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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 June 29, 2003
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)
(323) 582-9977
--------------
(Registrant's telephone number, including area code)
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 is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act.). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 12,338,797
-----------------------------
Outstanding at August 6, 2003
OVERHILL FARMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 29, 2003
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
June 29, 2003 and September 29, 2002 2
Consolidated Condensed Statements of Operations
For the Three Months Ended June 29, 2003 and June 30, 2002 4
Consolidated Condensed Statements of Operations
For the Nine Months Ended June 29, 2003 and June 30, 2002 5
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended June 29, 2003 and June 30, 2002 6
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 26
Item 3. Defaults Upon Senior Securities 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 29
Certifications 30
-1-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
June 29, September 29,
2003 2002
------------- -------------
(Unaudited) (Note 2)
Current assets:
Cash $ 744,048 $ 8,115
Accounts receivable, net of allowance for doubtful
accounts of $381,331 and $102,285 11,093,635 13,450,103
Inventories 10,778,566 18,489,530
Prepaid expenses and other 1,240,944 1,704,686
------------- -------------
Total current assets 23,857,193 33,652,434
------------- -------------
Property and equipment 21,280,720 16,675,445
Less accumulated depreciation (7,738,427) (7,504,929)
------------- -------------
13,542,293 9,170,516
------------- -------------
Other assets:
Excess of cost over fair value of net assets acquired 12,188,435 12,188,435
Deferred financing costs, net of accumulated amortization
of $3,745,450 and $1,395,829 3,511,020 2,952,587
Deferred tax asset 2,819,016 --
Other 2,032,965 1,053,610
------------- -------------
20,551,436 16,194,632
------------- -------------
Total assets $ 57,950,922 $ 59,017,582
============= =============
The accompanying notes are an integral part
of these consolidated condensed financial statements
-2-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 29, September 29,
2003 2002
------------- -------------
(Unaudited) (Note 2)
Current liabilities:
Accounts payable, primarily trade $ 7,968,005 $ 13,768,891
Accrued liabilities 2,838,900 1,908,439
Notes payable and current maturities of long-term debt 20,910,968 1,481,600
------------- -------------
Total current liabilities 31,717,873 17,158,930
Deferred taxes 265,127 265,127
Long-term debt, less current maturities 24,089,297 36,241,914
------------- -------------
Total liabilities 56,072,297 53,665,971
------------- -------------
Shareholders' equity:
Series A Preferred stock, $0.01 par value, authorized
50,000,000 shares, issued and outstanding, 23.57 shares -- --
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 12,338,797 and 9,400,828
shares 123,388 94,008
Additional paid-in capital 9,598,230 4,480,614
Warrants to purchase common stock 400 3,470,000
Receivable from Parent -- (10,534,679)
Retained earnings (accumulated deficit) (7,843,393) 7,841,668
------------- -------------
Total shareholders' equity 1,878,625 5,351,611
------------- -------------
Total liabilities and shareholders' equity $ 57,950,922 $ 59,017,582
============= =============
The accompanying notes are an integral part
of these consolidated condensed financial statements
-3-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
--------------------------------
June 29, June 30,
2003 2002
------------- -------------
Net revenues $ 34,072,251 $ 34,466,865
Cost of sales 29,420,118 28,655,542
------------- -------------
Gross profit 4,652,133 5,811,323
Selling, general and administrative expenses 3,763,179 3,910,367
------------- -------------
Operating income 888,954 1,900,956
------------- -------------
Other income (expense):
Interest expense (2,246,002) (1,156,015)
Amortization of deferred financing costs (1,533,170) (190,120)
Other income (expense) (34,786) (78,666)
------------- -------------
Total other expenses (3,813,958) (1,424,801)
------------- -------------
Income (loss) before income taxes (2,925,004) 476,155
Income tax provision (benefit) (1,174,037) 191,118
------------- -------------
Net income (loss) $ (1,750,967) $ 285,037
============= =============
Net income (loss) per share:
Basic $ (.14) $ .03
============= =============
Diluted $ (.14) $ .02
============= =============
The accompanying notes are an integral part
of these consolidated condensed financial statements
-4-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
----------------------------------
June 29, June 30,
2003 2002
-------------- --------------
Net revenues $ 105,631,502 $ 101,927,639
Cost of sales 91,970,565 85,745,966
-------------- --------------
Gross profit 13,660,937 16,181,673
Selling, general and administrative expenses 13,518,408 10,915,275
-------------- --------------
Operating income 142,529 5,266,398
-------------- --------------
Other income (expense):
Interest expense (4,578,447) (3,481,196)
Amortization of deferred financing costs (2,349,621) (416,338)
Other income (expense) (237,637) (227,267)
-------------- --------------
Total other expenses (7,165,705) (4,124,801)
-------------- --------------
Income (loss) before income taxes (7,023,176) 1,141,597
