**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

| **ý** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                       |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the  fiscal year ended December 31, 2005**                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                 |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the  transition period  from               to               ** |

 

**CommissionFile Number 1-12599**

 

**VITA FOOD PRODUCTS, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Nevada**                                                                                     | ** ** | **36-3171548**                         |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization)                               |       | (I.R.S.  Employer  Identification No.) |
|                                                                                           |       |                                   |
| **2222  West Lake Street, Chicago, Illinois   60612**                           |
| (Address of  principal executive offices)   (Zip code)                          |
|                                                                                           |       |                                   |
| Registrant’s  telephone number, including area code:**   (312)  738-4500** |

 

Securities registered pursuantto 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 ý

 

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

 

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

 

Indicate by check mark if disclosure of delinquent 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 orany amendment to this Form 10-K. o

 

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

Yes o   No ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule12b-2 of the Exchange Act). Yes o   Noý

 

The aggregate market value of common stock held by non-affiliates ofthe registrant as of June 30, 2005 was $5,222,772.

 

The number of shares outstanding of the registrant’s common stock as ofFebruary 28, 2006 was 3,872,822.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the definitive Proxy Statement to be delivered tostockholders in connection with the Annual Meeting of Stockholders to be heldon May 18, 2006 are incorporated by reference in Part III.

 

**PART I**

 

**Item 1. Business.**

 

**Introduction**

 

Vita Food Products, Inc. (the “Company”)has been engaged in the sale of specialty food products under the **Vita**brand name for over 70 years. The Company believes thatits long history of producing and marketing quality products has created astrong 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 itsaccompanying logo, is the most widely recognized brand name in herring productsand cured and smoked salmon products. The Company is the leading processor ofherring products and cured and smoked salmon products in the United States andhas been producing and selling herring products for over 70 years and cured andsmoked salmon products for over 30 years. The Company’s products include avariety of cuts of pickled herring in cream and wine based sauces, and lox andnova salmon. The Company markets other complementary specialty food products,such as cream cheese with salmon, shrimp cocktail, horseradish, cocktail,tartar sauces and salad dressings, all of which it purchases from third partyfood producers and markets under the **Vita** brand namepursuant to co-packing arrangements, with the exception of the salad dressingproducts, which are now produced by the Company’s subsidiary. Historically, theCompany has increased its sales through acquisitions that have enabled theCompany to add new product lines and expand its existing product lines. TheCompany markets and, in some cases, also produces related specialty foodproducts under other brand names, some of which are recognized regional brandnames, in certain regions of the country, that have been licensed to theCompany.

 

The Company significantly expanded its lineof specialty food products in 2002 and 2001 with the acquisitions of TheHalifax Group, Inc. (“Halifax”) and the Virginia Honey Company, Inc.(“Virginia Honey”), respectively. The Company has formed Vita Specialty Foods, Inc.(“VSF”) as a wholly owned subsidiary and a separate business unit (the “VitaSpecialty Foods Segment”) to consolidate the operations of Virginia Honey andHalifax (the Company’s operations conducted separately from the operations ofthe Vita Specialty Foods Segment are referred to herein as the “Vita SeafoodSegment” and references to the Company include the acquired operationssubsequent to their respective acquisition dates). The Vita Specialty FoodsSegment specializes in processing and marketing, (i) under the **Virginia Brand**name, honey, saladdressings, sauces, jams and jellies and gift basket products; (ii) underits **Oak Hill Farms**® brand name, aline of salad dressings, gourmet sauces, and beverages; and (iii) underits **Scorned Woman**® brand name, aline of hot sauce based products. In addition, the Vita Specialty Foods Segmenthas brand name product licensing agreements with **Jim Beam**®, **Allied Domecq**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 is leveragingits sales and distribution network to provide national exposure to the productsof the Vita Specialty Foods Segment. The Company also expects to introduce newproducts with a goal of enhancing the aforementioned brand names under the VitaSeafood Segment and the Vita Specialty Foods Segment.

 

**Company Background**

 

The Company was originally incorporated asVita Food Products, Inc. in 1928. In 1968, Brown and Williamson TobaccoCompany, a British company, purchased the Company. The Company was thenacquired by Dean Foods Company in 1978. In 1982, Mr. Stephen D. Rubin and Mr. ClarkL. Feldman, on behalf of an investor group (the “Investors”), negotiated theacquisition of the Company from Dean Foods Company and became the Company’slargest shareholders. On September 20, 1996, the Company reincorporated inthe 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

 

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January 23, 1997, the Company completed an initial public offeringof shares of its common stock, par value $.01 per share (“Common Stock”), andredeemable common stock purchase warrants, which expired in 2002, resulting innet proceeds before expenses of approximately $4.1 million.

 

Effective July 1, 2001, the Companyacquired 100% of the outstanding shares of capital stock of Virginia Honey. Theresults of Virginia Honey have been included in the Company’s consolidatedfinancial statements since the effective date of the acquisition as part ofthe Vita Specialty Foods Segment. Virginia Honey was established in 1962 as asmall beekeeping business. Since then, Virginia Honey has expanded its productofferings to include salad dressings and by 1998 the company had grown toinclude two production facilities, with one used to pack honey products and thesecond to process and pack salad dressings, sauces and marinades.

 

Effective November 1, 2002, the Companyacquired 100% of the outstanding shares of capital stock of Halifax. Theresults of Halifax have been included in the Company’s consolidated financialstatements since the effective date of the acquisition as part of the VitaSpecialty Foods Segment. Halifax specialized in product development andmarketing of its wide range of food products. The product list includes saladdressings, barbeque sauce, steak sauce, gourmet sauces, hot sauces and giftbasket related items. In addition, Halifax developed and marketed food productsthrough licensing agreements with well-recognized brands 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) focuson acquisitions; (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, Jim Beam Gourmet Foods, Scorned Woman** andother brand names owned, purchased or licensed from third parties. The Companyintends to implement its growth strategy through acquiring, or entering intojoint ventures with, companies producing complementary specialty food products,introducing and developing new products and increasing its marketing efforts.

 

**Products**

 

The Company’s products include: herring,cured and smoked salmon, honey, salad dressings, meat enhancements and avariety of related specialty food products. The Company’s refrigerated productscan be located in the dairy, meat and fish or deli department of Supermarkets.The Company also sells products in the grocery sections of Supermarkets. Manyof the Company’s products are also sold in bulk to Institutional Purchasers.The Company believes that, although the market for herring products has beenand is expected to remain constant, the market for salmon products and certainother specialty products is increasing. Consumption of fresh and frozen seafoodin the United States continues to increase, especially consumption of salmon.All of the Company’s salmon, herring and honey products, and most of its saladdressings, 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.

 

**Certain Financial Information**

 

See Note 12 in “Item 8. Financial Statements”for information regarding revenues from external customers, profit and totalassets of each of the Company’s business segments.

 

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**Vita Seafood Segment Products**

 

***Herring***

 

Vita & Elf brand herring are madefrom the best available grade of ocean herring. The herring is cured and mixedwith a variety of high quality spices, wines and other ingredients according tothe Company’s proprietary formulations to produce 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 the world.In the United States, herring is more of a specialty product that is served atparties or holiday gatherings. Herring products are often served as appetizers,part of a buffet, between-meal snacks 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 herringproducts represented 29%, 29% and 28% of total consolidated sales for the yearsended December 31, 2005, 2004 and 2003, respectively.

 

***Salmon***

 

Vita uses only premium and quality grades ofsalmon from Southeastern Alaska, Canada, Chile, and other regions of the world.The salmon is cured, smoked, and sliced for most of its salmon products. TheCompany’s retail salmon products are packaged and sold either refrigerated orfrozen to Supermarkets. The institutional cured and smoked salmon products arepackaged in bulk containers, including three-pound trays, and sold refrigeratedor 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 also served as appetizers at formal parties andare being more frequently used as light meals.****TheCompany’s salmon products include “**Vita** LoxSalmon,” “**Vita** Nova Salmon,” and “**Vita****Classic** Salmon,”“**Grand Isle** Salmon,” “**Vita**Salmon Burger,” “**Vita** MarinatedSalmon,” and “**Vita** Salmon Spread”. Sales ofsalmon products represented 25%, 24% and 24% of total consolidated sales forthe years ended December 31, 2005, 2004 and 2003, respectively.

 

***Complementary Products***

 

The Company sells a number of spreads andcondiments, including horseradish, cream cheese with smoked salmon, cocktailand tartar sauces, and shrimp cocktail products. These products are used asappetizers and condiments to accompany light meals and holiday trays. Theseproducts are marketed by the Company under the **Vita**brand name, but produced by third parties pursuant to co-packing arrangements.Sales of complementary products represented 2%, of total consolidated sales foreach of the years ended December 31, 2005, 2004 and 2003, respectively.

 

**Vita Specialty Foods Segment Products**

 

***Salad Dressings***

 

The Company manufactures and markets threepremium lines of salad dressings. Two lines are under the **Virginia Brand** and **Oak Hill Farms**namesand are sold in the grocery section. The third line, which has been developedsince the acquisition of Virginia Honey, is under the **Vita**brand name and is sold refrigerated. All salad dressing flavors feature thefinest ingredients available and most contain the Vidalia® Onion ingredient.While all of the dressings boast premium quality and taste, some also featureno cholesterol, low fat, low carbohydrates, and low calories. The Company’ssalad dressing customers are mainly Supermarkets. Sales of salad dressingsrepresented 25%, 25% and 21% of total consolidated sales for the years ended December 31,2005, 2004 and 2003, respectively.

 

***Honey***

 

Virginia Honey, followed by the VitaSpecialty Foods segment, has been packing and marketing Pure, Grade “A” honeyunder the **Virginia Brand** namesince 1962. The honey is available in several varieties and blends, includingClover, Wildflower, Orange Blossom, and Acacia. Each variety is available in

 

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many sizes ranging from 6oz mugs to 55-gallon drums used for foodservice. The Company’s customers include Supermarkets, InstitutionalPurchasers, bakeries and major food processors. Sales of honey productsrepresented 12%, 13% and 15% of total consolidated sales for the years ended December 31,2005, 2004 and 2003, respectively.

 

***Specialty Products***

 

The Company manufactures and sells BBQsauces, marinades, steak sauce, hot sauces, wing sauce, gourmet cooking saucesand other specialty items. These products are marketed by the Company under the**Oak Hill Farms** and **Scorned Woman** brand names and underlicensing agreements from **Jim Beam®**,**Kahl****úa**® and **Courvoisier**®.

 

In addition, the Company sells a wide arrayof other products including molasses, baking mixes, syrups, condiments, cider,mustard, jams, jellies, and preserves. These products are marketed by theCompany under the **Virginia Brand**name, but produced by third parties pursuant to co-packing arrangements. Salesof specialty products represented 7%, 7% and 10% of total consolidated salesfor the years ended December 31, 2005, 2004 and 2003, 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 has expanded the **Jim Beam Gourmet Food**line of products withthe addition of **Mild**and **MediumSalsas** and **Honey Bourbon**and **SavoryBourbon Glazes**and **Grilling Sauces**.

 

In addition, the Company has expanded its **Virginia Brand salad dressing**line ofproducts with **Chipotle Ranch**and **Cilantroand Green Chili Ranch**varieties.

 

Next,****the Company has expanded its**Oak Hill Farm Food**line ofproducts with the addition of a **Southwest Chipotle**salad dressing and**Sugar Free Green Tea withGinseng**and **Honey and Roobis Tea**concentrates.

 

The Vita Seafood Segment is introducing twonew sub lines under the Vita brand in 2006. **Vita Gold**is Vita’s new Wild Salmon smoked salmon product line. The line is “all natural” &has “no preservatives”. The line consists of Wild Sockeye, Coho, King and Novaitems.

 

Vita’s second new sub line is **Vita Simply Salmon**. The product line consists of ready tocook pre-marinated portions of salmon that reduces the difficulty of preparingfish. The product line consists of three products:**LemonPepper Wild Salmon, Cracked Peppercorn Wild Salmon**and **Lightly Seasoned Wild Sockeye Salmon**.

 

Lastly, Vita has introduced a new 8 oz. lineof seafood sauces that is packaged in a jar with a mouth wide enough to allowconsumers to get all the condiments out of the jar. Vita’s new 8 oz. condimentline includes: **Beet & Cream Style Horseradish,Cocktail Sauce, Tangy Tartar Sauce**and **ChesapeakeStyle Seafood Sauce**.

 

**Product Distribution and Sales**

 

The Company’s products, under both segments,are currently sold through a national distribution network of approximately 60established retail and institutional/food service brokers. The Company believesthat it is the only processor of herring products and cured and smoked salmonproducts that has established such an extensive national distribution network.The Company believes it has been successful in developing this network for anumber of reasons, including the recognition of the **Vita**brand name and the Company’s reputation for producing quality products. TheCompany has also been able to develop and strengthen its distribution networkby providing adequate shelf space for its products. The Company’s currentmarketing efforts and its long-term relationship with many of the food brokershas also contributed to the strength of this network. The Company, through itsmarketing efforts, attempts to maintain good relationships with theSupermarkets and Institutional Purchasers that purchase its products. TheCompany believes that its national distribution network has, in turn, helpedstrengthen the **Vita** brand name and has been animportant

 

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factor in the Company’s ability to introduce new products into themarketplace and is an important component of its acquisition strategy.

 

The Company’s regional sales managers overseeits national distribution network. The Company employs full-time regional salesmanagers who maintain contact with the food brokers in their region and monitortheir performance. The regional sales managers also assist the food brokers intheir selling efforts by, among other things, accompanying the food brokers onlocal sales calls. The Company believes that it is one of the few companies inits market niche to employ regional sales managers and that the presence of theregional sales managers has solidified the Company’s relationship with itsnational distribution network.

 

The Company enters into an agreement witheach food broker, which grants the food broker an exclusive territory in whichto sell its products and sets forth the amount of commissions to be paid onsuch sales by the Company. Such agreements do not permit the Company to makesales directly to Supermarkets located in a food broker’s exclusive territoryunless the Company pays the food broker the commission, which the food brokerwould have 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 ofSupermarkets, has generally accounted for approximately 93% of the Company’snet sales while Institutional Purchasers have accounted for the remaining 7% ofnet sales.

 

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

 

**Customers**

 

The Company’s customers include largeregional supermarket chains, wholesale clubs and gourmet shops throughout thecountry and 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 two largest customersrepresented 20% and 12% of its net sales in 2005, 21% and 14% in 2004 and 19%and 13% in 2003, respectively. The Company does not have a long-termcontractual relationship with either customer. The Company believes the loss ofeither of these customers would have a material adverse affect on the Company’sbusiness, financial condition and results of operations. To this point, during2003, the Vita Seafood Segment’s largest customer discontinued a Vita SeafoodSegment product resulting in a material impact to the Company’s financialresults for 2004. However, in 2004 the Company replaced much of this businessthrough sales to other customers. The Company believes that its present workingrelationships with these customers that have been built up over time are likelyto 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 countriestotaling $1,471,000, $2,076,000 and $1,658,000 during 2005, 2004 and 2003,respectively.

 

**Product Return Policy**

 

The Vita Seafood Segment guarantees the saleof most 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, products notsold before the expiration date are either returned to the Company through itsfood brokers or are disposed of by the Supermarkets or food distributor. Acredit is then issued to the Supermarket or food distributor. The Companyprovides a reserve that is recorded concurrently with the sale. The Companybelieves, 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.

 

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**Production**

 

***Suppliers***

 

The Company relies on outside suppliers forits requirements in producing its herring, salmon, honey, salad dressings,cooking sauces and other products. The Company previously purchased most of itsherring from one specialty herring harvester and processor (the “Supplier”)located in Canada, pursuant to a supply agreement. 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 Companywould pay 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 Supplier at competitiveprices and the Company has established other sources of supply it believes willbe adequate in the event the Supplier ceases to offer herring at competitiveprices. The Company currently purchases its other raw materials and co-packedproducts from a number of sources and the Company believes that there are othersuppliers from which the Company could meet its requirements, if necessary.

 

***Quality Control***

 

The Company believes that it was one of thefirst processors 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-techequipment in its production process dedicated solely to quality controlpurposes that the Company believes gives it a competitive advantage. Theproducts produced through co-packing arrangements are subject to both the qualitycontrol procedures of the co-packing company and the same frequent producttesting that is required of the Company’s products under its quality controlprocedures.

