<![CDATA[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: $ 25,480,339
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, $5,806,820 (as of January 31, 2008, bid price $19.25)
Class Outstanding at December 31, 2007
----------- --------------------------------
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.
==============
2007 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 and Small Business
Issuer Purchases of Equity Security II-1 - II-2
Item 6. Management's Discussion and Analysis or
Plan of Operation II-3 - II-10
Item 7. Financial Statements II-11 - II-43
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure II-44
Item 8A. Controls and Procedures II-44
Item 8B. Management's Annual Report on Internal
Control over Financial Reporting II-45 - II-46
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 and Related Stockholder Matters 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 11 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 2007, 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.
I-2
Item 1. Description of Business (Continued)
During 1993, and through another wholly owned subsidiary, the Company
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.
I-3
Item 1. Description of Business (Continued)
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
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 2007, the Company derived nearly 15% 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 13% 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 75-80% of all candied fruits and peels
consumed in the U.S. during 2007. The Company knows of two major
competitors; however, it estimates that neither 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.
I-4
Item 1. Description of Business (Continued)
By local ordinance, it is required that all water effluent is metered,
tested and discharged into a municipal industrial waste treatment plant.
During 2007, costs for this discharge exceeded $200,000, and management
estimates that all expenses directly related to compliance with
environmental regulations total well over $300,000 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.
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. In 2006, Paradise, Inc. built a new 10,000 square foot
building on this land. The building is primarily used for the production
of custom vacuum forming products for its Plastics customers.
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 and Small
Business Issuer Purchases of Equity Securities
On August 22, 1997 the Securities and Exchange Commission issued new
listing requirements for companies listed on the NASDAQ Small Cap Market.
The requirements became effective on February 23, 1998. As of December
2007, 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
------ ------
2007
----
First Quarter 20.20 17.75
Second Quarter 18.75 17.25
Third Quarter 19.50 18.50
Fourth Quarter 20.95 19.01
2006
----
First Quarter 18.25 17.50
Second Quarter 19.50 18.20
Third Quarter 16.75 15.61
Fourth Quarter 19.00 15.10
(b) Approximate Number of Equity Security Holders
As of December 31, 2007, 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 146
II-1
Item 5. Market for Common Equity and Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities (Continued)
(c) Dividend History and Policy
Dividends have been declared and paid annually, only when warranted by
profitability. On March 18, 2008, the Board of Directors declared
dividends of $.10 per share for stockholders of record on April 11, 2008.
Dividends paid to stockholders for 2006 were $.10 and for 2005, $.15.
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
----------------------- --------------------
2007 2006 2005 2007-2006 2006-2005
---- ---- ---- --------- ---------
NET SALES:
Candied Fruit 70.5% 69.9% 67.8% - 1.4% 7.8%
Molded Plastics 29.5 30.1 32.2 - 4.2 -2.5
----- ----- ----- ----- ----
100.0 100.0 100.0 - 2.3 4.5
Cost of Sales 71.3 74.4 74.8 - 6.5 4.0
Selling, General and
Administrative Expense 19.6 19.0 20.1 0.9 -1.3
Depreciation and
Amortization 3.4 3.5 3.4 - 6.1 6.3
Interest Expense 0.9 0.9 0.8 - 3.0 30.2
----- ----- ----- ----- -----
- 5.0 3.2
Income from Operations 4.9 2.2 0.9 120.2 144.8
Gain on Sale of Land 2.8
Other Income, Net 0.4 0.1 0.2 150.4 -7.3
----- ----- ----- ----- ----
Income Before Provision
for Income Taxes 5.3 2.3 3.9 122.3 -37.5
Provision for Income
Taxes 2.0 0.9 1.7 125.3 -45.2
----- ----- ----- ----- -----
Net Income 3.3% 1.4% 2.2% 120.5% -31.8%
===== ===== ===== ===== =====
(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 6 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
2007 Compared to 2006
---------------------
Paradise, Inc.'s fruit segment net sales represents 70.5% of
consolidated net sales totaled $17,966,624 for the twelve months ended
December 31, 2007 compared to 69.9% of consolidated net sales totaling
$18,225,869 for the similar reporting period for 2006. This represents
a 1.4% decrease in fruit segment net sales for 2007 compared to 2006.
While net fruit segment sales declined slightly in 2007, Paradise, Inc.
continues to be the leading producer of glace' fruit, a primary
ingredient of fruit cakes, which is sold to manufacturing bakers,
institutional users and retailers throughout the United States.
Consumer demand for glace' fruit is traditionally strongest during the
Thanksgiving and Christmas season. Approximately 80% of glace' fruit
net sales are realized during an eight to ten weeks period commencing
in mid September.
Due to the seasonal nature of Paradise, Inc.'s glace' fruit sales, the
Company continues to face challenges from its national and regional
customers who rely on computerized data reports to determine the
optimal number of days glace' fruit should remain on their store
shelves. Delays in rolling out the Company's line of glace' fruit will
result in fewer chances to attract consumers to the Company's products.
To counter this action, Paradise, Inc.'s experienced sales force will
continue to travel throughout the United States during the spring and
summer booking period to discuss with retail customers as to proper
timing and product placement in order to maximize selling opportunities
for the upcoming 2008 holiday season.
Paradise Plastics, Inc., a wholly owned subsidiary of Paradise, Inc.,
represents 29.5% of consolidated net sales, generated net sales
to unaffiliated customers of $7,513,715 for the twelve months ended
December 31, 2007 compared to 30.1% and $7,846,280 for the similar
reporting period of 2006. This 4.2% decrease in net sales is
associated with the recent decline in the housing market as plastics
orders from customers with ties to this sector slowed during 2007.
Consolidated cost of goods sold, expressed as a percentage of net sales,
decreased 3.1% for the twelve months ending December 31, 2007 compared to the
similar reporting period for 2006. Fruit segment cost of sales decreased 5.8%
as delays in harvesting of raw fruit materials and subsequent delivery to
Paradise, Inc. from existing supplier's required the Company to contract with
additional suppliers. As conditions improved, Paradise, Inc. received an
increased amount of its estimated raw fruit requirements for 2007.
This increase allowed the Company to allocate fixed levels of factory overhead
over a greater amount of finished glace' fruit inventory, resulting in the
decrease in cost of sales, mentioned above. At December 31, 2007 Paradise,
Inc. finished glace' fruit inventory was valued at $2,709,796 compared to
$1,669,697 at December 31, 2006.
