Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR7.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR8.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR1.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR9.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR2.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR6.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR4.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR3.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR13.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR17.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR16.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR15.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR11.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR12.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR14.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR18.htm
EX-10 - OVERHILL FARMS, INC. EXHIBIT 10 4-1-2012 - OVERHILL FARMS INCex10.htm
EX-32 - OVERHILL FARMS, INC. EXHIBIT 32 4-1-2012 - OVERHILL FARMS INCex32.htm
EX-31.2 - OVERHILL FARMS, INC. EXHIBIT 31-2 4-1-2012 - OVERHILL FARMS INCex31_2.htm
EX-31.1 - OVERHILL FARMS, INC. EXHIBIT 31-1 4-1-2012 - OVERHILL FARMS INCex31_1.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR5.htm
XML - IDEA: XBRL DOCUMENT - OVERHILL FARMS INCR10.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 1, 2012

OR

[  ]
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 [X] 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 9, 2012, 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 1, 2012



TABLE OF CONTENTS

 
PART I – FINANCIAL INFORMATION
Page No.
     
 
Item 1.  Financial Statements
 
     
 
Condensed Balance Sheets as of April 1, 2012 (unaudited) and October 2, 2011
1
     
 
Condensed Statements of Income (unaudited) for the Quarters Ended April 1, 2012 and April 3, 2011
 
3
     
 
Condensed Statements of Income (unaudited) for the Six Months Ended April 1, 2012 and April 3, 2011
4
     
 
Condensed Statements of Cash Flows (unaudited) for the Six Months Ended April 1, 2012 and April 3, 2011
 
5
     
 
Notes to Condensed Financial Statements (unaudited)
6
     
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
21
     
 
Item 4.   Controls and Procedures
21
     
 
PART II – OTHER INFORMATION
 
     
 
Item 1.   Legal Proceedings
22
     
 
Item 6.   Exhibits
23
     
 
SIGNATURES
24
     
 
EXHIBITS ATTACHED TO THIS FORM 10-Q
25

 
 

 

Item 1.   Financial Statements
 
 
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS



Assets

 
 
 
 
April 1,
 
October 2,
 
 
 
 
2012 
 
2011 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
$
 1,601,290 
 
$
 5,470,362 
 
Accounts receivable, net of allowance for doubtful accounts of $937
 
 17,685,747 
 
 
 13,700,034 
 
 
and $43,402 in 2012 and 2011, respectively
 
 
 
 
 
 
Inventories
 
 19,389,543 
 
 
 18,152,200 
 
Prepaid expenses and other
 
 1,786,774 
 
 
 2,013,222 
 
Deferred income taxes
 
 956,346 
 
 
 956,346 
 
 
 
Total current assets
 
 41,419,700 
 
 
 40,292,164 
 
 
 
 
 
 
 
 
 
Property and equipment, at cost:
 
 
 
 
 
 
Fixtures and equipment
 
 26,387,148 
 
 
 25,981,572 
 
Leasehold improvements
 
 12,574,408 
 
 
 12,757,679 
 
Automotive equipment
 
 92,886 
 
 
 92,886 
 
 
 
Property and equipment gross
 
 39,054,442 
 
 
 38,832,137 
 
Less accumulated depreciation and amortization
 
 (27,263,506)
 
 
 (25,686,444)
 
 
 
Total property and equipment
 
 11,790,936 
 
 
 13,145,693 
 
 
 
 
 
 
 
 
 
Other non-current assets:
 
 
 
 
 
 
Goodwill
 
 12,188,435 
 
 
 12,188,435 
 
Deferred financing costs, net of accumulated amortization of $532,425
 
 
 
 
 
 
 
and $489,129 at April 1, 2012 and October 2, 2011, respectively
 
 83,601 
 
 
 126,897 
 
Other
 
 1,483,502 
 
 
 1,556,656 
 
 
 
Total other non-current assets
 
 13,755,538 
 
 
 13,871,988 
 
 
 
 
 
 
 
 
 
Total assets
$
 66,966,174 
 
$
 67,309,845 

The accompanying notes are an integral part
of these condensed financial statements.

1

 
 

 


 
 
 
 
 
 
 
 
 
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS (continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 1,
 
 
October 2,
 
 
 
 
 
2012 
 
 
2011 
 
 
 
 
 
(Unaudited)
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
$
 10,186,198 
 
$
 10,586,162 
 
Accrued liabilities
 
 4,267,637 
 
 
 3,820,199 
 
 
 
Total current liabilities
 
 14,453,835 
 
 
 14,406,361 
 
 
 
 
 
 
 
 
 
Long-term accrued liabilities
 
 661,352 
 
 
 616,890 
Deferred tax liabilities
 
 1,001,199 
 
 
 1,001,199 
Long-term debt, less current maturities
 
 8,242,647 
 
 
 10,772,647 
 
 
 
Total liabilities
 
 24,359,033 
 
 
 26,797,097 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 1, 2012 and October 2, 2011
 
 158,233 
 
 
 158,233 
 
Additional paid-in capital
 
 11,558,479 
 
 
 11,558,479 
 
Retained earnings
 
 30,890,429 
 
 
 28,796,036 
 
 
 
Total stockholders’ equity
 
 42,607,141 
 
 
 40,512,748 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
 66,966,174 
 
$
 67,309,845 

The accompanying notes are an integral part
of these condensed financial statements.