 

**Competition**

 

The market for the Company’s products ishighly competitive. The Company believes that consumers choose herringproducts, salmon products, honey products, salad dressing products as well asits other specialty products based primarily on product quality and price.Although the Company’s competitors for herring and salmon products aregenerally small regional food processors and producers, certain of the Company’scompetitors may have greater financial and other resources than theCompany and may offer lower prices on comparable products. Since a keycompetitive factor among producers of cured and smoked salmon products andherring products is price, even smaller regional companies may be able tocompete effectively against the Company due to reduced shipping costs. Whilethe Company believes its prices are competitive for the quality level of itsproducts, the Company relies primarily on the recognition of the **Vita** brand name, its reputation for selling qualityproducts, and the strength of its distribution network. The Company’s maincompetitors in the herring product and cured and smoked salmon product marketare Lascco, Mama’s and Nathan’s, among others. The Company believes it is theonly independent company with national distribution capabilities in thismarket. In the honey products market, the Company’s main competitors are DutchGold Honey and Sioux Bee Honey. The Company recognizes that the salad dressingmarket is very competitive and there are large companies such as Kraft Foods, Inc.in this market. However, the Company believes that there is a niche with thesalad dressing products the Company offers. Most of the salad dressings arebased on the Vidalia® Onion as an ingredient. The Vidalia® Onion ingredient,coupled with the Company’s proprietary formulations, have created what theCompany believes are unique products.

 

**Environmental Matters**

 

In the ordinary course of the Company’sproduction process, at the Chicago Illinois facility, spillage and cleaningresults in a high concentration of sugars and vinegars, which create BiologicalOxygen Demands (“BODs”) as well as fats, oils and greases (“FOGs”), both ofwhich enter the waste water treatment system. The Company is assessed a usercharge by the Metropolitan Water Reclamation District (the “District”), basedin part on the costs of treating this waste water. If the level of FOGsentering the wastewater treatment system exceeds a specified level over aspecified period of time, the District, following certain proceduralrequirements, has the authority to fine the Company or to temporarily close theCompany’s

 

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production facility. TheDistrict has not initiated or threatened to initiate proceedings against theCompany for violating specified levels for FOGs.

 

**IntellectualProperty**

 

Trademarks and trade names are of criticalimportance to producers of food products. A recognized trademark or trade nameallows the consumer to immediately identify the source of a product, even ifthe product is new to the marketplace.

 

***Vita Seafood Segment***

 

The Company owns the federally registeredtrademark “**Vita**” (with accompanying design).The Company believes that this mark is widely recognized, and providesimmediate identification of the source of its products to consumers. Thisrecognition is the basis for the Company’s ability to maintain a significantshare of the national market for refrigerated herring products and cured andsmoked salmon products. The Company believes the “**Vita**”brand name and trademark has a substantial amount of goodwill associated withit. The Company believes the **Vita** trademarkand its accompanying design are critical to its ability to market new productsand to its 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**” trademarkoriginally belonged to Food Marketing Corp. and was transferred to SuperValu, Inc.,which affirmed Lyon Food’s right to use the mark as set forth in the LetterAgreement and consented to the Company’s right to use the trademark inconnection with smoked fish products. The Letter Agreement is terminable uponsix months notice to the Company. The Company also sells, under a new productline 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**.”

 

***Vita Specialty Foods Segment***

 

Through its acquisitions of Virginia Honeyand Halifax, the Company also acquired the federally registered trademarks “**Virginia Brand**”, “**Oak Hill Farms**” and “**Scorned Woman**”. In addition, the Company isnow producing and marketing products under various third-party licensingagreements. The Company believes that the brand names of **Jim Beam®**, **Kahl****úa**®, **Courvoisier**®and certain colleges and universities can attract consumer attention in ahighly competitive marketplace. The Company believes these licensing agreementscan provide opportunities within the Company’s national sales and distributionnetwork to add significant sales growth. The Company plans to explore the useof additional brand names through third-party licensing agreements as part ofits overall strategy. The Company is not aware of any names or marks whichinfringe on any of those the Company uses. Although the Company sells productsunder a number of other brand and trade names, such other brand or trade namesare not material to the Company’s marketing strategy. The Company also usesvarious recipes and proprietary formulations in its products, which itmaintains as trade secrets. The Company does not believe its business isotherwise dependent upon any patent, license, trademark, service mark or copyright.

 

**ProductLiability Insurance**

 

The Companycurrently maintains product liability insurance for its products with limits of$10,000,000 per occurrence and $11,000,000 in the aggregate, per annum for itsoperations. There can be no assurance that the Company’s insurance will beadequate to cover future product liability claims, or that the Company will beable to maintain adequate product liability insurance at commerciallyreasonable rates.

 

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**Employees**

 

At December 31,2005, the Company had 159 full-time employees. Additionally, up to 40 workersare hired on a temporary basis each year to meet seasonal production demands.At the Chicago Illinois plant, except for supervisors, all production employeesare represented by the Local 546 United Food & Commercial Workers,International Union and maintenance employees are represented by the Local 399International Union of Operating Engineers. The Company has not experienced anywork stoppages since the Company was 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 federaland state laws and regulations. In the United States, the Company’s business issubject to regulation by the Food and Drug Administration (the “**FDA**”). Applicable statutes and regulations governing foodproducts include “standards of identity” for the content of specific types offoods, nutritional labeling and serving size requirements. The Company believesthat its current products satisfy, and its new products will satisfy, allapplicable regulations and that all of the ingredients used in its products are“generally recognized as safe” by the **FDA**for the intended purposes for which they will be used.

 

Vita Specialty Food Segment’s operations andthe production facility from which such operations are conducted are underlicense by the Department of Alcohol, Tobacco and Firearms (the “ATF”), subjectto extensive federal laws and regulations based on the Vita Specialty FoodSegment’s use of alcohol as an ingredient in a number of its food products. TheCompany believes that its current products and processes and reportingrequirements satisfy all applicable regulations set forth by the ATF and itslicensing provisions.

 

**Seasonality**

 

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

 

**Item 1A.Risk Factors.**

 

The Company is subject to a number of important risks anduncertainties. The accompanying risk factors should be read in conjunction withthe information included in this Annual Report on Form 10-K.

 

**We have incurred substantial indebtedness**. Amounts outstanding under the revolving facility, the Term A and TermB facilities at December 31, 2005 were $8,588,000; $6,242,000 and $49,000respectively. The ratio of long term debt to total capitalization was 74% at December 31,2005. 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 our cash flow is insufficient to service ourdebt, the value of our equity could be reduced or eliminated throughforeclosure.

 

**Restrictions imposed by the terms of our LoanAgreement may limit our operating and financial flexibility.**Allof our assets have been pledged as security for any borrowings under the LoanAgreement (as hereinafter defined). The Loan Agreement contains variousbusiness and financial covenants including among other things, a debt serviceratio, a net worth covenant and a ratio of total liabilities to tangible networth. Our failure to comply with our obligations under the Loan Agreement may resultin an event of default, which, if not cured or waived, may permitacceleration of the indebtedness under the Loan Agreement. We most likely wouldnot have sufficient funds available to pay any accelerated indebtedness andcannot be certain that we would even have the ability to refinance acceleratedindebtedness on favorable terms should an event of default occur.

 

**Changes in interest rates affect the interestrate payable under our Loan Agreement**. We areexposed to interest rate fluctuations, primarily as a result of its LoanAgreement with rates which are based on a factor of the prime rate and thussubject to market fluctuations. We do not currently use derivative instrumentsto alter the interest rate characteristics of any debt.

 

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**General economic conditions and conditions inthe retail environment could adversely affect our customers**. Our largest customers are in the retail grocery business and we guaranteethe sales to the majority of these customers. Accordingly, a slow down in theeconomy, especially in the retail market could directly affect the Company’srevenues and profitability.

 

**We are dependent on a few large customers**. During 2005, our two largest customers represented 20% and 12% of itsnet sales. We do not have a long term contract with either of these customersand the loss of either customer would have a material adverse affect on theCompany’s business.

 

**Reduced spending by customers couldsignificantly impact our operating results, financial condition and cash flows.**While we enjoy very good relationships with ourcustomers, there can be no assurance that our principal customers will continueto purchase products from us at the current levels. Orders from our customersare affected by factors such as new product introductions, product life cycles,inventory levels, manufacturing strategies, contract awards, competitiveconditions and general economic conditions. The reduction, delay or cancellationof orders or a delay in shipment of products to such customers could have amaterial adverse effect on our operating results, financial condition and cashflows.

 

**Prices of our raw materials regularlyfluctuate**.  The cost of our raw materials,especially herring, salmon and honey, represents a large portion of the cost tocustomers of our products. Customers may be unwilling to pay costincreases resulting from increases in raw material prices. A significantincrease in the cost of our products which cannot be passed on to the customerscould have an adverse affect on our revenues and profits.

 

**We have numerous competitors with financialand other resources greater than ours**.  Weencounter competition from a number of competitors in the sale of our products.Many of our competitors have financial, product development and other resourcesgreater than ours. Our inability to compete with our competitors effectively bydeveloping and introducing innovative new products on a timely basis could havean adverse affect on our results of operations.

 

**Our business is seasonal in nature**. Many of our products are seasonal in nature causing a concentrationof annual revenue generation to occur in a relatively short time span.Consequently, a loss of business during the peak business season, for anyreason, may result in reduced full year revenues.

 

**We may be unable to execute ouracquisition strategy**.  Our long term strategyincludes a focus on acquisitions. We anticipate that significant future growth,if any, will be the result of the acquisition strategy and the successfulintegration of the acquired businesses into the existing operations. Currently,we have no agreements or understandings with respect to any acquisitions andthere can be no assurance that we will be successful in pursuing otherpotential acquisitions. Moreover, no assurances can be given that any completedacquisition will be beneficial to us or that the operations of an acquiredentity will be successfully integrated into our operations. In addition, thecosts associated with this strategy, means of financing any potentialacquisitions, and consummation and integration of any potential acquisitionscould significantly impact our financial and operating performance.

 

**We may experience significant volatilityin our stock price which may negatively impact our ability to financefuture growth**.  The trading price of ourCommon Stock is subject to wide fluctuations in response to quarter-to-quarterfluctuations in operating results and other events or factors. In addition,stock markets have experienced extreme price and trading volume volatility inrecent years. Our Common Stock has historically had relatively small tradingvolumes. As a result, small transactions in our Common Stock can have a disproportionatelylarge impact on the quoted price of the Common Stock. We believe that ourfuture growth through either current operations or any future acquisitions may beat least partially financed through the capital markets. Thus, fluctuations inour stock price will have an affect on the financing available.

 

**We are dependent on attracting and retainingkey personnel.**The Company believes the success ofthe organization is dependant upon the continued success of attracting andretaining talented personnel.

 

**The terms of our relationships with oursuppliers could change.**We do not have long termpurchase agreements with any supplier. Our ability to continue to procure keymaterials at a competitive price is critical to future success. There can be noassurance that our current suppliers will not consolidate, go out of business,terminate their relationship with us or negatively change the terms upon whichthey service us. We purchase herring from one supplier. Other raw materials andco-packed products, such

 

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as salmon, are purchased from a number of sources, allowing us tonegotiate competitive prices. A consolidation of such suppliers could have anadverse affect on the price of our key materials.

 

**Trade accounts receivable potentially subjectus to significant concentrations of credit risk**.  Weprimarily provide credit in the normal course of business. We perform ongoingcredit evaluations of our customers and maintain allowances for potentialcredit losses, if necessary. However, actual write-offs could exceed thoserecorded allowances for doubtful accounts.

 

**Promotional programs offered to our customersmay result in excessive cost**.  Inaccordance with industry practices, inventory is sold to customers often withthe right to return or dispose if the merchandise is not resold prior to theexpiration 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. Weregularly review and revise, when we deem necessary, estimates of costs to usfor these marketing and merchandising programs based on estimates of what hasbeen 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 could experience a material goodwillimpairment**.  Our assets include a substantialamount of goodwill. This is a result of the acquisition of VSF. The value ofthis goodwill is assessed at least annually. If future operating performance atthis business unit were to fall significantly below current levels, a non-cashcharge to operating earnings for goodwill impairment could result.

 

**Government regulations including any futureclaims could have a negative impact**.  Localauthorities measure and assess the amount of certain pollutants discharged fromthe Chicago facility and entering the wastewater treatment system. Theseauthorities have the power to fine or temporarily close that productionfacility. Furthermore, the quality of our products is regulated by the FDA andfailure to comply with regulations could result in a product recall ortemporary closure of a facility.

 

**Certain of our employees are covered under acollective bargaining agreement.** Ourproduction employees at the Chicago facility, other than supervisors, arerepresented by the Local 546 United Food & Commercial Workers,International Union and maintenance employees are represented by the Local 399International Union of Operating Engineers. Although we consider our laborrelations to be good, a strike, walkout or lockout occurred for a significantperiod of time could have an adverse affect on results of operations.

 

**We could be exposed to increased costs andrisks associated with complying with increasing and new regulations ofcorporate governance and disclosure standards**.  TheSEC has postponed, for one year, the compliance date for reporting on internalcontrols by non-accelerated filers. Despite this postponement, we expect tocontinue to spend an increased amount of management time and internal andexternal resources to comply with changing laws, regulations and standardsrelating to corporate governance and public disclosure, including theSarbanes-Oxley Act of 2002, new SEC regulations and American Stock Exchangerules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002requires management’s annual review and evaluation of our internal controlsystem and attestations of the effectiveness of these systems by ourindependent auditors. We will be documenting and testing internal controlsystems and procedures and considering improvements that could be necessary inorder for us to comply with the requirements of Section 404 by the end of2007. This process may require us to hire outside advisory services andhas resulted in additional accounting and legal expenses. While we believe thatwe currently 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 Staff Comments.**

 

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-ownedfacility located in Chicago, Illinois. The Company’s facility is located on125,600 square feet of land. The facility contains approximately

 

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82,200 square feet of space,including approximately 65,000 square feet of production space, approximately13,900 square feet of refrigerated storage space, and approximately 3,300square feet of office space. LaSalle National Bank of Chicago has a mortgage onthis facility.

 

The Companyproduces, packages, stores, and distributes its **Vita** and **Virginia Brand**salad dressing products and its **Oak HillFarms**, **Jim Beam**® Brand,and **Scorned Woman** Brand ofproducts ranging from salad dressing, cooking sauces, pasta sauces, hot saucesand beverage products and its **Virginia Brand**honey products at a leased facility located in Martinsburg, West Virginia. TheCompany’s facility is located on 8.75 acres of land. The facility containsapproximately 68,000 square feet of space, including approximately 62,300square feet of production space, and approximately 5,700 square feet of officespace.

 

The Companymanufactures and stores, for its own use, plastic bottles at a leased facilitylocated in Berryville, Virginia. The Company’s facility is located on 6.25acres of land. The facility contains approximately 24,000 square feet of space,including approximately 23,250 square feet of production space, andapproximately 750 square feet of office space.

 

The Company believes that its currentfacilities provide sufficient capacity for its needs.

 

**Item 3.Legal Proceedings.**

 

The Company isnot currently involved in any material pending legal proceedings and is notaware of any material legal proceedings threatened against it.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

 

No matters were submitted to a vote ofsecurity holders during the fourth quarter 2005.

 

**PART II**

 

### **Item5. Market for Registrant’s Common Equity and Related Stockholder MattersSecurities.**

 

The Company’sCommon Stock began trading on the Chicago Stock Exchange on January 17,1997, and on the American Stock Exchange on May 12, 1997, under the symbol“VSF”. The Company believes that as of February 28, 2006 there wereapproximately 800 beneficial holders of the Company’s Common Stock.

 

The Companyhas never paid a cash dividend on its Common Stock and currently anticipatesthat all of its earnings will be retained for use in the operation andexpansion of its business. The Company’s revolving and term loan facilitiesrestrict the Company’s ability to pay dividends through requiring approval fromthe lender.

 

There were notreasury stock repurchases in the fourth quarter 2005.

 

The followingtable sets forth the high and low sales prices per share for the Common Stockof the Company for each quarter within fiscal years 2005 and 2004.

