**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                |
| ** ** | ** ** | **For the  Quarterly Period Ended June 30, 2006**                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                |
| **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 registrantas specified in its charter)

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

##  

| **2222 West Lake Street, Chicago, Illinois** | ** ** | **60612**  |
|----------------------------------------------|------------|------------|
| (Address of  principal executive offices)    |       | (Zip Code) |

 

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.   Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. (asdefined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o      Acceleratedfiler o      Non-accelerated filer x

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

The number ofshares outstanding of registrant’s common stock as of July 31, 2006 was4,904,086.

 

 

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**VITA FOODPRODUCTS, INC.**

**FORM 10-Q**

**For the QuarterEnded June 30, 2006**

**INDEX**
|               | ** ** | **Page**                                                                                    |
|---------------|------------|---------------------------------------------------------------------------------------------|
| **PART  I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                  | ** ** | ** ** |
| Item  1.      |       | Financial  Statements                                                                       |   |   |
|          |       | a)                                                                                          |   | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005 |   | 3 |
|          |       | b)                                                                                          |   | Consolidated Statements of Operations for the Three  Months and Six Months Ended June 30, 2006 and 2005 |   | 4 |
|          |       | c)                                                                                          |   | Consolidated Statement of Shareholders’ Equity for the  Six Months Ended June 30, 2006 |   | 4 |
|          |       | d)                                                                                          |   | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2006 and 2005 |   | 5 |
|          |       | e)                                                                                          |   | Notes to Consolidated Financial Statements |   | 6 |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 11 |
| Item 3.       |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |   | 16 |
| Item 4.       |       | Controls and Procedures                                                                     |   | 16 |
| **PART  II.** | ** ** | **OTHER  INFORMATION**                                                                      | ** ** | ** ** |
| Item  1A.     |       | Risk  Factors                                                                               |   | 17 |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                         |   | 17 |
| Item 6.       |       | Exhibits                                                                                    |   | 17 |
| SIGNATURES    |       | 18                                                                                          |

 

2

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**PART1.  FINANCIAL STATEMENTS**

**Item1.**   Financial Statements

**Vita Food Products, Inc. And Subsidiary**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                           |       |              |       |                  |       |
| Current Assets                                                                                                                       |       |              |       |                  |       |
| Cash                                                                                                                                 |       | $                 | 30,796     |                  | $          | 25,133 |   |
| Accounts  receivable-trade, net of allowance for discounts, returns, and doubtful  accounts of $545,000 in 2006 and $563,000 in 2005 |       | 5,058,840         |       | 5,215,912             |       |
| Inventories                                                                                                                          |       |              |       |                  |       |
| Raw material and  supplies                                                                                                           |       | 5,311,714         |       | 5,503,048             |       |
| Work in process                                                                                                                      |       | 56,567            |       | 192,630               |       |
| Finished goods                                                                                                                       |       | 2,771,660         |       | 1,827,245             |       |
| Prepaid expenses  and other current assets                                                                                           |       | 372,256           |       | 400,679               |       |
| Income taxes  receivable                                                                                                             |       | 48,620            |       | 381,312               |       |
| Deferred income  taxes                                                                                                               |       | 519,578           |       | 519,578               |       |
| Total Current Assets                                                                                                                 |       | 14,170,031        |       | 14,065,537            |       |
|                                                                                                                                 |       |              |       |                  |       |
| Property, Plant and  Equipment                                                                                                       |       |              |       |                  |       |
| Land                                                                                                                                 |       | 35,000            |       | 35,000                |       |
| Building and  improvements                                                                                                           |       | 2,829,135         |       | 2,660,975             |       |
| Leasehold  improvements                                                                                                              |       | 585,798           |       | 549,926               |       |
| Machinery and  office equipment                                                                                                      |       | 11,609,228        |       | 11,302,648            |       |
|                                                                                                                                 |       | 15,059,161        |       | 14,548,549            |       |
| Less accumulated  depreciation and amortization                                                                                      |       | (9,149,326        | )          | (8,710,072            | )          |
| Net Property, Plant and  Equipment                                                                                                   |       | 5,909,835         |       | 5,838,477             |       |
|                                                                                                                                 |       |              |       |                  |       |
| Goodwill                                                                                                                             |       | 6,696,705         |       | 6,696,705             |       |
| Other assets                                                                                                                         |       | 443,332           |       | 422,661               |       |
| Total Assets                                                                                                                         |       | $                 | 27,219,903 |                  | $          | 27,023,380 |   |
|                                                                                                                                 |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                       |       |              |       |                  |       |
| Current Liabilities                                                                                                                  |       |              |       |                  |       |
| Current  maturities of long-term obligations                                                                                         |       | $                 | 8,086,542  |                  | $          | 2,217,840 |   |
| Accounts payable                                                                                                                     |       | 4,177,436         |       | 3,142,406             |       |
| Accrued expenses                                                                                                                     |       | 922,221           |       | 853,982               |       |
| Total Current  Liabilities                                                                                                           |       | 13,186,199        |       | 6,214,228             |       |
|                                                                                                                                 |       |              |       |                  |       |
| Long-term Obligations,  Less Current Maturities                                                                                      |       | 7,337,461         |       | 16,653,369            |       |
|                                                                                                                                 |       |              |       |                  |       |
| Deferred Income Taxes                                                                                                                |       | 502,728           |       | 453,728               |       |
|                                                                                                                                 |       |              |       |                  |       |
| Shareholders’ Equity                                                                                                            |       |              |       |                  |       |
| Preferred stock,  $.01 par value, authorized 1,000,000 shares; none issued                                                           |       |              |       |                  |       |
| Common stock,  $.01 par value; authorized 10,000,000 shares; issued 4,910,602 shares in 2006  and 3,879,338 shares in 2005           |       | 49,106            |       | 38,793                |       |
| Treasury stock,  at cost 6,516 shares                                                                                                |       | (50,043           | )          | (50,043               | )          |
| Additional  paid-in capital                                                                                                          |       | 6,221,517         |       | 3,812,397             |       |
| Accumulated  deficit                                                                                                                 |       | (27,065           | )          | (99,092               | )          |
| Total Shareholders’  Equity                                                                                                     |       | 6,193,515         |       | 3,702,055             |       |
| Total Liabilities and Shareholders’ Equity                                                                                      |       | $                 | 27,219,903 |                  | $          | 27,023,380 |   |

 

See accompanying notes to consolidated financial statements.

