflects all adjustments (consisting ofnormal recurring entries) necessary for a fair presentation of the informationpresented.  Quarterly data are notnecessarily indicative of any future period results.

 

***Net Sales Information***
| ** ** | ** ** | **Net  Sales**       | ** ** |
|------------|------------|----------------------|------------|
| **Year**   | ** ** | **First****Quarter** | ** ** | **Second****Quarter** | ** ** | **Third****Quarter** | ** ** | **Fourth****Quarter** | ** ** |
| ** ** | ** ** | **(in  thousands)**  | ** ** |
| 2000       |       | $                    | 6,218      |   | $ | 4,757 |   | $ | 5,434 |   | $ | 8,718 |   |
| 2001       |       | 6,220                |       | 5,027 |   | 8,477 | (1) | 12,259 |   |
| 2002       |       | 10,067               |       | 8,785 |   | 9,292 |   | 14,719 | (2) |
| 2003       |       | 12,957               |       | 12,855 |   | 11,651 |   | 13,467 |   |
| 2004       |       | 12,612               |       | 10,658 |   | 11,575 |   | 13,911 |   |
|            |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Virginia Honey was acquired on July 1,2001.  Results after this date includethe effect of this acquisition.

 

(2)          Halifax was acquired on November 1,2002.   Results after this date includethe effect of this acquisition.

 

***Net Income Information***
| ** ** | ** ** | **Net  Income (Loss)** | ** ** |
|------------|------------|------------------------|------------|
| **Year**   | ** ** | **First  Quarter**     | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** ** | ** ** | **(in  thousands)**    | ** ** |
| 2000       |       | 44                     |       | (110 | ) | (89 | ) | 878 |   |
| 2001       |       | 59                     |       | (88 | ) | 295 | (1) | 891 |   |
| 2002       |       | 304                    |       | 132 |   | 208 |   | 802 | (2) |
| 2003       |       | 307                    |       | 320 |   | 145 |   | 276 |   |
| 2004       |       | (38                    | )          | (340 | ) | (276 | ) | (2,062 | )(3) |

 

14

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(1)          Virginia Honey was acquired on July 1,2001.  Results after this date includethe effect of this acquisition.

 

(2)          Halifax was acquired on November 1,2002.   Results after this date includethe effect of this acquisition.

 

(3)          The fourth quarter of 2004 includes a chargeof $2,314,000 representing goodwill impairment. See Note 1 of “Item 8. Financial Statements” for further description ofgoodwill impairment.

 

The Company has in the past and expects in the future toexperience significant fluctuation in quarterly operating results.  As the tables indicate, historically, theCompany’s net sales and net income, absent impairment charges, have typicallybeen the highest in the fourth quarter of each year.  The Company’s business is seasonal becauseits sales volume increases significantly during the Christmas holiday seasonand, to a lesser extent, during other holidays in the fall and spring andperiods of colder weather in certain sections of the country.  Certain of these holidays, includingPassover, Easter, Yom Kippur and Rosh Hashanah, may fall in different quartersin different years and could cause the quarterly operating results to fluctuatein the future. However, the Company believes that through the Vita SpecialtyFood acquisitions and the introduction of new non-seasonal or counter-seasonalproducts, it can, over time, reduce the variability in its quarterly operatingresults by increasing sales during the second and third quarters of each year.

 

# **Liquidityand Capital Resources**

# ** **

# ***Working Capital***

# ** **

At December 31, 2004, the Company had $7,766,000 inworking capital, compared to $10,510,000 at December 31, 2003, a decrease of$2,744,000 or 26%.  As a result, thecurrent ratio fell to 2.6 to 1.0 from 3.5 to 1.0.  Of this decrease, $1,743,000 is attributed toa combined decrease in accounts receivable, cash and inventories; another$832,000 is attributable to the reclassification to current status of theadditional amount payable for the Virginia Honey acquisition, and an additional$348,000 was the result of a net reduction in current income tax assets.  The decrease in these working capital items waspartially offset by a $178,000 decrease in accounts payable and other currentliabilities.  Vita Specialty Foodsaccounted for substantially all of the decrease in accounts receivable andinventories as lower year-end sales resulted in lower open customer balancesand reduced inventory-stocking requirements. The reclassification of the Virginia Honey acquisition balance reflectsthe scheduled April, 2005 payment date. The reduction of the current income tax asset is a reflection of therefunds received during 2004.

 

# ***Third Party Financing***

# ** **

At December 31, 2004, the Company had $56,000 in cash, arevolving credit facility of $8,500,000 and term facilities totaling$9,500,000, consisting of a $6,500,000 facility that represents the Company’slong term borrowing and a six year $3,000,000 facility that is not currentlybeing utilized.  The revolving loanfacility matures January 31, 2006 and the term loan is payable in monthlyinstallments 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 facilitiesat December 31, 2004 were $7,678,000 and $5,636,000, respectively.  According to the terms of the loan agreement,the interest rates on these facilities are subject to adjustment at certainpredetermined dates based upon the Funded Debt to EBITDA ratio as each suchterm is defined in the loan agreement. The loan agreement contains customary representations, warranties, andcovenants; at December 31, 2004, the Company was in compliance with these covenants.  See Note 4 of “Item 8.” Financial Statements.

 

# ***Amounts Owed Pursuant to Acquisition***

# ** **

Pursuantto the Company’s acquisitions of Virginia Honey and Halifax in 2001 and 2002,respectively, the previous owners of those businesses, both of whom are employeesand one of whom is a director of the Company, are subject to earn outprovisions that may result in additional proceeds paid by the Company for theacquired businesses.  As amended, theearn out provisions for Terry Hess, the previous owner of Virginia Honey, haveresulted in an additional amount due to Mr. Hess of approximately $832,000 asof December 31, 2004 with an interest rate of 4.2% payable in April 2005.  This additional payment is based on theoperating results of Virginia Honey for the period from January 1, 2001 toDecember 31, 2002.  Potential remainingearn out payments to Mr. Hess will be based on the earnings of VSF, as computedby a predefined allocation formula, for two separate periods – January 1, 2003to December 31, 2005 and January 1, 2006 to December 31, 2007.  Should VSF maintain its current profitabilitylevels throughout these periods, management estimates that additional paymentswith a net present value as of December 31, 2004 of approximately $1,000,000would be 

 

15

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dueto Mr. Hess.  Any future payments will berecorded as additional goodwill, and be subject to impairment analysis, whenand if such payments are finally determined at the end of each of the periodsdescribed above.

 

Similarly, Budd, the previous owner of Halifax, had twoseparate earn out periods — January 1, 2003 to December 31, 2005 and January 1,2006 to December 31, 2007.  Potentialremaining earn out payments to Budd were to be based on earnings of VSF, ascomputed by a pre-defined allocation formula. On January 7,2005, the Company terminated the Budd Employment Agreement, made as of November1, 2002 between Halifax and Budd in connection with the Company’s acquisition of Halifax.   The Company alleged a for “cause”termination as defined in the Budd Employment Agreement, and, in connectiontherewith, filed suit against Budd which was settled in accordance with theterms and conditions of the Settlement Agreement entered into on March 28,2005.  Pursuant to the SettlementAgreement, the remaining potential earn out payments to Mr. Budd have beeneliminated entirely.  See Note 2 to “Item 8. Financial Statements.”

 

# ***Contractual Obligations***

# ** **

The aggregate amount of long-term debt maturing by yearis presented in the table below.

 

During 2004, the Company incurred rental expense ofapproximately $596,000, primarily due to operating leases for the facilities inMartinsburg, West Virginia; Berryville, Virginia and Atlanta, Georgia and forequipment at the herring and salmon product processing facility in Chicago,Illinois.  Future commitments under alloperating leases are presented in the table below.

 

In connection with the Halifax acquisition, the Companyacquired the licensing rights to various brand names.  Along with these rights, the Company hasassumed the commitment to make minimum royalty payments under the terms ofthese licensing agreements.  Theseagreements fully expire in 2006 and the commitments are presented in the tablebelow.

 
| ** **                        | ** ** | **Payments  due by period  (in thousands)** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| **Contractual Obligations**       | ** ** | **Total**                                   | ** ** | **Less  than  1 year** | ** ** | **1-3   years** | ** ** | **3-5   years** | ** ** | **More   than 5   years** | ** ** |
| **Long-Term Debt**                | ** ** | **$**                                       | **17,869** | ** ** | **$** | **1,871** | ** ** | **$** | **9,997** | ** ** | **$** | **6,001** | ** ** | **$** | **—** | ** ** |
| **Operating Leases**              | ** ** | **6,534**                                   | ** ** | **672** | ** ** | **1,167** | ** ** | **929** | ** ** | **3,766** | ** ** |
| **Licensing Royalties**           | ** ** | **428**                                     | ** ** | **418** | ** ** | **10** | ** ** | **—** | ** ** | **—** | ** ** |
| **Total Contractual Obligations** | ** ** | **$**                                       | **24,831** | ** ** | **$** | **2,961** | ** ** | **$** | **11,174** | ** ** | **$** | **6,930** | ** ** | **$** | **3,766** | ** ** |
|                                   |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The ratio of long-term debt-to-total capitalization was71% at both December 31, 2004 and December 31, 2003.  The Company believes its financial resourcesare adequate to fund its needs for at least the next twelve months.

 

16

----

 

# ***Cash Flow***

 

***Cash flows fromoperating activities.*** Net cash provided by operating activities was$2,420,000 for the year ended December 31, 2004, compared to net cash used of$1,388,000 for the year ended December 31, 2003.  The $2,420,000 of operating cash provided wasprimarily a reflection of $1,426,000 decrease in accounts receivable due tolower sales especially of the Vita Specialty Foods products; $580,000 ofnon-cash asset impairment and depreciation charges less the net loss; adecrease in income tax receivable of $519,000 and a $249,000 decrease ininventories.  The cash provided by theseitems was partially offset by a $105,000 reduction in accounts payable andaccrued expenses.

 

During 2003, $1,248,000 of cash was used to increaseaccounts receivable, and another $529,000 used to increase inventories,$1,785,000 was used to lower accounts payable and accruals and $145,000 forhigher prepaid expenses.  These balancesheet uses of operating cash were partially offset by operating cash sourcestotaling $2,319,000 and representing net income and depreciation plus a netincrease in income tax liabilities.

 

***Cash flows from investingactivities***. Net cash used in investing activities was $1,196,000and $1,173,000 for the years ended December 31, 2004 and 2003, respectively.During both years, this cash was used primarily for capital additions totaling$1,178,000 during 2004 and $1,136,000 during 2003.  The capital expenditures for both yearsprimarily reflect investment in production equipment at the Chicago and theMartinsburg facilities; similar usages are anticipated for the year ending December31, 2005.

 

***Cash flows from financingactivities.***Net cash used by financing activities was $1,293,000 forthe year ended December 31, 2004, compared to cash provided of $2,640,000 forthe year ended December 31, 2003.  Themost recent year activity includes $139,000 of cash provided from stock andstock option proceeds net of $50,000 used to purchases treasury stock plus$1,382,000 used to pay down bank debt. There was net bank borrowing required during 2003 to cover the cash usedin the operating and investing activities described above.

 

**Inflation**

** **

Inflation has historically not had a material effect onthe Company’s operations.

 

**Impact of Recently Issued Accounting Standards**

** **

In January 2003, FASB issued Interpretation No. 46, Consolidation ofVariable Interest Entities (“FIN 46”). In general, a variable interest entityis a corporation, partnership, trust or any other legal structure used forbusiness purposes that either (a) does not have equity investors with votingrights or (b) has equity investors that do not provide significant financialresources for the entity to support its activities. FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. The consolidation requirements of FIN 46 apply immediately tovariable interest entities created after January 31, 2003.  In December 2003, the FASB issued FIN 46R,which amended FIN 46 and added additional guidance and interpretation.  The Company adopted the provisions of FIN 46and FIN 46R in 2003 and such adoption did not have a material impact on its consolidatedfinancial statements since it currently has no variable interest entities.

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards 123(revised 2004) “Share-Based Payment” (“SFAS 123R”).  Among other things, SFAS 123R requiresexpensing the fair value of stock options, which was previously optional.  SFAS 123R is effective as of July 1,2005.  The Company expects the impact ofadopting SFAS 123R will be similar to the pro forma impacts as described inNote 2 “Stock Options”.

 

**CriticalAccounting Policies and Estimates**

 

The Company’s financialstatements reflect the selection and application of accounting policies thatrequire management to make significant estimates and assumptions.  The Company believes that the following aresome of the more critical judgment areas in the application of its accountingpolicies that currently affect the Company’s financial condition and results ofoperations.