Income tax provision (benefit) (2,818,962) 458,217
-------------- --------------
Net income (loss) $ (4,204,214) $ 683,380
============== ==============
Net income (loss) per share:
Basic $ (.36) $ .07
============== ==============
Diluted $ (.36) $ .06
============== ==============
The accompanying notes are an integral part
of these consolidated condensed financial statements
-5-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
------------------------------
June 29, June 30,
2003 2002
------------ ------------
Operating Activities:
Net income (loss) $(4,204,214) $ 683,380
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,114,383 1,362,639
Provision for doubtful accounts 279,046 --
Deferred tax provision (benefit) (2,818,962) --
Changes in:
Accounts receivable 2,077,422 1,391,211
Inventories 7,710,964 910,608
Prepaid expenses and other (515,667) (305,368)
Accounts payable (5,800,886) (2,563,808)
Accrued liabilities 930,461 (498,495)
------------ ------------
Net cash provided by operating activities 1,772,547 980,167
------------ ------------
Investing Activities:
Net additions to property and equipment (5,225,709) (2,451,386)
------------ ------------
Net cash used in investing activities (5,225,709) (2,451,386)
------------ ------------
The accompanying notes are an integral part
of these consolidated condensed financial statements
-6-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Nine Months Ended
--------------------------------
June 29, June 30,
2003 2002
------------- -------------
Financing Activities:
Net borrowings (payments) on line of
credit arrangements $(11,957,293) $ 4,604,777
Proceeds from borrowings on short-term debt 20,347,272 --
Principal payments on long-term debt (2,024,058) (1,710,868)
Net advances to or on behalf of Parent (946,168) (1,059,496)
Deferred financing costs (1,230,658) (436,493)
------------- -------------
Net cash provided by financing activities 4,189,095 1,397,920
------------- -------------
Net increase (decrease) in cash 735,933 (73,299)
Cash at beginning of period 8,115 81,414
------------- -------------
Cash at end of period $ 744,048 $ 8,115
============= =============
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,486,891 $ 3,032,989
Income taxes $ -- $ --
The accompanying notes are an integral part
of these consolidated condensed financial statements
-7-
OVERHILL FARMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company, effective upon the completion of its spin-off from its former
Parent, netted a total of approximately $11.5 million, consisting of all accrued
income taxes due to and the unpaid receivable due from its former Parent,
against retained earnings.
During the nine months ended June 29, 2003, the Company issued a total of
2,937,987 shares of its common stock, for nominal consideration, in connection
with the exercise of warrants and dilution protection rights granted to its
senior subordinated lender in prior fiscal periods.
In connection with bridge financing arrangements during the nine months ended
June 29, 2003, the Company recorded a debt discount of approximately $1.65
million, which is being amortized over a 10-month period ending in January 2004.
During the nine months ended June 30, 2002, the Company issued 23.57 shares of a
newly created Series A Preferred Stock, convertible into 283,076 shares of
common stock and having an estimated value of $750,000, as consideration for
certain consents and additional monitoring costs and expenses to be incurred by
the Company's senior subordinated lender.
The accompanying notes are an integral part
of these consolidated condensed financial statements
-8-
OVERHILL FARMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND ORGANIZATIONAL MATTERS
Overhill Farms, Inc. (the "Company" or "Overhill Farms") is a producer of
high-quality entrees, plated meals, meal components, soups, sauces, and
poultry, meat and fish specialties. From May 5, 1995 through October 29,
2002, the Company was a majority-owned subsidiary of TreeCon Resources, Inc.,
formerly Overhill Corporation and Polyphase Corporation (the "Parent"). The
Parent's ownership of Overhill Farms during that period was subject to
various warrants to purchase Overhill Farms' common stock, which had been
issued to certain lenders to the Company. On October 29, 2002, TreeCon
Resources, Inc. distributed to its shareholders, in the form of a tax-free
dividend, all of its ownership of Overhill Farms.
In October 2002, in connection with the above mentioned spin-off transaction,
the Company's Board of Directors authorized a 12,010-shares-for-1 stock
split. Share and per share data as of and for all periods presented herein
have been restated to reflect the stock split.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Overhill Farms
and its wholly owned subsidiary, Overhill L.C. Ventures, Inc. All material
intercompany accounts and transactions are eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The financial statements included herein have been prepared by the Company,
without an audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The Company believes that the disclosures are
adequate to make the information presented not misleading. The information
presented reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods when read in conjunction with
the financial statements and the notes thereto included in the Company's
latest financial statements filed as part of its Form 10-K for the year ended
September 29, 2002.
