**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                         |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                            |
|       |       | **For the  Quarterly Period Ended September 30, 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             |       | (I.R.S.  Employer    |
| incorporation  or organization)              |       | Identification  No.) |
|                                         |       |                 |
| **2222 West Lake Street, Chicago, Illinois** | ** ** | **60612**            |
| (Address of  principal executive offices)    |       | (Zip Code)           |

 

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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 past 90 days.  Yes  ý   No  o

 

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

Yes  o   No  ý

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes  o   No  ý

 

The number of sharesoutstanding of registrant’s common stock as of October 31, 2005 was3,866,062.

 

 

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**VITA FOODPRODUCTS, INC.**

 

**FORM 10-Q**

 

## **For the Quarter Ended September 30, 2005**

 

## **INDEX**

 
|              |                                                                                        | **Page**                                                                                                           |
|-------------------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
|              |                                                                                        |                                                                                                               |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                   |                                                                                                               |
|              |                                                                                        |                                                                                                               |
| Item 1.           | Financial Statements                                                                        |                                                                                                               |
|              |                                                                                        |                                                                                                               |
|              | a)                                                                                          | Consolidated Balance Sheets as of September 30, 2005 and  December 31, 2004                              | 3 |
|              |                                                                                        |                                                                                                               |   |
|              | b)                                                                                          | Consolidated Statements of Operations for the Three Months and Nine  Months Ended September 30, 2005 and 2004 | 4 |
|              |                                                                                        |                                                                                                               |   |
|              | c)                                                                                          | Consolidated Statement of Shareholders’ Equity for the Nine Months  Ended September 30, 2005             | 4 |
|              |                                                                                        |                                                                                                               |   |
|              | d)                                                                                          | Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004                  | 5 |
|              |                                                                                        |                                                                                                               |   |
|              | e)                                                                                          | Notes to Financial Statements                                                                                      | 6 |
|              |                                                                                        |                                                                                                               |
| Item 2.           | Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 10                                                                                                                 |
|              |                                                                                        |                                                                                                               |
| Item 3.           | Quantitative and Qualitative  Disclosures About Market Risk                                 | 14                                                                                                                 |
|              |                                                                                        |                                                                                                               |
| Item 4.           | Controls and Procedures                                                                     | 14                                                                                                                 |
|              |                                                                                        |                                                                                                               |
| **PART II.** | **OTHER  INFORMATION**                                                                      |                                                                                                               |
|              |                                                                                        |                                                                                                               |
| Item  6.          | Exhibits                                                                                    | 16                                                                                                                 |
|              |                                                                                        |                                                                                                               |
| SIGNATURES        | 17                                                                                          |

 

2

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**PART 1. FINANCIAL STATEMENTS**

 

**Item 1. Financial Statements**
| **Consolidated Balance Sheets** | ** ** | **Vita Food Products, Inc.** |
|---------------------------------|------------|-----------------------------------|
| ** **                      | ** ** | **And Subsidiary**                |

 
| ** **                                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                                                                                                                 |       |                   |       |                  |       |
| **ASSETS**                                                                                                                           |       |                   |       |                  |       |
| Current Assets                                                                                                                       |       |                   |       |                  |       |
| Cash                                                                                                                                 |       | $                      | 35,325     |                  | $          | 55,968 |   |
| Accounts receivable-trade, net of allowance  for discounts, returns, and doubtful accounts of $459,000 in 2005 and  $569,000 in 2004 |       | 5,017,097              |       | 5,118,517             |       |
| Inventories                                                                                                                          |       |                   |       |                  |       |
| Raw material and supplies                                                                                                            |       | 5,558,183              |       | 4,342,754             |       |
| Work in process                                                                                                                      |       | 264,277                |       | 235,504               |       |
| Finished goods                                                                                                                       |       | 2,764,933              |       | 2,390,924             |       |
| Prepaid expenses and other current assets                                                                                            |       | 546,162                |       | 447,602               |       |
| Income taxes receivable                                                                                                              |       | 319,133                |       | 35,441                |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Total Current Assets                                                                                                                 |       | 14,505,110             |       | 12,626,710            |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Property, Plant and Equipment                                                                                                        |       |                   |       |                  |       |
| Land                                                                                                                                 |       | 35,000                 |       | 35,000                |       |
| Building and improvements                                                                                                            |       | 2,627,172              |       | 2,626,097             |       |
| Leasehold improvements                                                                                                               |       | 583,123                |       | 425,336               |       |
| Machinery and office equipment                                                                                                       |       | 11,292,293             |       | 10,636,716            |       |
|                                                                                                                                 |       |                   |       |                  |       |
|                                                                                                                                 |       | 14,537,588             |       | 13,723,149            |       |
| Less accumulated depreciation and  amortization                                                                                      |       | (8,469,987             | )          | (7,797,581            | )          |
|                                                                                                                                 |       |                   |       |                  |       |
| Net Property, Plant and Equipment                                                                                                    |       | 6,067,601              |       | 5,925,568             |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Goodwill                                                                                                                             |       | 5,996,705              |       | 5,996,705             |       |
| Other assets                                                                                                                         |       | 443,829                |       | 373,695               |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Total Assets                                                                                                                         |       | $                      | 27,013,245 |                  | $          | 24,922,678 |   |
|                                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                        |       |                   |       |                  |       |
| Current Liabilities                                                                                                                  |       |                   |       |                  |       |
| Current maturities of long-term obligations                                                                                          |       | $                      | 904,128    |                  | $          | 1,619,430 |   |
| Accounts payable                                                                                                                     |       | 3,474,623              |       | 2,278,696             |       |
| Accrued expenses                                                                                                                     |       | 842,817                |       | 817,919               |       |
| Deferred income taxes                                                                                                                |       | 114,430                |       | 144,924               |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Total Current Liabilities                                                                                                            |       | 5,335,998              |       | 4,860,969             |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Long-term Obligations, Less Current  Maturities                                                                                      |       | 17,559,449             |       | 15,497,900            |       |
|                                                                                                                                 |       |                   |       |                  |       |
| 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 3,872,578 shares in 2005 and 3,865,254 in 2004                   |       | 38,726                 |       | 38,652                |       |
| Treasury stock, at cost 6,516 shares                                                                                                 |       | (50,043                | )          | (50,043               | )          |
| Additional paid-in capital                                                                                                           |       | 3,802,580              |       | 3,785,596             |       |
| Retained earnings                                                                                                                    |       | 326,535                |       | 789,604               |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Total Shareholders’ Equity                                                                                                      |       | 4,117,798              |       | 4,563,809             |       |
|                                                                                                                                 |       |                   |       |                  |       |
| Total Liabilities and Shareholders’ Equity                                                                                      |       | $                      | 27,013,245 |                  | $          | 24,922,678 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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