 

| **Quarter**     | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
|            |       |     |       |    |       |
| 1st – 2005 |       | $        | 3.81       |    | $          | 2.90 |   |
| 2nd – 2005 |       | 2.94     |       | 2.01    |       |
| 3rd – 2005 |       | 2.99     |       | 2.30    |       |
| 4th – 2005 |       | 2.32     |       | 1.63    |       |
|            |       |     |       |    |       |
| 1st – 2004 |       | 9.50     |       | 5.55    |       |
| 2nd – 2004 |       | 5.64     |       | 4.37    |       |
| 3rd – 2004 |       | 4.74     |       | 3.10    |       |
| 4th – 2004 |       | 3.95     |       | 3.06    |       |
|                 |            |          |            |         |            |  |  |

 

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## **Equity Compensation PlanInformation**

 
| **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     |       | 349,600                                                                                            |       | $                                                                                  | 3.84       |                                                                                                                                                  | 321,062    |   |
| Equity  compensation plans not approved by security holders |       | 0                                                                                                  |       | 0                                                                                  |       | 0                                                                                                                                                     |       |
| Total                                                       |       | 349,600                                                                                            |       | $                                                                                  | 3.84       |                                                                                                                                                  | 321,062    |   |

 

**Item 6.Selected Financial Data.**

 

In thousands, except per share data

 
| **Year Ended December 31,**              | ** ** | **2005(4)** | ** ** | **2004(3)** | ** ** | **2003**   | ** ** | **2002(2)** | ** ** | **2001(1)** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Net  Sales**                                | ** ** | **$**       | **46,856** | ** **  | $          | 48,756     |       | $           | 50,930     |        | $          | 42,863 |   | $ | 31,982 |   |
| **Operating  (Loss) Profit**                  | ** ** | **(358**    | **)**      | (2,219      | )          | 2,502      |       | 2,915       |       | 2,099       |       |
| **Operating  Margin**                         | ** ** | **(0.80**   | **)%**     | (4.60       | )%         | 4.90       | %          | 6.80        | %          | 6.56        | %          |
| **Net  (Loss) Income**                        | ** ** | **(889**    | **)**      | (2,717      | )          | 1,048      |       | 1,446       |       | 1,156       |       |
| **Basic  Earnings (Loss) per Share**          | ** ** | **(0.23**   | **)**      | (0.71       | )          | 0.28       |       | 0.39        |       | 0.31        |       |
| **Diluted  Earnings (Loss) per Share**        | ** ** | **(0.23**   | **)**      | (0.71       | )          | 0.27       |       | 0.38        |       | 0.31        |       |
| **Cash**                                      | ** ** | **25**      | ** ** | 56          |       | 125        |       | 46          |       | 529         |       |
| **Total  Assets**                             | ** ** | **27,023**  | ** ** | 25,300      |       | 29,084     |       | 26,542      |       | 20,068      |       |
| **Long-Term  Debt (less current maturities)** | ** ** | **16,653**  | ** ** | 15,498      |       | 17,685     |       | 14,416      |       | 7,112       |       |
| **Shareholders’  Equity**                | ** ** | **3,702**   | ** ** | 4,564       |       | 7,192      |       | 5,993       |       | 4,430       |       |
|                                               |            |             |            |             |            |            |            |             |            |             |            |  |  |  |  |  |

 

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

 

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

 

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

 

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

 

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperation.**

 

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

 

***Revenues.***Netsales for the year ended December 31, 2005 were $46,856,000 compared to$48,756,000 for 2004, a decrease of $1,900,000 or 3.9%. Of this decrease,$1,325,000 is attributable to the Vita Specialty Foods Segment, which had 2005revenues of $20,549,000, representing a reduction of 6.1% and $575,000 isattributable to the Vita Seafood Segment, which had 2005 revenues of$26,397,000, representing a decrease of 2.1%. The decrease for the VitaSpecialty Food Segment is largely a reflection of the sales of honey products,which were down $1,178,000 and salad dressing products which were down$640,000. The decrease in honey sales is a result of a 25% decrease in averageselling price, since there was actually more pounds of honey sold in 2005 thanin 2004. These lower prices followed the open market pricing for thiscommodity. Salad dressing sales decreased primarily as a result of sales brokertransition issues which affected one key regional market. Partially offsettingthe decline in sales of these Vita Specialty Food product lines was animprovement of returns and allowances for this business unit of $527,000,primarily due to reduced sales promotional programs. In addition to thedecrease from the Vita Specialty Foods Segment

 

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was a decline of $575,000, or 2.1% for the Vita Seafood Segment, whichwas primarily the result of an $833,000 decrease in gross sales of herringproducts reflecting both the loss of a significant co-pack customer which is nolonger in business and reduced volume with a major wholesale club. Thisdecrease in the herring product line was partially offset by a $114,000increase for salmon products, primarily reflecting the success of marketing forboth colored and natural products and an improvement of $139,000 for salesreturns and allowances resulting from reduced promotional costs.

 

***Gross Margin.**** *Gross margin for the year ended December 31, 2005was $14,223,000 compared to $14,348,000 for 2004, a decrease of $125,000 or0.9%. The Vita Seafood Segment accounted for a $84,000 increase but the VitaSpecialty Foods Segment, following the large sales decline, incurred a $209,000decrease. The increased gross margin for the Vita Seafood Segment, in the faceof lower sales, was a result of both this segment’s ability to pass along aportion of the cost increases by focusing on product pricing and on thereduction of sales return and allowance costs. As a percentage of net sales,gross margin totaled 30.4%, which was 1.0 percentage point above the 29.4%prior year result. Gross margin for the Vita Specialty Foods Segment, as apercentage of net sales rose to 35.3%, compared to the 34.1% prior year result,as the sales decrease occurred largely in the lower margin honey product line.The Vita Seafood Segment’s gross margin, as a percentage of net sales, alsoincreased, rising to 26.5% in 2005 from 25.6% in 2004; this was primarily dueto a combination of strategic pricing decisions, reduced sales returns andallowances and a sales mix shift away from the lower margin resale salmonproduct and in favor of the higher margin colored and natural lines.

 

***Operating Expenses.**** *Selling, marketing, distribution and administrativeexpenses for the year ended December 31, 2005 were $14,080,000 compared to$14,253,000 for 2004, a decrease of $173,000 or 1.2%. As a percentage of netsales, however, these expenses rose to 30.0% from 29.2% for 2004. The VitaSpecialty Foods Segment accounted for a decrease of $474,000 with an increaseof $301,000 attributable to the Vita Seafood Segment. The total reductionreflects a $478,000 decrease for selling, marketing and distribution and a$305,000 increase in administrative expenses. The Vita Specialty Foods Segmentis primarily responsible for the improvement in selling, marketing anddistribution expenses. This improvement primarily reflects lower totalsalespersons’ compensation expenses of $265,000, largely as a result of theBudd settlement and additional reductions in proportion with the volumedecrease plus a reduction of freight out and other distribution relatedexpenses totaling $178,000, which results from both the overall lower salesvolume and from a greater portion of the current year sales being concentratedin large volume transactions. The decrease in selling, marketing anddistribution was partially offset by a $305,000 increase in administrativespending. This can be explained by increased professional fees totaling$323,000 reflecting, among other things, the cost of work performed for thestockholders’ rights plan, acquisition investigations and the Sarbanes Oxleyinitiative.

 

***Employment Contract Charge.**** *During the fourth quarter of 2005 a $502,000, non cashcharge was recognized to account for the future costs associated with a seniorexecutive officer, pursuant to a 2005 amendment to his employment contract,which significantly reduced his duties during 2006 and committed the Company toterminate the agreement in 2007. The Company expects to pay $294,000 in 2006without the benefit of any services from the officer and $208,000 in 2007 asseverance.

 

***Goodwill Impairment Charge.**** *During thefourth quarter of 2004, the Company completed its annual assessment ofimpairment regarding the goodwill recorded as a result of the Virginia Honeyacquisition ($6,004,000) and the Halifax acquisition ($2,307,000). Thisassessment, supported by an independent appraisal of the fair value of VSF wasmade using customary valuation methodologies including discounted cash flowsand fundamental analysis, did reveal impairment issues. The appraisal reflecteda decreased fair value of VSF, principally caused by the decline in operatingincome of VSF during 2004. That decline was primarily a result of a substantialdecline in the sales of Halifax products – which were down $1,600,000 or 21% in2004. Based on the appraised value of VSF, the resulting impairment charge ofapproximately $2,314,000 was recorded in the fourth quarter of 2004. The 2005appraisal did not result in additional impairment.

 

***Interest Expense.***Interestexpense for the year ended December 31, 2005 was $1,082,000 compared to$767,000 for the same period in 2004, an increase of $315,000 or 41.1%. Thisincrease was primarily attributable to higher interest rates on the Company’sbank loan facilities as detailed under “Liquidity and Capital Resources – ThirdParty Financing” and in Note 4 of “Item 8. Financial Statements”.

 

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***Income Taxes.***Atax credit for the year ended December 31, 2005 of $552,000 or 38% ofpretax loss, was recognized, compared to a credit of $269,000 or 40% of pretaxincome, excluding the goodwill impairment, during 2004.

 

***Net Income.***As aresult of the operating results described 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 sharebasis. This compares to a net loss of $(2,717,000) or $(0.71) per share on botha basic and diluted basis for 2004, a 67% reduction of the loss which totaled$1,882,000 or $0.49 per share, on both a basic and a diluted basis.

 

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

 

***Revenues.**** *Net sales for the year ended December 31, 2004were $48,756,000 compared to $50,930,000 for 2003, a decrease of $2,174,000 or4.3%. Of this decrease, $1,931,000 is attributable to Vita Specialty Foodsrepresenting a reduction of 8.1% and $243,000 is attributable to Vita Seafood,representing a decrease of 0.9%. The decrease for the Vita Specialty Foodsbusiness unit is a reflection, in part, of the sales of sauce products, whichwere down $1,376,000. Sales decreases were also reflected in the business unit’shoney product line of $977,000 and resale products of $407,000. All decreaseswere primarily due to certain 2003 sales that unexpectedly proved to beone-time transactions and thus were not repeated in 2004. In addition, returnsand allowances increased by $353,000, primarily due to augmented salespromotions. The decrease in sales of certain Vita Specialty Foods product lineswas partially offset by a $1,182,000 increase in the line of salad dressingproducts due to increased customer demand. Added to the decrease from VitaSpecialty Foods was a decline of $243,000, or 0.9% for the Vita seafoodbusiness, which was primarily the result of a $592,000 decrease in gross salesof salmon products and a $146,000 decrease in specialty products. The salmonsales decrease is primarily the result of Vita seafood’s largest customerdiscontinuing sales of a Vita salmon product starting in the fourth quarter of2003. The decrease in sales of certain Vita seafood product lines was partiallyoffset by a $488,000 increase in the herring product line due to increasedcustomer demand.

 

*** Gross Margin.**** *Gross margin for the year ended December 31, 2004was $14,348,000 compared to $15,831,000 for 2003, a decrease of $1,483,000 or9.4%. The Vita seafood business accounted for $771,000 of this decrease and$712,000 of the decline was attributable to the Vita Specialty Foods business.As a percentage of net sales, gross margin totaled 29.4%, which was 1.7percentage points below the 31.1% prior year result. Gross margin for the VitaSpecialty Foods business, as a percentage of net sales was 34.1%, compared tothe 34.3% prior year result, as volume efficiencies subsided. Vita seafood’sgross margin, as a percentage of net sales, decreased to 25.6% in 2004 from28.2% in 2003; this was primarily due to the higher costs of raw salmon andhigher factory expenses.

 

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

 

***Goodwill Impairment Charge.**** *During thefourth quarter of 2003, the Company completed its annual assessment ofimpairment regarding the goodwill recorded as a result of the Virginia Honeyacquisition ($6,004,000) and the Halifax acquisition ($2,307,000). Thisassessment, supported by independent appraisals of the fair value of VSF, didnot identify any impairment. However, the 2004 independent appraisal – madeusing customary valuation methodologies including discounted cash flows andfundamental analysis, did reveal impairment issues. The revised appraisalreflects a decreased fair value of VSF, principally caused by the decline inoperating income of VSF during 2004. That decline was primarily a result of asubstantial decline in the sales of Halifax products – which were down$1,600,000 or 21% in 2004. Based on the appraised value of VSF, the resultingimpairment charge of approximately $2,314,000 was recorded in the fourthquarter of 2004.

 

***Interest Expense.**** *Interest expense for the year ended December 31,2004 was $767,000 compared to $753,000 for the same period in 2003, an increaseof $14,000 or 1.9%. This increase was primarily

 

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attributable to additional borrowing as detailed in Note 4 of “Item 8.Financial Statements”, partially offset by lower effective interest rates.

 

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

 

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

 

### **Seasonality;Quarterly Results**

 

The Companyhas in the past and expects in the future to experience significant fluctuationin 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’s business is seasonal because its salesvolume increases significantly during the Christmas holiday season and, to alesser extent, during other holidays in the fall and spring and periods ofcolder weather in certain sections of the country. Certain of these holidays,including Passover, Easter, Yom Kippur and Rosh Hashanah, may fall indifferent quarters in different years and could cause the quarterly operatingresults to fluctuate in the future. However, through the Vita Specialty FoodSegment acquisitions and the introduction of new non-seasonal orcounter-seasonal products, the variability in the Company’s quarterly operatingresults have been less pronounced

 

**Liquidityand Capital Resources**

 

***Working Capital***

 

At December 31,2005, the Company had $7,887,000 in working capital, compared to $8,288,000 at December 31,2004, a decrease of $401,000 or 4.8%. As a result, the current ratio fell to2.3 to 1.0 from 2.8 to 1.0. Primary factors contributing to the working capitalreduction include a $900,000 increase in accounts payable and other currentliabilities due to the timing of payments at both business segments plus a$598,000 increase in the current portion of debt, primarily reflecting theincreased term loan balance and the amounts due in 2006 under a revisedemployment contract. This decrease is net of an inventory increase of $554,000;a $20,000 combined net increase in accounts receivable, prepaid expenses andcash and plus an additional $524,000 increase in current income tax net assets.The Vita Specialty Foods Segment accounted for a $906,000 increase ininventories partially offset by lower balances at the Vita Seafood Segment. Theincrease of the current income tax assets is a reflection of both increasedamounts anticipated to be received as refunds and increased current deferredtaxes.

 

***Third Party Financing***

 

On September 8, 2003, the Companyentered into a loan agreement with a bank (the “Loan Agreement”) and paid offits existing credit facility with initial borrowings under this new LoanAgreement. The original Loan Agreement provided for a two-year $8,500,000revolving line of credit (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 Agreementwas amended several times to, among other things, extend the maturity dates ofthe revolver and change the available borrowings under the revolver (which mostrecently had been $10,500,000), the Term Loans and an over-advance loan of$1,000,000 which was terminated on February 28, 2006. On March 24,2006, the Loan Agreement was further amended. Pursuant to this latestamendment, the Loan Agreement now provides for a $9,500,000 revolver whichterminates 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 TermLoan B due in monthly installments of 1/60th of the outstandingbalance as of August 2006 from that date through May 31, 2010 and theremainder due on June 30, 2010. The revolver is now limited to a borrowingbase equal to 80% of eligible accounts receivable and 60% of eligibleinventories, as defined. No borrowing was outstanding under the over-advanceline as of December 31, 2005. Outstanding borrowings under the LoanAgreement are secured by substantially all assets of the Company.

 

Interest under each piece of the amended Loan Agreement is at afloating rate per annum equal to the prime rate plus 0.5%. This rate was 7.75percent as of December 31, 2005.

 

16

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The Loan Agreement imposes certain restrictions on the Company, includingits ability to complete significant asset sales, merge or acquire businessesand pay dividends. Additionally, the Company must 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 2004 and 2005, theCompany had violated certain of these covenants and had obtained permanentwaiver from the bank for such violations. The March 24, 2006 amendment tothe Loan Agreement retroactively amended these financial covenants, and, asamended, the Company was in compliance with those covenants. Managementbelieves that the Company will maintain compliance with the amended covenants.

 

***Amounts Owed Pursuant toAcquisitions***

 

Pursuant to the Company’s acquisitions ofVirginia Honey and Halifax in 2001 and 2002, respectively, the previous ownersof those businesses, both of whom are employees; one of whom is a director ofthe Company, and is subject to earn out provisions that have resulted inadditional payments and may continue for one more period to result in anadditional payment by the Company for the acquired 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.This first earn out payment was based on the operating results of VirginiaHoney for the period from January 1, 2001 to December 31, 2002. In addition,a second earn out payment to be made to Mr. Hess in the amount of $700,000will be paid in April 2006. The second earn out payment was based on theoperating results of the VSF for the period from January 1, 2003 to December 31,2005. A potential remaining earn out payment to Mr. Hess will be based onthe earnings of VSF, as computed by a predefined allocation formula, for theperiod January 1, 2006 to December 31, 2007. Should VSF maintain itscurrent profitability level throughout this period, management estimates thatan additional payment with a net present value as of December 31, 2005 ofapproximately $550,000 would be due to Mr. Hess in April 2008. Anyfuture payment will be recorded as additional goodwill, and be subject toimpairment analysis, when and if such payment is finally determined at the endof the period described above. Accordingly, the $700,000 due to Mr. Hessin April 2006 has been recorded as an addition to goodwill in the December 31,2005 balance sheet.