3

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**Vita Food Products, Inc. And Subsidiary**

**ConsolidatedStatements of Operations**
| ** **                                  | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                  | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Sales                                   |       | $                                                  | 11,828,461 |                                             | $          | 10,157,914 |   | $ | 24,616,910 |   | $ | 21,055,342 |   |
| Cost of Goods  Sold                         |       | 8,456,243                                          |       | 6,679,457                                        |       | 17,348,249 |   | 14,375,393 |   |
| Gross Margin                                |       | 3,372,218                                          |       | 3,478,457                                        |       | 7,268,661 |   | 6,679,949 |   |
|                                        |       |                                               |       |                                             |       |   |   |   |   |
| Selling and  Administrative Expenses        |       |                                               |       |                                             |       |   |   |   |   |
| Selling, Marketing and Distribution         |       | 2,097,383                                          |       | 2,081,700                                        |       | 4,422,746 |   | 4,266,626 |   |
| Administrative                              |       | 933,662                                            |       | 1,072,652                                        |       | 2,085,232 |   | 2,307,323 |   |
| Total Selling and Administrative Expenses   |       | 3,031,045                                          |       | 3,154,352                                        |       | 6,507,978 |   | 6,573,949 |   |
| Operating Profit                            |       | 341,173                                            |       | 324,105                                          |       | 760,683 |   | 106,000 |   |
| Interest Expense                            |       | 313,941                                            |       | 238,150                                          |       | 639,656 |   | 449,102 |   |
| Income (Loss)  Before Income Taxes          |       | 27,232                                             |       | 85,955                                           |       | 121,027 |   | (343,102 | ) |
| Income Tax Expense  (Benefit)               |       | 12,000                                             |       | 35,000                                           |       | 49,000 |   | (137,000 | ) |
| Net Income  (Loss)                          |       | $                                                  | 15,232     |                                             | $          | 50,955 |   | $ | 72,027 |   | $ | (206,102 | ) |
|                                        |       |                                               |       |                                             |       |   |   |   |   |
| Basic Earnings  (Loss) Per Share            |       | $                                                  | 0.00       |                                             | $          | 0.01 |   | $ | 0.02 |   | $ | (0.05 | ) |
| Weighted Average  Common Shares Outstanding |       | 4,884,778                                          |       | 3,858,738                                        |       | 4,442,369 |   | 3,858,738 |   |
|                                        |       |                                               |       |                                             |       |   |   |   |   |
| Diluted Earnings  (Loss) Per Share          |       | $                                                  | 0.00       |                                             | $          | 0.01 |   | $ | 0.02 |   | $ | (0.05 | ) |
| Weighted Average Common  Shares Outstanding |       | 4,938,816                                          |       | 3,884,002                                        |       | 4,479,336 |   | 3,858,738 |   |

 

**Vita Food Products, Inc. And Subsidiary**

**Consolidated Statementof Shareholders’ Equity**
| ** **                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                           | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balance, at  January 1, 2006                         |       | 3,879,338             |       | $            | 38,793     |        | $          | (50,043        | )          | $            | 3,812,397  |       | $          | (99,092 | ) | $ | 3,702,055 |   |
| Common stock and  warrant issuance, net              |       | 1,017,000             |       | 10,170       |       | -           |       | 2,378,809      |       | -            |       | 2,388,979  |       |
| Stock - based  compensation expense                  |       | -                     |       | -            |       | -           |       | 9,600          |       | -            |       | 9,600      |       |
| Proceeds from  stock purchase and stock option plans |       | 14,264                |       | 143          |       | -           |       | 20,711         |       | -            |       | 20,854     |       |
| Net income                                           |       | -                     |       | -            |       | -           |       | -              |       | 72,027       |       | 72,027     |       |
| Balance, at June 30,  2006                           |       | 4,910,602             |       | $            | 49,106     |        | $          | (50,043        | )          | $            | 6,221,517  |       | $          | (27,065 | ) | $ | 6,193,515 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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** **

**Vita Food Products, Inc. And Subsidiary**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                               | ** ** | **For the six months ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                               | ** ** | **June 30,**                                | ** ** |
| ** **                                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities**                                                |       |                                             |       |   |   |
| Net income (loss)                                                                        |       | $                                                | 72,027     |   | $ | (206,102 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities |       |                                             |       |   |   |
| Depreciation and amortization                                                            |       | 470,707                                          |       | 470,691 |   |
| Deferred income tax provision (benefit)                                                  |       | 49,000                                           |       | (137,000 | ) |
| Non-cash stock-based compensation expense                                                |       | 9,600                                            |       | - |   |
| Changes in assets and liabilities:                                                       |       |                                             |       |   |   |
| Accounts receivable                                                                      |       | 157,072                                          |       | 1,863,460 |   |
| Inventories                                                                              |       | (617,018                                         | )          | (1,888,742 | ) |
| Prepaid expenses and other current assets                                                |       | 28,424                                           |       | 44,450 |   |
| Income taxes receivable                                                                  |       | 332,691                                          |       | (4,355 | ) |
| Accounts payable                                                                         |       | 1,035,030                                        |       | 685,142 |   |
| Accrued expenses and other long term obligations                                         |       | (108,618                                         | )          | 102,665 |   |
| Net cash provided by operating activities                                                |       | 1,428,915                                        |       | 930,209 |   |
| ** **                                                                               |       |                                             |       |   |   |
| **Cash  Flows From Investing Activities**                                                |       |                                             |       |   |   |
| Capital expenditures                                                                     |       | (527,910                                         | )          | (352,680 | ) |
| Change in other assets                                                                   |       | (34,826                                          | )          | (50,211 | ) |
| Net cash used in investing activities                                                    |       | (562,736                                         | )          | (402,891 | ) |
| ** **                                                                               |       |                                             |       |   |   |
| **Cash  Flows From Financing Activities**                                                |       |                                             |       |   |   |
| Proceeds from issuance of stock and warrants                                             |       | 2,409,833                                        |       | 17,058 |   |
| Net payments under revolving loan facility                                               |       | (2,080,677                                       | )          | 726,653 |   |
| Payments on term loan facility                                                           |       | (489,672                                         | )          | (443,196 | ) |
| Payments on other debt                                                                   |       | (700,000                                         | )          | (840,422 | ) |
| Net cash used in financing activities                                                    |       | (860,516                                         | )          | (539,907 | ) |
| Net increase  (decrease) in cash                                                         |       | 5,663                                            |       | (12,589 | ) |
|                                                                                     |       |                                             |       |   |   |
| Cash, at  beginning of period                                                            |       | 25,133                                           |       | 55,968 |   |
| Cash, at end of  period                                                                  |       | $                                                | 30,796     |   | $ | 43,379 |   |
|                                                                                     |       |                                             |       |   |   |
| Supplemental  Disclosure of Cash Flow Information                                        |       |                                             |       |   |   |
| Cash paid for interest                                                                   |       | $                                                | 639,000    |   | $ | 455,000 |   |
| Income taxes  (received) paid                                                            |       | $                                                | (333,000   | ) | $ | 4,000 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**Vita FoodProducts, Inc. and Subsidiary**

**Notes toConsolidated Financial Statements(Unaudited)**

**Basis ofPresentation**

Inthe opinion of management, the accompanying balance sheets and related interimstatements of operations, cash flows, and shareholders’ equity include alladjustments, consisting only of normal recurring items necessary for their fairpresentation in conformity with U.S. generally accepted accounting principles. Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue, and expenses. Examplesinclude provisions for returns, deductions, bad debts, and length of buildingand equipment lives. Actual results may differ from these estimates. Interimresults are not necessarily indicative of results for a full year. The informationincluded in this Form 10-Q should be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operations andfinancial statements and notes thereto included in the Form 10-K for the fiscalyear ended December 31, 2005 of Vita Food Products, Inc. (“Vita Seafood”)together with its wholly owned subsidiary, Vita Specialty Foods, Inc. (“VSF”),hereinafter collectively referred to as the “Company”.