 
| ** **                                 | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                 | ** ** | **2005**                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Net Sales                                  |       | $                              | 11,417,852 |                          | $          | 11,575,134 |   | $ | 32,670,097 |   | $ | 34,845,034 |   |
| Cost of Goods Sold                         |       | 8,191,091                      |       | 8,514,949                     |       | 22,566,483 |   | 24,840,433 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Gross Margin                               |       | 3,226,761                      |       | 3,060,185                     |       | 10,103,614 |   | 10,004,601 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Selling and Administrative Expenses        |       |                           |       |                          |       |   |   |   |   |
| Selling, Marketing and Distribution        |       | 2,349,611                      |       | 2,387,361                     |       | 6,813,141 |   | 7,299,594 |   |
| Administrative                             |       | 1,014,229                      |       | 940,535                       |       | 3,321,552 |   | 3,246,924 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Total Selling and Administrative Expenses  |       | 3,363,840                      |       | 3,327,896                     |       | 10,134,693 |   | 10,546,518 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Operating Loss                             |       | (137,079                       | )          | (267,711                      | )          | (31,079 | ) | (541,917 | ) |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Interest Expense                           |       | 291,886                        |       | 192,721                       |       | 740,990 |   | 548,802 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Loss Before Income Taxes                   |       | (428,965                       | )          | (460,432                      | )          | (772,069 | ) | (1,090,719 | ) |
| Income Tax Benefit                         |       | (172,000                       | )          | (184,000                      | )          | (309,000 | ) | (436,000 | ) |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Net Loss                                   |       | $                              | (256,965   | )                             | $          | (276,432 | ) | $ | (463,069 | ) | $ | (654,719 | ) |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Basic Loss Per Share                       |       | $                              | (0.07      | )                             | $          | (0.07 | ) | $ | (0.12 | ) | $ | (0.17 | ) |
| Weighted Average Common Shares Outstanding |       | 3,866,062                      |       | 3,847,214                     |       | 3,861,206 |   | 3,837,600 |   |
|                                       |       |                           |       |                          |       |   |   |   |   |
| Diluted Loss Per Share                     |       | $                              | (0.07      | )                             | $          | (0.07 | ) | $ | (0.12 | ) | $ | (0.17 | ) |
| Weighted Average Common Shares Outstanding |       | 3,866,062                      |       | 3,847,214                     |       | 3,861,206 |   | 3,837,600 |   |

 

 
| **Consolidated Statement of Shareholders’ Equity** | ** ** | **Vita Food Products, Inc.** |
|---------------------------------------------------------|------------|-----------------------------------|
| ** **                                              | ** ** | **And Subsidiary**                |

 
| ** **                                           | ** ** | ** **       | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                           | ** ** | **Shares**       | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                 |       |             |       |         |       |        |       |           |       |         |       |       |       |
| Balance, at January 1, 2005                     |       | 3,865,254        |       | $            | 38,652     |        | $          | (50,043        | )          | $            | 3,785,596  |       | $          | 789,604 |   | $ | 4,563,809 |   |
|                                                 |       |             |       |         |       |        |       |           |       |         |       |       |       |
| Proceeds from stock purchase and stock  option plans |       | 7,324            |       | 74           |       | —      |       | 16,984         |       | —       |       | 17,058     |       |
|                                                 |       |             |       |         |       |        |       |           |       |         |       |       |       |
| Net Loss                                             |       | —           |       | —       |       | —      |       | —         |       | (463,069     | )          | (463,069   | )          |
|                                                 |       |             |       |         |       |        |       |           |       |         |       |       |       |
| Balance, at September 30, 2005                  |       | 3,872,578        |       | $            | 38,726     |        | $          | (50,043        | )          | $            | 3,802,580  |       | $          | 326,535 |   | $ | 4,117,798 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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

 
| ** **                                                                      | ** ** | **For the nine months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**        | ** ** |
| ** **                                                                      | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                                            |       |                          |       |   |   |
| **Cash Flows From Operating Activities**                                        |       |                          |       |   |   |
| Net loss                                                                        |       | $                             | (463,069   | ) | $ | (654,719 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities |       |                          |       |   |   |
| Depreciation and amortization                                                   |       | 718,678                       |       | 722,981 |   |
| (Gain) loss on sale of fixed assets                                             |       | (14,066                       | )          | 3,877 |   |
| Deferred income tax benefit                                                     |       | (318,186                      | )          | (226,304 | ) |
| Changes in assets and liabilities:                                              |       |                          |       |   |   |
| Accounts receivable                                                             |       | 101,420                       |       | 1,854,469 |   |
| Inventories                                                                     |       | (1,618,211                    | )          | (48,890 | ) |
| Prepaid expenses and other current assets                                       |       | (98,560                       | )          | 46,375 |   |
| Accounts payable                                                                |       | 1,195,927                     |       | 309,251 |   |
| Income taxes receivable                                                         |       | 4,000                         |       | 198,536 |   |
| Accrued expenses                                                                |       | 24,895                        |       | (135,994 | ) |
|                                                                            |       |                          |       |   |   |
|  Net cash (used in) provided by  operating activities                      |       | (467,172                      | )          | 2,069,582 |   |
|                                                                            |       |                          |       |   |   |
| **Cash Flows From Investing Activities**                                        |       |                          |       |   |   |
| Capital expenditures                                                            |       | (831,461                      | )          | (1,002,693 | ) |
| Proceeds from sale of fixed asset                                               |       | 15,240                        |       | 7,400 |   |
| Change in other assets                                                          |       | (61,258                       | )          | (59,090 | ) |
|                                                                            |       |                          |       |   |   |
|  Net cash used in investing activities                                     |       | (877,479                      | )          | (1,054,383 | ) |
|                                                                            |       |                          |       |   |   |
| **Cash Flows From Financing Activities**                                        |       |                          |       |   |   |
| Proceeds from issuance of stock and  exercise of stock options                  |       | 17,058                        |       | 101,463 |   |
| Purchase of treasury stock                                                      |       | —                        |       | (50,043 | ) |
| Net borrowing (payments) under revolving  loan facility                         |       | 1,483,889                     |       | (532,443 | ) |
| Borrowing on the term loan                                                      |       | 1,298,846                     |       | — |   |
| Payments on term loan facility                                                  |       | (635,363                      | )          | (584,432 | ) |
| Payments on other debt                                                          |       | (840,422                      | )          | — |   |
|                                                                            |       |                          |       |   |   |
|  Net  cash provided by (used in) financing activities                      |       | 1,324,008                     |       | (1,065,455 | ) |
|                                                                            |       |                          |       |   |   |
| Net decrease in cash                                                            |       | (20,643                       | )          | (50,256 | ) |
|                                                                            |       |                          |       |   |   |
| Cash, at beginning of period                                                    |       | 55,968                        |       | 125,457 |   |
|                                                                            |       |                          |       |   |   |
| Cash, at end of period                                                          |       | $                             | 35,325     |   | $ | 75,201 |   |
|                                                                            |       |                          |       |   |   |
| Supplemental Disclosure of Cash Flow  Information                               |       |                          |       |   |   |
| Cash paid for interest                                                          |       | $                             | 747,000    |   | $ | 490,000 |   |
| Income taxes paid (refunded)                                                    |       | $                             | 4,000      |   | $ | (385,000 | ) |