II-4
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2007 Compared to 2006 (Continued)
---------------------------------
Paradise Plastics, Inc. which is not subject to seasonal demands of the fruit
segment incurred a 2.1% increase in cost of goods sold as a percentage of sales
for the twelve months ended December 31, 2007 compared to the similar reporting
period for 2006. Rising energy prices for petroleum based resins absorbed from
the Company's suppliers outpaced the plastics segment's ability to pass along
these increases at the same percentage.
Selling, general and administrative expenses for 2007 increased by less than
1.0% as increases in professional fees were offset by the reduction in cost
associated with the implementation and administration of the Company's newly
established 401(k) plan. As disclosed in last year's annual filing, Paradise,
Inc. elected to terminate the Company's defined benefit pension plan and offer
all eligible employees the opportunity to transfer their vested pension funds
into the Company sponsored 401(k) retirement plan. As of the date of this
filing, the Company is awaiting final regulatory approval to terminate the
defined benefit pension plan. The liability associated with terminating the
defined benefit pension plan is $446,717 and was accrued for during 2006.
Depreciation and amortization expenses for 2007 decreased 6.1% compared to 2006
as fixed asset retirements for the past twelve months exceeded the amount of
new assets placed into service.
Interest expense for the twelve months ending December 31, 2007 decreased 3.0%
compared to the similar reporting period for the prior year as short-term bank
financing used to produce the Company's glace' fruit inventory declined to an
average monthly balance of $920,833 for 2007 compared to $1,393,750 for 2006.
The Consolidated Statement of Cash Flow reflects a decrease in cash of
$2,078,178 for the twelve months ended December 31, 2007. The major reasons
for the decrease are twofold; first uncertainty surrounding the availability of
raw fruit, produced an increase in finish glace' fruit inventory in excess of
$1 million dollars; secondly accounts receivable from Wal-Mart Stores, Inc.
totaled $1,345,913 at December 31, 2007 compared to $34,432 at December 31,
2006. As of the date of this filing, Wal-Mart Stores, Inc. has remitted
payments to Paradise, Inc. totaling $1,290,644.
Pursuant to the events described above, Paradise, Inc.'s consolidated net sales
decreased 2.3% to $25,480,339 for the twelve months ending December 31, 2007
compared to $26,072,149 for the twelve months ending December 31, 2006. Net
income after the provision for income taxes was $837,515 or $1.61 earnings per
share for 2007 compared to $379,914 and $.73 earnings per share for 2006.
II-5
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2006 Compared to 2005
---------------------
In 2006, Paradise, Inc. reinforced its long standing position as the leading
producer of glace' fruit, a primary ingredient of fruit cakes, which is sold to
manufacturing bakers, institutional users and retailers throughout the United
States leading up to and during the holiday season of Thanksgiving and
Christmas. This position was evident as Paradise, Inc.'s glace' fruit net
sales activity increased to $18,225,869 during 2006 compared to net sales of
$16,906,637 for 2005. With continuing consolidation occurring in the grocery
industry, Management is pleased to see the decision to expand its relabeling
and coupon redemption program for the Company's brand name and private label
customers has resulted in greater awareness and net sales growth for the
Company's glace' fruit products.
Paradise Plastics, Inc., a wholly owned subsidiary of Paradise, Inc., which
experienced cumulative growth in net sales of more than 80% over the past five
years, produced net sales to unaffiliated customers of $7,846,280 for 2006
compared to $8,045,187 for 2005. This 2.5% decrease in net sales is partially
attributable to the relocation of Paradise Plastics, Inc.'s Central Florida
operations to its newly constructed 10,000 square foot facility located at
Company's headquarters in Plant City, Florida. This relocation, successfully
completed during March and April of 2006, resulted in a scheduled delay of
processing customer orders as production equipment was dismantled, transferred
and re-assembled at headquarters. The other factor contributing to this
decrease was the decision of several existing customers' to reduce their re-
orders during 2006. However, management is confident that the expertise
developed in designing various high tech custom molding products over the past
several years will continue to help expand this segment in the future.
Cost of goods sold, expressed as a percentage of net sales, remained consistent
with the previous year's reporting as increases in the cost of raw fruit
materials absorbed from suppliers were successfully incorporated into the
Company's pricing structure for its glace' fruit products prior to the late
spring and summer booking periods.
Selling expenses, which includes bad debt expense, for 2006 decreased by 11.2%
compared to the prior year as management's decision during 2005 to terminate
several supplier and marketing agreements along with several larger than usual
customer receivable write-offs resulted in a one-time charge to operations of
$303,129. Excluding these charges to operations during 2005, selling expenses
in 2006 decreased by less than 1.0% compared to 2005.
General and administrative expenses increased 12.0% for 2006 compared to 2005
as increases in professional fees, health and life insurance premiums and
expenses associated with funding the Company's defined benefit pension plan
continue to rise.
II-6
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2006 Compared to 2005 (Continued)
--------------------------------
In response to continuing increases in the cost associated with maintaining the
Company's defined benefit pension plan, the Board of Directors of Paradise,
Inc. authorized the following corporate action. The Board elected to freeze
pension plan benefit accruals effective November 30, 2006, provide 100% vesting
for all active participants as of November 30, 2006, terminate the pension plan
effective December 31, 2006 and establish a 401(k) retirement plan for all
active pension plan participants effective January 1, 2007.
Furthermore, the Company has fully complied with all accounting and disclosure
provisions of FASB #158, "Employer's Accounting for Defined Pension and Other
Post-retirement Plans", issued by the Financial Accounting Standard Board in
October, 2006. This accounting treatment is reflected in the Company's
Consolidated Statement of Income and is expanded upon in Footnote 10 of the
enclosed report.
Depreciation and amortization expenses increased by 6.3% for 2006 compared to
the prior year primarily due to the increase in amortization expense associated
with the asset purchase of a competitor's glace' fruit business. As disclosed
in previous filings, Paradise, Inc. entered into this agreement during June
2006, purchasing a competitor's customer list, remaining glace' fruit inventory
and a non-compete agreement which is being amortized over a period of ten
years. Total consideration equaled $1,646,000 with $671,000 paid in cash at
closing. The remaining balance of $975,000 is payable in the following
installments: $425,000 - December 2007; $275,000 - December 2008; and a final
payment of $275,000 - December 2009.
