UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
Commission File No. 0-3026
PARADISE, INC.
INCORPORATED IN FLORIDA
IRS IDENTIFICATION NO. 59-1007583
1200 DR. MARTIN LUTHER KING, JR., BLVD.
PLANT CITY, FLORIDA 33563
TELEPHONE NO. (813) 752-1155
Securities Registered Under Section 12 (b) of the Exchange Act:
None
Securities Registered Under Section 12 (g) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock,
$.30 Par Value None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. Yes x No
--- ---
Issuer's revenues for its most recent fiscal year: $ 24,951,824
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, $5,278,929 (as of January 31, 2006, bid price $17.50)
Class Outstanding at December 31, 2005
----------- --------------------------------
Common Stock,
$.30 Par Value 519,350 Shares
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No x
--- ---
Transitional Small Business Disclosure Format (check one): Yes No x
--- ---
PARADISE, INC.
==============
2005 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
-----------------
PART I
--------
Item 1. Description of Business I-1 - I-5
Item 2. Description of Property I-5
Item 3. Legal Proceedings I-5
Item 4. Submission of Matters to a Vote of
Security Holders I-5
PART II
---------
Item 5. Market for Common Equity and
Related Stockholder Matters II-1 - II-2
Item 6. Management's Discussion and Analysis or
Plan of Operation II-3 - II-9
Item 7. Financial Statements II-10 - II-39
Item 8. Changes In and Disagreements with Accountants
On Accounting and Financial Disclosure II-40
Item 8A. Controls and Procedures II-40
PART III
----------
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section 16(a) of
The Exchange Act III-1 - III-2
Item 10. Executive Compensation III-3 - III-4
Item 11. Security Ownership of Certain Beneficial Owners
And Management III-4 - III-5
Item 12. Certain Relationships and Related Transactions III-6
Item 13. Exhibits and Reports on Form 8-K III-6
Item 14. Principal Accountant Fees and Services III-7
SIGNATURES III-8
PART I
Item 1. Description of Business
-----------------------
Forward-Looking Statements
This Annual Report on Form 10-KSB contains "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical fact should
be considered "forward-looking statements" for purposes of these
provisions, including statements that include projections of, or
expectations about, earnings, revenues or other financial items, statements
about our plans and objectives for future operations, statements concerning
proposed new products or services, statements regarding future economic
conditions or performance, statements concerning our expectations regarding
the attraction and retention of customers, statements about market risk and
statements underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of such terminology as "may,"
"will," "expects," "plans," "anticipates," "intends," "believes,"
"estimates," "potential," or "continue," or the negative thereof or
other similar words. Although we believe that the expectations reflected
in our forward-looking statements are reasonable, we can give no assurance
that such expectations or any of our forward-looking statements will prove
to be correct. Actual results and developments are likely to be different
from, and may be materially different from, those expressed or implied by
our forward-looking statements. Forward-looking statements are subject to
inherent risks and uncertainties.
(a) Business Development
--------------------
Paradise, Inc., was incorporated under the laws of the State of Florida
in September, 1961 as Canaveral Utilities and Development Corporation.
After the acquisition and merger of several other assets, the Corporation
was renamed Paradise Fruit Company, Inc. in February, 1964, and the
corporate name was changed again to Paradise, Inc. during July, 1993.
There have been no bankruptcies, receiverships, or similar proceedings
during the corporation's history. There have been no material
reclassifications, mergers, consolidations, purchases or sales of a
significant amount of assets not in the ordinary course of business
during the past three years.
(b) The Company's operations are conducted through two business segments.
These segments, and the primary operations of each, are as follows:
BUSINESS SEGMENT OPERATION
------------------ --------------------
Candied Fruit Production of candied fruit, a basic
fruitcake ingredient, sold to
manufacturing bakers, institutional users,
and retailers for use in home baking.
Also, based on market conditions, the
processing of frozen strawberry products for
sale to commercial and institutional users
I-1
Item 1. Description of Business (Continued)
such as preservers, dairies, drink
manufacturers, etc.
Molded Plastics Production of plastic containers for the
Company's products and other molded
plastics for sale to unaffiliated
customers.
For further segment information, refer to Note 13 in Part II, Item 7 of
this Annual Report.
The Company knows of no other manufacturer in the Western Hemisphere
whose sales of glace' (candied) fruit is equal to those of Paradise, Inc.
While there are no industry statistics published, from the generally
reliable sources available, management believes that Company brands
account for a large majority of all candied fruit sold in supermarkets
and other grocery outlets in the USA.
In terms of candied fruit dollar sales, during 2005, approximately 20%
were shipped to manufacturing bakers and other institutional users, with
the balance being sold through supermarkets and other retail outlets for
ultimate use in the home.
Sales to retail outlets are usually generated through registered food
brokers operating in exclusively franchised territories. This method of
distribution is widely accepted in the food industry because of its
efficiency and economy.
The principal raw materials used by the Company are fruits, fruit peels,
corn syrups and plastic resins. Most of these materials are readily
accessible from a number of competitive suppliers. The supply and prices
may fluctuate with growing and crop conditions, factors common to all
agricultural products. Feed stocks for some plastic resins are petroleum
related and may be subject to supply and demand fluctuations in this
market.
The trademarks "Paradise", "Dixie", "Mor-Fruit" and "Sun-Ripe" are
registered with the appropriate Federal and State authorities for use on
the Company's candied fruit. These registrations are kept current, as
required, and have a value in terms of customer recognition. The Company
is also licensed to use the trademarks "White Swan", "Queen Anne", "Palm
Beach", "Golden Crown," and "Pennant" in the sale of candied fruit.
The demand for fruit cake materials is highly seasonal, with over 85% of
sales in these items occurring during the months of September, October
and November. However, in order to meet delivery requirements during
this relatively short period, the Company must process candied fruit and
peels for approximately ten months during the year. Also, the Company
must acquire the fruits used as raw materials during their seasonal
growing periods. These factors result in large inventories, which
require financing to meet relatively large short-term working capital
needs.
During 1993, and through another wholly owned subsidiary, the Company
I-2
Item 1. Description of Business (Continued)
launched an enterprise for the growing and selling of strawberries, both
fresh and frozen. Plant City, Florida, the location of the Company's
manufacturing facilities and main office, styles itself as the "The
Winter Strawberry Capital" because of the relatively large volume of
fruit that is grown and harvested locally, mostly from December through
April of each season. However, once competing fresh berries from the
West Coast of the USA begin finding their way to market, the price of
Florida fruit begins to diminish, and local growers had no other market
for their product.
While there are significant freight cost advantages in the sale and
marketing of local strawberries to customers in the eastern U.S., growers
and producers on the West Coast, from southern California to Washington
state, still dominate pricing and marketing conditions. The Company
estimates more than 90% of total U.S. strawberry production is located in
that area.
Therefore, Paradise, Inc. limits its activities in this market to years
in which basic supply and demand statistics, such as West Coast harvest
predictions and frozen strawberry prior year inventory carryovers, lead
to a reasonable anticipation of profitability.
In the plastics molding segment of business, sales to unaffiliated
customers continue to strengthen. This trend began several years ago
when management shifted its focus from the sale of high volume, low
profit "generics" to higher technology value added custom applications.
Some molded plastics container demand is seasonal, by virtue of the fact
that a substantial portion of sales are made to packers of food items and
horticultural interests, with well defined growing and/or harvest
seasons.
In the opinion of management, the seasonal nature of some plastics sales
does not have a significant impact upon the working capital requirements
of the Company.
During the first several months of the year, the Company contracts with
certain commercial bakers for future delivery of quantities representing
a substantial portion of the sales of fruit cake materials to
institutional users. Deliveries against these contracts are completed
prior to the close of the fiscal year ending December 31.
Many of the commercial bakers and other institutional accounts face the
same seasonal demands as the Company, and must contend with similar
short-term working capital needs. The Company accommodates some of these
customers with extended payment terms of up to ninety days.
By the same token, many suppliers offer similar extended payment terms to
the Company.
It is a trade practice to allow some supermarket chains to return
unopened cases of candied fruit products that remain unsold at year-end,
an option for which they normally pay a premium. A provision for the
estimated losses on retail returns is included in the Company's financial
I-3
Item 1. Description of Business (Continued)
statements, for the year during which the sales are made.
With the continuing acquisitions, mergers and other consolidations in the
supermarket industry, there is increasing concentration of candied fruit
buying activity. During 2005, the Company derived nearly 13% of its
consolidated revenues from Wal-Mart Stores, Inc. This customer is not
affiliated with Paradise, Inc. in any way, and has exclusive use of a
Paradise-owned controlled brand. In addition, plastics sales to Aqua Cal,
Inc. accounted for 16% of the Company's consolidated revenues. The loss of
any of these customers would have a material adverse effect on operating
earnings.
While there is no industry-wide data available, management estimates that
the Company sold approximately 65-75% of all candied fruits and peels
consumed in the U.S. during 2005. The Company knows of two major
competitors; however, it estimates that none of these has as large a
share of the market as the Company's.
The molded plastics industry is very large and diverse, and management
has no reasonable estimate of its total size. Many products produced by
the Company are materials for its own use in the packaging of candied
fruits for sale at the retail level. Outside sales represent
approximately 80% of the Company's total plastics production at cost,
and, in terms of the overall market, are insignificant.
In the above business segments, it is the opinion of management that
price, which is to include the cost of delivery, is the largest single
competitive factor, followed by product quality and customer service.
Given the above competitive criteria, it is the opinion of management,
that the Company is in a favorable position.
During recent years, the Company has made capital investments of over
$1 million in order to comply with the growing body of environmental
regulations. These have included the building of screening and
pretreatment facilities for water effluent, the redesign and rebuilding
of one processing department in order to improve the control of the
quality of air emissions, and removing underground fuel storage tanks to
approved above ground locations. All of these facilities are permitted
by governmental authorities at various levels, and are subjected to
periodic testing as a condition of permit maintenance and renewal. All
required permitting is currently in effect, and the Company is in full
compliance with all terms and conditions stated therein.
By local ordinance, it is required that all water effluent is metered,
tested and discharged into a municipal industrial waste treatment plant.