 

See accompanying notes to consolidated financial statements.

 

5

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## **NOTES TO FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

#### **Basisof Presentation**

 

In the opinion ofmanagement, the accompanying balance sheets and related interim statements ofoperations, cash flows, and shareholders’ equity include all adjustments,consisting only of normal recurring items necessary for their fair presentationin conformity with U.S. generally accepted accounting principles.  Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenue, and expenses. Examples include provisions for returns, deductions, bad debts, andlength of building and equipment lives. Actual results may differ from these estimates.  Interim results are not necessarilyindicative of results for a full year. The information included in this Form 10-Qshould be read in conjunction with Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and financial statements andnotes thereto included in the Form 10-K for the fiscal year ended December 31,2004 of Vita Food Products, Inc. (Vita Food Products, Inc. (“Vita”) together with its wholly ownedsubsidiary, Vita Specialty Foods, Inc. (“Vita Specialty Foods”),hereinafter referred to as the “Company”.)

 

The third quarter andnine month periods ended September 30, 2005 and 2004 diluted earnings(loss) per share computations exclude 281,900 and 265,100 shares for 2005 and213,000 and 74,000 shares for 2004, respectively, issuable upon exercise ofstock options because the assumed exercise of these options would beanti-dilutive.

 

**Principles of Consolidation**

 

The consolidated financial statements include the accountsof Vita and Vita Specialty Foods.  VitaSpecialty Foods includes Virginia Honey Company, Inc. (“Virginia Honey”)and The Halifax Group, Inc. (“Halifax”). All significant intercompany transactions and balances have been eliminated.

 

##### **Revenue Recognition**

 

Revenue is recognizedupon the passing of title to the customers, which occurs upon shipment ofproduct to customers in fulfillment of customer orders.

 

### **EarnOut Provisions Under Acquisitions 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 now employees and one ofwhom is a director of the Company, were subject to earn out provisions that mayresult in additional proceeds paid by the Company for the acquiredbusinesses.  As amended, the earn outprovisions for Terry Hess, the previous owner of Virginia Honey, have resultedin an additional amount due to Mr. Hess of $840,000, which was paid in April 2005.  This additional payment was based on theoperating results of Virginia Honey for the period from January 1, 2001 toDecember 31, 2002.  Potentialremaining earn out payments to Mr. Hess will be based on the earnings ofVita Specialty Foods, as computed by a pre-defined allocation formula, for twoseparate periods – January 1, 2003 to December 31, 2005 and January 1,2006 to December 31, 2007.  ShouldVita Specialty Foods maintain its current profitability levels throughout theseperiods, management estimates that additional payments with a net present valueas of September 30, 2005 of approximately $1,070,000 would be due to Mr. Hess.  Any future payments will be recorded asadditional goodwill when and if such payments are finally determined at the endof each of the periods described above.

 

Mr. Budd, theprevious 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 earn out payments to Mr. Buddwere to be based on the earnings of Vita Specialty Foods, as computed by apre-defined allocation formula.  On January 7,2005, the Company terminated the Employment Agreement, made as of November 1,2002, between Halifax and Mr. Budd in connection with the Company’sacquisition of Halifax.   The Companyalleged a for “cause” termination as defined in the Employment Agreement, and,in connection therewith, filed suit against Mr. Budd which was settled inaccordance with the terms and conditions of the Settlement Agreement entered intoon March 28, 2005.  Pursuant to theSettlement Agreement, the

 

6

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remainingpotential earn out payments to Mr. Budd have been eliminated entirely.

 

#### **Bank Loan Agreement**

 