2

 
 

 

OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)

 
 
 
For the Quarter Ended
 
 
 
April 1,
 
 
April 3,
 
 
 
2012 
 
 
2011 
 
 
 
 
 
 
 
Net revenues
$
 50,201,781 
 
$
 40,539,552 
Cost of sales
 
 45,498,635 
 
 
 36,008,722 
Gross profit
 
 4,703,146 
 
 
 4,530,830 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 3,081,145 
 
 
 2,039,032 
 
 
 
 
 
 
 
Operating income
 
 1,622,001 
 
 
 2,491,798 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Interest expense
 
 (64,230)
 
 
 (52,845)
 
Amortization of debt discount and deferred financing costs
 
 (13,554)
 
 
 (27,179)
Total interest expense
 
 (77,784)
 
 
 (80,024)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
 
 1,544,217 
 
 
 2,411,774 
 
 
 
 
 
 
 
Income tax expense
 
 569,816 
 
 
 889,945 
 
 
 
 
 
 
 
Net income
$
 974,401 
 
$
 1,521,829 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
Basic
$
 0.06 
 
$
 0.10 
 
Diluted
$
 0.06 
 
$
 0.09 
 
 
 
 
 
 
 
Shares used in computing net income per share:
 
 
 
 
 
 
Basic
 
 15,823,271 
 
 
 15,823,271 
 
Diluted
 
 16,023,073 
 
 
 16,061,133 

The accompanying notes are an integral part
of these condensed financial statements.

3

 
 

 

OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)

 
 
 
For the Six Months Ended
 
 
 
April 1,
 
 
April 3,
 
 
 
2012 
 
 
2011 
 
 
 
 
 
 
 
Net revenues
$
 97,711,491 
 
$
 85,301,010 
Cost of sales
 
 88,323,265 
 
 
 75,799,756 
Gross profit
 
 9,388,226 
 
 
 9,501,254 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 5,895,896 
 
 
 4,313,921 
 
 
 
 
 
 
 
Operating income
 
 3,492,330 
 
 
 5,187,333 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Interest expense
 
 (133,442)
 
 
 (116,446)
 
Amortization of debt discount and deferred financing costs
 
 (40,712)
 
 
 (55,388)
Total interest expense
 
 (174,154)
 
 
 (171,834)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 3,318,176 
 
 
 5,015,499 
 
 
 
 
 
 
 
Income taxes
 
 1,223,783 
 
 
 1,884,567 
 
 
 
 
 
 
 
Net income
$
 2,094,393 
 
$
 3,130,932 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
Basic
$
 0.13 
 
$
 0.20 
 
Diluted
$
 0.13 
 
$
 0.20 
 
 
 
 
 
 
 
Shares used in computing net income per share:
 
 
 
 
 
 
Basic
 
 15,823,271 
 
 
 15,823,271 
 
Diluted
 
 16,016,226 
 
 
 16,053,629 
 
 
 
 
 
 
 

The accompanying notes are an integral part
of these condensed financial statements.

4

 
 

 

OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
 
 
 
For the Six Months Ended
 
 
 
 
 
April 1,
 
April 3,
 
 
 
 
 
2012 
 
2011 
 
 
 
 
 
 
 
 
 
 
Operating Activities:
 
 
 
 
 
 
Net income
$
 2,094,393 
 
$
 3,130,932 
 
Adjustments to reconcile net income to net cash (used in) provided by
 
 
 
 
 
 
 
operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 1,719,275 
 
 
 1,936,172 
 
 
 
Amortization of debt discount and deferred financing costs
 
 43,296 
 
 
 55,388 
 
 
 
(Recovery) of doubtful accounts
 
 (42,465)
 
 
 - 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 (3,943,248)
 
 
 1,635,506 
 
 
 
 
Inventories
 
 (1,237,343)
 
 
 (2,027,756)
 
 
 
 
Prepaid expenses and other assets
 
 226,448 
 
 
 109,269 
 
 
 
 
Accounts payable
 
 (399,964)
 
 
 353,707 
 
 
 
 
Accrued liabilities
 
 447,438 
 
 
 (123,344)
Net cash (used in) provided by operating activities
 
 (1,092,170)
 
 
 5,069,874 
 
 
 
 
 
 
 
 
 
 
Investing Activities:
 
 
 
 
 
 
Additions to property and equipment
 
 (246,902)
 
 
 (435,117)
Net cash used in investing activities
 
 (246,902)
 
 
 (435,117)
 
 
 
 
 
 
 
 
 
 
Financing Activities:
 
 
 
 
 
 
Principal payments on debt
 
 (2,530,000)
 
 
 (5,525,000)
 
Deferred financing costs
 
 - 
 
 
 (1,117)
Net cash used in financing activities
 
 (2,530,000)
 
 
 (5,526,117)
 
 
 
 
 
 
 
 
 
 
Net decrease in cash
 
 (3,869,072)
 
 
 (891,360)
Cash at beginning of period
 
 5,470,362 
 
 
 5,967,741 
Cash at end of period
$
 1,601,290 
 
$
 5,076,381 
 
 
 
 
 
 
 
 
 
 
Supplemental Schedule of Cash Flow Information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
$
 133,254 
 
$
 114,663 
 
Income taxes
$
 625,000 
 
$
 1,671,065 

The accompanying notes are an integral part
of these condensed financial statements.

5

 
 

 

OVERHILL FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
April 1, 2012
(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 1, 2012 are not necessarily indicative of the results that may be expected for the Company’s fiscal year ending September 30, 2012 or for any other period.

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 October 2, 2011 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 October 2, 2011.