Interest expense for 2006 increased by $57,230 compared to the prior year for
the following two reasons. First, the rate of interest charged by Paradise,
Inc.'s primary bank on its short-term revolving line of credit increased
throughout the year. Second, the accrual of imputed interest at 6% commencing
July 2006 was applied against the amounts due note disclosed in the previous
paragraph.
In summary, based upon the information above, Paradise, Inc. generated
consolidated net sales of $26,072,149 for 2006 compared to $24,951,824 for
2005. Net Income for 2006 was $379,914 or $.73 earnings per share compared to
Net Income for 2005 of $556,780 or $1.07 earnings per share.
II-7
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
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
fruit products at prices ranging from 2-5% lower than in the previous year.
II-8
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2005 Compared to 2004 (Continued)
--------------------------------
This was 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.
II-9
Item 6. Management's Discussion and Analysis or Plan of Operation (Continued)
(3) Results of Operations (Continued)
2005 Compared to 2004 (Continued)
--------------------------------
The proceeds from this sale were used to assist in the funding for 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 facilitated 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.
II-10
Item 7. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of
Paradise, Inc.
Plant City, FL 33563
We have audited the accompanying consolidated balance sheets of Paradise, Inc.,
and subsidiaries as of December 31, 2007 and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity
and cash flows for the year 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 audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2007 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Paradise, Inc., and subsidiaries as of December 31, 2007 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
Respectfully submitted,
/s/ Pender Newkirk and Co., LLP
PENDER NEWKIRK AND CO., LLP
Certified Public Accountants
Tampa, Florida
March 24, 2008
II-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of
Paradise, Inc.
Plant City, FL 33563
We have audited the accompanying consolidated balance sheets of Paradise, Inc.,
and subsidiaries as of December 31, 2006 and 2005, 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, 2006 and 2005, 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
March 16, 2007
II-12
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
DECEMBER 31,
2007 2006 2005
------ ------ ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,193,207 $ 5,271,385 $ 4,069,884
Accounts Receivable, Net of
Allowance for Doubtful
Accounts of $ -0- and
Allowance for Returns of
$1,151,811 (2007), $1,124,000
(2006) and $981,000 (2005) 1,775,793 641,674 2,085,033
Inventories 7,578,006 6,433,402 6,077,413
Prepaid Expenses and Other
Current Assets 472,876 497,565 326,658
Deferred Income Tax Asset 470,929 391,186 175,932
---------- ---------- ----------
Total Current Assets 13,490,811 13,235,212 12,734,920
PROPERTY, PLANT AND EQUIPMENT:
Net of Accumulated Depreciation of
$16,183,229 (2007), $15,500,258
(2006) and $14,615,187 (2005) 5,520,252 5,963,152 5,962,979
GOODWILL 413,280 413,280 413,280
CUSTOMER BASE AND NON-COMPETE
AGREEMENT 1,069,172 1,195,057
OTHER ASSETS 447,408 411,861 466,007
---------- ---------- ----------
TOTAL ASSETS $ 20,940,923 $ 21,218,562 $ 19,577,186
========== ========== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements
II-13
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DECEMBER 31,
2007 2006 2005
------ ------ ------
CURRENT LIABILITIES:
Short-Term Debt $ 154,489 $ 90,676 $ 10,785
Accounts Payable 746,902 1,060,036 570,547
Accrued Expenses 1,754,391 1,972,430 1,396,542
Income Taxes Payable 247,112 305,766 390,097
Current Portion of Long-Term Debt 423,115 525,781 219,328
---------- ---------- ----------
Total Current Liabilities 3,326,009 3,954,689 2,587,299
LONG-TERM DEBT,
NET OF CURRENT PORTION 515,188 938,725 610,033
DEFERRED INCOME TAX LIABILITY 297,373 352,595 431,784
---------- ---------- ----------
Total Liabilities 4,138,570 5,246,009 3,629,116
---------- ---------- ----------
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 15,886,998 15,101,418 14,799,406
Accumulated Other Comprehensive
Income (Loss) ( 271,447 ) ( 315,667 ) ( 38,138 )
---------- ---------- ----------
17,079,272 16,249,472 16,224,989
Less: Common Stock in Treasury,
at Cost, 63,744 Shares 276,919 276,919 276,919
---------- ---------- ----------
Total Stockholders' Equity 16,802,353 15,972,553 15,948,070
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 20,940,923 $ 21,218,562 $ 19,577,186
========== ========== ==========
II-14
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2007 2006 2005
------ ------ ------
NET SALES $ 25,480,339 $ 26,072,149 $ 24,951,824
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of Goods Sold
(Excluding Depreciation) 18,153,670 19,404,930 18,665,504
Selling, General and
Administrative Expenses 4,985,480 4,943,774 5,008,995
Depreciation and Amortization 854,800 910,476 856,706
Interest Expense 239,009 246,448 189,218
---------- ---------- ----------
Total Costs and Expenses 24,232,959 25,505,628 24,720,423
---------- ---------- ----------
INCOME FROM OPERATIONS 1,247,380 566,521 231,401
GAIN ON SALE OF PROPERTY,
PLANT AND EQUIPMENT 697,266
OTHER INCOME - NET 104,776 41,842 45,136
---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,352,156 608,363 973,803
PROVISION FOR INCOME TAXES 514,641 228,449 417,023
---------- ---------- ----------
NET INCOME 837,515 379,914 556,780
OTHER COMPREHENSIVE INCOME:
Unrealized Gain on Pension Plan,
Net of Tax 326,805
Unrealized Gain on Available
for Sale Securities, Net of Tax 44,220 8,370 16,201
---------- ---------- ----------
COMPREHENSIVE INCOME $ 881,735 $ 715,089 $ 572,981
========== ========== ==========
EARNINGS PER SHARE:
Basic $ 1.61 $ 0.73 $ 1.07
==== ==== ====
Diluted $ 1.61 $ 0.73 $ 1.07
==== ==== ====
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements II-15
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
----------------------------------------------------------
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE
STOCK PAR VALUE EARNINGS INCOME
------ ---------- -------- ----------
Balance, December 31,
2004 $ 174,928 $ 1,288,793 $ 14,294,561 $( 54,339 )
Cash Dividends Declared,
$.10 per Share ( 51,935 )
Unrealized Gain on
Appreciation of
Marketable Equity
Securities 16,201
Net Income 556,780
------- --------- ---------- -------
Balance, December 31,
2005 174,928 1,288,793 14,799,406 ( 38,138 )