On September 9,2003, the Company entered into a loan agreement (the “Loan Agreement”) with abank and paid off its existing credit facility. The Loan Agreement provided for a two year $8,500,000 revolving line ofcredit for working capital needs; a five year $6,500,000 term loan, Term LoanA, that represented the Company’s long term financing and a six-year $3,000,000term loan that was never utilized.  Theagreement was amended in August 2005 to raise the revolving line of creditto $10,000,000 from August 30, 2005 through November 14, 2005 andthen to $9,500,000, from November 15, 2005 and all times thereafter; toincrease the Term Loan A line by $1,250,000 and to replace the un-utilized$3,000,000 line of credit with a capital expenditure line of credit, Term LoanB, of $150,000.  The revolving loanfacility matures January 31, 2007 (as amended in August 2005); TermLoan A is payable in monthly installments of $80,000 through July 31,2008, with a balloon payment of $3,682,000 due on August 31, 2008.  Term Loan B is payable in monthly installmentsof 1/60th of the total principal, beginning on the last business dayof August, 2006 and continuing monthly through May 31, 2010 with anyremaining amount payable on June 30, 2010. Amounts outstanding under the revolving facility, the Term A and Term Bfacilities at September 30, 2005 were $9,162,000 and $6,403,000 and$48,000 respectively.  The interest rateson these facilities have been determined, subject to adjustment at certainpredetermined dates, based upon the Funded Debt to EBITDA ratio as each suchterm is defined in the Loan Agreement. The Loan Agreement contains customary representations, warranties andcovenants (as amended in August 2005 and amended again in November 2005).  The impact of the Company’s loss on earningsbefore income taxes, depreciation and amortization for the twelve months ended September 30,2005 resulted in non-compliance with one of the Company’s debt covenants atthat date.  However, the Company receiveda permanent waiver from its lender relating to such non-compliance.  The Company’s lender also has approved a newamendment to the Loan and Security Agreement that changes the Company’s debtcovenants and other provisions.  TheCompany believes that the new debt covenants will be attainable.  In April 2005, the bank provided theCompany with a temporary overadvance of $800,000 due September 2005 (asamended in June 2005).  As part of the August 2005 amendment,the overadvance was extended through January 30, 2006.  In November 2005, the bank approved anew overadvance schedule with overadvance amounts set at $1,500,000 from November 1through November 30, 2005; $1,000,000 from December 1 through December 31,2005; and $250,000 from January 1 through January 31, 2006.  As of September 30, 2005, the interestrates on the revolving line of credit and the term loans were prime plus 0.5%.

 

#### **Business Segments**

 

The Company is reportingtwo operating business segments in the same format as reviewed by the Company’ssenior management. Segment one, Vita, processes and sells various herring andcured and smoked salmon products throughout the United States.  Segment two, Vita Specialty Foods, combinesthe products of Virginia Honey and Halifax and manufactures and distributeshoney, salad dressings, sauces, marinades, jams and jellies and giftbaskets.  Management uses operatingprofit as the measure of profit or loss by business segment.

 

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

 
| **Three months ended September 30,** | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|
|                                      |       |      | ** ** |       |       |
| **Net Sales**                             |       |      | ** ** |       |       |
| Vita                                      | ** ** | **$**     | **5,828**  | ** ** | $          | 6,239 |   |
| Vita Specialty Foods                      | ** ** | **5,590** | ** ** | 5,336      |       |
|                                      |       |      | ** ** |       |       |
| Total Net Sales                           | ** ** | **$**     | **11,418** | ** ** | $          | 11,575 |   |
|                                      |       |      | ** ** |       |       |
| **Operating Profit (Loss)**               |       |      | ** ** |       |       |
| Vita                                      | ** ** | **$**     | **(373**   | **)**      | $          | (309 | ) |
| Vita Specialty Foods                      | ** ** | **236**   | ** ** | 41         |       |
|                                      |       |      | ** ** |       |       |
| Total Operating Loss                      | ** ** | **$**     | **(137**   | **)**      | $          | (268 | ) |
|                                      |       |      | ** ** |       |       |
| **Net Income (Loss)**                     |       |      | ** ** |       |       |
| Vita                                      | ** ** | **$**     | **(320**   | **)**      | $          | (248 | ) |
| Vita Specialty Foods                      | ** ** | **63**    | ** ** | (28        | )          |
| Total Net Loss                            | ** ** | **$**     | **(257**   | **)**      | $          | (276 | ) |

 

7

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| **Three months ended September 30,** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
|                                      |       |       | ** ** |       |       |
| **Depreciation and Amortization**         |       |       | ** ** |       |       |
| Vita                                      | ** ** | **$**      | **129**    | ** ** | $          | 124 |   |
| Vita Specialty Foods                      | ** ** | **119**    | ** ** | 128        |       |
|                                      |       |       | ** ** |       |       |
| Total Depreciation and Amortization       | ** ** | **$**      | **248**    | ** ** | $          | 252 |   |
|                                      | ** ** | ** ** | ** ** |       |       |
| **Capital Expenditures**                  |       |       | ** ** |       |       |
| Vita                                      | ** ** | **$**      | **73**     | ** ** | $          | 68 |   |
| Vita Specialty Foods                      | ** ** | **405**    | ** ** | 162        |       |
|                                      |       |       | ** ** |       |       |
| Total Capital Expenditures                | ** ** | **$**      | **478**    | ** ** | $          | 230 |   |

 

 
| **Nine months ended September 30,** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
|                                     |       |       |       |       |       |
| **Goodwill**                             |       |       |       |       |       |
| Vita                                     | ** ** | **$**      | **—** |       | $          | — |   |
| Vita Specialty Foods                     | ** ** | **5,997**  |       | 8,311      | (a)        |
|                                     |       |       |       |       |       |
| Total Goodwill                           | ** ** | **$**      | **5,997**  |       | $          | 8,311 |   |
|                                     |       |       | ** ** |       |       |
| **Total Assets**                         |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **16,034** | ** ** | $          | 18,586 |   |
| Vita Specialty Foods                     | ** ** | **10,979** | ** ** | 8,751      |       |
|                                     |       |       | ** ** |       |       |
| Total Assets                             | ** ** | **$**      | **27,013** | ** ** | $          | 27,337 |   |
|                                     |       |       | ** ** |       |       |
| **Net Sales**                            |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **16,594** | ** ** | $          | 17,335 |   |
| Vita Specialty Foods                     | ** ** | **16,076** | ** ** | 17,510     |       |
|                                     |       |       | ** ** |       |       |
| Total Net Sales                          | ** ** | **$**      | **32,670** | ** ** | $          | 34,845 |   |
|                                     |       |       | ** ** |       |       |
| **Operating Profit (Loss)**              |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **(1,051** | **)**      | $          | (1,261 | ) |
| Vita Specialty Foods                     | ** ** | **1,020**  | ** ** | 719        |       |
|                                     |       |       | ** ** |       |       |
| Total Operating Loss                     | ** ** | **$**      | **(31**    | **)**      | $          | (542 | ) |
|                                     |       |       | ** ** |       |       |
| **Net Income (Loss)**                    |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **(891**   | **)**      | $          | (918 | ) |
| Vita Specialty Foods                     | ** ** | **428**    | ** ** | 263        |       |
|                                     |       |       | ** ** |       |       |
| Total Net Loss                           | ** ** | **$**      | **(463**   | **)**      | $          | (655 | ) |
|                                     |       |       | ** ** |       |       |
| **Depreciation and Amortization**        |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **378**    | ** ** | $          | 370 |   |
| Vita Specialty Foods                     | ** ** | **341**    | ** ** | 353        |       |
|                                     |       |       | ** ** |       |       |
| Total Depreciation and Amortization      | ** ** | **$**      | **719**    | ** ** | $          | 723 |   |
|                                     | ** ** | ** ** | ** ** |       |       |
| **Capital Expenditures**                 |       |       | ** ** |       |       |
| Vita                                     | ** ** | **$**      | **121**    | ** ** | $          | 579 |   |
| Vita Specialty Foods                     | ** ** | **710**    | ** ** | 424        |       |
|                                     |       |       | ** ** |       |       |
| Total Capital Expenditures               | ** ** | **$**      | **831**    | ** ** | $          | 1,003 |   |