During 2005, costs for this discharge exceeded $300,000, and management
estimates that all expenses directly related to compliance with
environmental regulations total well over $400,000 annually, which
includes costs for permits, third party inspections and depreciation of
installations.
The Company employs between 140 and 275 people, depending upon the
season.
I-4
Item 1. Description of Business (Continued)
The Company conducts operations principally within the United States.
Foreign activities are not material.
Item 2. Description of Property
(a) Built in 1961, the plant is located in a modern industrial subdivision at
Plant City, Florida, approximately 20 miles east of the City of Tampa.
It is served by three railroad sidings, and has paved road access to
three major state and national highways. It has production and warehouse
facilities of nearly 350,000 sq. ft.
During 1985, the Company acquired approximately 5.2 acres immediately
adjacent to, and to the west of, its main plant building. Several
buildings and a truck weight scale existed on the property. Some of
these facilities have been significantly updated, remodeled, and/or
rebuilt and are used for the strawberry processing and some plastics
molding operations. Other facilities, in excess of the Company's current
needs, are leased to others.
The Company owns its plant facilities and other properties subject to a
secured note and real estate mortgages.
Because of the unique processing methods employed for candied fruit, much
of the equipment used by the Company is designed, built and assembled by
the Company's employees. The Company considers its plant one of the most
modern, automated plants in the industry. The equipment consists of
vats, dehydrators, tanks, giant evaporators, carbon filter presses, syrup
pumps and other scientifically designed processing equipment. Finished
retail packages are stored in air-conditioned warehouses, if required.
Regarding molded plastic manufacturing, most equipment is normally
available from a number of competitive sources. The molds used for
specialized plastic products must be individually designed and
manufactured, requiring substantial investment, and are considered
proprietary.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
I-5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On August 22, 1997 the Securities and Exchange Commission issued new
listing requirements for companies listed on the NASDAQ Small Cap Market.
The new requirements became effective on February 23, 1998. As of March
2006, the Company had not met the listing criteria.
(a) The following table shows the range of closing bid prices for the
Company's Common Stock in the over-the-counter market for the calendar
quarters indicated. The quotations represent prices in the over-the-
counter market between dealers in securities, do not include retail
mark-up, mark-down, or commissions and do not necessarily represent
actual transactions.
BID PRICES
High Low
------ ------
2005
First Quarter 22.00 20.10
Second Quarter 21.00 17.85
Third Quarter 19.00 17.05
Fourth Quarter 19.00 17.00
2004
First Quarter 29.00 23.00
Second Quarter 24.00 19.80
Third Quarter 22.50 20.50
Fourth Quarter 22.50 20.20
(b) Approximate Number of Equity Security Holders
As of December 31, 2005, the approximate number of holders of record of
each class of equity securities of the Registrant were:
NUMBER OF
TITLE OF CLASS HOLDERS OF RECORD
------------------- -----------------
Common Stock, $.30 Par Value 164
II-1
Item 5. Market for Common Equity and Related Stockholder Matters (Continued)
(c) Dividend History and Policy
Dividends have been declared and paid annually, only when warranted by
profitability. On February 9, 2006 the Board of Directors declared
dividends of $.15 per share for stockholders of record on April 14, 2006.
Dividends paid to stockholders for 2004 were $.10 and for 2003, $.20.
The Company does not have a standard policy in regards to the
declaration and payment of dividends. Each year dividend payments, if
any, are determined upon consideration of the current profitability,
cash flow requirements, investment outlook and other pertinent factors.
According to the covenants of a loan agreement, dated May 29, 1986,
amended several times thereafter, and in effect until June 8, 1995, the
declaration of dividends was specifically limited by certain financial
parameters. That agreement was modified in 1995, and while still
requiring the attainment of certain balance sheet ratios, specific
references to dividends were omitted.
II-2
Item 6. Management's Discussion and Analysis or Plan of Operation
Summary
The following tables set forth for the periods indicated (i) percentages
which certain items in the financial data bear to net sales of the Company
and (ii) percentage increase of such item as compared to the indicated
prior period.
RELATIONSHIP TO PERIOD TO PERIOD
TOTAL REVENUE INCREASE (DECREASE)
YEAR ENDED DECEMBER 31, YEARS ENDED
----------------------- --------------------
2005 2004 2003 2005-2004 2004-2003
---- ---- ---- --------- ---------
NET SALES:
Candied Fruit 67.8% 70.0% 77.0% 6.1% -4.0%
Molded Plastics 32.2 30.0 23.0 17.9 37.6
----- ----- ----- ---- ----
100.0 100.0 100.0 9.6 5.6
Cost of Sales 74.8 76.1 71.4 7.7 12.6
Selling, General and
Administrative Expense 20.1 19.4 20.1 13.7 1.6
Depreciation and
Amortization 3.4 3.6 3.5 5.8 6.6
Interest Expense 0.8 0.6 0.4 35.3 52.5
----- ----- ----- ----- -----
9.0 10.3
Income from Operations 0.9 0.3 4.6 209.2 -92.4
Gain on Sale of Land 2.8
Other Income, Net 0.2 0.2 0.1 0.7 46.0
----- ----- ----- ----- ----
Income Before Provision
for Income Taxes 3.9 0.5 4.7 713.8 -88.2
Provision for Income
Taxes 1.7 0.2 1.9 822.9 -89.2
----- ----- ----- ----- -----
Net Income 2.2% 0.3% 2.8% 647.6% -87.5%
===== ===== ===== ===== =====
(1) Liquidity
Management is not aware of any demands, commitments, events or uncertainties
that will result in, or are reasonably likely to result in, a material
increase or decrease in the Company's liquidity. One trend to be noted is
the Company's ability over the past three years to materially decrease its
short-term debt position while maintaining a consistent level of inventory.
As discussed in footnote 5 of the Company's financial statements, a line of
credit is available to the Company to finance short-term working capital
needs.
(2) Capital Resources
The Company does not have any material outstanding commitments for capital
expenditures. Management is not aware of any material trends either favorable
or unfavorable in the Company's capital resources.
II-3
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations
2005 Compared to 2004
---------------------
Despite the continuing challenges facing the grocery industry during 2005 and
coupled with the direct impact of Hurricane Katrina on the rising cost of
energy during the fourth quarter of 2005, Paradise, Inc. generated consolidated
net sales of $24,951,824 compared to $22,763,684 for 2004. This represents a
9.6% increase in consolidated net sales for 2005 compared to the previous year.
Paradise, Inc.'s glace' fruit segment net sales, representing 67.8% of total
consolidated net sales increased 6.1% for 2005 compared to 2004. This business
segment continues to benefit from management's decision during 2003 to develop
and implement a marketing campaign centered around the introduction of newly
designed labels for Paradise, Inc.'s brand glace' fruit products. These
labels include recipes for holiday baking ideas along with coupons redeemable
for the purchase of additional glace' fruit items. Based upon the initial
success of the program, management has expanded this labeling and coupon
program to several additional private label customers during 2005. Paradise,
Inc. is confident this program will continue to have a positive impact on
future glace' fruit segment sales.
Paradise Plastics, Inc., a wholly owned subsidiary of Paradise, Inc. generated
an increase in net sales to unaffiliated customers of 17.9% for 2005 compared
to the prior year. Several factors have contributed to this growth. First, as
disclosed in a previous filing, Paradise, Inc. purchased 100% of the
outstanding stock of Mastercraft Products Corporation, a Central Florida
plastics thermoformer on May 13, 2004. With additional support in the form of
increased production capacity from the Company's Plant City, Florida location,
sales to existing Mastercraft Products Corporation customers advanced by more
than 25% over the same comparable period of 2005 versus 2004. Secondly,
Paradise Plastics, Inc. continues to receive a steady increase in the volume of
purchase orders from both new and long-term customers who are benefiting from
the Company's ability to design high tech custom molded products for resale to
their customers.
With the increase in consolidated net sales for 2005 of $2,188,140 over 2004,
Paradise, Inc.'s accounts receivable balance as of December 31, 2005 increased
to $2,085,033 from $475,211 as of December 31, 2004. Subsequent to year-end,
customer payments have reduced this balance by more than $2,000,000.
Cost of goods sold expressed as a percentage of net sales within the fruit
segment decreased by 1% for 2005 compared to the prior year. This decrease is
evidenced by Paradise, Inc.'s ability to contract for favorable prices during
late 2004 and early 2005 for deliveries of certain raw fruit commodities during
the last season. As mentioned in previous filings, Paradise, Inc., in order to
meet the highly seasonal demands of its glace' fruit customers, must contract
and acquire product from its suppliers well in advance of its selling season in
order to ensure timely deliveries. Furthermore, prices for raw materials vary
at time of harvest based on changes in weather patterns, supply and demand,
market conditions and product availability. During 2005, Paradise, Inc. was
able to benefit from favorable market conditions and contract for various raw
II-4
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2005 Compared to 2004
---------------------
fruit products at prices ranging from 2-5% lower than in the previous year.
This is critical because the Company must quote annual selling prices to
supermarket customers in the spring and early summer for delivery during the
holiday season. An increase in consumer demand for Paradise, Inc. glace' fruit
products enabled the Company to distribute its fixed overhead over a larger
production base. The results of lower raw fruit material prices along with an
increase in production were greater than increases in labor, packaging
materials and various other energy related cost.
The plastics segment's cost of sales as a percentage of net sales decreased by
2%, for 2005 compared to 2004 as Paradise Plastics, Inc. was successful in
factoring into its selling prices corresponding cost increases for plastic
resins. With plastics raw materials produced from petroleum based products,
cost increases received from suppliers during the fourth quarter of 2005 place
great pressure on selling margins.
During the year, a customer dispute as to product quality resulted in a charge
to operations of $185,611. Selling, General and Administrative expenses for
2005 increased 13.7% compared to 2004 based on the following events: (1) the
Company negotiated a settlement with a national food brokerage firm to resolve
a dispute regarding certain marketing expenses; (2) due to changes in market
conditions and with competitive pricing alternatives, Paradise, Inc. terminated
its minority interest in its Mexican based supplier of pineapple; (3) Paradise,
Inc. also incurred selling expenses with the termination of a joint marketing
agreement with a West Coast distributor of frozen strawberry products; and (4)
the Company charged to bad debt expense a larger than usual balance of customer
receivables that were deemed to be uncollectible. The total effect of these
actions resulted in a current charge to operations of $303,129.