 

17

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Preparation of the consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions affecting the reported amounts of assets, liabilities, revenues andexpenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates, includingthose related to revenues, returns, bad debts, income taxes and contingenciesand litigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

 

*RevenueRecognition and Merchandise Returns*

 

# Revenue is recognized upon the passing of title to the customers, whichoccurs upon shipment of product to customers in fulfillment of customerorders.  In accordance with industrypractices, inventory is sold to customers often with the right to return or disposeif the merchandise is not resold prior to the expiration of its shelflife.  In order to support the Company’sproducts, various marketing programs are offered to customers, which reimbursethem for a portion, or all of their promotional activities related to theCompany’s products.  The Companyregularly reviews and revises, when it deems necessary, estimates of costs tothe Company for these marketing and merchandising programs based on estimatesof what has been incurred by customers. Actual costs incurred by the Company may differ significantly if factorssuch as the level and success of the customers’ programs or other conditionsdiffer from expectations.  Sales arereduced by a provision for estimated future returns, disposals and promotionalexpense.

# ** **

*Income TaxAssets and Liabilities*

 

TheCompany recognizes deferred income tax assets and liabilities for the expectedfuture tax consequences of temporary differences between the tax basis andfinancial reporting basis of certain assets and liabilities and certain incometax credit carryforwards.  In estimatingfuture tax consequences, the Company generally considers all expected futureevents other than enactments of changes in tax laws or rates.  A valuation reserve is recognized based onthe evidence available; if it is more likely than not that some portion or allof the deferred income tax asset will not be realized.  See Note 5 of “Item 8. Financial Statements”for a further description of income taxes.

 

18

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*Acquisitionand Exit Costs*

 

Shortly after theacquisition of Halifax, the Company’s management finalized plans to restructurethe operations of pre-acquisition Halifax to eliminate redundant facilities andheadcount, reduce cost structure and better align the operating expenses with existingeconomic conditions.  Consequently, in2003, the Company recorded $724,503 of costs relating to activities ofpre-acquisition Halifax such as severance and related benefits, the cost ofabandoned leasehold improvements, the cost to vacate the leased facilities andother pre-acquisition liabilities.  Thesecosts were accounted for under EITF 95-3, “Recognition of Liabilities inConnection with Purchase of Business Combinations”.  These costs were recognized as a liabilityassumed in the acquisition and included in the allocation of the purchaseprice.  See Note 2 of “Item 8. FinancialStatements” for a further description of acquisition and exit costs.

 

*GoodwillCarrying Value*

 

The Company assesses theimpairment of goodwill, at least, whenever events or changes in circumstancesindicate 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 toexpected historical or projected future operating results;

•                  Significant changes in the manner of theCompany’s use of the acquired assets or the strategy for the Company’s overallbusiness;

•                  Significant negative industry or economictrends;

•                  Significant decline in the Company’s stockprice for a sustained period; and

•                  The Company’s market capitalization relativeto net book value.

 

When the Company determinesthat the carrying value of goodwill may not be recoverable based upon theexistence of one or more of the above indicators of impairment, the Companywill review for impairment under the provisions of SFAS 142.

 

The provisions of SFAS 142also required an annual impairment test for goodwill.  See Note 1 of “Item 8. Financial Statements”for a further description of the annual goodwill impairment assessment.

 

# **Item7A. Quantitative and Qualitative Disclosures About Market Risk.**

# ** **

# The Company is exposed tointerest rate fluctuations, primarily as a result of its $18 million creditagreement (the “Credit Agreement”) with interest rates subject to marketfluctuations.  The Company does notcurrently use derivative instruments to alter the interest rate characteristicsof any of its debt.  The Credit Agreementincludes a revolving line of credit with a bank, which at December 31, 2004bore interest at the prime rate minus 0.50% resulting in a 4.75% rate for aportion of the debt and at LIBOR plus 2.25% resulting in a 4.18% rate foranother portion.  This rate remainsconstant until December 31, 2005.  Onthat date, the interest rate may be adjusted based upon certain financialcovenants and may range from prime minus 0.50% to LIBOR plus 1.75% or, to LIBORplus 2.25%.  In addition, the CreditAgreement includes two term loan facilities, one of which is active, and whichat December 31, 2004 bore interest at the prime rate minus 0.50% resulting in a4.75% rate for this debt.  On December31, 2005, the interest rate may be adjusted based on certain financialcovenants, and may range from prime minus 0.50% to LIBOR plus 2.00% or, to LIBORplus 2.50%.  A 10% fluctuation ininterest rates would not have a material impact on the Company’s financialstatements.

# ** **

**Forward-Looking Statements**

** **

This annual report on Form 10-K, including “Descriptionof Business,” “Description of Property,” “Legal Proceedings” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,contains forward-looking statements within the meaning of the “safe-harbor”provisions of the Private Securities Litigation Reform Act of 1995.  Such statements are based on management’scurrent expectations and are subject to a number of factors and uncertaintieswhich could cause actual results to differ materially from those described inthe forward-looking statements.  Suchfactors and uncertainties include: (i) the impact of the level of the Company’sindebtedness; (ii) restrictive covenants contained in the Company’s variousdebt documents; (iii) general economic conditions and conditions in theretail environment; (iv) the Company’s dependence on a few large customers; (v)relationships with retailers; (vi) price fluctuations in the raw materials usedby the Company, particularly herring and salmon; (vii) whether the Company willbe capable of increasing sales of Halifax products; (viii) selling its Vitaseafood products for higher prices to take account of increased costs incurredby the Company; (ix) competitive conditions in the 

 

19

----

 

Company’smarkets; (x) the seasonal nature of the Company’s business; (xi) theCompany’s ability to execute its acquisition strategy; (xii) fluctuations inthe stock market; (xiii) the extent to which the Company is able to retain andattract key personnel; (xiv) relationships with key vendors; (xv) consolidationof the Company’s supplier base; (xvi) successful integration of Virginia Honeyand Halifax and (xvii) the impact of federal, state and local environmentalrequirements (including the impact of current or future environmental claimsagainst the Company).  As a result, theCompany’s operating results may fluctuate, especially when measured on aquarterly basis.

 

The Company’s business strategy contemplates that theCompany will pursue potential acquisitions. The Company currently has no agreements or understandings with respectto any acquisitions and there can be no assurance that the Company will besuccessful in pursuing other potential acquisitions.  However, the costs associated with thisstrategy, means of financing any potential acquisitions, and consummation andintegration of any potential acquisitions could significantly impact theCompany’s financial and operating performance.

 

20

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**Item 8.Financial Statements and Supplementary Data.**

 

Listed below are the financial statements included inthis part of the Annual Report on Form 10-K:

 

 
| (a)    |   | Consolidated  Financial Statements |                                                                                                       | **Page No**. |   |
|--------|--------|------------------------------------|------------------------------------------------------------------------------------------------------------|--------------|--------|
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Report of Independent Registered Public Accounting  Firm                                                   |         | 22     |
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Consolidated Balance Sheets at December 31,  2004 and December 31, 2003                                    |         | 23     |
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Consolidated Statements of Operations for  the years ended December 31, 2004, 2003 and 2002                |         | 24     |
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Consolidated Statements of Shareholders’ Equity for the years ended  December 31, 2004, 2003 and 2002 |         | 24     |
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Consolidated  Statements of Cash Flow for the years ended December 31, 2004, 2003 and 2002                 |         | 25     |
|   |   |                               |                                                                                                       |         |   |
|   |   |                               | Notes to Consolidated  Financial Statements                                                                |         | 26-41  |
|        |        |                                    |                                                                                                            |              |        |  |

 

21

----

 

**Report of Indep****endentRegistered Public Accounting Firm**

 

To the Board of Directors of

Vita Food Products, Inc.

Chicago, Illinois

 

We have audited the accompanying consolidated balancesheets of Vita Food Products, Inc. and Subsidiary, as of December 31, 2004 and2003, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended December31, 2004.  These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal controls over financial reporting.  Our audits included consideration of internalcontrols over financial reporting as a basis for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlsover financial reporting.  Accordingly,we express no such opinion.  An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall presentation of the financial statements.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Vita Food Products, Inc. and Subsidiary, at December 31, 2004 and2003, and the results of their operations and cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
|   | /s/ BDO Seidman, LLP |
|--------|----------------------|

 

 

Chicago, Illinois

February 11, 2005

 

22

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| **Consolidated Balance Sheets** | ** ** | **Vita Food Products, Inc.** |               |
|---------------------------------|------------|------------------------------|--------------------|
|                            | ** ** | ** **                   | **And Subsidiary** |
|                                 |            |                              |                    |  |  |  |

 
| **December 31,**                                                                                                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                          |       |       |       |       |       |
| Current Assets                                                                                                                      |       |       |       |       |       |
| Cash                                                                                                                                |       | $          | 55,968     |       | $          | 125,457 |   |
| Accounts receivable-trade, net of allowance for discounts, returns,  and doubtful accounts of $569,000 in 2004 and $301,000 in 2003 |       | 5,118,517  |       | 6,544,521  |       |
| Inventories                                                                                                                         |       |       |       |       |       |
| Raw material and supplies                                                                                                           |       | 4,342,754  |       | 5,007,237  |       |
| Work in process                                                                                                                     |       | 235,504    |       | 235,862    |       |
| Finished goods                                                                                                                      |       | 2,390,924  |       | 1,975,413  |       |
| Prepaid expenses and other current assets                                                                                           |       | 447,602    |       | 481,369    |       |
| Income taxes receivable                                                                                                             |       | 35,441     |       | 347,684    |       |
| Total Current Assets                                                                                                                |       | 12,626,710 |       | 14,717,543 |       |
|                                                                                                                                |       |       |       |       |       |
| Property, Plant and Equipment                                                                                                       |       |       |       |       |       |
| Land                                                                                                                                |       | 35,000     |       | 35,000     |       |
| Building and improvements                                                                                                           |       | 2,626,097  |       | 2,489,828  |       |
| Leasehold improvements                                                                                                              |       | 425,336    |       | 308,646    |       |
| Machinery and office equipment                                                                                                      |       | 10,636,716 |       | 9,733,439  |       |
|                                                                                                                                |       | 13,723,149 |       | 12,566,913 |       |
| Less accumulated depreciation and amortization                                                                                      |       | (7,797,581 | )          | (6,864,222 | )          |
| Net Property, Plant and Equipment                                                                                                   |       | 5,925,568  |       | 5,702,691  |       |
|                                                                                                                                |       |       |       |       |       |
| Goodwill                                                                                                                            |       | 5,996,705  |       | 8,310,659  |       |
| Other Assets                                                                                                                        |       | 373,695    |       | 353,461    |       |
|                                                                                                                                |       |       |       |       |       |
| Total Assets                                                                                                                        |       | $          | 24,922,678 |       | $          | 29,084,354 |   |
|                                                                                                                                     |            |            |            |            |            |  |  |  |  |

 
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Current Liabilities                                                                                                                                                                                                         |       |       |       |       |       |
| Current maturities of long-term obligations                                                                                                                                                                                 |       | $          | 1,619,430  |       | $          | 780,390 |   |
| Accounts payable                                                                                                                                                                                                            |       | 2,278,696  |       | 2,299,580  |       |
| Accrued expenses                                                                                                                                                                                                            |       | 817,919    |       | 900,891    |       |
| Deferred income taxes                                                                                                                                                                                                       |       | 144,924    |       | 226,304    |       |
| Total Current Liabilities                                                                                                                                                                                                   |       | 4,860,969  |       | 4,207,165  |       |
|                                                                                                                                                                                                                        |       |       |       |       |       |
| Long-term Obligations, Less Current Maturities                                                                                                                                                                              |       | 15,497,900 |       | 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 and outstanding 3,865,254 shares in 2004  and 3,819,116 shares in 2003 |       | 38,652     |       | 38,191     |       |
| Treasury stock, at cost 6,516 shares                                                                                                                                                                                        |       | (50,043    | )          | —     |       |
| Additional paid-in capital                                                                                                                                                                                                  |       | 3,785,596  |       | 3,647,262  |       |
| Retained earnings                                                                                                                                                                                                           |       | 789,604    |       | 3,506,805  |       |
| Total Shareholders’ Equity                                                                                                                                                                                             |       | 4,563,809  |       | 7,192,258  |       |
|                                                                                                                                                                                                                        |       |       |       |       |       |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                             |       | $          | 24,922,678 |       | $          | 29,084,354 |   |
|                                                                                                                                                                                                                             |            |            |            |            |            |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