 

----

(a) Prior to a fourthquarter 2004 impairment charge.

 

8

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**Accounting for Stock BasedCompensation**

 

The Company applies the intrinsic value methodunder APB Opinion 25 and related interpretations in accounting for itsplans.  No compensation cost has beenrecognized for its 1996 Stock Option Plan, 1996 Stock Option Plan forNon-Employee Directors and 1996 Employee Stock Purchase Plan, as the marketprice of the stock did not exceed the exercise price of the options granted onthe measurement date.

 

**The Company is required to provide pro forma disclosures ofnet income (loss) and earnings (loss) per share as if the Company adopted thefair value method to account for stock based compensation.  The weighted-average, grant date fair valueof stock options granted to employees during the period and theweighted-average significant assumptions used to determine those fair values,using a modified Black-Scholes option pricing model, and the pro forma effecton earnings (loss) of the fair value accounting for stock options are asfollows:**

 
| ** **                                       | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|--------------------------------------------------|------------|------------------|------------|-----------------|------------|
| **For the Period Ending  September 30,**    | ** ** | **2005**         | ** ** | **2004**        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted  average fair value per options granted |       | $                | 1.63       |            | N/A        |   | $ | 1.73 |   | $ | 4.42 |   |
|                                             |       |             |       |            |       |   |   |   |   |
| Significant  assumptions (weighted average)      |       |             |       |            |       |   |   |   |   |
| Risk-free interest rate at grant date            |       | 4.2              | %          | N/A             |       | 4.2 | % | 4.1 | % |
| Expected stock price volatility                  |       | 0.66             |       | N/A             |       | 0.67 |   | 0.69 |   |
| Expected dividend payout                         |       | —           |       | N/A             |       | — |   | — |   |
| Expected option life (years)                     |       | 5                |       | N/A             |       | 5 |   | 5 |   |
|                                             |       |             |       |            |       |   |   |   |   |
| Net loss                                         |       |             |       |            |       |   |   |   |   |
| As reported                                      |       | $                | (256,965   | )               | $          | (276,432 | ) | $ | (463,069 | ) | $ | (654,719 | ) |
| Deduct total stock based compensation expense    |       |             |       |            |       |   |   |   |   |
| determined under the fair value method           |       | (14,670          | )          | 0               |       | (59,835 | ) | (132,660 | ) |
| Pro forma                                        |       | $                | (271,635   | )               | $          | (276,432 | ) | $ | (522,904 | ) | $ | (787,379 | ) |
|                                             |       |             |       |            |       |   |   |   |   |
| Basic loss  per share                            |       |             |       |            |       |   |   |   |   |
| As reported                                      |       | $                | (0.07      | )               | $          | (0.07 | ) | $ | (0.12 | ) | $ | (0.17 | ) |
| Pro forma                                        |       | $                | (0.07      | )               | $          | (0.07 | ) | $ | (0.14 | ) | $ | (0.21 | ) |
|                                             |       |             |       |            |       |   |   |   |   |
| Diluted loss  per share                          |       |             |       |            |       |   |   |   |   |
| As reported                                      |       | $                | (0.07      | )               | $          | (0.07 | ) | $ | (0.12 | ) | $ | (0.17 | ) |
| Pro forma                                        |       | $                | (0.07      | )               | $          | (0.07 | ) | $ | (0.14 | ) | $ | (0.21 | ) |

 

9

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### **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

***Comparison of the Three Months Ended September 30,2005 and September 30, 2004***

 

***Revenues.***  Net sales for the three months ended September 30,2005 were $11,418,000, compared to $11,575,000 for the same period in 2004, adecrease of $157,000 or 1.4%.  Thisdecrease is attributable to Vita Seafood, which experienced a decrease of$411,000, or 6.6%, led by a decline of $372,000 in its line of herring products;additional decreases were also reflected in the salmon product line of $60,000,and in the specialty product line of $23,000; offset partially by lower returnsand allowances of $44,000.  The reducedherring volume is primarily attributable to one customer, which substantiallyincreased purchases during the prior year quarter but did not repeat suchvolume during the current year quarter. Partially offsetting the decrease in net sales from Vita Seafood was anincrease of $254,000, or 4.8%, for the Vita Specialty Foods business, which wasthe result of a $259,000 or 46.3% improvement in sales deductions as the higherlevel of promotional allowances experienced in 2004 was, as planned, notrepeated in 2005.  Herring, salmon, andspecialty product sales represented 46%, 50% and 4% respectively, of VitaSeafood’s total gross sales during the current period compared to 49%, 47%, and4%, during the prior year quarter.  Saladdressings/sauces, honey products and specialty items, represented 77%, 22% and1%, respectively, of Vita Specialty Foods current quarter total gross salescompared to 73%, 25% and 2% during the prior year quarter.