The consolidated condensed balance sheet at September 29, 2002 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
-9-
3. INVENTORIES
Inventories are summarized as follows:
June 29, September 29,
2003 2002
------------- -------------
Raw ingredients $ 4,611,532 $ 8,003,573
Finished product 4,927,759 8,681,091
Packaging 1,239,275 1,804,866
------------- -------------
$ 10,778,566 $ 18,489,530
============= =============
4. LONG-TERM DEBT
In November 1999, the Company refinanced substantially all of its existing
debt. The total facility amounted to $44 million, consisting of a $16 million
line of credit, expiring in November 2002, provided by Union Bank of
California, N.A. ("Union Bank") together with $28 million in the form of a
five-year term loan provided by Levine Leichtman Capital Partners II, L.P.
("LLCP"). Both of these agreements have subsequently been amended on multiple
occasions as discussed in the Company's annual financial statements included
in its Form 10-K for the year ended September 29, 2002 and in its quarterly
financial statements included in its quarterly reports on Form 10-Q for the
periods ended December 29, 2002 and March 30, 2003. Additionally, the Company
issued a term note payable to Union Bank in connection with an acquisition
that occurred in August 2000.
At March 30, 2003, amounts outstanding under these arrangements were $12.6
million payable to Union Bank on the revolving line of credit, $850,000
payable to Union Bank on term loans, and $24.7 million payable to LLCP on a
term loan.
The Company's revolving line of credit, senior subordinated note and term
loan agreements all contain various financial covenants, including
restrictions on changes in control, capital expenditures, minimum EBITDA and
net worth levels, specified debt service and debt-to-equity ratios, and
prohibitions on certain loans, advances and dividend payments. As of March
30, 2003, the Company was not in compliance with certain financial covenants
with respect to its financing arrangements with both Union Bank and LLCP and
was also experiencing a liquidity shortfall.
To assist the Company in meeting its liquidity needs, effective April 4,
2003, the Company entered into amendments to its then-existing securities
purchase agreement with LLCP, the note and certain related agreements,
pursuant to which LLCP waived the Company's non-compliance with certain
covenants under the various financing and related agreements with LLCP, and
LLCP purchased from the Company a secured senior subordinated bridge note in
the principal amount of $3.0 million, bearing interest at 15% and due and
payable January 30, 2004, thereby providing the Company with the liquidity it
needed to meet its short-term payment obligations. In a related transaction,
LLCP also agreed with Union Bank that it or an LLCP affiliate would acquire
-10-
Union Bank's senior secured loans to the Company. Finally, as part of the
bridge financing and in substantial consideration for LLCP's financial
accommodations, the Company agreed to issue and sell to LLCP, and LLCP agreed
to purchase from the Company, 2,466,759 shares of the Company's common stock
for a purchase price of $0.01 per share. The Company was originally required
to issue and sell these shares to LLCP by April 16, 2003; subsequently, LLCP
agreed to extend the issuance date to April 24, 2003, and then, in
consideration of the payment by the Company to LLCP of an amendment fee of
$125,000, to July 20, 2003. In addition, the Company was required to wind up
and dissolve Overhill L.C. Ventures, Inc., the Company's subsidiary, by June
30, 2003, but the Company was unable to meet that deadline. As discussed
below, the deadlines for the issuance of the shares and the dissolution of
Overhill L.C. Ventures, Inc. were further extended to August 20, 2003.
After completing the bridge financing and submitting an application to the
American Stock Exchange ("AMEX") requesting listing of the shares to be
issued to LLCP, AMEX advised the Company that its approval of the Company's
listing application with respect to the issuance and sale of these shares to
LLCP is subject to approval of the Company's stockholders. The Company has
obtained a waiver from LLCP for its failure to deliver these shares by July
20, 2003, provided that delivery of these shares is made on or before August
20, 2003. The waiver also extends the deadline for the dissolution of
Overhill L.C. Ventures, Inc. to August 20, 2003. At a meeting of the
Company's stockholders held on August 11, 2003, the stockholders approved the
issuance of these shares to LLCP; accordingly the Company expects to obtain
AMEX approval and to deliver the shares prior to the expiration of the
waiver. In connection with this transaction, a debt discount of approximately
$1.65 million was recorded and is being amortized over a 10-month period
ending in January 2004.
If the Company is not able to dissolve Overhill L.C. Ventures or to obtain
AMEX's approval of the listing of, and to issue, the LLCP Common Shares by
August 20, 2003, the Company will be deemed to have been in default under its
financing arrangements with LLCP and Pleasant Street Investors, which could
have a material adverse effect on the Company's financial condition, results
of operations, or cash flows.