Cash Dividends Declared,
$.15 per Share ( 77,902 )
Unrealized Gain on
Appreciation of
Marketable Equity
Securities 8,370
Adjustment to initially
apply FASB Statement
No. 158, Net of Tax ( 612,704 )
Gain on Retirement Plan 326,805
Net Income 379,914
------- --------- ---------- -------
Balance, December 31,
2006 174,928 1,288,793 15,101,418 ( 315,667 )
Cash Dividends Declared,
$.10 per Share ( 51,935 )
Unrealized Gain on
Appreciation of
Marketable Equity
Securities 44,220
Net Income 837,515
------- --------- ---------- -------
Balance, December 31,
2007 $ 174,928 $ 1,288,793 $ 15,886,998 $( 271,447 )
======= ========= ========== =======
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements
II-16
TREASURY
STOCK TOTAL
-------- ----------
$( 276,919 ) $ 15,427,024
( 51,935 )
16,201
556,780
------- ----------
( 276,919 ) 15,948,070
( 77,902 )
8,370
( 612,704 )
326,805
379,914
------- ----------
( 276,919 ) 15,972,553
( 51,935 )
44,220
837,515
------- ----------
$( 276,919 ) $ 16,802,353
======= ==========
II-17
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2007 2006 2005
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 837,515 $ 379,914 $ 556,780
Adjustments to Reconcile Net
Income to Net Cash Provided by
(Used in) Operating Activities:
Allowance for Sales Returns 27,811 143,000 ( 204,000 )
Provision for Estimated Inventory
Returns ( 19,147 ) ( 141,000 ) 198,000
Decrease in Net Deferred Income
Tax Liability (Asset) ( 134,965 ) ( 133,625 ) ( 2,726 )
Depreciation and Amortization 854,800 910,476 856,706
Gain on Sale of Property,
Plant and Equipment ( 697,266 )
Changes in Assets and Liabilities,
Net of Acquisition:
Accounts Receivable ( 1,161,930 ) 1,300,359 ( 1,405,822 )
Inventories ( 1,144,604 ) ( 214,989 ) 261,841
Prepaid Expenses and Other
Current Assets 31,402 ( 170,907 ) 125,637
Income Tax Refund Receivable 365,485
Other Assets 1,363 7,462 16,201
Accounts Payable ( 313,134 ) 489,489 352,817
Accrued Expenses ( 217,679 ) 129,171 406,830
Income Taxes Payable ( 58,654 ) ( 84,331 ) 390,097
--------- --------- ---------
Net Cash Provided by (Used in)
Operating Activities ( 1,297,222 ) 2,615,019 1,220,580
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on Sale of Property,
Plant and Equipment 897,266
Purchase of Property, Plant and
Equipment ( 259,532 ) ( 792,652 ) ( 518,622 )
Construction in Progress ( 696,605 )
Purchase of Customer Base and
Non-Compete Agreement ( 425,000 )
--------- --------- ---------
Net Cash Used in Investing
Activities ( 259,532 ) ( 1,217,652 ) ( 317,961 )
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds (Repayments) of
Short-Term Debt 63,813 79,891 ( 34,431 )
Proceeds from Issuance of
Long-Term Debt 27,345 23,296
II-18
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2007 2006 2005
------ ------ ------
Principal Payments on Long-Term
Debt ( 533,302 ) ( 225,200 ) ( 253,285 )
Dividends Paid ( 51,935 ) ( 77,902 ) ( 51,935 )
Increase (Decrease) in
Other Assets 224,809
--------- --------- ---------
Net Cash Used in Financing
Activities ( 521,424 ) ( 195,866 ) ( 91,546 )
--------- --------- ---------
Net Increase (Decrease) in Cash ( 2,078,178 ) 1,201,501 811,073
CASH AND CASH EQUIVALENTS,
at Beginning of Year 5,271,385 4,069,884 3,258,811
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
at End of Year $ 3,193,207 $ 5,271,385 $ 4,069,884
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 239,009 $ 203,114 $ 200,359
======= ======= =======
Income Taxes $ 388,480 $ 320,000 $
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Unrealized Holding Gain on
Securities $ 44,220 $ 8,370 $ 16,201
======= ======= =======
Customer Base Acquired and
Non-Compete Agreement Entered
with Unrelated Party $ $ 1,258,850 $
Cash Paid ( 425,000 )
--------- --------- -------
Note Payable Issued $ $ 833,850 $
========= ========= =======
II-19
PARADISE, INC.
AND SUBSIDIARIES
================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
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-20
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
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. Also, based
on market conditions, the processing of frozen strawberry products, for sale to
commercial and institutional users such as preserves, dairies, drink
manufacturers, etc. 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. Substantially all of the Company's customers are
located in the United States of America.
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.
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, which approximates
carrying value, 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.
II-21
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 shipment of goods to its customers.
Inventories
-----------
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost includes material, labor, factory overhead and depreciation.
Property, Plant and Equipment
-----------------------------
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
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-22
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable Equity Securities and Deferred Compensation
------------------------------------------------------
The Company holds marketable securities as a trustee under the terms of a
trust agreement to provide compensation benefits to two key executives upon
retirement. 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. Included in accrued expenses at December 31, 2007 and 2006 is
$195,362 and $156,194 of deferred compensation related to these agreements.
The Company records unrealized gains and losses on marketable equity
securities available for sale in the stockholders' equity section of its
balance sheet as a component of Accumulated Other Comprehensive Income
(Loss).
When securities are sold, the cost of securities sold is based on weighted
average cost in order to determine gross realized gains and losses.
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.
Goodwill
--------
Goodwill totaling $413,280 represents the excess purchase price over the
fair value of the net assets acquired in the acquisition of Mastercraft
Products, Corporation. These costs are reviewed annually for impairment
pursuant to SFAS No. 142, Goodwill and Other Intangible Assets.
Identifiable Intangible Assets
------------------------------
Customer Base and Non-Compete Agreement
---------------------------------------
The customer base and non-compete agreement represents $1,258,000 of the
fair value of these assets pursuant to the Company's purchase during 2006
of an unrelated entity's inventories, their customer list and a non-
compete agreement for a period of ten years. The customer base and non-
compete agreement are being amortized over ten years.
