OVERHILL FARMS INC - FORM 10-Q

Attached files

file	filename
EX-32 - OVERHILL FARMS, INC. EXHIBIT 32 4-3-2011 - OVERHILL FARMS INC	ex32.htm
EX-31.2 - OVERHILL FARMS, INC. EXHIBIT 31.2 4-3-2011 - OVERHILL FARMS INC	ex31_2.htm
EX-31.1 - OVERHILL FARMS, INC. EXHIBIT 31.1 4-3-2011 - OVERHILL FARMS INC	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2011

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-16699

OVERHILL FARMS, INC.

(Exact name of registrant as specified in its charter)

	Nevada		75-2590292
	(State or other jurisdiction of		(IRS Employer
	incorporation or organization)		Identification Number)

	2727 East Vernon Avenue
	Vernon, California		90058
	(Address of principal executive offices)		(Zip code)

(323) 582-9977

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer [ ]	Accelerated Filer [ ]
Non-Accelerated Filer [ ]	Smaller Reporting Company [X]

(Do not check if smaller reporting company)

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

Yes [ ] No [X]

As of May 13, 2011, there were 15,823,271 shares of the issuer’s common stock, $.01 par value, outstanding.

OVERHILL FARMS, INC.

FORM 10-Q

QUARTER ENDED APRIL 3, 2011

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION	Page No.

	Item 1. Financial Statements

	Condensed Balance Sheets as of April 3, 2011 (unaudited) and September 26, 2010	1

	Condensed Statements of Income (unaudited) for the Quarters Ended April 3, 2011 and March 28, 2010	3

	Condensed Statements of Income (unaudited) for the Six Months Ended April 3, 2011 and March 28, 2010	4

	Condensed Statements of Cash Flows (unaudited) for the Six Months Ended April 3, 2011 and March 28, 2010	5

	Notes to Condensed Financial Statements (unaudited)	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	19

	Item 4. Controls and Procedures	20

	PART II – OTHER INFORMATION

	Item 1. Legal Proceedings	20

	Item 6. Exhibits	21

	SIGNATURES	22

	EXHIBITS ATTACHED TO THIS FORM 10-Q	23

Item 1. Financial Statements

OVERHILL FARMS, INC.

CONDENSED BALANCE SHEETS

Assets

				April 3,		September 26,
				2011		2010
				(Unaudited)

Current assets:
	Cash			$	5,076,381	$	5,967,741
	Accounts receivable				12,486,094		14,121,600
	Inventories				15,086,820		13,059,063
	Prepaid expenses and other				1,501,780		1,611,049
	Deferred income taxes				1,073,897		1,073,897
			Total current assets		35,224,972		35,833,350

Property and equipment, at cost:
	Fixtures and equipment				25,458,528		25,041,914
	Leasehold improvements				12,504,667		12,528,025
	Automotive equipment				92,886		92,886
			Property and equipment gross		38,056,081		37,662,825
	Less accumulated depreciation and amortization				(24,170,764)		(22,524,036)
			Total property and equipment		13,885,317		15,138,789

Other non-current assets:
	Goodwill				12,188,435		12,188,435
	Deferred financing costs, net of accumulated amortization of $435,000
		and $379,000 at April 3, 2011 and September 26, 2010, respectively			181,214		235,484
	Other				2,172,362		2,381,261
			Total other non-current assets		14,542,011		14,805,180

Total assets				$	63,652,300	$	65,777,319

The accompanying notes are an integral part

of these condensed financial statements.


OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS (continued)



Liabilities and Stockholders’ Equity


					April 3,		September 26,
					2011		2010
					(Unaudited)
Current liabilities:
	Accounts payable			$	8,557,510	$	8,203,803
	Accrued liabilities				3,125,092		3,248,436
			Total current liabilities		11,682,602		11,452,239

Long-term accrued liabilities					575,416		536,730
Deferred tax liabilities					1,519,463		1,519,463
Long-term debt, less current maturities					7,672,647		13,197,647
			Total liabilities		21,450,128		26,706,079



Commitments and contingencies


Stockholders’ equity:
	Preferred stock, $0.01 par value, authorized 50,000,000 shares, 4.43
		designated as Series A Convertible Preferred Stock, 0 shares
		issued and outstanding			-		-
	Common stock, $0.01 par value, authorized 100,000,000 shares, 15,823,271
		shares issued and outstanding at April 3, 2011 and September 26, 2010			158,233		158,233
	Additional paid-in capital				11,558,479		11,558,479
	Retained earnings				30,485,460		27,354,528
			Total stockholders’ equity		42,202,172		39,071,240

Total liabilities and stockholders’ equity				$	63,652,300	$	65,777,319

The accompanying notes are an integral part

of these condensed financial statements.

OVERHILL FARMS, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

			For the Quarter Ended
			April 3,		March 28,
			2011		2010

Net revenues		$	40,539,552	$	50,459,303
Cost of sales			36,008,722		43,640,235
Gross profit			4,530,830		6,819,068

Selling, general and administrative expenses			2,039,032		2,691,512

Operating income			2,491,798		4,127,556

Interest expense:
	Interest expense		(52,845)		(244,209)
	Amortization of debt discount and deferred financing costs		(27,179)		(101,504)
Total interest expense			(80,024)		(345,713)


Income before income taxes			2,411,774		3,781,843

Income taxes			889,945		1,421,217

Net income		$	1,521,829	$	2,360,626

Net income per share:
	Basic	$	0.10	$	0.15
	Diluted	$	0.09	$	0.15

Shares used in computing net income per share:
	Basic		15,823,271		15,823,271
	Diluted		16,061,133		16,046,275

The accompanying notes are an integral part

of these condensed financial statements.

OVERHILL FARMS, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

			For the Six Months Ended
			April 3,		March 28,
			2011		2010

Net revenues		$	85,301,010	$	106,691,840
Cost of sales			75,799,756		91,986,643
Gross profit			9,501,254		14,705,197

Selling, general and administrative expenses			4,313,921		5,253,293

Operating income			5,187,333		9,451,904

Interest expense:
	Interest expense		(116,446)		(575,323)
	Amortization of debt discount and deferred financing costs		(55,388)		(203,008)
Total interest expense			(171,834)		(778,331)


Other expense			-		(1,000)

Income before income taxes			5,015,499		8,672,573

Income taxes			1,884,567		3,259,153

Net income		$	3,130,932	$	5,413,420

Net income per share:
	Basic	$	0.20	$	0.34
	Diluted	$	0.20	$	0.34

Shares used in computing net income per share:
	Basic		15,823,271		15,823,271
	Diluted		16,053,629		16,048,947

The accompanying notes are an integral part

of these condensed financial statements.

