**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**
| **x**                                            | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE   SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|
| ** **                                       | ** ** | ** **                                                                                      |
| **For the  fiscal year ended December 31, 2006** |
| ** **                                       |
| **o**                                            | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                       | ** ** | ** **                                                                                      |

Forthe transition period from           to           

 

CommissionFile Number 1-12599

 

**VITA FOOD PRODUCTS, INC.**

(Exactname of registrant as specified in its charter)

 

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

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

(Address of principalexecutive offices)   (Zip code)

 

Registrant’s telephonenumber, including area code:   **(312)738-4500**

 

Securitiesregistered pursuant to Section 12(b) of the 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 if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.   Yes o    No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.   Yes o    No x

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. .   Yes x    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one):

 

Large Accelerated Filer _____ Accelerated Filer ______ Non-acceleratedFiler _____ X ____ 

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule12b-2 of the Exchange Act)Yes o    No x

 

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The aggregate market value of common stock held bynon-affiliates of the registrant as of June 30, 2006 was $7,246,158.

Thenumber of shares outstanding of the registrant’s common stock as of March 30,2007 was 4,935,247.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the definitive Proxy Statement to bedelivered to stockholders in connection with the Annual Meeting of Stockholdersto be held on May 17, 2007 are incorporated by reference in Part III.

**PART I**

**Item 1.   Business.**

**Introduction**

Vita Food Products, Inc. (the “Company”) has beenengaged in the sale of specialty food products under the **Vita**brandname for over 70 years.  The Companybelieves that its long history of producing and marketing quality products hascreated a strong recognition of the **Vita** brand nameamong consumers 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 “InstitutionalPurchasers”).  The Company believes that “**Vita**”, with its accompanying logo, is the most widelyrecognized brand name in herring products and cured and smoked salmonproducts.  The Company is the leadingprocessor of herring products and cured and smoked salmon products in theUnited States and has been producing and selling herring products for over 70years and cured and smoked salmon products for over 30 years. The Company’sproducts include a variety of cuts of pickled herring in cream and wine basedsauces, 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-packing arrangements, withthe exception of the salad dressing products, which are now produced by theCompany’s subsidiary. Historically, the Company has increased its sales throughacquisitions that have enabled the Company to add new product lines and expandits existing product lines.  The Companymarkets and, in some cases, also produces related specialty food products underother brand names, some of which are recognized regional brand names, incertain regions of the country, that have been licensed to the Company.

The Company significantly expanded its line ofspecialty food products in 2002 and 2001 with the acquisitions of The HalifaxGroup, Inc. (“Halifax”) and the Virginia Honey Company, Inc. (“VirginiaHoney”), respectively. The Company has formed Vita Specialty Foods, Inc.  (“VSF”) as a wholly owned subsidiary and aseparate business unit (the “Vita Specialty Foods Segment”) to consolidate theoperations of Virginia Honey and Halifax (the Company’s operations conductedseparately from the operations of the Vita Specialty Foods Segment are referredto herein as the “Vita Seafood Segment” and references to the Company includethe acquired operations subsequent to their respective acquisition dates).  The Vita Specialty Foods Segment specializesin processing and marketing, (i) under the **Virginia Brand**name, honey, salad dressings, sauces, jams andjellies and gift basket products; (ii) under its **Oak Hill Farms**® brand name, a line of saladdressings, gourmet sauces, and beverages; and (iii) under its **Scorned Woman**® brand name, a line of hotsauce based products.  In addition, theVita Specialty Foods Segment has brand name product licensing agreements with **BudweiserTM, Jim Beam**®,**Allied Domecq** (expired June 30,2006) for the brand names **Kahl****úa**® and **Courvoisier**®, and certain colleges anduniversities under which the Company produces and markets various cookingsauces, steak sauces, marinades and other gourmet related products. As a resultof the acquisitions of Halifax and Virginia Honey, the Company leveraged itssales and distribution network to provide national exposure to the products ofthe Vita Specialty Foods Segment.  TheCompany also expects to continually introduce new products with a goal ofenhancing the aforementioned brand names under the Vita Seafood Segment and theVita Specialty Foods Segment.

**Company Background**

The Company was originally incorporated as Vita FoodProducts, Inc. in 1928.  In 1968, Brownand Williamson Tobacco Company, a British company, purchased the Company. TheCompany was then acquired by Dean Foods Company in 1978. In 1982, Mr. Stephen D.Rubin and Mr. Clark L. Feldman, on 

 

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behalf of an investor group (the “Investors”),negotiated the acquisition of the Company from Dean Foods Company and becamethe Company’s largest shareholders. On September 20, 1996, the Company reincorporatedin the State of Nevada through a merger of Vita Food Products, Inc., anIllinois corporation (“Vita-Illinois”), and V-F Acquisition, Inc., anIllinois corporation that was the largest shareholder of Vita-Illinois, intothe Company, a Nevada corporation formed for the purpose of effecting thereincorporation. On January 23, 1997, the Company completed an initialpublic offering of shares of its common stock, par value $.01 per share (“CommonStock”), and redeemable common stock purchase warrants, which expired in 2002,resulting in net proceeds before expenses of approximately $4.1 million.

Effective July 1, 2001, the Company acquired 100% ofthe outstanding shares of capital stock of Virginia Honey.  The results of Virginia Honey have been includedin the Company’s consolidated financial statements since the effective date ofthe acquisition as part of the Vita Specialty Foods Segment.  Virginia Honey was established in 1962 as asmall beekeeping business.  Since then,Virginia Honey has expanded its product offerings to include salad dressingsand by 1998 the company had grown to include two production facilities, withone used to pack honey products and the second to process and pack saladdressings, sauces and marinades.

Effective November 1, 2002, the Company acquired 100%of the outstanding shares of capital stock of Halifax.  The results of Halifax have been included inthe Company’s consolidated financial statements since the effective date of theacquisition 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**®. During 2005, the licensingagreements for both **HBO**® and **Drambuie**® expired. Halifax operations wererun in a production facility and warehouse in Georgia, until late in 2003 whenoperations were moved to the Company’s Martinsburg, West Virginia plant.

**Strategy**

The Company’s long-term strategy is to (i) focus onacquisitions; (ii) continue to strengthen its brands; and (iii) capitalizeon the strength of the Company’s national distribution network to increase itsmarket share for its existing products and introduce and market new productssold under the **Vita**,**Elf, Grand Isle, Virginia Brand**,**Oak Hill Farms, BudweiserTM, Jim Beam Gourmet Foods, Scorned Woman**and other brand names owned, purchased or licensed from third parties. TheCompany intends to implement its growth strategy through acquiring, or enteringinto joint ventures with, companies producing complementary specialty foodproducts, introducing and developing new products and increasing its marketingefforts.

**Products**

General

The Company’s products include: herring, cured andsmoked salmon, honey, salad dressings, meat enhancements and a variety ofrelated specialty food products. The Company’s refrigerated products can belocated in the dairy, meat and fish or deli department of Supermarkets.  The Company also sells products in thegrocery sections of Supermarkets. Many of the Company’s products are also sold inbulk to Institutional Purchasers. The Company believes that, although themarket for herring products has been and is expected to remain constant, themarket for salmon products and certain other specialty products is increasing.Consumption of fresh and frozen seafood in the United States continues toincrease, 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 alsoreceives the symbol of certification for the use of many of its products forPassover from the Orthodox Union. The Company believes that the market forkosher foods will continue to grow and that this represents a significantopportunity for the Company. The increase in consumption of kosher foodproducts is at least partially the result of (i) the perception by certainconsumers who are not bound by Judaism’s religious dietary restrictions thatkosher certification indicates a superior product, and (ii) an increase inthe U.S. population of members of other religious groups that observe dietaryrestrictions similar to many Jewish people.

 

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**Vita SeafoodSegment Products**

***Herring***

Vita & Elf brand herring are made from the bestavailable grade of ocean herring.  Theherring is cured and mixed with a variety of high quality spices, wines andother ingredients according to the Company’s proprietary formulations toproduce a number of products.  Theseproducts are then either packaged in vacuum-sealed glass jars to preserveflavor for sale to Supermarkets or packaged in bulk containers for sale toInstitutional Purchasers. Herring is a traditional Eastern European andScandinavian staple, being one of the most widely consumed fish in theworld.  In the United States, herring ismore of a specialty product that is served at parties or holiday gatherings.Herring products are often served as appetizers, part of a buffet, between-mealsnacks or an ingredient in salads.  TheCompany’s most popular herring products are its “**Vita**Herring in Wine Sauce” and “**Vita** Herring inReal Sour Cream.”  The Company also sellsa variety of other herring products under the **Vita**and**Elf**brand names.  Sales of herring products represented 26%,29% and 29% of total consolidated sales for the years ended December 31,2006, 2005 and 2004, respectively.

***Salmon***

Vita uses only premium and quality grades of salmonfrom Southeastern Alaska, Canada, Chile, and other regions of the world. Thesalmon is cured, smoked, and sliced 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 “NoPreservative” premium smoked Atlantic Salmon products, under the “**Grand Isle**” brand name in the fourth quarter of 2004. 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 salmonproducts are generally served as part of buffets at parties, particularlyduring the Christmas holiday season, or as a traditional brunch item withbagels.  The salmon products are alsoserved as appetizers at formal parties and are being more frequently used aslight meals.****The Company’s salmon productsinclude “**Vita** Lox Salmon,” “**Vita**Nova Salmon,” and “**Vita****Classic** Salmon,” “**Grand Isle**Salmon,” “**Vita**Salmon Burger,” “**Vita** Marinated Salmon,” and “**Vita**Salmon Spread”.  Sales of salmon productsrepresented 29%, 25% and 24% of total consolidated sales for the years endedDecember 31, 2006, 2005 and 2004, respectively.

***Complementary Products***

The Company sells a number of spreads and condiments,including horseradish, cream cheese with smoked salmon, cocktail and tartarsauces, and shrimp cocktail products. These products are used as appetizers andcondiments to accompany light meals and holiday trays. These products aremarketed by the Company under the **Vita** brandname, but produced by third parties pursuant to co-packing arrangements.  Sales of complementary products represented2%, of total consolidated sales for each of the years ended December 31,2006, 2005 and 2004.

**Vita SpecialtyFoods Segment Products**

***Salad Dressings***

The Company manufactures and markets three premiumlines of salad dressings.  Two lines areunder the **Virginia Brand** and **OakHill Farms**names and are sold in the grocery section. Thethird line, which has been developed since the acquisition of Virginia Honey,is under the **Vita** brand name and is soldrefrigerated.  All salad dressing flavorsfeature the finest ingredients available and most contain the Vidalia® Onioningredient. While all of the dressings boast premium quality and taste, somealso feature no cholesterol, low fat, low carbohydrates, and low calories. TheCompany’s salad dressing customers are mainly Supermarkets.  Sales of salad dressings represented 22%, 25%and 25% of total consolidated sales for the years ended December 31, 2006,2005 and 2004, respectively.

***Honey***

Virginia Honey, followed by the Vita Specialty FoodsSegment, has been packing and marketing Pure, Grade “A” honey under the **Virginia Brand** name since 1962. The honeyis available in several varieties and blends, including Clover, Wildflower,Orange Blossom, and Acacia. Each variety is available in 

 

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many sizes ranging from 6oz mugs to 55-gallon drumsused for food service. The Company’s customers include Supermarkets,Institutional Purchasers, bakeries and major food processors. Sales of honeyproducts represented 11%, 12% and 13% of total consolidated sales for the yearsended December 31, 2006, 2005 and 2004, respectively.

***Specialty Products***

The Company manufactures and sells BBQ sauces,marinades, steak sauce, hot sauces, wing sauce, gourmet cooking sauces andother specialty items. These products are marketed by the Company under the **Oak Hill Farms** and **Scorned Woman** brand names and underlicensing agreements with **BudweiserTM Jim Beam®**.

In addition, the Company sells a wide array of otherproducts including molasses, baking mixes, syrups, condiments, cider, mustard,jams, jellies, and preserves. These products are marketed by the Company underthe **Virginia Brand** name, butproduced by third parties pursuant to co-packing arrangements. Sales ofspecialty products represented 10%, 7% and 7% of total consolidated sales forthe years ended December 31, 2006, 2005 and 2004, respectively.

**Newer Products**

The Company’s newer products are those beingintroduced currently and during the past year and are developed by the Companyor marketed under co-packing arrangements or distribution agreements.

The Company introduced its **BudweiserTM**line of sauces made with **Budweiser®** beerin July 2006.  Included are four items; **BudweiserTM** Barbeque Sauce, Basting Sauce, Beechwood SmokedBarbeque Sauce and Wing Sauce.

**Certain FinancialInformation**

See Note 11 in “Item 8. Financial Statements” forinformation regarding revenues from external customers, profit and total assetsof each of the Company’s business segments.

**ProductDistribution and Sales**

The Company’s products, under both segments, are currentlysold through a national distribution network of approximately 60 establishedretail and institutional/food service brokers. The Company believes that it isthe only processor of herring products and cured and smoked salmon productsthat has established such an extensive national distribution network.  The Company believes it has been successfulin developing this network for a number of reasons, including the recognitionof the **Vita** brand name and the Company’sreputation for producing quality products. The Company has also been able todevelop and strengthen its distribution network by providing adequate shelfspace for its products. The Company’s current marketing efforts and itslong-term relationship with many of the food brokers has also contributed tothe strength of this network. The Company, through its marketing efforts,attempts to maintain good relationships with the Supermarkets and InstitutionalPurchasers that purchase its products. The Company believes that its national distribution network has, inturn, helped strengthen the **Vita** brand nameand has been an important factor in the Company’s ability to introduce newproducts into the marketplace and is an important component of its acquisitionstrategy.

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 salesmanagers also assist the food brokers in their selling efforts by, among otherthings, accompanying the food brokers on local sales calls. The Companybelieves that it is one of the few companies in its market niche to employregional sales managers and that the presence of the regional sales managers hassolidified the Company’s relationship with its national distribution 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’notice. The Company believes such terms are standard in the Company’s industry.The food brokers sell the Company’s products in both the retail andinstitutional/food service markets. The retail market, consisting of 

 

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Supermarkets, has generally accounted forapproximately 93% of the Company’s net sales while Institutional Purchasershave accounted for the remaining 7% of net sales.

In addition to the Company’s three facilities, theCompany also stores and distributes its products through approximately sixwarehouse facilities owned by third parties, which are located throughout theUnited States. See “Properties” for further information.

**Customers**

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

The Company’s three largest customers represented 24%,11% and 11% of its net sales in 2006. Two of these customers represented, 20% and 12% in 2005 and 21% and 14%in 2004, respectively of its net sales. The Company does not have a long-term contractual relationship withthese customers. The Company believes the loss of any of these customers wouldhave a material adverse affect on the Company’s business, financial conditionand results of operations.  To thispoint, during 2003, the Vita Seafood Segment’s largest customer discontinued aVita Seafood Segment product resulting in a material impact to the Company’sfinancial results for 2004. However, in 2004 the Company replaced much of thisbusiness 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 arecontinually reviewing their purchasing decisions which may result in suchcustomers changing their current orders from higher margin to lower marginproducts or reducing the amount of a product or products purchased. Anymaterial change in orders or reduction in the amount of a product or productspurchased by one or more significant customers could adversely affect theCompany’s business, financial condition and results of operations.

**Foreign Sales**

The Company had sales to foreign countries totaling$655,000, $1,471,000 and $2,076,000 during 2006, 2005 and 2004, respectively.

**Product ReturnPolicy**

The Vita Seafood Segment guarantees the sale of mostof its products sold in Supermarkets, excluding warehouse clubs, which salesrepresent approximately 76% of that segment’s sales. This guarantee helpsensure that consumers receive fresh products. Under the guarantee, the majorityof customers are issued an allowance off-invoice to cover products not soldbefore the expiration date. Other customers with product not sold before theexpiration date have the right to return unsold product to the Company throughits food brokers or dispose of the unsold product themselves or through a fooddistributor. A credit is then issued to the Supermarket or food distributor.The Company provides a reserve that is recorded concurrently with the sale. TheCompany believes, based on its historical return rates, which have been fairlyconsistent over the past several years, that this reserve is adequate torecognize the cost of all foreseeable future product return credits associatedwith previously recognized revenues.

**Production**

***Suppliers***

The Company relies on outside suppliers for itsrequirements in producing its herring, salmon, honey, salad dressings, cookingsauces and other products.  The Companypreviously purchased most of its herring from one specialty herring harvesterand processor (the “Supplier”) located in Canada, pursuant to a supplyagreement.  Under the agreement, theSupplier had the option to supply 90% of the Company’s annual requirements forherring, provided it sold the herring at the same prices which the Company wouldpay if it purchased herring elsewhere. The Supplier guaranteed the firstpriority of supply of herring to the Company, in an amount necessary to satisfythe Company’s requirements. The agreement was terminated in 2002, but has notchanged 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. The absence of an agreement has not impacted theCompany, since the Company continues to buy from the 

 

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Supplier at competitive prices and the Company hasestablished other sources of supply it believes will be adequate in the eventthe Supplier ceases to offer herring at competitive prices. The Companycurrently purchases its other raw materials and co-packed products from anumber of sources and the Company believes that there are other suppliers fromwhich the Company could meet its requirements, 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-timeemployees in its Quality Control Departments. The primary responsibility ofthese employees is to ensure the quality of all its products by overseeing theproduction process and by frequently testing the consistency of the products asthey are produced. In addition, the Company is using certain high-tech equipmentin its production process dedicated solely to quality control purposes that theCompany believes gives it a competitive advantage.  The products produced through co-packingarrangements are subject to both the quality control procedures of the co-packingcompany and the same frequent product testing that is required of the Company’sproducts under its quality control procedures. See “Item 7 Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forinformation relating to quality control in fiscal year 2006.

**Competition**

The market for the Company’s products is highlycompetitive. The Company believes that consumers choose herring products,salmon products, honey products, salad dressing products as well as its otherspecialty products based primarily on product quality and price. Although theCompany’s competitors for herring and salmon products are generally smallregional food processors and producers, certain of the Company’s competitorsmay have greater financial and other resources than the Company and may offerlower prices on comparable products. Since a key competitive factor amongproducers of cured and smoked salmon products and herring products is price,even smaller regional companies may be able to compete effectively against theCompany due to reduced shipping costs. While the Company believes its pricesare competitive for the quality level of its products, the Company reliesprimarily on the recognition of the **Vita** brandname, its reputation for selling quality products, and the strength of itsdistribution network. The Company’s main competitors in the herring product andcured and smoked salmon product market are Lascco, Mama’s and Nathan’s, amongothers. The Company believes it is the only independent company with nationaldistribution capabilities in this market. In the honey products market, theCompany’s main competitors are Dutch Gold Honey and Sioux Bee Honey. TheCompany recognizes that the salad dressing market is very competitive and thereare large companies such as Kraft Foods, Inc. in this market.  However, the Company believes that there is aniche with the salad dressing products the Company offers.  Most of the salad dressings are based on theVidalia® Onion as an ingredient.  TheVidalia® Onion ingredient, coupled with the Company’s proprietary formulations,have created what the Company believes are unique products.

**EnvironmentalMatters**

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 forviolating specified levels for FOGs.

**IntellectualProperty**

Trademarks and trade names are of critical importanceto producers 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.