Effective April 16, 2003, Pleasant Street Investors, LLC, an affiliate of
LLCP, acquired the senior secured loans previously made to the Company by
Union Bank, and the Company and Pleasant Street Investors amended and
restated the senior secured loan arrangements on mutually acceptable terms
and conditions. As a result of the repayment of Union Bank, the Company wrote
off unamortized deferred financing costs of approximately $450,000 related to
the arrangements with the Bank. Under the new agreement, amounts owing to
Union Bank on the effective date, $12.117 million, plus additional amounts
advanced to the Company by Pleasant Street Investors, $1.883 million,
together with the amounts owing to LLCP under the bridge financing agreement
described above, $3.0 million, were combined into a new $17.0 million Term
Loan A, bearing interest at no less than 10%, subject to periodic
adjustments, and due and payable on November 30, 2003. During the three
months ended June 29, 2003 the average rate of interest paid on Term Loan A
was 11.6%. Additional amounts advanced by Pleasant Street Investors to the
Company as of the effective date amounted to $5.0 million and are evidenced
by Term Loan B, bearing interest at 15%, and is due and payable January 30,
2004. The Company used $3.0 million of proceeds from Term Loan A to repay the
outstanding principal amounts of the term note issued to LLCP on April 4,
2003.
Due to the fact that a substantial portion of the Company's financing matures
within the next twelve months (Term Loan A in the amount of $17.0 million is
due November 30, 2003, and Term Loan B in the amount of $5.0 million is due
January 30, 2004, as described above), the Company is actively seeking new
financing arrangements both from LLCP, the Company's current lender, as well
as other potential sources of financing. No assurances can be made that such
financing arrangements would be obtained by the Company on substantially the
same terms and conditions, or at all.
As of June 29, 2003, the Company was in compliance with all of its amended
financial covenants. The Company believes, based upon historical performance,
current results of operations for the nine months ended June 29, 2003 and
forecasted performance for the remainder of fiscal 2003, that it is probable
that the Company will be in compliance with all of its revised financial and
other covenant requirements. Accordingly, the Company's senior subordinated
debt, which matures in November 2004, has been classified as a long-term
-11-
obligation in the accompanying consolidated balance sheet as of June 29,
2003. In the future, the failure of the Company to achieve certain revenue,
expense and profitability forecasts could result in a violation of the
amended financial covenants under its financing arrangements, which could
have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
5. PER SHARE DATA
The following table sets forth the calculation of net income (loss) per share
for the periods presented:
For the Three Months Ended
-------------------------------
June 29, June 30,
------------- ------------
2003 2002
------------- ------------
Numerator:
Net income (loss) attributable to common shareholders $ (1,750,967) $ 285,037
============= ============
Denominator:
Denominator for basic earnings
Per share - weighted average shares 12,338,797 9,400,828
------------- ------------
Effect of dilutive securities:
Warrants -- 1,994,140
Dilution protection shares -- --
Series A Preferred Stock -- 283,076
------------- ------------
Dilutive potential common shares -- 2,277,216
------------- ------------
Denominator for diluted earnings (loss) per share 12,338,797 11,678,044
============= ============
Net income (loss) per share - basic and diluted:
Net income (loss) per share - basic $ (.14) $ .03
============= ============
Net income (loss) per share - diluted $ (.14) $ .02
============= ============
-12-
For the Nine Months Ended
-------------------------------
June 29, June 30,
2003 2002
------------- ------------
Numerator:
Net income (loss) attributable to common shareholders $ (4,204,214) $ 683,380
============= ============
Denominator:
Denominator for basic earnings
per share - weighted average shares 11,587,421 9,400,828
------------- ------------
Effect of dilutive securities:
Warrants -- 1,994,140
Dilution protection shares -- --
Series A Preferred Stock -- 125,811
------------- ------------
Dilutive potential common shares -- 2,119,951
------------- ------------
Denominator for diluted earnings (loss) per share 11,587,421 11,520,779
============= ============
Net income (loss) per share - basic and diluted:
Net income (loss) per share - basic $ (.36) $ .07
============= ============
Net income (loss) per share - diluted $ (.36) $ .06
============= ============
For the three and nine month periods ended June 29, 2003, stock options
covering 672,000 shares, warrants to purchase 2,685,355 shares, 252,632
dilution protection shares and preferred stock convertible into 283,076
shares were excluded from the calculation of diluted per share amounts as
their effect, if any, would be antidilutive.
Share and per share data for prior periods presented have been retroactively
restated to reflect the 12,010-shares-for-1 stock split in October 2002.
6. INCOME TAXES
For the year ended September 29, 2002 and for the period through the
effective date of the spin-off, the Company is included in the consolidated
federal tax return of its former Parent and has provided for federal taxes on
a separate company basis in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME Taxes. Historically, with respect to state income taxes, primarily in
California, the Company has been able to reduce its tax liability by
offsetting otherwise taxable income with other losses under the Parent
entity. For periods following the completion of the spin-off in October 2002,
the Company's tax returns will be filed on a stand-alone basis.