 

Similarly,Robert Budd, the previous owner of Halifax, had two separate earn out periods —January 1, 2003 to December 31, 2005 and January 1, 2006 to December 31,2007. Potential remaining earn out payments to Mr. Budd were to be basedon earnings of the Vita Specialty Foods Segment, as computed by a pre-definedallocation formula. On January 7, 2005, the Company terminated Mr. Budd’sEmployment Agreement, made as of November 1, 2002 between Halifax and Mr. Buddin connection with the Company’s acquisition of Halifax. The Company alleged afor “cause” termination as defined in the Employment Agreement, and, inconnection therewith, filed suit against Mr. Budd which was settled inaccordance with the terms and conditions of the Settlement Agreement enteredinto on March 28, 2005. Pursuant to the Settlement Agreement, theremaining potential earn out payments to Mr. Budd have been eliminatedentirely. See Note 2 to “Item 8. Financial Statements.”

 

17

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***Contractual Obligations***

 

The aggregateamount of long-term obligations maturing by year is presented in the tablebelow.

 

During 2005,the Company incurred rental expense of approximately **$676,000**,primarily due to operating leases for the facilities in Martinsburg, WestVirginia; Berryville, Virginia and Atlanta, Georgia and for equipment at theherring and salmon product processing facility in Chicago, Illinois. Futurecommitments under all operating leases are presented in the table below.

 

In connectionwith the Halifax acquisition, the Company acquired the licensing rights tovarious brand names. Along with these rights, the Company has assumed thecommitment to make minimum royalty payments under the terms of these licensingagreements.

 

The Companyintends to refinance the bank debt coming due during years 1 through 3.

 
| ** **                                    | ** ** | **Payments due by period** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **(in thousands)**         | ** ** |
| **Contractual Obligations**                   | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More  than 5  years** | ** ** |
| **Long-Term  Obligations including interest** | ** ** | **$**                      | **19,860** | ** ** | **$** | **2,664** | ** ** | **$** | **15,092** | ** ** | **$** | **359** | ** ** | **$** | **1,745** | ** ** |
| **Capital  Lease Obligations**                | ** ** | **—**                 | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Operating  Lease Obligations**              | ** ** | **6,033**                  | ** ** | **676** | ** ** | **1,142** | ** ** | **825** | ** ** | **3,390** | ** ** |
| **Purchase  Obligations**                     | ** ** | **—**                 | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Licensing  Royalties**                      | ** ** | **780**                    | ** ** | **238** | ** ** | **542** | ** ** | **—** | ** ** | **—** | ** ** |
| **Total  Contractual Obligations**            | ** ** | **$**                      | **26,673** | ** ** | **$** | **3,578** | ** ** | **$** | **16,776** | ** ** | **$** | **1,184** | ** ** | **$** | **5,135** | ** ** |

 

The ratio oflong-term debt-to-total capitalization was 74% at December 31, 2005 and71% at December 31, 2004. The Company believes its financial resources areadequate to fund its needs for at least the next twelve months.

 

***Cash Flow***

 

***Cash flows from operating activities.*** Netcash provided by operating activities was $300,000 for the year ended December 31,2005, compared to $2,420,000 for the year ended December 31, 2004. Sincenet non cash income was relatively flat between years, this $2,120,000 decreasewas largely due to changes in non cash working capital items. Most noteworthy,was an increase of inventories of which $1,160,000 is raw materials purchasedin anticipation of strong first quarter 2006 sales.

 

***Cash flows from investing activities***. Netcash used in investing activities was $863,000 and $1,196,000 for the yearsended December 31, 2005 and 2004, respectively. During both years, thiscash was used primarily for capital additions totaling $841,000 during 2005 and$1,178,000 during 2004. The capital expenditures for both years primarilyreflect investment in production equipment at the Chicago and the Martinsburgfacilities. The reduction between years is primarily due to the largest singlepiece of production equipment having been obtained during 2005 through anoperational lease agreement which thus had minimal effect on cash flow. Similarcash usage is anticipated for the year ending December 31, 2006.

 

***Cash flows from financing activities.**** *Net cash provided by financing activities was $532,000for the year ended December 31, 2005, compared to cash used of $1,293,000for the year ended December 31, 2004. The most recent year activityincluded $840,000 used to make the scheduled installment payment under theterms of the Virginia Honey acquisition agreement. During 2005, $1,383,000 ofnet bank borrowing was provided to cover both the cash used for thisinstallment payment and the investing activities, net of cash

 

18

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provided from operations, as described above. Outflows in 2004primarily include $1,382,000 of net debt payments.

 

**Inflation**

 

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

 

**Impact ofRecently Issued Accounting Standards**

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards123 (revised 2004) “Share-Based Payment” (“SFAS 123R”). Among other things,SFAS 123R requires expensing the fair value of stock options, which waspreviously optional. SFAS 123R is effective as of January 1, 2006. TheCompany expects the impact of adopting SFAS 123R in 2006 would result in apre-tax expense of $14,000, assuming no further grants are made in 2006.

 

InNovember 2004, the FASB issued Statement of Financial Accounting StandardsNo. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS151”) which clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material (spoilage). The Company isrequired to adopt the provisions of SFAS 151 for inventory costs incurred in2006. The Company does not expect the adoption of this statement to have amaterial impact on its financial condition or results of operations.

 

**Critical Accounting Policies and Estimates**

 

The Company’s financial statements reflect theselection and application of accounting policies that require management tomake significant estimates and assumptions. The Company believes that thefollowing are some of the more critical judgment areas in the application ofits accounting policies that currently affect the Company’s financial conditionand results of operations.

 

Preparation of the consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions affecting thereported amounts of assets, liabilities, revenues and expenses and relatedcontingent liabilities. On an on-going basis, the Company evaluates itsestimates, including those related to revenues, returns, bad debts, incometaxes and contingencies and litigation. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions.

 

*Revenue Recognition and MerchandiseReturns*

 

Revenue isrecognized upon the passing of title to the customers, which occurs uponshipment of product to customers, including brokers, in fulfillment of customerorders. In accordance with industry practices, inventory is sold to customersoften with the right to return or dispose if the merchandise is not resoldprior to the expiration of its shelf life. 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 Company regularly reviews and revises, when it deemsnecessary, estimates of costs to the Company for these marketing andmerchandising programs based on estimates of what has been incurred bycustomers. Actual costs incurred by the Company may differ significantlyif factors such as the level and success of the customers’ programs or otherconditions differ from expectations. Sales are reduced by a provision forestimated future returns, disposals and promotional expense.

 

*Income Tax Assets and Liabilities*

 

The Company recognizesdeferred income tax assets and liabilities for the expected future taxconsequences of temporary differences between the tax basis and financialreporting basis of certain assets and liabilities and certain income tax creditcarryforwards. In estimating future tax consequences, the Company generallyconsiders all expected future events other than enactments of changes in taxlaws or rates. A valuation reserve is recognized based on the evidenceavailable; if it is more likely than not that some portion or all of thedeferred income tax asset will not be realized. See Note 5 of “Item 8.Financial Statements” for a further description of income taxes.

 

19

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*Goodwill Carrying Value*

 

The Company assesses the impairment of goodwill, atleast, whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. Factors the Company considers important,which could trigger an impairment review include the following:

 

•                  Significantunderperformance relative to expected historical or projected future operatingresults;

•                  Significantchanges in the manner of the Company’s use of the acquired assets or thestrategy for the Company’s overall business;

•                  Significantnegative industry or economic trends;

•                  Significantdecline in the Company’s stock price for a sustained period; and

•                  The Company’smarket capitalization relative to net book value.

 

When the Company determines that the carrying value ofgoodwill may not be recoverable based upon the existence of one or more ofthe above indicators of impairment, the Company will review for impairmentunder the provisions of SFAS 142. The Company uses an independent appraisal inits assessments.

 

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

 

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk.**

 

The Company isexposed to interest rate fluctuations, primarily as a result of its LoanAgreement with interest rates subject to market fluctuations. The Company doesnot currently use derivative instruments to alter the interest ratecharacteristics of any of its debt. The Loan Agreement (as amended) includes arevolving line of credit and two term loan facilities with a bank, all of whichbear interest at a floating per annum rate equal to the prime rate plusone-half of one percent. At December 31, 2005 this resulted in a 7.75%rate for the revolving and the term loan facilities. A 10% fluctuation ininterest rates would not have a material impact on the Company’s financialstatements.

 

**Forward-LookingStatements**

 

This annualreport on Form 10-K, including “Description of Business,” “Description ofProperty,” “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” “Financial Statements and Supplementary Data” andQuantitative and Qualitative Disclosures About Market Risk,” containsforward-looking statements within the meaning of the “safe-harbor” provisionsof the Private Securities Litigation Reform Act of 1995. Such statementsare based on management’s current expectations and are subject to a number offactors and uncertainties which could cause actual results to differ materiallyfrom those described in the forward-looking statements. Such factors anduncertainties 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) whetherthe Company will be capable of increasing sales of Halifax products; (viii) itsability to sell Vita Seafood Segment products for higher prices to take accountof increased costs incurred by the Company; (ix) competitive conditions inthe Company’s markets; (x) the seasonal nature of the Company’s business;(xi) the Company’s ability to execute its acquisition strategy; (xii)fluctuations in the stock market; (xiii) the extent to which the Company isable to retain and attract key personnel; (xiv) relationships with key vendors;(xv) consolidation of the Company’s supplier base and (xvi) the impact offederal, state and local environmental requirements (including the impact ofcurrent or future environmental claims against the Company). As a result, theCompany’s operating results may fluctuate, especially when measured on aquarterly basis.

 

20

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

 

Listed beloware the financial statements included in this part of the Annual Report onForm 10-K:

 
|   | (a)    |   | Consolidated Financial Statements                                                                               |   |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
|   |   |   |                                                                                                            |   |
|   |   |   | Report of Independent Registered Public Accounting Firm                                                         |   |
|   |   |   |                                                                                                            |   |
|   |   |   | Consolidated Balance Sheets at December 31, 2005 and  December 31, 2004                               |   |
|   |   |   |                                                                                                            |   |
|   |   |   | Consolidated Statements of Operations for the years ended  December 31, 2005, 2004 and 2003                |   |
|   |   |   |                                                                                                            |   |
|   |   |   | Consolidated Statements of Shareholders’ Equity for the years ended  December 31, 2005, 2004 and 2003 |   |
|   |   |   |                                                                                                            |   |
|   |   |   | Consolidated Statements of Cash Flow for the years ended  December 31, 2005, 2004 and 2003                 |   |
|   |   |   |                                                                                                            |   |
|   |   |   | Notes to Consolidated Financial Statements                                                                      |   |

 

21

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsof

Vita Food Products, Inc.

Chicago, Illinois

 

We have audited theaccompanying consolidated balance sheets of Vita Food Products, Inc. andSubsidiary, as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. The Company is not required to have, norwere we engaged to perform, an audit of its internal controls over financialreporting. Our audits included consideration of internal controls overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal controls over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation ofthe financial statements. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Vita Food Products, Inc. andSubsidiary, as of December 31, 2005 and 2004, and the results of theiroperations and cash flows for each of the three years in the period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
|                                                                                                                  | /s/ BDO Seidman,  LLP |
|-----------------------------------------------------------------------------------------------------------------------|-----------------------|
|                                                                                                                  |
|                                                                                                                  |
| Chicago,  Illinois                                                                                                    |
| February 15,  2006, except for certain matters described in Note 4, as to which the date is  March 24, 2006 |

 

22

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

 
| **December 31,**                                                                                                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                           |       |       |       |       |       |
| Current Assets                                                                                                                       |       |       |       |       |       |
| Cash                                                                                                                                 |       | $          | 25,133     |       | $          | 55,968 |   |
| Accounts receivable-trade, net of allowance for  discounts, returns, and doubtful accounts of $563,000 in 2005 and $569,000 in  2004 |       | 5,215,912  |       | 5,118,517  |       |
| Inventories                                                                                                                          |       |       |       |       |       |
| Raw material and supplies                                                                                                            |       | 5,503,048  |       | 4,342,754  |       |
| Work in process                                                                                                                      |       | 192,630    |       | 235,504    |       |
| Finished goods                                                                                                                       |       | 1,827,245  |       | 2,390,924  |       |
| Prepaid expenses and other current assets                                                                                            |       | 400,679    |       | 447,602    |       |
| Income taxes receivable                                                                                                              |       | 381,312    |       | 35,441     |       |
| Deferred income taxes                                                                                                                |       | 519,578    |       | 377,115    |       |
| Total Current Assets                                                                                                                 |       | 14,065,537 |       | 13,003,825 |       |
|                                                                                                                                 |       |       |       |       |       |
| Property, Plant and Equipment                                                                                                        |       |       |       |       |       |
| Land                                                                                                                                 |       | 35,000     |       | 35,000     |       |
| Building and improvements                                                                                                            |       | 2,660,975  |       | 2,626,097  |       |
| Leasehold improvements                                                                                                               |       | 549,926    |       | 425,336    |       |
| Machinery and office equipment                                                                                                       |       | 11,302,648 |       | 10,636,716 |       |
|                                                                                                                                 |       | 14,548,549 |       | 13,723,149 |       |
| Less accumulated depreciation and amortization                                                                                       |       | (8,710,072 | )          | (7,797,581 | )          |
| Net Property, Plant and Equipment                                                                                                    |       | 5,838,477  |       | 5,925,568  |       |
|                                                                                                                                 |       |       |       |       |       |
| Goodwill                                                                                                                             |       | 6,696,705  |       | 5,996,705  |       |
| Other Assets                                                                                                                         |       | 422,661    |       | 373,695    |       |
| Total Assets                                                                                                                         |       | $          | 27,023,380 |       | $          | 25,299,793 |   |
|                                                                                                                                 |       |       |       |       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                        |       |       |       |       |       |
| Current Liabilities                                                                                                                  |       |       |       |       |       |
| Current maturities of long-term obligations                                                                                          |       | $          | 2,217,840  |       | $          | 1,619,430 |   |
| Accounts payable                                                                                                                     |       | 3,142,406  |       | 2,278,696  |       |
| Accrued expenses                                                                                                                     |       | 853,982    |       | 817,919    |       |
| Total Current Liabilities                                                                                                            |       | 6,214,228  |       | 4,716,045  |       |
|                                                                                                                                 |       |       |       |       |       |
| Long-term Obligations, Less Current Maturities                                                                                       |       | 16,653,369 |       | 15,497,900 |       |
|                                                                                                                                 |       |       |       |       |       |
| Deferred income taxes                                                                                                                |       | 453,728    |       | 522,039    |       |
|                                                                                                                                 |       |       |       |       |       |
| 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 3,879,338 shares in 2005 and 3,865,254  shares in 2004                                                                   |       | 38,793     |       | 38,652     |       |
| Treasury stock, at cost 6,516 shares                                                                                                 |       | (50,043    | )          | (50,043    | )          |
| Additional paid-in capital                                                                                                           |       | 3,812,397  |       | 3,785,596  |       |
| Retained earnings                                                                                                                    |       | (99,092    | )          | 789,604    |       |
| Total Shareholders’ Equity                                                                                                      |       | 3,702,055  |       | 4,563,809  |       |
| Total Liabilities and Shareholders’ Equity                                                                                      |       | $          | 27,023,380 |       | $          | 25,299,793 |   |

 
|   | See accompanying notes to consolidated financial  statements. |
|--------|---------------------------------------------------------------|

 