Depreciation and amortization expenses increased by 5.8% compared to the
previous year as capital expenditures outpaced the retirement of various assets
during the year.
Interest expense for 2005 increased by $49,411 compared to the prior year as
the Company absorbed several interest rate adjustments to its revolving line of
credit. Interest expense for the Company's short-term and long-term borrowings
still remains less than 1% of consolidated net sales.
During the fourth quarter of 2005, Paradise, Inc.'s Board of Directors
authorized and executed the sale of approximately 20 acres of land leased to
others for agricultural purposes. The property, which is located 10 miles from
the Company's Plant City, Florida headquarters, generated taxable income of
$697,266. This amount is disclosed on the Company's Consolidated Statement of
Income and Comprehensive Income.
The proceeds from this sale have been used to assist in the funding for
II-5
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2005 Compared to 2004
---------------------
Paradise Inc.'s new 10,000 square foot plastics facility at the Company's
headquarters. Scheduled to open during the first quarter of 2006, it will
facilitate the moving of Mastercraft production capacity to Plant City, Florida
and increase the plastic segment's production capabilities.
In summary, based upon the information above, Paradise, Inc. generated
consolidated net sales of $24,951,824 for 2005 compared to $22,763,684 for
2004. Net income for 2005 was $566,780 or $1.07 earnings per share compared to
net income for 2004 of $74,455 or $.14 earnings per share.
2004 Compared to 2003
---------------------
Paradise, Inc. is the leading producer of glace' fruit, a primary ingredient of
fruit cakes which are sold to manufacturing bakers, institutional users and
retailers throughout the United States leading up to and during the holiday
season of Thanksgiving and Christmas. Paradise, Inc.'s position in the
marketplace continues to be strong as management estimates the Company sells
approximately 65-75% of all glace' fruits products and peels consumed in the
United States. Furthermore, Paradise, Inc. remains the only company in the
glace' fruit industry with its own in-house plastics packaging facility. The
Company's in-house facility provides management with the ability to maintain a
consistent level of quality control throughout the entire cycle of processing,
packaging and distribution of its glace' fruit products to the marketplace.
During 2004, net sales within the Company's fruit segment, which represents 70%
of the Company's overall net sales, decreased by 4% compared to 2003. Directly
affecting this decrease was a decision by Sam's Club, a subsidiary of Wal-Mart
Stores, Inc. not to renew its annual commitment to purchase glace' fruit
products. Based on Sam's Club's 2003 level of purchasing activity, this
cancellation resulted in a 5% decrease in fruit segment net sales during 2004.
Excluding the cancellation from Sam's Club, fruit segment net sales produced a
slight increase of 1% compared to 2003 net sales. Reasons for this small
increase are directly attributable to the on-going competition and
consolidation of various national and regional supermarket chains who are
trying to compete with the growth of Wal-Mart Stores, Inc. and its affiliated
Sam's Club. Supermarkets pressured by reduced profit margins are finding it
necessary to close their less profitable locations and/or sell off various
assets in order to maintain profitability. Consequently, the reduction of
stores along with the pressure to remain profitable has limited the ability of
Paradise, Inc. to increase its sales volume and prices to its primary retail
customers during the past year.
For 2004, Paradise Plastics, Inc., a wholly owned subsidiary, contributed net
II-6
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2004 Compared to 2003
---------------------
sales to unaffiliated customers that accounted for 30% of overall Company net
sales, compared to 23% in 2003. This contribution includes $829,305 in net
sales activity from the acquisition of Mastercraft Products Corporation (MPC),
a Central Florida plastics thermoformer, during 2004. As mentioned in
Paradise, Inc.'s earlier filing, the Company acquired 100% of the outstanding
shares of MPC on May 13, 2004. Management is confident that the combination of
resources, capabilities and facilities will greatly enhance the sales of
plastics products currently offered to MPC's food, medical and other high-tech
customers located throughout the Southeast.
Excluding the net sales activity generated from Mastercraft Products
Corporation during 2004, plastics net sales to unaffiliated customers increased
by 21% compared to the prior year. The primary factor for this growth has been
management's ability to consistently produce high quality plastics products on
a timely basis, and offer engineering and design expertise to both new and
existing customers. Thus, as current customer needs expand, and Paradise
Plastics' growing resources and facilities open the potential for new
customers, management is confident that this segment of business will continue
to flourish.
Cost of goods sold expressed as a percentage of net sales increased 4.9%
compared to the prior year. One reason for this increase was the sharp rise in
energy costs, both to the Company and to the Company's suppliers of plastics
raw materials, who were forced to raise their prices dramatically during the
second half of 2004. Furthermore, increases in gasoline prices resulted in
increased transportation expenses in the form of surcharges from commercial
freight carriers used to ship the majority of Paradise, Inc.'s glace' fruit
products to its customers. It is trade practice to negotiate annual sales
contracts for glace' fruit months in advance of actual delivery dates.
Therefore, the Company was unable to pass along these increases in fuel cost.
As the price of energy continues to increase, Paradise, Inc. will make every
attempt to incorporate these increases into the Company's 2005 pricing
structure.
Finally, increases in cost of sales were also incurred in connection with the
Company's introduction of an expanded labeling and coupon redemption program
for private label brands. During the prior year, Paradise, Inc. introduced
this program for Company brands only.
Selling, general and administrative expenses as a percentage to net sales
decreased by less than 1% compared to the prior year. Increases received
relating to the Company's pension and health care programs were more than
offset by payroll reductions to the Company's executive and managerial staff.
Depreciation and amortization expenses as a percentage to net sales remained
relatively unchanged as additions to plant equipment were offset by an almost
equal amount of retirements or dispositions.
II-7
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2004 Compared to 2003
---------------------
Interest expense increased by $48,159 or 52% compared to the prior year as the
Company began to receive increases in interest rates charged by its commercial
lender on long-term debt and revolving short-term working capital loans.
In summary, with continuing turmoil and consolidation occurring within the
grocery industry, along with the cancellation of sales by Sam's Club, fruit
segments net sales decreased by 4% during 2004. Furthermore, increases in the
cost of plastics raw materials received from the Company's suppliers, due to
rising energy prices, added 4.8% to the Company's overall cost of sales. The
combination of these events produced net income of $74,455 or $.14 earnings per
share for 2004, compared to $597352 in net income or $1.15 earnings per share
for 2003.
2003 Compared to 2002
During 2003, Paradise, Inc. witnessed further consolidation within the grocery
industry along with the reduction of the number of food brokerage firms who
market the Company's products to supermarket customers. The dynamics of the
entire industry continue to change dramatically, with Wal-Mart and its
affiliates growing their share of almost every market. Due to this factor and
the unsettled state of the national economy, many of the Company's customers
continued to be cautious as to the level of inventory they were willing to
maintain on their shelves leading up to and through the holiday selling season.
Given the challenges this environment presents, Paradise, Inc.'s fruit segment
net sales, which accounted for 77% of the Company's overall net sales in 2003,
experienced a 9.6% decline compared to the prior year.
With a view toward creating new sales opportunities in this changing market,
Paradise, Inc., the nation's leading producer of glace' fruit, is developing
new innovative methods to enhance the marketing, advertising and distribution
of its glace' fruit products.
The Company launched several major initiatives to expand consumer awareness of
the Company's glace' fruit products during 2003. First, the Company rolled out
a new marketing campaign which centered on the introduction of highly visible
new labels for Paradise, Inc.'s brand name glace' fruit products. These labels
included a number of baking recipes along with coupons redeemable for the
purchase of additional glace' fruit. Secondly, the Company introduced a web
site specifically designed for its glace' fruit, providing a variety of
traditional holiday and year round recipes. The website also listed a toll
free number in which consumers with questions regarding the Company's glace'
fruit products could call to receive additional information.
Reaction to Paradise, Inc.'s 2003 marketing campaign and web site was well
received from both supermarket buyers and individual consumers. In fact,
suggestions regarding new baking ideas and recipe recommendations have already
been included in the Company's marketing plans for the upcoming selling season.
Paradise, Inc. is confident these changes will continue to have a positive
II-8
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2003 Compared to 2002
---------------------
impact on future glace' fruit sales.
The Plastics segment generated an increase of 4.3% in net sales to unaffiliated
customers, as compared to the prior year. Management continues to focus its
attention on the retention of customers who require a higher degree of
technology in the production of custom molding products. Plastics, which
contributed 23% of the Company's overall net sales during 2003 compared to 20%
for the prior year, will continue to play an important role in the future, as
the Company explores opportunities to expand its injection molding and
thermoforming operations. This segment also introduced its own web site
during 2003. Information highlighting product types are included on the web
site along with video illustrations of the production process of its custom
molding and thermoforming applications.
Cost of goods sold expressed as a percentage of net sales increased 4.8%
compared to the prior year. Contributing 1% to this increase was the sale of
frozen strawberry products held in inventory from the prior year. As of the
end of 2003, frozen strawberry inventory available for sale was depleted.
Other increases in cost of sales were due to higher prices paid for certain
raw materials within the fruit and plastics segments. Furthermore, increases
in cost of goods were incurred in connection with the Company's redesign and
production of its new labeling and coupon redemption program.
Selling, general and administrative expenses as a percentage to net sales
decreased less than 1% compared to the prior year. Increases in selling
expenses associated with Paradise, Inc.'s new labeling and coupon redemption
program were offset by decreases in administrative payroll. Depreciation and
amortization expenses declined 11% compared to the prior year as retirements
to the Company's fixed assets exceeded new additions.
Interest expense declined 45% compared to the prior year as Paradise, Inc.
continues to benefit from low interest rates charged by its commercial lender
on long-term debt and revolving short-term working capital loans.