 

***Gross Margin.***  Gross margin for the three months ended September 30,2005 was $3,227,000, compared to $3,060,000 for the same period in 2004, anincrease of $167,000 or 5.5%.  The VitaSpecialty Foods business accounted for $206,000 of this increase and a declineof $39,000 was attributable to the Vita Seafood business.  As a percent of net sales, gross margintotaled 28.3%, up from 26.4% for the same period in 2004.  Gross margin for the Vita Specialty Foodsbusiness, as a percentage of net sales, increased to 33.3% from 31.0% for thesame period in 2004.  This improvementwas largely a result of the reduced sales deductions as described above.  For the Vita Seafood business, gross marginas a percent of net sales also increased, rising to 23.5% for the currentquarter versus 22.6% for the same period in 2004.  This improvement was attributable to thecombination of several factors including a sales mix shift away from the lowermargin resale salmon products in favor of the higher margin manufactured items,a selling price increase in the herring product line, lower sales deductionsand some reductions in salmon material purchase costs.

 

***Operating Expenses****.*  Selling, marketing,distribution and administrative expenses for the three months ended September 30,2005 were $3,364,000, compared to $3,328,000 for the same period in 2004, anincrease of $36,000 or 1.1%.  Theseexpenses represented 29.5% of sales for the quarter ending September 30,2005 compared to 28.8% for the same period in 2004.  The increased dollar amount of these expensesresulted from a $74,000 increase in administrative expenses net of a $38,000decrease in selling, marketing and distribution expenses.  Excluding the effect of a 2004reclassification of employment expenses between selling and administrative, thetotal administrative category was unchanged between years 2004 and 2005 and theselling, marketing and distribution expenses increased $36,000.  The largest single factor affecting theincreased selling, marketing and distribution category was demonstrationexpenses for Vita Specialty Foods, which increased $103,000 primarily forincreased activity at one major customer. The higher costs for demonstrations were partially offset by $74,000 ofplanned reductions of other Vita Specialty Foods marketing expenses

 

***Interest Expense.***  Interest expense for the three months ended September 30,2005 was $292,000, compared to $193,000 for the same period in 2004, anincrease of $99,000 or 51.3%.  Duringthis period, the average debt increased to $17,200,000 from $16,600,000 or only3.6% compared to the third quarter of the prior year, thus the increase ininterest expense was primarily attributable to higher effective interest ratesunder the Company’s Loan Agreement.

 

***Income Taxes.*** The Company recognized benefits of $172,000and $184,000 for the quarters ending September 30, 2005 and September 30,2004, respectively.  These benefitsrepresent approximately 40% of pretax losses for those periods.

 

***Net Loss.***  Reflecting the operating results describedabove, the net loss for the three months ended September 30, 2005 totaled$(257,000) or $(0.07) per share on both a basic and fully diluted basis.  This compares to a net loss of $(276,000) forthe same period in 2004, also $(0.07) per share on both bases.

 

10

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***Comparison of the Nine Months Ended September 30,2005 and September 30, 2004***

 

***Revenues.***  Net sales for the nine months ended September 30,2005 were $32,670,000, compared to $34,845,000 for the same period in 2004, adecrease of $2,175,000 or 6.2%.  Of thisdecrease, $1,434,000 is attributable to Vita Specialty Foods, representing areduction of 8.2%, and $741,000 is attributable to Vita Seafood, representing areduction of 4.3%.  The decrease in theVita Specialty Foods business is a reflection in part, of gross sales of honeyproducts which decreased $1,138,000 as a result of both a market driven pricereduction and certain 2004 sales of bulk material that were not repeated in2005.  Furthermore, gross sales of saladdressings decreased by $637,000 primarily due to a large first time purchase byone customer during 2004 not recurring in 2005. Additionally, resale and other products decreased by $305,000, largelyas a result of a decision to phase out the resale packaging business.  Partially offsetting the declines in thesethree product lines was a $236,000 increase in the line of sauces; the greatmajority of this increase representing an annual sales transaction with asingle customer.  The sales declines inthe Vita Specialty Foods product lines were partially offset by a $409,000sales deduction improvement, the majority of which reflects planned reductionsin promotional allowances.  Added to thedecrease from Vita Specialty Foods was a decline of $741,000, or 4.3%, for theVita Seafood business, which was primarily the result of a $861,000 or 9.2%decrease in gross sales of herring products as a result of lower demand, net ofa $203,000 or 15.8% improvement in sales deductions.  Herring, salmon, and specialty product salesrepresented 48%, 48% and 4%, respectively, of Vita Seafood’s total gross salesduring the current period compared to 51%, 45%, and 4%, respectively, duringthe previous year.  Saladdressings/sauces, honey products and specialty items, represented 75%, 24% and1%, respectively, of the Vita Specialty Foods total gross sales during thecurrent period compared to 70%, 28%, and 2%, respectively, during the previousyear.

 

***Gross Margin.***  Gross margin for the nine months ended September 30,2005 was $10,104,000, compared to $10,005,000 for the same period in 2004, anincrease of $99,000 or 1.0%.  An increaseof $137,000 was attributable to the Vita Seafood business, however the VitaSpecialty Foods business accounted for a decrease of $38,000.  As a percent of net sales, gross marginincreased to 30.9%, from 28.7% for the same period in 2004.  Despite the sales decrease, gross margin forthe Vita Specialty Foods business, as a percentage of net sales, increased to37.1% from 34.2% for the same period in 2004, largely as a result of the salesmix shift in favor of the higher margin salad dressing and sauces and away fromthe lower margin honey products plus the benefit of the lower salesdeductions.  For the Vita Seafoodbusiness, gross margin as a percent of net sales increased to 25.0% for thecurrent year versus 23.1% for the same period in 2004.  This improvement was attributable to the samecombination of factors which resulted in the quarterly improvement.  These factors included a sales mix shift awayfrom the lower margin resale salmon products in favor of the higher marginmanufactured items, a selling price increase in the herring product line, lowersales deductions and some reductions in salmon material purchase costs.

 

***Operating Expenses****.*  Selling, marketing,distribution and administrative expenses for the nine months ended September 30,2005 were $10,135,000, compared to $10,547,000 for the same period in 2004, animprovement of $412,000 or 3.9%.  As apercentage of net sales, these expenses were 31.0% compared with 30.3% in 2004.  This reduction in expenses was the result ofa decrease of $486,000 or 6.7%, in the selling, marketing and distributionexpense category with administrative expenses increasing $74,000 or 2.3%.  The improvement in selling, marketing anddistribution expense was the result of a $375,000 improvement for VitaSpecialty Foods plus an improvement of $111,000 for Vita Seafood.  This spending reduction included $237,000attributable to distribution expenses, primarily freight-out costs; $82,000 inmarketing and promotion expenses and $167,000 in selling expenses, largelysalaries.