OVERHILL FARMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

					For the Six Months Ended
					April 3,		March 28,
					2011		2010

Operating Activities:
	Net income				$	3,130,932	$	5,413,420
	Adjustments to reconcile net income to net cash provided by
		operating activities:
			Depreciation and amortization			1,936,172		1,980,846
			Amortization of debt discount and deferred financing costs			55,388		203,008
			Recovery for doubtful accounts			-		(10,000)
			Gain on sale of property and equipment			-		(57)
			Changes in:
				Accounts receivable		1,635,506		1,199,791
				Inventories		(2,027,756)		968,263
				Prepaid expenses and other assets		109,269		(101,081)
				Accounts payable		353,707		253,994
				Accrued liabilities		(123,344)		274,940
Net cash provided by operating activities						5,069,874		10,183,124

Investing Activities:
	Additions to property and equipment					(435,117)		(1,151,678)
	Proceeds from sale of property and equipment					-		637
Net cash used in investing activities						(435,117)		(1,151,041)

Financing Activities:
	Principal payments on debt					(5,525,000)		(8,250,000)
	Principal payments on equipment loans					-		(422,830)
	Deferred financing costs					(1,117)		-
Net cash used in financing activities						(5,526,117)		(8,672,830)

Net (decrease) increase in cash						(891,360)		359,253
Cash at beginning of period						5,967,741		5,430,295
Cash at end of period					$	5,076,381	$	5,789,548

Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
	Interest				$	114,663	$	600,193
	Income taxes				$	1,671,065	$	3,186,946

The accompanying notes are an integral part

of these condensed financial statements.

OVERHILL FARMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

April 3, 2011

(Unaudited)

1.	NATURE OF BUSINESS AND ORGANIZATIONAL MATTERS

Overhill Farms, Inc. (the “Company” or “Overhill Farms”) is a value-added manufacturer of high quality, prepared frozen food products for branded retail, private label, foodservice and airline customers. The Company’s product line includes entrées, plated meals, bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish specialties, and organic and vegetarian offerings.

2.	BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended April 3, 2011 are not necessarily indicative of the results that may be expected for the year ending October 2, 2011 or for any other period. Certain prior period amounts have been reclassified to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The condensed balance sheet at September 26, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 26, 2010.

3.	RECENT ACCOUNTING PRONOUNCEMENTS

No new accounting pronouncements were issued during the quarter ended April 3, 2011 and through the date of this filing that the Company believes are applicable or would have a material impact on the Company's financial position or results of operations.

4.	INVENTORIES

Inventories of the Company as of April 3, 2011 and September 26, 2010 are summarized as follows:

	April 3,		September 26,
	2011		2010
	(unaudited)

Raw ingredients	$	5,865,731	$	5,223,444
Finished product		7,487,586		6,225,935
Packaging		1,733,503		1,609,684
	$	15,086,820	$	13,059,063

5.	LONG-TERM DEBT

Long-term debt of the Company as of April 3, 2011 and September 26, 2010 is summarized as follows:

	April 3,		September 26,
	2011		2010
	(unaudited)

Bank of America Revolver	$	7,672,647	$	13,197,647
	$	7,672,647	$	13,197,647

The Company executed a senior secured credit agreement with Bank of America on September 24, 2010. The facility is structured as a $30 million three-year senior secured revolving credit facility, secured by a first priority lien on substantially all the Company’s assets. The Company made an initial loan drawdown of $13.2 million on September 24, 2010, which was used to pay off the Company’s prior credit facility. Under the Bank of America facility the Company has the ability to increase the aggregate amount of the financing by $20 million under certain conditions.

The Bank of America facility bears annual interest at the British Bankers Association LIBOR Rate, or LIBOR, plus an applicable margin (listed below). The margin was initially 1.75%. Beginning on January 1, 2011, and adjusted quarterly thereafter, the margin is calculated as follows:


	Ratio of aggregate outstanding funded commitments under the facility (including letter of credit obligations) to EBITDA for the preceding four quarters		Applicable Margin
	Greater than or equal to 1.50:1		2.00%

	Greater than or equal to 0.50:1
	but less than 1.50:1		1.75%

	Less than 0.50:1		1.50%

As of April 3, 2011, there was $7.7 million outstanding under the Bank of America facility with an applicable interest rate of 2.0%. In addition, the Company pays an unused fee equal to 0.25% per annum. For the first half of fiscal years 2011 and 2010, the Company incurred $116,000 and $575,000, respectively, in interest expense, excluding amortization of deferred financing costs. During the first half of fiscal year 2011, the Company reduced the outstanding balance of the facility by $5.5 million in voluntary payments. As of April 3, 2011, the Company had $22.3 million available to borrow under the Bank of America facility.

The Bank of America facility contains covenants whereby, among other things, the Company is required to maintain compliance with agreed levels of fixed charge coverage and total leverage. The facility also contains customary restrictions on incurring indebtedness and liens, making investments and paying dividends.

As of April 3, 2011, the Company was in compliance with the covenant requirements of the Bank of America facility. The Company believes it is probable that it will remain in compliance with all of those covenant requirements for the foreseeable future. However, if the Company fails to achieve certain revenue, expense or profitability levels, the Company could violate the financial covenants under the facility, potentially resulting in interest rate increases and acceleration of maturity of the loans, which in turn could adversely affect the Company’s financial condition, results of operations or cash flows.

The Company previously executed a senior secured credit agreement with Guggenheim Corporate Funding, LLC (“GCF”) on April 17, 2006. Under the credit agreement, GCF acted as collateral agent, administrative agent, arranger and syndication agent in connection with loans made by various lenders, including affiliates of GCF. The facility was originally structured as a $7.5 million non-amortizing revolving loan, a $25.0 million amortizing Tranche A Term Loan and a $15.0 million non-amortizing Tranche B Term Loan. On March 9, 2007, the Company executed a second amendment to the senior secured credit agreement allowing for $7.0 million of additional capital expenditures to facilitate new business by increasing plant capacity and improving line efficiency, to be funded by increases of $3.5 million in each of the Tranche A and Tranche B Term Loans. The GCF facility was paid off on September 24, 2010 with the initial proceeds from the Bank of America facility.

6.	PER SHARE DATA

The following table sets forth the calculation of earnings per share (“EPS”) for the periods presented:

				Quarter Ended
				(unaudited)
				April 3,		March 28,
				2011		2010
Basic EPS Computation:
Numerator:
		Net income		$	1,521,829	$	2,360,626
Denominator:
	Weighted average common shares outstanding				15,823,271		15,823,271
			Total shares		15,823,271		15,823,271
			Basic EPS	$	0.10	$	0.15

Diluted EPS Computation:
Numerator:
		Net income		$	1,521,829	$	2,360,626
Denominator:
	Weighted average common shares outstanding				15,823,271		15,823,271
	Incremental shares from assumed
		exercise of stock options			237,862		223,004
			Total shares		16,061,133		16,046,275
			Diluted EPS	$	0.09	$	0.15

				Six Months Ended
				(unaudited)
				April 3,		March 28,
				2011		2010
Basic EPS Computation:
Numerator:
		Net income		$	3,130,932	$	5,413,420
Denominator:
	Weighted average common shares outstanding				15,823,271		15,823,271
			Total shares		15,823,271		15,823,271
			Basic EPS	$	0.20	$	0.34

Diluted EPS Computation:
Numerator:
		Net income		$	3,130,932	$	5,413,420
Denominator:
	Weighted average common shares outstanding				15,823,271		15,823,271
	Incremental shares from assumed
		exercise of stock options			230,358		225,676
			Total shares		16,053,629		16,048,947
			Diluted EPS	$	0.20	$	0.34

7.	STOCK OPTIONS

The Company measures the cost of all employee stock-based compensation awards based on the grant date fair value of those awards using a Black-Scholes model and records that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). No options were granted during the quarter and six months ended April 3, 2011 or March 28, 2010. Therefore, there was no impact on the income statement or cash flow statement as a result of stock-based compensation for any of these periods as there were no new options granted and all outstanding options are fully vested.