23

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| **Consolidated Statements of  Operations** | ** ** | **Vita Food Products, Inc.** |               |
|--------------------------------------------|------------|------------------------------|--------------------|
|                                       | ** ** | ** **                   | **And Subsidiary** |
|                                            |            |                              |                    |  |  |  |

 
| **Year Ended December 31,**                       | ** ** | **2004**       | ** **     | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** **     | ** **     | ** ** | ** ** | ** ** | ** ** |
| Net Sales                                         | ** ** | **$**          | **48,756,128** |       | $          | 50,930,474 |       | $ | 42,862,746 |   |
| Cost of Goods Sold                                | ** ** | **34,408,406** |           | 35,099,833 |       | 29,531,009 |       |
| Gross Margin                                      | ** ** | **14,347,722** |           | 15,830,641 |       | 13,331,737 |       |
|                                              |       |           |           |       |       |       |       |
| Selling and Administrative Expenses               |       |           |           |       |       |       |       |
| Selling, Marketing & Distribution             | ** ** | **9,971,794**  |           | 8,738,409  |       | 6,483,715  |       |
| Administrative                                    | ** ** | **4,281,352**  |           | 4,590,003  |       | 3,933,045  |       |
| Goodwill Impairment Charge                        | ** ** | **2,313,954**  |           | —     |       | —     |       |
| Total Selling and Administrative Expenses         | ** ** | **16,567,100** |           | 13,328,412 |       | 10,416,760 |       |
|                                              |       |           |           |       |       |       |       |
| Operating (Loss) Profit                           | ** ** | **(2,219,378** | **)**          | 2,502,229  |       | 2,914,977  |       |
| Interest Income                                   | ** ** | **—**     |           | (399       | )          | (441       | )          |
| Interest Expense                                  | ** ** | **766,823**    |           | 752,574    |       | 602,183    |       |
| (Loss) Income Before Income Tax (Benefit) Expense | ** ** | **(2,986,201** | **)**          | 1,750,054  |       | 2,313,235  |       |
| Income Tax (Benefit) Expense                      | ** ** | **(269,000**   | **)**          | 702,000    |       | 867,000    |       |
| Net (Loss) Income                                 | ** ** | **$**          | **(2,717,201** | **)**      | $          | 1,048,054  |       | $ | 1,446,235 |   |
| Basic (Loss) Earnings Per Share                   | ** ** | **$**          | **(0.71**      | **)**      | $          | 0.28       |       | $ | 0.39 |   |
| Weighted Average Common Shares Outstanding        | ** ** | **3,840,017**  | ** **     | 3,789,428  |       | 3,750,176  |       |
|                                              |       |           | ** **     |       |       |       |       |
| Diluted (Loss) Earnings Per Share                 | ** ** | **$**          | **(0.71**      | **)**      | $          | 0.27       |       | $ | 0.38 |   |
| Weighted Average Common Shares Outstanding        | ** ** | **3,840,017**  | ** **     | 3,925,681  |       | 3,854,462  |       |
|                                                   |            |                |                |            |            |            |            |  |  |  |  |  |  |

 
| **Consolidated Statements of Shareholder’s Equity** | ** ** | **Vita Food Products, Inc.** |               |
|----------------------------------------------------------|------------|------------------------------|--------------------|
|                                                     | ** ** | ** **                   | **And Subsidiary** |
|                                                          |            |                              |                    |  |  |  |

 

 
| ** **                                          | ** ** | ** **        | ** ** | ** **   | ** ** | **Additional** | ** **   | ** **   | ** ** | ** **    | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|--------------|------------|----------------|--------------|--------------|------------|---------------|------------|
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Treasury** | ** ** | **Paid-in**    | ** **   | **Retained** | ** ** | ** **    | ** ** |
| ** **                                          | ** ** | **Shares**        | ** ** | **Amount**   | ** ** | **Stock**      | ** **   | **Capital**  | ** ** | **Earnings**  | ** ** | **Total** | ** ** |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Balance, at January 1, 2002                         |       | 3,729,683         |       | $            | 37,296     |           | $            | 0            |       | $             | 3,379,931  |   | $ | 1,012,516 |   | $ | 4,429,743 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Proceeds from stock purchase and stock option plans |       | 44,212            |       | 443          |       | —         |         | 116,551      |       | —        |       | 116,994 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Net Income                                          |       | —            |       | —       |       | —         |         | —       |       | 1,446,235     |       | 1,446,235 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Balance, at December 31, 2002                       |       | 3,773,895         |       | $            | 37,739     |           | $            | 0            |       | $             | 3,496,482  |   | $ | 2,458,751 |   | $ | 5,992,972 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Proceeds from stock purchase and stock option plans |       | 45,221            |       | 452          |       | —         |         | 150,780      |       | —        |       | 151,232 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Net income                                          |       | —            |       | —       |       | —         |         | —       |       | 1,048,054     |       | 1,048,054 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Balance, at December 31, 2003                       |       | 3,819,116         |       | $            | 38,191     |           | $            | 0            |       | $             | 3,647,262  |   | $ | 3,506,805 |   | $ | 7,192,258 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Proceeds from stock purchase and stock option plans |       | 46,138            |       | 461          |       | —         |         | 138,334      |       | —        |       | 138,795 |   |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Treasury stock purchases                            |       | —            |       | —       |       | (50,043        | )            | —       |       | —        |       | (50,043 | ) |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Net loss                                            |       | —            |       | —       |       | —         |         | —       |       | (2,717,201    | )          | (2,717,201 | ) |
|                                                |       |              |       |         |       |           |         |         |       |          |       |   |   |
| Balance, at December 31, 2004                       | ** ** | **3,865,254**     | ** ** | **$**        | **38,652** | ** **     | **($50,043** | **)**        | **$**      | **3,785,596** | ** ** | **$** | **789,604** | ** ** | **$** | **4,563,809** | ** ** |

 

See accompanying notes to consolidated financial statements.

 

24

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| **Consolidated Statements of Cash Flows** | ** ** | **Vita Food  Products, Inc.** |                |
|-------------------------------------------|------------|------------------------------------|---------------------|
|                                      | ** ** | ** **                         | **And  Subsidiary** |
|                                           |            |                                    |                     |  |  |  |

 
| **Year  Ended December 31,**                                                                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  Flows From Operating Activities**                                                           |       |       |       |       |       |       |       |
| Net (loss) income                                                                                   |       | $          | (2,717,201 | )          | $          | 1,048,054  |       | $ | 1,446,235 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |       |       |       |       |       |       |
| Depreciation and  amortization                                                                      |       | 983,366    |       | 956,461    |       | 802,121    |       |
| Deferred income tax  (benefit) provision                                                            |       | (288,000   | )          | 488,000    |       | 138,000    |       |
| Goodwill impairment charge                                                                          |       | 2,313,954  |       | —     |       | —     |       |
| Changes in assets and  liabilities, net of effects from purchase of subsidiary:                     |       |       |       |       |       |       |       |
| Accounts receivable                                                                                 |       | 1,426,004  |       | (1,248,331 | )          | 382,793    |       |
| Inventories                                                                                         |       | 249,330    |       | (528,851   | )          | (1,305,668 | )          |
| Prepaid expenses and other  current assets                                                          |       | 33,767     |       | (144,632   | )          | 52,298     |       |
| Income taxes receivable                                                                             |       | 518,863    |       | (173,366   | )          | (168,318   | )          |
| Accounts payable                                                                                    |       | (20,884    | )          | (1,283,811 | )          | 651,639    |       |
| Accrued expenses                                                                                    |       | (79,094    | )          | (501,364   | )          | (141,910   | )          |
| Net cash provided by (used  in) operating activities                                                |       | 2,420,105  |       | (1,387,840 | )          | 1,857,190  |       |
|                                                                                                |       |       |       |       |       |       |       |
| **Cash  Flows From Investing Activities**                                                           |       |       |       |       |       |       |       |
| Capital expenditures                                                                                |       | (1,177,642 | )          | (1,135,894 | )          | (1,245,432 | )          |
| Payments for subsidiary,  net of cash acquired                                                      |       | —     |       | —     |       | (243,531   | )          |
| Other assets                                                                                        |       | (18,567    | )          | (37,286    | )          | (703       | )          |
| Net cash used in investing  activities                                                              |       | (1,196,209 | )          | (1,173,180 | )          | (1,489,666 | )          |
|                                                                                                |       |       |       |       |       |       |       |
| **Cash  Flows From Financing Activities**                                                           |       |       |       |       |       |       |       |
| Proceeds from issuance of  stock and exercise of stock options                                      |       | 138,795    |       | 151,232    |       | 116,994    |       |
| Purchase of treasury stock                                                                          |       | (50,043    | )          | —     |       | —     |       |
| Net (payments) borrowings  under revolving loan facility                                            |       | (613,625   | )          | 2,931,791  |       | 1,404,242  |       |
| Payments on term loan  facility                                                                     |       | (768,512   | )          | (6,714,886 | )          | (4,525,111 | )          |
| Proceeds from new term  loan                                                                        |       | —     |       | 6,500,000  |       | 2,300,000  |       |
| Payments under capital  lease obligations                                                           |       | —     |       | (131,038   | )          | (107,240   | )          |
| Deferred loan costs paid                                                                            |       | —     |       | (96,719    | )          | (39,665    | )          |
| Net cash (used in)  provided by financing activities                                                |       | (1,293,385 | )          | 2,640,380  |       | (850,781   | )          |
| Net (decrease) increase in  cash                                                                    |       | (69,489    | )          | 79,360     |       | (483,257   | )          |
|                                                                                                |       |       |       |       |       |       |       |
| Cash, at beginning of year                                                                          |       | 125,457    |       | 46,097     |       | 529,354    |       |
| Cash, at end of year                                                                                |       | $          | 55,968     |       | $          | 125,457    |       | $ | 46,097 |   |
|                                                                                                |       |       |       |       |       |       |       |
| Supplemental Disclosure of  Cash Flow Information:                                                  |       |       |       |       |       |       |       |
| Cash paid for interest                                                                              |       | $          | 682,398    |       | $          | 737,316    |       | $ | 600,587 |   |
| Income taxes (received)  paid                                                                       |       | $          | (499,506   | )          | $          | 387,366    |       | $ | 1,014,900 |   |
|                                                                                                     |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

See accompanying notes to consolidatedfinancial statements.

 

25

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**1.****        ****Summary of Significant Accounting Policies**

#  

# **Industry**

#  

Vita FoodProducts, Inc. (“Vita Seafood”) processes and sells various herring, curedand smoked salmon products and other complementary specialty food productsthroughout the United States.  VitaSeafood has one processing plant located in Chicago, Illinois.  Vita Specialty Foods, Inc. (“VSF”), a

 

wholly owned subsidiary ofVita Seafood, manufactures and distributes salad dressings, gourmet sauces,honey, jams and jellies.  VSF has twomanufacturing plants located in Martinsburg, West Virginia and Berryville,Virginia.  Management considers VitaSeafood and VSF as a separate business segments which are collectively referredto herein as the ‘Company’.

 

A summary of the significantaccounting policies utilized in the preparation of the accompanying financialstatements follows.

 

# **Principles of Consolidation**

#  

The consolidated financialstatements include the accounts of Vita Seafood and VSF.  VSF includes the now integrated results ofThe Virginia Honey Company, Inc. (“Virginia Honey”), acquired in 2001 andThe Halifax Group, Inc. (“Halifax”), acquired in 2002.  All significant intercompany transactions andbalances have been eliminated.

 

**Concentrationof Credit Risk**

 

Financial instruments that potentially subject theCompany to significant concentrations of credit risk consist principally oftrade accounts receivable.  The Companyprimarily provides credit in the normal course of business.  The Company performs ongoing creditevaluations of its customers and maintains allowances for potential creditlosses, if necessary.

 

**RevenueRecognition and Merchandise Returns**

 

# Revenue isrecognized upon the passing of title to the customers, which occurs uponshipment 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 themerchandise 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 aportion, or all of their promotional activities related to the Company’sproducts.  The Company regularly reviewsand revises, when it deems necessary, estimates of costs to the Company forthese marketing and merchandising programs based on estimates of what has beenincurred by customers.  Actual costsincurred by the Company may differ significantly if factors such as the leveland success of the customers’ programs or other conditions differ fromexpectations.  Sales are reduced by aprovision for estimated future returns, disposals and promotional expense.

#  

**Accounts Receivable and Allowance forDoubtful Accounts**

 

Accounts receivable arecustomer obligations due under normal trade terms.  The Company sells products to distributorsand retailers throughout the food industry. The Company performs continuing credit evaluations of its customers’financial condition.

 

Senior management reviewsaccounts receivable on a regular basis to determine if any receivables willpotentially be uncollectible.  TheCompany provides an allowance sufficient to cover any accounts receivablebalances that are potentially uncollectible, along with a general reserve basedon historic experience.  After attemptsto collect the receivable have failed and it is considered to be uncollectible,it is written off against the allowance. Based on the information available, the Company believes the allowancefor doubtful accounts as of December 31, 2004 to be adequate and notexcessive.  However, it is still possiblethat in the future, actual write offs may exceed the recorded balance.