Forthe second quarter and six month periods ended June 30, 2006 and 2005,diluted earnings (loss) per share computations exclude 1,175,000 and 1,225,100shares for 2006 and 269,400 and 265,100 shares for 2005, respectively, issuableupon exercise of stock options and warrants because the assumed exercise ofthese options and warrants would be anti-dilutive.

Startingon January 1, 2006, the Company changed the classification of “Slotting”expense, which had previously been included in the Selling, Marketing andDistribution category of operating expenses, to be treated as a sales deductionand thus classify these expenses as a reduction to arrive at the Net Salestotal. These expenses are fees charged by customers to place the Company’s newitems into the customers’ distribution system. Additionally, the 2005 operatingresults, as presented above, have been adjusted to consider this change andthus make these results more comparable with the 2006 results. The result ofthis reclassification, which had no affect on Operating Profit or Net Income(Loss), was to reduce both Net Sales and Selling, Marketing and Distributionexpenses, in an offsetting fashion, for the six months ended June 30, 2006and 2005 by $36,000 and $197,000, respectively and for the three months endedJune 30, 2006 and 2005 by $(6,000) and $74,000, respectively.

**Principles of Consolidation**

The consolidatedfinancial statements include the accounts of Vita Seafood and VSF. VSF includesthe now integrated results of Virginia Honey Company, Inc. (“Virginia Honey”)acquired in 2001 and The Halifax Group, Inc. (“Halifax”), acquired in 2002. Allsignificant intercompany transactions and balances have been eliminated.

##### **RevenueRecognition**

Revenueis recognized upon the passing of title to the customers, which occurs uponshipment of product to customers, including brokers, in fulfillment of customerorders. In accordance with 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 significantly iffactors 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.

6

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**EarnOut Provisions Under Acquisition Agreement**

Pursuantto the Company’s acquisition of Virginia Honey in 2001, the previous owner ofthat business, who is an employee and director of the Company, is subject toearn out provisions that have resulted in additional payments and may continuefor one more period to result in an additional payment by the Company for theacquired business. As amended, the earn out provisions for Terry Hess, theprevious owner of Virginia Honey, have resulted in an additional amount of$840,000 paid to Mr. Hess in April 2005. This first earn out payment wasbased on the operating results of Virginia Honey for the period fromJanuary 1, 2001 to December 31, 2002. In addition, a second earn outpayment to Mr. Hess in the amount of $700,000 was paid in April 2006. Thesecond earn out payment was based on the operating results of the VSF for theperiod from January 1, 2003 to December 31, 2005. A potential remainingearn out payment to Mr. Hess will be based on the earnings of VSF, ascomputed by a predefined allocation formula, for the period fromJanuary 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 June 30, 2006 ofapproximately $594,000 would be due to Mr. Hess in April 2008. Previousearn out payments have been recorded as goodwill. Any future payment will berecorded as additional goodwill, and be subject to impairment analysis, whenand if such payment is finally determined at the end of the period describedabove.

#### **Bank Loan Agreement**

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 Loan Agreement originallyprovided for a two-year $8,500,000 revolving line of credit (the “revolver”), afive-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 neverutilized. During 2004 and 2005, the Loan Agreement was amended several timesto, among other things, extend the maturity dates of the revolver and changethe available borrowings under the revolver and the Term Loans and obtain anover-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 Loandue in monthly installments of $80,000 through July 31, 2008 with aballoon payment of $3,682,000 due on August 31, 2008; a $150,000 capitalexpenditure Term Loan B due in monthly installments of 1/60th of the outstanding balance as of August 2006from that date through May 31, 2010 and the remainder due on June 30,2010. The revolver is now limited to a borrowing base equal to 80% of eligibleaccounts receivable and 60% of eligible inventories, as defined in the LoanAgreement. No borrowing was outstanding under the over-advance line as ofDecember 31, 2005. Outstanding borrowings under the Loan Agreement aresecured by substantially all assets of the Company.

Interestunder each piece of the amended Loan Agreement is at a floating rate per annumequal to the prime rate plus 0.5%. This rate was 8.75 percent as of June 30,2006.

TheLoan Agreement imposes certain restrictions on the Company, including itsability to complete significant asset sales, merge or acquire businesses andpay dividends. Additionally, the Company must meet certain financial covenantsat each quarter end during the term of the Loan Agreement, including a MinimumTangible Net Worth, a Minimum EBITDA and a Minimum Cash Flow Coverage Leverageratio, all as defined in the Loan Agreement. During 2004 and 2005, the Companyhad violated certain of these covenants and had obtained permanent waivers fromthe bank for such violations. The March 24, 2006 amendment to the LoanAgreement retroactively amended these financial covenants, and, as amended, theCompany was in compliance with those covenants as of the amendment date andthrough June 30, 2006. Management believes that the Company will maintaincompliance with the amended covenants.

#### **Business Segments**

The Company reports two operating business segments inthe same format as reviewed by the Company’s senior management. Segment one,Vita Seafood, processes and sells various herring, and cured and smoked salmonproducts throughout the United States and Mexico. Segment two, VSF, combinesthe products of Virginia Honey and Halifax and manufactures and distributeshoney, salad dressings, sauces, marinades, jams and jellies and gift basketsthroughout North America. Management predominately uses operating profit as themeasure of profit or loss by business segment.