8.	INCOME TAXES

The Company accounts for any uncertainty in income taxes based on 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. The balance of unrecognized tax benefits was zero as of April 3, 2011 and September 26, 2010.

The Company recognizes interest and penalties, if any, as part of income taxes. The total amount of interest and penalties recognized in the statements of income was zero for the quarters and six months ended April 3, 2011 and March 28, 2010.

The Company does not anticipate any significant change within 12 months of this reporting date of its uncertain tax positions.

The effective tax rate was 37.6% for the first half of fiscal years 2011 and 2010.

9.	CONTINGENCIES

Legal Proceedings

The Company is involved in certain legal actions and claims arising in the ordinary course of business. Management believes (based, in part, on advice of legal counsel) that such contingencies, including the matters described below, have been or will be resolved without materially and adversely affecting the Company’s financial position, results of operations or cash flows. The Company intends to vigorously contest all claims and grievances described below.

Overhill Farms v. Larry (Nativo) Lopez, et al.

On June 30, 2009, the Company filed a lawsuit against Nativo Lopez and six other leaders of what the Company believes to be an unlawful campaign to force the Company to continue the employment of workers who had used invalid social security numbers to hide their illegal work status. Among other things, the Company alleges that the defendants defamed the Company by calling its actions “racist” and unlawful. The Company has asserted claims for defamation, extortion, intentional interference with prospective economic advantage, and intentional interference with contractual relations. The Company filed the lawsuit in Orange County, California, and seeks damages and an injunction barring the defendants from continuing their conduct.

All of the named defendants tried unsuccessfully to dismiss the action. In refusing to dismiss the case, the court ruled on November 13, 2009, that the Company had established a probability of prevailing on the merits, and that the Company had submitted substantial evidence that the defendants’ accusations of racism were not true. The defendants thereafter filed an appeal, which was denied by the California court of appeals. The defendants petitioned for review by the California Supreme Court, which denied review on March 2, 2011. The action has returned to the trial court for further proceedings.

Agustiana, et al. v. Overhill Farms.

On July 1, 2009, Bohemia Agustiana, Isela Hernandez, and Ana Munoz filed a purported “class action” against the Company in which they asserted claims for failure to pay minimum wage, failure to furnish wage and hour statements, waiting time penalties, conversion and unfair business practices. The plaintiffs are former employees who had been terminated one month earlier because they had used invalid social security numbers in connection with their employment with the Company. They filed the case in Los Angeles County on behalf of themselves and a class which they say includes all non-exempt production and quality control workers who were employed in California during the four-year period prior to filing their complaint. The plaintiffs seek unspecified damages, restitution, injunctive relief, attorneys’ fees and costs.

The Company filed a motion to dismiss the conversion claim, and the motion was granted by the court on February 2, 2010.

On May 12, 2010, Alma Salinas filed a separate purported “class action” in Los Angeles County Superior Court against the Company in which she asserted claims on behalf of herself and all other similarly situated current and former production workers for failure to provide meal periods, failure to provide rest periods, failure to pay minimum wage, failure to make payments within the required time, unfair business practice in violation of Section 17200 of the California Business and Professions Code and Labor Code Section 2698 (known as the Private Attorney General Act (“PAGA”)). Salinas is a former employee who had been terminated because she had used an invalid social security number in connection with her employment with the Company. Salinas seeks allegedly unpaid wages, waiting time penalties, PAGA penalties, interest and attorneys’ fees, the amounts of which are unspecified. The Salinas action has been consolidated with the Agustiana action.

The parties are engaged in the discovery phase of the case. The Company believes it has valid defenses to the plaintiffs’ remaining claims and that the Company paid all wages due to these employees.

Marcelino Arteaga, et al. v. Overhill Farms.

On July 7, 2009, the Company received an unfair labor practice charge that had been filed with the National Labor Relations Board (“NLRB”) on June 29, 2009. The charge was filed by Marcelino Arteaga on behalf of himself and two other former employees, Agapita Padilla and Fernando Morales Lira. In addition, on June 30, 2009, these three former employees separately submitted grievances and demanded arbitration arising out of the Company’s decision on June 26, 2009, to terminate their employment because they had publicly accused the Company of being “racist.” On August 7, 2009, the NLRB granted the Company’s request to defer further proceedings pending the resolution of the grievance and arbitration process.

On October 7, 2010, the arbitrator ruled in the Company’s favor, upholding the Company’s decision to terminate the employment of these former employees. Arteaga thereafter asked the NLRB to examine the arbitrator’s decision and to make a determination on the merits of the unfair labor practice charge. After its own investigation, the NLRB dismissed the charge on February 17, 2011.

Concentration of Sources of Labor

The Company’s total hourly and salaried workforce consisted of approximately 763 employees at April 3, 2011. Approximately 78% of the Company’s employees are unionized with the United Food & Commercial Workers Union, Local 770 and are covered by a three-year collective bargaining agreement renewed effective March 1, 2008, which expired on March 1, 2011. As of April 3, 2011, the Company was in on-going negotiations with the union.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with two major financial institutions. The account balances as of April 3, 2011 exceeded the Federal Deposit Insurance Corporation insurance limits. If the financial banking markets experience disruption, the Company may need to temporarily rely on other forms of liquidity, including borrowing under its credit facility.

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. The Company performs on-going credit evaluations of each customer’s financial condition and generally requires no collateral from its customers. A bankruptcy or other significant financial deterioration of any customer could impact its future ability to satisfy its receivables with the Company. Allowance for doubtful accounts is calculated based primarily upon historical bad debt experience and current market conditions. For the first six months of fiscal years 2011 and 2010, write-offs, net of recoveries, to the allowance for doubtful accounts were immaterial.

A significant portion of the Company’s total net revenues and receivables during the first six months of fiscal years 2011 and 2010 were derived from three customers as described below:

Net Revenues

	April 3,	March 28,
Customer	2011	2010
Jenny Craig, Inc.	31%	25%
Panda Restaurant Group, Inc.	26%	31%
Safeway Inc.	16%	17%

Receivables

	April 3,	March 28,
Customer	2011	2010
Panda Restaurant Group, Inc. (through its distributors)	34%	36%
Jenny Craig, Inc.	24%	23%
Safeway Inc.	19%	18%

10.	RELATED PARTY TRANSACTIONS

In February 2004, the Company engaged Alexander Auerbach & Co., Inc. (“AAPR”) to provide the Company with public relations and marketing services. AAPR provides public relations, media relations and communications marketing services to support the Company’s sales activities. Alexander Auerbach, who is a director and stockholder of the Company, is a stockholder, director and officer of AAPR. Fees paid to AAPR for services rendered under this engagement during the first half of fiscal years 2011 and 2010 were $29,000 and $21,000, respectively.