 

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*** ***

***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 share of the nationalmarket for refrigerated herring products and cured and smoked salmonproducts.  The Company believes the “**Vita**” brand name and trademark has a substantial amount ofgoodwill associated with it.  The Companybelieves the **Vita** trademark and itsaccompanying design are critical to its ability to market new products and toits marketing strategy in general.

The Company has also licensed the “**Elf**” brand name, of herring products, which the Companybelieves has widespread consumer recognition in the Midwest region of thecountry. The Company obtained all of Lyon Food Product Inc.’s rights to the “**Elf**” trademark in connection with herring products from FoodMarketing Corp. pursuant to a letter agreement (the “Letter Agreement”).  Ownership of the “**Elf**”trademark originally belonged to Food Marketing Corp. and was transferred toSuperValu, Inc., which affirmed Lyon Food’s right to use the mark as set forthin the Letter Agreement and consented to the Company’s right to use thetrademark in connection with smoked fish products.  The Letter Agreement is terminable upon sixmonths notice to the Company.  TheCompany also sells, under a new product line of premium smoked Atlantic Salmon,“**Grand Isle**.”  The Company applied for and received aregistered federal trademark for “**Grand Isle**.” In addition, the Company plans to sell, under a new product line ofmarinated salmon, “**Simply Salmon**.”  The Company has applied for and is awaitingapproval of a registered federal trademark for “**SimplySalmon**.”

***VitaSpecialty Foods Segment***

Through its acquisitions of Virginia Honey andHalifax, 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 **BudweiserTM**, **Jim Beam®**and certain colleges and universities can attract consumer attention in ahighly competitive marketplace.  TheCompany believes these licensing agreements can provide opportunities withinthe Company’s national sales and distribution network to add significant salesgrowth.  The Company plans to explore theuse of additional brand names through third-party licensing agreements as partof its overall strategy.  The Company isnot aware of any names or marks which infringe on any of those the Companyuses.  Although the Company sellsproducts under a number of other brand and trade names, such other brand ortrade names are not material to the Company’s marketing strategy. The Companyalso uses various recipes and proprietary formulations in its products, whichit maintains as trade secrets. The Company does not believe its business isotherwise dependent upon any patent, license, trademark, and service mark orcopyright.

**Product LiabilityInsurance**

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, 2006, the Company had 178 full-timeemployees.  Additionally, up to 50workers 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 Local 1546United 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**

The manufacture, processing, packaging, storage,distribution and labeling of food products are subject to extensive federal andstate laws and regulations.  In theUnited States, the Company’s business is subject to regulation by the Food andDrug Administration (the “**FDA**”).  Applicable statutes and regulations governingfood products include “standards of identity” for the content of specific typesof 

 

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foods, nutritional labeling and serving sizerequirements.  The Company believes thatits current products satisfy, and its new products will satisfy, all applicableregulations and that all of the ingredients used in its products are “generallyrecognized as safe” by the **FDA** forthe intended purposes for which they will be used.  See “Item 7 Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” for information relating to FDA labeling issues faced by theCompany in fiscal year 2006.

Vita Specialty Food Segment’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 the Vita Specialty Food Segment’suse of alcohol as an ingredient in a number of its food products.  The Company believes that its currentproducts and processes and reporting requirements satisfy all applicableregulations set forth by the ATF and its licensing provisions.

**Seasonality**

See “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Seasonality; Quarterly Results.”

**Internet Address**

The Company’s Internet address iswww.vitafoodproducts.com.  The Companymakes available, free of charge on or through its website, its annual report onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicableafter it has electronically filed such material with, or furnished it to, theSecurities and Exchange Commission.

**Item 1A.**                 Risk Factors.

The Company is subject to a number of important risksand uncertainties.  The accompanying riskfactors should be read in conjunction with the information included in thisAnnual Report on Form 10-K.

**We have incurred substantial indebtedness**.  Amounts outstanding under our revolvingcredit facility, Term A facility and Term B facility at December 31, 2006 were$7,526,730; $5,282,000 and $150,000 respectively.  The ratio of long term debt to totalcapitalization was 69% at December 31, 2006. This substantial indebtedness represents an element of risk in the eventthat our operating proceeds are insufficient to meet the principal and interestpayments on our indebtedness.  If ourcash flow is insufficient to service our debt, the value of our equity could bereduced or eliminated through foreclosure.

**Restrictionsimposed by the terms of our Loan Agreement may limit our operating andfinancial flexibility. **All of our assets have been pledged as security for any borrowingsunder our Loan Agreement. The Loan Agreement contains various business andfinancial covenants including among other things, a debt service ratio, a networth covenant and a ratio of total liabilities to tangible net worth.  Our failure to comply with our obligationsunder the Loan Agreement may result in an event of default, which, if not curedor waived, may permit acceleration of the indebtedness under the LoanAgreement.  We most likely would not havesufficient funds available to pay any accelerated indebtedness and cannot becertain that we would even have the ability to refinance acceleratedindebtedness on favorable terms should an event of default occur.

**Changesin interest rates affect the interest rate payable under our Loan Agreement**.We are exposed to interest rate fluctuations, primarily as a result of the factthat rates under our Loan Agreement are based on a factor of the prime rate andthus subject to market fluctuations.  Wedo not currently use derivative instruments to alter the interest rate characteristicsof any debt.

**Generaleconomic conditions and conditions in the retail environment could adverselyaffect our customers**.  Our largest customers are in the retailgrocery business and we guarantee the sales to the majority of these customers.  Accordingly, a slow down in the economy,especially in the retail market could directly affect our revenues andprofitability.

**We aredependent on a few large customers**.  During 2006, our three largest customersrepresented 24%, 11% and 11% of our net sales. We do not have a long term contract with either of these customers andthe loss of either customer would have a material adverse affect on the Company’sbusiness.

** **

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** **

**Reducedspending by customers could significantly impact our operating results, financialcondition and cash flows.** While we enjoy very good relationships with our customers, there can beno assurance that our principal customers will continue to purchase productsfrom us at the current levels. Orders from our customers are affected by factorssuch as new product introductions, product life cycles, inventory levels,manufacturing strategies, contract awards, competitive conditions and generaleconomic conditions. The reduction, delay or cancellation of orders or a delayin shipment of products to such customers could have a material adverse effecton our operating results, financial condition and cash flows. 

**Prices ofour raw materials regularly fluctuate**.  The cost of our raw materials, especiallyherring, salmon and honey, represents a large portion of the cost to customersof our products.  Customers may beunwilling to pay cost increases resulting from increases in raw materialprices.  A significant increase in thecost of our products which cannot be passed on to the customers could have anadverse affect on our revenues and profits.

**Howard Bedford, a member of theboard of directors, may control approximately 38.2% of our outstanding votingstock in the near future.** The Company has reached an agreement in principle with Mr. Bedford pursuantto which he would acquire additional Common Stock that would bring him to thistotal ownership percentage interest.  Byvirtue of this significant ownership percentage, Mr. Bedford would havesubstantial influence over the Company’s affairs and the election of themembers of our board of directors.  Healso may be able to prevent or cause a change in control of the Company.  If Mr. Bedford exercises all of the warrantsthat are part of the agreement, he would control approximately 48.5% of theCompany’s outstanding voting stock.

**Our reserves may be inaccurate**.  Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reportedamounts.  Actual results may differ fromthese estimates.

**Our quality control procedurescould fail to detect a quality issue**.  Although the Company has six full-timeemployees responsible primarily for ensuring the quality of all the Company’sproducts by overseeing the production process and by frequently testing theconsistency of the products as they are produced, and the Company useshigh-tech equipment in its production processes dedicated solely to qualitycontrol purposes, the Company’s quality control procedures could fail to detecta particular issue affecting the quality of one or more of its products.  See “Item 7 Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for informationrelating to quality control in fiscal year 2006.

**We havenumerous competitors with financial and other resources greater than ours**.  We encounter competition from a number ofcompetitors in the sale of our products. Many of our competitors havefinancial, product development and other resources greater than ours. Ourinability to compete with our competitors effectively by developing andintroducing innovative new products on a timely basis could have an adverseaffect on our results of operations.

**Ourbusiness is seasonal in nature**.  Many of our products are seasonal in naturecausing a concentration of annual revenue generation to occur in a relativelyshort time span.  Consequently, a loss ofbusiness during the peak business season, for any reason, may result in reducedfull year revenues.

**We may beunable to execute our acquisition strategy**.  Our long term strategy includes a focus onacquisitions.  We anticipate thatsignificant future growth, if any, will be the result of the acquisitionstrategy and the successful integration of the acquired businesses into theexisting operations.  Currently, we haveno agreements or understandings with respect to any acquisitions and there canbe no assurance that we will be successful in pursuing other potentialacquisitions.  Moreover, no assurancescan be given that any completed acquisition will be beneficial to us or thatthe operations of an acquired entity will be successfully integrated into ouroperations.  In addition, the costsassociated with this strategy, means of financing any potential acquisitions,and consummation and integration of any potential acquisitions couldsignificantly impact our financial and operating performance.

**We mayexperience significant volatility in our stock price which may negativelyimpact our ability to finance future growth**.  The trading price of our Common Stock issubject to wide fluctuations in response to quarter-to-quarter fluctuations inoperating results and other events or factors. In addition, stock markets haveexperienced extreme price and trading volume volatility in recent years. OurCommon Stock has historically had relatively small trading volumes. As aresult, small transactions in our Common Stock can have a disproportionatelylarge impact on the quoted price of the Common Stock.  We believe 

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that our futuregrowth through either current operations or any future acquisitions may be atleast partially financed through the capital markets.  Thus, fluctuations in our stock price willhave an affect on the financing available.

**We aredependent on attracting and retaining key personnel.**  The Company believes the success of theorganization is dependant upon the continued success of attracting andretaining talented personnel.

**The termsof our relationships with our suppliers could change.**  We do not have long term purchase agreementswith any supplier.  Our ability tocontinue to procure key materials at a competitive price is critical to futuresuccess.  There can be no assurance thatour current suppliers will not consolidate, go out of business, terminate theirrelationship with us or negatively change the terms upon which they serviceus.  We purchase herring from onesupplier.  Other raw materials, such assalmon, and co-packed products are purchased from a number of sources, allowingus to negotiate competitive prices.  Aconsolidation of such suppliers could have an adverse affect on the price ofour key materials.

**Tradeaccounts receivable potentially subject us to significant concentrations ofcredit risk**.  Weprimarily provide credit in the normal course of business.  In the year ended December 31, 2006, theCompany had sales to three customers representing 24%, 11% and 11% of totalannual net sales.  At December 31, 2006,these customers had open accounts receivable balances of $1,002,000, $618,000and $1,104,000, respectively.  We performongoing credit evaluations of our customers and maintain allowances forpotential credit losses, if necessary. However, actual write-offs could exceedthose recorded allowances for doubtful accounts.

**Promotionalprograms offered to our customers may result in excessive cost**.  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 our products, variousmarketing programs are offered to customers, which reimburse them for aportion, or all of their promotional activities related to our products.  We regularly review and revise, when we deemnecessary, estimates of costs to us for these marketing and merchandisingprograms based on estimates of what has been incurred by customers.  Actual costs incurred by us may differsignificantly if factors such as the level and success of the customers’programs or other conditions differ from expectations.  

**We couldexperience material goodwill impairment**.  Our assets include a substantial amount ofgoodwill.  This is a result of theacquisition of VSF.  The value of thisgoodwill is assessed at least annually. If future operating performance at this business unit were to fallsignificantly below current levels, a non-cash charge to operating earnings forgoodwill impairment could result as has happened in 2004 and 2006.  The impairments were principally due to thedecline in the sales volume of Halifax products in 2004 and overall performanceissues in 2006.

**The costand potentially reduced availability of petroleum based products and services,including freight, utilities and raw material surcharges, could impact ourprofitability**.  Anysignificant increases in the prevailing price levels or any change in thesupply availability of petroleum based products and services could have asignificant affect on our costs.  Asignificant increase in costs which cannot be passed on to our customers willhave an adverse affect on our profitability.

**Governmentregulations including any future claims could have a negative impact**.  Local authorities measure and assess theamount of certain pollutants discharged from the Chicago facility and enteringthe wastewater treatment system.  Theseauthorities have the power to fine or temporarily close that productionfacility.  Furthermore, the quality ofour products is regulated by the FDA and failure to comply with regulationscould result in a product recall or temporary closure of a facility.  The Martinsburg, West Virginia facility usesingredients under the regulation of the Alcohol, Tobacco and Firearms Agencyand failure to comply with regulations could result in a product recall ortemporary closing of the facility.

**Certainof our employees are covered under a collective bargaining agreement.**  Our production employees at the Chicagofacility, other than supervisors, are represented by the Local 1546 United Food& Commercial Workers, International Union and maintenance employees arerepresented by the Local 399 International Union of Operating Engineers.  Although we consider our labor relations tobe good, a strike, walkout or lockout occurred for a significant period of timecould have an adverse affect on results of operations.

**We couldbe exposed to increased costs and risks associated with complying withincreasing and new regulations of corporate governance and disclosure standards**.  The SEC has postponed, for one year, thecompliance date for reporting on internal controls by non-acceleratedfilers.  Despite this postponement, weexpect to continue to spend an increased amount of management time and internaland external resources to comply with changing laws, regulations and standardsrelating to corporate governance and public disclosure, including the Sarbanes-OxleyAct of 2002, new SEC regulations and

 

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American Stock Exchange rules.  In particular, Section 404 of theSarbanes-Oxley Act of 2002 requires management’s annual review and evaluationof our internal control system and attestations of the effectiveness of thesesystems by our independent auditors.  Wewill be documenting and testing internal control systems and procedures andconsidering improvements that could be necessary in order for us to comply withthe requirements of Section 404 by the end of 2007.  This process may require us to hire outsideadvisory services and has resulted in additional accounting and legalexpenses.  While we believe that wecurrently have adequate internal controls over financial reporting, in theevent that the chief executive officer, chief financial officer or independentauditors determine that the controls over financial reporting are not effectiveas defined under Section 404, investors’ perceptions of us could be adverselyaffected and could cause a decline in the market price of our stock.

**Item 1B.**                 Unresolved StaffComments.

Not applicable

**Item 2.**                Properties.

The Company produces, packages, stores, anddistributes its **Vita** and **Elf**Brand of herring and **Vita** and **Grand Isle** Brand of salmon products at the Company-owned facilitylocated in Chicago, Illinois.  TheCompany’s facility is located on 125,600 square feet of land. The facilitycontains approximately 82,200 square feet of space, including approximately65,000 square feet of production space, approximately 13,900 square feet ofrefrigerated storage space, and approximately 3,300 square feet of officespace.  LaSalle National Bank of Chicagohas a mortgage on this facility.

The Company produces, packages, stores, anddistributes its **Vita** and **Virginia Brand** salad dressing products andits **BudweiserTM** Brand,**Oak Hill Farms**, **Jim Beam**® Brand, and **ScornedWoman** Brand of products ranging from salad dressing, cooking sauces,pasta sauces, hot sauces and beverage products and its **Virginia Brand** honey products at a leasedfacility located in Martinsburg, West Virginia. The Company’s facility is located on 8.75 acres of land. The facilitycontains approximately 68,000 square feet of space, including approximately62,300 square feet of production space, and approximately 5,700 square feet ofoffice space.

The Company manufactures and stores, for its own use,plastic bottles 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. In December 2006, management determined that it would exercise itsoption to terminate its lease of the Company’s Berryville plant.  The option was exercised in February 2007 andthe lease will terminate as of April 2007. The plastic bottle manufacturing operations of this plant will beterminated and the Company will start purchasing plastic bottles for itsMartinsburg plant from third parties.  Additionally, honey processing operations willbe transferred to the Martinsburg plant other than a small industrial gradehoney processing operation which represented an immaterial product line for theCompany.

The Company believes that its current facilities,excluding the Berryville facility, provide sufficient capacity for its needs.

**Item 3.**                Legal Proceedings.

The Company is not currently involved in any materialpending legal proceedings and is not aware of any material legal proceedingsthreatened against it.

**Item 4.**          Submission of Matters to a Vote of SecurityHolders.

No matters were submitted to a vote of securityholders during the fourth quarter 2006.

**PART II**

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

 

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The Company’s Common Stock began trading on theChicago Stock Exchange on January 17, 1997, and on the American Stock Exchangeon May 12, 1997, under the symbol “VSF”. The Company believes that as of February 28, 2007 there wereapproximately 800 beneficial holders of the Company’s Common Stock.

The Company has never paid a cash dividend on itsCommon Stock and currently anticipates that all of its earnings will beretained for use 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 2006 and 2005.

| Quarter              | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|----------|------------|---------|------------|
|                 |       |     |       |    |       |
| 1st — 2006 |       | $        | 3.70       |    | $          | 1.65 |   |
| 2nd — 2006 |       | 4.70     |       | 3.15    |       |
| 3rd — 2006 |       | 3.65     |       | 2.35    |       |
| 4th — 2006 |       | 3.30     |       | 1.92    |       |
|                 |       |     |       |    |       |
| 1st — 2005 |       | 3.81     |       | 2.90    |       |
| 2nd — 2005 |       | 2.94     |       | 2.01    |       |
| 3rd — 2005 |       | 2.99     |       | 2.30    |       |
| 4th — 2005 |       | 2.32     |       | 1.63    |       |
|                      |            |          |            |         |            |  |  |

 

**Recent Sales ofUnregistered Securities**

Equity Investments

On February 16,2006, the Company entered into Subscription Agreements pursuant to which fiveindividuals or their affiliated entities (the “Equity Investors”) invested atotal of $2,500,000 in the Company. Substantially all of these funds were usedto reduce funded debt. The investors received $250,000 units, each consistingof 100,000 shares of common stock; three-year warrants to purchase 50,000shares of common stock at an exercise price of $5.00 per share; and five-yearwarrants to purchase an additional 50,000 shares of common stock at an exerciseprice of $7.50 per share. The Equity Investors included the followingindividuals or their affiliated entities: (i) Stephen D. Rubin, then Office of the Chief Executive, President anda director of the Company and currently Chairman of the Board of the Company,who invested $500,000; (ii) Clifford K. Bolen, then Office of the ChiefExecutive, Senior Vice President, Chief Operating Officer and Chief FinancialOfficer of the Company and currently President and Chief Executive Officer ofthe Company, together with certain of his affiliates, who invested $250,000;(iii) Delphi Casualty Co., of which Glenn S. Morris, a director of the Company,owns a 44% equity interest, which invested $250,000; (iv) a trust of which JohnC. Seramur, a director of the Company, serves as trustee, which invested$500,000; and (v) Howard Bedford, then a third party investor and currently amember of the Company’s Board of Directors, who invested $1,000,000.  None of the warrants have been exercised andall remain outstanding.

The Company reliedon the exemption provided by Section 4(2) of the Securities Act of 1933, asamended, and Regulation D promulgated thereunder, in connection with theunregistered sale of Common Stock to the Equity Investors.

Directors Shares

On each of August18, 2006 and November 16, 2006, the Company issued shares of Common Stock toeach of its non-employee directors in lieu of fees for attending meetings ofthe Board and its committees that took place on those dates.  The numbers of shares to be issued wasdetermined based on the amount of fees payable to each director divided by theclosing price of the Common Stock on the respective meeting date.  The number of shares issued to eachindividual director for the August and November meetings, respectively, were asfollows:

 

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|        | Glenn Morris:    | 1,447 and 1,840 |
|--------|------------------|-----------------|
|   | John Seramur:    | 1,496 and 1,840 |
|   | Steve Rothstein: | 1,628 and 1,957 |
|   | Scott Levitt:    | 1,644 and 1,887 |
|   | Howard Bedford:  | 1,447 and 1,840 |

 

The Company reliedon the exemption provided by Section 4(2) of the Securities Act of 1933, asamended, and Regulation D promulgated thereunder, in connection with the unregisteredissuance of Common Stock to the non-employee directors.