 

***Interest Expense.***  Interest expense for the nine months ended September 30,2005 was $741,000, compared to $549,000 for the same period in 2004, anincrease of $192,000 or 35.0%.  Theaverage debt remained relatively steady, averaging approximately $16,300,000for the first nine months of both years. Thus, the increase in interest expense was attributable to highereffective interest rates under the Company’s Loan Agreement.

 

***Income Taxes.*** The Company recognized benefits of $309,000and $436,000, respectively, for the nine-month periods ending September 30,2005 and 2004.  These benefits representapproximately 40% of pretax loss for both periods.

 

***Net Loss.***  Reflecting the operating results describedabove, the net loss for the nine months ended September 30, 2005 totaled$(463,000) or $(0.12) per share on both a basic and fully diluted basis.  This compares to a net loss of $(655,000) forthe same period in 2004 or $(0.17) per share on both bases, thus representing animprovement of $0.05 per share.

 

11

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#### **FinancialCondition**

 

At September 30, 2005, the Company had $9,169,000 in workingcapital, versus $7,766,000 at December 31, 2004, and due to theclassification of the bank debt as current liabilities, a negative $ (125,000)at September 30, 2004.  The currentratio at September 30, 2005 was 2.7 to 1.0 compared to 1.1 to 1.0 at September 30,2004 and 2.6 to 1.0 at December 31, 2004. Due to the seasonality of the business, it is typical for a reduction inthe Company’s current assets to occur during the first nine months of each yearsince this period follows the fourth quarter peak of the annual businesscycle.  However, this year, the currentassets increased $1,828,000 of which $1,618,000 represented an increase ininventory as the Company made significant purchases of raw honey in advance ofexpected price increases for this commodity. The increase in current liabilities was $475,000, resulting primarilyfrom a $1,196,000 increase in accounts payable which reflect the higherinventory purchases net of a $840,000 reduction in the current portion of debtfollowing a payment in accordance with the terms of the Virginia Honey earn outagreement.

 

At September 30, 2005, the Company had $35,000 in cash, a revolvingcredit facility of $10,000,000 and term facilities totaling $6,650,000,consisting of a $6,500,000 facility that represents the Company’s long termborrowing, Term Loan A and a $150,000 capital expenditure line of credit, TermLoan B.  The revolving loan facilitymatures January 31, 2007 (as amended in August 2005) and Term Loan Ais payable in monthly installments of $80,000 through July 31, 2008, witha balloon payment of $3,682,000 due on August 31, 2008.  Term Loan B is payable in monthly installmentsof 1/60th of the total principal, beginning on the last business day of August,2006 and continuing monthly through May 31, 2010 with any remaining amountpayable on June 30, 2010.  Amountsoutstanding under the revolving facility, the Term A and Term B facilities at September 30,2005 were $9,162,000, $6,403,000 and $48,000 respectively.  The interest rates on these facilities havebeen determined, subject to adjustment at certain predetermined dates, basedupon the Funded Debt to EBITDA ratio as each such term is defined in the LoanAgreement.  The Loan Agreement containscustomary representations, warranties and covenants (as amended in August 2005and amended again in November 2005). The impact of the Company’s loss on earnings before income taxes,depreciation and amortization for the twelve months ended September 30,2005 resulted in non-compliance with one of the Company’s debt covenants atthat date.  However, the Company receiveda permanent waiver from its lender relating to such non-compliance.  The Company’s lender also has approved a newamendment to the Loan and Security Agreement that changes the Company’s debtcovenants and other provisions.  TheCompany believes that the new debt covenants will be attainable.  In April 2005, the bank provided theCompany with a temporary overdraft of $800,000 due September 2005 (asamended in June 2005).  As part ofthe August 2005 amendment, the overadvance was extended through January 30,2006.  In November 2005 the bankapproved a new overadvance schedule with overadvance amounts set at$1,500,000 from November 1 through November 30, 2005; $1,000,000 fromDecember 1 through December 31, 2005; and $250,000 from January 1through January 31, 2006.  As of September 30,2005, the interest rates on the revolving line of credit and the term loanswere prime plus 0.5%.

 

The ratio of long-term debt to totalcapitalization totaled 78% at September 30, 2005 up from 71% at December 31,2004.  The Company believes its financialresources are adequate to fund its needs for the next twelve months.

 

***Cash flows from operating activities.***Net cash used in operating activities was $467,000 for the nine months ended September 30,2005, primarily reflecting $1,618,000 used to increase inventory, net of a$1,196,000 provided from increased accounts payable.  The net cash used in operating activities forthe current nine month period is $2,537,000 less than the $2,070,000 providedduring the same period in 2004.  Thisdecrease was primarily attributable to less net collections of accountsreceivable during the period of $1,753,000 while using an additional $1,569,000to increase inventory, both partially offset by $887,000 of additional cashprovided from the increase in accounts payable. The reduced collections of accounts receivable is primarily due to alower beginning of the year balance for 2005 compared to 2004.  The inventory was increased as a result of amanagement decision in anticipation of rising market costs of raw honey.  The increase in accounts payable is associatedwith the higher raw materials purchases.

 

***Cash flows from investing activities.***Net cash used in investing activities was $877,000 for the nine months ended September 30,2005, which was $177,000 less than the $1,054,000 used during the same periodof the prior year.  The decreased cashusage primarily represents lower purchases of machinery and equipment this yearcompared to the prior year.  However, theCompany anticipates that such lower capital investing will be only temporary,as several new product and process initiatives are currently being explored bythe Company’s new members of operations and marketing management.

 

12

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***Cash flows from financing activities.***Net cash provided by financing activities was $1,324,000 for the nine monthsended September 30, 2005, primarily reflecting the $1,484,000 additionalnet borrowing on the revolving loan and $1,299,000 additional borrowing on theterm loan, offset by the $635,000 term loan installment payments and the$840,000 earnout payment made in April 2005 under the provisions of theVirginia Honey acquisition agreement which amount had been included in thecurrent portion of long term maturities at December 31, 2004.  The cash thus provided in the current yearcontrasts to the $1,065,000 used, primarily to pay down debt, during the sameperiod in 2004, a difference of $2,339,000. The need to borrow cash in the current year is a result of the cash usedin operating and investing activities as described above.