3.
RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standard Board (“FASB”) issued an update to its authoritative guidance regarding the methods used to test goodwill for impairment. The amendment allows the option to first assess qualitative factors to determine whether it is necessary to perform the existing two-step quantitative goodwill impairment test. Under that option, an entity would no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on the newly permitted qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If an entity concludes otherwise, then it must perform the two-step impairment test. The Company plans to adopt this guidance commencing in fiscal 2013, effective October 1, 2012, and apply it prospectively. The adoption of the standard is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued authoritative guidance that revised its requirements related to the presentation of comprehensive income. This guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the consolidated statement of equity. It requires presentation of comprehensive income, the components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company plans to adopt this guidance commencing in fiscal 2013, effective October 1, 2012, and apply it retrospectively. The adoption of the standard is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued an update to its authoritative guidance regarding fair value measurements to clarify disclosure requirements and improve comparability. Additional disclosure requirements include: (a) for Level 3 fair value measurements, quantitative information about significant unobservable inputs used, qualitative information about the sensitivity of the measurements to change in the unobservable inputs disclosed (including the interrelationship between inputs), and a description of the Company’s valuation processes; (b) all, not just significant, transfers between Level 1 and Level 2 of the fair value hierarchy; (c) the reason why, if applicable, the current use of a nonfinancial asset measured at fair value differs from its highest and best use; and (d) the categorization in the fair value hierarchy for financial instruments not measured at fair value but for which disclosure of fair value is required. The Company adopted this guidance in the second quarter of fiscal 2012, effective January 2, 2012, and applied it retrospectively. The adoption of the standard did not have a material impact on the Company’s financial position or results of operations.
 
6
 
 

 
4.
INVENTORIES

Inventories of the Company as of April 1, 2012 and October 2, 2011 are summarized as follows:

 
 
April 1,
 
October 2,
 
 
 
2012 
 
2011 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Raw ingredients
$
 5,856,197 
 
$
 5,978,588 
 
 
Finished product
 
 11,525,455 
 
 
 10,208,600 
 
 
Packaging
 
 2,007,891 
 
 
 1,965,012 
 
 
 
$
 19,389,543 
 
$
 18,152,200 
 

5.
LONG-TERM DEBT

Long-term debt of the Company as of April 1, 2012 and October 2, 2011 is summarized as follows:

 
 
 
 
 
 
 
 
April 1,
 
October 2,
 
 
 
2012 
 
2011 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank of America Revolver
$
 8,242,647 
 
$
 10,772,647 
 
 
 
$
 8,242,647 
 
$
 10,772,647 
 

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 (for an aggregate of $50 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 1, 2012, there was $8.2 million outstanding under the Bank of America facility with an applicable interest rate of 2.2%.  In addition, the Company pays an unused line fee equal to 0.25% per annum.  For the first half of fiscal years 2012 and 2011, the Company incurred $133,000 and $116,000, respectively, in interest expense, excluding amortization of deferred financing costs.  As of April 1, 2012, the Company had $21.8 million available to borrow under the Bank of America facility.  During the first half of fiscal year 2012, the Company reduced the outstanding balance of the facility by voluntary payments of $2.5 million.
 
        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 1, 2012, the Company was in compliance with the amended covenant requirements of the Bank of America facility.
 
7
 
 

 
6.
PER SHARE DATA

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

 
 
 
 
Quarter Ended
 
 
 
 
(unaudited)
 
 
 
 
April 1,
 
April 3,
 
 
 
 
2012 
 
2011 
Basic EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 974,401 
 
$
 1,521,829 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Total shares
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Basic EPS
$
 0.06 
 
$
0.10 
 
 
 
 
 
 
 
 
 
Diluted EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 974,401 
 
$
 1,521,829 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
Incremental shares from assumed
 
 
 
 
 
 
 
exercise of stock options
 
 199,802 
 
 
 237,862 
 
 
 
Total shares
 
 16,023,073 
 
 
 16,061,133 
 
 
 
Diluted EPS
$
 0.06 
 
$
0.09 

 
 
 
 
Six Months Ended
 
 
 
 
(unaudited)
 
 
 
 
April 1,
 
April 3,
 
 
 
 
2012 
 
2011 
Basic EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 2,094,393 
 
$
 3,130,932 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Total shares
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Basic EPS
$
0.13 
 
$
0.20 
 
 
 
 
 
 
 
 
 
Diluted EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 2,094,393 
 
$
 3,130,932 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
Incremental shares from assumed
 
 
 
 
 
 
 
exercise of stock options
 
 192,955 
 
 
 230,358 
 
 
 
Total shares
 
 16,016,226 
 
 
 16,053,629 
 
 
 
Diluted EPS
$
0.13 
 
$
0.20 

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 1, 2012 or April 3, 2011.  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
 
 

 
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 1, 2012 and October 2, 2011.

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 1, 2012 and April 3, 2011.

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

The effective tax rates were 36.9% and 37.6% for the first six months of fiscal years 2012 and 2011.

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 their 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.

Five of the six defendants have now agreed to withdraw their defamatory statements. They also agreed to a permanent injunction prohibiting them from publishing the defamatory statements they made against the Company. They further agreed to withdraw from and opt-out of any claims asserted on their behalf in the Agustiana case described below. Based on these agreements, the Company dismissed its claims against these five defendants.

On April 6, 2012, the court signed an order against the remaining defendant, Nativo Lopez, in which the court awarded judgment in favor of the Company.  The court ordered Mr. Lopez to pay the Company $30,000, and it permanently enjoined Mr. Lopez from publishing the defamatory statements against the Company.

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 sought 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.
 
9
 
 

 
In about September 2011, plaintiffs Agustiana and Salinas agreed to voluntarily dismiss and waive all of their claims against the Company. They also agreed to abandon their allegations that they could represent any other employees in the alleged class. The Company did not pay them any additional wages or money.

The remaining plaintiff added four former employees of the Company as additional plaintiffs.  Three of the four new plaintiffs are former employees that the Company terminated one month before this case was filed because they had used invalid social security numbers in connection with their employment with the Company.  The fourth new plaintiff has not worked for the Company since February 2007.

The court scheduled a class certification hearing date for April 2012, which the court has postponed until June 26, 2012.  The Company believes it  has valid defenses to the plaintiffs’ remaining claims, and that the Company paid all wages due to these employees.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with a major financial institution. The account balances as of April 1, 2012 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 2012 and 2011, write-offs, net of recoveries, to the allowance for doubtful accounts were immaterial.