7

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

| *Three months ended June 30,* | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
|                                              |       |       |       |       |       |
| **Net  Sales**                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                              | ** ** | **$**      | **5,873**  |       | $          | 4,758 |   |
| Vita Specialty Foods                              | ** ** | **5,955**  |       | 5,400      |       |
|                                              |       |       |       |       |       |
| Total Net Sales                                   | ** ** | **$**      | **11,828** |       | $          | 10,158 |   |
|                                              |       |       |       |       |       |
| **Operating  Profit (Loss)**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                              | ** ** | **$**      | **(136**   | **)**      | $          | (308 | ) |
| Vita Specialty Foods                              | ** ** | **477**    |       | 632        |       |
|                                              |       |       |       |       |       |
| Total Operating  Profit                           | ** ** | **$**      | **341**    |       | $          | 324 |   |
|                                              |       |       |       |       |       |
| **Net  Income (Loss)**                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                              | ** ** | **$**      | **(198**   | **)**      | $          | (276 | ) |
| Vita Specialty Foods                              | ** ** | **213**    |       | 327        |       |
|                                              |       |       |       |       |       |
| Total Net Income                                  | ** ** | **$**      | **15**     |       | $          | 51 |   |
|                                              |       |       |       |       |       |
| **Depreciation  and Amortization**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                              | ** ** | **$**      | **126**    |       | $          | 126 |   |
| Vita Specialty Foods                              | ** ** | **118**    |       | 111        |       |
|                                              |       |       |       |       |       |
| Total  Depreciation and Amortization              | ** ** | **$**      | **244**    |       | $          | 237 |   |
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Capital  Expenditures**                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                              | ** ** | **$**      | **116**    |       | $          | 44 |   |
| Vita Specialty  Foods                             | ** ** | **150**    |       | 198        |       |
|                                              |       |       |       |       |       |
| Total Capital  Expenditures                       | ** ** | **$**      | **266**    |       | $          | 242 |   |

** **

| *Six months ended June 30,* | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |
| **Goodwill**                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                            | ** ** | **$**      | **-**      |       | $          | - |   |
| Vita Specialty Foods                            | ** ** | **6,697**  |       | 5,997      |       |
|                                            |       |       |       |       |       |
| Total Goodwill                                  | ** ** | **$**      | **6,697**  |       | $          | 5,997 |   |
|                                            |       |       |       |       |       |
| **Total  Assets**                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                            | ** ** | **$**      | **17,407** |       | $          | 14,986 |   |
| Vita Specialty Foods                            | ** ** | **9,813**  |       | 9,865      |       |
|                                            |       |       |       |       |       |
| Total Assets                                    | ** ** | **$**      | **27,220** |       | $          | 24,851 |   |
|                                            |       |       |       |       |       |
| **Net  Sales**                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                            | ** ** | **$**      | **13,274** |       | $          | 10,738 |   |
| Vita Specialty Foods                            | ** ** | **11,343** |       | 10,317     |       |
|                                            |       |       |       |       |       |
| Total Net Sales                                 | ** ** | **$**      | **24,617** |       | $          | 21,055 |   |

 

8

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| **Operating Profit (Loss)**          | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Vita                                 | ** ** | **$**      | **66**     |       | $          | (679 | ) |
| Vita Specialty Foods                 | ** ** | **695**    |       | 785        |       |
|                                 |       |       |       |       |       |
| Total Operating  Profit              | ** ** | **$**      | **761**    |       | $          | 106 |   |
|                                 |       |       |       |       |       |
| **Net  Income (Loss)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                 | ** ** | **$**      | **(190**   | **)**      | $          | (571 | ) |
| Vita Specialty Foods                 | ** ** | **262**    |       | 365        |       |
|                                 |       |       |       |       |       |
| Total Net Income  (Loss)             | ** ** | **$**      | **72**     |       | $          | (206 | ) |
|                                 |       |       |       |       |       |
| **Depreciation  and Amortization**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                 | ** ** | **$**      | **247**    |       | $          | 249 |   |
| Vita Specialty Foods                 | ** ** | **224**    |       | 222        |       |
|                                 |       |       |       |       |       |
| Total  Depreciation and Amortization | ** ** | **$**      | **471**    |       | $          | 471 |   |
|                                 | ** ** | ** ** |       |       |       |
| **Capital  Expenditures**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vita                                 | ** ** | **$**      | **276**    |       | $          | 49 |   |
| Vita Specialty Foods                 | ** ** | **252**    |       | 304        |       |
|                                 |       |       |       |       |       |
| Total Capital  Expenditures          | ** ** | **$**      | **528**    |       | $          | 3534 |   |

 

**StockBased Compensation**

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share Based Payment” (SFAS 123 (R)), applying themodified prospective method. Prior to the adoption of SFAS 123(R), theCompany applied the provisions of APB Opinion No. 25, “Accounting forStock Issued to Employees,” in accounting for its stock-based awards, andaccordingly, recognized no compensation cost for its stock option plan awards. Underthe modified prospective method, SFAS 123(R) applies to new awards and toawards that were outstanding as of December 31, 2005 that are subsequentlyvested, modified, repurchased or cancelled. Compensation expense recognizedduring the first half of 2006 includes the portion vesting during the periodfor (1) all share-based payments granted prior to, but not yet vested asof December 31, 2005, based on the grant date fair value estimated inaccordance with the original provisions of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”(SFAS 123) and (2) all share-based payments granted subsequent toDecember 31, 2005, based on the grant-date fair value estimated using theBlack-Scholes option-pricing model. Due to the late 2005 acceleration ofvesting for all outstanding stock options granted prior to January 1,2005, future compensation expense related to unvested stock options grantedbefore such date is expected to be less than $50,000. Stock options to purchase10,000 shares were granted in each of the first and second quarters of 2006 todirectors and an employee respectively. Stock compensation expense of $4,900and $8,300 was recognized during the first and second quarters of 2006,respectively on existing stock options. As a result of the Company’s decisionto adopt the modified prospective method, prior period results have not beenrestated.

**Beforeadoption of SFAS 123(R), pro forma disclosures reflected the fair value ofeach option grant estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions for stockoptions granted during the three months ended June 30, 2005. The followingtable also shows similar information for the options granted during the secondquarter of 2006.**

| Three months ended June 30, | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Expected option  life in years                  |       | 5          |       | 5        |       |
| Risk-free  interest rate                        |       | 5.1        | %          | 4.1      | %          |
| Dividend yield                                  |       | -          |       | -        |       |
| Expected  volatility                            |       | 52.5       | %          | 48.2     | %          |
| Per share fair value                            |       | $          | 1.92       |     | $          | 1.17     |       |
|                                                 |            |            |            |          |            |          |            |  |  |

 

9

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**The following table illustrates theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of SFAS 123 for the three and six monthsended June 30, 2005:**

|                                                                             | ** ** | **Three**  | ** ** | **Six**    | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **For the period ended June 30, 2005**        | ** ** | ** ** | ** ** | **Months** | ** ** | **Months** | ** ** |
| Net income / (loss) -  as reported                                          |       | 50,955     |       | (206,102   | )          |
| Deduct: Total stock  based compensation expense, net of related tax effects |       | (14,040    | )          | (35,775    | )          |
| Pro forma net income                                                        |       | 36,915     |       | (241,877   | )          |
| Basic and diluted loss  per share:                                          |       |       |       |       |       |
| As reported                                                                 |       | $          | 0.01       |       | ($0.06     | ) |
| Pro forma                                                                   |       | $          | 0.01       |       | ($0.06     | ) |
|                                                                             |            |            |            |            |            |  |  |  |

 

The aggregate intrinsic value (defined as thedifference between the market value of the Company’s stock as of the end of theperiod and the exercise price of the stock options) for stock options outstandingand exercisable at June 30, 2006 is $179,559 and $98,119, respectively. Stockoptions representing 17,000 shares were exercised during the second quarter of2006.