 

The allowance for discounts,returns and doubtful accounts has fluctuated as follows over the last threeyears:

 

26

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**Allowance for Discounts, Returns and Doubtful Accounts**

**(in thousands)**

 
| **Calendar  Year** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Expense** | ** ** | **Write-offs &  Collections** | ** ** | **Acquisition of  Subsidiary** | ** ** | **Balance at  End  of Year** | ** ** |
|--------------------|------------|------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **2002**           | ** ** | **$**                              | **209**    | ** **              | **6**      | ** **                             | **(39**    | **)**                          | **101**    | ** **                   | **$**      | **277** | ** ** |
| **2003**           | ** ** | **$**                              | **277**    | ** **              | **74**     | ** **                             | **(50**    | **)**                          | **0**      | ** **                   | **$**      | **301** | ** ** |
| **2004**           | ** ** | **$**                              | **301**    | ** **              | **306**    | ** **                             | **(38**    | **)**                          | **0**      | ** **                   | **$**      | **569** | ** ** |

 

# **Inventories**

#  

Inventories are stated atthe lower of cost or market.  Costs aredetermined by the first-in, first-out method and include raw materials, laborand plant overhead.

 

**Property,Plant and Equipment**

 

Property, plant andequipment are stated at cost. Depreciation and amortization are being provided, on straight-linemethods, over the estimated useful lives of the assets as follows:

 
| Buildings and improvements          |   | 15 to 31.5 years |
|-------------------------------------|--------|------------------|
|                                |   |             |
| Machinery and equipment             |   | 5 to 15 years    |
|                                |   |             |
| Office and transportation equipment |   | 3 to 7 years     |

 

Leasehold improvements arebeing amortized on a straight-line basis over the lives of the respectiveleases or the service lives of the improvements whichever is shorter.  Amortization of assets under capital lease isincluded in depreciation and amortization. Repair and maintenance items are expensed as incurred.

 

**Long-LivedAssets**

 

The Company reviews thecarrying values of its long-lived assets for possible impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable.  Anylong-lived assets held for disposal are reported at the lower of their carryingamounts or fair value less cost to sell. As of December 31, 2004 there has been no impairment of long-livedassets.

 

**Goodwill**

 

The changes in the carryingamount of goodwill related to the VSF acquisitions for the years endedDecember 31, 2004, 2003 and 2002 were as follows:

 
| Balance as of  December 31, 2002                         |   | $          | 7,565,821 |   |
|---------------------------------------------------------------|--------|------------|-----------|--------|
|                                                          |   |       |      |
| Adjustment to the original  Halifax purchase price allocation |   | 744,838    |      |
| Balance as of  December 31, 2003                         |   | 8,310,659  |      |
| Goodwill impairment charge                                    |   | (2,313,954 | )         |
| Balance as of  December 31, 2004                         |   | $          | 5,996,705 |   |

 

27

----

 

On January 1, 2002, theCompany adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS142”), which addresses the financial accounting and reporting standards forgoodwill and other intangible assets subsequent to their acquisition.  This accounting standard requires thatgoodwill no longer be amortized, and instead be tested for impairment on atleast an annual basis.

 

During the fourth quartersof 2003 and 2002, the Company completed its annual assessment of impairmentregarding the goodwill recorded as a result of the Virginia Honey acquisition($6,004,000) and the Halifax acquisition ($2,307,000).  Those assessments, supported by independentappraisals of the fair value of VSF, did not identify any impairment.  However, the 2004 independent appraisal –made using customary valuation methodologies including discounted cash flowsand fundamental analysis, did reveal impairment issues.  The revised appraisal reflects a decreasedfair value of VSF, principally caused by the decline in operating income of VSFduring 2004.  That decline was primarilya result of a substantial decline in the sales of Halifax products – which weredown $1,600,000 or 21% in 2004.  Based onthe appraised value of VSF, the resulting impairment charge of approximately$2,314,000 was recorded in the fourth quarter of 2004.

 

The adjustment to theoriginal Halifax purchase price allocation made in 2003 is more fully describedin Note 2.

 

# **Estimates**

#  

The accompanying financialstatements include estimated amounts and disclosures based on management’sassumptions about future events.  Actualresults may differ from those estimates.

 

**Advertising**

 

Advertising costs areexpensed as incurred and included in selling, marketing and distributionexpenses.  Advertising expenses amountedto approximately $349,000, $393,000 and $370,000 in 2004, 2003 and 2002,respectively.

 

**Shippingand Handling Fees**

 

The Company classifiesshipping and handling costs billed to customers as revenue.  Costs related to shipping are classified aspart of selling, marketing and distribution expenses and were $3,539,000,$2,851,000 and $2,447,000 in 2004, 2003 and 2002, respectively.

 

**IncomeTaxes**

 

The Company recognizesdeferred income tax assets and liabilities for the expected future taxconsequences of temporary differences between the tax basis and financialreporting basis of certain assets and liabilities and certain income tax creditcarryforwards.  In estimating future taxconsequences, the Company generally considers all expected future events otherthan enactments of changes in tax laws or rates.  A valuation reserve is recognized based onthe evidence available, if it is more likely than not that some portion or allof the deferred income tax asset will not be realized.

 

**Basic andDiluted Earnings (Loss) Per Common Share**

 

Basic earnings (loss) pershare is computed by dividing income (loss) available to common shareholders bythe weighted-average number of common shares outstanding for the period.  Diluted earnings (loss) per share follows thecomputation of basic earnings (loss) per share but also gives effect to alldilutive potential common shares equivalents that were outstanding during theyear.

 

The following is areconciliation from basic earnings/(loss) per share to diluted earnings (loss)per share for each of the last three years:

 

28

----

 
| ** **         | ** ** | **Net  Income /  (Loss)** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Earnings /  (Loss)  Per Share** | ** ** |
|--------------------|------------|---------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| 2004               |       |                      |       |                                       |       |                              |       |
| Basic              |       | $                         | (2,717,201 | )                                          | 3,840,017  |                              | $          | (0.71 | ) |
| Effect of dilutive |       |                      |       |                                       |       |                              |       |
| stock options      |       | —                    |       | —                                     |       |                              |       |
| Diluted            |       | $                         | (2,717,201 | )                                          | 3,840,017  |                              | $          | (0.71 | ) |
| 2003               |       |                      |       |                                       |       |                              |       |
| Basic              |       | $                         | 1,048,054  |                                       | 3,789,428  |                              | $          | 0.28 |   |
| Effect of dilutive |       |                      |       |                                       |       |                              |       |
| stock options      |       | —                    |       | 136,253                                    |       |                              |       |
| Diluted            |       | $                         | 1,048,054  |                                       | 3,925,681  |                              | $          | 0.27 |   |
| 2002               |       |                      |       |                                       |       |                              |       |
| Basic              |       | $                         | 1,446,235  |                                       | 3,750,176  |                              | $          | 0.39 |   |
| Effect of dilutive |       |                      |       |                                       |       |                              |       |
| stock options      |       | —                    |       | 104,286                                    |       |                              |       |
| Diluted            |       | $                         | 1,446,235  |                                       | 3,854,462  |                              | $          | 0.38 |   |
|                    |            |                           |            |                                            |            |                                   |            |  |  |  |  |  |  |  |

 

In 2004, 2003 and 2002 therewere an additional 82,500, 29,000 and 30,000 common shares respectivelyissuable upon exercise stock options that were not considered in thecomputation because they would have been anti-dilutive.

 

**Accountingfor Stock Based Compensation**

 

The Company applies theintrinsic value method under Accounting Principals Board Opinion 25 and relatedinterpretations in accounting for its stock based compensation plans.  No compensation cost has been recognized forthe Company’s stock compensation plans as the market price of the common stockunderlying the grant did not exceed the exercise price of the grant on themeasurement date.

 

The Company is required toprovide pro forma disclosures of net income and earnings per share had theCompany adopted the fair value method under Statement of Financial AccountingStandards No. 123.  Theweighted-average, grant date fair value of stock options granted to employeesduring the year and the weighted-average significant assumptions used todetermine those fair values, using a modified Black-Scholes option pricingmodel, and the pro forma effect on earnings of the fair value accounting forstock options under Statement of Financial Accounting Standards No. 123,are as follows:

 

29

----

 
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Weighted average fair  value per options granted                                                             |       | $        | 4.42       |     | $          | 2.71      |       | $ | 2.92 |   |
|                                                                                                         |       |     |       |     |       |      |       |
| Significant assumptions  (weighted average)                                                                  |       |     |       |     |       |      |       |
| Risk-free interest rate at  grant date                                                                       |       | 4.1      | %          | 3.7      | %          | 4.4       | %          |
| Expected stock price  volatility                                                                             |       | 0.68     |       | 0.72     |       | 0.74      |       |
| Expected dividend payout                                                                                     |       | —   |       | —   |       | —    |       |
| Expected option life  (years)                                                                                |       | 5        |       | 5        |       | 5         |       |
|                                                                                                         |       |     |       |     |       |      |       |
| Net (Loss) Income                                                                                            |       |     |       |     |       |      |       |
| As reported                                                                                                  |       | $        | (2,717,201 | )        | $          | 1,048,054 |       | $ | 1,446,235 |   |
| Deduct total stock based  compensation expense (net of income taxes) determined under the fair value  method |       | (132,660 | )          | (56,844  | )          | (267,592  | )          |
| Pro forma                                                                                                    |       | $        | (2,849,861 | )        | $          | 991,210   |       | $ | 1,178,643 |   |
|                                                                                                         |       |     |       |     |       |      |       |
| Basic (loss) earnings per  share                                                                             |       |     |       |     |       |      |       |
| As reported                                                                                                  |       | $        | (0.71      | )        | $          | 0.28      |       | $ | 0.39 |   |
| Pro forma                                                                                                    |       | $        | (0.74      | )        | $          | 0.26      |       | $ | 0.31 |   |
|                                                                                                         |       |     |       |     |       |      |       |
| Diluted (loss) earnings  per share                                                                           |       |     |       |     |       |      |       |
| As reported                                                                                                  |       | $        | (0.71      | )        | $          | 0.27      |       | $ | 0.38 |   |
| Pro forma                                                                                                    |       | $        | (0.74      | )        | $          | 0.25      |       | $ | 0.31 |   |
|                                                                                                              |            |          |            |          |            |           |            |  |  |  |  |  |  |  |

 

**Recent Accounting Pronouncements**

 

In January 2003, FASBissued Interpretation No. 46, Consolidation of Variable Interest Entities(“FIN 46”). In general, a variable interest entity is a corporation,partnership, trust or any other legal structure used for business purposes thateither (a) does not have equity investors with voting rights or(b) has equity investors that do not provide significant financialresources for the entity to support its activities. FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. The consolidation requirements of FIN 46 apply immediately tovariable interest entities created after January 31, 2003.  In December 2003, the FASB issued FIN46R, which amended FIN 46 and added additional guidance andinterpretation.  The Company adopted theprovisions of FIN 46 and FIN 46R in 2003 and such adoption did not have amaterial impact on its consolidated financial statements since it currently hasno variable interest entities.

 

In December 2004, theFASB issued Statement of Financial Accounting Standards 123 (revised 2004)“Share-Based Payment” (“SFAS 123R”). Among other things, SFAS 123R requires expensing the fair value of stockoptions, which was previously optional. SFAS 123R is effective as of July 1, 2005.  The Company expects the impact of adoptingSFAS 123R will be similar to the pro forma impacts as displayed in the tableabove.

 

# **2.Acquisitions**

#  

**The Virginia Honey Company, Inc.**

Effective July 1, 2001, Vita Seafood acquired100% of the outstanding shares of capital stock of Virginia Honey from Terry W.Hess.  The results of Virginia Honey havebeen included in the

 

30

----

 

Company’s consolidated financial statements sincethe effective date. The aggregate purchase price, including direct costs of theacquisition, of $4,884,437 was paid in cash. 

 

**The Halifax Group, Inc.**

 

Effective November 1, 2002, Vita Seafoodacquired all of the issued and outstanding shares of capital stock of Halifax,a Georgia corporation, from Robert J. Budd and certain affiliates or associatesof Mr. Budd.  Since the effectivedate, the results of Halifax have been fully integrated with the results ofVirginia Honey to form the Company’s wholly owned subsidiary, VSF.

 

On the November 6, 2002 closing date, as adirect cost of the acquisition, the Company paid cash of $450,000 toMr. Budd in partial payment of the $795,781 preexisting debt owed to himby Halifax.  The Company has recorded thediscounted value of the remaining debt as a long-term obligation as describedin Note 4.  The Company also assigned toMr. Budd any potential rights or exposure associated with an unresolvedlegal case involving Halifax.  The caseremains unresolved and the Company and its subsidiary, VSF, have since beennamed as co-defendants in that case.