No purchases weremade by or on behalf of the Company or any “affiliated purchaser” of shares ofthe Company’s Common Stock during the fourth quarter of fiscal year 2006.

**Equity CompensationPlan Information**

The followingtable presents certain information as of December 31, 2006 with respect tocompensation plans under which Common Stock of the Company is authorized forissuance.
| **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     |       | 1,289,100  |       | $                                                                                                                                                    | 3.84       |                                                                                                        | 0          |                                                                                                                                                                                                         |
| Equity compensation  plans not approved  by security holders |       | 50,000     |       | 2.12                                                                                                                                                 |       | 425,000                                                                                                     |       |
| Total                                                        |       | 1,339,100  |       | $                                                                                                                                                    | 3.84       |                                                                                                        | 425,000    |                                                                                                                                                                                                         |

 

**Item 6.**                Selected Financial Data.

In thousands,except per share data
| **Year Ended December 31,** | ** ** | ** ** | ** ** | **2006**(4) | ** ** | **2005**(3) | ** ** | **2004**(2) | ** ** | **2003**   | ** ** | **2002**(1) | ** ** |
|--------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|-------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Net Sales**                              | ** ** | **$**      | **50,954** | ** **  | **$**      | **46,573**  |       | $           | 48,408     |       | $          | 50,641      |       | $ | 42,504 |   |
| **Operating (Loss) Profit**                | ** ** | **(1,862** | **)**      | **(358**    | **)**      | (2,219      | )          | 2,502       |       | 2,915      |       |
| **Operating Margin**                       | ** ** | **(3.70**  | **)%**     | **(0.80**   | **)%**     | (4.60       | )%         | 4.90        | %          | 6.80       | %          |
| **Net (Loss) Income**                      | ** ** | **$**      | **(2,391** | **)**       | **$**      | **(889**    | **)**      | $           | (2,717     | )          | $          | 1,048       |       | $ | 1,446 |   |
| **Basic Earnings (Loss) per Share**        | ** ** | **(0.51**  | **)**      | **(0.23**   | **)**      | (0.71       | )          | 0.28        |       | 0.39       |       |
| **Diluted Earnings (Loss) per  Share**     | ** ** | **(0.51**  | **)**      | **(0.23**   | **)**      | (0.71       | )          | 0.27        |       | 0.38       |       |
| **Cash**                                   | ** ** | **54**     | ** ** | **25**      |       | 56          |       | 125         |       | 46         |       |
| **Total Assets**                           | ** ** | **27,534** | ** ** | **27,023**  |       | 25,300      |       | 29,084      |       | 26,542     |       |
| **Long-Term Debt (less current**           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** maturities)**                      | ** ** | **14,373** | ** ** | **16,653**  |       | 15,498      |       | 17,685      |       | 14,416     |       |
| **Shareholders’ Equity**              | ** ** | **3,866**  | ** ** | **3,702**   |       | 4,564       |       | 7,192       |       | 5,993      |       |

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(1)      Includesthe results of Halifax since the effective acquisition date of November 1,2002.

(2)      Operatingresults for 2004 include a $2,314,000 goodwill impairment charge.

(3)      Operatingresults for 2005 include a $301,000 charge, net of tax benefit, to recognizethe future costs associated with a senior executive officer, whose duties werematerially reduced.

(4)      Operatingresults for 2006 include a $1,126,000 goodwill impairment charge and a longterm asset impairment charge of $193,000, net of tax benefit.

 

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**Item7.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operation.

**Comparison of Year Ended December 31, 2006 and YearEnded December 31, 2005**

**Revenues.  **Net sales forthe year ended December 31, 2006 were $50,954,000 compared to $46,573,000 for2005, an increase of approximately $4,381,000 or 9.4%. Of this increase,approximately $2,532,000 is attributable to the Vita Seafood Segment, which had2006 net sales of approximately $28,878,000, representing an increase ofapproximately 9.6% and approximately $1,849,000 is attributable to the VitaSpecialty Foods Segment, which had 2006 net revenues of approximately$22,075,000, representing an increase of approximately 9.1%. The increase forthe Vita Seafood Segment is the result of increased gross sales of salmonproducts, which were up approximately $3,253,000, off-set by minor decreases ingross sales for herring products and other products coupled with an increase insales deductions of approximately $362,000 as a result of fourth quarterpromotional activity.   The increase forthe Vita Specialty Foods Segment is the result of increased gross sales ofsauces, which were up approximately $1,918,000 and honey products, which wereup approximately $475,000. The increase in gross sales of sauces isattributable to the introduction of the**BudweiserTM**lineof sauces. The increase in honey products sales is attributable to additionalsales to an existing customer.

**Gross Margin.  **Gross Marginfor the year ended December 31, 2006 was approximately $12,787,000 compared toapproximately $13,939,000 for 2005, or a decrease of approximately $1,152,000or approximately 8.2%. The Vita Seafood Segment accounted for an increase ofapproximately $649,000 and Vita Specialty Foods Segment off-set the increasewith a decrease of approximately $1,801,000. The increased gross margin forVita Seafood was mainly the result of increased sales volume. As a percentageof net sales, gross margin totaled 26.3%, which was .1 percentage points underthe prior year result. Gross margin for the Vita Specialty Foods Segment, as apercentage of net sales decreased to approximately 23.5%, compared toapproximately 34.6% for the prior year. A major cause of the decline was theestablishment, in the third quarter, of a one-time reserve of approximately$430,000 to provide for costs associated with the start-up of a new line ofVita Specialty Foods’ products. These costs resulted from a one-time oversightwith respect to established quality control procedures which has been identifiedand fully rectified. In addition, an unrelated product recall caused by thefailure to declare a milk allergen on a product label resulted in theestablishment of a reserve of approximately $444,000. There have not been anyallergy issues related to this mis-labeling event and all affected product hasbeen recalled. Additional conversion and start-up costs, materials, directlabor and manufacturing expenses, were incurred relating to Vita SpecialtyFoods Segment new products.

**Operating Expenses.  **Selling,marketing and administrative expenses for the year ended December 31, 2006 wereapproximately $13,203,000 compared to approximately $13,796,000 for 2005, animprovement of approximately $593,000 or approximately 4.3%. As a percentage ofnet sales these expenses decreased to 25.9% from 29.6%.  The Vita Seafood Segment is responsible forthe decrease in operating expenses with a decrease of approximately $690,000off-setting an increase in Vita Specialty Foods of approximately $98,000. Thereduction of $690,000 is mainly attributable to reduced compensation expensesas a result of headcount reductions, professional fees, ads, marketingincentives and coupons.  The $98,000increase is mainly due to freight cost increases.

**Long Term Asset Impairment Charges****.**   In December 2006, management determined that it wouldexercise its option to terminate its lease of the Company’s Berryville plant. Theoption was exercised in February 2007 and the lease will terminate as of April2007. The plastic bottle manufacturing operations of this plant will beterminated and the Company will start purchasing plastic bottles for itsMartinsburg plant from third parties. Additionally, honey processing operationswill be transferred to the Martinsburg plant other than a small industrialgrade honey processing operation which represented an immaterial product linefor the Company. Due to this decision, management evaluated the remaininglong-lived assets at this facility and determined that a $321,000 impairmentcharge was required to write down assets, primarily leasehold improvements thatcould not be transferred to Martinsburg, to their estimated fair values. Inaddition, the carrying value of these assets started being depreciated over aterm to end in April 2007. Other Berryville equipment will be sold for amountsin excess of carrying value or transferred to Martinsburg where they will beput back in operation during the second and third quarters of 2007. 

Annually,effective as of December

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31, the Companyengages an independent appraiser to assist in management’s assessment as towhether recorded goodwill is impaired. The independent appraisals are madeusing customary valuation methodologies, including discounted cash flow andother fundamental analysis and comparisons. In its 2006 assessment, managementdetermined that the Company’s recorded goodwill was in excess of its fair valueand accordingly, the Company recorded a goodwill impairment charge of$2,314,000 in 2006. The impairment was principally due to overall performanceissues in 2006.

**Employment Contract Charge.  **During the fourth quarter of 2005 a $502,000charge was recognized to account for the future costs associated with a seniorexecutive officer, pursuant to a 2005 amendment to his employment contract, whichsignificantly reduced his duties during 2006 and terminated the employmentagreement as December 31, 2006.  TheCompany paid $278,000 in 2006 without the benefit of any services from theofficer and $224,000 in 2007 as severance. There was no similar expense in 2006.

**Interest Expense.  **Interestexpense for the year ended December 31, 2006 was $1,314,000 compared to$1,082,000 for the same period in 2005, an increase of $232,000 or 21.4%.  This increase was primarily attributable tohigher interest rates on the Company’s bank loan facilities as detailed under “Liquidityand Capital Resources-Third Party Financing” and in Note 4 of “Item 8.Financial Statements”.

**Income Taxes.  **A tax creditfor the year ended December 31, 2006 of $785,000 or 24.7% of pretax loss, wasrecognized, compared to a credit of $552,000 or 38% of pretax loss, for 2005.

**Net Income.  **As a result ofthe operating results described above, net loss for the year ended December 31,2006 was approximately $(2,391,000) or approximately $(0.51) per share on botha basic and diluted per share basis. This compares to a net loss of $(889,000) or $(0.23) per share on both abasic and diluted basis for 2005, a 169.0% increase of the loss which totaledapproximately $(1,502,000) or approximately $(0.28) per share, on both basicand a diluted basis.  2006 resultsinclude the impact of the sale of 1,000,000 common shares in February 2006.

**Comparison of Year Ended December 31, 2005 and YearEnded December 31, 2004**

***Revenues.***   Net sales for the year ended December 31,2005 were $46,572,000 compared to $48,408,000 for 2004, a decrease of$1,836,000 or 3.8%. Of this decrease, $1,266,000 is attributable to the VitaSpecialty Foods Segment, which had 2005 revenues of $20,226,000, representing areduction of 5.9% and $570,000 is attributable to the Vita Seafood Segment,which had 2005 revenues of $26,346,000, representing a decrease of 2.1%. Thedecrease for the Vita Specialty Foods Segment is largely a reflection of thesales of honey products, which were down $1,178,000 and salad dressing productswhich were down $640,000.  The decreasein honey sales is a result of a 25% decrease in average selling price, sincethere was actually more pounds of honey sold in 2005 than in 2004.  These lower prices followed the open marketpricing for this commodity. Salad dressing sales decreased primarily as aresult of sales broker transition issues which affected one key regionalmarket. Partially offsetting the decline in sales of these Vita Specialty Foodproduct lines was an improvement of returns and allowances for this businessunit of $586,000, primarily due to reduced sales promotional programs. Inaddition to the decrease from the Vita Specialty Foods Segment was a decline of$570,000, or 2.1% for the Vita Seafood Segment, which was primarily the resultof an $833,000 decrease in gross sales of herring products reflecting both theloss of a significant co-pack customer which is no longer in business andreduced volume with a major wholesale club. This decrease in the herring product line was partially offset by an$114,000 increase for salmon products, primarily reflecting the success ofmarketing for both colored and natural products and an improvement of $145,000for sales returns and allowances resulting from reduced promotional costs.

***Gross Margin.*  **Gross margin for the year ended December 31, 2005 was $13,939,000compared to $14,000,000 for 2004, a decrease of $61,000 or .4%. The VitaSeafood Segment accounted for a $90,000 increase but the Vita Specialty FoodsSegment, following the large sales decline, incurred a $150,000 decrease. Theincreased gross margin for the Vita Seafood Segment, in the face of lowersales, was a result of both this segment’s ability to pass along a portion ofthe cost increases by focusing on product pricing and on the reduction of salesreturn and allowance costs. As a percentage of net sales, gross margin totaled29.9%, which was 1.0 percentage point above the 28.9% prior year result. Grossmargin for the Vita Specialty Foods Segment, as a percentage of net sales roseto 34.6%, compared to the 33.2% prior year result, as the sales decreaseoccurred largely in the lower margin honey product line. The Vita Seafood 

 

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Segment’s gross margin, as a percentage of netsales, also increased, rising to 26.4% in 2005 from 25.5% in 2004; this wasprimarily due to a combination of strategic pricing decisions, reduced salesreturns and allowances and a sales mix shift away from the lower margin resalesalmon product and in favor of the higher margin colored and natural lines.

***Operating Expenses.***   Selling, marketing, distribution andadministrative expenses for the year ended December 31, 2005 were $13,796,000compared to $13,905,000 for 2004, a decrease of $109,000 or 0.8%.  As a percentage of net sales, however, theseexpenses rose to 29.6% from 28.7% for 2004. The Vita Specialty Foods Segment accounted for a decrease of $505,000with an increase of $396,000 attributable to the Vita Seafood Segment.  The total reduction reflects a $414,000decrease for selling, marketing and distribution and a $305,000 increase inadministrative expenses.  The VitaSpecialty Foods Segment is primarily responsible for the improvement inselling, marketing and distribution expenses. This improvement primarily reflects lower total salespersons’compensation expenses of $265,000, largely as a result of the Budd settlementand additional reductions in proportion with the volume decrease plus areduction of freight out and other distribution related expenses totaling$178,000, which results from both the overall lower sales volume and from agreater portion of the current year sales being concentrated in large volumetransactions.  The decrease in selling,marketing and distribution was partially offset by a $305,000 increase inadministrative spending.  This can beexplained by increased professional fees totaling $323,000 reflecting, amongother things, the cost of work performed for the stockholders’ rights plan,acquisition investigations and the Sarbanes Oxley initiative.

***Employment Contract Charge.***   During the fourth quarter of 2005 a$502,000, charge was recognized to account for the future costs associated witha senior executive officer, pursuant to a 2005 amendment to his employmentcontract, which significantly reduced his duties during 2006 and committed theCompany to terminate the agreement in 2007. The Company paid $294,000 in 2006 without the benefit of any servicesfrom the officer and $208,000 in 2007 as severance.

***Goodwill Impairment Charge*.***  *The Company’s goodwill resulted from the acquisitionsof Virginia Honey and Halifax.  Annually,effective as of December 31, the Company engages an independent appraiserto assist in management’s assessment as to whether the recorded goodwill isimpaired. The independent appraisals are made using customary valuationmethodologies, including discounted cash flow and other fundamental analysisand comparisons. In its 2004 assessment, management determined that the Company’srecorded goodwill was in excess of its fair value and accordingly, the Companyrecorded goodwill impairment charges of $2,314,000.

***Interest Expense.***   Interest expense for the year endedDecember 31, 2005 was $1,082,000 compared to $767,000 for the same period in2004, an increase of $315,000 or 41.1%. This increase was primarily attributableto higher interest rates on the Company’s bank loan facilities as detailedunder “Liquidity and Capital Resources — Third Party Financing” and inNote 4 of “Item 8. Financial Statements”.

***Income Taxes.  ***A tax credit for the year ended December 31, 2005of $552,000 or 38% of pretax loss was recognized, compared to a credit of$269,000 or 40% of pretax income, excluding the goodwill impairment, during2004.

***Net Income.***   As a result of the operating resultsdescribed above, net loss for the year ended December 31, 2005 was $(889,000)or $(0.23) per share on both a basic and diluted per share basis. This comparesto a net loss of $(2,717,000) or $(0.71) per share on both a basic and dilutedbasis for 2004, a 67% reduction of the loss which totaled $1,882,000 or $0.48per share, on both a basic and a diluted basis.

**Seasonality; Quarterly Results**

The Company has in the past and expects in the futureto experience significant fluctuation in quarterly operating results.  Historically, the Company’s net sales and netincome, absent unusual charges, have typically been the highest in the fourthquarter of each year.  The Company’sbusiness is seasonal because its sales volume increases significantly duringthe Christmas holiday season and, to a lesser extent, during other holidays inthe fall and spring and periods of colder weather in certain sections of thecountry.  Certain of these holidays,including Passover, Easter, Yom Kippur and Rosh Hashanah, may fall in differentquarters in different years and could cause the quarterly operating results tofluctuate in the future.  However,through the Vita Specialty Foods Segment acquisitions and the introduction ofnew non-seasonal or counter-seasonal products, the variability in the Company’squarterly operating results have been less pronounced.

#  

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#  

# **Liquidityand Capital Resources**

***Working Capital***

At December 31, 2006, the Company had $6,197,000 inworking capital, compared to $7,851,000 at December 31, 2005, a decrease of$1,654,000.  As a result, the currentratio fell to 1.7 to 1.0 from 2.3 to 1.0. Primary factors contributing to the working capital reduction include anapproximately $3,784,000 increase in  accounts payable and other current liabilities due to the delayed timingof payments at both business segments at 2006 year end.  This decrease in working capital is offset byan accounts receivable increase of approximately $1,253,000 as a result ofincreased sales, an inventory increase of approximately $388,000 and an approximately$166,000 combined net increase in cash, prepaids and current deferred incometax offsetting a decrease in income taxes receivable of approximately $381,000.

***Cash Flow 2006compared to 2005***

***Cash flows from operating activities.***   Net cash provided by operating activitieswas approximately $1,501,000 for the year ended December 31, 2006, compared to$300,000 for the year ended December 31, 2005. The increase is mainly due to an increase in accounts payable due to thedelayed timing of payments at both business segments offset by an increase inaccounts receivable due to increased sales and collection in 2006 of incometaxes receivable.

***Cash flows from investing activities***.   Net cash used in investing activities was$1,184,000 and $863,000 for the years ended December 31, 2006 and 2005,respectively. During both years, this cash was used primarily for capitaladditions totaling $1,166,000 during 2006 and $841,000 during 2005. Similarcash usage is anticipated for the year ending December 31, 2007.

***Cash flows from financing activities.***   Net cash used in financing activities was$287,000 for the year ended December 31, 2006, compared to cash provided of$532,000 for the year ended December 31, 2005. The most recent year activity included $700,000 used to make thescheduled installment payment under the terms of the Virginia Honey acquisitionagreement.  During 2006, proceeds fromthe issuance of stock and exercise of stock options provided approximately$2,433,000 (see Note 10 of “Item 8-Financial Statements”) which was mainly usedto pay scheduled debt payments. Accordingly, approximately $1,045,000 of debtwas paid down in 2006. During 2005, $1,383,000 of net bank borrowing was providedto cover both the debt pay down and the investing activities, net of cashprovided from operations, as described above.

***Cash Flow 2005compared to 2004***

***Cash flows from operating activities.***   Net cash provided by operating activitieswas $300,000 for the year ended December 31, 2005, compared to $2,420,000for the year ended December 31, 2004. Since net non cash income was relatively flat between years, this$2,120,000 decrease was largely due to changes in non cash working capitalitems. Most noteworthy was an increase of inventories of which $1,160,000 wasraw materials purchased in anticipation of strong first quarter 2006 sales.