The following is a summary of non vested stock option activity:

|                                  | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                       | ** ** | **Number**         | ** ** | **Grant-Date**      | ** ** |
| ** **                       | ** ** | **of Shares** | ** ** | **Fair Value** | ** ** |
| Non-vested at December  31, 2005 |       | 63,000             |       | $                   | 2.47       |   |
| Granted                          |       | 10,000             |       | 2.30                |       |
| Vested                           |       | (1,000             | )          | (3.41               | )          |
| Cancelled                        |       | (4,000             | )          | (3.41               | )          |
| Non-vested at March 31,  2006    |       | 68,000             |       | $                   | 2.37       |   |
| Granted                          |       | 10,000             |       | 3.73                |       |
| Vested                           |       | (4,000             | )          | (2.49               | )          |
| Cancelled                        |       | -                  |       | -                   |       |
| Non-vested at June 30, 2006      |       | 74,000             |       | $                   | 2.55       |   |

 

At June 30, 2006, there was $53,976 of totalunrecognized cost related to non-vested stock options which will be recognizedover the next 4.75 years.

**Equity Issuance**

In February 2006, the Company entered into agreementspursuant to which five individuals or their affiliated entities invested a totalof $2,500,000 in the Company. Substantially all of these funds were used toreduce funded debt. The investors received units consisting of an aggregate of1,000,000 shares of common stock; three-year warrants to purchase 500,000shares of common stock at an exercise price of $5.00 per share; and five-yearwarrants to purchase an additional 500,000 shares of common stock at an exerciseprice of $7.50 per share. The investors included the following:(i) Stephen D. Rubin, Office of the Chief Executive, President and adirector of the Company, (ii) Clifford K. Bolen, Office of the ChiefExecutive, Senior Vice President, Chief Operating Officer and Chief FinancialOfficer of the Company, together with certain of his affiliates, (iii) DelphiCasualty Co., of which Glenn S. Morris, a director of the Company, owns a44% equity interest, (iv) a trust of which John C. Seramur, a director ofthe Company, serves as trustee, as well as (v) Howard Bedford, then anunrelated third-party investor and, as of May 18, 2006, a director of theCompany. The warrants were valued at $0.37 and $0.44 per share for the threeyear and five year warrants, respectively, based on the Black Scholes optionpricing model with an expected life assumption of 3 years and 5 yearsrespectively, a risk free interest rate of 4.59%, a dividend rate of 0% and a volatilityrate of 51.5%. The aggregate value of the warrants is included in additionalpaid-in-capital. Based on the stock price on the date the employees anddirectors committed to acquire the units, the aggregate value of the securitiesreceived was not greater than the consideration paid. Accordingly, nocompensation was paid.

10

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Comparisonof the Three Months Ended June 30, 2006 and June 30, 2005**

***Revenues.***   Net salesfor the three months ended June 30, 2006 were $11,828,000, compared to$10,158,000 for the same period in 2005, an increase of $1,670,000 or 16.4%. Thisincrease is attributable to both units. Vita Seafood, experienced an increaseof $1,115,000, or 23.4%, led by growth of $1,007,000 in its line of salmonproducts. An additional gain was reflected in the Vita Seafood herring productline of $228,000, and in the specialty product line sales of $20,000. Theseresults were partially offset by higher returns and allowances of $140,000. Ofthe substantial increase in salmon sales, approximately $755,000 is a result ofa volume increase with the balance of $252,000 arising primarily from pricinggains. Furthermore, although this increase in salmon sales was applicable tomost major customers of this product line, two of these customers contributedover half of this gain. The increase in herring sales was primarily the resultof volume increases. Adding to the increase in net sales from Vita Seafood wasan increase of $555,000, or 10.3%, for the VSF business, which was primarilythe result of a $423,000 or 60.6% improvement in sales of sauces, including a$216,000 increase in hot filled products, primarily barbeque sauces and a$207,000 increase in cold filled products, primarily marinades, almost all ofwhich was driven by demand from two large customers. Herring, salmon, andspecialty product sales represented 39%, 57% and 4%, respectively, of VitaSeafood’s total gross sales during the current period compared to 44%, 51%, and5%, respectively, during the prior year quarter. Salad dressings/sauces, honeyproducts and specialty items, represented 76%, 23% and 1%, respectively, of VSFcurrent quarter total gross sales compared to 77%, 22% and 1%, respectively,during the prior year quarter.

***Gross Margin.***   Grossmargin for the three months ended June 30, 2006 was $3,372,000, comparedto $3,478,000 for the same period in 2005, a decrease of $106,000 or 3.0%. Thisdecrease was attributed to the VSF business which decreased $312,000; the VitaSeafood results were up $206,000. As a percent of net sales, gross margintotaled 28.5%, down from 34.2% for the same period in 2005. Gross margin forthe Vita Seafood business, as a percentage of net sales, decreased to 25.0%from 26.5% for the same period in 2005 and thus the increase in gross margindollars is the result of the higher sales volume. The falloff as a percent ofsales was largely the result of rising raw material costs, especially salmon,outpacing the steps taken to pass these costs along through higher sellingprices. The cost of at least one significant raw salmon item increased over 40%compared to the prior year quarter. Despite the increase in sales for the VSFbusiness, gross margin as a percent of net sales decreased to 32.0% for thecurrent quarter versus 41.1% for the same period in 2005. This significantdecrease was a continuing result of competitive factors limiting the ability topass along, through price increases, either the rising material or productioncosts.

***Operating Expenses.***   Selling,marketing, distribution and administrative expenses for the three months endedJune 30, 2006 were $3,031,000, compared to $3,154,000 for the same periodin 2005, a decrease of $123,000 or 3.9%. These expenses represented 25.6% of salesfor the quarter ended June 30, 2006 compared to 31.1% for the same periodin 2005. This decrease resulted from a $139,000 reduction in administrationexpenses net of a $16,000 increase in selling, marketing and distributionexpenses*.* The reduction in administrativeexpense is notable at both units and primarily reflects a salary and incentiveexpense decline arising from the fourth quarter 2005 amendment to the contractof a senior officer which included a significant reduction in his duties. Theincrease in selling, marketing and distribution expense arose as a result of severaloffsetting factors, most significantly, an increase in distribution expenses atboth operations, principally freight out, which was largely offset bysignificantly reduced commission and royalty expenses at the VSF business dueto the expiration of brand named licensing agreements with HBO®, Drambuie®, Kahlua®and Courvoisier®. The expiration of these agreements has not had and is notexpected to have a material effect on revenues.