A significant portion of the Company’s total net revenues during the first six months of fiscal years 2012 and 2011 were derived from three customers, as described below:

 
Net Revenues
 
 
 
(unaudited)
 
 
 
 
 
April 1,
 
April 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc.
 
27%
 
26%
 
 
 
Jenny Craig, Inc.
 
22%
 
31%
 
 
 
Safeway Inc.
 
16%
 
16%
 
 

A significant portion of the Company’s total receivables as of April 1, 2012 and April 3, 2011 were derived from four customers as described below:

 
Receivables
 
 
   (unaudited)    
 
 
 
April 1,
 
April 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc. (through its distributors)
 
35%
 
34%
 
 
 
Bellisio Foods, Inc. (for various third party customers)
 
20%
 
0%
 
 
 
Jenny Craig, Inc.
 
19%
 
24%
 
 
 
Safeway Inc.
 
13%
 
19%
 
 
 
10
 
 

 
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 six months of fiscal years 2012 and 2011 were $28,000 and $29,000, 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 1, 2012 and October 2, 2011, as the debt bears interest at variable rates based on prevailing market conditions.  As of April 1, 2012, 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.

Goodwill is tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines its fair value and compares it to its carrying amount. The Company determines the fair value using a discounted cash flow analysis, which requires unobservable inputs (Level 3 as defined above). These inputs include selection of an appropriate discount rate and the amount and timing of expected future cash flows. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting units' goodwill and other intangibles over the implied fair value.

12.
COLLABORATIVE ARRANGEMENT

On November 4, 2010, the Company entered into an exclusive license agreement with Boston Market Corporation, whereby the Company has the right to manufacture, sell and distribute Boston Market frozen food products.  The license agreement was effective July 1, 2011.  The then existing Boston market business was predominately located in the Eastern half of the United States. The Company’s initial plan was to develop an internal sales and administrative staff to handle the Boston Market business. Based on a previous relationship with Bellisio Foods, Inc., (Bellisio), the Company held discussions and determined that initially the most cost-effective way to maintain distributions to existing Boston Market accounts was to enter into a Co-Manufacturing, Sales, and Distribution Agreement with Bellisio.  Bellisio operates a manufacturing and storage facility in Ohio, and has an existing sales force in place to manage consumer brands, and currently sells into 25,000 retail locations.
 
11
 
 

 
The initial term of the agreement is two years and commenced on July 1, 2011.  The agreement automatically renews for one year periods, unless either party provides a six month notice of termination date prior to the renewal period.  During the initial term, the Company will evaluate the overall cost-effectiveness of that relationship and actively consider all viable alternatives for the future.

The agreement is considered a collaborative arrangement between the Company and Bellisio regarding the co-manufacture, sale and distribution of Boston Market products.  The agreement provides that the Company and Bellisio will each manufacture approximately 50% of the total production volume of current and future Boston Market products during the term of the agreement. The Company began its manufacturing in June 2011, and Bellisio began its manufacturing in August 2011 at its Jackson, Ohio facility.

In addition to its co-manufacturing responsibilities during the term of the agreement, Bellisio will be responsible for all sales and distribution responsibilities for all Boston Market products produced by both the Company and Bellisio. These responsibilities include marketing, sales, warehousing and handling, product distribution and all billing and collection activities. The Company has final approval rights for all sales and marketing promotion plans and expenses. Pursuant to the agreement, the Company will be responsible for development of all new items for the Boston Market line as well as maintaining the quality and consistency of all products produced.  In addition, the Company maintains exclusive control and rights of the license.

The Company and Bellisio will share equally in the first $2 million of aggregate profits from the co-manufactured products, with the percentage shifting to 60% to the Company and 40% to Bellisio for any profits in excess of $2 million. Profits will be calculated after deducting from gross revenues: pre-established labor, material overhead costs relating to manufacturing of the products, all pre-approved sales and promotion expenses including a fixed sales and administrative fee charged by Bellisio as a percentage of sales; pre-negotiated warehouse charges; actual freight costs; interest expense on working capital; and any legitimate invoice deduction from retailers for spoilage, cash discounts, if any, or defective products.  The Company has elected to recognize any settlements of profit or loss from this arrangement as net revenue in the statement of income.

The Company recognizes revenue and expenses related to the collaborative arrangement in accordance with authoritative guidance, which directs participants in collaborative arrangements to report costs incurred and revenue generated from transactions with third parties (that is, parties that do not participate in the arrangement) in each entity’s respective income statement line items for revenues and expenses.  Revenues from the collaborative arrangement consist of sales to third party supermarkets.

The following tables illustrate the Company’s portion of the income statement, classification and activities attributable to transactions arising from the agreement for the quarter and six months ended April 1, 2012:

 
 
 
 
 
 
 
 
For the Quarter Ended
 
 
 
 
April 1, 2012
 
 
 
 
 
 
 
Net Revenues
$
 8,745,332 
 
 
 
 
 
 
 
Cost of Sales
$
 7,758,297 
 
 
 
 
 
 
 
Gross Profit
$
 987,035 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
 856,572 
 
 
 
 
 
 
 
Net income
$
 130,463 
 

In addition to the expenses noted above, during the second quarter of fiscal year 2012, the Company incurred marketing expenses of $43,000.

 
 
 
 
 
 
 
 
For the Six Months Ended
 
 
 
 
April 1, 2012
 
 
 
 
 
 
 
Net Revenues
$
 15,166,491 
 
 
 
 
 
 
 
Cost of Sales
$
 13,701,389 
 
 
 
 
 
 
 
Gross Profit
$
 1,465,102 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
 1,495,127 
 
 
 
 
 
 
 
Net loss
$
 (30,025)
 

In addition to the expenses noted above, during the first six months of fiscal year 2012, the Company incurred marketing expenses of $122,000.
 