II-23
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Identifiable Intangible Assets
------------------------------------
Identifiable 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 in 2004, the Company
entered into a covenant not to compete agreement with the former owner in
the amount of $123,000. It was amortized over a period of 36 months and
is fully amortized.
Debt issue costs incurred of $84,662 and $18,971 are being amortized over
the term of the agreement of 24 months and 84 months, respectively.
Amortization expense for the years ended December 31, 2007, 2006 and 2005
was $162,097, $120,317 and $59,710, respectively.
Accumulated amortization for the same periods totaled $381,737 (2007),
$196,403 (2006) and $76,086 (2005).
Future amortization expense is anticipated to be as follows:
2008 $149,015
2009 $134,430
2010 $128,595
2011 $125,885
2012 $125,885
Thereafter $439,086
Selling Expenses
----------------
The Company considers freight delivery costs to be selling expenses and has
included $564,799 (2007), $575,877 (2006) and $632,418 (2005) 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 $122,528 (2007), $208,659 (2006) and $297,211
(2005) and are included in selling, general and administrative expenses in
the income statement.
II-24
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee Benefit Plan
---------------------
The Company established a 401(k) retirement plan on January 1, 2007 to
replace the Company's defined benefit pension plan. All active employees in
the defined benefit pension plan may elect to transfer their vested pension
balance directly into the 401(k) plan. Eligibility requirements for new
employees are based on completing 1,000 hours of service by the end of the
first twelve months of consecutive employment and being at least 21 years
old. Employee contributions are voluntary and subject to Internal Revenue
Service limitations. The Company provides a matching contribution subject to
annual review of the Company's financial performance. For the year ended
December 31, 2007, the Company incurred $54,266 in 401(k) expense.
Earnings Per 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 2007, 2006 and 2005 for basic). There are no
dilutive securities outstanding at December 31, 2007, 2006 and 2005.
Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 2: INVENTORIES
2007 2006 2005
------ ------ ------
Supplies $ 140,868 $ 160,885 $ 202,743
Raw Materials 1,457,375 1,626,330 1,516,514
Work in Progress 713,092 517,142 137,459
Finished Goods 5,266,671 4,129,045 4,220,697
--------- --------- ---------
TOTAL $ 7,578,006 $ 6,433,402 $ 6,077,413
========= ========= =========
II-25
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 2: INVENTORIES (CONTINUED)
Included in Finished Goods inventory are estimated returns related to the
Allowance for Sales Returns totaling $996,147 (2007), $977,000 (2006) and
$836,000 (2005).
Substantially all inventories are pledged as collateral for certain short-
term obligations as well as long-term obligations.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
2007 2006 2005
------ ------ ------
Land and Improvements $ 656,040 $ 656,040 $ 656,040
Buildings and Improvements 6,941,132 6,933,632 5,957,590
Machinery and Equipment 14,106,309 13,873,738 13,267,931
---------- ---------- ----------
Total 21,703,481 21,463,410 19,881,561
Less: Accumulated Depreciation 16,183,229 15,500,258 14,615,187
---------- ---------- ----------
5,520,252 5,963,152 5,266,374
Construction in Progress 696,605
--------- ---------- ----------
NET $ 5,520,252 $ 5,963,152 $ 5,962,979
========== ========== ==========
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.
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, 2007, 2006 and
2005 was $692,702, $790,158 and $796,996, respectively.
II-26
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 4: INVESTMENT IN MARKETABLE EQUITY SECURITIES
Available-for-sale securities, which are included in other assets in the
balance sheet, consist of the following:
2007 2006 2005
------ ------ ------
Equity Mutual Funds, at cost $ 281,837 $ 281,833 $ 281,817
Gross Unrealized Losses,
Before Tax ( 18,351 ) ( 62,568 ) ( 70,923 )
------- ------- -------
Total Marketable Equity
Securities, at Fair Value $ 263,486 $ 219,265 $ 210,894
======= ======= =======
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:
2007 2006 2005
---- ---- ------
Unrealized Gains on Appreciation
of Marketable Equity Securities $ 44,220 $ 8,370 $ 16,201
====== ===== ======
NOTE 5: SHORT-TERM DEBT
2007 2006 2005
------ ------ ------
Letters of credit and other short-
term debt under a revolving line of
credit with a bank. $ 154,489 $ 90,676 $ 10,785
------- ------ ------
TOTAL $ 154,489 $ 90,676 $ 10,785
======= ====== ======
II-27
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 5: SHORT-TERM DEBT (CONTINUED)
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
2007 AMOUNT INTEREST RATE
------ -------- ----------------
Average bank short-term
borrowings (monthly) $ 920,833 8.40%
Average aggregate short-term
borrowings (monthly) $ 1,182,975 11.11%
Maximum aggregate short-term
borrowings (at any month-end) $ 4,380,027
WEIGHTED AVERAGE
2006 AMOUNT INTEREST RATE
------ -------- ----------------
Average bank short-term
borrowings (monthly) $ 1,393,750 7.76%
Average aggregate short-term
borrowings (monthly) $ 2,648,827 6.12%
Maximum aggregate short-term
borrowings (at any month-end) $ 7,533,475
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%
Maximum aggregate short-term
borrowings (at any month-end) $ 6,743,263
Pursuant to a revolving 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.
II-28
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 5: SHORT-TERM DEBT (CONTINUED)
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 loan agreement is secured by all of the Company's assets, whether tangible
or intangible.
The amount available to be drawn down based on the available collateral at
December 31, 2007 was $5,633,013, at December 31, 2006 was $4,140,740 and at
December 31, 2005 was $5,073,533.
NOTE 6: LONG-TERM DEBT
2007 2006 2005
------ ------ ------
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, 2010. $ 402,796 $ 570,394 $ 737,993
Note Payable, 0% stated interest,
6% imputed interest, payments of
$275,000 and $275,000 due
December 2008 and 2009,
respectively. 499,650 833,000
Note Payable, Other 7,099
Obligations under capital leases. 35,857 61,112 84,269
------- --------- -------
Total Debt 938,303 1,464,506 829,361
Less, Current Portion 423,115 525,781 219,328
------- --------- -------
LONG-TERM DEBT $ 515,188 $ 938,725 $ 610,033
======= ========= =======
II-29
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 6: LONG-TERM DEBT (CONTINUED)
The aggregate principal amounts, excluding obligations under capital leases,
maturing in each of the subsequent years are:
2008 $ 409,599
2009 426,099
2010 66,748
-------
Total $ 902,446
=======
NOTE 7: LEASES
The Company has certain equipment leases which are classified as capital
leases. At December 31, 2007, 2006 and 2005, the amount capitalized was
$158,679, $158,679 and $395,799, respectively, and the accumulated
amortization was $66,431 (2007), $50,563 (2006) and $163,333 (2005).