In summary, with the reduction of net fruit sales combined with increases in
the cost of raw materials and marketing expenses to produce the Company's new
labeling and coupon program, Paradise, Inc. recorded after tax net income of
$597,352 for 2003 versus $1,205,419 for 2002. Earnings per share
were $1.15 in 2003 versus $2.32 in 2002. The effective tax rate for 2003 was
41.1% versus 40.8% for 2002.
II-9
Item 7. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
March 23, 2006
To the Board of Directors
and Shareholders of
Paradise, Inc.
Plant City, FL 33566
We have audited the accompanying consolidated balance sheets of Paradise, Inc.,
and subsidiaries as of December 31, 2005, 2004 and 2003, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paradise, Inc.,
and subsidiaries as of December 31, 2005, 2004 and 2003, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Respectfully submitted,
/s/ Bella, Hermida, Gillman, Hancock & Mueller
BELLA, HERMIDA, GILLMAN, HANCOCK & MUELLER
Certified Public Accountants
Plant City, Florida
II-10
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
DECEMBER 31,
2005 2004 2003
------ ------ ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,069,884 $ 3,258,811 $ 3,110,599
Accounts Receivable, Net of
Allowance for Doubtful
Accounts of $ -0- and
Allowance for Returns of
$981,000 (2005), $1,185,000
(2004) and $986,000 (2003) 2,085,033 475,211 644,310
Inventories 6,077,413 6,537,254 7,237,850
Prepaid Expenses and Other
Current Assets 326,658 452,295 429,510
Deferred Income Tax Asset 175,932 277,970 305,983
Income Tax Refund Receivable 365,485 452,537
---------- ---------- ----------
Total Current Assets 12,734,920 11,367,026 12,180,789
PROPERTY, PLANT AND EQUIPMENT:
Net of Accumulated Depreciation of
$14,615,187 (2005), $13,901,051
(2004) and $13,174,738 (2003) 5,962,979 5,744,748 5,675,711
GOODWILL 413,280 413,280
OTHER ASSETS 466,007 750,526 637,552
---------- ---------- ----------
TOTAL ASSETS $ 19,577,186 $ 18,275,580 $ 18,494,052
========== ========== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements
II-11
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DECEMBER 31,
2005 2004 2003
------ ------ ------
CURRENT LIABILITIES:
Short-Term Debt $ 10,785 $ 45,216 $ 274,405
Accounts Payable 570,547 217,730 391,591
Accrued Expenses 1,391,927 984,734 1,271,025
Dividends Payable 4,615 4,978 108,848
Income Taxes Payable 390,097
Current Portion of Long-Term Debt 219,328 255,459 235,554
---------- ---------- ----------
Total Current Liabilities 2,587,299 1,508,117 2,281,423
LONG-TERM DEBT,
NET OF CURRENT PORTION 610,033 803,891 373,407
DEFERRED INCOME TAX LIABILITY 431,784 536,548 494,273
---------- ---------- ----------
Total Liabilities 3,629,116 2,848,556 3,149,103
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, $.30 Par Value,
2,000,000 Shares Authorized,
583,094 Shares Issued, 519,350
Shares Outstanding 174,928 174,928 174,928
Capital in Excess of Par Value 1,288,793 1,288,793 1,288,793
Retained Earnings 14,799,406 14,294,561 14,220,106
Unrealized Holding Loss on
Securities ( 38,138 ) ( 54,339 ) ( 61,959 )
---------- ---------- ----------
16,224,989 15,703,943 15,621,868
Less: Common Stock in Treasury,
at Cost, 63,744 Shares 276,919 276,919 276,919
---------- ---------- ----------
Total Stockholders' Equity 15,948,070 15,427,024 15,344,949
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,577,186 $ 18,275,580 $ 18,494,052
========== ========== ==========
II-12
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
------ ------ ------
NET SALES $ 24,951,824 $ 22,763,684 $ 21,559,973
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Goods Sold
(Excluding Depreciation) 18,665,504 17,332,636 15,387,779
Selling, General and
Administrative Expenses 5,008,995 4,406,990 4,338,168
Depreciation and Amortization 856,706 809,412 759,049
Interest Expense 189,218 139,807 91,648
---------- ---------- ----------
Total Costs and Expenses 24,720,423 22,688,845 20,576,644
---------- ---------- ----------
INCOME FROM OPERATIONS 231,401 74,839 983,329
GAIN ON SALE OF PROPERTY,
PLANT AND EQUIPMENT 697,266
OTHER INCOME - NET 45,136 44,823 30,696
---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 973,803 119,662 1,014,025
PROVISION FOR INCOME TAXES 417,023 45,207 416,673
---------- ---------- ----------
NET INCOME 556,780 74,455 597,352
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized Gain (Loss) on
Available for Sale Securities,
Net of Tax 16,201 7,620 24,832
---------- ---------- ----------
COMPREHENSIVE INCOME $ 572,981 $ 82,075 $ 622,184
========== ========== ==========
EARNINGS PER SHARE:
Basic $ 1.07 $ 0.14 $ 1.15
==== ==== ====
Diluted $ 1.07 $ 0.14 $ 1.15
==== ==== ====
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements II-13
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
----------------------------------------------------------
UNREALIZED
CAPITAL IN HOLDING GAIN
COMMON EXCESS OF RETAINED (LOSS) ON
STOCK PAR VALUE EARNINGS SECURITIES
------ ---------- -------- ----------
Balance, December 31,
2002 $ 174,928 $ 1,288,793 $ 13,726,624 $( 86,791 )
Cash Dividends Declared,
$.20 per Share ( 103,870 )
Other Comprehensive Gain 24,832
Net Income 597,352
------- --------- ---------- ------
Balance, December 31,
2003 174,928 1,288,793 14,220,106 ( 61,959 )
Other Comprehensive Gain 7,620
Net Income 74,455
------- --------- ---------- ------
Balance, December 31,
2004 174,928 1,288,793 14,294,561 ( 54,339 )
Cash Dividends Declared,
$.10 per Share ( 51,935 )
Other Comprehensive Gain 16,201
Net Income 556,780
------- --------- ---------- ------
Balance, December 31,
2005 $ 174,928 $ 1,288,793 $ 14,799,406 $( 38,138 )
======= ========= ========== ======
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements
II-14
TREASURY
STOCK TOTAL
-------- -----
$( 276,919 ) $ 14,826,635
( 103,870 )
24,832
597,352
------- ----------
( 276,919 ) 15,344,949
7,620
74,455
------- ----------
( 276,919 ) 15,427,024
( 51,935 )
16,201
556,780
------- ----------
$ ( 276,919 ) $ 15,948,070
======= ==========
II-15
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 556,780 $ 74,455 $ 597,352
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Allowance for Sales Returns ( 204,000 ) 199,000 ( 47,000 )
Provision for Estimated Inventory
Returns 198,000 ( 252,000 ) ( 22,000 )
Increase (Decrease) in Net
Deferred Income Tax Liability ( 2,726 ) 65,692 109,212
Depreciation and Amortization 856,706 809,412 759,049
Loss (Gain) on Sale of Property,
Plant and Equipment ( 697,266 ) 7,172
Changes in assets and liabilities,
Net of Acquisition:
Accounts Receivable ( 1,405,822 ) 29,901 1,756,177
Inventories 261,841 952,596 ( 2,864 )
Prepaid Expenses and Other
Current Assets 125,637 ( 13,314 ) 112,829
Income Tax Refund Receivable 365,485 87,052 ( 451,219 )
Other Assets 16,201 5,583 ( 19,257 )
Accounts Payable 352,817 ( 213,419 ) 76,580
Accrued Expenses 406,830 ( 145,854 ) ( 206,779 )
Income Taxes Payable 390,097 ( 79,370 )
--------- --------- ---------
Net Cash Provided by
Operating Activities 1,220,580 1,599,104 2,589,882
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on Sale of Property,
Plant and Equipment 897,266
Purchase of Property, Plant and
Equipment ( 518,622 ) ( 687,435 ) ( 557,355 )
Construction in Progress ( 696,605 )
Acquisition, Net of Cash ( 738,816 )
Purchase of Investments ( 8 )
-------- --------- ---------
Net Cash Used in Investing
Activities ( 317,961 ) ( 1,426,251 ) ( 557,363 )
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds (Repayments) of
Short-Term Debt ( 34,431 ) ( 229,189 ) 176,922
Proceeds from Issuance of
Long-Term Debt 23,296 800,000
Principal Payments on Long-Term
Debt ( 253,285 ) ( 349,611 ) ( 219,068 )
II-16
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
------ ------ ------
Dividends Paid ( 51,935 ) ( 103,870 ) ( 181,773 )
Increase (Decrease) in
Other Assets 224,809 ( 141,971 ) ( 32,803 )
--------- --------- ---------
Net Cash Used in Financing
Activities ( 91,546 ) ( 24,641 ) ( 256,722 )
--------- --------- ---------
Net Increase in Cash 811,073 148,212 1,775,797
CASH AND CASH EQUIVALENTS,
at Beginning of Year 3,258,811 3,110,599 1,334,802
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
at End of Year $ 4,069,884 $ 3,258,811 $ 3,110,599
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 200,359 $ 140,155 $ 91,165
======= ======= =======
Income Taxes $ $ 333,750 $ 830,520
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Long-Term Debt Assumed or Issued for:
Equipment Purchases or
Capital Leases $ $ $ 41,053
======= ======= =======
Unrealized Holding Gain (Loss) on
Securities $ 16,201 $ 7,620 $ 24,832
======= ======= =======
II-17
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003
------ ------ ------
Fair Value of Assets Acquired on
Purchase of Mastercraft Products
Corporation $ $ 829,034 $
Cash Paid for Capital Stock ( 738,816 )
------- ------- --------
Liabilities Assumed $ $ 90,218 $
======= ======= ========
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements
II-18
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Paradise, Inc. operations are conducted through two business segments, candied
fruit and molded plastics. The primary operations of the fruit segment is
production of candied fruit, a basic fruitcake ingredient, sold to manufacturing
bakers, institutional users, and retailers for use in home baking. The molding
plastics segment provides production of plastic containers for the Company's
products and other molded plastics for sale to unaffiliated customers.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, after elimination of all material intercompany
transactions and profits.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounts Receivable and Revenue Recognition
-------------------------------------------
Management considers subsequent collection results and writes off all year-
end balances that are not deemed collectible by the time the financial
statements are issued. Additionally, management has provided for estimated
product returns by applying an allowance against Accounts Receivable for the
invoiced price of the returns. A provision to recognize a related estimate
of finished goods returns has been added to inventories (Note 2).