 

#### **Seasonality**

 

The Vita segment of the Company’sbusiness is seasonal in nature, primarily resulting from the effect of thetiming of certain holidays on the demand for certain products. Historically,the Company’s sales and profits have been substantially higher in the fourthquarter of each year.

 

**Critical Accounting Policies andEstimates**

 

The Company’s financial statements reflect theselection and application of accounting policies that require management tomake significant estimates and assumptions. The Company believes that the following are some of the more criticaljudgment areas in the application of its accounting policies that currentlyaffect the Company’s financial condition and 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-goingbasis, the Company evaluates its estimates, including those related torevenues, returns, bad debts, income taxes and contingencies andlitigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Revenue is recognized upon shipment of product tocustomers in fulfillment of customer orders. In accordance with industry practices, inventory is sold to customersoften with the right to return or dispose if the merchandise is not sold priorto the expiration of its shelf life.  Inorder to support the Company’s products, various marketing programs are offeredto customers which reimburse them for a portion or all of their promotionalactivities related to the Company’s products. The Company regularly reviews and revises, when it deems necessary,estimates of costs to the Company for these marketing and merchandisingprograms based on estimates of what has been incurred by customers.  Actual costs incurred by the Company maydiffer significantly if factors such as the level and success of the customers’programs or other conditions differ from expectations.  Sales are reduced by a provision forestimated future returns, 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 future tax consequences, theCompany considers expected future events other than enactments of changes intax laws or rates.  A valuation reserveis recognized based on the evidence available; if it is more likely than notthat some portion or 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 atleast annually.  Factors the Companyconsiders important, which could trigger an impairment review include thefollowing:

 

•                  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 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.

 

13

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During the fourth quarters of 2003 and 2002, 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).  Thoseassessments, supported by independent appraisals of the fair value of VitaSpecialty Foods, did not identify any impairment.  However, the 2004 independent appraisal –made using customary valuation methodologies including discounted cash flowsand fundamental analysis, did reveal impairment issues.  The revised appraisal reflected a decreasedfair value of Vita Specialty Foods, principally caused by the decline inoperating income during 2004.  Thatdecline was primarily a result of a substantial reduction in the sales ofHalifax products – which were down $1,600,000 or 21% in 2004.  Based on the appraised value of VitaSpecialty Foods, the resulting impairment charge of approximately $2,314,000was recorded in the fourth quarter of 2004.

 

#### **Forward-LookingStatements**

#### ** **

Certain statements in this report,including statements in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” are “forward-looking statements” asdefined by the Federal securities laws. Such statements are based on management’scurrent expectations and involve known and unknown risks and uncertaintieswhich may cause the Company’s actual results, performance or achievements todiffer materially from any results, performance or achievements expressed orimplied in 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 raw materials, changes in raw materialprocurement costs, fluctuations in the market cost of major commodities such ashoney, changes in energy costs, the introduction and success of new products,changes in economic and market conditions, integration and management ofacquired businesses, the seasonality of Vita’s business, the Company’s abilityto attract and retain key personnel, the Company’s ability to maintain itsrelationships with key vendors and retailers, consolidation of the Company’scustomer and supplier base, the potential impact of claims and litigation, theeffects of competition in the Company’s markets and the dietary habits andtrends of the general public.  In lightof these and other risks and uncertainties, the Company makes no representationthat any future results, performance or achievements expressed or implied inthis report will be attained. The Company’s actual results may differmaterially from any results expressed or implied by the forward-lookingstatements, especially when measured on a quarterly basis.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

The Company is exposedto interest rate fluctuations, primarily as a result of its $16 million LoanAgreement with interest rates subject to market fluctuations.  The Company does not currently use derivativeinstruments to alter the interest rate characteristics of any of its debt.  The Loan Agreement includes a revolving lineof credit with a bank, which at September 30, 2005 bore interest at theprime rate plus 0.5% resulting in a 7.25% rate. In addition, the Loan Agreement includes two term loan facilities bothof which at September 30, 2005 bore interest at the prime rate plus 0.5%resulting in a 7.25% rate.  Through September 2005,the Loan Agreement has been amended to, among other things, set the interestrates as described above.  A 10%fluctuation in interest rates would not have a material impact on the Company’sfinancial statements.

 

**Item 4.  Controls and Procedures**

 

Under the supervision and with the participation ofthe Company’s management team, the principal executive officer and principalfinancial officer have evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures as defined in Rules 13a– 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), as of September 30, 2005 and, based on theirevaluation, have concluded that these controls and procedures areeffective.  There were no changes in theCompany’s internal control over financial reporting during the fiscal quarterended September 30, 2005 that have materially affected, or are reasonablelikely to materially affect, the Company’s internal control over financialreporting.

 

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

 

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It should be noted that any system ofcontrols, however well designed and operated, can provide only reasonable, andnot absolute, assurance that the objectives of the system are met. In addition,the design of any control system is based in part upon certain assumptionsabout the 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- OTHER INFORMATION**

 

#### **Item 6.  Exhibits**

 

31.1                           PrincipalExecutive Officer Certification pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2                           PrincipalFinancial Officer Certification pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                           PrincipalExecutive Officer Certification pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2                           PrincipalFinancial Officer Certification pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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## **SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |                   | **VITA FOOD PRODUCTS, INC.**                        |
|--------|------------------------|-----------------------------------------------------|
|   |                   |                                                |   |
|   |                   |                                                |   |
| Date:  | November 14, 2005 | By:                                                 | /s/ Stephen  D. Rubin |   |
|   |                   |                                                | Stephen D.  Rubin |   |
|   |                   |                                                | *President* |   |
|   |                   |                                                | (*Principal Executive Officer*) |   |
|   |                   |                                                |   |   |
|   |                   |                                                |   |   |
| Date:  | November 14, 2005 | By:                                                 | /s/ Clifford  K. Bolen |   |
|   |                   |                                                | Clifford K.  Bolen |   |
|   |                   | *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 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.  |

 

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