 

The following table summarizes the preliminary fairvalues of the assets acquired and the liabilities assumed at the date ofacquisition, November 1, 2002:

 
| **(in 000’s)**            | ** ** |
|--------------------------------|------------|
|                           |       |   |   |
| Current assets                 |       | $ | 1,815 |   |
| Property, plant and  equipment |       | 982 |   |
| Other assets                   |       | 560 |   |
| Goodwill                       |       | 1,562 |   |
| Total assets acquired          |       | 4,919 |   |
| Current liabilities            |       | (3,670 | ) |
| Long-term debt                 |       | (1,005 | ) |
|                           |       |   |   |
| Total liabilities assumed      |       | (4,675 | ) |
|                           |       |   |   |
| Net assets acquired            |       | $ | 244 |   |

 

During 2003, the following adjustments were made tothe purchase price allocation:

 
| **(in $000’s)**                                                                                    | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|
|                                                                                                    |       |   |   |
| Exit costs incurred in  acquisition                                                                     |       | $ | 725 |   |
| Deferred tax asset  relating to the exit costs                                                          |       | (317 | ) |
| Changes in estimated  valuation allowance relating to the acquired net operating loss carryforwards     |       | 267 |   |
| Changes to estimates  relating to inventory and relating to inventory and accounts receivable  reserves |       | 70 |   |
|                                                                                                    |       |   |   |
| Adjustment to the original  purchase price allocation                                                   |       | $ | 745 |   |

 

None of the amount of goodwill is expected to bedeductible for tax purposes.

 

31

----

 

The unaudited consolidated results of operation on apro forma basis as though Halifax had been acquired as of the beginning of 2002are as follows ($000’s except earnings per share data):

 
| **Year ended December 31,** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|
|                             |       |     |       |
| Net sales                        | ** ** | **$**    | **50,275** | ** ** |
| Net income                       | ** ** | **$**    | **970**    | ** ** |
|                             |       |     |       |
| Basic earnings per share         | ** ** | **$**    | **0.26**   | ** ** |
| Diluted earnings per share       | ** ** | **$**    | **0.25**   | ** ** |

 

The pro forma financial information is notnecessarily indicative of the operating results that would have occurred hadthe Halifax acquisition been consummated as of the above dates, nor are theyindicative of future operating results.

 

#### **Acquisition and Exit Costs**

Shortly after the acquisition of Halifax, theCompany’s management finalized plans to restructure the operations ofpre-acquisition Halifax to eliminate redundant facilities and headcount, reducecost structure and better align the operating expenses with existing economicconditions.  Consequently, in 2003, theCompany recorded $724,503 of costs relating to activities of pre-acquisitionHalifax such as severance and related benefits, the cost of abandoned leaseholdimprovements, the cost to vacate the leased facilities and otherpre-acquisition liabilities.  These costswere accounted for under EITF 95-3, “Recognition of Liabilities inConnection with Purchase of Business Combinations”.  These costs were recognized as a liabilityassumed in the acquisition and included in the allocation of the purchaseprice.

 

The acquisition and exit costs consisted of thefollowing:

 
| ** **                                                            | ** ** | **Closedown  of  Facility** | ** ** | **Employee  Severance  & Related** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------|------------|-----------|------------|
| Exit costs incurred in  acquisition                                   |       | $                           | 497,538    |                                   | $          | 111,699   |       | $         | 115,266    |   | $ | 724,503 |   |
|                                                                  |       |                        |       |                                   |       |      |       |      |       |
| Payments made during the  twelve months ending December 31, 2003 |       | 481,247                     |       | 111,699                                |       | 115,266   |       | 708,212   |       |
| Acquisition cost accrual,  December 31, 2003 (all paid in 2004)  |       | $                           | 16,291     |                                   | $          | —    |       | $         | —     |   | $ | 16,291 |   |

 

**Earn Out Provision under AcquisitionAgreements**

Pursuant to the Company’s acquisitions of VirginiaHoney and Halifax in 2001 and 2002, respectively, the previous owners of thosebusinesses, both of whom were employees as of December 31, 2004 (one ofwhom continues to be an employee), and one of whom is a director of theCompany, are subject to earn out provisions that may result in additionalproceeds paid by the Company for the acquired businesses.  As amended, the earn out provisions for TerryHess, the previous owner of Virginia Honey, have resulted in an additionalamount due to Mr. Hess of approximately $832,000 as of December 31,2004 with an interest rate of 4.2% payable in April 2005.  This additional payment is based on theoperating results of Virginia Honey for the period from January 1, 2001 toDecember 31, 2002.  Potentialremaining earn out payments to Mr. Hess will be based on the earnings ofVSF, as computed by a predefined allocation formula, for two separate periods –January 1, 2003 to December 31, 2005 and January 1, 2006 toDecember 31, 2007.  Should VSFmaintain its current profitability levels throughout these periods, managementestimates that additional payments with a net present value as ofDecember 31, 2004 of approximately $1,000,000 would be due toMr. Hess.  Any future

 

32

----

 

payments will be recorded as additional goodwill,and be subject to impairment analysis, when and if such payments are finallydetermined at the end of each of the periods described above.

 

Similarly, Mr. Budd, the previous owner ofHalifax, had two separate earn out periods – January 1, 2003 toDecember 31, 2005 and January 1, 2006 to December 31, 2007.  Potential remaining earn out payments toMr. Budd were to be based on earnings of VSF, as computed by a pre-definedallocation formula.  On January 7,2005, Vita Food Products, Inc. terminated the Employment Agreement (the“Employment Agreement”) made as of November 1, 2002, between Halifax andMr. Budd.  The Company alleged a for“cause” termination and, accordingly, filed suit against Mr. Budd whichwas settled in accordance with the terms and conditions of the ConfidentialSettlement Agreement and Mutual Release entered into on March 28, 2005(the “Settlement Agreement”).  Pursuantto the Settlement Agreement, the remaining potential earn out payments toMr. Budd have been eliminated entirely.

 

The Settlement Agreement also amended theNon-Competition and Non-Solicitation Agreement entered into by Budd inconnection with the Company’s acquisition of Halifax.  Pursuant to the Non-Competition Agreement, asamended, Budd is prohibited from competing with the Company and soliciting itsemployees and customers until March 1, 2010, provided, that Budd mayfreely engage in any business that is not producing products competitive withthe products of the Company as of February 28, 2005.

 

**3.****        ****Accrued Expenses**

 

Accrued expenses consist ofthe following:

 
| **December 31,**          | ** ** | **2004**    | ** **  | **2003** | ** ** |
|--------------------------------|------------|-------------|-------------|----------|------------|
|                           |       |        |        |     |       |
| Interest                       | ** ** | **$**       | **41,159**  |     | $          | 22,679 |   |
| Salaries and bonuses           | ** ** | **284,901** |        | 361,810  |       |
| Taxes other than income  taxes | ** ** | **64,407**  |        | 51,205   |       |
| Utilities, freight and  other  | ** ** | **427,452** |        | 465,197  |       |
| ** **                     |       | **$**       | **817,919** |     | $          | 900,891 |   |
|                                |            |             |             |          |            |  |  |  |

 

**4.****        ****Long-Term Obligations**

 

Long-term obligationsconsist of the following:

 
| **December 31,**                                   | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|---------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                    | ** ** | ** **     |           |       |       |
| Revolving loan facility  (a)                            | ** ** | **$**          | **7,677,617**  |       | $          | 8,291,243 |   |
| Term loan facility (a)                                  | ** ** | **5,636,000**  |           | 6,284,000  |       |
| Term loan payable (b)                                   | ** ** | **2,599,846**  |           | 2,710,727  |       |
| Additional purchase price  payable to Mr. Hess (c) | ** ** | **831,659**    |           | 797,512    |       |
| Robert J. Budd Note (d)                                 | ** ** | **315,276**    |           | 303,398    |       |
| Other notes payable                                     | ** ** | **56,932**     |           | 78,441     |       |
| ** **                                              |       | **17,117,330** |           | 18,465,321 |       |
| Less current maturities                                 | ** ** | **1,619,430**  |           | 780,390    |       |
|                                                    |       |           |           |       |       |
| ** **                                              |       | **$**          | **15,497,900** |       | $          | 17,684,931 |   |

 

(a)     On September 9, 2003, the Companyentered into a loan agreement (the “Loan”) with a new bank and paid off theexisting credit facility.  The Loanprovides for a two-year $8,500,000 revolving line of credit

 

33

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(“revolving loan facility”) for working capitalneeds; a five-year $6,500,000 term loan (“term loan facility”) that representsthe Company’s long-term financing and a six-year $3,000,000 term loan that hasnot yet been utilized.  Borrowing under therevolving loan facility is limited to 80% of eligible receivables and 60% ofeligible inventory as such terms are defined in the Loan.  The revolving loan facility maturesJanuary 31, 2006 (as amended in December 2004).  Availability under this line is $521,000 asof December 31, 2004.  The term loanfacility is payable in monthly installments of $54,000 through July 31,2008, with a balloon payment of $3,368,000 due on August 30, 2008.  The loans are collateralized by all of theassets of the Company.

 

According to the terms of the Loan, interest is paidmonthly and interest rates are subject to adjustment at certain predetermineddates based upon the Funded Debt to EBITDA ratio, as each such term is definedin the Loan.  Under these terms, therevolving loan facility bears interest at rates ranging from LIBOR plus 1.75%to 2.25% or prime minus 0.50% at the Company’s option.  The term loan facility bears interest atrates ranging from LIBOR plus 2.00% to 2.50% or prime minus 0.50%.  As of December 31, 2004, a portion ofthe revolving loan facility bore interest at 4.18%, which was equal to LIBOR of1.93% plus 2.25% and another portion at 4.75%, which equaled prime of 5.25%minus 0.50%.  At that date, the term loanfacility also bore interest at 4.75%, which equaled prime minus 0.50%.

 

The Loan imposes certain restrictions upon theCompany and requires the Company to maintain certain financial covenants andratios, including Tangible Net Worth and Cash Flow Coverage Ratio, as each suchterm is defined in the Loan.  AtDecember 31, 2003, the Company was in compliance with these covenants,however, at June 30 and September 30, 2004, the impact of the loss onearnings before income taxes, depreciation and amortization (as defined in theagreement) for the respective twelve months then ended resulted innon-compliance with certain of the Company’s financial covenants.  The Company received a permanent waiver fromits lender with respect to these instances of non-compliance and an amendment,which changed the financial covenants through December 31, 2004.  The Company was in compliance with therevised covenants at December 31, 2004. The Company intends to closely monitor its financial covenants goingforward and is currently in discussions with its lender to further amend thefacility, including the scheduled revolving loan facility maturity date.

 

(b)   As part of the acquisition agreement forVirginia Honey, the Company assumed a 7.0% note payable to a former VirginiaHoney shareholder.  At December 31,2004 the balance due was $2,599,846. This note is secured and is payable in monthly installments through2018.

 

(c)    As described in Note 2, Mr. Hess earnedadditional purchase price on his sale of Virginia Honey to Vita Seafood basedon a measurement date of December 31, 2002.  That obligation, at a 4.2% interest rate, ispayable in April 2005.

 

(d)   The merger agreement with Halifax providedthat, as part of the acquisition price, the Company would repay the balance ofa note due to the former owner by Halifax, to that individual on April 1,2006.  The Settlement Agreement enteredinto between the Company and such former owner in connection with the Company’sinstitution of litigation against the former owner amended the terms of thenote to provide for payment in 78 bi-weekly equal installments of $4,241.  The principle amount did not change and nointerest accrues on this debt.  See Note14 for further information regarding this obligation.

 

Scheduled annual maturitiesof long-term obligations as of December 31, 2004 are as follows:

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2005                              |       | $          | 1,619,430  |   |
| 2006                              |       | 8,789,441  |       |
| 2007                              |       | 795,149    |       |
| 2008                              |       | 5,913,310  |       |
|                              |       |       |       |
|                              |       | $          | 17,117,330 |   |

 

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**5.****        ****Income Taxes**

 

Deferred income taxesreflect the net effects of temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  The effects ofexisting temporary differences, that give rise to significant portions of thenet deferred income tax asset (liability), are as follows:

 
| ***December 31,***            | ** ** | **2004**      | ** **   | **2003**  | ** ** |
|------------------------------------|------------|---------------|--------------|-----------|------------|
|                               |       |          |         |      |       |
| Deferred income tax asset:         |       |          |         |      |       |
| Uniform inventory  capitalization  | ** ** | **$**         | **68,000**   |      | $          | 71,000 |   |
| Accrued expenses and  reserves     | ** ** | **276,000**   |         | 271,000   |       |
| Contributions carryover            | ** ** | **77,000**    |         | —    |       |
| Net operating loss  carryforwards  | ** ** | **1,091,000** |         | 791,000   |       |
|                               |       |          |         |      |       |
| ** **                         |       | **1,512,000** |         | 1,133,000 |       |
| Deferred income tax  liability:    |       |          |         |      |       |
| Depreciation                       | ** ** | **(866,000**  | **)**        | (568,000  | )          |
|                               |       |          |         |      |       |
| ** **                         |       | **646,000**   |         | 565,000   |       |
| Less valuation allowance           | ** ** | **(791,000**  | **)**        | (791,000  | )          |
|                               |       |          |         |      |       |
| Net deferred income tax  liability | ** ** | **$**         | **(145,000** | **)**     | $          | (226,000 | ) |

 

The Company has grossfederal net operating loss carryforwards of $ 2.7 million, which expire, ifunused, in 2022 – 2024.  The valuationallowance relates to the net operating loss carryforward acquired in theHalifax acquisition.