Management considers the remaining accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts has been
established. If accounts become uncollectible, they will be charged to
operations when that determination is made. The Company does not have a
policy to charge interest on past due amounts. The Company recognizes
revenue on the delivery of goods to its customers.
Goodwill
--------
The goodwill acquired represents the excess purchase price over the fair
value of the net assets acquired in the acquisition of Mastercraft Products,
Inc. (Note 18). These costs are reviewed annually for impairment pursuant
to SFAS No. 142, Goodwill and Other Intangible Assets.
II-19
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Selling Expenses
----------------
The Company considers freight delivery costs to be selling expenses and has
included $632,418 (2005), $458,483 (2004) and $352,465 (2003) in selling,
general and administrative expenses in the income statements.
Advertising Expenses
--------------------
The Company expenses advertising costs in the year they are incurred.
Advertising expenses totaled $297,211 (2005), $299,820 (2004) and $200,230
(2003) and are included in selling, general and administrative expenses in
the income statement.
Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform with the
current period presentation.
Other
-----
Certain accounting policies are also included in the text of other notes to
these financial statements.
NOTE 2: INVENTORIES
2005 2004 2003
------ ------ ------
Supplies $ 202,743 $ 171,442 $ 192,452
Raw Materials 1,516,514 2,029,118 1,165,530
Work in Progress 137,459 453,991 425,444
Finished Goods 4,220,697 3,882,703 5,454,424
--------- --------- ---------
TOTAL $ 6,077,413 $ 6,537,254 $ 7,237,850
========= ========= =========
Included in Finished Goods inventory are estimated returns related to the
Allowance for Sales Returns totaling $836,000 (2005), $1,034,000 (2004)
And $782,000 (2003).
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost includes material, labor and factory overhead.
II-20
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 2: INVENTORIES (CONTINUED)
Substantially all inventories are pledged as collateral for certain short-
term obligations.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
2005 2004 2003
------ ------ ------
Land and Improvements $ 656,040 $ 856,040 $ 856,040
Buildings and Improvements 5,957,590 5,914,755 5,887,707
Machinery and Equipment 13,267,931 12,875,004 12,106,702
---------- ---------- ----------
Total 19,881,561 19,645,799 18,850,449
Less: Accumulated Depreciation 14,615,187 13,901,051 13,174,738
---------- ---------- ----------
5,266,374 5,744,748 5,675,711
Construction in Progress 696,605
--------- ---------- ----------
NET $ 5,962,979 $ 5,744,748 $ 5,675,711
========== ========== ==========
Property, plant and equipment are stated at cost. Generally, the straight-
line method is used in computing depreciation. Estimated useful lives of
plant and equipment are:
Years
-------
Buildings and Improvements 10 - 30
Machinery and Equipment 3 - 10
Tax depreciations are calculated using rates and lives prescribed by the
Internal Revenue Code. Differences in amounts of depreciation for tax and
financial statement purposes are recognized through the computation of net
income for financial statement purposes and that for income tax purposes in
determining current and deferred income tax expense.
Expenditures which significantly increase values or extend useful lives are
capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Upon sale or retirement of property, plant and
equipment, the cost and related accumulated depreciation are eliminated
from the respective accounts and the resulting gain or loss is included in
the current earnings. Amortization is also computed using the straight-
line method over the estimated life of the asset.
II-21
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 3: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
All of the real property and machinery and equipment are pledged as
collateral for certain short-term and long-term obligations.
Depreciation expense for the years ended December 31, 2005, 2004 and 2003
was $796,996, $769,780 and $739,303, respectively.
NOTE 4: INVESTMENT IN MARKETABLE SECURITIES
The Company records unrealized gains and losses on marketable securities
available for sale in the stockholders' equity section of its balance sheet
as "unrealized holding gain (loss) on securities".
Available-for-sale securities, which are included in other assets in the
balance sheet, consist of the following:
2005 2004 2003
------ ------ ------
Equity Mutual Funds, at cost $ 281,817 $ 280,409 $ 281,009
Gross Unrealized Losses,
Before Tax ( 70,923 ) ( 87,124 ) ( 99,342 )
------- ------- -------
Total Marketable Securities,
at Fair Value $ 210,894 $ 193,285 $ 181,667
======= ======= =======
Proceeds and gross realized gains and losses from the sale of available-for-
sale securities and the change in unrealized holding loss were as follows:
2005 2004 2003
------ ------ ------
Proceeds $ 0 $ 0 $ 0
====== ====== ======
Gross Realized Gains $ 0 $ 0 $ 0
====== ====== ======
Gross Realized Losses $ 0 $ 0 $ 0
====== ====== ======
Change in Unrealized Loss,
Net of Tax $ 16,201 $ 12,218 $ 39,813
====== ====== ======
When securities are sold, the cost of securities sold is based on
weighted average cost in order to determine gross realized gains and
losses.
II-22
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 4: INVESTMENT IN MARKETABLE SECURITIES (CONTINUED)
Realized gains and losses, and declines in value judged to be other-
than-temporary on available-for-sale securities, if any, are included
in the determination of net income (loss) as gains (losses) on sale of
securities.
The above investments, held under a trust agreement, are to be used to
provide deferred compensation benefits to two key executives. The
investments in the trusts are subject to the claims of the Company's general
creditors; therefore, the Company is treated as the owner of the trusts.
NOTE 5: AMORTIZABLE INTANGIBLE ASSETS
Amortizable intangible assets included in Other Assets consist of a covenant
not to compete and debt issue costs. In connection with the acquisition of
Mastercraft Products Corporation, the Company entered into a covenant not to
compete agreement with the former owner in the amount of $123,000. It is being
amortized over a period of 36 months. Accumulated amortization totaled $61,500
and $20,500 at December 31, 2005 and 2004, respectively. Debt issue costs
incurred of $50,395 are being amortized over the respective terms of the
agreements of 24 and 84 months. Amortization expense for the years ended
December 31, 2005, 2004 and 2003 was $59,710, $39,632 and $19,746,
respectively.
NOTE 6: SHORT-TERM DEBT
2005 2004 2003
------ ------ ------
Letters of credit and other short-
term debt under a revolving line of
credit with a bank. $ 10,785 $ 45,216 $ 274,405
------ ------ -------
TOTAL $ 10,785 $ 45,216 $ 274,405
====== ====== =======
The average monthly borrowings and weighted average interest rates were
determined by month-end balances. Non-interest bearing letters of credit were
included in the aggregate figures.
WEIGHTED AVERAGE
2005 AMOUNT INTEREST RATE
------ -------- ----------------
Average bank short-term
borrowings (monthly) $ 1,214,583 5.68%
Average aggregate short-term
borrowings (monthly) $ 2,441,025 5.46%
II-23
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 6: SHORT-TERM DEBT (CONTINUED)
WEIGHTED AVERAGE
2005 AMOUNT INTEREST RATE
------ -------- ----------------
Maximum aggregate short-term
borrowings (at any month-end) $ 6,743,263
WEIGHTED AVERAGE
2004 AMOUNT INTEREST RATE
------ -------- ----------------
Average bank short-term
borrowings (monthly) $ 1,358,352 4.02%
Average aggregate short-term
borrowings (monthly) $ 2,557,664 3.56%
Maximum aggregate short-term
borrowings (at any month-end) $ 6,737,964
WEIGHTED AVERAGE
2003 AMOUNT INTEREST RATE
------ -------- ----------------
Average bank short-term
borrowings (monthly) $ 1,539,583 3.32%
Average aggregate short-term
borrowings (monthly) $ 2,985,413 2.14%
Maximum aggregate short-term
borrowings (at any month-end) $ 7,249,386
Pursuant to a loan agreement, a bank has agreed to advance the Company 80% of
the Company's eligible receivables and 50% of the Company's eligible
inventory up to a maximum of $9,000,000. Interest is payable monthly and is
computed from a daily floating rate equal to the Libor rate plus an applicable
margin. Principal is due May 31, 2007.
This agreement is subject to certain conditions which must be met for the
Company to continue borrowing, including debt service coverage and debt to
equity ratios, a resting period provision, and other financial covenants.
The amount available to be drawn down based on the available collateral at
December 31, 2005 was $5,073,533, at December 31, 2004 was $3,373,890 and at
December 31, 2003 was $3,739,831.
II-24
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 7: LONG-TERM DEBT
2005 2004 2003
------ ------ ------
Note Payable, Libor rate plus
applicable margin, collateralized
by accounts receivable, inventories,
property and equipment. Monthly
payments of $13,967 plus interest,
ending May 31, 2007. $ 737,993 $ 905,591 $ 373,190
Note Payable, 0% interest,
collateralized by an automobile.
Monthly payments of $404, maturing
February 5, 2006. 7,099 7,828 12,097
Obligations under capital leases.
Monthly payments totaling $8,413
including interest at rates ranging
from 5.21% to 8.25%, collateralized
by equipment, maturing March 12, 2006
through August 2, 2010. 84,269 145,931 223,674
------- --------- -------
Total Debt 829,361 1,059,350 608,961
Less, Current Portion 219,328 255,459 235,554
------- --------- -------
LONG-TERM DEBT $ 610,033 $ 803,891 $ 373,407
======= ========= =======
The aggregate principal amounts maturing in each of the subsequent years are:
2006 $ 219,328
2007 190,478
2008 175,853
2009 172,560
2010 71,142
-------
Total $ 829,361
=======
II-25
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 8: LEASES
The Company has certain equipment leases which are classified as capital
leases. At December 31, 2005, 2004 and 2003, the amount capitalized was
$395,799, $372,594 and $439,865, respectively, and the accumulated
amortization was $163,333 (2005), $125,407 (2004) and $136,199 (2003).