12
 
 

 
13.
SUBSEQUENT EVENTS

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements, and concluded no subsequent events occurred that require recognition or disclosure other than the legal matters described in Note 9 to these financial statements.

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,” “may,” “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 uncertainty of the domestic economic outlook;

·  
the impact of competitive product 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;

·  
commodity prices and fulfillment by suppliers of existing raw materials contracts;

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

·  
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 self-manufactured by customers with such capabilities;

·  
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 uncertainty 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;

·  
ability to remain in compliance with the amended covenant requirements of the Bank of America facility;
 
13
 
 

 
·  
continued unfavorable operating variances due to lower sales volumes;

·  
voluntary or government-mandated food recalls;

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

·  
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 October 2, 2011 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., Target Corporation, Pinnacle Foods Group LLC, and American Airlines, Inc. We also sell frozen foods under the Boston Market brand, under exclusive license with Boston Market Corporation.

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, including:

·  
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 and investments.
 
For the second quarter of fiscal year 2012, which ended on April 1, 2012, we performed well and were profitable with significant improvement in net revenues as compared to our second quarter of fiscal year 2011.

Rising fuel and energy costs have had a significant impact on our gross profit margins.  In fact, higher freight costs, including the cost to ship Boston Market products, accounts for a major portion of the decrease in gross profit margins for the second quarter of fiscal 2012, as compared to the same period last year.

We have already taken several initiates to offset high fuel costs.  We recently re-bid most of our freight arrangements, and we are in the process of testing and changing over to new carriers.  We expect that this will have a significant positive impact based on the current cost of fuel.  Also, as we have in the past, we continue to work with our major customers to have their carriers pick up products from us, and consolidate our products with those of the other vendors.

With the expected new business for Boston Market in the Western region, we are working with Bellisio to reduce freight expense by taking advantage of our Los Angeles area production facilities.

On a long-term basis, we are evaluating all of our inbound and outbound freight lanes, and we are working to look at opportunities to consolidate freight loads and lanes to reduce costs.  We are reviewing a proposal with a national freight consultant to determine if we can expedite this process.

We also continue to look at all of the other cost areas to find reductions to offset high fuel and energy costs.
 
14
 
 

 
The Boston Market line of products, which we feel will be a significant part of our future growth, continues to improve.  Although we show a small net loss for the Boston Market brand for the first half of fiscal year 2012, with most of the initial marketing investments and start-up costs behind us, the Boston Market line was profitable during the second quarter of fiscal year 2012.  Our focus now is to improve that profitability through a number of product, promotion and process enhancements.

Additionally, we expect increased sales for the rest of fiscal and calendar 2012 in our foodservice category through increased sales to a major existing account and new customer initiatives.
 
Net revenues of $50.2 million for the second quarter of fiscal year 2012 reflected an increase of $9.7 million or 24.0% compared to the second quarter of fiscal year 2011. The retail category increased $5.7 million due primarily to net revenues of $8.7 million in sales of our portion of Boston Market products (sold to numerous retail accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $3.7 million. The foodservice category increased $4.3 million or 35.8% due primarily to increased sales to the Panda Restaurant Group, Inc. (“PRG”).  The airline category decreased by $352,000 or 18.5%.  We continue to be optimistic and anticipate further growth in net revenues as we continue to improve sales of the Boston Market brand products, increase foodservice sales, new initiatives and an anticipated improvement in the economy.

Gross profit was $4.7 million for the second quarter of fiscal year 2012, compared to $4.5 million for the second quarter of fiscal year 2011.  Gross margin (gross profit as a percentage of net revenues) decreased to 9.4% for the second quarter of fiscal year 2012, from 11.1% for the second quarter of fiscal year 2011. Despite an increase to gross profit dollars our gross margin decreased due largely to higher product costs, specifically higher raw material costs as we had less favorable commodity prices on higher volume usage and higher direct and indirect labor costs. We also had increased freight and storage expense of $752,000 due primarily to shipments for Boston Market products in the second quarter of fiscal year 2012 (there were no similar freight and storage costs in the second quarter of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).  We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.

Operating income for the second quarter of fiscal year 2012 was $1.6 million (3.2% of net revenues), down $870,000 compared to operating income of $2.5 million (6.2% of net revenues) for the second quarter of fiscal year 2011, due primarily to lower gross margin as noted above as well as higher selling, general and administrative (“SG&A”) expenses.  SG&A increased $1.1 million to $3.1 million (6.2% of net revenues) for the second quarter of fiscal year 2012, from $2.0 million (4.9% of net revenues) for the second quarter of fiscal year 2011, primarily due to higher brokerage, royalty and marketing expenses of $433,000, $380,000 and $43,000, respectively, related to the Boston Market brand. We also incurred higher legal fees expense of $150,000 as compared to the second quarter of fiscal year 2011 as we continue to contest remaining claims and grievances as described in Part II, Item 1 of this report.  In light of recent activities and indications from the court, we are hopeful that these expenses will decrease significantly in the near future.  We expect other SG&A expense to remain at the current level.  With anticipated growth in our retail accounts, primarily Boston Market, we expect to incur additional brokerage and selling expense, including royalty expenses related to the Boston Market brand.
 
Net income for the second quarter of fiscal year 2012 was $974,000 (1.9% of net revenues), compared to net income of $1.5 million (3.7% of net revenues) for the second quarter of fiscal year 2011, due to lower operating income partially offset by a reduction in income tax expense.

For the first six months of fiscal year 2012 (which included 26 weeks), net revenues of $97.7 million reflected a 14.5% increase compared to the first six months of fiscal year 2011 (which included 27weeks).  Retail net revenues increased $8.8 million primarily due to $15.2 million in sales of our portion of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. and other retail customers of $5.3 million and $1.1 million, respectively.  Foodservice net revenues increased $4.2 million or 16.7% due to increased sales to Panda Restaurant Group. These increases were partially offset by a decrease in airline net revenues of $589,000 or 14.4%.