 

Income tax (benefit) expensefor the years ended December 31, 2004, 2003 and 2002 consist of thefollowing:

 
| **December 31,**         | ** ** | **2004**     | ** **   | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|--------------|--------------|----------|------------|----------|------------|
|                          |       |         |         |     |       |     |       |
| Current                       | ** ** | **$**        | **19,000**   |     | $          | 214,000  |       | $ | 729,000 |   |
| Deferred                      | ** ** | **(288,000** | **)**        | 488,000  |       | 138,000  |       |
|                          |       |         |         |     |       |     |       |
| Income tax (benefit)  expense | ** ** | **$**        | **(269,000** | **)**    | $          | 702,000  |       | $ | 867,000 |   |
|                               |            |              |              |          |            |          |            |  |  |  |  |  |

 

The reconciliation of income tax computed at theUnited States federal statutory tax rate of 34% to income tax (benefit) expenseis as follows:

 
| **Year ended December 31,** | ** ** | **2004**    | ** **     | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|-------------|----------------|----------|------------|----------|------------|
|                             |       |        |           |     |       |     |       |
| Tax at federal statutory  rate   | ** ** | **$**       | **(1,015,000** | )        | $          | 595,000  |       | $ | 786,000 |   |
|                             | ** ** | ** **  |           |     |       |     |       |
| Impairment charge                | ** ** | **787,000** |           | —   |       | —   |       |
|                             | ** ** | ** **  |           |     |       |     |       |
| Other (primarily state  taxes)   | ** ** | **(41,000** | )              | 107,000  |       | 81,000   |       |
|                             |       |        |           |     |       |     |       |
| Income tax (benefit)  expense    | ** ** | **$**       | **(269,000**   | )        | $          | 702,000  |       | $ | 867,000 |   |
|                                  |            |             |                |          |            |          |            |  |  |  |  |  |

 

**6. Commitments and Contingencies**

 

A.           In the ordinary course of business, theCompany becomes involved in litigation as a defendant in

 

35

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various lawsuits. In the opinion of management, after considering the advice of counsel,the ultimate resolution of these legal proceedings will not have a materialeffect on the financial statements taken as a whole and thus no provision hasbeen made in the financial statements for any loss contingencies.  

 

B.             The Company leases two of its Virginia Honeyfacilities from a former owner of Virginia Honey, who is now an officer ofVSF.  During 2003, the Company renewedboth of these leases, one through December 31, 2008 and the second throughDecember 31, 2018.  Additionalrenewal options are available.  Futurepayments under these leases amount to approximately $508,000 for each of 2005through 2007, $520,000 for 2008 and $409,000 each of the subsequentperiods.  Rent expense under theseagreements totaled $306,000, $358,000 and $451,000 in, 2002, 2003 and 2004,respectively.

 

C.             The Company leases its Atlanta office from anunrelated lessor.  The lease expires onAugust 31, 2006.  Future paymentsunder the lease will amount to approximately $35,000 and $22,000 for 2005 and2006, respectively.  SinceNovember 1, 2002, the effective date of the lease, rent expense under thisagreement totaled $50,000.

 

D.            See Note 2 for potential Company obligationsrelated to an earn out provision under the acquisition agreements for VirginiaHoney and Halifax.

 

E.     The Company has brand name product licensing agreements, whichcontain provisions for minimum future royalty payments.  During 2004 and 2003, the Company paid$535,000 and $271,000, respectively, in royalty payments under these licensingagreements.  The minimum future royaltypayments are $418,000 and $10,000 for 2005 and 2006, respectively.

 

**7.****        ****Employee Benefit Plans**

 

The Company has establisheda qualified 401(k) profit sharing plan covering its non-union employees.Participants may elect to defer a portion of their annual compensation.  The Company may contribute amounts at thediscretion of the board of directors.

 

TheCompany expensed 401(k) matching contributions of $68,000, $67,000 and $59,000in 2004, 2003 and 2002, respectively.

 

Additionally, the Companyparticipates in two multi-employer plans that provide benefits to the Company’sunion employees.  Contributions to theplans for the years ended December 31, 2004, 2003 and 2002 were $35,000,$33,000 and $31,000, respectively.

 

**8.****        ****Major Customers**

 

In the year endedDecember 31, 2004, the Company had sales to one customer representing 21%and sales to another customer representing 14% of total annual net sales.  At December 31, 2004, these customershad open accounts receivable balances of $705,000 and $941,000,respectively.  During 2003, the Company hadsales to one customer representing 19% and sales to another customer representing13% of total annual net sales. At December 31, 2003, these customers hadopen accounts receivable balances of $1,390,000 and $578,000,respectively.  During 2002, the Companyhad sales to one customer representing 19% and sales to another customer representing12% of total annual net sales.

 

**9.****        ****Stock Option and Purchase Plans**

 

On September 11, 1996,the Company adopted the Vita Food Products, Inc. 1996 Stock Option Planfor employees or other constituencies of the Company, including members of theboard of directors who are employees. The plan was amended and restated in 2004 to provide for 525,000 sharesof common stock to be reserved for issuance upon the exercise of optionsdesignated as either an

 

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“incentive stock option” oras a “nonqualified stock option.”  Theseoptions vest at 20% per year and may be granted to employees or otherconstituencies of the Company, including members of the board of directors whoare employees.  On September 11,1996, the Company also adopted the Vita Food Products, Inc. 1996 StockOption Plan for Non-Employee Directors. The plan was amended and restated in 2000 to provide for 175,000 sharesof common stock to be reserved for issuance upon the exercise of options designatedas a “nonqualified stock option.”  Theseoptions become fully vested six months after issuance and may be granted todirectors who are not employees of the Company. Generally, all options are issued at exercise prices equal to marketprice and are exercisable for a period of ten years from the date ofgrant.  Further, in September 1996,the Company adopted the 1996 Employee Stock Purchase Plan pursuant to which150,000 shares of common stock have been reserved for issuance.

 

                   Information with respect to the stock optionplans follows:

 
| **Year ended December 31,**             | ** ** | **2004**     | ** **     | **2003** |   | **2002**   |   |
|----------------------------------------------|------------|--------------|----------------|----------|--------|------------|--------|
|                                         |       |         |           |     |   |       |   |
| Options outstanding at  beginning of year    | ** ** | **314,400**  |           | 328,500  |   | 221,500    |   |
| Options granted                              | ** ** | **50,000**   |           | 35,000   |   | 157,000    |   |
| Options exercised                            | ** ** | **(23,500**  | )              | (32,200  | )      | (40,800    | )      |
| Options forfeited                            | ** ** | **(10,500**  | )              | (16.900  | )      | (9,200     | )      |
|                                         |       |         |           |     |   |       |   |
| Options outstanding at end  of year          | ** ** | **330,400**  |           | 314,400  |   | 328,500    |   |
|                                         |       |         |           |     |   |       |   |
| Weighted average remaining  contractual life | ** ** | **6.8 yrs.** |           | 7.3 yrs. |   | 8.0 yrs.   |   |
| Options exercisable                          | ** ** | **200,180**  |           | 173,120  |   | 150,400    |   |
|                                         |       |         |           |     |   |       |   |
| Exercise prices per option  granted          | ** ** | **$**        | **4.45-$7.52** |     | $      | 4.00-$5.15 |   | $ | 4.00-$6.00 |   |
|                                              |            |              |                |          |        |            |        |  |  |  |

 
| **Weighted  Average Exercise Price** | ** ** | **2004** | ** ** | **2003** |   | **2002** |   |
|--------------------------------------|------------|----------|------------|----------|--------|----------|--------|
|                                 |       |     |       |     |   |     |   |
| January 1,                      | ** ** | **$**    | **3.52**   |     | $      | 3.42     |   | $ | 2.53 |   |
| December 31,                    | ** ** | **4.15** |       | 3.52     |   | 3.42     |   |
| Exercised                            | ** ** | **2.43** |       | 3.08     |   | 2.58     |   |
| Exercisable                          | ** ** | **3.60** |       | 3.03     |   | 2.75     |   |
| Forfeited                            | ** ** | **4.83** |       | 4.20     |   | 3.49     |   |
|                                      |            |          |            |          |        |          |        |  |  |  |

 

**10.**** ****Employment Contracts**

 

In 2002, the Company enteredinto employment agreements with two officers of the Company.  Under the terms of these agreements, theofficers were each entitled to be paid a salary of $240,030 annually (adjustedannually for increases of at least the cost of living index), plus bonuses, ifany, and certain perquisites.  During2003, one of the officers had his employment agreement renewed on substantiallythe same terms and conditions through December 2007, and during 2004 theother had his agreement renewed on substantially the same terms and conditionsthrough December 2006.

 

The Company also enteredinto an employment agreement with an officer of Virginia Honey in conjunctionwith the purchase of Virginia Honey. The agreement extended toDecember 31, 2004 and calls for the officer to receive a salary of$300,000 per year with, at the sole discretion of Virginia Honey’s board of directors,a maximum raise equal to the percentage increase in the cost of livingindex.  The agreement was extended in2004 under the present terms and conditions through December 31, 2007.

 

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In addition, inJanuary 2005 the Company terminated an employment agreement with anofficer of Halifax that was entered into in conjunction with the purchase ofHalifax.  The agreement had a term thatextended to December 31, 2007 and called for the officer to receive a salaryof $242,500 per year with a 3% per year increase starting January 1,2004.  See Note 14 for a furtherdescription of the termination of employment agreement and the settlement thatwas entered into between the parties in respect of the litigation commenced bythe Company against the former Halifax officer.

 

**11. Fair Value of Financial Instruments**

 

The carrying amounts of cash, accounts receivable,accounts payable and short-term obligations approximate fair value due to theshort-term nature of these instruments. The carrying value of the Company’s long-term obligations, based onrates currently available for instruments with similar terms and maturities,also approximates fair value.

 

# **12.Business Segments**

#  

The Company reports twooperating business segments in the same format as reviewed by the Company’ssenior management. Segment one, Vita Seafood, processes and sells variousherring, and cured and smoked salmon products throughout the United States andMexico.  Segment two, VSF, combines theproducts of Virginia Honey and Halifax and manufactures and distributes honey,salad dressings, sauces, marinades, jams and jellies and gift basketsthroughout North America.  Managementpredominately uses operating profit as the measure of profit or loss by businesssegment.  The significant accountingpolicies as described in Note 1 were utilized in the preparation of thefinancial statements for both segments.

 

Business segment information is as follows ($000’s):

 
| **Year ended December 31,**     | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                 |       |       |       |     |       |     |       |
| **Goodwill**                         |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **—** |     | $          | —   |       | $ | — |   |
| VSF                                  | ** ** | **5,997**  |       | 8,311    |       | 7,566    |       |
|                                 |       |       |       |     |       |     |       |
| Total Goodwill                       | ** ** | **$**      | **5,997**  |     | $          | 8,311    |       | $ | 7,566 |   |
|                                 |       |       |       |     |       |     |       |
| **Total  Assets**                    |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **17,557** |     | $          | 20,056   |       | $ | 18,566 |   |
| VSF                                  | ** ** | **7,366**  |       | 9,028    |       | 7,976    |       |
|                                 |       |       |       |     |       |     |       |
| Total Assets                         | ** ** | **$**      | **24,923** |     | $          | 29,084   |       | $ | 26,542 |   |
|                                 |       |       |       |     |       |     |       |
| **Net Sales**                        |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **26,972** |     | $          | 27,216   |       | $ | 28,096 |   |
| VSF                                  | ** ** | **21,784** |       | 23,714   |       | 14,767   |       |
|                                 |       |       |       |     |       |     |       |
| Total Net Sales                      | ** ** | **$**      | **48,756** |     | $          | 50,930   |       | $ | 42,863 |   |
|                                 |       |       |       |     |       |     |       |
| **Operating  (Loss) Profit**         |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **(483**   | )        | $          | 612      |       | $ | 1,887 |   |
| VSF (a)                              | ** ** | **(1,736** | )          | 1,890    |       | 1,028    |       |
|                                 |       |       |       |     |       |     |       |
| Total Operating (Loss)  Profit       | ** ** | **$**      | **(2,219** | )        | $          | 2,502    |       | $ | 2,915 |   |
|                                 |       |       |       |     |       |     |       |
| **Net  (Loss) Income**               |       |       |       |     |       |     |       |
| Vita Seafood (b)                     | ** ** | **$**      | **(521**   | )        | $          | 148      |       | $ | 983 |   |
| VSF (a)                              | ** ** | **(2,196** | )          | 900      |       | 463      |       |
|                                 |       |       |       |     |       |     |       |
| Total Net (Loss) Income              | ** ** | **$**      | **(2,717** | )        | $          | 1,048    |       | $ | 1,446 |   |
|                                 |       |       |       |     |       |     |       |
| **Depreciation  and Amortization**   |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **500**    |     | $          | 540      |       | $ | 491 |   |
| VSF                                  | ** ** | **483**    |       | 416      |       | 311      |       |
|                                 |       |       |       |     |       |     |       |
| Total Depreciation and  Amortization | ** ** | **$**      | **983**    |     | $          | 956      |       | $ | 802 |   |
|                                 |       |       |       |     |       |     |       |
| **Capital  Expenditures**            |       |       |       |     |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **612**    |     | $          | 389      |       | $ | 1,034 |   |
| VSF                                  | ** ** | **566**    |       | 747      |       | 211      |       |
|                                 |       |       |       |     |       |     |       |
| Total Capital Expenditures           | ** ** | **$**      | **1,178**  |     | $          | 1,136    |       | $ | 1,245 |   |

 

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----

(a) Includesthe 2004 goodwill impairment charge of $2,314.