The amount recognized as an obligation was $84,269 (2005), $145,931
(2004) and $223,674 (2003), respectively, which has been included in
long-term debt shown in Note 7. Amortization expense is included in
depreciation.
The Company leases certain automobiles and office equipment under
operating leases ranging in length from thirty-six to sixty months.
Lease payments charged to operations amounted to $67,692 (2005), $66,022
(2004) and $82,416 (2003).
At December 31, 2005, future minimum payments required under leases with
terms greater than one year, and the present value of minimum capital lease
payments, were as follows:
OPERATING
YEARS ENDING DECEMBER 31, CAPITAL LEASES LEASES
--------------------------- -------------- ---------
2006 $ 50,606 $ 42,317
2007 21,430 20,038
2008 8,872 8,024
2009 5,281
2010 3,613
------ ------
Total Minimum Lease Payments 89,802 $ 70,379
Less, Amount Representing Interest 5,531 ======
------
PRESENT VALUE OF FUTURE MINIMUM
CAPITAL LEASE PAYMENTS $ 84,271
======
II-26
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 9: ACCRUED EXPENSES
2005 2004 2003
------ ------ ------
Accrued Payroll and Bonuses $ 137,968 $ 164,350 $ 65,267
Accrued Brokerage Payable 290,174 239,176 305,295
Accrued Pension Cost (Note 10) 168,686 195,371 147,555
Other Accrued Expenses 62,938 13,421 101,540
Coupon Reimbursement 67,501 70,000 70,208
Accrued Credit Due to Customers 566,504 193,195 443,916
Accrued Insurance Payable 98,156 109,221 137,244
--------- ------- ---------
TOTAL $ 1,391,927 $ 984,734 $ 1,271,025
========= ======= =========
NOTE 10: RETIREMENT PLAN
The Company and its subsidiaries have a defined benefit pension plan covering
all employees who become eligible for participation in the plan on the
semiannual date following one year of service (1,000 hours worked) and the
attainment of age 21. The total pension cost for 2005, 2004 and 2003 was
$207,660, $185,194 and $157,854, respectively, which includes amortization of
past service cost over 10 years. The Company makes annual contributions to
fund the plan equal to the amounts deductible for Federal Income Tax
purposes. The benefit formula being used is known as the frozen initial
liability cost method. The plan's assets consist of fixed income assets,
whole life insurance contracts and mutual funds.
II-27
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 10: RETIREMENT PLAN (CONTINUED)
The following table sets forth the changes in benefit obligations, changes in
plan assets and the reconciliation of funded status for 2005, 2004 and 2003:
2005 2004 2003
------ ------ ------
Change in Benefit Obligation:
Benefit Obligation at Beginning
of Year $ 3,475,312 $ 3,274,584 $ 2,749,088
Service Cost 174,942 171,208 154,688
Interest Cost 182,081 178,444 163,412
Actuarial (Gain) Loss 120,167 105,418 244,884
Benefits Paid ( 188,115 ) ( 254,342 ) ( 37,488 )
--------- --------- ---------
Benefit Obligation at End of Year 3,764,387 3,475,312 3,274,584
--------- --------- ---------
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year 2,695,393 2,602,907 2,328,805
Actual Return on Plan Assets 216,191 209,450 187,421
Employer Contributions 207,663 137,378 124,169
Benefits Paid ( 188,115 ) ( 254,342 ) ( 37,488 )
--------- --------- ---------
Fair Value of Plan Assets at
End of Year 2,931,132 2,695,393 2,602,907
--------- --------- ---------
Reconciliation of Funded Status:
Funded Status (Underfunded)
Overfunded ( 833,255 ) ( 779,919 ) ( 671,677 )
Unrecognized Net Actuarial Loss 708,766 660,233 631,798
Unrecognized Prior Service Cost ( 44,197 ) ( 75,685 ) ( 107,676 )
--------- --------- ---------
Accrued Benefit Cost $( 168,686 ) $( 195,371 ) $( 147,555 )
========= ========= =========
II-28
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 10: RETIREMENT PLAN (CONTINUED)
The Net Periodic Benefit Cost for 2005, 2004 and 2003 included the following
components:
2005 2004 2003
------ ------ ------
Service Cost $ 174,942 $ 171,208 $ 154,688
Interest Cost 182,081 178,444 163,412
Expected Return on Plan Assets ( 172,303 ) ( 159,140 ) ( 142,257 )
Recognized Net Actuarial (Gain)
Loss 27,746 26,673 15,069
Amortization of Prior Service
Cost ( 31,488 ) ( 31,991 ) ( 33,058 )
------- ------- -------
Net Periodic Benefit Cost $ 180,978 $ 185,194 $ 157,854
======= ======= =======
Weighted-Average Assumptions Used:
2005 2004 2003
------ ------ ------
Discount Rate 5.50% 5.50% 5.50%
Expected Long-Term Rate of Return 6.50% 6.50% 6.00%
Rate of Compensation Increase 4.01% 4.01% 3.96%
2005 2004 2003
------ ------ ------
Comparison of Obligations to
Plan Assets:
Projected benefit obligation $ 3,764,387 $ 3,475,312 $ 3,274,584
Accumulated benefit obligation 2,896,637 2,600,345 2,492,616
Fair value of plan assets at
measurement date 2,931,132 2,695,393 2,602,907
II-29
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 10: RETIREMENT PLAN (CONTINUED)
2005 2004 2003
------ ------ ------
Plan Assets by Category:
Equity securities 48% 44% 34%
Debt securities 13% 13% 21%
Real estate 0% 0% 0%
Uncategorized - Whole Life
Insurance Contract 39% 43% 45%
--- --- ---
Total 100% 100% 100%
=== === ===
Description of investment policies
----------------------------------
The assets of the Plan are allocated in a diversified portfolio of
investments. The portfolio is primarily invested in mutual funds;
however, a significant portion of the Plan's total asset value is
allocated to the cash value of life insurance contracts. An investment
policy statement defines the target asset allocation of the Plan, which
is reviewed quarterly. The target allocation is 40% domestic equity, 10%
international equity and the remainder is invested in the cash value of
the life insurance contracts and an investment in the insurance company's
general account. The primary investment in the general account is fixed
income securities.
Estimated future contributions
------------------------------
In 2006, the Company expects to make $178,122 of contributions directly
to pension plan assets.
II-30
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 10: RETIREMENT PLAN (CONTINUED)
Estimated future benefit payments
---------------------------------
The following benefit payments are expected to be paid over the next 10
fiscal years ending:
2006 140,000
2007 68,000
2008 97,000
2009 130,000
2010 370,000
Years 2011-2015 2,250,000
These amounts are based on current data and assumptions and reflect expected
future service, as appropriate.
Net Periodic Benefit Cost for Upcoming Year
-------------------------------------------
2006
----
Components of net periodic benefit cost:
Service cost $ 183,899
Interest cost 193,955
Expected return on plan assets ( 192,546 )
Amortization of net (gain)/loss 29,383
Amortization of prior service cost ( 31,488 )
-------
Net periodic benefit cost $ 183,203
=======
Weighted-average assumptions used to determine
net periodic benefit cost:
Discount rate 5.25%
Expected long-term rate of return 6.50%
Rate of compensation increase 4.01%
II-31
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 10: RETIREMENT PLAN (CONTINUED)
Basis used to determine expected long-term return on plan assets
----------------------------------------------------------------
Historical and future expected returns of multiple asset classes were
analyzed to develop a risk-free real rate of return and risk premiums
for each asset class. The overall rate for each asset class was
developed by combining a long-term inflation component, the risk-free
real rate of return, and the associated risk premium. A weighted-
average rate was developed based on those overall rates and the target
asset allocation of the plan.
NOTE 11: PROVISION FOR FEDERAL AND STATE INCOME TAXES
The provisions for income taxes are comprised of the following amounts:
2005 2004 2003
------ ------ ------
CURRENT:
Federal $ 372,490 $ ( 20,485 ) $ 262,626
State 47,260 44,836
------- ------ -------
419,750 ( 20,485 ) 307,462
------- ------ -------
DEFERRED:
Federal ( 2,328 ) 56,090 93,249
State ( 399 ) 9,602 15,962
------- ------ -------
( 2,727 ) 65,692 109,211
------- ------ -------
TOTAL PROVISION FOR
INCOME TAXES $ 417,023 $ 45,207 $ 416,673
======= ====== =======
II-32
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
A reconciliation of the differences between the tax provisions attributable to
income from continuing operations and the tax provision at statutory Federal
income tax rate follows:
2005 2004 2003
------ ------ ------
Income Taxes Computed at
Statutory Rate $ 331,093 $ 40,685 $ 344,768
State Income Tax, Net of Federal
Income Tax Benefit 32,313 6,337 40,127
Other, Net 53,617 ( 1,815 ) 31,778
------- ------ -------
PROVISION FOR INCOME TAXES $ 417,023 $ 45,207 $ 416,673
======= ====== =======
NOTE 12: EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are based on the weighted average
number of shares outstanding and assumed to be outstanding during the year
(519,350 shares in 2005, 2004 and 2003 for basic) and (519,350 shares in 2005,
2004 and 2003 for diluted).
NOTE 13: BUSINESS SEGMENT DATA
The Company's operations are conducted through two business segments. These
segments, and the primary operations of each, are as follows:
BUSINESS SEGMENT OPERATION
---------------- ---------
Candied Fruit Production of candied fruit, a basic fruitcake
ingredient, sold to manufacturing bakers,
institutional users, and retailers for use in
home baking. Also, based on market conditions, the
processing of frozen strawberry products, for sale
to commercial and institutional users such as
preservers, dairies, drink manufacturers, etc.
Molded Plastics Production of plastics containers and other
molded plastics for sale to various food
processors and others.