23

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

 
| **Year Ended December 31,**                  | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** **     | ** **     | ** ** | ** ** | ** ** | ** ** |
| Net Sales                                         | ** ** | **$**          | **46,856,130** |       | $          | 48,756,128 |       | $ | 50,930,474 |   |
| Cost of Goods Sold                                | ** ** | **32,633,126** |           | 34,408,406 |       | 35,099,833 |       |
| Gross Margin                                      | ** ** | **14,223,004** |           | 14,347,722 |       | 15,830,641 |       |
|                                              |       |           |           |       |       |       |       |
| Selling and Administrative Expenses               |       |           |           |       |       |       |       |
| Selling, Marketing & Distribution        | ** ** | **9,493,225**  |           | 9,971,794  |       | 8,738,409  |       |
| Administrative                                    | ** ** | **4,586,282**  |           | 4,281,352  |       | 4,590,003  |       |
| Employment Contract Charge                        | ** ** | **501,709**    |           | —     |       | —     |       |
| Goodwill Impairment Charge                        | ** ** | **—**     |           | 2,313,954  |       | —     |       |
| Total Selling and Administrative Expenses         | ** ** | **14,581,216** |           | 16,567,100 |       | 13,328,412 |       |
| Operating (Loss) Profit                           | ** ** | **(358,212**   | )              | (2,219,378 | )          | 2,502,229  |       |
|                                              |       |           |           |       |       |       |       |
| Interest Expense                                  | ** ** | **1,082,484**  |           | 766,823    |       | 752,175    |       |
| (Loss) Income Before Income Tax (Benefit) Expense | ** ** | **(1,440,696** | )              | (2,986,201 | )          | 1,750,054  |       |
| Income Tax (Benefit) Expense                      | ** ** | **(552,000**   | )              | (269,000   | )          | 702,000    |       |
| Net (Loss) Income                                 | ** ** | **$**          | **(888,696**   | )          | $          | (2,717,201 | )          | $ | 1,048,054 |   |
|                                              |       |           |           |       |       |       |       |
| Basic (Loss) Earnings Per Share                   | ** ** | **$**          | **(0.23**      | )          | $          | (0.71      | )          | $ | 0.28 |   |
| Weighted Average Common Shares Outstanding        | ** ** | **3,862,430**  |           | 3,840,017  |       | 3,789,428  |       |
|                                              |       |           |           |       |       |       |       |
| Diluted (Loss) Earnings Per Share                 | ** ** | **$**          | **(0.23**      | )          | $          | (0.71      | )          | $ | 0.27 |   |
| Weighted Average Common Shares Outstanding        | ** ** | **3,862,430**  |           | 3,840,017  |       | 3,925,681  |       |
|                                              |       |           |           |       |       |       |       |
|                                                   |            |                |                |            |            |            |            |  |  |  |  |  |

 
| **Consolidated  Statements of Shareholders’ Equity** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------|
| ** **                                                | ** ** | ** ** |

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

 
|   | See accompanying notes to consolidated financial  statements. |
|--------|---------------------------------------------------------------|

 

24

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

 
| **Year  Ended December 31,**                                                                   | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|
|                                                                                                |       |      |       |       |       |       |       |
| **Cash  Flows From Operating Activities**                                                           |       |      |       |       |       |       |       |
| Net (loss) income                                                                                   |       | $         | (888,696   | )          | $          | (2,717,201 | )          | $ | 1,048,054 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |      |       |       |       |       |       |
| Depreciation and amortization                                                                       |       | 961,927   |       | 983,366    |       | 956,461    |       |
| Deferred income tax (benefit) provision                                                             |       | (458,000  | )          | (288,000   | )          | 488,000    |       |
| Employment contract charge                                                                          |       | 501,709   |       | —     |       | —     |       |
| Goodwill impairment charge                                                                          |       | —    |       | 2,313,954  |       | —     |       |
| Changes in assets and liabilities                                                                   |       |      |       |       |       |       |       |
| Accounts receivable                                                                                 |       | (97,395   | )          | 1,426,004  |       | (1,248,331 | )          |
| Inventories                                                                                         |       | (553,741  | )          | 249,330    |       | (528,851   | )          |
| Prepaid expenses and other current assets                                                           |       | 32,857    |       | 33,767     |       | (144,632   | )          |
| Income taxes receivable                                                                             |       | (98,645   | )          | 518,863    |       | (173,366   | )          |
| Accounts payable                                                                                    |       | 863,710   |       | (20,884    | )          | (1,283,811 | )          |
| Accrued expenses                                                                                    |       | 36,060    |       | (79,094    | )          | (501,364   | )          |
| Net cash provided by (used in) operating activities                                                 |       | 299,786   |       | 2,420,105  |       | (1,387,840 | )          |
|                                                                                                |       |      |       |       |       |       |       |
| **Cash  Flows From Investing Activities**                                                           |       |      |       |       |       |       |       |
| Capital expenditures                                                                                |       | (840,865  | )          | (1,177,642 | )          | (1,135,894 | )          |
| Change in other assets                                                                              |       | (22,064   | )          | (18,567    | )          | (37,286    | )          |
| Net cash used in investing activities                                                               |       | (862,929  | )          | (1,196,209 | )          | (1,173,180 | )          |
|                                                                                                |       |      |       |       |       |       |       |
| **Cash  Flows From Financing Activities**                                                           |       |      |       |       |       |       |       |
| Proceeds from issuance of stock and exercise of  stock options                                      |       | 26,942    |       | 138,795    |       | 151,232    |       |
| Net borrowings (payments) under revolving loan  facility                                            |       | 910,472   |       | (613,625   | )          | 2,931,791  |       |
| Payments on term loan facility                                                                      |       | (825,489  | )          | (768,512   | )          | (6,714,886 | )          |
| Proceeds from term loan                                                                             |       | 1,298,846 |       | —     |       | 6,500,000  |       |
| Payments on other debt                                                                              |       | (840,422  | )          | —     |       | —     |       |
| Purchase of treasury stock                                                                          |       | —    |       | (50,043    | )          | —     |       |
| Payments under capital lease obligations                                                            |       | —    |       | —     |       | (131,038   | )          |
| Deferred loan costs paid                                                                            |       | (38,041   | )          | —     |       | (96,719    | )          |
| Net cash provided by (used in) financing activities                                                 |       | 532,308   |       | (1,293,385 | )          | 2,640,380  |       |
| Net (decrease)  increase in cash                                                                    |       | (30,835   | )          | (69,489    | )          | 79,360     |       |
|                                                                                                |       |      |       |       |       |       |       |
| Cash, at  beginning of year                                                                         |       | 55,968    |       | 125,457    |       | 46,097     |       |
| Cash, at end of  year                                                                               |       | $         | 25,133     |       | $          | 55,968     |       | $ | 125,457 |   |
|                                                                                                |       |      |       |       |       |       |       |
| Supplemental  Disclosure of Cash Flow Information:                                                  |       |      |       |       |       |       |       |
| Cash paid for interest                                                                              |       | $         | 990,682    |       | $          | 682,398    |       | $ | 737,316 |   |
| Income taxes paid (received)                                                                        |       | $         | 4,646      |       | $          | (499,506   | )          | $ | 387,366 |   |
|                                                                                                     |            |           |            |            |            |            |            |  |  |  |  |

 
|   | See accompanying notes to consolidated financial  statements. |
|--------|---------------------------------------------------------------|

 

25

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**Vita Food Products, Inc. and Subsidiaries**

 

## **Notes to ConsolidatedFinancial Statements**

 

**1.****              Summaryof Significant Accounting Policies**

 

**Industry**

 

Vita Food Products, Inc.(“Vita Seafood”) processes and sells various herring, cured and smoked salmonproducts and other complementary specialty food products throughout the UnitedStates. Vita Seafood has one processing plant located in Chicago, Illinois. VitaSpecialty Foods, Inc. (“VSF”), a wholly owned subsidiary of Vita Seafood,manufactures and distributes salad dressings, gourmet sauces, honey, jams andjellies. VSF has two manufacturing plants located in Martinsburg, West Virginiaand Berryville, Virginia. Management considers Vita Seafood and VSF as separatebusiness segments which 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 includesthe now integrated results of The Virginia Honey Company, Inc. (“VirginiaHoney”), acquired in 2001 and The Halifax Group, Inc. (“Halifax”),acquired in 2002. All significant intercompany transactions and balances havebeen eliminated.

 

**Concentrationof Credit Risk**

 

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist principally of trade accounts receivable. The Companyprimarily provides credit in the normal course of business. The Companyperforms ongoing credit evaluations of its customers and maintains allowancesfor potential credit losses, if necessary.

 

**RevenueRecognition and Merchandise Returns**

 

Revenue is recognized upon the passing of title to thecustomers, which occurs upon shipment of product to customers, includingbrokers, in fulfillment of customer orders. 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’s products, various marketing programsare offered to customers, which reimburse them for a portion, or all, of theirpromotional activities related to the Company’s products. The Company regularlyreviews and revises, when it deems necessary, estimates of costs to the Companyfor these marketing and merchandising programs based on estimates of what hasbeen incurred by customers. Actual costs incurred by the Company may differsignificantly if factors such as the level and success of the customers’programs or other conditions differ from expectations. Sales are reduced by a provisionfor estimated future returns, disposals and promotional expense.

 

**AccountsReceivable and Allowance for Doubtful Accounts**

 

Accounts receivable are customer obligations dueunder normal trade terms. The Company sells products to distributors and retailersthroughout the food industry. The Company performs continuing creditevaluations of its customers’ financial condition.

 

Senior management reviews accounts receivable on aregular basis to determine if any receivables will potentially be uncollectible.The Company provides an allowance sufficient to cover any accounts

 

26

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receivable balances that are potentiallyuncollectible, along with a general reserve based on historic experience. Afterattempts to collect the receivable have failed and it is considered to beuncollectible, it is written off against the allowance. Based on theinformation available, the Company believes the allowance for doubtful accountsas of December 31, 2005 to be adequate and not excessive. However, it isstill possible that in the future, actual write offs may exceed therecorded balance.

 

The allowance for discounts, returns and doubtfulaccounts has fluctuated as follows over the last three years:

 

**Allowance for Discounts, Returns and DoubtfulAccounts**

**(in thousands)**

 

| **Calendar  Year** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Expense** | ** ** | **Write-offs &  Collections** | ** ** | **Balance at  End  of Year** | ** ** |
|--------------------|------------|------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| **2003**           | ** ** | **$**                              | **277**    | ** **              | **74**     | ** **                             | **(50**    | **)**                        | **$**      | **301** | ** ** |
| **2004**           | ** ** | **$**                              | **301**    | ** **              | **306**    | ** **                             | **(38**    | **)**                        | **$**      | **569** | ** ** |
| **2005**           | ** ** | **$**                              | **569**    | ** **              | **99**     | ** **                             | **(105**   | **)**                        | **$**      | **563** | ** ** |

 

**Inventories**

 

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

 

**Property,Plant and Equipment**

 

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

 

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

 

Leasehold improvementsare being amortized on a straight-line basis over the lives of the respectiveleases or the service lives of the improvements whichever is shorter. Amortizationof assets under capital lease is included in depreciation and amortization. Repairand maintenance items are expensed as incurred.

 

**Long-LivedAssets**

 

The Company reviews thecarrying values of its long-lived assets for possible impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable. Any long-lived assets held for disposal arereported at the lower of their carrying amounts or fair value less cost to sell.As of December 31, 2005, there has been no impairment of plant, propertyand equipment.

 

27

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**Goodwill**

 

The changes in the carrying amount of goodwillrelated to the VSF acquisitions for the years ended December 31, 2005 and 2004were as follows:

 
| Balance as of  December 31, 2003                                             |   | $          | 8,310,659 |   |
|------------------------------------------------------------------------------|--------|------------|-----------|--------|
|                                                                         |   |       |      |
| Goodwill  impairment charge                                                  |   | (2,313,954 | )         |
| Balance as of  December 31, 2004                                             |   | 5,996,705  |      |
|                                                                         |   |       |      |
| Additional  purchase price payable related to the Virginia Honey acquisition |   | 700,000    |      |
| Balance as of  December 31, 2005                                             |   | $          | 6,696,705 |   |

 

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

 

During the fourth quarterof 2003, the Company completed its annual assessment of impairment regardingthe goodwill recorded as a result of the Virginia Honey acquisition($6,004,000) and the Halifax acquisition ($2,307,000).  Those assessments, supported by independentappraisals of the fair value of VSF, did not identify any impairment.  However, the 2004 independent appraisal —made using customary valuation methodologies including discounted cash flowsand fundamental analysis, did reveal impairment issues.  The appraisal reflected a decreased fairvalue of VSF, principally caused by the decline in operating income of VSFduring 2004.  That decline was primarilya result of a substantial decline in the sales of Halifax products – which weredown $1,600,000 or 21% in 2004.  Based onthe appraised value of VSF, the resulting impairment charge of approximately$2,314,000 was recorded in the fourth quarter of 2004.  The 2005 assessment and independent appraisaldid not indicate any further impairment.

 

The additional purchase price payable at December 31, 2005 is morefully described in Note 2.

 

# **Estimates**

 

The accompanyingfinancial statements include estimated amounts and disclosures based onmanagement’s assumptions about future events. Actual results may differ from those estimates.

 

**Advertising**

 

Advertising costs areexpensed as incurred and included in selling, marketing and distributionexpenses.  Advertising expenses amountedto approximately $280,000, $349,000 and $393,000 in 2005, 2004 and 2003,respectively.

 

**Shipping and Handling Fees**

 

The Company classifies shipping and handling costs billed to customersas revenue.  Costs related to shippingand handling are classified as part of selling, marketing and distributionexpenses and were $3,339,000, $3,539,000 and $2,851,000 in 2005, 2004 and 2003,respectively.

 

**Income Taxes**

 

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

 

28

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**Basicand Diluted Earnings (Loss) Per Common Share**

 

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

 

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

 
| ** **                        | ** ** | **Net  Income  (Loss)** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Earnings  (Loss)  Per Share** | ** ** |
|-----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| 2005                              |       |                    |       |                                       |       |                                 |       |
| Basic                             |       | $                       | (888,696   | )                                          | 3,862,430  |                                 | $          | (0.23 | ) |
| Effect of  dilutive stock options |       | —                  |       | —                                     |       |                                 |       |
| Diluted                           |       | $                       | (888,696   | )                                          | 3,862,430  |                                 | $          | (0.23 | ) |
| 2004                              |       |                    |       |                                       |       |                                 |       |
| Basic                             |       | $                       | (2,717,201 | )                                          | 3,840,017  |                                 | $          | (0.71 | ) |
| Effect of  dilutive stock options |       | —                  |       | —                                     |       |                                 |       |
| Diluted                           |       | $                       | (2,717,201 | )                                          | 3,840,017  |                                 | $          | (0.71 | ) |
| 2003                              |       |                    |       |                                       |       |                                 |       |
| Basic                             |       | $                       | 1,048,054  |                                       | 3,789,428  |                                 | $          | 0.28 |   |
| Effect of  dilutive stock options |       | —                  |       | 136,253                                    |       |                                 |       |
| Diluted                           |       | $                       | 1,048,054  |                                       | 3,925,681  |                                 | $          | 0.27 |   |

 

In 2005, 2004 and 2003there were an additional 349,600, 330,400 and 29,000 common shares,respectively, issuable upon exercise of stock options that were not consideredin the computation because they would have been anti-dilutive.

 

**Accountingfor Stock Based Compensation**

 

The Company applies theintrinsic value method under Accounting Principals Board Opinion 25 and relatedinterpretations in accounting for its stock based compensation plans. Nocompensation cost has been recognized for the Company’s stock compensationplans as the market price of the common stock underlying the grant did notexceed the exercise price of the grant on the measurement date.