***Cash flows from investing activities***.   Net cash used in investing activities was$863,000 and $1,196,000 for the years ended December 31, 2005 and 2004,respectively. During both years, this cash was used primarily for capitaladditions totaling $841,000 during 2005 and $1,178,000 during 2004. The capitalexpenditures for both years primarily reflect investment in productionequipment at the Chicago and the Martinsburg facilities. The reduction betweenyears is primarily due to the largest single piece of production equipmenthaving been obtained during 2005 through an operational lease agreement whichthus had minimal effect on cash flow.

***Cash flows from financing activities.***   Net cash provided by financing activitieswas $532,000 for the year ended December 31, 2005, compared to cash usedof $1,293,000 for the year ended December 31, 2004. The most recent yearactivity included $840,000 used to make the scheduled installment payment underthe terms of the Virginia Honey acquisition agreement. During 2005, $1,383,000of net bank borrowing was provided to cover both the cash used for thisinstallment payment and the investing activities, net of cash provided by operationsas described above. Outflows in 2004 primarily include $1,382,000 of debtpayments.

***Equity Issuance***

In February 2006, the Company entered into agreementspursuant to which five individuals or their affiliated entities invested atotal of $2,500,000 in the Company. Substantially all of these funds were used to reduce funded debt.  The investors received units consisting of anaggregate of 1,000,000 shares 

 

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of common stock; three-year warrants to purchase500,000 shares of common stock at an exercise price of $5.00 per share; andfive-year warrants to purchase an additional 500,000 shares of common stock atan exercise price of $7.50 per share. The investors include the following: (i) Stephen D. Rubin, thenpresident and Chairman of the Board of Directors of the Company, and as ofAugust 18, 2006, Chairman of the Board of Directors, (ii) Clifford K.Bolen, then Senior Vice President, Chief Operating Officer and Chief FinancialOfficer of the Company, and, as of August 18, 2006, President and ChiefExecutive Officer, (iii) Delphi Casualty Co., of which Glen S.Morris, a director of the Company, owns a 44% equity interest, (iv) atrust of which John C. Seramur, a director of the Company, serves astrustee, as well as (v) Howard Bedford, then an unrelated third-partyinvestor and, as of May 18, 2006, a director of the Company.

***LoanAgreement***

On September 8, 2003, the Company entered into a loanagreement with a bank (the “Loan Agreement”) and paid off its existing creditfacility with initial borrowings under this new Loan Agreement. The originalLoan Agreement provided for a two-year $8,500,000 revolving line of credit (the‘revolver’), a five-year $6,500,000 term loan (the ‘Term A Loan”) and asix-year $3,000,000 term loan (the “Term B Loan”).  The Term B Loan was never utilized.  During 2004 and 2005, the Loan Agreement wasamended several times to, among other things, extend the maturity dates of therevolver and change the available borrowings under the revolver (which most recentlyhad been $10,500,000) and the Term Loans and add an over-advance loan of$1,000,000 which was terminated on February 28, 2006.  On March 24, 2006, the Loan Agreement wasfurther amended.  Pursuant to this amendment,the Loan Agreement provided for a $9,500,000 revolver which was scheduled toterminate on April 1, 2007; a $7,750,000 Term A Loan due in monthlyinstallments of $80,000 through July 31, 2008 with a balloon payment of$3,682,000 due on August 31, 2008; a $150,000 capital expenditure Term Loan Bdue in monthly installments of 1/60th ofthe outstanding balance as of August 2006 from that date through May 31, 2010and the remainder due on June 30, 2010. On March 30, 2007, the Loan Agreement was amended again to extend thedate of maturity date of the revolver for one year to April 1, 2008 and toamend certain of the loan covenants.  Therevolver is now limited to a borrowing base equal to 80% of eligible accountsreceivable and 60% of eligible inventories, as defined in the Loan Agreement(as amended).  On April 13, 2007, theLoan Agreement was amended to add a one-year $1,000,000 term loan and to modifythe loan covenants.    Outstandingborrowings under the Loan Agreement are secured by substantially all assets ofthe Company.

Interest under each piece of the amended Loan Agreementis at a floating rate per annum equal to the prime rate plus 0.5% other thanthe new $1,000,000 term loan which bears an interest rate of prime plus2.0%.  The prime rate was 8.25 % as ofDecember 31, 2006.

The Loan Agreement imposes certain restrictions on theCompany, including its ability to complete significant asset sales, merge oracquire businesses and pay dividends. Additionally, the Company had been required to meet certain financialcovenants at each quarter end during the term of the Loan Agreement, includinga Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum Cash Flow CoverageLeverage ratio, all as defined in the Loan Agreement.  During 2005 and 2006, the Company hadviolated certain of these covenants and had obtained permanent waivers from thebank for such violations.  The March 24,2006 amendment to the Loan Agreement retroactively amended these financialcovenants, and, as amended, the Company was in compliance with those covenantsas of December 31, 2005 and June 30, 2006. During the third and fourth quarter of 2006, the Company was not incompliance with certain of the revised covenants.  The March 30, 2007 amendment to the LoanAgreement waived these 2006 covenant violations and the April 13, 2007amendment reset the covenants to start with the six months ending June 30, 2007and to only include a Minimum EBITDA and a Minimum Cash Flow Coverage LeverageRatio.

***Amounts OwedPursuant to Acquisitions***

Pursuant to the Company’s acquisitions of VirginiaHoney and Halifax in 2001 and 2002, respectively, the previous owners of thosebusinesses were subject to earn out provisions that have resulted in additionalpayments by the Company for the acquired businesses. As amended, the earn outprovisions for Terry Hess, the previous owner of Virginia Honey, have resultedin an additional amount of $840,000 paid to Mr. Hess in April 2005 basedon specific VSF operating results from January 1, 2001 to December 31,2002. In addition, a second earn out payment to Mr. Hess in the amount of$700,000 was

 

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paid in April 2006 based on the operating results ofVSF for the period from January 1, 2003 to December 31, 2005.  Provisions for a third earnout payment werecancelled as described below.

Effective December 2006, the Company entered intocertain agreements (the “Hess Agreements”) with Mr. Hess, who had resigned asVice Chairman and a member of the Company’s Board of Directors effectiveNovember 20, 2006 and retired from his position as Chief Executive Officer ofVSF effective August 25, 2006.  The HessAgreements include (i) an Earnout Agreement,  (ii) a Termination Agreement and (iii) first amendments to the leasesbetween Virginia Honey and an affiliate of Mr. Hess with respect to the KillerBee Packaging Plant located in Martinsburg, West Virginia and the facility locatedin Berryville, Virginia (the “Lease Amendments”).

The Earnout Agreement provides that all earnouts underthe Stock Purchase Agreement dated June 29, 2001, as amended, between theparties (the “Stock Purchase Agreement”) pursuant to which the Companypurchased the stock of Virginia Honey from Mr. Hess are satisfied in full andthat no further amounts are owed by the Company to Mr. Hess.  The Earnout Agreement also provides for therelease of the shares of Virginia Honey’s capital stock from the Company’spledge to Mr. Hess to secure the earn out payments under the Stock PurchaseAgreement.  The Earnout Agreementincludes mutual non-disparagement provisions and releases between the Companyand Virginia Honey, on the one hand, and Mr. Hess, on the other, except for theperformance of obligations under the Hess Agreements and the Stock PurchaseAgreement.

The Termination Agreement formalizes the terminationof Mr. Hess’ Employment Agreement with the Company, including reaffirming Mr.Hess’ five-year non-competition agreement with the Company.   Pursuant to the Lease Amendments, theCompany has given up its option to purchase the Berryville, Virginia andMartinsburg, West Virginia properties owned by Mr. Hess’ affiliate.  In addition, the Lease Amendments provide theCompany with an option to terminate the Berryville lease upon 60 days noticeuntil December 31, 2007, which the Company exercised on February 26, 2007 to beeffective April 30, 2007, and an option to terminate the Martinsburg lease upon12 months notice at the end of five and nine years from the date of theapplicable Amendment.  In connection withthese agreements, Mr. Hess also resigned as a director and officer of theCompany and each of its subsidiaries.

Similarly, Mr. Budd, the previous owner of Halifax,had two separate earnout periods — January 1, 2003 to December 31,2005 and January 1, 2006 to December 31, 2007. Potential remainingearn out payments to Mr. Budd were to be based on earnings of VSF, ascomputed by a pre-defined allocation formula. On January 7, 2005, the Companyterminated the Employment Agreement (the “Employment Agreement”) made as ofNovember 1, 2002, between Halifax and Mr. Budd. The Company alleged a for “cause” termination and, accordingly, filedsuit against Mr. Budd which was settled in accordance with the terms andconditions of the Confidential Settlement Agreement and Mutual Release enteredinto on March 28, 2005 (the “Settlement Agreement”).  Pursuant to the Settlement Agreement, theremaining potential earn out payments to Mr. Budd have been eliminatedentirely.

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 theNon-Competition Agreement, as amended, Budd is prohibited from competing withthe Company and soliciting its employees and customers until March 1,2010, provided, that Mr. Budd may freely engage in any business that is notproducing products competitive with the products of the Company as of February28, 2005.

***PossibleSubsequent Event—Additional***Equity Issuance

The Company has reached an agreement in principle,with Howard Bedford, a Company director, pursuant to which Mr. Bedford wouldinvest $3,000,000 in the Company.  Substantiallyall of these funds would be used for working capital requirements.  In consideration for his investment, Mr.Bedford would receive 2,400,000 shares of Common Stock; two year warrants topurchase 500,000 shares of Common Stock at an exercise price of $1.25 pershare; three-year warrants to purchase 500,000 shares of Common Stock at anexercise price of $1.50 per share; four-year warrants to purchase 500,000shares of Common Stock at an exercise price of $1.50 per share; and five-yearwarrants to purchase 500,000 shares of Common Stock at an exercise price of$1.75 per share.  The warrants would beexercisable immediately.  Subsequent tothis transaction, Mr. Bedford would own approximately 38.2% of the Company’soutstanding common stock and warrants to acquire another 10.3%. On April 10,2007, $1,000,000 has been invested.

 

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# ***ContractualObligations***

The aggregate amount of long-term obligationsmaturing by year is presented in the table below.

During 2006, the Company incurred rental expenseof approximately $824,000, primarily due to operating leases for the facilitiesin Martinsburg, West Virginia; Berryville, Virginia and for equipment at theherring and salmon product processing facility in Chicago, Illinois.  Future commitments under all operating leasesare presented in the table below.

In connection with the Halifax acquisition, theCompany acquired 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.

The Company intends to refinance the bank debtcoming due during years 1 through 3.
| **Contractual Obligations**               | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **More  than 5  years** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                   | ** ** |
| Long-Term Debt  Obligations Including Interest | ** ** | $                                         | 17,278     |   | $ | 1,660 |   | $ | 13,413 |   | $ | 504 |   | $ | 1,701 | ** ** |
| Operating Lease  Obligations                   | ** ** | 5,072                                     |       | 530 |   | 826 |   | 826 |   | 2,890 | ** ** |
| Minimum Licensing  Royalties                   | ** ** | 543                                       |       | 258 |   | 285 |   | — |   | — | ** ** |
| **Total Contractual Obligations**              | ** ** | $                                         | 22,893     |   | $ | 2,448 |   | $ | 14,524 |   | $ | 1,330 |   | $ | 4,591 | ** ** |

 

An additional $1.0 million of long-term debt wasissued in April 2007 which bears interest at a rate of prime plus 2.0% (10.25%as of April 17, 2007) and is due in full April 1, 2008.

The ratio of long-term debt-to-totalcapitalization was 69% at December 31, 2006 and 74% at December 31, 2005.  The Company believes its financial resourcesare adequate to fund its needs for at least the next 12 months.

**Inflation**

Inflation hashistorically not had a material effect on the Company’s operations.

**Recently IssuedAccounting Standards**

InJune 2006, the FASB issued Interpretation No. 48,”Accounting for Uncertainty inIncome Taxes” (“FIN 48”) which clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes”.  The Company adopted FIN 48 effective January1, 2007 and management does not expect any material impact on the Company’sfinancial statements.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS 157”).  This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  The Company expects toadopt SFAS 157 in 2008 and does not anticipate any material impact on theCompany’s financial statements.

InSeptember 2006, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 108, “Quantifying Misstatements in Financial Statements”(“SAB 108”).  The SEC staff outlined theapproach it believes registrants should use to quantify the misstatement ofcurrent year financial statements that result from misstatements of prior yearfinancial statements.  The Companyexpects to apply SAB 108 in 2007 and does not anticipate any material impact onthe Company’s financial statements.

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**CriticalAccounting Policies and Estimates**

The Company’sfinancial statements reflect the selection and application of accountingpolicies that require 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.

Preparation of theconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions affecting the reported amounts of assets, liabilities, revenuesand expenses and related contingent liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to revenues, returns, bad debts, incometaxes and contingencies and litigation. The Company bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates under different assumptions or conditions.

*RevenueRecognition and Merchandise Returns*

# Revenueis recognized upon the passing of title to the customers, which occurs uponshipment of product to customers, including brokers, in fulfillment of customerorders.  In accordance with industrypractices, inventory is sold to customers often with the right to return ordispose if 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, who 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.

The Vita Seafood Segment guarantees the sale ofmost of its products sold in Supermarkets, excluding warehouse clubs, whichsales represent approximately 76% of that segment’s sales. This guarantee helpsensure that consumers receive fresh products. Under the guarantee, the majorityof customers are issued an allowance off-invoice to cover products not soldbefore the expiration date. Other customers with product not sold before the expiration date have theright to return unsold product to the Company through its food brokers or disposeof the unsold product themselves or through a food distributor. A credit isthen issued to the Supermarket or food distributor. The Company provides areserve that is recorded concurrently with the sale.  The Company believes, based on its historicalreturn rates, which have been fairly consistent over the past several years,that this reserve is adequate to recognize the cost of all foreseeable futureproduct return credits associated with previously recognized revenues.

*IncomeTax Assets 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.  A valuationreserve is recognized based on the evidence available; if it is more likelythan not that some portion or the entire deferred income tax asset will not berealized.  In estimating future taxconsequences, the Company generally considers all expected future events otherthan enactments of changes in tax laws or rates in its assessment of whetheradequate taxable income will be available in the future to offset current netdeferred taxes.

*GoodwillCarrying Value*

The Companyassesses the impairment of goodwill, at least annually and whenever events orchanges in circumstances indicate that the carrying value may not berecoverable.  Factors the Companyconsiders important, which could trigger an impairment review include thefollowing:

·                  Significant underperformance relativeto expected historical or projected future operating results;

·                  Significant changes in the manner ofthe Company’s use of the acquired assets or the strategy for the Company’soverall business;

·                  Significant negative industry oreconomic trends;

·                  Significant decline in the Company’sstock price for a sustained period; and

·                  TheCompany’s market capitalization relative to net book value.

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When the Companydetermines that the carrying value of goodwill may not be recoverable basedupon the existence of one or more of the above indicators of impairment, theCompany will review for impairment under the provisions of SFAS 142. TheCompany uses an independent appraisal in its assessments. If future operatingperformance at this business unit were to fall significantly below currentlevels, a non-cash charge to operating earnings for goodwill impairment couldresult as has happened in 2004 and 2006. The impairments were principally dueto the decline in the sales volume of Halifax products in 2004 and overallperformance issues in 2006.

See Note 1 of “Item8. Financial Statements” for a further description of the annual goodwillimpairment assessment.

**Item 7A.**                 Quantitative andQualitative Disclosures About Market Risk.

# The Company is exposed to interest rate fluctuations, primarily as aresult of its Loan Agreement with interest rates subject to marketfluctuations. The Company does not currently use derivative instruments toalter the interest rate characteristics of any of its debt. The Loan Agreement(as amended) includes a revolving line of credit and three term loan facilitieswith a bank, two of which bear interest at a floating per annum rate equal tothe prime rate plus one-half of one percent and the third prime rate plus twopercent.  At December 31, 2006, thisresulted in an 8.75% rate for the revolving and the two then-existing term loanfacilities. A 10% fluctuation in interest rates would not have a materialimpact on the Company’s financial statements.

**Forward-LookingStatements**

This annual report on Form 10-K, including “Descriptionof Business,” “Description of Property,” “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” “Financial Statements andSupplementary Data” and Quantitative and Qualitative Disclosures About MarketRisk,” contains forward-looking statements within the meaning of the “safe-harbor”provisions of the Private Securities Litigation Reform Act of 1995. Suchstatements are based on management’s current expectations and are subject to anumber of factors and uncertainties which could cause actual results to differmaterially from those described in the forward-looking statements. Such factorsand uncertainties include: (i) the impact of the level of the Company’sindebtedness; (ii) restrictive covenants contained in the Company’svarious debt documents; (iii) general economic conditions and conditionsin the retail environment; (iv) the Company’s dependence on a few largecustomers; (v) relationships with retailers; (vi) price fluctuationsin the raw materials used by the Company, particularly herring and salmon;(vii) the success of quality control processes and procedures; (viii) whetherthe Company will be capable of increasing sales of Halifax products; (ix) theCompany’s ability to sell Vita Seafood Segment products for higher prices totake account of increased costs incurred by the Company; (x) competitiveconditions in the Company’s markets; (xi) the seasonal nature of theCompany’s business; (xii) the Company’s ability to execute its long-termacquisition strategy; (xiii) fluctuations in the stock market; (xiv) theextent to which the Company is able to retain and attract key personnel;(xv) relationships with key vendors; (xvi) consolidation of theCompany’s supplier base and (xvii) the impact of federal, state and localenvironmental requirements (including the impact of current or futureenvironmental claims against the Company). As a result, the Company’s operatingresults may fluctuate, especially when measured on a quarterly basis.

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**Item8.**                       FinancialStatements 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                                                   |   |   |   | 25           |
|   |   |                                                                                                       |   |   |   |         |
|   |   | Consolidated Balance Sheets at December 31, 2006 and December  31, 2005                                    |   |   |   | 26           |
|   |   |                                                                                                       |   |   |   |         |
|   |   | Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004                |   |   |   | 27           |
|   |   |                                                                                                       |   |   |   |         |
|   |   | Consolidated Statements of Shareholders’ Equity for  the years ended December 31, 2006, 2005 and 2004 |   |   |   | 27           |
|   |   |                                                                                                       |   |   |   |         |
|   |   | Consolidated Statements of Cash Flow for the years  ended December 31, 2006, 2005 and 2004                 |   |   |   | 28           |
|   |   |                                                                                                       |   |   |   |         |
|   |   | Notes to Consolidated Financial Statements                                                                 |   |   |   | 29 – 44 |
|   |   |                                                                                                       |   |   |   |         |
|   |   |                                                                                                       |   |   |   |         |

 

 

24

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**Report ofIndependent Registered Public Accounting Firm**

Tothe Board of Directors of

VitaFood Products, Inc.

Chicago, Illinois

We have audited the accompanying consolidated balancesheets of Vita Food Products, Inc. and Subsidiary, as of December 31, 2006 and2005, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended December31, 2006.  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 and performthe 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, as of December 31, 2006and 2005, and the results of their operations and cash flows for each of thethree years in the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America.

As described in Note 1 to the consolidated financial statements,effective January 1, 2006, the Company adopted the fair value method ofaccounting provisions of Statement of Financial Accounting Standard No. 123(revised 2004), “Share Based Payment.”