11.	FINANCIAL INSTRUMENTS

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

The carrying amount of the Company’s financial instruments, which are not marked to fair value at each reportable date and principally include trade receivables and accounts payable, approximate fair value due to the relatively short maturity of such instruments. The Company believes the carrying value of the debt approximates the fair value at both April 3, 2011 and September 26, 2010, as the debt bears interest at variable rates based on prevailing market conditions. As of April 3, 2011, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on variable rate debt approximated rates currently available to the Company.

Long-lived assets, such as property, plant, and equipment, and purchased intangibles that are subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets that are to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by such asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of such asset exceeds its fair value. The fair value calculation requires management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in the future cash flows. The estimated cash flows used for this nonrecurring fair value measurement is considered a Level 3 input as defined above.

12.	SUBSEQUENT EVENTS

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements, and concluded no other subsequent events occurred that required recognition or disclosure other than the matter noted below.

Subsequent to the end of the second quarter of fiscal year 2011, the Company removed "Interim" from Tracy E. Quinn's Chief Financial Officer title. She will continue her employment at the Company as an at-will employee.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our condensed financial statements and notes to condensed financial statements included elsewhere in this report. This report, and our condensed financial statements and notes to our condensed financial statements, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. Forward-looking statements are based on current expectations or beliefs. For this purpose, statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “continue,” “efforts,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” “forecasts,” “strategy,” “will,” “goal,” “target,” “prospects,” “optimistic,” “confident” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), on-going business strategies or prospects, and possible future company actions, which may be provided by management, are also forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including, among others:

·	the impact of competitive products and pricing;

·	market conditions that may affect the costs and/or availability of raw materials, fuels, energy, logistics and labor as well as the market for our products, including our customers’ ability to pay and consumer demand;

·	changes in our business environment, including actions of competitors and changes in customer preferences, as well as disruptions to our customers’ businesses;

·	seasonality in the retail category;

·	loss of key customers due to competitive environment or production being moved in-house by customers;

·	fulfillment by suppliers of existing raw materials contracts;

·	natural disasters that can impact, among other things, costs of fuel and raw materials;

·	the occurrence of acts of terrorism or acts of war;

·	changes in governmental laws and regulations, including income taxes;

·	change in control due to takeover or other significant changes in ownership;

·	financial viability and resulting effect on revenues and collectability of accounts receivable of our customers during the on-going economic downturn and any future deep recessionary periods;

·	ability to obtain additional financing as and when needed, and rising costs of credit that may be associated with new borrowings;

·	voluntary or government-mandated food recalls;

·	continued price promotions by national brands;

·	effects of legal proceedings in which we are or may become involved from time to time; and

·	other factors discussed in this report and other reports we file with the Securities and Exchange Commission (“Commission”), including those described in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended September 26, 2010 and any updates to that report.

We do not undertake to update, revise or correct any forward-looking statements, except as otherwise required by law.

Overview

We are a value-added manufacturer of high quality, prepared frozen food products for branded retail, private label, foodservice and airline customers. Our product line includes entrées, plated meals, bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish specialties, and organic and vegetarian offerings. Our extensive research and development efforts, combined with our extensive catalogue of recipes and flexible manufacturing capabilities, provide customers with a one-stop solution for new product ideas, formulations and product manufacturing, as well as precise replication of existing recipes. Our capabilities allow customers to outsource product development, product manufacturing and packaging, thereby avoiding significant fixed-cost and variable investments in resources and equipment. Our customers include prominent nationally recognized names such as Panda Restaurant Group, Inc., Jenny Craig, Inc., Safeway Inc., American Airlines, Inc. and Pinnacle Foods Group LLC.

Our goal is to continue as a leading developer and manufacturer of value-added food products and provider of custom prepared frozen foods. We intend to continue to execute our growth and operating strategies, which include:

·	diversifying and expanding our customer base by focusing on sectors we believe have attractive growth characteristics, such as foodservice and retail;

·	investing in and operating efficient production facilities;

·	providing value-added ancillary support services to customers;

·	offering a broad range of products to customers in multiple channels of distribution; and

·	exploring strategic acquisitions, investments and alliances.

Net revenues of $40.5 million for the second quarter of fiscal year 2011 reflected a decline of $10.0 million or 19.8% compared to the second quarter of fiscal year 2010. The retail category declined $7.2 million due to reduced sales to our significant customers in the category, and was further impacted by the previously disclosed reduction in sales to H.J. Heinz Company. The foodservice category declined $2.6 million due primarily to reduced sales to the Panda Restaurant Group, Inc. (“PRG”). The airline category declined slightly by $62,000 or 3.1%. We anticipate that declines in these areas will be partially offset in future periods by sales of the Boston Market brand products as well as another major national retailer’s products that we began producing in the third quarter of fiscal year 2011 as detailed below.

On November 4, 2010, we entered into a five-year licensing agreement with Boston Market Corporation (“BMC”) for the exclusive right to use BMC’s trademarks, trade dress and copyrights in connection with the manufacturing, advertising, promotion, sales and distribution of frozen food and certain shelf-stable licensed products. The agreement commences on July 1, 2011. The agreement also contains options for two sixty-month renewal terms. We will pay BMC an earned royalty computed at four and a half percent of net sales of Boston Market brand product, with no guaranteed minimum royalties during the initial term. We will pay a guaranteed minimum royalty of $2.75 million and $3.25 million for the first and second renewal terms, respectively, if we choose to exercise the renewal options. We anticipate producing the Boston Market products towards the end of the third quarter of fiscal year 2011 with shipment and sales occurring in the fourth quarter of fiscal year 2011.

On November 11, 2010, we were selected to produce a line of 16 private label frozen meals for a major national retailer. The multi-year agreement with the national retailer is expected to generate initial annual sales of approximately $7 million, with the opportunity for increased volume over time. Full production and shipment began in the middle of the third quarter of fiscal year 2011. For competitive reasons, the customer has asked that its name not be disclosed.

Additionally, we continue to move forward on significant new customer initiatives, which we hope will convert to additional revenue beginning in the third and fourth quarters of fiscal year 2011. Also, in an effort to expedite the recovery of retail sales to existing customers, we have been working with our major existing retail accounts to refresh product lines and to introduce additional lines of products. Some of these new lines and products will be introduced in our third and fourth fiscal quarters of 2011. With these new products and lines for our existing customers, our launch of Boston Market products, the start of 16 new products for the customer described above and what appears to be a somewhat improved economy, we are optimistic for future retail sales.