Gross profit was $9.4 million for the first six months of fiscal year 2012, compared to $9.5 million for the first six months of fiscal year 2011.  Gross margin decreased to 9.6% of net sales for the first six months of fiscal year 2012 from 11.1% for the first six months of fiscal year 2011.  The decrease in gross profit dollars and margin was driven largely by higher raw material cost and other product costs, specifically higher direct and indirect labor costs. We also had increased freight and storage expense of $1.4 million due primarily to shipments for Boston Market products in the first half of fiscal year 2012 (there were no similar storage costs in the first half of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011). Although we see indications of inflation on commodities for the rest of calendar year 2012, we plan to mitigate increases with forward buying and pricing opportunities where appropriate.

Operating income for the first six months of fiscal year 2012 was $3.5 million (3.6% of net revenues), compared to $5.2 million (6.1% of net revenues) for the first six months of fiscal year 2011, due primarily to lower gross profit dollars and margin as described above as well as higher SG&A expenses.  SG&A expenses as a percentage of net revenues increased to 6.0% for the first six months of fiscal year 2012 compared to 5.0% for the first six months of fiscal year 2011 due primarily to higher brokerage, royalty and marketing expenses of $759,000, $665,000 and $122,000, respectively, related to the Boston Market brand. We also incurred higher legal fees expense of $171,000 compared to the first six months of fiscal year 2011 as we continue to contest remaining claims and grievances as described in Part II, Item 1 of this report.  In light of recent activities and indications from the court, we are hopeful that these expenses will decrease significantly in the near future.
 
15
 
 

 
Net income for the first six months of fiscal year 2012 was $2.1 million (2.1% of net revenues) compared to $3.1 million (3.6% of net revenues) for the first six months of fiscal year 2011, due to lower gross profit partially offset by lower income tax expense.

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 October 2, 2011 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 1, 2012, 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 1, 2012 and October 2, 2011.

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 2012.
 
16
 
 

 
Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with a major financial institution. The account balances as of April 1, 2012 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 during the first six months of fiscal years 2012 and 2011 were derived from three customers as described below:
 
 
Net Revenues
 
 
 
(unaudited)
 
 
 
 
 
April 1,
 
April 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc.
 
27%
 
26%
 
 
 
Jenny Craig, Inc.
 
22%
 
31%
 
 
 
Safeway Inc.
 
16%
 
16%
 
 

A significant portion of our total receivables as of April 1, 2012 and April 3, 2011 were derived from four customers as described below:

 
Receivables
 
 
   (unaudited)    
 
 
 
April 1,
 
April 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc. (through its distributors)
 
35%
 
34%
 
 
 
Bellisio Foods, Inc. (for various third party customers)
 
20%
 
0%
 
 
 
Jenny Craig, Inc.
 
19%
 
24%
 
 
 
Safeway Inc.
 
13%
 
19%
 
 

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 1, 2012 Compared to Quarter Ended April 3, 2011

The quarters ended April 1, 2012 and April 3, 2011were both 13-week periods.

Net Revenues.  Net revenues for the second quarter of fiscal year 2012 increased $9.7 million (24.0%) to $50.2 million from $40.5 million for the second quarter of fiscal year 2011 due to higher sales volume in retail and foodservice categories partially offset by decreases in airline net revenues.

Retail net revenues increased $5.7 million (21.4%) to $32.3 million for the second quarter of fiscal year 2012 from $26.6 million for the second quarter of fiscal year 2011.  The increase in retail net revenues was primarily due to sales of our portion of Boston Market branded products (sold to various third party customers) of $8.7 million partially offset by reduced sales to Jenny Craig, Inc. of $3.7 million. The decrease to Jenny Craig, Inc. was due to the slow economic recovery and their inventory management plans.

Foodservice net revenues increased $4.3 million (35.8%) to $16.3 million for the second quarter of fiscal year 2012 from $12.0 million for the second quarter of fiscal year 2011 due primarily to increased sales volume to Panda Restaurant Group of $4.5 million.  We continue to increase our sales efforts in this category and believe that foodservice represents a significant opportunity for us in 2012 and beyond.
 
17
 
 

 
Airline net revenues decreased $352,000 (18.5%) to $1.6 million for the second quarter of fiscal year 2012 from $1.9 million for the second quarter of fiscal year 2011 due to decreased sales to an existing customer stemming from continuing airline industry initiatives to cut costs.

Gross Profit. Gross profit for the second quarter of fiscal year 2012 increased by $172,000 (3.8%) to $4.7 million for the second quarter of fiscal year 2012 from $4.5 million for the second quarter of fiscal year 2011.  Gross margin decreased to 9.4% of net sales for the second quarter of fiscal year 2012 from 11.1% for the second quarter of fiscal year 2011, due largely to higher product cost, specifically higher raw material cost as we had less favorable commodity prices on higher volume usage, higher direct and indirect labor costs driven by increased volume produced during the second quarter of fiscal year 2012 and increased freight and storage expense of $752,000 due to increased shipments for Boston Market products in the second quarter of fiscal year 2012 (we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).  We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.

Selling, General and Administrative Expenses.  SG&A expenses increased $1.1  million (55.0%) to $3.1 million  for the second quarter of fiscal year 2012 from $2.0 million for the second quarter of fiscal year 2011.  SG&A expense as a percentage of net revenues increased to 6.2% for the second quarter of fiscal year 2012 compared to 4.9% for the second quarter of fiscal year 2011 due primarily to higher brokerage, royalty and marketing expenses related to the Boston Market brand of $433,000, $380,000 and $43,000, respectively. We also incurred higher legal fees expense of $150,000 compared to the second quarter of fiscal year 2011 as we continue to contest remaining claims and grievances as described in Part II, Item 1 of this report.  In light of recent activities and indications from the court, we are hopeful that these expenses will decrease significantly in the near future.  We expect other SG&A expenses to remain at the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Operating Income.  Operating income decreased $870,000 (34.8%) to $1.6 million (3.2% of net revenues) for the second quarter of fiscal year 2012 from $2.5 million (6.2% of net revenues) for the second quarter of fiscal year 2011.  The decrease in operating income was the result of lower gross margin and higher SG&A expenses as noted above.