/s/ BDO Seidman, LLP

Chicago,Illinois

April13, 2007

 

25

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**Vita FoodProducts, Inc.And SubsidiaryConsolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current Assets                                                                                                                                                                                             |       |                  |       |   |   |
| Cash                                                                                                                                                                                                       |       | $                     | 54,194     |   | $ | 25,133 |   |
| Accounts  receivable-trade, net of allowance for discounts, returns, and doubtful  accounts of $948,000 in 2006 and $563,000 in 2005                                                                       |       | 6,468,669             |       | 5,215,912 |   |
| Inventories                                                                                                                                                                                                |       |                  |       |   |   |
| Raw material and  supplies                                                                                                                                                                                 |       | 5,562,243             |       | 5,503,048 |   |
| Work in process                                                                                                                                                                                            |       | 170,167               |       | 192,630 |   |
| Finished goods                                                                                                                                                                                             |       | 2,178,575             |       | 1,827,245 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                 |       | 446,516               |       | 400,679 |   |
| Income taxes  receivable                                                                                                                                                                                   |       | —                |       | 381,312 |   |
| Deferred income  taxes                                                                                                                                                                                     |       | 610,714               |       | 519,578 |   |
| Total Current Assets                                                                                                                                                                                       |       | 15,491,078            |       | 14,065,537 |   |
| Property, Plant and  Equipment                                                                                                                                                                             |       |                  |       |   |   |
| Land                                                                                                                                                                                                       |       | 35,000                |       | 35,000 |   |
| Building and  improvements                                                                                                                                                                                 |       | 3,105,339             |       | 2,660,975 |   |
| Leasehold improvements                                                                                                                                                                                     |       | 582,620               |       | 549,926 |   |
| Machinery and  office equipment                                                                                                                                                                            |       | 11,970,640            |       | 11,302,648 |   |
| ** **                                                                                                                                                                                                 |       | 15,693,599            |       | 14,548,549 |   |
| Less accumulated  depreciation and amortization                                                                                                                                                            |       | (9,950,781            | )          | (8,710,072 | ) |
| Net Property, Plant and  Equipment                                                                                                                                                                         |       | 5,742,818             |       | 5,838,477 |   |
| Goodwill                                                                                                                                                                                                   |       | 5,571,012             |       | 6,696,705 |   |
| Other Assets                                                                                                                                                                                               |       | 403,572               |       | 422,661 |   |
| Deferred income taxes                                                                                                                                                                                      |       | 325,304               |       | — |   |
| Total Assets                                                                                                                                                                                               |       | $                     | 27,533,784 |   | $ | 27,023,380 |   |
|                                                                                                                                                                                                       |       |                  |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current Liabilities                                                                                                                                                                                        |       |                  |       |   |   |
| Current  maturities of long-term obligations                                                                                                                                                               |       | $                     | 1,513,783  |   | $ | 2,217,840 |   |
| Accounts payable                                                                                                                                                                                           |       | 6,520,166             |       | 3,142,406 |   |
| Accrued expenses                                                                                                                                                                                           |       | 1,260,308             |       | 853,982 |   |
| Total Current  Liabilities                                                                                                                                                                                 |       | 9,294,257             |       | 6,214,228 |   |
| Long-term Obligations,  Less Current Maturities                                                                                                                                                            |       | 14,373,490            |       | 16,653,369 |   |
| Deferred income taxes                                                                                                                                                                                      |       | —                |       | 453,728 |   |
| Shareholders’ Equity                                                                                                                                                                                  |       |                  |       |   |   |
| Preferred stock,  $.01 par value, authorized 1,000,000 shares; none issued Common stock, $.01  par value; authorized 10,000,000 shares; outstanding 4,941,763 shares in 2006  and 3,879,338 shares in 2005 |       | 49,417                |       | 38,793 |   |
| Treasury stock,  at cost 6,516 shares                                                                                                                                                                      |       | (50,043               | )          | (50,043 | ) |
| Additional  paid-in capital                                                                                                                                                                                |       | 6,357,093             |       | 3,812,397 |   |
| Accumulated  deficit                                                                                                                                                                                       |       | (2,490,430            | )          | (99,092 | ) |
| Total Shareholders’  Equity                                                                                                                                                                           |       | 3,866,037             |       | 3,702,055 |   |
| Total Liabilities and  Shareholders’ Equity                                                                                                                                                           |       | $                     | 27,533,784 |   | $ | 27,023,380 |   |

 

See accompanyingnotes to consolidated financial statements

26

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**Vita FoodProducts, Inc.And SubsidiaryConsolidated Statements of Operations**
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Sales                                   | ** ** | $                                          | 50,954,166 |   | $ | 46,572,268 |   | $ | 48,407,989 |   |
| Cost of Goods Sold                          | ** ** | 38,166,705                                 |       | 32,633,126 |   | 34,408,406 |   |
| Gross Margin                                | ** ** | 12,787,461                                 |       | 13,939,142 |   | 13,999,583 |   |
| Selling and  Administrative Expenses        |       |                                       |       |   |   |   |   |
| Selling,  marketing & distribution      | ** ** | 9,201,615                                  |       | 9,209,363 |   | 9,623,655 |   |
| Administrative                              | ** ** | 4,001,645                                  |       | 4,586,282 |   | 4,281,352 |   |
| Employment  contract charge                 | ** ** | —                                     |       | 501,709 | ** ** | **—** | ** ** |
| Impairment of long  term assets             | ** ** | 1,446,294                                  |       | — | ** ** | 2,313,954 | ** ** |
| Total Selling  and Administrative Expenses  | ** ** | 14,649,554                                 |       | 14,297,354 |   | 16,218,961 |   |
| Operating Loss                              | ** ** | (1,862,093                                 | )          | (358,212 | ) | (2,219,378 | ) |
| Interest Expense                            | ** ** | 1,314,245                                  |       | 1,082,484 |   | 766,823 |   |
| Loss Before Income Tax  Benefit             | ** ** | (3,176,338                                 | )          | (1,440,696 | ) | (2,986,201 | ) |
| Income Tax Benefit                          | ** ** | (785,000                                   | )          | (552,000 | **)** | (269,000 | ) |
| Net Loss                                    | ** ** | $                                          | (2,391,338 | ) | $ | (888,696 | ) | $ | (2,717,201 | ) |
| Basic Loss Per Share                        | ** ** | $                                          | (0.51      | ) | $ | (0.23 | **)** | $ | (0.71 | ) |
| Weighted Average Common  Shares Outstanding | ** ** | 4,679,113                                  |       | 3,862,430 |   | 3,840,017 |   |
| Diluted Loss Per Share                      | ** ** | $                                          | (0.51      | ) | $ | (0.23 | **)** | $ | (0.71 | ) |
| Weighted Average Common Shares Outstanding  | ** ** | 4,679,113                                  |       | 3,862,430 |   | 3,840,017 |   |

 

**Vita FoodProducts, Inc.And SubsidiaryConsolidated Statements of Shareholders’ Equity**
| ** **                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **  | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------|------------|
| ** **                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                           | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**   | ** ** |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |        |       |
| Balance, at January 1,  2004                         |       | 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 Income                                           | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  | ** ** | **—**     |       | (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   |       |
| Proceeds from stock  purchase and stock option plans |       | 14,084                |       | 141          | ** ** | **—**  |       | 26,801         | ** ** | **—**   |       | 26,942      |       |
| Net loss                                             | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  | ** ** | **—**     |       | (888,696     | )          | (888,696    | )          |
| Balance, at December  31, 2005                       |       | 3,879,338             |       | 38,793       |       | (50,043     | )          | 3,812,397      |       | (99,092      | )          | 3,702,055   |       |
| Common stock and warrants  issuance, net             |       | 1,000,000             |       | 10,000       | ** ** | **—**  |       | 2,350,141      | ** ** | **—**   |       | 2,360,141   |       |
| Stock options exercised                              |       | 17,000                |       | 170          | ** ** | **—**  |       | 28,668         | ** ** | **—**   |       | 28,838      |       |
| Stock based  compensation expense                    | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  |       | 78,814         | ** ** | **—**   |       | 78,814      |       |
| Shares issued to settle  director fees               |       | 17,026                |       | 170          |       | —      |       | 43,067         |       | —       |       | 43,237      |       |
| Proceeds from stock  purchase plans                  |       | 28,399                |       | 284          | ** ** | **—**  |       | 44,006         | ** ** | **—**   |       | 44,290      |       |
| Net loss                                             |       | —                |       | —       |       | —      |       | —         |       | (2,391,338   | )          | (2,391,338  | )          |
| Balance, at December 31, 2006                        |       | 4,941,763             |       | $            | 49,417     |        | $(50,043   | )              | $          | 6,357,093    |       | $(2,490,430 | )          | $ | 3,866,037 |   |
|                                                      |            |                       |            |              |            |             |            |                |            |              |            |             |            |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

 

27

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**Vita FoodProducts, Inc.And SubsidiaryConsolidated Statements of Cash Flows**
| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows From Operating  Activities**                                        |       |                                       |       |   |   |   |   |
| Net loss                                                                         |       | $                                          | (2,391,338 | ) | ($888,696 | ) | ($2,717,201 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                   |       | 993,357                                    |       | 961,927 |   | 983,366 |   |
| Deferred income  tax benefit                                                     |       | (785,000                                   | )          | (458,000 | ) | (288,000 | ) |
| Employment  contract charge                                                      |       | —                                     |       | 501,709 |   | — |   |
| Non-cash  stock-based compensation expense                                       |       | 78,814                                     |       | — |   | — |   |
| Impairment of  long term assets                                                  |       | 1,446,294                                  |       | — |   | 2,313,954 |   |
| Changes in  assets and liabilities                                               |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                             |       | (1,252,757                                 | )          | (97,395 | ) | 1,426,004 |   |
| Inventories                                                                      |       | (388,062                                   | )          | (553,741 | ) | 249,330 |   |
| Prepaid expenses  and other current assets                                       |       | (45,721                                    | )          | 32,857 |   | 33,767 |   |
| Income taxes  receivable                                                         |       | 296,144                                    |       | (98,645 | ) | 518,863 |   |
| Accounts payable                                                                 |       | 3,377,759                                  |       | 863,710 |   | (20,884 | ) |
| Accrued expenses                                                                 |       | 171,111                                    |       | 36,060 |   | (79,094 | ) |
| Net cash  provided by operating activities                                       |       | 1,500,601                                  |       | 299,786 |   | 2,420,105 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| **Cash Flows From Investing  Activities**                                        |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                            |       | (1,166,153                                 | )          | (840,865 | ) | (1,177,642 | ) |
| Change in other  assets                                                          |       | (18,247                                    | )          | (22,064 | ) | (18,567 | ) |
| Net cash used in  investing activities                                           |       | (1,184,400                                 | )          | (862,929 | ) | (1,196,209 | ) |
|                                                                             |       |                                       |       |   |   |   |   |
| **Cash Flows From Financing  Activities**                                        |       |                                       |       |   |   |   |   |
| Proceeds from  issuance of stock and warrants                                    |       | 2,433,269                                  |       | 26,942 |   | 138,795 |   |
| Net borrowings  (payments) under revolving loan facility                         |       | (1,061,361                                 | )          | 910,472 |   | (613,625 | ) |
| Payments on term  loan facility                                                  |       | (1,045,276                                 | )          | (825,489 | ) | (768,512 | ) |
| Proceeds from  term loan facility                                                |       | 101,154                                    |       | 1,298,846 |   | — |   |
| Payments on  other debt                                                          |       | (700,000                                   | )          | (840,422 | ) | — |   |
| Purchase of  treasury stock                                                      |       | —                                     |       | — |   | (50,043 | ) |
| Deferred loan  costs paid                                                        |       | (14,926                                    | )          | (38,041 | ) | — |   |
| Net cash  provided by (used in) financing activities                             |       | (287,140                                   | )          | 532,308 |   | (1,293,385 | ) |
| Net (decrease) increase  in cash                                                 |       | 29,061                                     |       | (30,835 | ) | (69,489 | ) |
| Cash, at beginning of  year                                                      |       | 25,133                                     |       | 55,968 |   | 125,457 |   |
| Cash, at end of year                                                             |       | $                                          | 54,194     |   | $ | 25,133 |   | $ | 55,968 |   |
|                                                                             |       |                                       |       |   |   |   |   |
| Supplemental Disclosure  of Cash Flow Information:                               |       |                                       |       |   |   |   |   |
| Cash paid for  interest                                                          |       | $                                          | 1,277,036  |   | $ | 990,682 |   | $ | 682,398 |   |
| Income taxes paid  (received)                                                    |       | ($296,144                                  | )          | $ | 4,646 |   | ($499,506 | ) |

 

See accompanying notes toconsolidated financial statements.

 

28

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**Vita FoodProducts, Inc. and Subsidiaries**

**Notes toConsolidated Financial Statements**

**1.   Summary of Significant Accounting Policies**

# **Industry**

VitaFood Products, 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 whollyowned subsidiary of Vita Seafood, manufactures and distributes salad dressings,gourmet sauces, honey, jams and jellies. Through April 2007, VSF has two manufacturing plants located inMartinsburg, West Virginia and Berryville, Virginia at which time the Companywill exit the leased Berryville location. Management considers Vita Seafood and VSF as separate business segmentswhich are collectively referred to herein as the “Company”.

A summary of thesignificant accounting policies utilized in the preparation of the accompanyingfinancial statements follows.

# **Principles of Consolidation**

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

**Concentration of 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.

**Revenue Recognition and Merchandise Returns**

# Revenueis recognized upon the passing of title to the customers, which occurs uponshipment of product to customers, including brokers, in fulfillment of customerorders.  In accordance with industrypractices, inventory is sold to customers often with the right to return ordispose if 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.

# Starting on January 1, 2006, the Company changed theclassification of “Slotting” expense, which had previously been included in theSelling, Marketing and Distribution category of operating expenses, to be treatedas a sales deduction and thus classify these expenses as a reduction to arriveat the Net Sales total.  These expensesare fees charged by customers to place the Company’s new items into thecustomers’ distribution system. Additionally, the 2005 and 2004 operating results, as presented above,have been adjusted to consider this change and thus make these results morecomparable with the 2006 results.  Theresult of this reclassification, which had no affect on Operating Loss or NetLoss, 

29

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# was to reduce both Net Sales and Selling, Marketingand Distribution expenses, in an offsetting fashion, for the year endedDecember 31, 2005 and 2004 by $284,000 and $348,000, respectively.

**Accounts Receivable and Allowance for Doubtful Accounts**

Accountsreceivable are customer 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.

Seniormanagement reviews accounts receivable on a regular basis to determine if anyreceivables will potentially be uncollectible. The Company provides an allowance sufficient to cover any accountsreceivable balances that are potentially uncollectible, along with a generalreserve based on historic experience. After attempts to collect the receivable have failed and it isconsidered to be uncollectible, it is written off against the allowance.  Based on the information available, theCompany believes the allowance for doubtful accounts as of December 31, 2006 tobe adequate and not excessive.  However,it is still possible that in the future, actual write offs may exceed therecorded balance.

Theallowance for discounts, returns and doubtful accounts has fluctuated as followsover the last three years:

**Allowancefor Discounts, Returns and Doubtful Accounts**

**(inthousands)**

** **
| ** ** | **Calendar  Year** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Expense** | ** ** | **Write-offs &  Collections** | ** ** | **Balance at  End  of Year** | ** ** |
|------------|--------------------|------------|------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|------------------------------|------------|
|       | 2004               |       | $301                               |       | 306                     |       | (38)                              |       | $569                         |       |
|       | 2005               |       | $569                               |       | 99                      |       | (105)                             |       | $563                         |       |
|       | 2006               |       | $563                               |       | 444                     |       | (59)                              |       | $948                         |       |
|       |               |       |                               |       |                    |       |                              |       |                         |       |

# **Inventories**

Inventories are stated at the lower of cost ormarket.  Costs are determined by thefirst-in, first-out method and include raw materials, labor and plant overhead.

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs — An Amendment of ARBNo. 43, Chapter 4” (“SFAS 151”) which clarifies the accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted material(spoilage).  The Company adopted theprovisions of SFAS 151 for inventory costs incurred in 2006.  The adoption of this statement did not have amaterial impact on the Company’s financial condition or results of operations.

**Property, Plant and Equipment**

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

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

 

 

30

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Leaseholdimprovements are being amortized on a straight-line basis over the terms of therespective leases or the service lives of the improvements whichever isshorter.  Amortization of assets undercapital lease is included in depreciation and amortization.  Repair and maintenance items are expensed asincurred.

The Companyreviews the carrying values of its property, plant and equipment for possibleimpairment whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable.  A long-lived asset held for use will beconsidered impaired if the estimated future undiscounted cash flows generatedby its use and eventual disposal are lower than its then carrying amount.  The resulting impairment charge would be thedifference between its carrying value and its fair value, generally determinedby a discounted cash flows method.  Anyassets held for disposal are reported at the lower of their carrying amounts orfair value less cost to sell

In December 2006,management determined that it would exercise its option to terminate its leaseof the Company’s Berryville plant.  Theoption was exercised in February 2007 and the lease will terminate as of April2007.  The plastic bottle manufacturingoperations of this plant will be terminated and the Company will startpurchasing plastic bottles for its Martinsburg plant from third parties.  Additionally, honey processing operationswill be transferred to the Martinsburg plant other than a small industrialgrade honey processing operation which represented an immaterial product linefor the Company.  Due to this decision,management evaluated the remaining long-lived assets at this facility anddetermined that a $321,000 impairment charge was required to write down assets,primarily leasehold improvements that could not be transferred to Martinsburg,to their estimated fair values.  Inaddition, the carrying value of these assets started being depreciated over aterm to end in April 2007.  OtherBerryville equipment will be sold for amounts in excess of carrying value ortransferred to Martinsburg where they will be put back in operation during thesecond and third quarters of 2007. Moving costs will be expensed as incurred.

**Goodwill**

The changes in the carrying amount of goodwillrelated to the VSF acquisitions for the years ended December 31, 2006 and 2005were as follows:

| Balance as of December 31,  2004             |   | $          | 5,996,705 |   |
|----------------------------------------------|--------|------------|-----------|--------|
|                                         |   |       |      |
| Contingent  purchase price paid (see Note 2) |   | 700,000    |      |
| Balance as of  December 31, 2005             |   | 6,696,705  |      |
|                                         |   |       |      |
| Goodwill  impairment charge                  |   | (1,125,693 | )         |
| Balance as of  December 31, 2006             |   | $          | 5,571,012 |   |
|                                         |   |       |      |

The Company’s goodwill resulted from the acquisitionsof Virginia Honey and Halifax.  Annually,effective as of December 31, the Company engages an independent appraiser toassist in management’s assessment as to whether the recorded goodwill isimpaired.  The independent appraisals aremade using customary valuation methodologies, including discounted cash flowand other fundamental analysis and comparisons. In its 2004 and 2006 assessments, management determined that the Company’srecorded goodwill was in excess of its fair value and accordingly, the Companyrecorded goodwill impairment charges of $2,313,954 and $1,125,693 in 2004 and2006, respectively.  The impairments wereprincipally due to the decline in the sales volume of Halifax products in 2004and overall performance issues in 2006.

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# **Estimates**

Theaccompanying financial statements include estimated amounts and disclosuresbased on management’s assumptions about future events.  Actual results may differ from thoseestimates.

**Fair Value of FinancialInstruments**

The carrying amounts of cash, accounts receivable, accounts payable andshort-term obligations approximate fair value due to the short-term nature ofthese instruments.  The carrying value ofthe Company’s long-term obligations, based on rates currently available forinstruments with similar terms and maturities, also approximates fair value.