II-33
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 13: BUSINESS SEGMENT DATA (CONTINUED)
YEAR YEAR YEAR
ENDED ENDED ENDED
NET SALES IN EACH SEGMENT 2005 2004 2003
------ ------ ------
Candied Fruit:
Sales to Unaffiliated
Customers $ 16,906,637 $ 15,939,808 $ 16,601,065
Molded Plastics:
Sales to Unaffiliated
Customers 8,045,187 6,823,876 4,958,908
---------- ---------- ----------
NET SALES $ 24,951,824 $ 22,763,864 $ 21,559,973
========== ========== ==========
YEAR YEAR YEAR
ENDED ENDED ENDED
2005 2004 2003
------ ------ ------
THE OPERATING PROFIT OF
EACH SEGMENT IS LISTED BELOW
Candied Fruit $ 3,538,725 $ 3,173,166 $ 4,524,929
Molded Plastics 2,097,688 1,636,567 1,057,554
--------- --------- ---------
OPERATING PROFIT OF SEGMENTS 5,636,413 4,809,733 5,582,483
General Corporate Expenses,
Net ( 5,215,794 ) ( 4,595,087 ) ( 4,507,506 )
Interest Expense ( 189,218 ) ( 139,807 ) ( 91,648 )
Other Income 742,402 44,823 30,696
--------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES $ 973,803 $ 119,662 $ 1,014,025
========= ========= =========
Operating profit is composed of net sales, less direct costs and overhead
costs associated with each segment. Due to the high degree of integration
between the segments of the Company, it is not practical to allocate general
corporate expenses, interest, and other income between the various segments.
II-34
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 13: BUSINESS SEGMENT DATA (CONTINUED)
YEAR YEAR YEAR
ENDED ENDED ENDED
2005 2004 2003
------ ------ ------
IDENTIFIABLE ASSETS OF EACH
SEGMENT ARE LISTED BELOW
Candied Fruit $ 7,907,087 $ 6,970,061 $ 9,261,206
Molded Plastics 5,508,452 5,029,726 2,933,248
---------- ---------- ----------
Identifiable Assets 13,415,539 11,999,787 12,194,454
General Corporate Assets 6,161,647 6,275,793 6,299,598
---------- ---------- ----------
TOTAL ASSETS $ 19,577,186 $ 18,275,580 $ 18,494,052
========== ========== ==========
Included in the Identifiable Assets of the Molded Plastics Segment is goodwill
totaling $413,280 at December 31, 2005 and 2004.
Identifiable assets by segment are those assets that are principally used in
the operations of each segment. General corporate assets are principally
cash, land and buildings, and investments.
YEAR YEAR YEAR
ENDED ENDED ENDED
2005 2004 2003
------ ------ ------
DEPRECIATION AND
AMORTIZATION EXPENSE OF
EACH SEGMENT ARE LISTED BELOW
Candied Fruit $ 460,945 $ 377,403 $ 385,387
Molded Plastics 248,672 264,431 204,323
------- ------- -------
Segment Depreciation and
Amortization Expense 709,617 641,834 589,710
General Corporate Depreciation
and Amortization Expense 147,089 167,578 169,339
------- ------- -------
TOTAL DEPRECIATION AND
AMORTIZATION EXPENSE $ 856,706 $ 809,412 $ 759,049
======= ======= =======
II-35
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 13: BUSINESS SEGMENT DATA (CONTINUED)
YEAR YEAR YEAR
ENDED ENDED ENDED
2005 2004 2003
------ ------ ------
CAPITAL EXPENDITURES OF
EACH SEGMENT ARE LISTED BELOW
Candied Fruit $ 397,436 $ 173,450 $ 261,512
Molded Plastics 739,703 431,920 282,438
--------- ------- -------
Segment Capital Expenditures 1,137,139 605,370 543,950
General Corporate Capital
Expenditures 78,088 113,143 54,458
--------- ------- -------
TOTAL CAPITAL EXPENDITURES $ 1,215,227 $ 718,513 $ 598,408
========= ======= =======
The Company conducts operations only within the United States. Foreign sales
are insignificant; primarily all sales are to domestic companies.
NOTE 14: MAJOR CUSTOMERS
With the continuing acquisitions, mergers and other consolidations in the
supermarket industry, there is increasing concentration of candied fruit
buying activity. During 2005, the Company derived nearly 13% of its
consolidated revenues from Wal-Mart Stores, Inc. This customer is not
affiliated with Paradise, Inc. in any way, and has exclusive use of a
Paradise-owned controlled brand. In addition, plastics sales to Aqua Cal,
Inc. accounted for 16% of the Company's consolidated revenues. The loss
of any of these customers would have a material adverse effect on
operating earnings.
NOTE 15: CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash equivalents and
unsecured trade receivables. The Company's cash equivalents are
maintained with several financial institutions located in Florida.
Accounts at each institution are secured by the Federal Deposit Insurance
Corporation up to $100,000. Uninsured balances aggregate to $3,969,034 at
December 31, 2005. The Company grants credit to customers, substantially
all of whom are located in the United States. The Company's ability to
collect these receivables is dependent upon economic conditions in the
United States and the financial condition of its customers.
II-36
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 16: DEFERRED INCOME TAXES
The Company recognizes deferred tax assets and liabilities for future tax
consequences of events that have been previously recognized in the
Company's financial statements or tax returns. The measurement of
deferred tax assets and liabilities is based on provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not
anticipated.
Significant components of the Company's deferred tax assets and
liabilities at December 31, 2005, 2004 and 2003 were:
2005 2004 2003
------ ------ ------
Deferred Tax Assets resulting from:
Inventory Valuation $ 97,019 $ 148,739 $ 191,836
Allowance for Sales Returns
and Related Provision for
Return of Finished Goods 54,563 56,821 76,765
Contribution and Loss Carryforwards 39,625
Unrealized Loss on Investments 24,350 32,785 37,382
------- ------- -------
Total Deferred Tax Assets 175,932 277,970 305,983
------- ------- -------
2005 2004 2003
------ ------ ------
Deferred Tax Liabilities resulting from:
Tax over Book Depreciation 431,784 536,548 494,273
------- ------- -------
Total Deferred Tax Liabilities 431,784 536,548 494,273
------- ------- -------
Net Deferred Tax (Asset) Liability $ 225,852 $ 258,578 $ 188,290
======= ======= =======
The Net Deferred Tax (Asset)
Liability is reflected in the
Balance Sheet under these captions:
Deferred Income Tax Asset $ ( 175,932 ) $ ( 277,970 ) $ ( 305,983 )
Deferred Income Tax Liability 431,784 536,548 494,273
------- ------- -------
$ 225,852 $ 258,578 $ 188,290
======= ======= =======
II-37
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
The aggregated net fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to
management. The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These financial
instruments include cash and cash equivalents, receivables, payables,
accrued expenses and short-term borrowings. Fair values were assumed to
approximate carrying values for these financial instruments since they
are short-term in nature and their carrying amounts approximate fair
values or they are receivable or payable on demand. The fair value of
the Company's debt is estimated based upon the quoted market prices for
the same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities.
NOTE 18: ACQUISITION
On May 13, 2004, the Company acquired 100 percent of the outstanding shares of
Mastercraft Products Corporation, for a total cost of $894,417. The results
of Mastercraft Products Corporation operations have been included in the
consolidated financial statements since April 1, 2004. Mastercraft Products
Corporation manufactures and sells custom plastic and related products. The
acquisition was made to increase the Company's customer base and add new
products to the Company's existing line of plastics goods. The source of funds
for the acquisition was a combination of the Company's available cash and loan
proceeds of $800,000.
The following summarizes the fair values at the date of acquisition:
Cash $ 155,600
Accounts Receivable 144,671
Inventory 106,228
Other Current Assets 13,471
Property, Plant and Equipment, net 151,385
Goodwill 413,280
-------
Total Assets Acquired 984,635
-------
II-38
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
--------------------------------
NOTE 18: ACQUISITION (CONTINUED)
Accounts Payable 39,558
Other Current Liabilities 44,560
Other Liabilities 6,100
-------
Total Liabilities 90,218
-------
Net Assets Acquired $ 894,417
=======
The following (unaudited)pro forma consolidated results of operations have been
prepared as if the acquisition of Mastercraft Products Corporation had occurred
at January 1, 2003:
2004 2003
---- ----
Net Sales $ 23,060,262 $ 22,429,208
Net Income 91,656 548,049
Net Income per Share - Basic $ .18 $ 1.06
Net Income per Share - Diluted $ .18 $ 1.06
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor
is it intended to be a projection of future results.
NOTE 19: SUBSEQUENT EVENT
On February 9, 2006, the Company declared a regular dividend of $.10 per share
and a special dividend of $.05 per share to stockholders of record at April 14,
2006.
II-39
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 8A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the Company's disclosure controls and procedures
as of December 31, 2005. Based on their evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the applicable Securities and
Exchange Commission rules and forms. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the most recent evaluation of
these controls by the Company's Chief Executive Officer and Chief Financial
Officer. No significant deficiencies or material weaknesses in the Company's
internal controls were identified therefore no corrective actions were taken.
II-40
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16 (a) of the Exchange Act
Directors of the Registrant
---------------------------
Melvin S. Gordon - CEO and Chairman of the Registrant, 72 years old.
Term of office will expire at next stockholders'
meeting. Officer with Registrant past 41 years.
Eugene L. Weiner - Vice-President of the Registrant, 74 years old.
Term of office will expire at next stockholders'
meeting. Officer with Registrant past 40 years.
(See note on page III-2)
Randy S. Gordon - President of the Registrant, 50 years old. Term
of office will expire at next stockholders'
meeting. Employee or officer of Registrant past
27 years.
Tracy W. Schulis - Senior Vice-President and Secretary of the
Registrant, 49 years old. Term of office will
expire at next stockholders' meeting. Employee
or officer of Registrant past 26 years.
Mark H. Gordon - Executive Vice-President of the Registrant, 43
years old. Term of office will expire at next
stockholders' meeting. Employee or Officer of
Registrant past 20 years.
Executive Officers of the Registrant
------------------------------------
Melvin S. Gordon - CEO and Chairman, 72 years old. Term of office
will expire at next annual directors' meeting.
Officer with Registrant past 41 years.
Eugene L. Weiner - Vice-President, 74 years old. Term of office
will expire at next annual directors' meeting.
Officer with Registrant past 40 years.
Randy S. Gordon - President, 50 years old. Term of office will
expire at next annual directors' meeting.