The amount recognized as an obligation was $35,857 (2007), $61,112 (2006)
and $84,269 (2005), respectively, which has been included in
long-term debt shown in Note 6. 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 $59,614 (2007), $77,195
(2006) and $67,692 (2005).
At December 31, 2007, 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
--------------------------- -------------- --------
2008 $ 15,558 $ 56,853
2009 11,966 41,077
2010 9,474 23,819
2011 2,943 2,232
2012
------ -------
Total Minimum Lease Payments 39,941 $ 123,981
Less, Amount Representing Interest 4,084 =======
------
PRESENT VALUE OF FUTURE MINIMUM
CAPITAL LEASE PAYMENTS $ 35,857
======
II-30
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 8: ACCRUED EXPENSES
2007 2006 2005
------ ------ ------
Accrued Payroll and Bonuses $ 274,706 $ 276,527 $ 137,968
Accrued Brokerage Payable 299,096 315,520 290,174
Accrued Pension Cost (Note 10) 446,717 446,717 168,686
Other Accrued Expenses 21,510 74,320 67,553
Coupon Reimbursement 100,000 87,500 67,501
Accrued Credit Due to Customers 318,754 457,596 566,504
Accrued Insurance Payable 98,246 158,056 98,156
Accrued Deferred Compensation 195,362 156,194
--------- --------- ---------
TOTAL $ 1,754,391 $ 1,972,430 $ 1,396,542
========= ========= =========
NOTE 9: RETIREMENT PLAN
The Company and its subsidiaries had 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 2007, 2006 and 2005 was
$0, $184,457 and $207,660, respectively, which includes amortization of
past service cost over 10 years. The Company made annual contributions to
fund the plan equal to the amounts deductible for Federal Income Tax
purposes.
The Company elected to freeze the pension plan benefit accruals effective
November 30, 2006, provide 100% vesting for all active participants as of
November 30, 2006 and terminate the pension plan effective December 31, 2006.
The Company has filed with the appropriate regulators and will terminate the
plan in 2008 once approvals have been given. The Company has treated the action
as a curtailment as no further benefits will accrue after November 30, 2006.
II-31
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 9: RETIREMENT PLAN (CONTINUED)
The following table sets forth the changes in benefit obligations, changes in
plan assets and the reconciliation of funded status for 2007, 2006 and 2005:
2007 2006 2005
------ ------ ------
Change in Benefit Obligation:
Benefit Obligation at Beginning
of Year $ 3,590,367 $ 3,764,387 $ 3,475,312
Service Cost 183,899 174,942
Interest Cost 193,955 182,081
Actuarial Loss 1,126,955 120,167
Benefits Paid ( 111,278 ) ( 188,115 )
Effect of Curtailment ( 1,567,551 )
--------- --------- ---------
Benefit Obligation at End of Year 3,590,367 3,590,367 3,764,387
--------- --------- ---------
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year 3,143,650 2,931,132 2,695,393
Actual Return on Plan Assets 277,396 216,191
Employer Contributions 46,400 207,663
Benefits Paid ( 111,278 ) ( 188,115 )
--------- --------- ---------
Fair Value of Plan Assets at
End of Year 3,143,650 3,143,650 2,931,132
--------- --------- ---------
Funded Status at end of year
(Underfunded) ( 446,717 ) ( 446,717 )
--------- --------- ---------
Amounts recognized in Statement
of Financial Position
Current Deferred Income Tax
Assets 160,818 160,818 N/A
Current Liabilities ( 446,717 ) ( 446,717 ) N/A
--------- --------- ---
Accumulated Other Comprehensive
Income, Net of Current Deferred
Income Tax Assets ( 285,899 ) ( 285,899 ) N/A
--------- --------- ---
II-32
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 9: RETIREMENT PLAN (CONTINUED)
2007 2006 2005
---- ---- ----
Weighted-average assumptions used to
determine benefit obligations
Discount rate N/A 4.69% 5.25%
Rate of compensation increase N/A 3.96% 4.01%
The 12/31/2006 amounts include the effect of the plan curtailment.
The items marked N/A were new in 2006 due to the application of SFAS 158.
Retrospective application was not required. The cumulative effect of
approximately $612,000, net of tax, was recognized as an adjustment to
Accumulated Other Comprehensive Income in 2006.
The Components of Net Periodic Benefit Cost and Other Changes Recognized in
Other Comprehensive Income (OCI) for 2007, 2006 and 2005 included the
following components:
2007 2006 2005
---- ---- ----
Components of net periodic benefit cost
Service Cost $ $ 183,899 $ 174,942
Interest Cost 193,955 182,081
Expected Return on Plan Assets ( 192,546 ) ( 172,303 )
Amortization of net loss 29,383 27,746
Amortization of Prior Service
(Credit) ( 31,488 ) ( 31,488 )
Effect of Curtailment ( 12,709 )
------- ------- -------
Net Periodic Benefit Cost $ $ 170,494 $ 180,978
======= ======= =======
2007 2006 2005
---- ---- ----
Other Changes Recognized in OCI
Net loss $ $ 1,042,105 N/A
Amortization of Net Gain ( 29,383 ) N/A
Amortization of Prior Service
Cost 31,488 N/A
Amount Recognized Due to Curtailment ( 1,554,842 ) N/A
--------- --------- ---
II-33
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 9: RETIREMENT PLAN (CONTINUED)
2007 2006 2005
---- ---- ----
Total Recognized in Other
Comprehensive Income (Loss) ( 510,632 ) N/A
Deferred Income Tax Expense 183,827 N/A
--------- --------- ---
Net Amount Recognized in Other
Comprehensive Income (Loss) $ $( 326,805 ) N/A
========= ========= ===
Total Recognized in Net Periodic
Benefit Cost and OCI Gain $ $( 156,311 ) N/A
========= ========= ===
Weighted-Average Assumptions Used to
Determine Net Periodic Benefit Cost
Discount Rate N/A 5.25% 5.50%
Expected Long-Term Return on Plan Assets N/A 6.50% 6.50%
Rate of Compensation Increase N/A 4.01% 4.01%
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.