**Advertising**

Advertisingcosts are expensed as incurred and included in selling, marketing and distributionexpenses.  Advertising expenses amountedto approximately $284,000, $280,000 and $349,000 in 2006, 2005 and 2004,respectively.

**Shipping and Handling Fees**

The Company classifies shipping and handling costs billedto customers as revenue.  Costs relatedto shipping and handling are classified as part of selling, marketing anddistribution expenses and were $3,640,000, $3,339,000 and $3,539,000 in 2006,2005 and 2004, respectively.

**Income Taxes**

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 theentire deferred income tax asset will not be realized.

**Basic and Diluted Earnings (Loss) Per Common Share**

Basicearnings (loss) per share is computed by dividing income (loss) available tocommon shareholders by the weighted-average number of common shares outstandingfor the period.  Diluted earnings (loss)per share follows the computation of basic earnings (loss) per share but alsogives effect to all dilutive potential common shares equivalents that wereoutstanding during the year.

In2006, 2005 and 2004 there were 1,339,100, 349,600 and 330,400 common shares,respectively, issuable upon exercise of stock options and warrants that werenot considered in the computation because they would have been anti-dilutive.

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**Accountingfor Stock Based Compensation**

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share BasedPayment” (“SFAS 123 (R)”), applying the modified prospective method inaccounting for stock-based awards.  Priorto the adoption of SFAS 123(R), the Company applied the provisions of APBOpinion No. 25, “Accounting for Stock Issued to Employees,” in accounting forits stock-based awards, and under such provisions, recognized no compensationcost for its stock-based awards.  Underthe modified prospective method, SFAS 123(R) applies to new awards and toawards that were outstanding as of December 31, 2005 that are subsequentlyvested, modified, repurchased or cancelled. Compensation expense recognized during 2006 includes the portion vestingduring the period for (1) all share-based payments granted prior to, but notyet vested as of December 31, 2005, based on the grant date fair valueestimated in accordance with the original provisions of Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”) and (2) all share-based payments granted subsequent to December 31, 2005,based on the grant date fair value estimated in accordance with SFAS 123(R),both using grant-date fair values estimated under the Black-Scholesoption-pricing model.  Due to the late 2005acceleration of vesting for all outstanding stock options granted prior toJanuary 1, 2005, future compensation expense related to unvested stock optionsgranted before such date was minimized. As a result of the Company’s decision to adopt the modified prospectivemethod, prior period results have not been restated.

**Beforeadoption of SFAS 123(R), pro forma disclosures reflected the fair value of eachoption grant estimated on the date of grant using the Black-Scholesoption-pricing model with the following results:**

 

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| ** **                                                                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average fair  value per options granted                                                             |       | $        | 1.25       |     | $          | 2.67     |       | $ | 4.42 |   |
|                                                                                                         |       |     |       |     |       |     |       |
| Significant assumptions  (weighted average)                                                                  |       |     |       |     |       |     |       |
| Risk-free  interest rate at grant date                                                                       |       | 4.7      | %          | 4.3      | %          | 4.1      | %          |
| Expected stock  price volatility                                                                             |       | 0.54     |       | 0.43     |       | 0.68     |       |
| Expected  dividend payout                                                                                    |       | —   |       | —   |       | —   |       |
| Expected option  life (years)                                                                                |       | 5        |       | 5        |       | 5        |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Net loss                                                                                                     |       |     |       |     |       |     |       |
| As reported                                                                                                  |       |     |       | $        | (888,696   | )        | $          | (2,717,201 | ) |
| Deduct total  stock based compensation expense (net of income taxes) determined under the fair  value method |       |     |       | (108,075 | )          | (41,490  | )          |
| Pro forma                                                                                                    |       |     |       | $        | (996,771   | )        | $          | (2,758,691 | ) |
|                                                                                                         |       |     |       |     |       |     |       |
| Basic loss per share                                                                                         |       |     |       |     |       |     |       |
| As reported                                                                                                  |       |     |       | $        | (0.23      | )        | $          | (0.71 | ) |
| Pro forma                                                                                                    |       |     |       | $        | (0.26      | )        | $          | (0.72 | ) |
|                                                                                                         |       |     |       |     |       |     |       |
| Diluted loss per share                                                                                       |       |     |       |     |       |     |       |
| As reported                                                                                                  |       |     |       | $        | (0.23      | )        | $          | (0.71 | ) |
| Pro forma                                                                                                    |       |     |       | $        | (0.26      | )        | $          | (0.72 | ) |
|                                                                                                              |            |          |            |          |            |          |            |  |  |  |

 

Theaccelerated vesting of certain stock options in 2005 (see note 9 for furtherdescription) increased the 2005 pro forma expense by $70,000.

Thekey assumptions used in the Black Sholes model are:

Expectedvolatility — based on the historical volatility of the Company’s common stockfor the expected term of the stock options.

Dividendyield — based on the Company’s historical and projected dividend payouts.

Risk-freeinterest rate — based on the observed interest rates appropriate for theexpected term of the Company’s stock options.

Expectedoption life — based on historical experience.

Forfeiturerate assumption — assumed 0% for the forfeiture rate based on limitedhistorical experience.

Theaggregate intrinsic value (defined as the spread between the market price ofthe Company’s common stock as of the end of the period and the exercise priceof the stock options) for both stock options outstanding and exercisable as ofDecember 31, 2006 was $8,745 and $8,109, respectively.

SFAS123(R) also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as cash flow from financing activities ratherthan as cash flow from operations as required under Emerging Issues Task Forceissue No. 00-15, “Classification in the Statement of Cash Flow of the IncomeTax Benefit Received by a Company upon Exercise of a Nonqualified EmployeeStock Option.”  The Company has only hadimmaterial net income tax impacts related to stock compensation expense orexercising of stock options.

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**Recent Accounting Pronouncements**

In June 2006, the FASBissued Interpretation No. 48,”Accounting for Uncertainty in Income Taxes” (“FIN48”) which clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB Statement No.109, “Accounting for Income Taxes”.  TheCompany adopted FIN 48 effective January 1, 2007 and management does not expecta material impact upon the Company’s financial statements.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measures” (“SFAS 157”).  This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  The Company expects toadopt SFAS 157 in 2008 and is evaluating if adoption will have any materialimpact on the Company’s financial statements.

In September 2006, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.108, “Quantifying Misstatements in Financial Statements” (“SAB 108”). The SECstaff outlined the approach it believes registrants should use to quantify themisstatement of current year financial statements that result frommisstatements of prior year financial statements.  The Company adopted SAB 108 on January 1, 2007and it did not have any material impact on the Company’s financial statements.

**2.      Earn Out Provision underAcquisition Agreements**

Pursuant to theCompany’s acquisitions of Virginia Honey and Halifax in 2001 and 2002,respectively, the previous owners of those businesses were subject to earn outprovisions that have resulted in additional payments 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 of $840,000 paid to Mr. Hess in April 2005 basedon specific VSF operating results from January 1, 2001 to December 31,2002.  In addition, a second earn outpayment to Mr. Hess in the amount of $700,000 was paid in April 2006 based onthe operating results of VSF for the period from January 1, 2003 to December31, 2005.  Provisions for a third earnoutpayment were cancelled as described below.

Effective December2006, the Company entered into certain agreements (the “Hess Agreements”) withMr. Hess, who had resigned as Vice Chairman and a member of the Company’s Boardof Directors effective November 20, 2006 and retired from his position as ChiefExecutive Officer of VSF effective August 25, 2006.  The Hess Agreements include (i) an EarnoutAgreement,   (ii) a Termination Agreementand (iii) first amendments to the leases between Virginia Honey and anaffiliate of Mr. Hess with respect to the Killer Bee Packaging Plant located inMartinsburg, West Virginia and the facility located in Berryville, Virginia(the “Lease Amendments”).

The EarnoutAgreement provides that all earnouts under the Stock Purchase Agreement datedJune 29, 2001, as amended, between the parties (the “Stock Purchase Agreement”)pursuant to which the Company purchased the stock of Virginia Honey from Mr.Hess are satisfied in full and that no further amounts are owed by the Companyto Mr. Hess.  The Earnout Agreement alsoprovides for the release of the shares of Virginia Honey’s capital stock fromthe Company’s pledge to Mr. Hess to secure the earn out payments under theStock Purchase Agreement.  The EarnoutAgreement includes mutual non-disparagement provisions and releases between theCompany and Virginia Honey, on the one hand, and Mr. Hess, on the other, exceptfor the performance of obligations under the Hess Agreements and the StockPurchase Agreement.

The Termination Agreementformalizes the termination of Mr. Hess’ Employment Agreement with the Company,including reaffirming Mr. Hess’ five-year non-competition agreement with theCompany.   Pursuant to the LeaseAmendments, the Company has given up its option to purchase the Berryville,Virginia and Martinsburg, West Virginia properties owned by Mr. Hess’affiliate.  In addition, the LeaseAmendments provide the Company with an option to terminate the Berryville leaseupon 60 days notice until December 31, 2007, which the Company exercised onFebruary 26, 2007 to be effective April 30, 

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2007, and anoption to terminate the Martinsburg lease upon 12 months notice at the end offive and nine years from the date of the applicable Amendment.  In connection with these agreements, Mr. Hessalso resigned as a director and officer of the Company and each of itssubsidiaries.

Similarly, Mr. Budd, theprevious owner of Halifax, had two separate earnout periods — January 1, 2003to December 31, 2005 and January 1, 2006 to December 31, 2007.  Potential remaining earn out payments to Mr.Budd were to be based on earnings of VSF, as computed by a pre-definedallocation formula.  On January 7, 2005, the Company terminated the Employment Agreement (the “EmploymentAgreement”) made as of November 1, 2002, between Halifax and Mr. Budd.  The Company alleged a for “cause”termination and, accordingly, filed suit against Mr. Budd which was settled inaccordance with the terms and conditions of the Confidential SettlementAgreement and Mutual Release entered into on March 28, 2005 (the “SettlementAgreement”).  Pursuant to the SettlementAgreement, the remaining potential earn out payments to Mr. Budd have beeneliminated entirely.

The Settlement Agreementalso amended the Non-Competition and Non-Solicitation Agreement entered into byBudd in connection 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 Mr. Budd may freelyengage in any business that is not producing products competitive with theproducts of the Company as of February 28, 2005.

**3.      Accrued Expenses**

Accruedexpenses consist of the following:

| December 31,              | ** ** | **2006**    | ** **    | **2005** | ** ** |
|--------------------------------|------------|-------------|---------------|----------|------------|
|                           |       |        |          |     |       |
| Interest                       | ** ** | **$**       | **107,046**   |     | $          | 111,069 |   |
| Salaries and  bonuses          | ** ** | **304,422** |          | 302,882  |       |
| Taxes other than  income taxes | ** ** | **59,529**  |          | 54,200   |       |
| Utilities,  freight and other  | ** ** | **789,311** |          | 385,831  |       |
|                           | ** ** | **$**       | **1,260,308** |     | $          | 853,982 |   |

 

**4.      Long-Term Obligations**

 

Long-termobligations consist of the following:

 

| December 31,                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
|                                               |       |       |       |       |       |
|  Revolving loan facility (a)                  |       | $          | 7,526,730  |       | $          | 8,588,089 |   |
| Term loan-A  facility (a)                          |       | 5,282,000  |       | 6,242,000  |       |
| Term loan - B  facility (a)                        |       | 150,000    |       | 48,846     |       |
| Term loan  payable (b)                             |       | 2,353,455  |       | 2,480,948  |       |
| Additional  purchase price payable to Mr. Hess (c) |       | —     |       | 700,000    |       |
| Robert J. Budd  note (d)                           |       | 131,285    |       | 231,887    |       |
| Employment  contract (e)                           |       | 223,256    |       | 501,709    |       |
| Other notes  payable                               |       | 220,547    |       | 77,730     |       |
|                                               |       | 15,887,273 |       | 18,871,209 |       |
| Less current  maturities                           |       | 1,513,783  |       | 2,217,840  |       |
|                                               | ** ** | $          | 14,373,490 |       | $          | 16,653,369 |   |

 

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(a)             OnSeptember 8, 2003, the Company entered into a loan agreement with a bank (the “LoanAgreement”) and paid off its existing credit facility with initial borrowingsunder this new Loan Agreement.  Theoriginal Loan Agreement provided for a two-year $8,500,000 revolving line ofcredit (the ‘revolver’), a five-year $6,500,000 term loan (the ‘Term A Loan”)and a six-year $3,000,000 term loan (the “Term B Loan”).  The Term B Loan was never utilized.  During 2004 and 2005, the Loan Agreement wasamended several times to, among other things, extend the maturity dates of therevolver and change the available borrowings under the revolver (which mostrecently had been $10,500,000) and the Term Loans and add an over-advance loanof $1,000,000 which was terminated on February 28, 2006.  On March 24, 2006, the Loan Agreement wasfurther amended.  Pursuant to thisamendment, the Loan Agreement provided for a $9,500,000 revolver which wasscheduled to terminate on April 1, 2007; a $7,750,000 Term A Loan due inmonthly installments of $80,000 through July 31, 2008 with a balloon payment of$3,682,000 due on August 31, 2008; a $150,000 capital expenditure Term Loan Bdue in monthly installments of 1/60th of the outstanding balance as of August 2006from that date through May 31, 2010 and the remainder due on June 30,2010.  The revolver is now limited to aborrowing base equal to 80% of eligible accounts receivable and 60% of eligibleinventories, as defined in the Loan Agreement (as amended).  On March 30, 2007, the Loan Agreement wasamended again to extend the date of maturity date of the revolver for one yearto April 1, 2008 and to amend certain of the loan covenants.  The revolver is now limited to a borrowingbase equal to 80% of eligible accounts receivable and 60% of eligibleinventories, as defined in the Loan Agreement (as amended).  On April 13, 2007, the Loan Agreement wasamended to add a one-year $1,000,000 term loan and to further modify the loancovenants.  Outstanding borrowings underthe Loan Agreement are secured by substantially all assets of the Company.

Interest under each piece of the amended LoanAgreement is at a floating rate per annum equal to the prime rate plus 0.5%other than for the new $1,000,000 term loan which bears an interest rate ofprime plus 2.0%.  The prime rate was 8.25% as of December 31, 2006.

The Loan Agreement imposes certain restrictions on theCompany, including its ability to complete significant asset sales, merge oracquire businesses and pay dividends. Additionally, the Company had been required to meet certain financialcovenants at each quarter end during the term of the Loan Agreement, includinga Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum Cash Flow CoverageLeverage ratio, all as defined in the Loan Agreement.  During 2005 and 2006, the Company hadviolated certain of these covenants and had obtained permanent waivers from thebank for such violations.  The March 24,2006 amendment to the Loan Agreement retroactively amended these financialcovenants, and, as amended, the Company was in compliance with those covenantsas of December 31, 2005 and June 30, 2006. During the third and fourth quarter of 2006, the Company was not incompliance with certain of the revised covenants.  The March 30, 2007 amendment to the Loan Agreementwaived these 2006 covenant violations and the April 13, 2007 amendment resetthe covenants to start with the six months ending June 30, 2007 and to onlyinclude a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio.

(b)            Aspart of the acquisition agreement for Virginia Honey, the Company assumed a7.0% note payable to a former Virginia Honey shareholder.  At December 31, 2006, the balance due was$2,353,457.  This note is secured and ispayable in monthly installments through 2018.

(c)             Asdescribed in Note 2, Mr. Hess earned additional purchase price on his sale ofVirginia Honey to the Company based on a measurement date of December 31,2005.  That obligation was paid in April2006.  The agreement with Mr. Hess hasbeen terminated and no further amounts are payable thereunder.

(d)            Themerger agreement with Halifax provided that, as part of the acquisition price,the Company would repay the balance of a note due to the former owner byHalifax, on April 1, 2006.  TheSettlement 

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Agreement entered intobetween 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 principal amount did not change and nointerest accrues on this debt.  See Note10 for further information regarding this obligation.

(e)             Duringthe fourth quarter of 2005, a $501,709 non cash charge was recognized toaccount for the future costs associated with a senior officer, pursuant to a2005 amendment to his employment contract, which significantly reduced hisduties during 2006 and terminated the agreement as of December 31, 2007.  The Company paid $278,453 to the officer in2006 without the benefit of any services from him and paid $223,256 to theofficer in 2007 as severance.

Scheduled annual maturities of long-term obligationsas of December 31, 2006 are as follows:

| Year ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2007                                    |       | $          | 1,513,783  |   |
| 2008                                    |       | 12,111,006 |       |
| 2009                                    |       | 235,102    |       |
| 2010                                    |       | 254,926    |       |
| 2011                                    |       | 208,772    |       |
| 2012 and  subsequent                    |       | 1,563,684  |       |
|                                    |       | $          | 15,887,273 |   |

 

**5.      Income Taxes**

Deferredincome taxes reflect the net effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes as well as credit carryforwards.  The effects of existing temporarydifferences, that give rise to significant portions of the net deferred incometax asset (liability), are as follows:

| December 31,                                 | ** ** | **2006**      | ** **  | **2005** | ** ** |
|---------------------------------------------------|------------|---------------|-------------|----------|------------|
| Deferred income  tax asset:                       |       |          |        |     |       |
| Uniform inventory capitalization                  | ** ** | **$**         | **57,000**  |     | $          | 76,000 |   |
| Accrued expenses and reserves                     | ** ** | **500,000**   |        | 383,000  |       |
| Contributions carryover                           | ** ** | **53,000**    |        | 60,000   |       |
| Net operating loss carryforwards                  | ** ** | **845,000**   |        | 264,000  |       |
|                                              |       |          |        |     |       |
|                                              | ** ** | **1,455,000** |        | 783,000  |       |
| Deferred income  tax liability:                   |       |          |        |     |       |
| Depreciation and other property basis differences | ** ** | **(519,000**  | **)**       | (717,000 | )          |
|                                              |       |          |        |     |       |
| Net deferred income tax  asset (liability)        | ** ** | **$**         | **936,000** |     | $          | 66,000 |   |

 

TheCompany has gross federal net operating loss carryforwards of $1.0 million,which expire, if unused, in 2022 — 2026.

Income tax benefit for the years ended December 31, 2006,2005 and 2004 consist of the following:

| December 31,  | ** ** | **2006**     | ** **   | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|--------------|--------------|----------|------------|----------|------------|
| Current            | ** ** | **$**        | **—**   |     | $          | (94,000  | )          | $ | 19,000 |   |
| Deferred           | ** ** | **(785,000** | **)**        | (458,000 | )          | (288,000 | )          |
|               |       |         |         |     |       |     |       |
| Income tax benefit | ** ** | **$**        | **(785,000** | **)**    | $          | (552,000 | )          | $ | (269,000 | ) |

 

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Thereconciliation of income tax computed at the United States federal statutorytax rate of 34% to income tax benefit is as follows:

| Year ended December 31, | ** ** | **2006**    | ** **     | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|-------------|----------------|----------|------------|----------|------------|
| Tax at federal  statutory rate         | ** ** | **$**       | **(1,080,000** | **)**    | $          | (490,000 | )          | $ | (1,015,000 | ) |
| Goodwill  impairment charge            | ** ** | **383,000** |           | —   |       | 787,000  |       |
| Other (primarily  state taxes)         | ** ** | **(88,000** | **)**          | (62,000  | )          | (41,000  | )          |
|                                   |       |        |           |     |       |     |       |
| Income tax benefit                     | ** ** | **$**       | **(785,000**   | **)**    | $          | (552,000 | )          | $ | (269,000 | ) |

**6. Commitments and Contingencies**

A.              Inthe ordinary course of business, the Company becomes involved in litigation asa defendant in various lawsuits.  In theopinion of management, after considering the advice of counsel, the ultimateresolution of these legal proceedings will not have a material effect on thefinancial statements taken as a whole and thus no provision has been made inthe financial statements for any loss contingencies.