 

(b) Includesvarious unallocated corporate expenses that benefit both segments but aremonitored as part of the Vita Seafood segment.

 

39

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**13.Selected Quarterly Financial Data (unaudited)**

 

# **For The Three Month Period Ended**

**(inthousands, except share and per share data)**

 
| ** **                                      | ** ** | **March 31,  2004** | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Revenues**                                    | ** ** | **$**                    | **12,612** | ** **              | **$**      | **10,658**                   | ** ** | **$**                       | **11,575** | ** ** | **$** | **13,911** | ** ** |
| **Gross  Profit**                               | ** ** | **3,835**                | ** ** | **3,109**               | ** ** | **3,060**                    | ** ** | **4,343**                   | ** ** |
| **Net Loss**                                    | ** ** | **(38**                  | **)**      | **(340**                | **)**      | **(276**                     | **)**      | **(2,062**                  | **)(a)**   |
| **Basic  Loss per Share**                       | ** ** | **$**                    | **(0.01**  | **)**                   | **$**      | **(0.09**                    | **)**      | **$**                       | **(0.07**  | **)** | **$** | **(0.54** | **)** |
| **Weighted  Average Common Shares Outstanding** | ** ** | **3,833,319**            | ** ** | **3,836,100**           | ** ** | **3,847,214**                | ** ** | **3,847,214**               | ** ** |
| ** **                                      | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Diluted  Loss per Share**                     | ** ** | **$**                    | **(0.01**  | **)**                   | **$**      | **(0.09**                    | **)**      | **$**                       | **(0.07**  | **)** | **$** | **(0.54** | **)** |
| **Weighted  Average Common Shares Outstanding** | ** ** | **3,833,319**            | ** ** | **3,836,100**           | ** ** | **3,847,214**                | ** ** | **3,847,214**               | ** ** |
|                                                 |            |                          |            |                         |            |                              |            |                             |            |  |  |  |  |  |  |

 

----

**(a) Includesgoodwill impairment charge of $2,314.**

 

# **For The Three Month Period Ended**

**(inthousands, except share and per share data)**

 
| ** **                                      | ** ** | **March 31,  2003** | ** ** | **June 30,  2003** | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Revenues**                                    | ** ** | **$**                    | **12,957** | ** **              | **$**      | **12,855**                   | ** ** | **$**                       | **11,651** | ** ** | **$** | **13,467** | ** ** |
| **Gross  Profit**                               | ** ** | **4,022**                | ** ** | **4,158**               | ** ** | **3,841**                    | ** ** | **3,809**                   | ** ** |
| **Net  Income**                                 | ** ** | **307**                  | ** ** | **320**                 | ** ** | **145**                      | ** ** | **276**                     | ** ** |
| **Basic  Earnings per Share**                   | ** ** | **$**                    | **0.08**   | ** **              | **$**      | **0.08**                     | ** ** | **$**                       | **0.04**   | ** ** | **$** | **0.07** | ** ** |
| **Weighted  Average Common Shares Outstanding** | ** ** | **3,776,562**            | ** ** | **3,777,895**           | ** ** | **3,792,993**                | ** ** | **3,809,857**               | ** ** |
| ** **                                      | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Diluted  Earnings per Share**                 | ** ** | **$**                    | **0.08**   | ** **              | **$**      | **0.08**                     | ** ** | **$**                       | **0.04**   | ** ** | **$** | **0.07** | ** ** |
| **Weighted  Average Common Shares Outstanding** | ** ** | **3,846,987**            | ** ** | **3,872,585**           | ** ** | **3,948,284**                | ** ** | **3,994,167**               | ** ** |
|                                                 |            |                          |            |                         |            |                              |            |                             |            |  |  |  |  |  |  |

 

**14.Subsequent Event (unaudited)**

 

OnJanuary 7, 2005, the Company terminated the Employment Agreement (the“Budd Employment Agreement”), made as of November 1, 2002, between Halifaxand Robert J. Budd (“Budd”) in connection with the Company’s acquisition ofHalifax.  Pursuant to the Budd EmploymentAgreement, Budd served as the president of Halifax.  The Company alleged a for “cause” terminationand, accordingly, filed suit against Budd which was settled in accordance withthe terms and conditions of the Confidential Settlement Agreement and MutualRelease, entered into on March 28, 2005, among the Company, VSF, VirginiaHoney, Halifax and Budd (the “Settlement Agreement”).   

 

Pursuantto the Settlement Agreement, the Promissory Note, dated November 1, 2002,in the original principal amount of $345,781 issued by Halifax to Budd, payablein a lump sum on April 1, 2006, which was assumed by the Company inconnection with its acquisition of Halifax, was amended to provide for paymentin 78 bi-weekly installments of $4,240.78, without interest (the “BuddNote”).  In addition, the Budd EmploymentAgreement remained terminated but the Company agreed to reinstate Budd as anemployee of the Company for three years at a reduced annual salary of $51,500****plus health insurance

 

40

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coverageand participation in all other Company employee benefits programs on the sameterms and conditions as other employees. Budd will perform those duties specified by Mr. Hess from time totime, but such duties will be limited so as to permit Budd to assume otherresponsibilities for other employers. The Settlement Agreement also provides that if, by April 30, 2005,the lawsuit brought against Halifax prior to its acquisition by the Company andto which the Company and VSF were added as defendants in 2004 (the “Lawsuit”) isnot fully settled so as to preclude the Company from having any liability or ifthe Company is not dismissed with prejudice from the Lawsuit as a defendant,Budd will pay the fees and costs incurred by the Company with respect to theLawsuit as of the date hereof and provide the Company with documentationreasonably sufficient to demonstrate Budd’s ability to indemnify the Companyfrom any further expenditures that the Company may incur in the Lawsuit.  In the event that any such amounts are notpaid by Budd, the Company will be entitled to offset such amounts against anypayments due to Budd under the Budd Note. Finally, the Settlement Agreement contains a mutual release by theparties.

 

41

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**Item 9. Changes In and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

No changes in accountants or disagreementswith accountants on accounting and financial disclosure occurred.

 

**Item 9A. Controls and Procedures.**

 

Under the supervision and with theparticipation of the Company’s management team, the principal executive officerand principal financial officer have evaluated the effectiveness of the designand operation of the Company’s disclosure controls and procedures as defined inRules 13a – 15(e) and 15d – 15(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), as of December 31, 2004 and,based on their evaluation, have concluded that these controls and proceduresare effective.  There were no changes inthe Company’s internal control over financial reporting during the fiscalquarter ended December 31, 2004 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

Disclosure controls and procedures are designed toensure that information required to be disclosed by the Company in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports that it files under the Exchange Act is accumulatedand communicated to the Company’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met. In addition, thedesign of any control system is based in part upon certain assumptions aboutthe likelihood of future events. Because of these and other inherent limitationsof control systems, there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless ofhow remote.

 

**Item 9B. Other Information.**

 

All information required to be disclosed in a reporton Form 8-K during the fourth quarter of 2004 has been reported.

 

**PART III**

 

**Item 10. Directors and Executive Officers of the Registrant.**

 

The information required bythis Item 10 is incorporated herein by reference to the information set forthunder the captions “Election of Directors,” “Executive Officers” and“Section 16(a) Beneficial Ownership Reporting Compliance” in theCompany’s definitive Proxy Statement for the 2005 Annual Meeting ofStockholders.

 

# **Item11. Executive Compensation.**

#  

The information required by this Item 11 isincorporated by reference to the information set forth under the caption“Compensation of Executive Officers” in the Company’s definitive ProxyStatement for the 2005 Annual Meeting of Stockholders.

 

42

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**Item 12. Security Ownershipof Certain Beneficial Owners and****Management and Related StockholderMatters.**

 

The information required by this Item 12 isincorporated by reference to the information set forth under the caption “SecurityOwnership of Principal Holders and Management” in the Company’s definitiveProxy Statement for the 2005 Annual Meeting of Stockholders.

 

**Item 13. Certain Relationships and Related Transactions.**

 

The information required by this Item 13 isincorporated by reference to the information set forth under the caption“Certain Relationships and Related Transactions” in the Company’s definitiveProxy Statement for the 2005 Annual Meeting of Stockholders.

 

**Item 14. Principal Accountant Feesand Services.**

 

The information required by this Item 14 isincorporated by reference to the information set forth under the caption “AuditCommittee Disclosure” in the Company’s definitive Proxy Statement for the 2005Annual Meeting of Stockholders.

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules.**

 

(a)(1),(a)(2) and (c):                                       The Company has filed its consolidatedfinancial statements in Part II, Item 8 of this Annual Report onForm 10-K.

 

(a)(3) and (b):                        Listed below are the exhibits filed as partof this Annual Report on Form 10-K:

 

43

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|------------------------|
|       |       |                   |
| (1)        | 2.1        |                   | Stock Purchase Agreement, dated as of June 29, 2001, between  Vita Food Products, Inc., Virginia Honey Company, Inc. and Terry W.  Hess (Ex. 2.1) |
|       |       |                   |   |
| (2)        | 2.2        |                   | Merger Agreement, dated as of October 17, 2002, between the  Company, Vita Holdings, Inc., Vita/Halifax Acquisition Company, Halifax,  Robert J. Budd, Oak Hill Family LLC and Terry W. Hess (Ex 2.2) |
|       |       |                   |   |
| (3)        | 3.1        |                   | Articles of Incorporation of the Company (Ex. 3.1) |
|       |       |                   |   |
| (3)        | 3.2        |                   | By-laws of the Company (Ex. 3.2) |
|       |       |                   |   |
| (3)        | 4.1        |                   | Form of Common Stock Certificate (Ex. 4.1) |
|       |       |                   |   |
| (4)        | 10.1       |                   | Loan and Security Agreement dated as of September 5, 2003 by and  between the Company and LaSalle National Bank, N.A. (Ex. 10.1) |
|       |       |                   |   |
|       | 10.1.1     |                   | First Amendment to Loan and Security Agreement dated November 5,  2004 * |
|       |       |                   |   |
| (5)        | 10.1.2     |                   | Second Amendment to Loan and Security Agreement dated  December 21, 2004 (Ex. 10.1) |
|       |       |                   |   |
| (3)        | 10.2       |                   | Form of 1996 Employee Stock Option Plan (Ex. 10.4) (x) |
|       |       |                   |   |
| (3)        | 10.3       |                   | Form of 1996 Stock Option Plan for Non-Employee Directors (Ex.  10.5) (x) |
|       |       |                   |   |
| (3)        | 10.4       |                   | Form of Employment Agreement between the Company and Stephen D.  Rubin (Ex. 10.7) (x) |
|       |       |                   |   |
| (6)        | 10.4.1     |                   | Amendment One to Employment Agreement between the Company and Stephen  D. Rubin (Ex. 10.4.1) (x) |

 

----

(1) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on August 30, 2001. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

(2) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on November 6, 2002. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

(3) Incorporatedby reference to Form SB-2 Registration Statement (File No. 333-5738),filed with the Securities and Exchange Commission on September 23,1996.  Form SB-2Exhibit Number is included in parenthesis following the title of theexhibit.

 

(4) Incorporatedby reference to Form 10-Q for the fiscal quarter endedSeptember 30, 2003, filed with the Securities and Exchange Commission onNovember 14, 2003. Form 10-Q Exhibit Number is included inparenthesis following the title of the exhibit.