Total Interest Expense.  Total interest expense for the second quarter of fiscal year 2012 was $78,000, compared to $80,000 for the second quarter of fiscal year 2011.

Income Tax Provision.  Income tax expense was $570,000 for the second quarter of fiscal year 2012, compared to income tax expense of $890,000 for the second quarter of fiscal year 2011.  The difference was a result of income before taxes decreasing $868,000 from $2.4 million for the second quarter of fiscal year 2011 to $1.5 million for the second quarter of fiscal year 2012.  The effective tax rate was 36.9% for the second quarter of fiscal years 2012 and 2011.

Net Income. Net income for the second quarter of fiscal year 2012 was $974,000 or $0.06 per basic and diluted share, compared to net income of $1.5 million, or $0.10 per basic and $0.09 per diluted share, for the second quarter of fiscal year 2011.
 
Six Months Ended April 1, 2012 Compared to Six Months Ended April 3, 2011

The six month period ended April 1, 2012 was a 26 week period compared to the six month period ended April 3, 2011 which was a 27 week period.
 
        Net Revenues.  Net revenues increased $12.4 million (14.5%) to $97.7 million for the first six months of fiscal year 2012 from $85.3 million for the first six months of fiscal year 2011, due to increases in retail and foodservice net revenues partially offset by decrease in airline net revenues.
 
         Retail net revenues increased $8.8 million (15.7%) to $64.8 million for the first six months of fiscal year 2012 from $56.0 million for the first six months of fiscal year 2011.  The increase in retail net revenues was largely due to $15.2 million in sales of our portion of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. and other retail customers of $5.3 million and $1.1 million, respectively. The decrease to Jenny Craig, Inc. is due to their inventory management plans and a slow economic recovery. We expect continued growth in the retail category in fiscal year 2012 as we continue to expand the Boston Market line.
 
         Foodservice net revenues increased $4.2 million (16.7%) to $29.4 million for the first six months of fiscal year 2012 from $25.2 million for the first six months of fiscal year 2011.  The increase was attributable primarily to increased sales volume to PRG of $3.9 million. We continue our sales efforts in this category and continue to believe that foodservice represents a significant opportunity for us.
 
18
 
 

 
        Airline net revenues decreased $589,000 (14.4%) to $3.5 million for the first six months of fiscal year 2012 from $4.1 million for the first six months of fiscal year 2011 due to decreased volume to an existing customer stemming from continuing airline industry initiatives to cut costs. Airline net revenues are likely to continue to decrease in future periods.
 
         Gross Profit.  Gross profit decreased by $113,000 (1.2%) to $9.4 million for the first six months of fiscal year 2012 from $9.5 million for the first six months of fiscal year 2011.  Gross profit as a percentage of net revenues decreased to 9.6% for the first six months of fiscal year 2012 from 11.1% for the first six months of fiscal year 2011. The decrease in gross profit dollars and margin was driven largely by higher raw material cost and other product costs, specifically higher direct and indirect labor costs. We also had increased freight and storage expense of $1.4 million due primarily to shipments for Boston Market products in the first half of fiscal year 2012 (there were no similar storage costs in the first half of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011). Although we see indications of inflation on commodities for the rest of calendar year 2012, we plan to mitigate increases with forward buying and pricing opportunities where appropriate.
 
         Selling, General and Administrative Expenses. SG&A expenses increased $1.6 million (37.2%) to $5.9 million (6.0% of net revenues) for the first six months of fiscal year 2012 from $4.3 million (5.0% of net revenues) for the first six months of fiscal year 2011. The increase in SG&A expenses were driven primarily to higher brokerage, royalty and marketing expenses of $759,000, $665,000 and $122,000, respectively, related to the Boston Market brand. We also incurred higher legal fees expense of $171,000 compared to the first six months of fiscal year 2011 as we continue to contest remaining claims and grievances as described in Part II, Item 1 of this report.  In light of recent activities and indications from the court, we are hopeful that these expenses will decrease significantly in the near future. We expect other SG&A expense to remain at the current level as we incur additional brokerage and selling expenses, including royalty expenses, related to the Boston Market brand.
 
        Operating Income.  Operating income decreased $1.7 million (32.7%) to $3.5 million for the first six months of fiscal year 2012 from $5.2 million for the first six months of fiscal year 2011.  The decrease in operating income was the result of decreased gross profit and higher SG&A expenses as noted above.
 
         Total Interest Expense.  Total interest expense for the first six months of fiscal year 2012 was $174,000, compared to $172,000 for the first six months of fiscal year 2011.
 
         Income Tax Provision.  Income tax expense was $1.2 million for the first six months of fiscal year 2012, compared to $1.9 million for the first six months of fiscal year 2011.  The difference was a result of income before taxes decreasing $1.7 million from $5.0 million for the first six months of fiscal year 2011 to $3.3 million for the first six months of fiscal year 2012.  The effective tax rates were 36.9% for the first six months of fiscal year 2012 and 37.6% for the first six months of fiscal year 2011.
 
         Net Income. Net income for the first six months of fiscal year 2012 was $2.1 million, or $0.13 per basic and diluted share, compared to net income of $3.1 million, or $0.20 per basic and diluted share, for the first six months of fiscal year 2011.