***Interest Expense.***   Interestexpense for the three months ended June 30, 2006 was $314,000, compared to$238,000 for the same period in 2005, an increase of $76,000 or 31.9%. Duringthe 2006 period, average debt decreased to $15,200,000 from $16,000,000 or 5.0%compared to the same quarter of the prior year. Thus, the increase in interestexpense was primarily attributable to higher average interest rates under theCompany’s Loan Agreement which rose to 8.2% in the 2006 period from 5.9% in the2005 period.

***Income Taxes.*****  **The Company provided expense of $12,000 and $35,000for the quarters ended June 30, 2006 and 2005, respectively. Bothrepresented approximately 40% of the pretax income for those periods.

11

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*** ***

***Net Income.***   Reflectingthe operating results described above, net income for the three months endedJune 30, 2006 totaled $15,000 or a negligible amount per share on both a basicand fully diluted basis. This compares to a net income of $51,000 for the sameperiod in 2005, or $0.01 per share on both bases. Weighted average outstandingshares increased due to the February 2006 issuance of 1,000,000 shares ofcommon stock.

**Comparison of theSix Months Ended June 30, 2006 and June 30, 2005**

***Revenues.***   Net salesfor the six months ended June 30, 2006 were $24,617,000, compared to$21,055,000 for the same period in 2005, an increase of $3,562,000 or 16.9%. Thisincrease is attributable to both units. Vita Seafood, experienced an increaseof $2,536,000, or 23.6%, led by growth of $2,287,000 in its line of salmonproducts. An additional gain was reflected in the Vita Seafood herring productline of $484,000, and in the specialty product line sales of $21,000. Theseresults were partially offset by higher returns and allowances of $256,000. Ofthe substantial increase in salmon sales, approximately $1,677,000 was a resultof a volume increase with the balance of $610,000 arising primarily frompricing gains. Furthermore, although this increase in salmon sales wasapplicable to most major customers of this product line, two major customerscontributed over half of this gain. The increase in herring sales was theresult of a $330,000 volume increase with the balance of $154,000 arising fromnet pricing gains. Adding to the increase in net sales from Vita Seafood was anincrease of $1,026,000, or 9.9%, for the VSF business, which was primarily theresult of a $305,000 or 23.2% improvement in sales of sauces, a $320,000 or11.3% increase for honey products and a $255,000 or 3.7% increase for saladdressings. Additionally, sales deductions contributed to the increase in netsales, decreasing $133,000. Herring, salmon, and specialty product salesrepresented 43%, 53% and 4%, respectively, of Vita Seafood’s total gross salesduring the current period compared to 49%, 46%, and 5%, respectively, duringthe prior year quarter. Salad dressings/sauces, honey products and specialtyitems, represented 73%, 26% and 1%, respectively, of VSF current quarter totalgross sales compared to 74%, 25% and 1%, respectively, during the prior yearquarter.

***Gross Margin.***   Grossmargin for the six months ended June 30, 2006 was $7,269,000, compared to$6,680,000 for the same period in 2005, an increase of $589,000 or 8.8%. Thisincrease was attributed to the Vita Seafood business which increased $885,000;the VSF results were down $296,000. As a percent of net sales, gross margintotaled 29.5%, down from 31.7% for the same period in 2005. However, grossmargin for the Vita Seafood business, as a percentage of net sales, increasedto 27.4% from 25.6%. This improvement as a percent of sales was largely theresult of factory labor and overhead costs remaining partially fixed while bothselling prices and sales volume increased notably. Despite the increase insales for the VSF business, gross margin as a percent of net sales decreased to32.0% for the current period versus 38.1% for the same period in 2005. Thissignificant decrease was a continuing result of competitive factors limitingthe ability to pass along, through pricing increases, either the risingmaterial or production costs.

***Operating Expenses.***   Selling,marketing, distribution and administrative expenses for the six months endedJune 30, 2006 were $6,508,000, compared to $6,574,000 for the same periodin 2005, an improvement of $66,000 or 1.0%. As a percentage of net sales, theseexpenses were 26.4% compared with 31.2% in 2005. This reduction in expenses wasthe net result of a $156,000 increase in the selling, marketing anddistribution expense category and a $222,000 decrease in administrativeexpenses. The increase in selling, marketing and distribution expense arose asa result of several offsetting factors, most significantly, an increase indistribution expenses at both operations which totaled $188,000, principallyconsisting of freight out. This distribution expense increase directly resultedfrom higher volume and fuel costs. The reduction in administrative expense isnotable at both units and primarily reflects a reduction in officers’ salaryand incentive expense totaling $182,000 and largely arising from the fourthquarter 2005 amendment to the contract of a senior officer which included asignificant reduction in his duties.

***Interest Expense.***   Interestexpense for the six months ended June 30, 2006 was $640,000, compared to$449,000 for the same period in 2005, an increase of $191,000 or 42.5%. Duringthe current period, the average debt increased only 2.5% to $16,200,000compared to the average for the first half of the prior year of $15,800,000. Thus,the increase in interest expense was primarily attributable to higher averageinterest rates under the Company’s Loan Agreement which rose to 7.9% in the2006 period from 5.7% in the 2005 period.

***Income Taxes.*****  **The Company provided expense of $49,000 for theperiod ended June 30, 2006 and recognized a benefit of $(137,000) for theperiod ending June 30, 2005. Both represented approximately 40% of thepretax results for those periods.

12

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*** ***

***Net Income( Loss).***   Reflectingthe operating results described above, the net income for the six months endedJune 30, 2006 totaled $72,000 or $0.02 per share on both a basic and fullydiluted basis. This compares to a net loss of $(206,000) for the same period in2005 or $(0.05) per share on both bases, thus representing an improvement of$0.07 per share.

**FinancialCondition**

In February 2006, the Company entered into agreementspursuant to which five individuals or their affiliated entities invested atotal of $2,500,000 in the Company. Substantially all of these funds were usedto reduce funded debt. The investors received units consisting of an aggregateof 1,000,000 shares of common stock; three-year warrants to purchase 500,000shares of common stock at an exercise price of $5.00 per share; and five-yearwarrants to purchase an additional 500,000 shares of common stock at an exerciseprice of $7.50 per share. The investors included the following:(i) Stephen D. Rubin, Office of the Chief Executive, President and adirector of the Company, (ii) Clifford K. Bolen, Office of the ChiefExecutive, Senior Vice President, Chief Operating Officer and Chief FinancialOfficer of the Company, together with certain of his affiliates, (iii) DelphiCasualty Co., of which Glenn S. Morris, a director of the Company, owns a44% equity interest, (iv) a trust of which John C. Seramur, adirector of the Company, serves as trustee, as well as (v) Howard Bedford,then an unrelated third-party investor and, as of May 18, 2006, a director ofthe Company.