 

The Company is requiredto provide pro forma disclosures of net income (loss) and earnings (loss) pershare had the Company adopted the fair value method under Statement ofFinancial Accounting Standards No. 123. The weighted-average, grant date fair valueof stock options granted to employees during the year and the weighted-averagesignificant assumptions used to determine those fair values, using a modifiedBlack-Scholes option pricing model, and the pro forma effect on earnings (loss)of the fair value accounting for stock options under Statement of FinancialAccounting Standards No. 123, are as follows:

 

29

----

 
| ** **                                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Weighted average  fair value per options granted                                                             |       | $        | 2.67       |     | $          | 4.42       |       | $ | 2.71 |   |
|                                                                                                         |       |     |       |     |       |       |       |
| Significant  assumptions (weighted average)                                                                  |       |     |       |     |       |       |       |
| Risk-free  interest rate at grant date                                                                       |       | 4.3      | %          | 4.1      | %          | 3.7        | %          |
| Expected stock  price volatility                                                                             |       | 0.43     |       | 0.68     |       | 0.72       |       |
| Expected  dividend payout                                                                                    |       | —   |       | —   |       | —     |       |
| Expected option  life (years)                                                                                |       | 5        |       | 5        |       | 5          |       |
|                                                                                                         |       |     |       |     |       |       |       |
| Net (loss)  Income                                                                                           |       |     |       |     |       |       |       |
| As reported                                                                                                  |       | $        | (888,696   | )        | $          | (2,717,201 | )          | $ | 1,048,054 |   |
| Deduct total  stock based compensation expense (net of income taxes) determined under the  fair value method |       | (303,911 | )          | (117,637 | )          | (92,199    | )          |
| Pro forma                                                                                                    |       | $        | (1,192,607 | )        | $          | (2,834,838 | )          | $ | 955,855 |   |
|                                                                                                         |       |     |       |     |       |       |       |
| Basic (loss)  earnings per share                                                                             |       |     |       |     |       |       |       |
| As reported                                                                                                  |       | $        | (0.23      | )        | $          | (0.71      | )          | $ | 0.28 |   |
| Pro forma                                                                                                    |       | $        | (0.31      | )        | $          | (0.74      | )          | $ | 0.25 |   |
|                                                                                                         |       |     |       |     |       |       |       |
| Diluted (loss)  earnings per share                                                                           |       |     |       |     |       |       |       |
| As reported                                                                                                  |       | $        | (0.23      | )        | $          | (0.71      | )          | $ | 0.27 |   |
| Pro forma                                                                                                    |       | $        | (0.31      | )        | $          | (0.74      | )          | $ | 0.24 |   |

 

The accelerated vestingof certain stock options in 2005 (see note 9 for further description) increasedthe 2005 pro forma expense by $200,171.

 

**Recent Accounting Pronouncements**

 

In December 2004, theFASB issued Statement of Financial Accounting Standards 123 (revised 2004)“Share-Based Payment” (“SFAS 123R”). Among other things, SFAS 123R requiresexpensing the fair value of stock options, which was previously optional. SFAS123R is effective as of January 1, 2006. The Company expects the impact ofadopting SFAS 123R in 2006 would result in a pre-tax expense of $14,000,assuming no further grants are made in 2006.

 

In November 2004, theFASB issued Statement of Financial Accounting Standards No. 151, “InventoryCosts – An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”) which clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and wasted material (spoilage). The Company is required to adopt theprovisions of SFAS 151 for inventory costs incurred in 2006. The Company doesnot expect the adoption of this statement to have a material impact on itsfinancial condition or results of operations.

 

# **2. Acquisitions**

# ** **

**The Virginia Honey Company, Inc.**

** **

Effective July 1, 2001,Vita Seafood acquired 100% of the outstanding shares of capital stock ofVirginia Honey from Terry W. Hess. The results of Virginia Honey have beenincluded in the Company’s consolidated financial statements since the effectivedate. The aggregate purchase price, including direct costs of the acquisition,of $4,884,437 was paid in cash.

 

30

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**The Halifax Group, Inc.**

** **

Effective November 1,2002, Vita Seafood acquired all of the issued and outstanding shares of capitalstock of Halifax, a Georgia corporation, from Robert J. Budd and certainaffiliates or associates of Mr. Budd. Since the effective date, the results ofHalifax have been fully integrated with the results of Virginia Honey to formthe Company’s wholly owned subsidiary, VSF.

 

On the November 6, 2002closing date, as a direct cost of the acquisition, the Company paid cash of$450,000 to Mr. Budd in partial payment of the $795,781 preexisting debt owedto him by Halifax. The Company has recorded the discounted value of theremaining debt as a long-term obligation as described in Note 4. The Companyalso assigned to Mr. Budd any potential rights or exposure associated with anunresolved legal case involving Halifax. The case was settled by all parties in2005 and was dismissed with prejudice at an insignificant cost of legal fees tothe Company.

 

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

#### ** **

Shortlyafter the acquisition of Halifax, the Company’s management finalized plans torestructure the operations of pre-acquisition Halifax to eliminate redundantfacilities and headcount, reduce cost structure and better align the operatingexpenses with existing economic conditions. Consequently, in 2003, the Companyrecorded $724,503 of costs relating to activities of pre-acquisition Halifaxsuch as severance and related benefits, the cost of abandoned leaseholdimprovements, the cost to vacate the leased facilities and otherpre-acquisition liabilities. These costs were accounted for under EITF 95-3,“Recognition of Liabilities in Connection with Purchase of BusinessCombinations”. These costs were recognized as a liability assumed in theacquisition and included in the allocation of the purchase price.

 

Theacquisition and exit costs consisted of the following:

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

# ** **

**Earn Out Provision under Acquisition Agreements**

** **

Pursuant to the Company’sacquisitions of Virginia Honey and Halifax in 2001 and 2002, respectively, theprevious owners of those businesses, both of whom are employees; and one ofwhom is a director of the Company, and is subject to earn out provisions thathave resulted in additional payments and may continue for one more period toresult in an additional payment by the Company for the acquired businesses. Asamended, the earn out provisions for Terry Hess, the previous owner of VirginiaHoney, have resulted in an additional amount of $840,000 paid to Mr. Hess inApril 2005. This first earn out payment was based on the operating results ofVirginia Honey for the period from January 1, 2001 to December 31, 2002. Inaddition, a second earn out payment to be made to Mr. Hess in the amount of$700,000 will be paid in April 2006. The second earn out payment was based onthe operating results of VSF for the period from January 1, 2003 to December31, 2005. A potential remaining earn out payment to Mr. Hess will be based onthe earnings of VSF, as computed by a predefined allocation formula, for theperiod January 1, 2006 to December 31, 2007. Should VSF maintain its currentprofitability level throughout this period, management estimates that anadditional payment with a net present value as of December 31, 2005 ofapproximately $550,000 would be due to Mr. Hess in April 2008. Any futurepayment will be recorded as additional goodwill, and be subject to impairmentanalysis, when and if such payment is finally determined at the end of theperiod described above.

 

31

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Similarly, Mr. Budd, theprevious owner of Halifax, had two separate earn out periods — January 1, 2003to December 31, 2005 and January 1, 2006 to December 31, 2007. Potentialremaining earn out payments to Mr. Budd were to be based on earnings of VSF, ascomputed by a pre-defined allocation formula. On January 7, 2005, Vita FoodProducts, Inc. terminated the Employment Agreement (the “Employment Agreement”)made as of November 1, 2002, between Halifax and Mr. Budd. The Company allegeda for “cause” termination and, accordingly, filed suit against Mr. Budd whichwas settled in accordance with the terms and conditions of the ConfidentialSettlement Agreement and Mutual Release entered into on March 28, 2005 (the“Settlement Agreement”). Pursuant to the Settlement Agreement, the remainingpotential earn out payments to Mr. Budd have been eliminated 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 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 not producingproducts competitive with the products of the Company as of February 28, 2005.

 

**3.   Accrued Expenses**

 

Accrued expenses consist of the following:

 
| **December 31,**          | ** ** | **2005**    | ** **  | **2004** | ** ** |
|--------------------------------|------------|-------------|-------------|----------|------------|
|                           |       |        |        |     |       |
| Interest                       | ** ** | **$**       | **111,069** |     | $          | 41,159 |   |
| Salaries and  bonuses          | ** ** | **302,882** |        | 284,901  |       |
| Taxes other than  income taxes | ** ** | **54,200**  |        | 64,407   |       |
| Utilities,  freight and other  | ** ** | **385,831** |        | 427,452  |       |
| ** **                     |       | **$**       | **853,982** |     | $          | 817,919 |   |

 

**4.   Long-TermObligations**

 

Long-termobligations consist of the following:

 
| **December 31,**                              | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|----------------------------------------------------|------------|----------------|----------------|------------|------------|
| ** **                                         | ** ** | ** **     | ** **     | ** ** | ** ** |
| Revolving loan  facility (a)                       | ** ** | **$**          | **8,588,089**  |       | $          | 7,677,617 |   |
| Term loan  facility (a)                            | ** ** | **6,242,000**  |           | 5,636,000  |       |
| Term loan - B  facility (a)                        | ** ** | **48,846**     | ** **     | ** ** | ** ** |
| Term loan  payable (b)                             | ** ** | **2,480,948**  |           | 2,599,846  |       |
| Additional  purchase price payable to Mr. Hess (c) | ** ** | **700,000**    |           | 831,659    |       |
| Robert J. Budd  Note (d)                           | ** ** | **231,887**    |           | 315,276    |       |
| Employment  contract (e)                           | ** ** | **501,709**    |           |       |       |
| Other notes  payable                               | ** ** | **77,730**     |           | 56,932     |       |
| ** **                                         |       | **18,871,209** |           | 17,117,330 |       |
| Less current  maturities                           | ** ** | **2,217,840**  |           | 1,619,430  |       |
|                                               |       |           |           |       |       |
| ** **                                         |       | **$**          | **16,653,369** |       | $          | 15,497,900 |   |

 

----

(a) OnSeptember 8, 2003, the Company entered into a loan agreement with a bank (the“Loan Agreement”) and paid off its existing credit facility with initialborrowings under this new Loan Agreement. The original Loan Agreement providedfor a two-year $8,500,000 revolving line of credit

 

32

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(the ‘revolver’), afive-year $6,500,000 term loan (the ‘Term A Loan”) and a six-year $3,000,000term loan (the “Term B Loan”). The Term B Loan was never utilized. During 2004and 2005, the Loan Agreement was amended several times to, among other things,extend the maturity dates of the revolver and change the available borrowingsunder the revolver (which most recently had been $10,500,000), the Term Loansand an over-advance loan of $1,000,000 which was terminated on February 28,2006. On March 24, 2006, the Loan Agreement was further amended. Pursuant tothis latest amendment, the Loan Agreement now provides for a $9,500,000revolver which terminates 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 asof August 2006 from that date through May 31, 2010 and the remainder due onJune 30, 2010. The revolver is now limited to a borrowing base equal to 80% ofeligible accounts receivable and 60% of eligible inventories, as defined. No borrowingwere outstanding under the over-advance line as of December 31, 2005.Outstanding borrowings under the Loan Agreement are secured by substantiallyall assets of the Company.

 

Interest under each pieceof the amended Loan Agreement is at a floating rate per annum equal to theprime rate plus 0.5%. This rate was 7.75 percent as of December 31, 2005.

 

The Loan Agreementimposes certain restrictions on the Company, including its ability to completesignificant asset sales, merge or acquire businesses and pay dividends.Additionally, the Company must meet certain financial covenants at each quarterend during the term of the Loan Agreement, including a Minimum Tangible NetWorth, a Minimum EBITDA and a Minimum Cash Flow Coverage Leverage ratio, all asdefined in the Loan Agreement. During 2004 and 2005, the Company had violatedcertain of these covenants and had obtained permanent waiver from the bank forsuch violations. The March 24, 2006 amendment to the Loan Agreementretroactively amended these financial covenants, and, as amended, the Companywas in compliance with those covenants. Management believes that the Companywill maintain compliance with the amended covenants.

 

(b) As part of the acquisition agreement for VirginiaHoney, the Company assumed a 7.0% note payable to a former Virginia Honeyshareholder. At December 31, 2005 the balance due was $2,480,948. This note issecured and is payable in monthly installments through 2018.

 

(c) As described in Note 2, Mr. Hess earned additionalpurchase price on his sale of Virginia Honey to the Company based on ameasurement date of December 31, 2005. That obligation is payable in April2006.

 

(d) The merger agreement with Halifax provided that,as part of the acquisition price, the Company would repay the balance of a notedue to the former owner by Halifax, to that individual on April 1, 2006. TheSettlement Agreement entered into between the Company and such former owner inconnection with the Company’s institution of litigation against the former owneramended the terms of the note to provide for payment in 78 bi-weekly equalinstallments of $4,241. The principle amount did not change and no interestaccrues on this debt. See Note 10 for further information regarding thisobligation.

 

(e) During the fourth quarter of 2005, a $501,709 noncash charge was recognized to account for the future costs associated with asenior officer, pursuant to a 2005 amendment to his employment contract, whichsignificantly reduced his duties during 2006 and committed the Company toterminate the agreement in 2007. The Company expects to pay $294,189 in 2006without the benefit of any services from the officer and $207,520 in 2007 asseverance.

 

33

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Scheduledannual maturities of long-term obligations as of December 31, 2005 are asfollows:

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2006                                        |       | $          | 2,217,840  |   |
| 2007                                        |       | 10,033,864 |       |
| 2008                                        |       | 4,515,872  |       |
| 2009                                        |       | 175,196    |       |
| 2010                                        |       | 184,019    |       |
| 2011 and  subsequent                        |       | 1,744,418  |       |
|                                        |       |       |       |
|                                        |       | $          | 18,871,209 |   |

 

**5.   Income Taxes**

 

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

 
| **December 31,**                      | ** ** | **2005**     | ** ** | **2004**   | ** ** |
|--------------------------------------------|------------|--------------|------------|------------|------------|
|                                       |       |         | ** ** |       |       |
| Deferred income  tax asset:                |       |         | ** ** |       |       |
| Uniform  inventory capitalization          | ** ** | **$**        | **76,000** | ** ** | $          | 68,000 |   |
| Accrued expenses  and reserves             | ** ** | **383,000**  | ** ** | 276,000    |       |
| Contributions  carryover                   | ** ** | **60,000**   | ** ** | 77,000     |       |
| Net operating  loss carryforwards          | ** ** | **264,000**  | ** ** | 300,000    |       |
|                                       |       |         | ** ** |       |       |
| ** **                                 |       | **747,000**  | ** ** | 721,000    |       |
| Deferred income  tax liability:            |       |         | ** ** |       |       |
| Depreciation                               | ** ** | **(849,000** | **)**      | (866,000   | )          |
|                                       |       |         | ** ** |       |       |
| Net deferred  income tax asset (liability) | ** ** | **$**        | **66,000** | ** ** | $          | (145,000 | ) |

 

TheCompany has gross federal net operating loss carryforwards of $ 1.2 million,which expire, if unused, in 2022 – 2024.

 

Incometax (benefit) expense for the years ended December 31, 2005, 2004 and 2003consist of the following:

 
| **December 31,**         | ** ** | **2005**     | ** **   | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|--------------|--------------|----------|------------|----------|------------|
|                          |       |         | ** **   |     |       |     |       |
| Current                       | ** ** | **$**        | **(94,000**  | **)**    | $          | 19,000   |       | $ | 214,000 |   |
| Deferred                      | ** ** | **(458,000** | **)**        | (288,000 | )          | 488,000  |       |
|                          |       |         | ** **   |     |       |     |       |
| Income tax  (benefit) expense | ** ** | **$**        | **(552,000** | **)**    | $          | (269,000 | )          | $ | 702,000 |   |

 

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

 
| **Year ended December 31,** | ** ** | **2005**    | ** **   | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------------------|------------|-------------|--------------|----------|------------|------------|------------|
|                                       |       |        | ** **   |     |       |       |       |
| Tax at federal  statutory rate             | ** ** | **$**       | **(495,000** | **)**    | $          | (1,015,000 | )          | $ | 595,000 |   |
| Impairment  charge                         | ** ** | **—**  | ** **   | 787,000  |       | —     |       |
| Other (primarily  state taxes)             | ** ** | **(57,000** | **)**        | (41,000  | )          | 107,000    |       |
|                                       |       |        | ** **   |     |       |       |       |
| Income tax  (benefit) expense              | ** ** | **$**       | **(552,000** | **)**    | $          | (269,000   | )          | $ | 702,000 |   |

 

34

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**6.   Commitmentsand Contingencies**

 

A.    In the ordinary course of business, theCompany becomes involved in litigation as a defendant in various lawsuits. Inthe opinion of management, after considering the advice of counsel, theultimate resolution of these legal proceedings will not have a material effecton the financial statements taken as a whole and thus no provision has beenmade in the financial statements for any loss contingencies.

 

B.    The Company leases two of its Virginia Honeyfacilities from a former owner of Virginia Honey, who is now an officer of VitaSeafood and VSF. During 2003, the Company renewed both of these leases, onethrough December 31, 2008 and the second through December 31, 2018. Additionalrenewal options are available. Future payments under these leases amount toapproximately $512,000 for both of 2006 and 2007, $524,000 for 2008 and$412,000 each of the subsequent periods. Rent expense under these agreementstotaled $519,000, $451,000 and $358,000 in 2005, 2004 and 2003, respectively.

 

C.    The Company leases its Atlanta office froman unrelated lessor. The lease expires on August 31, 2006. Future paymentsunder the lease will amount to approximately $25,000 for 2006. Since November1, 2002, the effective date of the lease, rent expense under this agreementtotaled $89,000.