-13-
Due to operating losses for the three and nine month periods ended June 29,
2003, the Company has provided tax benefits representing operating loss
carryforwards. As of June 29, 2003, the Company has recorded $2.8 million in
deferred tax assets, most of which are related to the operating loss
carryforwards. The Company has not recorded a valuation allowance against any
of its deferred tax assets, since it is believed that such assets are more
likely than not to be recoverable through estimated future profitable
operations. The Company currently expects to improve its operating results
from those experienced over the last nine months, which have been negatively
affected by significant plant consolidation activities and additional
interest expense associated with amendments to debt agreements. The Company's
return to profitable operating results is anticipated to be achieved through
(a) improved gross margins achieved by streamlining additional costs and
continuing to leverage its newly consolidated manufacturing and storage
facilities to improve manufacturing efficiency, (b) growing revenues from
profitable product lines and (c) reducing future interest costs on
outstanding debt upon refinancing its short-term debt within the next five
months. Failure by the Company to successfully improve margins, grow revenues
and/or reduce future interest costs, and return to profitable operating
results in the near term, could adversely impact the Company's expected
realization of some or all of its deferred tax assets and could require the
Company to record a valuation allowance against some or all of such assets,
which could have a material adverse effect on the Company's financial
position and results of operations.
7. SPIN-OFF TRANSACTION AND RELATED EVENTS
SPIN-OFF TRANSACTION
On August 14, 2001, the Parent's Board of Directors approved a plan to spin
off Overhill Farms to the stockholders of the Parent. On October 29, 2002,
the Parent accomplished the spin-off by distributing, in the form of a
tax-free dividend, 100% of its ownership of Overhill Farms' common stock,
representing 99% of the then issued and outstanding common stock of Overhill
Farms, to the Parent's stockholders of record as of September 30, 2002. The
Parent's stockholders each received one share of Overhill Farms' common stock
for every two shares of the Parent's common stock they owned as of the date
of record. Any Parent stockholder entitled to a fractional share under this
formula received cash, which was immaterial. Immediately after the spin-off
transaction became effective, the Parent no longer had any ownership interest
in Overhill Farms.
STOCK SPLIT AND INCOME PER SHARE
To facilitate the spin-off, the Company's Board of Directors, in October
2002, authorized a stock split of 12,010-shares-for-1, which increased the
Company's outstanding shares of common stock to approximately 9.4 million
shares. Shares issuable pursuant to outstanding warrants and conversion
rights of preferred stock were similarly increased. Share and per share data
for all periods presented herein have been adjusted to reflect the
12,010-shares-for-1 stock split.
-14-
STOCK OPTION PLAN AND DILUTION PROTECTION SHARES ISSUANCE
In connection with the spin-off, the Company's Board of Directors adopted a
stock option plan for eligible employees. A total of 800,000 post-stock split
shares of the Company's common stock were reserved for issuance under this
plan. This reservation of shares gave effect to the dilution protection for
LLCP and resulted in an increase in the number of common shares issuable to
LLCP with respect to the dilution protection rights related to LLCP's stock
ownership and to its warrant exercise and preferred stock conversion
positions. Accordingly, in November 2002, an additional 252,632 shares of
common stock were issued to LLCP, for no additional consideration,
representing all dilution protection shares then currently issuable pursuant
to the agreements with LLCP.
In October 2002, concurrently with the spin-off and pursuant to the Company's
2002 Employee Stock Option Plan, the Company's Board of Directors granted to
certain officers and directors nonqualified options to purchase 472,000
shares, at an exercise price of $1.60 per share, the fair market value per
share as of the date of grant. These options became exercisable on January 1,
2003 and generally have a ten-year life. Options covering an additional
200,000 shares, 50,000 shares immediately exercisable at $0.70 per share and
150,000 shares, immediately exercisable at $0.48 per share, the fair market
values at the dates of grant, were subsequently granted and are exercisable
over a five-year period.
The Company accounts for stock-based compensation utilizing the intrinsic
value method in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and
related interpretations, and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, no
compensation expense is recognized for fixed option plans because the
exercise prices of employee stock options equal or exceed the market prices
of the underlying stock on the dates of grant. For purposes of pro forma
disclosure, the estimated fair value of stock-based compensation plans and
other options is amortized to expense primarily over the vesting period.
The following table represents the effect on net income (loss) and related
per share amounts if the Company had applied the fair value based method and
recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," to stock-based Employee
compensation (in thousands, except per share amounts) for the three and nine
months ended June 29, 2003 and June 30, 2002:
3 Months Ended 9 Months Ended
---------------------------- -----------------------------
JUNE 29, 2003 JUNE 30,2002 JUNE 29, 2003 JUNE 30, 2002
------------- ------------ ------------- -------------
Net income (loss), as reported $ (1,751) $ 285 $ (4,204) $ 683
Deduct: Total stock-based employee
Compensation expense determined under
Fair value based methods for all awards,
Net of related tax effects $ (37) $ -- $ (281) $ --
Pro forma net income (loss) $ (1,788) $ 285 $ (4,485) $ 683
-15-
Net income (loss) per share
Basic, as reported $ (0.14) $ 0.03 $ (0.36) $ 0.07
Basic, pro forma $ (0.15) $ 0.03 $ (0.39) $ 0.07
Diluted, as reported $ (0.14) $ 0.02 $ (0.36) $ 0.06
Diluted, pro forma $ (0.15) $ 0.02 $ (0.39) $ 0.06
WARRANT EXERCISE
In December 2002, LLCP exercised warrants to purchase 2,685,355 shares of the
Company's common stock for a nominal exercise price.