The Company’s outstanding revolving bank facility of$6,500,000 was scheduled to mature on April 1, 2007 and thus has beenclassified on the June 30, 2006 balance sheet as a current obligation.However, at December 31, 2005 and at June 30, 2005, the outstandingrevolver balances of $8,600,000 and $8,400,000 respectively, were classified aslong-term obligations. Primarily as a result of this reclassification of therevolving debt into the current obligations, the working capital decreased to$984,000 at June 30, 2006, versus $7,851,000 at December 31, 2005, and$7,817,000 at June 30, 2005. Additionally, the current ratio at June 30,2006 dropped to 1.1 to 1.0 compared to 2.3 to 1.0 at December 31, 2005 and2.6 to 1.0 at June 30, 2005. Due to the seasonality of the business, it istypical for a reduction in the Company’s current assets to occur during thefirst six months of each year since this period follows the fourth quarter peakof the annual business cycle. However, this year, as a direct result of the anticipatedcontinuation of the sizeable increase in sales activity, the current assetsincreased $104,000 as the increase in finished goods inventory offset thetypical seasonal decline in trade accounts receivable and most other currentassets.

At June 30, 2006, the Company had $31,000 incash, a revolving credit facility of $9,500,000 and term facilities totaling$7,900,000, consisting of a $7,750,000 facility that represents the Company’slong term borrowing, Term Loan A and a $150,000 capital expenditure line ofcredit, Term Loan B. As discussed above, the revolving loan facilitymatures April 1, 2007 (as amended in March 2006) and Term Loan A ispayable in monthly installments of $80,000 through July 31, 2008, with aballoon payment of $3,682,000 due on August 31, 2008. Term Loan B ispayable in monthly installments of 1/60th of the total principal, beginning onthe last business day of August, 2006 and continuing monthly through May 31,2010 with any remaining amount payable on June 30, 2010. Amounts outstandingunder the revolving facility, the Term A and Term B facilities atJune 30, 2006 were $6,507,000, $5,762,000 and $150,000, respectively.

Interest under each piece of the amended LoanAgreement is at a floating rate per annum equal to the prime rate plus 0.5%. Thisrate was 8.75% as of June 30, 2006.

The Loan Agreement imposes certain restrictions on theCompany, including its ability to complete significant asset sales, merge oracquire businesses and pay dividends. Additionally, the Company must meetcertain financial covenants at each quarter end during the term of the LoanAgreement, including a Minimum Tangible Net Worth, a Minimum EBITDA and aMinimum Cash Flow Coverage Leverage ratio, all as defined in the LoanAgreement. During 2004 and 2005, the Company had violated certain of thesecovenants and had obtained permanent waivers from the bank for such violations.The March 24, 2006 amendment to the Loan Agreement retroactively amendedthese financial covenants, and, as amended, the Company was in compliance withthe covenants as of such date and at June 30, 2006. Management believesthat the Company will maintain compliance with the amended covenants.

The ratio of long-term debt to total capitalizationtotaled 34% at June 30, 2006 down from 74% at December 31, 2005. Thischange was primarily the result of both the $2,500,000 equity investment anduse of the proceeds to reduce debt and the classification of the revolving debtinto the current category. The Company believes its financial resources areadequate to fund its needs for the next 12 months.

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*** ***

***Cash flows from operating activities.***   Netcash provided by operating activities was $1,429,000 for the six months endedJune 30, 2006, primarily reflecting the $1,035,000 increase in accountspayable since December 31, 2005 plus the $543,000 total of net income plusdepreciation and amortization. This amount of net cash provided by operatingactivities for the current six month period was $499,000 more than the $930,000provided during the same period in 2005. Additionally, this increase occurreddespite a $1,706,000 decrease in net collections of accounts receivable duringthe period since the decrease was offset by an additional $473,000 providedfrom higher net income plus the adjustments necessary to reconcile net incometo cash flow, an additional $1,272,000 resulting from a smaller inventoryincrease in the current period compared to the prior year, an additional$333,000 provided from collection of income taxes receivable and $138,000 fromhigher accounts payable and other obligations. The reduced collections ofaccounts receivable was primarily due to a combination of higher sales in thecurrent year quarter and a collection delay due to invoicing specificationissues with two large customers.

***Cash flows from investing activities.***   Netcash used in investing activities was $563,000 for the six months endedJune 30, 2006, which was $160,000 more than the $403,000 used during thesame period of the prior year. During both periods, these funds primarilyrepresent investment in the production facilities. The increased cash usage forthe current period reflects the costs associated with the roof renovation atthe Vita Seafood facility which totaled approximately $140,000 during thecurrent period.

***Cash flows from financing activities.***   Netcash used in financing activities was $861,000 for the six months endedJune 30, 2006. This net usage is the excess of $2,570,000 of net cash usedto pay down the loan facilities including $2,081,000 of net revolver payments,$490,000 of term loan payments in addition to $700,000 used to make thescheduled installments under the terms of the Virginia Honey acquisitionagreement; less cash received of $2,379,000 representing the February 2006equity investment, net of associated transaction costs and less the proceedsfrom the stock purchase, option and compensation transactions totaling $30,000.The cash used in the current year compares to the $540,000 used during the sameperiod in 2005.

**Seasonality**

The Vita segment of the Company’s business is seasonalin nature, primarily resulting from the effect of the timing of certainholidays on the demand for certain products. Historically, the Company’s salesand profits have been substantially higher in the fourth quarter of each year.

**Subsequent Event**

During the third quarter of 2006, VSF recorded a onetime charge related to product development and recipe formulation costsrelating to new products for a new customer in the amount of approximately$180,000.

**CriticalAccounting 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 these estimatesunder different assumptions or conditions.

Revenue is recognized upon shipment of product tocustomers 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 sold 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. 

14

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The Company regularly reviews and revises, when itdeems necessary, 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 significantly iffactors such as the level and success of the customers’ programs or other conditionsdiffer from expectations. Sales are reduced by a provision for estimated futurereturns, disposals and promotional expenses.

The Company recognizes deferred income tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the tax basis and financial reporting basis of certain assets andliabilities and certain income tax credit carryforwards. In estimating futuretax consequences, the Company considers expected future events other thanenactments of changes in tax laws or rates. A valuation reserve is recognizedbased on the evidence available; if it is more likely than not that some portionor the entire deferred income tax asset will not be realized.

The Company assesses the impairment of itsidentifiable intangibles and goodwill whenever events or changes incircumstances indicate that the carrying value may not be recoverable and at leastannually. Factors the Company considers important, which could trigger animpairment 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

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

When the Company determines that the carrying value ofits intangible assets may not be recoverable based upon the existence of one ormore of the above indicators of impairment, the Company will review forimpairment under the provisions of SFAS 142.