 

D.    See Note 2 forpotential Company obligations related to an earn out provision under theacquisition agreements for Virginia Honey and Halifax.

 

E.     The Company hasbrand name product licensing agreements, which contain provisions for minimumfuture royalty payments, which currently expire in 2008. During 2005, 2004 and2003, the Company paid $555,000, $535,000 and $271,000, respectively, inroyalty payments under these licensing agreements. The minimum future royaltypayments are $238,000, $258,000 and $285,000 for 2006, 2007 and 2008,respectively.

 

F.     The Company hasan operating lease for production equipment at the Virginia Honey facility.This lease originated in 2004 and during 2005 and 2004 the Company paid $60,000and $21,000 respectively. This lease expires in 2007. Future payments are$140,000 in 2006 and $105,000 in 2007.

 

**7.   EmployeeBenefit Plans**

 

The Company hasestablished a qualified 401(k) profit sharing plan covering its non-unionemployees. Participants may elect to defer a portion of their annualcompensation. The Company may contribute amounts at the discretion of the boardof directors. The Company expensed 401(k) matching contributions of $43,000,$68,000 and $67,000 in 2005, 2004 and 2003, respectively.

 

***Additionally, the Company participates intwo multi-employer plans that provide benefits to the Company’s unionemployees. Contributions to the plans for the years ended December 31, 2005,2004 and 2003 were $34,000, $35,000 and $33,000, respectively.***

*** ***

**8.   MajorCustomers**

 

In the year endedDecember 31, 2005, the Company had sales to one customer representing 20% andsales to another customer representing 12% of total annual net sales. AtDecember 31, 2005, these customers had open accounts receivable balances of$767,000 and $554,000, respectively. During 2004, the Company had sales to onecustomer representing 21% and sales to another customer representing 14% oftotal annual net sales. At December 31, 2004, these customers had open accountsreceivable balances of $705,000 and $941,000, respectively. During 2003, theCompany had sales to one customer representing 19% and sales to anothercustomer representing 13% of total annual net sales.

 

35

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**9.****        StockOption and Purchase Plans**

 

***On September 11, 1996, the Companyadopted the Vita Food Products, Inc. 1996 Stock Option Plan for employees orother constituencies of the Company, including members of the board ofdirectors 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. OnSeptember 11, 1996, the Company also adopted the Vita Food Products, Inc. 1996Stock Option Plan for Non-Employee Directors. The plan was amended and restatedin 2000 to provide for 175,000 shares of common stock to be reserved forissuance 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, all options are issued at exercise pricesequal to market price and are exercisable for a period of ten years from thedate of grant. Further, in September 1996, the Company adopted the 1996Employee Stock Purchase Plan pursuant to which 150,000 shares of common stockhave 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 was made in order to reduce the complicationsof and potential compensation expense pursuant to adopting FASB 123(R) as ofJanuary 1, 2006. No additional compensation expense was recorded due toexercise prices of the accelerated unvested options exceeding the market valueof the Company’s stock in December 2005.***

 

Information with respectto the stock option plans follows:

 
| **Year  ended December 31,**                 | ** ** | **2005**        | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|----------------------------------------------|------------|-----------------|------------|-------------|------------|-------------|------------|
|                                         |       |            |       |        |       |        |       |
| Options outstanding  at beginning of year    | ** ** | **330,400**     | ** ** | 314,400     |       | 328,500     |       |
| Options granted                              | ** ** | **80,500**      | ** ** | 50,000      |       | 35,000      |       |
| Options exercised                            | ** ** | **—**      | ** ** | (23,500     | )          | (32,200     | )          |
| Options forfeited                            | ** ** | **(61,300**     | **)**      | (10,500     | )          | (16,900     | )          |
|                                         |       |            | ** ** |        |       |        |       |
| Options outstanding  at end of year          | ** ** | **349,600**     | ** ** | 330,400     |       | 314,400     |       |
|                                         |       |            | ** ** |        |       |        |       |
| Weighted average  remaining contractual life | ** ** | **6.6 yrs.**    | ** ** | 6.8 yrs.    |       | 7.3 yrs.    |       |
| Options exercisable                          | ** ** | **286,600**     | ** ** | 200,180     |       | 173,120     |       |
|                                         |       |            | ** ** |        |       |        |       |
| Exercise prices per  option granted          | ** ** | **$1.71-$3.41** | ** ** | $4.45-$7.52 |       | $4.00-$5.15 |       |

 
| **Weighted Average Exercise Price** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                |       |       |       |     |       |     |       |
| January 1,                          | ** ** | **$**      | **4.15**   |     | $          | 3.52     |       | $ | 3.42 |   |
| December 31,                        | ** ** | **3.84**   |       | 4.15     |       | 3.52     |       |
| Exercised                           | ** ** | **—** |       | 2.43     |       | 3.08     |       |
| Exercisable                         | ** ** | **4.14**   |       | 3.60     |       | 3.03     |       |
| Forfeited                           | ** ** | **3.99**   |       | 4.83     |       | 4.20     |       |
|                                     |            |            |            |          |            |          |            |  |  |  |

 

**10.****  EmploymentContracts**

 

In 2002, the Companyentered into employment agreements with two officers of the Company. Under theterms of these agreements, the officers were each entitled to be paid a salaryof $240,030 annually (adjusted annually for increases of at least the cost ofliving index), plus bonuses, if any, and certain perquisites. During 2003, oneof the officers had his employment agreement renewed on substantially

 

36

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the same terms andconditions through December 2006. In December 2005, the Company’s board ofdirectors exercised its right to terminate his contract effective December 31,2006 in accordance with the terms of that agreement and also decided tosubstantially reduce the duties to be provided by the officer in 2006. During2004, the other officer had his agreement renewed on substantially the sameterms and conditions through December 2006. The Company intends to amend thisagreement to reflect a reduction in salary and duties, and extend the term to2009. In addition, the Company has entered into an employment agreement withanother one of its officers in 2006.

 

The Company also enteredinto an employment agreement with an officer of Virginia Honey in conjunctionwith the purchase of Virginia Honey. The agreement extends to December 31, 2007(as amended) and calls for the officer to receive a salary of $300,000 per yearwith, at the sole discretion of Virginia Honey’s board of directors, a maximumraise equal to the percentage increase in the cost of living index.

 

In addition, in January2005, the Company terminated an employment agreement with an officer of Halifaxthat was entered into in conjunction with the purchase of Halifax. Theagreement had a term that extended to December 31, 2007 and called for theofficer to receive a salary of $242,500 per year with a 3% per year increasestarting January 1, 2004. See Note 2 for a further description of thetermination of employment agreement and the settlement that was entered intobetween the parties in respect of the litigation commenced by the Companyagainst the former Halifax officer.

 

**11.****  FairValue of Financial Instruments**

 

The carrying amounts ofcash, accounts receivable, accounts payable and short-term obligationsapproximate fair value due to the short-term nature of these instruments. Thecarrying value of the Company’s long-term obligations, based on rates currentlyavailable for instruments with similar terms and maturities, also approximatesfair value.

 

**12.****  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 the products of Virginia Honey and Halifaxand manufactures and distributes honey, salad dressings, sauces, marinades,jams and jellies and gift baskets throughout North America. Managementpredominately uses operating profit as the measure of profit or loss bybusiness segment. The significant accounting policies as described in Note 1were utilized in the preparation of the financial statements for both segments.

 

37

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

 
| **Year  ended December 31,**         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|----------|------------|
|                                 |       |       |       |       |       |     |       |
| **Goodwill**                         |       |       |       |       |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **—** | ** ** | $          | —   |       | $ | — |   |
| VSF                                  | ** ** | **6,697**  | ** ** | 5,997      |       | 8,311    |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Goodwill                       | ** ** | **$**      | **6,697**  | ** ** | $          | 5,997    |       | $ | 8,311 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Total  Assets**                    |       |       | ** ** |       |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **18,523** | ** ** | $          | 17,934   |       | $ | 20,056 |   |
| VSF                                  | ** ** | **8,500**  | ** ** | 7,366      |       | 9,028    |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Assets                         | ** ** | **$**      | **27,023** | ** ** | $          | 25,300   |       | $ | 29,084 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Net  Sales**                       |       |       | ** ** |       |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **26,397** | ** ** | $          | 26,972   |       | $ | 27,216 |   |
| VSF                                  | ** ** | **20,459** | ** ** | 21,784     |       | 23,714   |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Net Sales                      | ** ** | **$**      | **46,856** | ** ** | $          | 48,756   |       | $ | 50,930 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Operating  (Loss) Profit**         |       |       | ** ** |       |       |     |       |
| Vita Seafood (b) (c)                 | ** ** | **$**      | **(1,290** | **)**      | $          | (483     | )          | $ | 612 |   |
| VSF (a)                              | ** ** | **932**    | ** ** | (1,736     | )          | 1,890    |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Operating  (Loss) Profit       | ** ** | **$**      | **(358**   | **)**      | $          | (2,219   | )          | $ | 2,502 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Net  (Loss) Income**               |       |       | ** ** |       |       |     |       |
| Vita Seafood (b) (c)                 | ** ** | **$**      | **(1,174** | **)**      | $          | (521     | )          | $ | 148 |   |
| VSF (a)                              | ** ** | **285**    | ** ** | (2,196     | )          | 900      |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Net (Loss)  Income             | ** ** | **$**      | **(889**   | **)**      | $          | (2,717   | )          | $ | 1,048 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Depreciation  and Amortization**   |       |       | ** ** |       |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **491**    | ** ** | $          | 500      |       | $ | 540 |   |
| VSF                                  | ** ** | **471**    | ** ** | 483        |       | 416      |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Depreciation  and Amortization | ** ** | **$**      | **962**    | ** ** | $          | 983      |       | $ | 956 |   |
|                                 |       |       | ** ** |       |       |     |       |
| **Capital  Expenditures**            |       |       | ** ** |       |       |     |       |
| Vita Seafood                         | ** ** | **$**      | **244**    | ** ** | $          | 612      |       | $ | 389 |   |
| VSF                                  | ** ** | **597**    | ** ** | 566        |       | 747      |       |
|                                 |       |       | ** ** |       |       |     |       |
| Total Capital  Expenditures          | ** ** | **$**      | **841**    | ** ** | $          | 1,178    |       | $ | 1,136 |   |

 

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

 

(b)         Includes various unallocated corporate expenses thatbenefit both segments but are monitored as part of the Vita Seafood segment.

 

(c)          Includes in 2005 a $502 charge, $301 net of tax benefit, torecognize the future costs associated with a senior executive officer, whoseduties have been materially reduced.

 

38

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

 

# **For The Three MonthPeriods Ended**

**(in thousands, except share and per share data)**

 
| ** **                                      | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|------------------------|------------|
| **Revenues**                                    | ** ** | **$**               | **11,020** | ** **         | **$**      | **10,232**              | ** ** | **$**                  | **11,418** | ** ** | **$** | **14,186** | ** ** |
| **Gross  Profit**                               | ** ** | **3,324**           | ** ** | **3,553**          | ** ** | **3,227**               | ** ** | **4,119**              | ** ** |
| **Net  Income (Loss)**                          | ** ** | **(257**            | **)**      | **51**             | ** ** | **(257**                | **)**      | **(a) (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**          | ** ** |

 

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

 

# **For The Three MonthPeriods Ended**

**(in thousands, except share and per share data)**

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

 

----

**(a)****          Includes goodwillimpairment charge of $2,314.**

 

**14.****                               SubsequentEvent (unaudited)**

 

In February 2006, theCompany entered into agreements pursuant to which five individuals or theiraffiliated entities will invest a total of $2,500,000 in the Company. Theinvestors will receive units consisting of an aggregate of 1,000,000 shares ofcommon stock; three-year warrants to purchase 500,000 shares of common stock atan exercise price of $5.00 per share; and five-year warrants to purchase anadditional 500,000 shares of common stock at an exercise price of $7.50 pershare. The investors include the following: (i) Stephen D. Rubin, the Presidentand a director of the Company, (ii) Clifford K. Bolen, the Chief OperatingOfficer and Chief Financial Officer of the Company, together with certain ofhis affiliates, (iii) Delphi Casualty Co., of which Glenn S. Morris, a directorof the Company, owns a 44% equity interest, (iv) a trust of which John C.Seramur, a director of the Company, serves as trustee, as well as (v) oneunrelated third-party investor.

 

39

----

 

The transactions weresubject to the Board of Directors’ receipt of a fairness opinion from aninvestment banker or other acceptable party, and to approval by the AmericanStock Exchange, each of which has been received.

 

***Upon theclosing of the transactions, Messrs. Rubin and Bolen as well as Terry W. Hess,the President of VSF and a director of the Company, were appointed to a newlyestablished Office of the Chief Executive. Mr. Rubin will also serve as thenon-executive Chairman of the Board. In addition, Mr. Bolen has entered into anemployment agreement with the Company.***

 

The Company intends touse the funds to reduce debt, increase working capital and allow the Company toconsider potential expansion, including through acquisitions.

 

On March 24, 2006, theCompany entered into an Eighth Amendment to Loan and Security Agreement withLaSalle Bank National Association (the “Lender”) (the “Amendment”). Pursuant tothe Amendment, the Lender and the Company have agreed to (i) extend thetermination date of the revolving loans issued under the Loan and SecurityAgreement dated as of September 5, 2003, between the parties, as amended (the “LoanAgreement”), to April 1, 2007; (ii) decrease the principal amount of therevolving loans issued under the Loan Agreement which was temporarily at$10,500,000 to $9,500,000; (Iii) modify certain of the Company’s financialcovenants under the Loan Agreement; and (iv) increase the frequency of certainreports provided by the Company to the Lender.

 

40

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**Item9. Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure.**

 

Nochanges in accountants or disagreements with accountants on accounting andfinancial disclosure occurred.

 

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

 

Underthe supervision and with the participation of the Company’s management team,the principal executive officer and principal financial officer have evaluatedthe effectiveness of the design and operation of the Company’s disclosure controlsand procedures as defined in Rules 13a – 15(e) and 15d – 15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as ofDecember 31, 2005 and, based on their evaluation, have concluded that thesecontrols and procedures are effective. There were no changes in the Company’sinternal control over financial reporting during the fiscal quarter endedDecember 31, 2005 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by theCompany in the reports that it files under the Exchange Act is accumulated andcommunicated to the Company’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

 

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met. In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents. Because of these and other inherent limitations of control systems,there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions, regardless of how remote.

 

**Item9B. Other Information.**

 

Allinformation required to be disclosed in a report on Form 8-K during the fourthquarter of 2005 has been reported.

 

**PART III**

** **

**Item 10. Directors and ExecutiveOfficers of the Registrant.**

 

Theinformation required by this Item 10 is incorporated herein by reference to theinformation set forth under the captions “Election of Directors,” “ExecutiveOfficers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in theCompany’s definitive Proxy Statement for the 2006 Annual Meeting ofStockholders.

 

# **Item 11. Executive Compensation.**

# ** **

Theinformation required by this Item 11 is incorporated by reference to theinformation set forth under the caption “Compensation of Executive Officers” inthe Company’s definitive Proxy Statement for the 2006 Annual Meeting ofStockholders.

 

41

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**Item12. Security Ownership of Certain Beneficial Owners and****Management and Related Stockholder Matters.**

 

Theinformation required by this Item 12 is incorporated by reference to theinformation set forth under the caption “Security Ownership of PrincipalHolders and Management” in the Company’s definitive Proxy Statement for the2006 Annual Meeting of Stockholders.

 

**Item 13. Certain Relationships andRelated Transactions.**

 

Theinformation required by this Item 13 is incorporated by reference to theinformation set forth under the caption “Certain Relationships and RelatedTransactions” in the Company’s definitive Proxy Statement for the 2006 AnnualMeeting of Stockholders.

 

**Item14. Principal Accountant Fees and Services.**

 

Theinformation required by this Item 14 is incorporated by reference to theinformation set forth under the caption “Audit Committee Disclosure” in theCompany’s definitive Proxy Statement for the 2006 Annual Meeting ofStockholders.