2007 2006 2005
------ ------ ------
Comparison of Obligations to
Plan Assets:
Projected benefit obligation $ 3,590,367 $ 3,590,367 $ 3,764,387
Accumulated benefit obligation 3,590,367 3,590,367 2,896,637
Fair value of plan assets at
measurement date 3,102,650 3,102,650 2,931,132
II-34
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 9: RETIREMENT PLAN (CONTINUED)
2007 2006 2005
------ ------ ------
Plan Assets by Category:
Cash and cash equivalents 100% 100% 0%
Equity securities 0% 0% 48%
Debt securities 0% 0% 13%
Real estate 0% 0% 0%
Uncategorized - Whole Life
Insurance Contract 0% 0% 39%
--- --- ---
Total 100% 100% 100%
=== === ===
Description of investment policies
----------------------------------
Prior to 2006, the assets of the Plan were allocated in a diversified
portfolio of investments. The portfolio was primarily invested in mutual
funds with a significant portion of the Plan's assets allocated to the
cash value of life insurance contracts. During 2006, Paradise, Inc.
elected to file for termination of the Company's Defined Benefit Pension
Plan. With the possibility that the process to receive governmental
approval to terminate the Plan taking upwards of 12-18 months, Paradise,
Inc. re-directed 100% of its pension plan investments to a money market
account. This investment strategy is conservative and is solely designed
to provide for the protection of the Plan's assets during the termination
period.
Estimated future contributions
------------------------------
In 2008, the Company expects to make $446,717 of contributions directly
to pension plan assets. The Company does not expect to make any further
contributions due to the planned termination of the pension plan.
II-35
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 9: RETIREMENT PLAN (CONTINUED)
Estimated future benefit payments
---------------------------------
The benefit payments expected to be paid in 2008 are $3,590,367. No
benefit payments are expected after 2008. These amounts are based on
current data and assumptions.
NOTE 10: PROVISION FOR FEDERAL AND STATE INCOME TAXES
The provisions for income taxes are comprised of the following amounts:
2007 2006 2005
------ ------ ------
CURRENT:
Federal $ 542,943 $ 299,837 $ 372,490
State 92,650 51,035 47,260
------- ------- -------
635,593 350,872 419,750
------- ------- -------
DEFERRED:
Federal ( 103,273 ) ( 104,530 ) ( 2,328 )
State ( 17,679 ) ( 17,893 ) ( 399 )
------- ------ -------
( 120,952 ) ( 122,423 ) ( 2,727 )
------- ------- -------
TOTAL PROVISION FOR
INCOME TAXES $ 514,641 $ 228,449 $ 417,023
======= ======= =======
II-36
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 10: PROVISION FOR FEDERAL AND STATE INCOME TAXES (CONTINUED)
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:
2007 2006 2005
------ ------ ------
Income Taxes Computed at
Statutory Rate $ 439,669 $ 206,576 $ 331,093
State Income Tax, Net of Federal
Income Tax Benefit 74,972 21,873 32,313
Other, Net 53,617
------- ------- -------
PROVISION FOR INCOME TAXES $ 514,641 $ 228,449 $ 417,023
======= ======= ======
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, 2007, 2006 and 2005 were:
2007 2006 2005
------ ------ ------
Deferred Tax Assets resulting from:
Inventory Valuation $ 190,785 $ 105,075 $ 97,019
Allowance for Sales Returns
and Related Provision for
Return of Finished Goods 58,569 55,316 54,563
Unrealized Loss on Investments 6,731 11,201 24,350
Deferred Compensation Liability 46,744 58,776
Retirement Plan Unfunded Liability 168,100 160,818
------- ------- -------
Total Deferred Tax Assets 470,929 391,186 175,932
------- ------- -------
II-37
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 10: PROVISION FOR FEDERAL AND STATE INCOME TAXES (CONTINUED)
2007 2006 2005
------ ------ ------
Deferred Tax Liabilities resulting from:
Tax over Book Depreciation 297,373 352,595 431,784
------- ------- -------
Total Deferred Tax Liabilities 297,373 352,595 431,784
------- ------- -------
Net Deferred Tax (Asset) Liability $( 173,556 ) $( 38,591 ) $ 255,852
======= ======= =======
The Net Deferred Tax (Asset)
Liability is reflected in the
Balance Sheet under these captions:
Deferred Income Tax Asset $( 470,929 ) $( 391,186 ) $( 175,932 )
Deferred Income Tax Liability 297,373 352,595 431,784
------- ------- -------
$( 173,556 ) $( 38,591 ) $ 255,852
======= ======= =======
FIN 48
------
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in a company's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes."
This interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted FIN 48 effective January
1, 2007.
II-38
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 10: PROVISION FOR FEDERAL AND STATE INCOME TAXES (CONTINUED)
Significant judgment is required in evaluating our tax positions and
determining our provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the
determination of the ultimate tax effects is uncertain. We record our tax
provision based on current and future income taxes that will be due. In
the determination of our provision, we have taken certain tax positions in
the consideration of the effects of income and expenses that have been
recognized and included in the accompanying financial statements that may
or may not be recognized in the determination of current or future income
taxes. Under FIN 48, we record a liability for these unrecognized tax
benefits when we believe that certain positions might be challenged
despite our belief that our tax return positions are fully supportable.
We review our liability for unrecognized tax benefits quarterly and adjust
it in light of changing facts and circumstances, such as the outcome of
tax audit. As of December 31, 2007, we do not expect that any of the tax
positions taken by the Company for the tax periods open to audit, if
challenged, would result in a significant tax liability.