During the fourth quarter of 2003, the Companycompleted its annual assessment of impairment regarding the goodwill recordedas a result of the Virginia Honey acquisition ($6,004,000) and the Halifaxacquisition ($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 methodologiesincluding discounted cash flows and fundamental analysis, did reveal impairmentissues. The appraisal reflected a decreased fair value of VSF, principallycaused by the decline in operating income of VSF during 2004. That decline wasprimarily a result of a substantial 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 resulting impairment charge of approximately $2,314,000 was recorded in thefourth quarter of 2004. The 2005 assessment and independent appraisal did notindicate any further impairment.

**Forward-LookingStatements**

Certain statements in this report, includingstatements in “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” are “forward-looking statements” as defined by theFederal securities laws. Such statements are based on management’s currentexpectations and involve known and unknown risks and uncertainties which maycause the Company’s actual results, performance or achievements to differmaterially from any results, performance or achievements expressed or impliedin this report. By way of example and not limitation and in no particularorder, known risks and uncertainties include the Company’s future growth andprofitability, the potential loss of large customers or accounts, downwardproduct price movements, availability of salmon and other raw materials,changes in raw material procurement costs, fluctuations in the market cost ofmajor commodities such as honey, changes in energy costs, the introduction andsuccess of new products, changes in economic and market conditions, integrationand management of acquired businesses, the seasonality of Vita’s business, theCompany’s ability to attract and retain key personnel, the Company’s ability tomaintain its relationships with key vendors and retailers, consolidation of theCompany’s customer and supplier base, the potential impact of claims andlitigation, the effects of competition in the Company’s markets and the dietaryhabits and trends of the general public. In light of these and other risks anduncertainties, the Company makes no representation that any future results,performance or achievements expressed or implied in this report will beattained. The Company’s actual results may differ materially from any resultsexpressed or implied by the forward-looking statements, especially whenmeasured on a quarterly basis.

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**Item 3.   Quantitative andQualitative Disclosures About Market Risk**

The Company is exposed to interest rate fluctuations,primarily as a result of its $17.4 million Loan Agreement with interestrates based on prime rate plus 0.5%, or 8.75% as of June 30, 2006. TheCompany does not currently use derivative instruments to alter the interestrate characteristics of any of the debt. A 10% fluctuation in interest rateswould not have a material impact on the Company’s financial statements.

**Item 4.   Controlsand Procedures**

Under the supervision and with the participation ofthe Company’s management team, the principal executive officers and principalfinancial officer have evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures as defined inRules 13a - 15(e) and 15d - 15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2006and, based on their evaluation, have concluded that these controls andprocedures are effective. There were no changes in the Company’s internalcontrol over financial reporting during the fiscal period ended June 30,2006 that have materially affected, or are reasonable likely to materiallyaffect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are designed toensure that information required to be disclosed by the Company in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by the Company in the reports that itfiles under the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive officer and principal financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

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

 

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**PART II - OTHERINFORMATION**

**Item 1A.**   RiskFactors

The risk factors included in Part I, “Item 1A.Risk Factors” in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005 have not materially changed other than as set forth below.

**The cost andpotentially reduced availability of petroleum based products and services,including freight, utilities and raw material surcharges, could impact ourprofitability.** Anysignificant increases in the prevailing price levels or any change in thesupply availability of petroleum based products and services could have a significantaffect on our costs. A significant increase in costs which cannot be passed onto our customers will have an adverse affect on our profitability.

**Item 4.**   Submissionof Matters to a Vote of Security Holders

(a)            The date of thecompany’s Annual Meeting of Stockholders was May 18, 2006.

(b)           and (c) At the AnnualMeeting of Stockholders, the following matters were submitted to a vote of thestockholders with the stated results:

(1)             The election of thefollowing persons as directors of the Company:

| Director            | ** ** | ** ** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Abstained** | ** ** | **Broker Non-Votes** | ** ** |
|---------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|---------------|------------|---------------------------|------------|
| Stephen D. Rubin    |       | 3,379,973  |       | 648,883            |       | -                       |       | -             |       |
| Terry W. Hess       |       | 3,978,676  |       | 50,180             |       | -                       |       | -             |       |
| Howard Bedford      |       | 3,391,398  |       | 637,458            |       | -                       |       | -             |       |
| Scott Levitt        |       | 3,385,798  |       | 643,058            |       | -                       |       | -             |       |
| Glenn Morris        |       | 2,512,339  |       | 1,516,517          |       | -                       |       | -             |       |
| Steven A. Rothstein |       | 3,388,998  |       | 639,858            |       | -                       |       | -             |       |
| John C. Seramur     |       | 3,391,398  |       | 637,458            |       | -                       |       | -             |       |

 

(2)             Ratification of theselection of BDO Seidman, LLP as independent accountants of the Company for theyear ending December 31, 2006

| Votes For | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker Non-Votes** | ** ** |
|----------------|------------|-------------|------------|---------------|------------|---------------------------|------------|
| 4,028,401      |       | 155         |       | 300           |       | -                         |       |

####  

**Item 6.**   Exhibits
| 31.1   |   | Principal Executive Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                |
| 31.2   |   | Principal Executive and Financial Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                |
| 31.3   |   | Principal Executive Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|   |   |                                                                                                                |
| 32.1   |   | Principal Executive and Financial Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                                        | ** ** | ** ** |   | **VITA  FOOD PRODUCTS, INC.**                           |
|----------------------------------------|------------|------------|--------|---------------------------------------------------------|
|                                   |       |       |   |                                                    |
|                                   |       |       |   |                                                    |
| Date:   August 14, 2006 |       | By:        |   | /s/ Stephen D.  Rubin                                   |
|                                   |       |       |   | Stephen D. Rubin                                        |
|                                   |       |       |   | Office of the  Chief Executive;*President*              |
|                                   |       |       |   | *(Principal  Executive Officer)*                        |
|                                   |       |       |   |                                                    |
|                                   |       |       |   |                                                    |
| Date:   August 14, 2006 |       | By:        |   | /s/ Clifford K.  Bolen                                  |
|                                   |       |       |   | Clifford K.  Bolen                                      |
|                                   |       |       |   | Office of the  Chief Executive;*Senior Vice President;* |
|                                   | * *   |       |   | *Chief  Operating Officer; Chief Financial Officer*     |
|                                   | * *   |       |   | *(Principal  Financial and Accounting Officer)*         |

 

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**Exhibit Index**
| Number | ** ** | **Exhibit Title  **                                                                                        | ** ** | ** ** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
|   |       |                                                                                                                      |
| 31.1   |       | Principal Executive  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.               |
|   |       |                                                                                                                      |
| 31.2   |       | Principal Executive and  Financial Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|   |       |                                                                                                                      |
| 31.3   |       | Principal Executive  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.               |
|   |       |                                                                                                                      |
| 32.1   |       | Principal Executive and Financial Officer Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

 

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