Employee or officer of Registrant past 27 years.
Tracy W. Schulis - Senior Vice-President and Secretary, 49 years
old. Term of office will expire at next annual
directors' meeting. Employee or officer of
Registrant past 26 years.
Mark H. Gordon - Executive Vice-President, 43 years old. Term of
office will expire at next annual directors'
meeting. Employee or Officer of Registrant past
20 years.
III-1
Item 9. Directors and Executive Officers of the Registrant (Continued)
Jack M. Laskowitz - CFO and Treasurer, 49 years old. Term of office
will expire at annual directors' meeting.
Employee or officer with Registrant past 5 years.
Mr. Weiner relinquished his duties as COO, CFO, Treasurer and Secretary of the
corporation as of June 30, 2002. Mr. Weiner remains a Director and Vice
President, concentrating on corporate development.
Family Relationships
--------------------
Melvin S. Gordon is first cousin by marriage to Eugene L. Weiner.
Melvin S. Gordon is the father of Randy S. Gordon and Mark H. Gordon
and the father-in-law of Tracy W. Schulis.
Audit Committee Financial Expert
--------------------------------
Rules recently adopted by the Securities and Exchange Commission (the "SEC")
to implement sections of the Sarbanes-Oxley Act of 2002 (the "Act") require
disclosure of whether the Company has an audit committee financial expert on
its audit committee. The Company has not formally designated an audit
committee; however, the Act stipulates that if no such committee exists,
then the audit committee is the entire board of directors.
The Company's Board of Directors has determined that Eugene L. Weiner, is
"an audit committee financial expert". Eugene L. Weiner is a Director and
also a Vice-President of the Company and therefore is not independent of
management.
Code of Business Conduct and Ethics
-----------------------------------
The Company has adopted a Code of Business Conduct and Ethics that applies
to all executive officers, directors and employees of the Company. The Code
of Business Conduct and Ethics is attached as an exhibit to this Annual
Report on Form 10-KSB.
III-2
Item 10. Executive Compensation
(a) and (b) The following summary compensation table sets forth all
remuneration paid or accrued by the Company and its subsidiaries
for the years ended December 31, 2005, 2004 and 2003 to its
Chief Executive Officer and the four other highest paid
executive officers whose total remuneration exceeded $100,000.
COMPENSATION
------------
NAME AND PRINCIPAL BENEFITS UPON
POSITION YEAR SALARY (1) BONUS RETIREMENT (2) (3)
-------------------- ---- ---------- ------- -------------------
Melvin S. Gordon,
Chief Exec. Officer 2005 $ 353,478 $ 65,000
2004 352,891 10,000 (4)
2003 352,366 - 0 -
Randy S. Gordon,
President 2005 206,814 49,257 $ 72,000
2004 206,433 10,000 72,000
2003 206,601 - 0 - 72,000
Tracy W. Schulis,
Senior Vice-President
and Secretary 2005 206,516 49,257 72,000
2004 206,701 10,000 72,000
2003 206,345 - 0 - 72,000
Mark H. Gordon,
Executive Vice-
President 2005 205,858 49,257 72,000
2004 205,818 10,000 72,000
2003 205,786 - 0 - 72,000
Jack M. Laskowitz,
Chief Financial Officer 2005 104,079 12,000 22,217
2004 98,672 2,000 21,877
2003 98,275 2,500 22,656
NOTES TO THE ABOVE TABLE
------------------------
1. Includes personal use of Company automobiles and PS-58 costs.
2. These amounts are computed actuarially according to the Retirement Plan of
the Company assuming certain facts as follows: a) that the participant
remains in the service of the Company until his normal retirement date at
age 65; b) that the participant's earnings increase 4.50% annually during
the remainder of his service until retirement age subject to the maximum
annual compensation limits established by law; and c) that the plan be
continued without substantial modification.
III-3
Item 10. Executive Compensation (Continued)
3. As of the latest available actuarial valuation date.
4. Received a "lump-sum" distribution in 1999.
(c) and (d) Options, Warrants, or Rights
----------------------------
Not applicable
(e) Long-Term Incentive Plan Awards Table
-------------------------------------
Not Applicable
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) The following table sets forth as of December 31, 2005, information
concerning the beneficial ownership of the common stock of the Company
by the persons who own, are known by the company to own, or who the
Company has been advised have filed with the S.E.C. declarations of
beneficial ownership, of more than 5% of the outstanding common stock.
III-4
Item 11. Security Ownership of Certain Beneficial Owners and Management
(Continued)
AMOUNT & NATURE
NAME AND ADDRESS OF TITLE OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER CLASS OWNERSHIP (1) OF CLASS
------------------- -------- --------------- --------
Melvin S. Gordon Common
2611 Bayshore Blvd.
Tampa, Florida 192,742 (1) 37.1%
------- ----
TOTAL 192,742 37.1%
======= ====
(1) Includes 141,760 shares owned by the Helen A. Weaner Family Partnership,
Ltd., control of which Mr. Gordon shares with his wife as Trustees.
(b) Beneficial ownership of common stock held by all directors and officers
of the Company as a group:
AMOUNT AND NATURE
TITLE OF OF BENEFICIAL PERCENT
CLASS OWNERSHIP (1) OF CLASS
-------- ----------------- --------
Directors and
Officers
As a Group Common 217,697 41.9%
======= ====
Melvin S. Gordon Common 192,742 (2) 37.1%
Eugene L. Weiner Common 307 0
Randy S. Gordon Common 7,400 1.4
Tracy W. Schulis Common 8,648 1.7
Mark H. Gordon Common 8,600 1.7
(1) The nature of the beneficial ownership for all shares is sole voting and
investment power.
(2) Includes 141,760 shares owned by the Helen A. Weaner Family Partnership,
Ltd., control of which Mr. Gordon shares with his wife as Trustees.
(c) The Company knows of no contractual arrangements which may at a
subsequent date result in a change in control of the Company.
III-5
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
None
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit (3) - Articles of Incorporation and By-Laws (Incorporated by
reference from Exhibits to Paradise, Inc.'s Annual
Report on Form 10-KSB for the year ended December 31,
1993, filed on March 31, 1994)
Exhibit (11) - Statement Re: Computation of Per Share Earnings
(Incorporated by reference from Exhibits to page II-24
of this Form 10-KSB)
Exhibit (14.1) - Code of Business Conduct and Ethics
Exhibit (21) - Subsidiaries of the Small Business Issuer (filed
herewith)
Exhibit (31.1) - Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) (filed herewith)
Exhibit (31.2) - Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) (filed herewith)
Exhibit (32.1) - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 (filed herewith)
Exhibit (32.2) - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350 (filed herewith)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 2005.
III-6
Item 14. Principal Accountant Fees and Services
--------------------------------------
Audit Fees
----------
The aggregate fees billed for professional services rendered by Bella,
Hermida, Gillman, Hancock & Mueller for the audit of the Company's annual
financial statements and review of financial statements included in the
Company's Forms 10-QSB for fiscal years 2005 and 2004 were $96,450 and
$93,000, respectively. At the time of this filing, not all audit fees had
been billed for the 2005 fiscal year.
Audit-Related Fees
------------------
The aggregate fees billed in fiscal years 2005 and 2004 for assurance and
related services by Bella, Hermida, Gillman, Hancock & Mueller that were
reasonably related to the performance of the audit or review of the
Company's financial statements were $-0- and $5,500, respectively. The
nature of those services was employee benefit plan audits, due diligence
related to potential acquisitions, and accounting consultations in
connection with potential acquisitions.
Tax Fees
--------
The aggregate fees billed in fiscal years 2005 and 2004 for professional
services rendered by Bella, Hermida, Gillman, Hancock & Mueller for tax
compliance, tax advice and tax planning were $19,500 and $19,150,
respectively. The nature of those services involved the preparation of
federal, state and local tax returns, tax payment-planning services and
preparation of employee benefit plan tax forms.
All Other Fees
--------------
No fees were billed in fiscal years 2005 and 2004 for professional services
rendered by Bella, Hermida, Gillman, Hancock & Mueller for other products or
services.
The Company has not formally designated an audit committee and as a result,
the entire board of directors performs the duties of an audit committee. It's
the Board's policy to pre-approve all services provided by Bella, Hermida,
Gillman, Hancock & Mueller effective as of May 26, 2005. Since all services
provided by the principal accountant are pre-approved, the Company does not
rely on pre-approval policies and procedures.
III-7
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
March 31, 2006 PARADISE, INC.
--------------
Date
/s/ Melvin S. Gordon
--------------------
Melvin S. Gordon
CEO and Chairman
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the
dates indicated.
/s/ Melvin S. Gordon CEO, Chairman March 31, 2006
---------------------- and Director --------------
Melvin S. Gordon Date
/s/ Eugene L. Weiner Vice-President March 31, 2006
---------------------- and Director --------------
Eugene L. Weiner Date
/s/ Randy S. Gordon President and Director March 31, 2006
---------------------- --------------
Randy S. Gordon Date
/s/ Tracy W. Schulis Senior Vice-President, March 31, 2006
---------------------- Secretary and Director --------------
Tracy W. Schulis Date
/s/ Mark H. Gordon Executive Vice-President March 31, 2006
---------------------- and Director --------------
Mark H. Gordon Date
/s/ Jack M. Laskowitz CFO and Treasurer March 31, 2006
---------------------- --------------
Jack M. Laskowitz Date
III-8
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
March 31, 2006 PARADISE, INC.
--------------
Date
--------------------
Melvin S. Gordon
CEO and Chairman
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the
dates indicated.
CEO, Chairman March 31, 2006
---------------------- and Director --------------
Melvin S. Gordon Date
Vice-President March 31, 2006
---------------------- and Director --------------
Eugene L. Weiner Date
President and Director March 31, 2006
---------------------- --------------
Randy S. Gordon Date
Senior Vice-President, March 31, 2006
---------------------- Secretary and Director --------------
Tracy W. Schulis Date
Executive Vice-President March 31, 2006
---------------------- and Director --------------
Mark H. Gordon Date
CFO and Treasurer March 31, 2006
---------------------- --------------
Jack M. Laskowitz Date
III-8