B.                TheCompany leases two of its Virginia Honey facilities from a former owner ofVirginia Honey, who was an officer of Vita Seafood and VSF until August 25,2006.  However, one of the leases wasterminated by the Company on February 26, 2007, effective April 30, 2007.  The other terminates in 2018 unlessterminated earlier by the Company or renewed by mutual consent.  Future payments under these leases amount toapproximately $431,000 for 2007, $413,000 for 2008, $413,000 for 2009, $413,000for 2010, $413,000 for 2011 and $413,000 thereafter.  Rent expense under these agreements totaled$572,000, $519,000 and $451,000 in 2006, 2005 and 2004, respectively.

C.                TheCompany had leased its Atlanta office from an unrelated lessor.  The lease expired on August 31, 2006.  Rent expense was less than $50,000 per year.

D.               TheCompany has an operating lease for production equipment at the Virginia Honeyfacility.  This lease originated in 2004and during 2006, 2005 and 2004 the Company paid approximately $138,000, $60,000and $21,000 respectively.  This leaseexpires in 2007.  Future payments areexpected to be approximately $99,000**,**all of whichis payable in 2007.

E.                 TheCompany has brand name product licensing agreements, which contain provisionsfor minimum future royalty payments, which currently expire in 2008.  During 2006, 2005 and 2004, the Company paid$460,000, $555,000 and $535,000, respectively, in royalty payments under theselicensing agreements.  The minimum futureroyalty payments are $258,000 and $285,000 for 2007 and 2008, respectively.

F.                 Otherthan for a contract terminated in February 2007 upon the resignation of therelated employee, the Company was party to two employment contracts as ofDecember 31, 2006.  The two officerscovered under these contracts have annual cash salaries (as amended) of$250,000 and $260,000, respectively, for 2007 with provisions for annualincreases through 2009 and 2008, respectively. Both agreements also provide for the payment of severance benefits incertain circumstances.  One agreementprovides for annual one year extensions.

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

TheCompany has established a qualified 401(k) profit sharing plan covering itsnon-union employees. Participants may elect to defer a portion of their annualcompensation.  The Company may contributeamounts at the discretion of the board of directors. The Company expensed401(k) matching contributions of $42,000, $43,000 and $68,000 in 2006, 2005 and2004, respectively.

 

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Additionally,the Company participates in two multi-employer plans that provide benefits tothe Company’s union employees. Contributions to the plans for the years ended December 31, 2006, 2005and 2004 were $36,000, $34,000 and $35,000, respectively.

**8.      Major Customers**

Inthe year ended December 31, 2006, the Company had sales to three customersrepresenting 24%, 11% and 11% of total annual net sales.  At December 31, 2006, these customers hadopen accounts receivable balances of $1,002,000, $618,000 and $1,104,000,respectively.  During 2005, the Companyhad sales to one customer representing 20% and sales to another customerrepresenting 12% of total annual net sales. At December 31, 2005, thesecustomers had open accounts receivable balances of $767,000 and $554,000,respectively.  During 2004, the Companyhad sales to one customer representing 21% and sales to another customerrepresenting 14% of total annual net sales.

**9.      Stock Option and Purchase Plans**

OnSeptember 11, 1996, the Company adopted the Vita Food Products, Inc. 1996 StockOption Plan for employees or other constituencies of the Company, includingmembers of the board of directors who are employees.  The plan was amended and restated in 2004 toprovide for 525,000 shares of common stock to be reserved for issuance upon theexercise of options designated as either an “incentive stock option” or as a “nonqualifiedstock option.”  These options vest at 20%per year and may be granted to employees or other constituencies of theCompany, including members of the board of directors who are employees.  On September 11, 1996, the Company alsoadopted the Vita Food Products, Inc. 1996 Stock Option Plan for Non-EmployeeDirectors.  The plan was amended andrestated in 2000 to provide for 175,000 shares of common stock to be reservedfor issuance upon the exercise of options designated as a “nonqualified stockoption.”  These options become fullyvested six months after issuance and may be granted to directors who are notemployees of the Company.  Generally, alloptions are issued at exercise prices equal to market price and are exercisablefor a period of ten years from the date of grant.  Further, in September 1996, the Companyadopted the 1996 Employee Stock Purchase Plan pursuant to which 150,000 sharesof common stock have been reserved for issuance.  In December 2005, the Company’s board ofdirectors elected to fully vest all unvested employee stock options grantedbetween 2001-2004.  This election wasmade in order to reduce the complications of and potential compensation expensepursuant to adopting FASB 123(R) as of January 1, 2006.  No additional compensation expense wasrecorded due to exercise prices of the accelerated unvested options exceedingthe market value of the Company’s stock in December 2005.

In November 2006,the Company adopted the Vita Food Products, Inc. 2006 Stock Option Plan foremployees, directors and other constituencies of the Company.  This plan provides for 475,000 shares ofcommon stock to be reserved for issuance upon the exercise of optionsdesignated as either “incentive stock options” or “nonqualified stock options.”  The plan was effective as of September 11,2006, the expiration date of the 1996 Stock Option Plan and 1996 Stock OptionPlan for Non-Employee Directors, and remains subject to shareholder approval atthe Company’s 2007 Annual Meeting of Stockholders.  Options granted under this new plan 50,000 asof December 31, 2006, are reflected in the tables and disclosures below eventhough shareholder approval is still pending.

In November 2006,the Company also adopted the Vita Food Products, Inc. 2006 Employee StockPurchase Plan pursuant to which 150,000 shares of common stock have beenreserved for issuance and which 28,399 shares have been issued as of December31, 2006.  The plan was effective as ofSeptember 11, 2006, the expiration date of the 1996 Employee Stock PurchasePlan, and remains subject to shareholder approval at the Company’s 2007 AnnualMeeting of Stockholders.

40

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Informationwith respect to the stock option plans follows:

| Year ended December 31,       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
|                                         |       |     |       |     |       |       |       |
| Options  outstanding at beginning of year    |       | 349,600  |       | 330,400  |       | 314,400    |       |
| Options granted                              |       | 70,000   |       | 80,500   |       | 50,000     |       |
| Options  exercised                           |       | (17,000  | )          | 0        |       | (23,500    | )          |
| Options  forfeited                           |       | (63,500  | )          | (61,300  | )          | (10,500    | )          |
|                                         |       |     |       |     |       |       |       |
| Options  outstanding at end of year          |       | 339,100  |       | 349,600  |       | 330,400    |       |
|                                         |       |     |       |     |       |       |       |
| Weighted average  remaining contractual life |       | 6.6 yrs. |       | 6.6 yrs. |       | 6.8 yrs.   |       |
| Options  exercisable                         |       | 240,700  |       | 286,600  |       | 200,180    |       |
|                                         |       |     |       |     |       |       |       |
| Exercise prices per  option granted          |       | $        | 2.12-$3.73 |     | $          | 1.71-$3.41 |       | $ | 4.45-$7.52 |   |
|                                              |            |          |            |          |            |            |            |  |  |  |

 

| Weighted Average Exercise Price Information | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |     |       |
| Outstanding  January 1,                                         | ** ** | **$**    | **3.84**   |     | $          | 4.15     |       | $ | 3.52 |   |
| Outstanding  December 31,                                       | ** ** | **3.61** |       | 3.84     |       | 4.15     |       |
| Exercisable at  year end                                        | ** ** | **4.11** |       | 4.14     |       | 3.60     |       |
| Exercised during  year                                          | ** ** | **1.70** |       | 0        |       | 2.43     |       |
| Forfeited during year                                           | ** ** | **4.02** |       | 3.99     |       | 4.83     |       |
|                                                                 |            |          |            |          |            |          |            |  |  |  |

 

For 2006, stock-basedcompensation expense from option plans and share purchase plans was $23,408 and$52,097, respectively.  As of December31, 2006, there was $100,221 of total unrecognized compensation cost related tooutstanding stock options granted to employees and directors which is expectedto be recognized over a weighted average period of 58 months.  The total intrinsic value of stock optionsexercised during 2006 and 2004 was $32,303 and $123,418, respectively.

**10.**   **Equity Issuance**

In February 2006, the Company entered into agreements pursuant to whichfive individuals or their affiliated entities invested a total of $2,500,000 inthe Company.  Substantially all of thesefunds were used to reduce funded debt. The investors received units consisting of an aggregate of 1,000,000shares of common stock; three-year warrants to purchase 500,000 shares ofcommon stock at an exercise price of $5.00 per share; and five-year warrants topurchase an additional 500,000 shares of common stock at an exercise price of$7.50 per share.  The warrants arecurrently exercisable.  The investorsinclude the following: (i) Stephen D. Rubin, then president and Chairman of theBoard of Directors of the Company, and as of August 18, 2006, Chairman of theBoard of Directors, (ii)  Clifford K.Bolen, then Senior Vice President, Chief Operating Officer and Chief FinancialOfficer of the Company, and, as of August 18, 2006, President and ChiefExecutive Officer, (iii) Delphi Casualty Co., of which Glen S. Morris, adirector of the Company, owns a 44% equity interest, (iv) a trust of which JohnC. Seramur, a director of the Company, serves as trustee, as well as (v) HowardBedford, then an unrelated third-party investor and, as of May 18, 2006, adirector of the Company.

**11.   BusinessSegments**

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 accounting policiesas described in Note 1 were utilized in the preparation of the financialstatements for both segments.

41

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Business segmentinformation is as follows ($000’s):

| Year ended December 31, | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Goodwill**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita Seafood                           | ** ** | $          | —     |       | $          | —     |       | $ | — |   |
| VSF (a)                                |       | 5,571      |       | 6,697      |       | 5,997      |       |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Goodwill                         | ** ** | $          | 5,571      | ** ** | $          | 6,697      |       | $ | 5,997 |   |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Total  Assets**                      | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood                           | ** ** | $          | 19,174     | ** ** | $          | 18,523     |       | $ | 17,934 |   |
| VSF                                    |       | 8,360      |       | 8,500      |       | 7,366      |       |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Assets                           | ** ** | $          | 27,534     | ** ** | $          | 27,023     |       | $ | 25,300 |   |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Net  Sales**                         | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood                           | ** ** | $          | 28,879     | ** ** | $          | 26,346     |       | $ | 26,916 |   |
| VSF                                    |       | 22,075     |       | 20,226     |       | 21,492     |       |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Net Sales                        | ** ** | $          | 50,954     | ** ** | $          | 46,572     |       | $ | 48,408 |   |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Operating  (Loss) Profit**           | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood (b) (c)                   | ** ** | $          | 550        |       | $          | (1,290     | )          | $ | (483 | ) |
| VSF (a)(d)                             |       | (2,412     | )          | 932        |       | (1,736     | )          |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Operating  (Loss) Profit         | ** ** | $          | (1,862     | )          | $          | (358       | )          | $ | (2,219 | ) |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Net  (Loss) Income**                 | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood (b) (c)                   | ** ** | $          | (179       | )          | $          | (1,174     | )          | $ | (521 | ) |
| VSF (a)(d)                             |       | (2,212     | )          | 285        |       | (2,196     | )          |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Net (Loss)  Income               | ** ** | $          | (2,391     | )          | $          | (889       | )          | $ | (2,717 | ) |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Depreciation  and Amortization**     | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood                           | ** ** | $          | 536        | ** ** | $          | 491        |       | $ | 500 |   |
| VSF                                    |       | 458        |       | 471        |       | 483        |       |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total  Depreciation and Amortization   | ** ** | $          | 994        | ** ** | $          | 962        |       | $ | 983 |   |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| **Capital  Expenditures**              | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Vita Seafood                           | ** ** | $          | 698        |       | 244        |       | $          | 612 |   |
| VSF                                    |       | 468        |       | 597        |       | 566        |       |
| ** **                             | ** ** |       | ** ** |       | ** ** | ** ** | ** ** |
| Total Capital  Expenditures            | ** ** | $          | 1,166      | ** ** | $          | 841        |       | $ | 1,178 |   |

 

(a)             Includesthe 2006 and 2004 goodwill impairment charge of $1,126 and $2,314, respectively.

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

(c)             Includesin 2005 a $502 charge, $301 net of tax benefit, to recognize the future costsassociated with a senior executive officer, whose duties were materiallyreduced.

(d)            Includesin 2006 a $321 charge to recognize a long term asset impairment related to thetermination of a facility lease.

 

42

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**12. SelectedQuarterly Financial Data (unaudited)**

# **For The Three Month Periods Ended**

**(in thousands, except share andper share data)**
| ** **                                  | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Revenues                                    |       | $                        | 12,788     |                    | $          | 11,828                       |       | $                           | 12,451     |   | $ | 13,887 |   |
| Gross Margin                                |       | 3,896                    |       | 3,372                   |       | 2,440                        |       | 3,079                       |       |
| Net Income (Loss)                           |       | 57                       |       | 15                      |       | (725                         | )          | (a) (1,738)                 |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Basic Income (Loss) per  Share              |       | $                        | 0.01       |                    | $          | 0.00                         |       | $                           | (0.15      | ) | $ | (0.35 | ) |
| Weighted Average Common  Shares Outstanding |       | 3,995,044                |       | 4,884,778               |       | 4,904,086                    |       | 4,916,328                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Diluted Income (Loss)  per Share            |       | $                        | 0.01       |                    | $          | 0.00                         |       | $                           | (0.15      | ) | $ | (0.35 | ) |
| Weighted Average Common Shares Outstanding  |       | 4,016,193                |       | 4,938,816               |       | 4,904,086                    |       | 4,916,328                   |       |

 

# **For The Three Month Periods Ended**

**(in thousands, except share andper share data)**
| ** **                                  | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                        | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Revenues                                    |       | $                        | 10,897     |                    | $          | 10,158                       |       | $                           | 11, 370    |   | $ | 14,147 |   |
| Gross Margin                                |       | 3,201                    |       | 3,478                   |       | 3,179                        |       | 4,081                       |       |
| Net Income (Loss)                           |       | (257                     | )          | 51                      |       | (257                         | )          | (b) (426)                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Basic Income (Loss) per  Share              |       | $                        | (0.07      | )                       | $          | 0.01                         |       | $                           | (0.07      | ) | $ | (0.11 | ) |
| Weighted Average Common  Shares Outstanding |       | 3,858,738                |       | 3,858,738               |       | 3,866,062                    |       | 3,866,062                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Diluted Income (Loss)  per Share            |       | $                        | (0.07      | )                       | $          | 0.01                         |       | $                           | (0.07      | ) | $ | (0.11 | ) |
| Weighted Average Common Shares Outstanding  |       | 3,858,738                |       | 3,884,002               |       | 3,866,062                    |       | 3,866,062                   |       |

----

(a)             Includesa $193 charge, net of tax benefit, to recognize impairment of long-livedassets.

(b)            Includesa $301 charge, net of tax benefit, to recognize the future costs associated witha senior executive whose duties have been materially reduced.

**13. SubsequentEvent (unaudited)**

On February 16, 2007, the Company voluntarily recalledcertain products because the labels did not disclose that the productscontained a flavor ingredient derived from milk.  No illnesses or adverse reactions have beenreported to date in connection with this label disclosure issue.  Existing procedures have been reviewed andcorrected where necessary.  The recallresulted in the establishment of a reserve of approximately $444,000 (audited)in the fourth quarter of 2006.

The Company has reached an agreement in principle withHoward Bedford, a Company director, pursuant to which Mr. Bedford would invest$3,000,000 in the Company.  Subsequentlyall of these funds would be used for****workingcapital requirements.  In considerationfor his investment, Mr. Bedford would receive 2,400,000 shares of the Company’scommon stock, two year warrants to purchase 500,000 shares of Common Stock atan exercise price of $1.25 per share; three-year warrants to purchase 500,000shares of Common Stock at an exercise price of $1.50 per share; four-yearwarrants to purchase 500,000 shares of Common Stock at an exercise price of$1.50 per share; and five-year warrants to purchase 500,000 shares of CommonStock at an exercise price of $1.75 per share. The warrants would be exercisable immediately.  Subsequent to this transaction, Mr. Bedfordwould own approximately 38.2% of the Company’s common stock and warrants toacquire another 10.3%.  On April 10,2007, $1,000,000 has been invested.  Withthe equity infusion, management believes it would be able to effectivelyoperate its business during 2007 and beyond.

43

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**Item 9. Changes inand Disagreements With Accountants on Accounting and Financial Disclosure.**

No changes in accountants ordisagreements with accountants on accounting and financial disclosure occurred.

**Item 9A. Controlsand Procedures.**

Under the supervision and with the participation ofthe Company’s management team, the principal executive officer and principalfinancial officer have evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures as defined in Rules 13a —15(e) and 15d — 15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), as of December 31, 2006 and, based on their evaluation,have concluded that these controls and procedures are effective.  There were no changes in the Company’sinternal control over financial reporting during the fiscal quarter endedDecember 31, 2006 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

Disclosure controls andprocedures are designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in the reports that it files under theExchange Act is accumulated and communicated to the Company’s management,including its principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system aremet. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events. Because of these andother inherent limitations of control systems, there can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

**Item 9B. OtherInformation.**

All information required to be disclosed in a report on Form 8-K duringthe fourth quarter of 2006 has been reported.

**PART III**

**Item 10.Directors, Executive Officers and Corporate Governance.**

The information required by thisItem 10 is incorporated herein by reference to the information set forth underthe captions “Election of Directors,” “Executive Officers and Directors,” “CorporateGovernance” and “Section 16(a) Beneficial Ownership Reporting Compliance” inthe Company’s definitive Proxy Statement for the 2007 Annual Meeting ofStockholders.

**Item 11. ExecutiveCompensation.**

The information required by thisItem 11 is incorporated by reference to the information set forth under thecaptions “Compensation of Directors and Executive Officers” and “CorporateGovernance” in the Company’s definitive Proxy Statement for the 2007 AnnualMeeting of Stockholders.

44

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**Item 12. SecurityOwnership of 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 2007 Annual Meeting of Stockholders.

**Item 13. CertainRelationships and Related Transactions, and Director Independence.**

The information required by this Item 13 isincorporated by reference to the information set forth under the captions “Transactionswith Related Persons, Promoters and Certain Control Persons” and “CorporateGovernance” in the Company’s definitive Proxy Statement for the 2007 AnnualMeeting of Stockholders.

**Item 14. PrincipalAccountant Fees and Services.**

The information required by this Item 14 isincorporated by reference to the information set forth under the caption “CorporateGoverance” in the Company’s definitive Proxy Statement for the 2007 AnnualMeeting of Stockholders.

**PART IV**

**Item 15. Exhibitsand Financial Statement Schedules.**

(a)(1), (a)(2) and (c):             The Company has filed its consolidated financialstatements in Part II, Item 8 of this Annual Report on Form 10-K.