RECEIVABLE FROM PARENT AND NOTES RECEIVABLE FROM OFFICERS
From time to time, Overhill Farms made noninterest-bearing advances to or on
behalf of the Parent for various purposes. Additionally, the Company has also
offset other amounts, primarily net income tax liabilities payable by the
Company to the Parent, as partial payments against the intercompany
receivable from the Parent. The net intercompany amount due from the Parent,
which included certain advances agreed to be made subsequent to the spin-off,
totaled approximately $11.5 million as of the effective date of the spin-off,
and was charged to retained earnings as of that time.
In October 2002, in connection with the spin-off, the Parent transferred to
the Company certain notes receivable having an aggregate principal balance of
approximately $400,000. These notes receivable are due from certain officers
of both the Parent and the Company who, subsequent to the spin-off, remained
officers of the Company but who have resigned, or are expected to resign from
the Parent. These notes receivable are collateralized solely by the common
stock of the Parent. Based upon the Company's assessment of the
collectibility of these notes receivable, including the value of the subject
collateral, the Company assigned no value to these notes receivable upon
their receipt effective as of October 29, 2002, the date of the spin-off, and
the notes receivable continue to have no recorded value as of June 29, 2003.
Any amounts ultimately realized, if any, on these notes receivable, will be
recorded as an adjustment to shareholders' equity at the time such amounts
are realized.
8. CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company is involved in various lawsuits, claims and
proceedings related to the conduct of its business. Management does not
believe that the disposition of any pending claims is likely to adversely
affect the Company's financial condition, results of operations or cash
flows.
-16-
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of trade receivables. The Company performs
ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers.
For the nine months ended June 29, 2003 and June 30, 2002, revenues
from airline-related customers accounted for approximately 20.9% and 23.9% of
total net revenues, respectively. Additionally, accounts receivable from
airline-related customers accounted for approximately 37.0% and 31.8% of the
total accounts receivable balance at June 29, 2003 and June 30, 2002,
respectively.
For the nine months ended June 29, 2003 and June 30, 2002, the Company's
largest airline customer, American Airlines, accounted for approximately 7.5%
and 8.8% of total net revenues, respectively. Additionally, accounts
receivable from American accounted for approximately 18.3% and 10.1% of the
total accounts receivable balance at June 29, 2003 and June 30, 2002,
respectively. The tragic events of September 11, 2001 have significantly
impacted the Company's sales to airlines. The long-term effect of these
events on the airline industry, airline revenues, and on Overhill Farms'
business in particular, still cannot be accurately determined at this time.
These events have resulted in a decreased demand for air travel and a
reduction in the number of meals served as a result of airlines' cost savings
measures. These effects, depending upon their scope and duration, which
cannot be predicted at this time, could negatively impact the Company's
financial position, results of operations or cash flows.
In December 2002, United Airlines filed a petition for bankruptcy
reorganization. As of the date of United's bankruptcy filing, the Company's
outstanding receivable balance from United was approximately $180,000. The
Company will continue to pursue collection of pre-bankruptcy receivables from
United through the normal course of bankruptcy proceedings. However, as of
June 29, 2003, the Company has fully reserved all of its pre-bankruptcy
receivables from United due to uncertainty with respect to their ultimate
collectibility. The Company no longer does business with United.
The Company continues to do business with American Airlines. The Company will
evaluate its business relationship with American Airlines on an ongoing basis
to determine the manner in which the relationship should be continued.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with our
consolidated condensed financial statements and notes to consolidated
condensed financial statements included elsewhere in this document. This
report and our consolidated condensed financial statements and notes to
consolidated condensed financial statements contain forward-looking
statements, which 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. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
o the projected growth or contraction in the markets in which we operate;
o our business strategy for expanding, maintaining or contracting our
presence in these markets;
o anticipated trends in our financial condition and results of
operations;
o our ability to comply with the financial and debt covenant requirements
under our financial arrangements with lenders.
o continued problems in the airline industry; and
o the ability to distinguish ourselves from our current and future
competitors.
We do not undertake to update, revise or correct any forward-looking
statements.
The information contained in this report is not a complete description of our
business or the risks associated with an investment in our common stock.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission
that discuss our business in greater detail and that disclose various risks,
uncertainties and other factors that may affect our business, results of
operations or financial condition. In particular, you should review the "Risk
Factors" section of the Company's Form 10K for the year ended September 29,
2002.