Gross profit was $4.5 million for the second quarter of fiscal year 2011, compared to $6.8 million for the second quarter of fiscal year 2010. The decrease in gross profit was due to decreased net revenues as well as reduced margin. Gross margin (gross profit as a percentage of net revenues) decreased to 11.1% for the second quarter of fiscal year 2011, from 13.5% for the second quarter of fiscal year 2010 due largely to higher overhead costs as a percentage of net revenues as well as a less favorable sales mix resulting from lower retail sales. In addition, our production efficiencies were somewhat reduced as a result of smaller production runs that were required to manage lower customer order levels. We expect that with increased production volume to our new customers we will improve our efficiencies and overhead cost as a percentage of net revenue starting in the latter part of the third quarter of fiscal year 2011. We also paid brokerage to Safeway Inc. of $221,000, which is recorded as a reduction to net revenues and thus adversely affects gross margin. Towards the end of the third quarter of fiscal year 2010, Safeway Inc. changed its in-store sales and marketing model thereby eliminating its previous brokerage arrangement. As a result, we are no longer paying brokerage to an independent third party but now pay Safeway Inc., which is recorded as a reduction to net revenues rather than as a selling, general and administrative (“SG&A”) expense.

Operating income for the second quarter of fiscal year 2011 was $2.5 million (6.2% of net revenues), compared to $4.1 million (8.1% of net revenues) for the second quarter of fiscal year 2010, due primarily to lower net revenues and gross profit as noted above. SG&A expenses as a percentage of net revenues decreased to 4.9% for the second quarter of fiscal year 2011, compared to 5.3% for the second quarter of fiscal year 2010 due primarily to reduced legal and brokerage expenses. SG&A expense decreased $652,000 to $2.0 million for the second quarter of fiscal year 2011, compared to $2.7 million for the second quarter of fiscal year 2010, due predominately to a reclassification of Safeway Inc. brokerage expense ($221,000), which is now recorded as a reduction of net revenues, as well as a $353,000 reduction in legal fees due partly to a one-time insurance reimbursement of $125,000 and partly to our resolution of certain litigation matters as described in Part II, Item 1 of this report and prior filings with the Commission. Net income for the second quarter of fiscal year 2011 was $1.5 million (3.7% of net revenues), compared to $2.4 million (4.8% of net revenues) for the second quarter of fiscal year 2010, due to lower gross profit partially offset by decreases in amortization and interest expense as a result of lower interest rates and pay-downs under our credit facility.

For the first six months of fiscal year 2011, net revenues of $85.3 million reflected a 20.1% decrease compared to the first six months of fiscal year 2010. Retail net revenues declined $12.9 million due to the loss of business from H. J. Heinz Company described above, as well as decreases in our significant accounts in this category. Foodservice net revenues decreased $8.7 million or 25.7%. These declines were partially offset by an increase in airline of $171,000 or 4.4%.

Gross profit was $9.5 million for the first six months of fiscal year 2011, compared to $14.7 million for the first six months of fiscal year 2010. The decrease in gross profit dollars was due to lower net revenues as well as reduced margin. Gross margin decreased to 11.1% for the first six months of fiscal year 2011 from 13.8% for the first six months of fiscal year 2010. The gross margin decrease was driven by lower sales volume and higher overhead cost due to smaller runs and increased maintenance cost. We also had less favorable commodity prices versus the same time last year due to increases in certain commodities. Although we see indications of inflation on commodities for the rest of calendar year 2011, we plan to manage increases with forward buying and pricing opportunities where appropriate.

Operating income for the first six months of fiscal year 2011 was $5.2 million (6.1% of net revenues), compared to $9.5 million (8.9% of net revenues) for the first six months of fiscal year 2010, due primarily to lower net revenues and lower gross profits. SG&A expenses as a percentage of net revenues were 5.0% for the first six months of both fiscal years 2011 and 2010. SG&A expense for the first six months of fiscal year 2011 decreased by $939,000 as compared to the first six months of fiscal year 2010, driven by a $421,000 reduction in legal fees, due partly to a one-time insurance reimbursement of $125,000 and partly to our resolution of certain litigation matters as described in Part II, Item 1 of this report and prior filings with the Commission, and a $596,000 decrease in brokerage expense, due primarily from the change in recording of brokerage expense for Safeway Inc. of $424,000. We expect SG&A to remain relatively steady as we continue to contest all remaining claims and grievances as described in Part II, Item 1 of this report. Net income for the first six months of fiscal year 2011 was $3.1 million (3.6% of net revenues) compared to $5.4 million (5.1% of net revenues) for the first six months of fiscal year 2010, due to lower gross profits partially offset by lower amortization expense and lower interest expense as a result of lower rates and pay-downs under our credit facility.

Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Note 2 to the financial statements contained in our annual report on Form 10-K for the year ended September 26, 2010 for a summary of our significant accounting policies. Management believes the following critical accounting policies are related to our more significant estimates and assumptions used in the preparation of our financial statements.

Inventories. Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. We use a standard costing system to estimate our FIFO cost of inventory at the end of each reporting period. Historically, standard costs have been materially consistent with actual costs. We periodically review our inventory for excess items, and write it down based upon the age of specific items in inventory and the expected recovery from the disposition of the items.

We write-down our inventory for the estimated aged surplus, spoiled or damaged products and discontinued items and components. We determine the amount of the write-down by analyzing inventory composition, expected usage, historical and projected sales information and other factors. Changes in sales volume due to unexpected economic or competitive conditions are among the factors that could result in material increases in the write-down of our inventory.

Property and Equipment. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements to our Plant No. 1 in Vernon, California are amortized over the lesser of the initial lease term plus one lease extension period, initially totaling 15 years, or the estimated useful lives of the assets. Other leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. Depreciation is generally computed using the straight-line method.

We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable.

Expenditures for maintenance and repairs are charged to expense as incurred. The cost of materials purchased and labor expended in betterments and major renewals are capitalized. Costs and related accumulated depreciation of properties sold or otherwise retired are eliminated from the accounts, and gains or losses on disposals are included in operating income.

Goodwill. We evaluate goodwill at least annually for impairment. We have one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow analysis, market capitalization, and other market-based data. As of April 3, 2011, we had goodwill of $12.2 million. A deterioration of our operating results and the related cash flow effect could decrease the estimated fair value of our business and, thus, cause our goodwill to become impaired and cause us to record a charge against operations in an amount representing the impairment.

Income Taxes. We evaluate the need for a valuation allowance on our deferred tax assets based on whether we believe that it is more likely than not that all deferred tax assets will be realized. We consider future taxable income and on-going prudent and feasible tax planning strategies in assessing the need for valuation allowances. In the event we determine that we would not be able to realize all or part of our deferred tax assets, we would record an adjustment to the deferred tax asset and a charge to income at that time.

We account for uncertainty in income taxes based on 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. The balance of unrecognized tax benefits was zero as of April 3, 2011 and September 26, 2010.

We recognize interest and penalties as part of income taxes. No interest and penalties were recognized in the statement of income for the first six months of fiscal year 2011.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with two major financial institutions. The account balances as of April 3, 2011 exceeded the Federal Deposit Insurance Corporation insurance limits. If the financial banking markets experience disruption, we may need to temporarily rely on other forms of liquidity, including borrowing under our credit facility.

Our financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. We perform on-going credit evaluations of each customer’s financial condition and generally require no collateral from our customers. We charge off uncollectible accounts at the point in time when no recovery is expected.