NOTE 11: 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-39
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 11: BUSINESS SEGMENT DATA (CONTINUED)
YEAR YEAR YEAR
ENDED ENDED ENDED
NET SALES IN EACH SEGMENT 2007 2006 2005
------ ------ ------
Candied Fruit:
Sales to Unaffiliated
Customers $ 17,966,624 $ 18,225,869 $ 16,906,637
Molded Plastics:
Sales to Unaffiliated
Customers 7,513,715 7,846,280 8,045,187
---------- ---------- ----------
NET SALES $ 25,480,339 $ 26,072,149 $ 24,951,824
========== ========== ==========
YEAR YEAR YEAR
ENDED ENDED ENDED
2007 2006 2005
------ ------ ------
THE OPERATING PROFIT OF
EACH SEGMENT IS LISTED BELOW
Candied Fruit $ 5,309,903 $ 4,426,349 $ 3,479,015
Molded Plastics 1,242,848 1,484,029 2,097,688
--------- --------- ---------
OPERATING PROFIT OF SEGMENTS 6,552,751 5,910,378 5,576,703
General Corporate Expenses,
Net ( 4,985,480 ) ( 4,943,774 ) ( 5,008,995 )
General Corporate Depreciation
and Amortization Expense ( 80,882 ) ( 153,635 ) ( 147,089 )
Interest Expense ( 239,009 ) ( 246,448 ) ( 189,218 )
Other Income 104,776 41,842 742,402
--------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES $ 1,352,156 $ 608,363 $ 973,803
========= ========= =========
II-40
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 11: BUSINESS SEGMENT DATA (CONTINUED)
Operating profit is composed of net sales, less direct costs and overhead
costs associated with each segment. The candied fruit segment purchases items
from the molded plastics segment at cost. These transactions are then
eliminated during consolidation. 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.
YEAR YEAR YEAR
ENDED ENDED ENDED
2007 2006 2005
------ ------ ------
IDENTIFIABLE ASSETS OF EACH
SEGMENT ARE LISTED BELOW
Candied Fruit $ 9,814,759 $ 7,422,446 $ 7,907,087
Molded Plastics 5,383,228 6,067,845 5,508,452
---------- ---------- ----------
Identifiable Assets 15,197,987 13,490,291 13,415,539
General Corporate Assets 5,742,936 7,728,271 6,161,647
---------- ---------- ----------
TOTAL ASSETS $ 20,940,923 $ 21,218,562 $ 19,577,186
========== ========== ==========
Included in the Identifiable Assets of the Molded Plastics Segment is goodwill
totaling $413,280 at December 31, 2007, 2006 and 2005.
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.
II-41
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 11: BUSINESS SEGMENT DATA (CONTINUED)
YEAR YEAR YEAR
ENDED ENDED ENDED
2007 2006 2005
------ ------ ------
DEPRECIATION AND
AMORTIZATION EXPENSE OF
EACH SEGMENT ARE LISTED BELOW
Candied Fruit $ 498,002 $ 444,445 $ 460,945
Molded Plastics 275,916 312,396 248,672
------- ------- -------
Segment Depreciation and
Amortization Expense 773,918 756,841 709,617
General Corporate Depreciation
and Amortization Expense 80,882 153,635 147,089
------- ------- -------
TOTAL DEPRECIATION AND
AMORTIZATION EXPENSE $ 854,800 $ 910,476 $ 856,706
======= ======= =======
YEAR YEAR YEAR
ENDED ENDED ENDED
2007 2006 2005
------ ------ ------
CAPITAL EXPENDITURES OF
EACH SEGMENT ARE LISTED BELOW
Candied Fruit $ 83,857 $ 412,814 $ 397,436
Molded Plastics 169,445 343,284 739,703
------- ------- ---------
Segment Capital Expenditures 253,302 756,098 1,137,139
General Corporate Capital
Expenditures 6,230 36,554 78,088
------- ------- ---------
TOTAL CAPITAL EXPENDITURES $ 259,532 $ 792,652 $ 1,215,227
======= ======= =========
The Company conducts operations only within the United States. Foreign sales
are insignificant; primarily all sales are to domestic companies.
II-42
PARADISE, INC.
AND SUBSIDIARIES
================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
--------------------------------
NOTE 12: MAJOR CUSTOMERS
With the continuing acquisitions, mergers and other consolidations in the
supermarket industry, there is increasing concentration of candied fruit
buying activity. During 2007, the Company derived nearly 15% 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 13% of the Company's consolidated revenues. The loss
of any of these customers would have a material adverse effect on
operating earnings.
NOTE 13: 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 $3,299,821 at
December 31, 2007. 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.
NOTE 14: SUBSEQUENT EVENT
On March 18, 2008, the Company declared a regular dividend of $.10 per share
to stockholders of record at April 11, 2008.
II-43
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Our management carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as
of the end of our year ended December 31, 2007 pursuant to Exchange Act
Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that, as of the end of our year
ended December 31, 2007, our disclosure controls and procedures were
effective.
The term "disclosure controls and procedures," as defined under the
Exchange Act, means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
There have been no changes in our internal control over financial
reporting that occurred during the year ended December 31, 2007 that have
materially affected, or are reasonable likely to materially affect, our
internal control over financial reporting.
II-44
Item 8B. Management's Annual Report on Internal Control over
Financial Reporting
Our management, under the supervision and with the participation of our
President and Chief Executive Officer and our Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control
over financial reporting as such term is defined in Exchange Act Rule 13a-
15(f). Our management has assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007. Management's
evaluation was based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of
our assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance
with authorizations of our management and board of directors; and
(3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over financial
reporting determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and may not prevent or
detect all misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Based on the COSO criteria and our management's evaluation, our management
believes our internal control over financial reporting as of December 31,
2007 was effective.
II-45
Item 8B. Management's Annual Report on Internal Control over
Financial Reporting (Continued)
Important Considerations
------------------------
The effectiveness of our disclosure controls and procedures and our
internal control over financial reporting is subject to various inherent
limitations, including cost limitations, judgments used in decision
making, assumptions about the likelihood of future events, the soundness
of our systems, the possibility of human error, and the risk of fraud.
Moreover, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of
changes in conditions and the risk that the degree of compliance with
policies or procedures may deteriorate over time. Because of these
limitations, there can be no assurance that any system of disclosure
controls and procedures or internal control over financial reporting will
be successful in preventing all errors or fraud or in making all material
information known in a timely manner to the appropriate levels of
management.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation
by the Company's registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
II-46
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, 74 years old.
Term of office will expire at next stockholders'
meeting. Officer with Registrant past 43 years.
Eugene L. Weiner - Vice-President of the Registrant, 76 years old.
Term of office will expire at next stockholders'
meeting. Officer with Registrant past 42 years.
(See note on page III-2)
Randy S. Gordon - President of the Registrant, 52 years old. Term
of office will expire at next stockholders'
meeting. Employee or officer of Registrant past
29 years.
Tracy W. Schulis - Senior Vice-President and Secreta]]>