Any of the factors described above or in the "Risk Factors" section of the
Company's Form 10K for the year ended September 29, 2002, could cause our
financial results, including our net income (loss) or growth in net income
(loss) to differ materially from prior results, which in turn could, among
other things, cause the price of our common stock to fluctuate substantially.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
NET REVENUES. Net revenues for the three months ended June 29, 2003 decreased
$395,000 (1.1%) to $34,072,000 from $34,467,000 for the three months ended
June 30, 2002. This decrease consisted of decreases in sales to existing
airline customers of $2,356,000 (25.2%), which was substantially offset by
increases in sales to existing customers in foodservice of $427,000 (3.4%),
health care of $1,527,000 (26.8%) and retail and other of $7,000 (0.1%).
-18-
GROSS PROFIT. Gross profit for the three months ended June 29, 2003 decreased
$1,159,000 (19.9%) to $4,652,000 from $5,811,000 for the comparable period in
the prior year. Gross profit as a percentage of net revenues decreased to
13.6% for the quarter ended June 29, 2003 from 16.9% for the comparable
period in 2002. The gross profit decrease related largely to
manufacturing-related inefficiencies encountered in connection with the plant
consolidation. Future improvements in gross profit are anticipated as the
Company begins to enjoy the cost benefits of the plant consolidation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") decreased $147,000 for the three months
ended June 29, 2003 to $3,763,000 (11.0% of net revenues) from $3,910,000
(11.3% of net revenues) for the second quarter of fiscal 2002. Significant
portions of this decrease in SG&A expenses were delivery and storage costs of
$591,000 which were largely related to the consolidation of facilities, the
effect of which was offset by increases in professional fees of $352,000
consisting of increased accounting and audit fees and consultants retained to
assist the Company in streamlining and reducing its cost structure and
compensation and related costs of $105,000.
The Company has now completed the consolidation of certain home office,
manufacturing, warehousing, product development, marketing and quality
control functions into a single 170,000 square foot operating facility
located in Vernon, California. The Company will now maintain only two
locations, the new site and an existing 48,000 square foot cooking facility
also located in Vernon, California. Management believes that the Company
should expect, as a result of this consolidation, to achieve significant
operating efficiencies as well as a reduction of its dependence on outside
cold storage facilities. The savings from the consolidation are expected to
result from reduced cold storage and refrigerant costs, a lower overall
facility lease expense, together with manpower and efficiency savings.
OTHER EXPENSES. Other expenses for the three months ended June 29, 2003,
consisting primarily of interest expense, increased $2,389,000 to $3,814,000
from $1,425,000 for the three months ended June 30, 2002 largely due to
increases in interest rates and in amortization of deferred financing costs.
The increase in interest and amortization of deferred financing costs is
related to the April 2003 financing agreements with LLCP. The April 4, 2003
short-term bridge financing agreement amended the Company's then-existing
securities purchase agreement with LLCP, the note, and certain related
agreements, pursuant to which LLCP waived the Company's non-compliance with
certain covenants under the various financing and related agreements with
LLCP, and LLCP purchased from the Company a secured senior subordinated
bridge note in the principal amount of $3 million, thereby providing the
company with the liquidity it needed to meet its short-term payment
obligations. In connection with the April 4, 2003 financing agreement the
Company recorded a debt discount of approximately $1.65 million, which is
being amortized over a 10-month period ending in January 2004. Under the
April 16, 2003 agreement Pleasant Street Investors, an affiliate of LLCP,
acquired the senior secured loans previously made to the Company by Union
Bank. Financing costs of approximately $1.2 million were incurred in
connection with the April 2003 financing agreements, which are being
amortized over a 10-month period ending in January 2004. These agreements are
described in more detail in the Long-Term Debt note to the financial
statements.
INCOME TAX PROVISION (BENEFIT). For the three months ended June 29, 2003, the
Company recorded a tax benefit of $1,174,000 as compared to a tax provision
of $191,000 for the three months ended June 30, 2002.
Due to operating losses for the three and nine month periods ended June 29,
2003, the Company has provided tax benefits representing operating loss
carryforwards. As of June 29, 2003, the Company has recorded $2.8 million in
deferred tax assets, most of which are related to the operating loss
carryforwards. The Company has not recorded a valuation allowance against any
of its deferred tax assets, since it is believed that such assets are more
likely than not to be recoverable through estimated future profitable
operations. The Company currently expects to improve its operating results
from those experienced over the last nine months, which have been negatively
affected by significant plant consolidation activities and additional
interest expense associated with amendments to debt agreements. The Company's
return to profitable operating results is anticipated to be achieved through
(a) improved gross margins achieved by streamlining additional costs and
continuing to leverage its newly consolidated manufacturing and storage
facilities to improve manufacturing efficiency, (b) growing revenues from
profitable product lines and (c) reducing future interest costs on
-19-
outstanding debt upon refinancing its short-term debt within the next five
months. Failure by the Company to successfully improve margins, grow revenues
and/or reduce future interest costs, and return to profitable operating
results in the near term, could adversely impact the Company's expected
realization of some or all of its deferred tax assets and could require the
Company to record a valuation allowance against some or all of such assets,
which could have a material adverse effect on the Company's financial
position and results of operations.