A significant portion of our total net revenues and receivables during the first six months of fiscal years 2011 and 2010 were derived from three customers as described below:

Net Revenues

	April 3,	March 28,
Customer	2011	2010
Jenny Craig, Inc.	31%	25%
Panda Restaurant Group, Inc.	26%	31%
Safeway Inc.	16%	17%

Receivables

	April 3,	March 28,
Customer	2011	2010
Panda Restaurant Group, Inc. (through its distributors)	34%	36%
Jenny Craig, Inc.	24%	23%
Safeway Inc.	19%	18%

Results of Operations

While we operate as a single business unit, manufacturing various products on common production lines, revenues from similar customers are grouped into the following natural categories: retail, foodservice and airlines.

Quarter Ended April 3, 2011 Compared to Quarter Ended March 28, 2010

The quarters ended April 3, 2011 and March 28, 2010 were both 13-week periods.

Net Revenues. Net revenues for the second quarter of fiscal year 2011 decreased $10.0 million, or 19.8% (predominantly attributable to lower sales volume and a less favorable sales mix resulting from lower retail sales), to $40.5 million from $50.5 million for the second quarter of fiscal year 2010 due to decreases in retail, foodservice and airline net revenues.

Retail net revenues decreased $7.2 million (21.3%) to $26.6 million for the second quarter of fiscal year 2011 from $33.8 million for the second quarter of fiscal year 2010. The decrease in net revenues was primarily due to reduced sales to Safeway Inc., H. J. Heinz Company, and Jenny Craig, Inc. of $3.8 million, $3.2 million and $1.2 million, respectively. As previously disclosed, H. J. Heinz Company had informed us that it intended to move all of its remaining volume to self-manufacture beginning after their contract expired at the end of calendar year 2009. The decreases in Safeway Inc. and Jenny Craig, Inc. are due to the slow economic recovery, their inventory management plans and increased price promotions by national brands, which seem to be abating. These decreases were partially offset by increases of $909,000 to other existing customers.

Foodservice net revenues decreased $2.6 million (17.8%) to $12.0 million for the second quarter of fiscal year 2011 from $14.6 million for the second quarter of fiscal year 2010 due to reduced sales to PRG. Although net revenues from PRG for the second quarter of fiscal year 2011 were lower than the second quarter of fiscal year 2010, based on our current run rates, we anticipate that our PRG annualized net revenues for calendar year 2011 will be similar to those of calendar year 2010.

Airline net revenues slightly decreased $62,000 (3.1%) to $1.9 million for the second quarter of fiscal year 2011 from $2.0 million for the second quarter of fiscal year 2010 due to decreased volume as the airline industry continues to cut costs.

Gross Profit. Gross profit for the second quarter of fiscal year 2011 decreased by $2.3 million (33.8%) to $4.5 million from $6.8 million for the second quarter of fiscal year 2010 due predominately to decreased net revenues. Gross margin decreased to 11.1% for the second quarter of fiscal year 2011 from 13.5% for the second quarter of fiscal year 2010, due largely to higher overhead costs as a percentage of net revenues on lower sales volume, a less favorable sales mix resulting from lower retail sales, reduced production efficiencies as a result of smaller production runs that were required to manage lower customer order levels, brokerage paid to Safeway Inc. of $221,000 and less favorable commodity prices versus the same time last year due to increases in certain commodities.

Selling, General and Administrative Expenses. SG&A expenses decreased $652,000 (24.1%) to $2.0 million (4.9% of net revenues) for the second quarter of fiscal year 2011 from $2.7 million (5.3% of net revenues) for the second quarter of fiscal year 2010. The decrease in SG&A expense was due to a $353,000 reduction in legal fees, due partly to a one-time insurance reimbursement of $125,000 and partly to our resolution of certain litigation matters as described in Part II, Item 1 of this report and prior filings with the Commission, and to a $303,000 decrease in brokerage expense, stemming primarily from the change in recording of brokerage expenses for Safeway Inc. ($221,000). During the latter part of the third quarter of fiscal year 2010, Safeway Inc. changed its in-store sales and marketing model thereby eliminating its previous brokerage arrangement. As a result, we are no longer paying brokerage to an independent third party but now pay Safeway Inc. and record these costs as a reduction to net revenues rather than as SG&A expense, as was done in the second quarter of fiscal year 2010.

Operating Income. Operating income decreased $1.6 million (39.0%) to $2.5 million (6.2% of net revenues) for the second quarter of fiscal year 2011 from $4.1 million (8.1% of net revenues) for the second quarter of fiscal year 2010. The decrease in operating income was the result of the decreases in net revenues and gross profit as noted above.

Total Interest Expense. Total interest expense for the second quarter of fiscal year 2011 was $80,000, compared to $346,000 for the second quarter of fiscal year 2010. The decrease in total interest expense is due to decreased amortization and interest expense due to lower debt balances and lower variable interest rates.

Income Tax Provision. Income tax expense was $890,000 for the second quarter of fiscal year 2011, compared to $1.4 million for the second quarter of fiscal year 2010. The difference was a result of income before taxes decreasing $1.4 million from $3.8 million for the second quarter of fiscal year 2010 to $2.4 million for the second quarter of fiscal year 2011. The effective tax rates were 36.9% and 37.6% for the second quarter of fiscal years 2011 and 2010, respectively.

Net Income. Net income for the second quarter of fiscal year 2011 was $1.5 million, or $0.10 per basic and $0.09 per diluted share, compared to net income of $2.4 million, or $0.15 per basic and diluted share, for the second quarter of fiscal year 2010.

Six Months Ended April 3, 2011 Compared to Six Months Ended March 28, 2010

The six month period ended April 3, 2011 was a 27 week period compared to the six month period ended March 28, 2010 which was a 26 week period.

Net Revenues. Net revenues decreased $21.4 million or 20.1% (predominantly attributable to lower sales volume and a less favorable sales mix resulting from lower retail sales), to $85.3 million for the first six months of fiscal year 2011 from $106.7 million for the first six months of fiscal year 2010, due to decreases in retail and foodservice net revenues offset by a slight increase in airline net revenues.

Retail net revenues decreased $12.9 million (18.7%) to $56.0 million for the first six months of fiscal year 2011 from $68.9 million for the first six months of fiscal year 2010. The decrease in retail net revenues was largely due to the loss of business from H. J. Heinz Company (a decrease of $7.0 million compared to the first six months of fiscal year 2010) because it moved a large portion of its production to its own facilities, and to reduced sales to Safeway Inc. and Jenny Craig, Inc., a decrease of $6.1 million and $2.9 million, respectively, due to their inventory management plans and a slow economic recovery. We expect an improvement in the retail category in the second half of fiscal year 2011 as we begin the Boston Market line and 16 entrees for a major national retailer.

Foodservice net revenues decreased $8.7 million (25.7%) to $25.2 million for the first six months of fiscal year 2011 from $33.9 million for the first six months of fiscal year 2010. The decrease was attributable to reduced sales to PRG of $8.4 million. Based on our current run rates, we anticipate that our PRG annualized net revenues for calendar year 2011 will be similar to those of calendar year 2010. We continue our sales efforts in this category and continue to believe that foodservice represents a significant opportunity for us.