 

(5) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on January 6, 2005. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

(6) Incorporatedby reference to Form 10-QSB for the fiscal quarter endedJune 30, 1999, filed with the Securities and Exchange Commission onAugust 9, 1999.  Form 10-QSBExhibit Number is included in parenthesis following the title of theexhibit.

 

(x)Indicates an employee benefit plan, management contract or compensatory plan orarrangement.

 

44

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| **Number** | ** ** | **Exhibit Title** |                                                                                  |
|------------|------------|------------------------|---------------------------------------------------------------------------------------|
|       | 10.4.2     |                   | Amendment Two to Employment Agreement between the Company and Stephen  D. Rubin * (x) |   |
|       |       |                   |                                                                                  |   |
|       | (7)        | 10.5                   |                                                                                  | Employment Agreement dated as of January 1, 2004 between the  Company and Clark L. Feldman (Ex. 10.6) (x) |
|       |       |                   |                                                                                  |   |
|       | (3)        | 10.6                   |                                                                                  | Long Term Supply/Purchase Agreement dated as of September 1,  1992 by and between the Company and Barry’s Limited (Ex. 10.9) |
|       |       |                   |                                                                                  |   |
|       | (3)        | 10.7                   |                                                                                  | Gorenstein Agreement dated September 20, 1996 by and among the  Company, Stephen D. Rubin, Clark L. Feldman, Sam Gorenstein, David Gorenstein  and J.B.F. Enterprises (Ex. 10.26) |
|       |       |                   |                                                                                  |   |
|       | (1)        | 10.8                   |                                                                                  | Form of Employment Agreement, dated as of July 1, 2001,  between Virginia Honey Company, Inc. and Terry W. Hess (First  Exhibit to Ex. 2.1) (x) |
|       |       |                   |                                                                                  |   |
|       |       | 10.8.1                 |                                                                                  | Amendment One to Employment Agreement between Virginia Honey  Company, Inc. and Terry W. Hess * (x) |
|       |       |                   |                                                                                  |   |
|       | (8)        | 10.9                   |                                                                                  | Employment Agreement, made as of November 1, 2002 between The  Halifax Group, Inc. and Robert J. Budd (Ex. 10.1) |
|       |       |                   |                                                                                  |   |
|       | (8)        | 10.10                  |                                                                                  | Amendment to Employment Agreement, made as of March, 2003 between The  Halifax Group, Inc. and Robert J. Budd (Ex. 10.2) |
|       |       |                   |                                                                                  |   |
|       | (8)        | 10.11                  |                                                                                  | Non-Competition and Non-Solicitation Agreement, made as of  November 1, 2002 among Vita Food Products, Inc., Vita Holdings, Inc.,  The Halifax Group, Inc. and Robert J. Budd (Ex. 10.3) |
|       |       |                   |                                                                                  |   |
|       |       | 10.12                  |                                                                                  | Confidential Settlement Agreement and Mutual Release, entered into on  March 28, 2005, among the Vita Food Products, Inc., Vita Specialty  Foods, Inc., Virginia Honey Company, Inc., The Halifax  Group, Inc. and Robert J. Budd * (x) |
|       |       |                   |                                                                                  |   |
|       | (7)        | 14.1                   |                                                                                  | Code of Ethics (Ex. 14.1) |
|       |       |                   |                                                                                  |   |
|       | (7)        | 21.1                   |                                                                                  | Subsidiary of the Company (Ex. 21.1) |
|       |       |                   |                                                                                  |   |
|       |       | 23.1                   |                                                                                  | Consent of Independent Registered Public Accounting Firm * |
|       |       |                   |                                                                                  |   |
|       |       | 31.1                   |                                                                                  | Principal Executive Officer Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 * |
|            |            |                        |                                                                                       |  |  |  |  |  |

 

----

(7) Incorporatedby reference to Form 10-K for the fiscal year endedDecember 31, 2003, filed with the Securities and Exchange Commission onMarch 30, 2004.  Form 10-KExhibit Number is included in parenthesis following the title of theexhibit.

 

(8) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on January 13, 2005. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

*Filed herewith.

 

45

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| **Number** | ** ** | **Exhibit Title** |                                                                                                        |
|------------|------------|------------------------|-------------------------------------------------------------------------------------------------------------|
|       |       |                   |
|       | 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 Executive Officer Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 * |

 

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* Filed herewith.

 

46

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | **VITA FOOD PRODUCTS, INC.** |
|--------|------------------------------|
|   |                         |   |   |
|   |                         |   |   |
|   | By:                          |   | /s/ Stephen D. Rubin |   |
|   |                         |   |   |
|   |                         | Stephen D. Rubin |   |
|   |                         | President |   |
|   |                         |   |   |
|   | Date:                        | March 28, 2005 |   |
|        |                              |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the following capacitieson March 28, 2005.

 
| **Signatures**          | ** ** | **Title**                                            |
|-------------------------|------------|------------------------------------------------------|
|                    |       |                                                 |
| /s/ Stephen D. Rubin    |       | Director and President                               |
| Stephen D. Rubin        |       | (Principal Executive  Officer)                       |
|                    |       |                                                 |
| /s/ Clark L. Feldman    |       | Director, Executive Vice  President and Secretary    |
| Clark L. Feldman        |       |                                                 |
|                    |       |                                                 |
| /s/ Clifford K. Bolen   |       | Senior Vice President,  Chief Financial Officer      |
| Clifford K. Bolen       |       | and Treasurer                                        |
|                    |       | (Principal Financial and  Accounting Officer)        |
|                    |       |                                                 |
| /s/ Terry W. Hess       |       | Director, Chief Executive  Officer of Vita Specialty |
| Terry W. Hess           |       | Foods, Inc.                                     |
|                    |       |                                                 |
| /s/ Michael Horn        |       | Director                                             |
| Michael Horn            |       |                                                 |
|                    |       |                                                 |
| /s/ Neal Jansen         |       | Director                                             |
| Neal Jansen             |       |                                                 |
|                    |       |                                                 |
| /s/ Steven A. Rothstein |       | Director                                             |
| Steven A. Rothstein     |       |                                                 |
|                    |       |                                                 |
| /s/ John C. Seramur     |       | Director                                             |
| John C. Seramur         |       |                                                 |
|                    |       |                                                 |
| /s/ Joel D. Spungin     |       | Director                                             |
| Joel D. Spungin         |       |                                                 |

 

47

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**Exhibit Index**

 
| **Number** | ** ** | **Exhibit Title** |
|------------|------------|------------------------|
|       |       |                   |
| (1)        | 2.1        |                   | Stock Purchase Agreement, dated as of June 29, 2001, between  Vita Food Products, Inc., Virginia Honey Company, Inc. and Terry W.  Hess (Ex. 2.1) |
|       |       |                   |   |
| (2)        | 2.2        |                   | Merger Agreement, dated as of October 17, 2002, between the  Company, Vita Holdings, Inc., Vita/Halifax Acquisition Company, Halifax,  Robert J. Budd, Oak Hill Family LLC and Terry W. Hess (Ex 2.2) |
|       |       |                   |   |
| (3)        | 3.1        |                   | Articles of Incorporation of the Company (Ex. 3.1) |
|       |       |                   |   |
| (3)        | 3.2        |                   | By-laws of the Company (Ex. 3.2) |
|       |       |                   |   |
| (3)        | 4.1        |                   | Form of Common Stock Certificate (Ex. 4.1) |
|       |       |                   |   |
| (4)        | 10.1       |                   | Loan and Security Agreement dated as of September 5, 2003 by and  between the Company and LaSalle National Bank, N.A. (Ex. 10.1) |
|       |       |                   |   |
|       | 10.1.1     |                   | First Amendment to Loan and Security Agreement dated November 5,  2004* |
|       |       |                   |   |
| (5)        | 10.1.2     |                   | Second Amendment to Loan and Security Agreement dated  December 21, 2004 (Ex. 10.1) |
|       |       |                   |   |
| (3)        | 10.2       |                   | Form of 1996 Employee Stock Option Plan (Ex. 10.4) (x) |
|       |       |                   |   |
| (3)        | 10.3       |                   | Form of 1996 Stock Option Plan for Non-Employee Directors (Ex.  10.5) (x) |
|       |       |                   |   |
| (3)        | 10.4       |                   | Form of Employment Agreement between the Company and Stephen D.  Rubin (Ex. 10.7) (x) |
|       |       |                   |   |
| (6)        | 10.4.1     |                   | Amendment One to Employment Agreement between the Company and Stephen  D. Rubin  (Ex. 10.4.1) (x) |
|            |            |                        |  |  |

 

----

(1) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on August 30, 2001. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

(2) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on November 6, 2002. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

(3) Incorporatedby reference to Form SB-2 Registration Statement (File No. 333-5738),filed with the Securities and Exchange Commission on September 23,1996.  Form SB-2Exhibit Number is included in parenthesis following the title of theexhibit.

 

(4) Incorporatedby reference to Form 10-Q for the fiscal quarter endedSeptember 30, 2003, filed with the Securities and Exchange Commission onNovember 14, 2003. Form 10-Q Exhibit Number is included inparenthesis following the title of the exhibit.

 

 (5) Incorporated by reference toForm 8-K filed with the Securities and Exchange Commission onJanuary 6, 2005.  Form 8-KExhibit Number is included in parenthesis following the title of theexhibit.

 

(6) Incorporatedby reference to Form 10-QSB for the fiscal quarter endedJune 30, 1999, filed with the Securities and Exchange Commission onAugust 9, 1999.  Form 10-QSBExhibit Number is included in parenthesis following the title of theexhibit.

 

(x)Indicates an employee benefit plan, management contract or compensatory plan orarrangement.

 

48

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|------------------------|
|       |       |                   |   |
|       | 10.4.2     |                   | Amendment Two to Employment Agreement between the Company and Stephen  D. Rubin  * (x) |
|       |       |                   |   |
| (7)        | 10.5       |                   | Employment Agreement dated January 1, 2004 between the Company  and Clark L. Feldman (Ex. 10.6) (x) |
|       |       |                   |   |
| (3)        | 10.6       |                   | Long Term Supply/Purchase Agreement dated as of September 1,  1992 by and between the Company and Barry’s Limited (Ex. 10.9) |
|       |       |                   |   |
| (3)        | 10.7       |                   | Gorenstein Agreement dated September 20, 1996 by and among the  Company, Stephen D. Rubin, Clark L. Feldman, Sam Gorenstein, David Gorenstein  and J.B.F. Enterprises (Ex. 10.26) |
|       |       |                   |   |
| (1)        | 10.8       |                   | Form of Employment Agreement, dated as of July 1, 2001,  between Virginia Honey Company, Inc. and Terry W. Hess (First  Exhibit to Ex. 2.1) (x) |
|       |       |                   |   |
|       | 10.8.1     |                   | Amendment One to  Employment Agreement between Virginia Honey  Company, Inc. and Terry W. Hess * (x) |
|       |       |                   |   |
| (8)        | 10.9       |                   | Employment Agreement, made as of November 1, 2002, between The  Halifax Group, Inc. and Robert J. Budd (Ex. 10.1) |
|       |       |                   |   |
| (8)        | 10.10      |                   | Amendment to Employment Agreement, made as of March, 2003 between The  Halifax Group, Inc. and Robert J. Budd (Ex. 10.2) |
|       |       |                   |   |
| (8)        | 10.11      |                   | Non-Competition and Non-Solicitation Agreement, made as of  November 1, 2002 among Vita Food Products, Inc., Vita  Holdings, Inc., The Halifax Group, Inc. and Robert J. Budd (Ex.  10.3) |
|       |       |                   |   |
|       | 10.12      |                   | Confidential Settlement Agreement and Mutual Release, entered into on  March 28, 2005, among the Vita Food Products, Inc., Vita Specialty  Foods, Inc., Virginia Honey Company, Inc., The Halifax  Group, Inc. and Robert J. Budd.* (x) |
|       |       |                   |   |
| (7)        | 14.1       |                   | Code of Ethics (Ex. 14.1) |
|       |       |                   |   |
| (7)        | 21.1       |                   | Subsidiary of the Company (Ex. 21.1) |
|       |       |                   |   |
|       | 23.1       |                   | Consent of Independent Registered Public Accounting Firm * |
|       |       |                   |   |
|       | 31.1       |                   | Principal Executive Officer Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002* |

 

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(7) Incorporatedby reference to Form 10-K for the fiscal year endedDecember 31, 2003, filed with the Securities and Exchange Commission onMarch 30, 2004.  Form 10-KExhibit Number is included in parenthesis following the title of theexhibit.

 

(8) Incorporatedby reference to Form 8-K filed with the Securities and ExchangeCommission on January 13, 2005. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

 

*Filed herewith.

 

 

49

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|------------------------|
|       |       |                   |   |
|       | 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* |

 

----

* Filed herewith.

 

50

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