Liquidity and Capital Resources

During the first six months of fiscal year 2012, our operating activities used cash of $1.1 million compared to cash provided of $5.1 million during the first six months of fiscal year 2011.  Cash generated from operations before working capital changes for the first six months of fiscal year 2012 was $3.8 million.  Cash used in changes in working capital was $4.9 during the first six months of fiscal year 2012 and resulted from increases to accounts receivable and inventory of $3.9 million and $1.2 million, respectively. The increases were driven by higher sales and inventory build up for Boston Market and other major customers. Changes in working capital were further impacted by the use of cash to decrease accounts payable by $400,000.  This was partially offset by increases in accrued liabilities of $447,000, as well as a decrease in prepaid and other expenses of $226,000.  As of April 1, 2012, we had working capital of $27.0 million compared to working capital of $25.9 million at fiscal year end 2011.  The increase in working capital was due primarily to increases in accounts receivable and inventory.  We were able to fund our operations in the first six months of fiscal year 2012 internally while decreasing our external debt.

During the first six months of fiscal year 2012, our investing activities, consisting primarily of capital expenditures, resulted in a net use of cash of approximately $247,000, compared to a net use of cash of approximately $435,000 million during the first six months of fiscal year 2011.  The property and equipment additions were made to accommodate additional business opportunities, meet anticipated growth and improve operating efficiency.

During the first six months of fiscal year 2012, our financing activities resulted in a use of cash of $2.5 million, compared to a use of cash of $5.5 million during the first six months of fiscal year 2011.  The use of cash during the first six months of fiscal year 2012 was primarily the result of $2.5 million in voluntary payments we made on our revolving credit facility. The use of cash during the first six months of fiscal year 2011 was primarily due to $5.5 million in voluntary payments made on our revolving credit facility.
 
19
 
 

 
We believe that our cash, financial liquidity position and financial strength are sufficient to fund current working capital needs and future growth initiatives, including potential acquisitions and the expansion 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 1, 2012, there was $8.2 million outstanding under the Bank of America facility with an applicable interest rate of 2.2%.  In addition, we will pay an unused fee equal to 0.25% per annum.  For the first six months of fiscal years 2012 and 2011, we incurred $133,000 and $116,000, respectively, in interest expense, excluding amortization of deferred financing costs.  During the first six months of fiscal year 2012, we reduced the outstanding balance of the facility by $2.5 million in voluntary payments.  As of April 1, 2012, we had $21.8 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 1, 2012, we were in compliance with the amended 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 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.
 
20
 
 

 
Following is a summary of our contractual obligations at April 1, 2012:

 
 
 
Payments Due By Period
 
 
CONTRACTUAL OBLIGATIONS
 
Total
 
 
Remainder of Fiscal Year 2012
 
 
2-3 Years
 
 
4-5 Years
 
 
More than 5 Years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt maturities
$
 8,242,647 
 
$
 - 
 
$
 8,242,647 
 
$
 - 
 
$
 - 
 
 
Interest Expense(1)
 
 360,981 
 
 
 121,881 
 
 
 239,100 
 
 
 - 
 
 
 - 
 
 
Operating lease
    obligations(2)
 
 7,544,017 
 
 
 1,266,329 
 
 
 3,990,887 
 
 
 2,286,801 
 
 
 - 
 
 
Other Contractual
    obligations
 
 1,458,094 
 
 
 265,108 
 
 
 1,060,432 
 
 
 132,554 
 
 
 - 
 
 
Open purchase
    orders
 
 9,709,782 
 
 
 9,187,802 
 
 
 521,980 
 
 
 - 
 
 
 - 
 
 
Total contractual
    obligations
$
 27,315,521 
 
$
 10,841,120 
 
$
 14,055,046 
 
$
 2,419,355 
 
$
 - 
 
 
________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Assumes only mandatory principal pay-down and the use of LIBOR as of April 1, 2012 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 $18,000 the annual interest expense on our debt outstanding as of April 1, 2012.

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 1, 2012, 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 1, 2012, 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.

 
21
 
 

 


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 their 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 seek 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.

Five of the six defendants have now agreed to withdraw their defamatory statements.  They also agreed to a permanent injunction prohibiting them from publishing the defamatory statements they made against us.  They further agreed to withdraw from and opt-out of any claims asserted on their behalf in the Agustiana case described below.  Based on these agreements, we dismissed our claims against these five defendants.

On April 6, 2012, the court signed an order against the remaining defendant, Nativo Lopez, in which the court awarded judgment in our favor.  The court ordered Mr. Lopez to pay us $30,000, and it permanently enjoined Mr. Lopez from publishing the defamatory statements against us.

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 sought 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.

In about September 2011, plaintiffs Agustiana and Salinas agreed to voluntarily dismiss and waive all of their claims against us.  They also agreed to abandon their allegations that they could represent any other employees in the alleged class.  We did not pay them any additional wages or money.

The remaining plaintiff added four former employees as additional plaintiffs.   Three of the four new plaintiffs are former employees that we terminated one month before this case was filed because they had used invalid social security numbers in connection with their employment with us.  The fourth new plaintiff has not worked for us since February 2007.
 
22
 
 

 
The court scheduled a class certification hearing date for April 2012, which the court has postponed until June 26, 2012.  We believe we have valid defenses to the plaintiffs’ remaining claims, and that we paid all wages due to these employees.

Item 6.
Exhibits


 
Exhibit
Number
Description
     
  10 (1)         Waiver and Amendment No 1 to Credit Agreement
     
 
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.

23

 
 

 

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 9, 2012
                       
By:
/s/ James Rudis
                           
James Rudis
                           
Chief Executive Officer
                           
(principal executive officer)
                             
                             
                             
Date:  May 9, 2012
                       
By:
/s/  Robert C. Bruning
                           
Robert C. Bruning
                           
Chief Financial Officer
                           
(principal financial officer)

24

 
 

 

EXHIBITS ATTACHED TO THIS FORM 10-Q



 
Exhibit
Number
Description
     
  10          Waiver and Amendment No 1 to Credit Agreement
     
 
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


 
25