Airline net revenues increased $171,000 (4.4%) to $4.1 million for the first six months of fiscal year 2011 from $3.9 million for the first six months of fiscal year 2010 due to increased volume to an existing customer. However, due to continuing airline industry initiatives to cut costs, airline net revenues are not likely to increase again and may decrease in future periods.

Gross Profit. Gross profit decreased by $5.2 million (35.4%) to $9.5 million for the first six months of fiscal year 2011 from $14.7 million for the first six months of fiscal year 2010. Gross profit as a percentage of net revenues decreased to 11.1% for the first six months of fiscal year 2011 from 13.8% for the first six months of fiscal year 2010 due largely to higher overhead costs as a percentage of net revenues, a less favorable sales mix resulting from lower retail sales, brokerage paid to Safeway Inc. of $424,000, increased maintenance cost as we make improvements to maintain certification under the new global Food Safety Management Systems standard FSSC 22000 and less favorable commodity prices versus the same time last year. Although we see indications of inflation on commodities for the rest of calendar year 2011, we plan to offset these increases with forward buying and pricing opportunities where appropriate.

Selling, General and Administrative Expenses. SG&A expenses decreased $939,000 (17.7%) to $4.3 million (5.0% of net revenues) for the first six months of fiscal year 2011 from $5.3 million (5.0% of net revenues) for the first six months of fiscal year 2010. SG&A expenses were driven by a $421,000 reduction in legal fees, due partly to a one-time insurance reimbursement of $125,000 and partly to our resolution of certain litigation matters as described in Part II, Item 1 of this report and prior filings with the Commission, and a $569,000 decrease in brokerage expense, due primarily from the change in recording of brokerage expense for Safeway Inc. ($424,000). During the latter part of the third quarter of fiscal year 2010, Safeway Inc. changed its distribution model and began handling its distribution itself. As a result, we are no longer paying brokerage to an independent third party but now paying Safeway Inc. as reduction to net revenues rather than as an SG&A expense. We expect SG&A expense to remain at the current level as we continue to contest all claims and grievances as described in Part II, item 1 of this report.

Operating Income. Operating income decreased $4.3 million (45.3%) to $5.2 million for the first six months of fiscal year 2011 from $9.5 million for the first six months of fiscal year 2010. The decrease in operating income was the result of the decrease in net revenues and gross profit as noted above.

Total Interest Expense. Total interest expense for the first six months of fiscal year 2011 was $172,000, compared to $778,000 for the first six months of fiscal year 2010. The decrease in total interest expense was due to decreased amortization and interest expense due to lower debt balances and lower variable interest rates. We expect interest expense to remain low going forward as our debt balance remains low.

Income Tax Provision. Income tax expense was $1.9 million for the first six months of fiscal year 2011, compared to $3.3 million for the first six months of fiscal year 2010. The difference was a result of income before taxes decreasing $3.7 million from $8.7 million for the first six months of fiscal year 2010 to $5.0 million for the first six months of fiscal year 2011. The effective tax rates were 37.6% for the first six months of fiscal years 2011 and 2010.

Net Income. Net income for the first six months of fiscal year 2011 was $3.1 million, or $0.20 per basic and diluted share, compared to net income of $5.4 million, or $0.34 per basic and diluted share, for the first six months of fiscal year 2010.

Liquidity and Capital Resources

During the first six months of fiscal years 2011 and 2010, our operating activities provided cash of $5.1 million and $10.2 million, respectively. Cash generated from operations before working capital changes for the first six months of fiscal year 2011 was $5.1 million. Cash used in changes in working capital was $53,000 during the first six months of fiscal year 2011 and resulted from cash used to increase inventory by $2.0 million, in anticipation of increased customer orders, as well as a decrease in accrued liabilities of $123,000. This was partially offset by decreases in accounts receivable and prepaid expenses and other assets of $1.6 million and $109,000, respectively, as well as an increase in accounts payable of $354,000. As of April 3, 2011, we had working capital of $23.5 million compared to working capital of $24.4 million at fiscal year end 2010. The decrease in working capital was due primarily to a decrease in accounts receivable. We anticipate increasing our working capital on an on-going basis, starting in the third quarter of fiscal year 2011, as we prepare for the launch of the Boston Market products. We were able to fund our operations in the first six months of fiscal year 2011 internally while decreasing our external debt.

During the first six months of fiscal year 2011, our investing activities, consisting primarily of capital expenditures, resulted in a net use of cash of approximately $435,000, compared to a net use of cash of approximately $1.2 million during the first six months of fiscal year 2010. The property and equipment additions were made to accommodate additional business opportunities, meet anticipated growth and improve operating efficiency as well as, maintain certification under the new global Food Safety Management Systems standard FSSC 22000. We believe the short-term cash outlay for this certification will allow us future growth opportunities as we are better positioned to compete for new customers and products.

During the first six months of fiscal year 2011, our financing activities resulted in a use of cash of $5.5 million, compared to a use of cash of $8.7 million during the first six months of fiscal year 2010. The use of cash during the first six months of fiscal year 2011 was primarily the result of $5.5 million in voluntary payments we made on our revolving credit facility.

We believe that our cash, financial liquidity positions and financial strength are sufficient to fund current working capital needs and future growth initiatives, including potential acquisitions and the launch of the Boston Market products.

We executed a senior secured credit agreement with Bank of America on September 24, 2010. The facility is structured as a $30 million three-year senior secured revolving credit facility, secured by a first priority lien on substantially all of our assets. We made an initial loan drawdown of $13.2 million, which was used to pay off our prior credit facility. Under the Bank of America facility we have the ability to increase the aggregate amount of the financing by $20 million under certain conditions.

The Bank of America facility bears annual interest at the British Bankers Association LIBOR Rate, or LIBOR, plus an applicable margin (listed below). The margin was initially 1.75%. Beginning January 1, 2011, and adjusted quarterly thereafter, the margin is calculated as follows:


	Ratio of aggregate outstanding funded commitments under the facility (including letter of credit obligations) to EBITDA for the preceding four quarters		Applicable Margin
	Greater than or equal to 1.50:1		2.00%

	Greater than or equal to 0.50:1
	but less than 1.50:1		1.75%

	Less than 0.50:1		1.50%

As of April 3, 2011, there was $7.7 million outstanding under the Bank of America facility with an applicable interest rate of 2.0%. In addition, we will pay an unused fee equal to 0.25% per annum. For the first six months of fiscal years 2011 and 2010, we incurred $116,000 and $575,000, respectively, in interest expense, excluding amortization of deferred financing costs. During the first six months of fiscal year 2011, we reduced the outstanding balance of the facility by $5.5 million in voluntary payments . As of April 3, 2011, we had $22.3 million available to borrow under the new credit facility.

Initial proceeds from the Bank of America facility, received September 24, 2010, were used to repay approximately $13.2 million in existing debt in connection with the termination of our former financing arrangements.

The Bank of America facility contains covenants whereby, among other things, we are required to maintain compliance with agreed levels of fixed charge coverage and total leverage. The facility also contains customary restrictions on incurring indebtedness and liens, making investments and paying dividends.