 

**PART IV**

** **

**Item 15. Exhibits and FinancialStatement Schedules.**

 

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

 

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

 

42

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |
| (1)        | 2.1        |              | Stock Purchase Agreement, dated as of June  29, 2001, between Vita Food Products, Inc., Virginia Honey Company, Inc. and  Terry W. Hess (Ex. 2.1) |
|       |       |              |   |   |
| (2)        | 2.2        |              | Merger Agreement, dated as of October 17,  2002, between the Company, Vita Holdings, Inc., Vita/Halifax Acquisition  Company, Halifax, Robert J. Budd, Oak Hill Family LLC and Terry W. Hess (Ex  2.2) |
|       |       |              |   |   |
| (3)        | 3.1        |              | Articles of Incorporation of the Company  (Ex. 3.1) |
|       |       |              |   |   |
| (3)        | 3.2        |              | By-laws of the Company (Ex. 3.2) |
|       |       |              |   |   |
| (3)        | 4.1        |              | Form of Common Stock Certificate (Ex. 4.1) |
|       |       |              |   |   |
| (9)        | 4.2        |              | Certificate of Designation of Series A  Preferred Stock, as filed with the Secretary of State of Delaware on November  11, 2005 (Ex. 4.1) |
|       |       |              |   |   |
| (4)        | 10.1       |              | Loan and Security Agreement dated as of  September 5, 2003 by and between the Company and LaSalle National Bank, N.A.  (Ex. 10.1) |
|       |       |              |   |   |
| (10)       | 10.1.1     |              | First Amendment to Loan and Security  Agreement dated November 5, 2004 (Ex. 10.1.1) |
|       |       |              |   |   |
| (5)        | 10.1.2     |              | Second Amendment to Loan and Security  Agreement dated December 21, 2004 (Ex. 10.1) |
|       |       |              |   |   |
| (11)       | 10.1.3     |              | Third Amendment to Loan and Security  Agreement dated January 31, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (12)       | 10.1.4     |              | Fourth Amendment to Loan and Security  Agreement dated April 4, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (13)       | 10.1.5     |              | Fifth Amendment to Loan and Security  Agreement dated June 30, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (14)       | 10.1.6     |              | Sixth Amendment to Loan and Security  Agreement dated August 4, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (15)       | 10.1.7     |              | Seventh Amendment to Loan and Security  Agreement dated August 30, 2005 (Ex. 10.1) |
|       |       |              |   |   |
|       | 10.1.8     |              | Eighth Amendment to Loan and Security  Agreement dated March 24, 2006 * |
|       |       |              |   |   |
| (3)        | 10.2       |              | Form of 1996 Employee Stock Option Plan  (Ex. 10.4) |
|       |       |              |   |   |
| (3)        | 10.3       |              | Form of 1996 Stock Option Plan for  Non-Employee Directors (Ex. 10.5) x |

 

----

(1) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on August 30, 2001. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(2) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on November 6, 2002. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(3) Incorporated by reference to Form SB-2 Registration Statement (FileNo. 333 5738), filed with the Securities and Exchange Commission on September23, 1996.  Form SB-2 Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

43

----

 
| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |   |
| (3)        | 10.4       |              |   | Form of Employment Agreement between the  Company and Stephen D. Rubin (Ex. 10.7) x |
|       |       |              |   |   |
| (6)        | 10.4.1     |              |   | Amendment One to Employment Agreement  between the Company and Stephen D. Rubin (Ex. 10.4.1) x |
|       |       |              |   |   |
| (10)       | 10.4.2     |              |   | Amendment Two to Employment Agreement  between the Company and Stephen D. Rubin (Ex. 10.4.2) x |
|       |       |              |   |   |
| (7)        | 10.5       |              |   | Employment Agreement dated as of January 1,  2004 between the Company and Clark L. Feldman (Ex. 10.6) x |
|       |       |              |   |   |
| (3)        | 10.6       |              |   | Long Term Supply/Purchase Agreement dated  as of September 1, 1992 by and between the Company and Barry’s Limited (Ex.  10.9) |
|       |       |              |   |   |
| (3)        | 10.7       |              |   | Gorenstein Agreement dated September 20,  1996 by and among the Company, Stephen D. Rubin, Clark L. Feldman, Sam  Gorenstein, David Gorenstein and J.B.F. Enterprises (Ex. 10.26) |
|       |       |              |   |   |
| (1)        | 10.8       |              |   | Form of Employment Agreement, dated as of  July 1, 2001, between Virginia Honey Company, Inc. and Terry W. Hess (First  Exhibit to Ex. 2.1) x |
|       |       |              |   |   |
| (10)       | 10.8.1     |              |   | Amendment One to Employment Agreement  between Virginia Honey Company, Inc. and Terry W. Hess (Ex. 10.8.1) x |
|       |       |              |   |   |
| (8)        | 10.9       |              |   | Employment Agreement, made as of November  1, 2002 between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.1) x |
|       |       |              |   |   |
| (8)        | 10.10      |              |   | Amendment to Employment Agreement, made as  of March, 2003 between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.2) |
|       |       |              |   |   |
| (8)        | 10.11      |              |   | Non-Competition and Non-Solicitation  Agreement, made as of November 1, 2002 among Vita Food Products, Inc., Vita  Holdings, Inc., The Halifax Group, Inc. and Robert J. Budd (Ex. 10.3) |
|       |       |              |   |   |
| (10)       | 10.12      |              |   | Confidential Settlement Agreement and  Mutual Release, entered into on March 28, 2005, among the Vita Food Products,  Inc., Vita Specialty |

 

----

(5) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on January 6, 2005. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(6) Incorporated by reference to Form 10-QSB for the fiscal quarterended June 30, 1999, filed with the Securities and Exchange Commission onAugust 9, 1999.  Form 10-QSB ExhibitNumber is included in parenthesis following the title of the exhibit.

 

(7) Incorporated by reference to Form 10-K for the fiscal year endedDecember 31, 2003, filed with the Securities and Exchange Commission on March30, 2004.  Form 10-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

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

 

(10) Incorporated by reference to Form 10-K for the fiscal year endedDecember 31, 2004, filed with the Securities and Exchange Commission on March31, 2005.  Form 10-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

44

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |   |
|       |       |              | Foods, Inc., Virginia Honey Company, Inc.,  The Halifax Group, Inc. and Robert J. Budd (Ex. 10.12) x |
|       |       |              |   |
| (9)        | 10.13      |              |   | 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) |
|       |       |              |   |   |
| (16)       | 10.14      |              |   | Employment Agreement, made as of March 20,  2006 between Vita Food Products, Inc. and Clifford Bolen (Ex. 10.1) x |
|       |       |              |   |   |
| (7)        | 14.1       |              |   | Code of Ethics (Ex. 14.1) |
|       |       |              |   |   |
| (7)        | 21.1       |              |   | Subsidiary of the Company (Ex. 21.1) |
|       |       |              |   |   |
|       | 23.1       |              |   | Consent of Independent Registered Public  Accounting Firm * |
|       |       |              |   |   |
|       | 31.1       |              |   | Principal Executive Officer Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 31.2       |              |   | Principal Financial Officer Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 32.1       |              |   | Principal Executive Officer Certification pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 32.2       |              |   | Principal Executive Officer Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 99.1       |              |   | Press release dated March 27, 2006 * |

 

----

(12) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on April 18, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(13) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on July 13, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(14) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on August 11, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(15) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on September 8, 2005. Form 8-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

(16) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on March 23, 2006. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

x Indicates an employee benefit plan,management contract or compensatory plan or arrangement.

 

* Filed herewith.

 

45

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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/ Stephen  D. Rubin |   |
|   |                         |   |
|   |                         | Stephen D. Rubin |   |
|   |                         | President |   |
|   |                         |   |
|   | Date:                        | March 30,  2006 |
|        |                              |  |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the following capacitieson March 30, 2006.

 
| **Signatures**          | ** ** | **Title** |
|-------------------------|------------|-----------|
|                    |       |      |
| /s/ Stephen D. Rubin    |       |      | Director and President |
| Stephen D. Rubin        |       |      | (Principal Executive Officer) |
|                    |       |      |   |
| /s/ Clark L. Feldman    |       |      | Director, Executive Vice President and  Secretary |
| Clark L. Feldman        |       |      |   |
|                    |       |      |   |
|                    |       |      | Senior Vice President, Chief Operating  Officer,  Chief Financial Officer |
| /s/ Clifford K. Bolen   |
| Clifford K. Bolen       |       |      | and Treasurer |
|                    |       |      | (Principal Financial and Accounting  Officer) |
|                    |       |      |   |
|                    |       |      |   |
| /s/ Terry W. Hess       |       |      | Director, Chief Executive Officer of Vita  Specialty |
| Terry W. Hess           |       |      | Foods, Inc. |
|                    |       |      |   |
| /s/ 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         |       |      |   |

 

46

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**Exhibit Index**

 
| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |   |
| (1)        | 2.1        |              |   | Stock Purchase Agreement, dated as of June  29, 2001, between Vita Food Products, Inc., Virginia Honey Company, Inc. and  Terry W. Hess (Ex. 2.1) |
|       |       |              |   |   |
| (2)        | 2.2        |              |   | Merger Agreement, dated as of October 17,  2002, between the Company, Vita Holdings, Inc., Vita/Halifax Acquisition  Company, Halifax, Robert J. Budd, Oak Hill Family LLC and Terry W. Hess (Ex  2.2) |
|       |       |              |   |   |
| (3)        | 3.1        |              |   | Articles of Incorporation of the Company  (Ex. 3.1) |
|       |       |              |   |   |
| (3)        | 3.2        |              |   | By-laws of the Company (Ex. 3.2) |
|       |       |              |   |   |
| (3)        | 4.1        |              |   | Form of Common Stock Certificate (Ex. 4.1) |
|       |       |              |   |   |
| (9)        | 4.2        |              |   | Certificate of Series A Preferred Stock, as  filed with the Secretary of State of Delaware on November 11, 2005 (Ex. 4.1) |
|       |       |              |   |   |
| (4)        | 10.1       |              |   | Loan and Security Agreement dated as of  September 5, 2003 by and between the Company and LaSalle National Bank, N.A.  (Ex. 10.1) |
|       |       |              |   |   |
| (10)       | 10.1.1     |              |   | First Amendment to Loan and Security  Agreement dated November 5, 2004 (Ex. 10.1.1) |
|       |       |              |   |   |
| (5)        | 10.1.2     |              |   | Second Amendment to Loan and Security  Agreement dated December 21, 2004 (Ex. 10.1) |
|       |       |              |   |   |
| (11)       | 10.1.3     |              |   | Third Amendment to Loan and Security  Agreement dated January 31, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (12)       | 10.1.4     |              |   | Fourth Amendment to Loan and Security  Agreement dated April 4, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (13)       | 10.1.5     |              |   | Fifth Amendment to Loan and Security  Agreement dated June 30, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (14)       | 10.1.6     |              |   | Sixth Amendment to Loan and Security  Agreement dated August 4, 2005 (Ex. 10.1) |
|       |       |              |   |   |
| (15)       | 10.1.7     |              |   | Seventh Amendment to Loan and Security  Agreement dated August 30, 2005 (Ex. 10.1) |
|       |       |              |   |   |
|       | 10.1.8     |              |   | Eighth Amendment to Loan and Security  Agreement dated March 24, 2006 * |
|       |       |              |   |   |
| (3)        | 10.2       |              |   | Form of 1996 Employee Stock Option Plan  (Ex. 10.4) x |
|            |            |                   |  |  |  |

 

----

(1) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on August 30, 2001. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(2) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on November 6, 2002. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(3) Incorporated by reference to Form SB-2 Registration Statement (FileNo. 333 5738), filed with the Securities and Exchange Commission on September23, 1996.  Form SB-2 Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

47

----

 

 
| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |   |
| (3)        | 10.3       |              |   | Form of 1996 Stock Option Plan for Non-Employee  Directors (Ex. 10.5) x |
|       |       |              |   |   |
| (3)        | 10.4       |              |   | Form of Employment Agreement between the  Company and Stephen D. Rubin (Ex. 10.7) x |
|       |       |              |   |   |
| (6)        | 10.4.1     |              |   | Amendment One to Employment Agreement  between the Company and Stephen D. Rubin  (Ex. 10.4.1) x |
|       |       |              |   |   |
| (10)       | 10.4.2     |              |   | Amendment Two to Employment Agreement  between the Company and Stephen D. Rubin (Ex. 10.4.2) x |
|       |       |              |   |   |
| (7)        | 10.5       |              |   | Employment Agreement dated January 1, 2004  between the Company and Clark L. Feldman (Ex. 10.6) x |
|       |       |              |   |   |
| (3)        | 10.6       |              |   | Long Term Supply/Purchase Agreement dated  as of September 1, 1992 by and between the Company and Barry’s Limited (Ex.  10.9) |
|       |       |              |   |   |
| (3)        | 10.7       |              |   | Gorenstein Agreement dated September 20,  1996 by and among the Company, Stephen D. Rubin, Clark L. Feldman, Sam  Gorenstein, David Gorenstein and J.B.F. Enterprises (Ex. 10.26) |
|       |       |              |   |   |
| (1)        | 10.8       |              |   | Form of Employment Agreement, dated as of  July 1, 2001, between Virginia Honey Company, Inc. and Terry W. Hess (First  Exhibit to Ex. 2.1) x |
|       |       |              |   |   |
| (10)       | 10.8.1     |              |   | Amendment One to Employment Agreement  between Virginia Honey Company, Inc. and Terry W. Hess (Ex. 10.8.1) x |
|       |       |              |   |   |
| (8)        | 10.9       |              |   | Employment Agreement, made as of November  1, 2002, between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.1) x |
|       |       |              |   |   |
| (8)        | 10.10      |              |   | Amendment to Employment Agreement, made as  of March, 2003 between The Halifax Group, Inc. and Robert J. Budd (Ex. 10.2) |

 

----

(5) Incorporated by reference to Form 8-K filed with the Securities andExchange Commission on January 6, 2005. Form 8-K Exhibit Number is included in parenthesis following the titleof the exhibit.

 

(6) Incorporated by reference to Form 10-QSB for the fiscal quarterended June 30, 1999, filed with the Securities and Exchange Commission onAugust 9, 1999.  Form 10-QSB ExhibitNumber is included in parenthesis following the title of the exhibit.

 

(7) Incorporated by reference to Form 10-K for the fiscal year endedDecember 31, 2003, filed with the Securities and Exchange Commission on March30, 2004.  Form 10-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

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

 

(10) Incorporated by reference to Form 10-K for the fiscal year endedDecember 31, 2004, filed with the Securities and Exchange Commission on March31, 2005.  Form 10-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

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

 

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| **Number** | ** ** | **Exhibit Title** |
|------------|------------|-------------------|
|       |       |              |   |
| (8)        | 10.11      |              |   | Non-Competition  and Non-Solicitation Agreement, made as of November 1, 2002 among Vita Food  Products, Inc., Vita Holdings, Inc., The Halifax Group, Inc. and Robert J.  Budd (Ex. 10.3) |
|       |       |              |   |   |
| (10)       | 10.12      |              |   | Confidential  Settlement Agreement and Mutual Release, entered into on March 28, 2005,  among the Vita Food Products, Inc., Vita Specialty Foods, Inc., Virginia  Honey Company, Inc., The Halifax Group, Inc. and Robert J. Budd (Ex. 10.12) x |
|       |       |              |   |   |
| (9)        | 10.13      |              |   | 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) |
|       |       |              |   |   |
| (16)       | 10.14      |              |   | Employment Agreement, made as of March 20,  2006, between Vita Food Products, Inc. and Clifford Bolen (Ex. 10.1) x |
|       |       |              |   |   |
| (7)        | 14.1       |              |   | Code of Ethics (Ex. 14.1) |
|       |       |              |   |   |
| (7)        | 21.1       |              |   | Subsidiary of the Company (Ex. 21.1) |
|       |       |              |   |   |
|       | 23.1       |              |   | Consent of Independent Registered Public  Accounting Firm * |
|       |       |              |   |   |
|       | 31.1       |              |   | Principal Executive Officer Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 31.2       |              |   | Principal Financial Officer Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 32.1       |              |   | Principal Executive Officer Certification pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 32.2       |              |   | Principal Financial Officer Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
|       |       |              |   |   |
|       | 99.1       |              |   | Press release dated March 27, 2006 * |

 

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(12) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on April 18, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(13) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on July 13, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(14) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on August 11, 2005. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

(15) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on September 8, 2005. Form 8-K Exhibit Number isincluded in parenthesis following the title of the exhibit.

 

(16) Incorporated by reference to Form 8-K filed with the Securitiesand Exchange Commission on March 23, 2006. Form 8-K Exhibit Number is includedin parenthesis following the title of the exhibit.

 

x Indicates an employee benefit plan,management contract or compensatory plan or arrangement.

 

* Filed herewith.

 

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