(a)(3) and (b):        Listedbelow are the exhibits filed as part of this Annual Report on Form 10-K:

 

45

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| Number       | ** ** | **Exhibit Title**                                                                                                                                                                                         | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1(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) |       |
|         |       |                                                                                                                                                                                                      |       |
| 3.1(3)       |       | Articles of Incorporation of the Company (Ex. 3.1)                                                                                                                                                        |       |
|         |       |                                                                                                                                                                                                      |       |
| 3.2(3)       |       | By-laws of the Company (Ex. 3.2)                                                                                                                                                                          |       |
|         |       |                                                                                                                                                                                                      |       |
| 4.1(3)       |       | Form of Common Stock Certificate (Ex. 4.1)                                                                                                                                                                |       |
|         |       |                                                                                                                                                                                                      |       |
| 4.2(9)       |       | Certificate of Designation of Series A Preferred  Stock, as filed with the Secretary of   State of Delaware on November 11, 2005 (Ex. 4.1)                                                                |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1(4)      |       | 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(10)   |       | First Amendment to Loan and Security Agreement dated  November 5, 2004 (Ex. 10.1.1)                                                                                                                       |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.2(5)    |       | Second Amendment to Loan and Security Agreement  dated December 21, 2004 (Ex. 10.1)                                                                                                                       |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.3(11)   |       | Third Amendment to Loan and Security Agreement dated  January 31, 2005 (Ex. 10.1)                                                                                                                         |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.4(12)   |       | Fourth Amendment to Loan and Security Agreement  dated April 4, 2005 (Ex. 10.1)                                                                                                                           |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.5(13)   |       | Fifth Amendment to Loan and Security Agreement dated  June 30, 2005 (Ex. 10.1)                                                                                                                            |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.6(14)   |       | Sixth Amendment to Loan and Security Agreement dated  August 4, 2005 (Ex. 10.1)                                                                                                                           |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.7(15)   |       | Seventh Amendment to Loan and Security Agreement  dated August 30, 2005 (Ex. 10.1)                                                                                                                        |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.8(20)   |       | Eighth Amendment to Loan and Security Agreement  dated March 30, 2007 (Ex. 10.1)                                                                                                                          |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.9(17)   |       | Ninth Amendment to Loan and Security Agreement dated  March 24, 2006 (Ex. 10.1)                                                                                                                           |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.1.10(20)* |       | Tenth Amendment to Loan and Security Agreement dated  April 13, 2007                                                                                                                                      |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.2(3)      |       | Form of 1996 Employee Stock Option Plan (Ex. 10.4)                                                                                                                                                        |       |
|         |       |                                                                                                                                                                                                      |       |
| 10.3(3)      |       | Form of 1996 Stock Option Plan for Non-Employee  Directors (Ex. 10.5)x                                                                                                                                    |       |

46

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|            |   |                                                                                                                                                                                                                                                 |   |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.4(3)    |   | Form of Employment Agreement between the Company and  Stephen D. Rubin   (Ex. 10.7)x                                                                                                                                                                 |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.4.1(6)  |   | Amendment One to Employment Agreement between the  Company and Stephen D. Rubin   (Ex. 10.4.1)x                                                                                                                                                      |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.4.2(10) |   | Amendment Two to Employment Agreement between the  Company and Stephen D. Rubin   (Ex. 10.4.2)x                                                                                                                                                      |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.4.3(18) |   | Employment Agreement between the Company and Stephen  D. Rubin, dated April 4, 2006  (Ex. 10.1)x                                                                                                                                                |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.5(7)    |   | Employment Agreement dated as of January 1, 2004  between the Company and Clark L. Feldman  (Ex. 10.6)x                                                                                                                                         |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.6(3)    |   | Long Term Supply/Purchase Agreement dated as of  September 1, 1992 by and between the Company and  Barry’s Limited (Ex. 10.9)                                                                                                              |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.7 (3)   |   | 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)                                                                    |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.8(1)    |   | 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(10) |   | Amendment One to Employment Agreement between  Virginia Honey Company, Inc. and   Terry W. Hess (Ex. 10.8.1)x                                                                                                                                        |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.9(8)    |   | Employment Agreement, made as of November 1, 2002  between The Halifax Group, Inc. and   Robert J. Budd (Ex. 10.1)x                                                                                                                                  |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.10(8)   |   | Amendment to Employment Agreement, made as of March,  2003 between The Halifax Group, Inc. and   Robert J. Budd (Ex. 10.2)                                                                                                                           |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.11(8)   |   | 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(10)  |   | 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 (Ex. 10.12) |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.13(9)   |   | Form of Rights Agreement dated as of November 10,  2005, between Vita Food Products, Inc. and American Stock Transfer and Trust  Company (Ex. 10.1)                                                                                                  |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.14(16)  |   | Employment Agreement, made as of March 20, 2006  between Vita Food Products, Inc. and Clifford Bolen (Ex. 10.1)x                                                                                                                                     |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.15(19)  |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and   Howard Bedford (Ex. 10.1)                                                                                                                                    |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.16(19)  |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Stephen D. Rubin (Ex. 10.2)                                                                                                                                    |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.17(19)  |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Stephen D. Rubin (Ex. 10.3)                                                                                                                                    |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.18(19)  |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and the John C. Seramur 2005 Flite Trust  dated September 19, 2005 (Ex. 10.4)                                                                                      |   |
|       |   |                                                                                                                                                                                                                                                 |   |
| 10.19(19)  |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and the John C. Seramur 2005 Flite Trust  dated September 19, 2005 (Ex. 10.5)                                                                                      |   |

47

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|           |   |                                                                                                                               |   |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.18(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Clifford K. Bolen and Affiliates (Ex.  10.6) |   |
|      |   |                                                                                                                               |   |
| 10.19(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Delphi Casualty  Co. (Ex. 10.7)         |   |
|      |   |                                                                                                                               |   |
| 14.1 (7)  |   | Code of Ethics (Ex. 14.1)                                                                                                          |   |
|      |   |                                                                                                                               |   |
| 21.1(7)   |   | Subsidiary of the Company (Ex. 21.1)                                                                                               |   |
|      |   |                                                                                                                               |   |
| 23.1      |   | Consent of Independent Registered Public Accounting  Firm *                                                                        |   |
|      |   |                                                                                                                               |   |
| 31.1      |   | Principal Executive and Financial Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley   Act of 2002 *             |   |
|      |   |                                                                                                                               |   |
| 32.1      |   | Principal Executive Officer and Financial  Certification pursuant to Section 906 of the Sarbanes-Oxley   Act of 2002 *             |   |

----

(1)             Incorporated byreference to Form 8-K filed with the Securities and Exchange Commission onAugust 30, 2001.  Form 8-K Exhibit Number is included in parenthesis following the title of theexhibit.

(2)             Incorporated byreference to Form 8-K filed with the Securities and Exchange Commission onNovember 6, 2002.  Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(3)             Incorporated byreference to Form SB-2 Registration Statement (File No. 333-5738), filedwith the Securities and Exchange Commission on September 23, 1996.  Form SB-2 Exhibit Number is included inparenthesis following the title of the exhibit.

(4)             Incorporated byreference to Form 10-Q for the fiscal quarter ended September 30, 2003, filedwith the Securities and Exchange Commission on November 14, 2003. Form 10-QExhibit Number is included in parenthesis following the title of the exhibit.

(5)             Incorporated byreference to Form 8-K filed with theSecurities and Exchange Commission on January 6, 2005.  Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

(6)             Incorporated byreference to Form 10-QSB for the fiscal quarter ended June 30, 1999, filed withthe Securities and Exchange Commission on August 9, 1999.  Form 10-QSB Exhibit Number is included inparenthesis following the title of the exhibit.

(7)             Incorporated byreference to Form 10-K for the fiscal year ended December 31, 2003, filed withthe Securities and Exchange Commission on March 30, 2004.  Form 10-K Exhibit Number is included inparenthesis following the title of the exhibit.

(8)             Incorporated byreference to Form 8-K filed with theSecurities and Exchange Commission on January 13, 2005.   Form 8-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

(9)             Incorporated byreference to Form 8-K filed with theSecurities and Exchange Commission on November 15, 2005.  Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

(10)       Incorporated by referenceto Form 10-K for the fiscal year ended December 31, 2004, filed with theSecurities and Exchange Commission on March 31, 2005.  Form 10-K Exhibit Number is included inparenthesis following the title of the exhibit.

(11)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on April 12, 2005.  Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

(12)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on April 18, 2005.  Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

(13)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on July 13, 2005.  Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

48

----

 

(14)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on August 11, 2005.  Form8-K Exhibit Number is included in parenthesis following the title of theexhibit.

(15)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on September 8, 2005. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

(16)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on March 23, 2006.  Form8-K Exhibit Number is included in parenthesis following the title of theexhibit.

(17)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onMarch 30, 2006.  Form 10-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(18)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 7, 2006.  Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(19)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onFebruary 22, 2006.  Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(20)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 5, 2007.  Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

x                      Indicates anemployee benefit plan, management contract or compensatory plan or arrangement.

*                    Filedherewith.

 

49

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|        |   | **VITA FOOD PRODUCTS, INC.** |
|--------|--------|------------------------------|
|   |   |                         |   |   |
|   |   |                         |   |   |
|   |   | By:                          |   | /s/ Clifford K. Bolen |
|   |   |                         |   | Clifford K. Bolen  President |
|   |   | Date:                        |   | April 17, 2007 |
|   |   |                         |   |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the following capacities on April 17, 2007.

 
| Signatures              |   | Title                                   |
|-------------------------|--------|-----------------------------------------|
|                    |   |                                    |
| /s/ Clifford K. Bolen   |   | President and Chief  Executive Officer  |
| Clifford K. Bolen       |   | (Principal Executive  and Financial and |
|                    |   | Accounting Officer)                     |
|                    |   |                                    |
|                    |   |                                    |
| /s/ Stephen D. Rubin    |   | Chairman of the Board                   |
| Stephen D. Rubin        |   |                                    |
|                    |   |                                    |
|                    |   |                                    |
| /s/ Howard Bedford      |   | Director                                |
| Howard Bedford          |   |                                    |
|                    |   |                                    |
|                    |   |                                    |
| /s/ Scott Levitt        |   | Director                                |
| Scott Levitt            |   |                                    |
|                    |   |                                    |
|                    |   |                                    |
| /s/ Glenn Morris        |   | Director                                |
| Glenn Morris            |   |                                    |
|                    |   |                                    |
|                    |   |                                    |
| /s/ Steven A. Rothstein |   | Director                                |
| Steven A. Rothstein     |   |                                    |
|                    |   |                                    |
|                    |   |                                    |
| /s/ John C. Seramur     |   | Director                                |
| John C. Seramur         |   |                                    |

 

50

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**Exhibit Index**

| **Number**  | ** ** | **Exhibit  Title**                                                                                                                                                                                    |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                  |
| 2.1(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) |
|        |       |                                                                                                                                                                                                  |
| 3.1(3)      |       | Articles of Incorporation of the Company (Ex. 3.1)                                                                                                                                                    |
|        |       |                                                                                                                                                                                                  |
| 3.2(3)      |       | By-laws of the Company (Ex. 3.2)                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                  |
| 4.1(3)      |       | Form of Common Stock Certificate (Ex. 4.1)                                                                                                                                                            |
|        |       |                                                                                                                                                                                                  |
| 4.2(9)      |       | Certificate of Designation of Series A Preferred  Stock, as filed with the Secretary of State of Delaware on November 11, 2005  (Ex. 4.1)                                                             |
|        |       |                                                                                                                                                                                                  |
| 10.1(4)     |       | 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(10)  |       | First Amendment to Loan and Security Agreement dated  November 5, 2004 (Ex. 10.1.1)                                                                                                                   |
|        |       |                                                                                                                                                                                                  |
| 10.1.2(5)   |       | Second Amendment to Loan and Security Agreement  dated December 21, 2004 (Ex. 10.1)                                                                                                                   |
|        |       |                                                                                                                                                                                                  |
| 10.1.3(11)  |       | Third Amendment to Loan and Security Agreement dated  January 31, 2005 (Ex. 10.1)                                                                                                                     |
|        |       |                                                                                                                                                                                                  |
| 10.1.4(12)  |       | Fourth Amendment to Loan and Security Agreement  dated April 4, 2005 (Ex. 10.1)                                                                                                                       |
|        |       |                                                                                                                                                                                                  |
| 10.1.5(13)  |       | Fifth Amendment to Loan and Security Agreement dated  June 30, 2005 (Ex. 10.1)                                                                                                                        |
|        |       |                                                                                                                                                                                                  |
| 10.1.6(14)  |       | Sixth Amendment to Loan and Security Agreement dated  August 4, 2005 (Ex. 10.1)                                                                                                                       |
|        |       |                                                                                                                                                                                                  |
| 10.1.7(15)  |       | Seventh Amendment to Loan and Security Agreement  dated August 30, 2005 (Ex. 10.1)                                                                                                                    |
|        |       |                                                                                                                                                                                                  |
| 10.1.8(17)  |       | Eighth Amendment to Loan and Security Agreement  dated March 24, 2006(Ex. 10.1)                                                                                                                       |
|        |       |                                                                                                                                                                                                  |
| 10.1.9(20)  |       | Ninth Amendment to Loan and Security Agreement dated  March 24, 2007(Ex. 10.1)                                                                                                                        |
|        |       |                                                                                                                                                                                                  |
| 10.1.10(20) |       | Tenth Amendment to Loan and Security Agreement dated  April 13, 2007                                                                                                                                  |
|        |       |                                                                                                                                                                                                  |
| 10.2(3)     |       | Form of 1996 Employee Stock Option Plan (Ex. 10.4)x                                                                                                                                                   |
|        |       |                                                                                                                                                                                                  |
| 10.3(3)     |       | Form of 1996 Stock Option Plan for Non-Employee  Directors (Ex. 10.5)x                                                                                                                                |

51

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|            |   |                                                                                                                                                                                                                                           |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4(3)    |   | Form of Employment Agreement between the Company and  Stephen D. Rubin (Ex. 10.7)x                                                                                                                                                             |
|       |   |                                                                                                                                                                                                                                           |
| 10.4.1(6)  |   | Amendment One to Employment Agreement between the  Company and Stephen D. Rubin(Ex. 10.4.1)x                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                           |
| 10.4.2(10) |   | Amendment Two to Employment Agreement between the  Company and Stephen D. Rubin (Ex. 10.4.2)x                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                           |
| 10.4.3(18) |   | Employment Agreement between the Company and Stephen  D. Rubin, dated April 4, 2006 (Ex. 10.1)x                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                           |
| 10.5(7)    |   | Employment Agreement dated as of January 1, 2004  between the Company and Clark L. Feldman (Ex. 10.6)x                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                           |
| 10.6(3)    |   | Long Term Supply/Purchase Agreement dated as of  September 1, 1992 by and between the Company and Barry’s Limited (Ex. 10.9)                                                                                                              |
|       |   |                                                                                                                                                                                                                                           |
| 10.7(3)    |   | 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)                                                              |
|       |   |                                                                                                                                                                                                                                           |
| 10.8(1)    |   | 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(10) |   | Amendment One to Employment Agreement between  Virginia Honey Company, Inc. and Terry W. Hess (Ex. 10.8.1)x                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                           |
| 10.9(8)    |   | Employment Agreement, made as of November 1,2002,  between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.1)x                                                                                                                              |
|       |   |                                                                                                                                                                                                                                           |
| 10.10(8)   |   | Amendment to Employment Agreement, made as of March,  2003 between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.2)                                                                                                                       |
|       |   |                                                                                                                                                                                                                                           |
| 10.11(8)   |   | 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(10)  |   | 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 (Ex. 10.12)x |
|       |   |                                                                                                                                                                                                                                           |
| 10.13(9)   |   | Form of Rights Agreement dated as of November 10,  2005, between Vita Food Products, Inc. and American Stock Transfer and Trust  Company (Ex. 10.1)                                                                                            |
|       |   |                                                                                                                                                                                                                                           |
| 10.14(16)  |   | Employment Agreement, made as of March 20,2006,  between Vita Food Products, Inc. and Clifford Bolen (Ex. 10.1)x                                                                                                                               |

52

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|           |   |                                                                                                                                                            |
|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Howard Bedford (Ex. 10.1)                                                 |
|      |   |                                                                                                                                                            |
| 10.16(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Stephen D. Rubin (Ex. 10.2)                                               |
|      |   |                                                                                                                                                            |
| 10.17(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Stephen D. Rubin (Ex. 10.3)                                               |
|      |   |                                                                                                                                                            |
| 10.18(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and the John C. Seramur 2005 Flite Trust  dated September 19, 2005 (Ex. 10.4) |
|      |   |                                                                                                                                                            |
| 10.19(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and the John C. Seramur 2005 Flite Trust  dated September 19, 2005 (Ex. 10.5) |
|      |   |                                                                                                                                                            |
| 10.18(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Clifford K. Bolen and Affiliates (Ex.  10.6)                              |
|      |   |                                                                                                                                                            |
| 10.19(19) |   | Subscription Agreement, dated February 16, 2006  between Vita Food Products, Inc. and Delphi Casualty Co. (Ex. 10.7)                                            |
|      |   |                                                                                                                                                            |
| 14.1(7)   |   | Code of Ethics (Ex. 14.1)                                                                                                                                       |
|      |   |                                                                                                                                                            |
| 21.1(7)   |   | Subsidiary of the Company (Ex. 21.1)                                                                                                                            |
|      |   |                                                                                                                                                            |
| 23.1      |   | Consent of Independent Registered Public Accounting  Firm*                                                                                                      |
|      |   |                                                                                                                                                            |
| 31.1      |   | Principal Executive and Financial Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                             |
|      |   |                                                                                                                                                            |
| 32.1      |   | Principal Executive and Financial Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                             |

----

(1)             Incorporated byreference to Form 8-K filed with the Securities and Exchange Commission onAugust 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 Exchange Commission onNovember 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-2 Exhibit Number isincluded in parenthesis following the title of the exhibit.

(4)             Incorporatedby reference to Form 10-Q for the fiscal quarter ended September 30, 2003,filed with the Securities and Exchange Commission on November 14, 2003.Form 10-Q ExhibitNumber is included in parenthesis following the title of the exhibit.

(5)             Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onJanuary 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 ended June 30, 1999, filedwith the Securities and Exchange Commission on August 9, 1999.  Form 10-QSB Exhibit Number is included inparenthesis following the title of the exhibit.

(7)             Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2003, filedwith the Securities and Exchange Commission on March 30, 2004.  Form 10-K Exhibit Number is included inparenthesis following the title of the exhibit.

(8)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on January 13, 2005. Form 8-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

(9)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on November 15, 2005. Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(10)       Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2004, filedwith the Securities and Exchange Commission on March 31, 2005.  Form 10-K Exhibit Number is included inparenthesis following the title of the exhibit.

53

----

 

(11)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on April 12, 2005. Form 8-K Exhibit Number is included in parenthesisfollowing the title of the exhibit.

(12)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on April 18, 2005. Form 8-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

(13)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on July 13, 2005. Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(14)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on August 11, 2005. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(15)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on September 8, 2005. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(16)       Incorporated by referenceto Form 8-K filed with the Securities andExchange Commission on March 23, 2006. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(17)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onMarch 30, 2006.  Form 10-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(18)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 7, 2006.  Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(19)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onFebruary 22, 2006.  Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(20)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 5, 2007.  Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

x                      Indicatesan employee benefit plan, management contract or compensatory plan or arrangement.

*                    Filedherewith.

54

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