As of April 3, 2011, we were in compliance with the covenant requirements of the Bank of America facility. We believe it is probable that we will remain in compliance with all of those covenant requirements for the foreseeable future. However, if we fail to achieve certain revenue, expense and profitability levels, a violation of the financial covenants under our financing arrangements could result, interest rate increases and acceleration of maturity of the loans could occur, which could adversely affect our financial condition, results of operations or cash flows.

We previously executed a senior secured credit agreement with Guggenheim Corporate Funding, LLC (“GCF”) on April 17, 2006. Under the credit agreement, GCF acted as collateral agent, administrative agent, arranger and syndication agent in connection with loans made by various lenders, including affiliates of GCF. The facility was originally structured as a $7.5 million non-amortizing revolving loan, a $25.0 million amortizing Tranche A Term Loan and a $15.0 million non-amortizing Tranche B Term Loan. On March 9, 2007, we executed a second amendment to the senior secured credit agreement allowing for $7.0 million of additional capital expenditures to facilitate new business by increasing plant capacity and improving line efficiency, to be funded by increases of $3.5 million in each of the Tranche A and Tranche B Term Loans. The GCF facility was paid off on September 24, 2010 with the initial proceeds from the Bank of America facility.

We believe that funds available to us from operations and existing capital resources will be adequate for our capital requirements for at least the next twelve months.

Following is a summary of our contractual obligations at April 3, 2011:

		Payments Due By Period
CONTRACTUAL OBLIGATIONS		Total		Remainder of Fiscal Year 2011		2-3 Years		4-5 Years		More than 5 Years

Debt maturities	$	7,672,647	$	-	$	7,672,647	$	-	$	-
Interest Expense(1)		527,841		106,383		421,458		-		-
Operating lease obligations(2)		10,193,797		1,657,561		4,966,264		2,486,642		1,083,330
Other Contractual obligations		440,493		312,029		128,464		-		-
Open purchase orders		17,862,389		13,438,208		4,424,181		-		-
Total contractual obligations	$	36,697,167	$	15,514,181	$	17,613,014	$	2,486,642	$	1,083,330
________
(1) Assumes only mandatory principal pay-down and the use of LIBOR as of April 3, 2011 on the Bank of America debt.
(2) Includes real estate leases.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk – Obligations. We are subject to interest rate risk on variable interest rate obligations. A hypothetical 10% increase in average market interest rates would increase by approximately $15,000 the annual interest expense on our debt outstanding as of April 3, 2011.

Item 4.

Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of April 3, 2011, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) are effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended April 3, 2011, there were no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved in certain legal actions and claims arising in the ordinary course of business. Management believes (based, in part, on advice of legal counsel) that such contingencies, including the matters described below, will be resolved without materially and adversely affecting our financial position, results of operations or cash flows. We intend to vigorously contest all claims and grievances described below.

Overhill Farms v. Larry (Nativo) Lopez, et al.

On June 30, 2009, we filed a lawsuit against Nativo Lopez and six other leaders of what we believe to be an unlawful campaign to force us to continue the employment of workers who had used invalid social security numbers to hide their illegal work status. Among other things, we allege that the defendants defamed us by calling our actions “racist” and unlawful. We have asserted claims for defamation, extortion, intentional interference with prospective economic advantage, and intentional interference with contractual relations. We filed the lawsuit in Orange County, California, and seeks damages and an injunction barring the defendants from continuing their conduct.

All of the named defendants tried unsuccessfully to dismiss the action. In refusing to dismiss the case, the court ruled on November 13, 2009, that we had established a probability of prevailing on the merits, and that we had submitted substantial evidence that the defendants’ accusations of racism were not true. The defendants thereafter filed an appeal, which was denied by the California court of appeals. The defendants petitioned for review by the California Supreme Court, which denied review on March 2, 2011. The action has returned to the trial court for further proceedings.

Agustiana, et al. v. Overhill Farms.

On July 1, 2009, Bohemia Agustiana, Isela Hernandez, and Ana Munoz filed a purported “class action” against us in which they asserted claims for failure to pay minimum wage, failure to furnish wage and hour statements, waiting time penalties, conversion and unfair business practices. The plaintiffs are former employees who had been terminated one month earlier because they had used invalid social security numbers in connection with their employment with us. They filed the case in Los Angeles County on behalf of themselves and a class which they say includes all non-exempt production and quality control workers who were employed in California during the four-year period prior to filing their complaint. The plaintiffs seek unspecified damages, restitution, injunctive relief, attorneys’ fees and costs.

We filed a motion to dismiss the conversion claim, and the motion was granted by the court on February 2, 2010.

On May 12, 2010, Alma Salinas filed a separate purported “class action” in Los Angeles County Superior Court against us in which she asserted claims on behalf of herself and all other similarly situated current and former production workers for failure to provide meal periods, failure to provide rest periods, failure to pay minimum wage, failure to make payments within the required time, unfair business practice in violation of Section 17200 of the California Business and Professions Code and Labor Code Section 2698 (known as the Private Attorney General Act (“PAGA”)). Salinas is a former employee who had been terminated because she had used an invalid social security number in connection with her employment with us. Salinas seeks allegedly unpaid wages, waiting time penalties, PAGA penalties, interest and attorneys’ fees, the amounts of which are unspecified. The Salinas action has been consolidated with the Agustiana action.

The parties are engaged in the discovery phase of the case. We believe we have valid defenses to the plaintiffs’ remaining claims and that we paid all wages due to these employees.

Marcelino Arteaga, et al. v. Overhill Farms.

On July 7, 2009, we received an unfair labor practice charge that had been filed with the National Labor Relations Board (“NLRB”) on June 29, 2009. The charge was filed by Marcelino Arteaga on behalf of himself and two other former employees, Agapita Padilla and Fernando Morales Lira. In addition, on June 30, 2009, these three former employees separately submitted grievances and demanded arbitration arising out of our decision on June 26, 2009, to terminate their employment because they had publicly accused us of being “racist.” On August 7, 2009, the NLRB granted our request to defer further proceedings pending the resolution of the grievance and arbitration process.

On October 7, 2010, the arbitrator ruled in our favor, upholding our decision to terminate the employment of these former employees. Arteaga thereafter asked the NLRB to examine the arbitrator’s decision and to make a determination on the merits of the unfair labor practice charge. After its own investigation, the NLRB dismissed the charge on February 17, 2011.

Item 6.

Exhibits

	Exhibit Number	Description

	31.1 (1)	Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2 (1)	Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32 (1)	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	(1)	Attached hereto.

SIGNATURES

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

OVERHILL FARMS, INC.

(Registrant)

Date: May 13, 2011

By:

/s/ James Rudis

James Rudis

Chief Executive Officer

(principal executive officer)

Date: May 13, 2011

By:

/s/ Tracy E. Quinn

Tracy E. Quinn

Chief Financial Officer

(principal financial officer)

EXHIBITS ATTACHED TO THIS FORM 10-Q

	Exhibit Number	Description

	31.1	Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached files

OVERHILL FARMS INC Reports

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