NET INCOME (LOSS). The net result for the three months ended June 29, 2003
was a loss of $1,751,000 ($.14 per share) as compared to net income of
$285,000 ($.02 per share) for the comparable period in the prior year. If the
Company is able to obtain financing on more favorable terms, reduced
financing costs could improve net income in future periods.
NINE MONTHS ENDED JUNE 29, 2003 COMPARED TO NINE MONTHS ENDED JUNE 30, 2002
NET REVENUES. Net revenues for the nine months ended June 29, 2003 increased
$3,704,000 (3.6%) to $105,632,000 from $101,928,000 for the nine months ended
June 30, 2002. This revenue increase is primarily due to increased sales to
existing customers in the foodservice and health care industries, with
current year revenues of $42,253,000 (an increase of 8.6%) and $18,271,000
(an increase of 16.8%), respectively. Current year revenues from airlines
decreased by $2,312,000 (9.5%) to $22,030,000 and retail and other remained
substantially unchanged from the comparable period in the prior year.
GROSS PROFIT. Gross profit for the nine months ended June 29, 2003 decreased
$2,521,000 (15.6%) to $13,661,000 from $16,182,000 for the nine months ended
June 30, 2002. Gross profit as a percentage of net revenues decreased to
12.9% in 2003 from 15.9% for the comparable period in 2002. The gross profit
decrease related largely to manufacturing-related inefficiencies encountered
in connection with the plant consolidation during the first nine months of
fiscal 2003. Future improvements in gross profit are anticipated as
the Company begins to enjoy the cost benefits of the plant consolidation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the nine
months ended June 29, 2003 increased $2,603,000 to $13,518,000 (12.8% of
revenues) from $10,915,000 (10.7% of revenues) for the nine months ended June
30, 2002. Factors significantly contributing to the increase were increases
in delivery and storage costs of $518,000, new product demonstration costs of
$374,000 for the Company's Chicago Brothers brand products in the retail
segment, professional fees of $801,000 consisting of increased accounting and
audit fees and consultants retained to assist the Company in streamlining and
reducing its cost structure, compensation and related costs of $335,000 and
bad debt expense of $279,000 due to the bankruptcy of United Airlines and to
the bankruptcies of two minor customers. The product demonstration costs in
the retail segment are expected to continue in future periods as the company
expands its presence in the retail segment.
The Company has now completed the consolidation of certain home office,
manufacturing, warehousing, product development, marketing and quality
control functions into a single 170,000 square foot operating facility
located in Vernon, California. The Company will now maintain only two
locations, the new site, and an existing 48,000 square foot cooking facility
also located in Vernon, California. Management believes that the Company
should expect, as a result of this consolidation, to achieve significant
operating efficiencies as well as a reduction of its dependence on outside
cold storage facilities. The savings from the consolidation are expected to
result from reduced cold storage and refrigerant costs, a lower overall
facility lease expense, together with manpower and efficiency savings.
-20-
OTHER EXPENSES. Other expenses for the nine months ended June 29, 2003,
consisting primarily of interest expense, increased $3,041,000 to $7,166,000
from $4,125,000 for the nine months ended June 30, 2002. This increase is
largely due to increases in interest rates and in amortization of deferred
financing costs.
The increase in interest and amortization of deferred financing costs is
related to the April 2003 financing agreements with LLCP. The April 4, 2003
short-term bridge financing agreement amended the Company's then-existing
securities purchase agreement with LLCP, the note, and certain related
agreements, pursuant to which LLCP waived the Company's non-compliance with
certain covenants under the various financing and related agreements with
LLCP, and LLCP purchased from the Company a secured senior subordinated
bridge note in the principal amount of $3 million, thereby providing the
company with the liquidity it needed to meet its short-term payment
obligations. In connection with the April 4, 2003 financing agreement the
Company recorded a debt discount of approximately $1.65 million, which is
being amortized over a 10-month period ending in January 2004. Under the
April 16, 2003 agreement Pleasant Street Investors, an affiliate of LLCP,
acquired the senior secured loans previously made to the Company by Union
Bank. Financing costs of approximately $1.2 million were incurred in
connection with the April 2003 financing agreements, which are being
amortized over a 10-month period ending in January 2004. These agreements are
described in more detail in the Long-Term Debt note to the financial
statements.
INCOME TAX PROVISION (BENEFIT). For the nine months ended June 29, 2003, the
Company recorded a tax benefit of $2,819,000 as compared to a tax provision
of $458,000 for the nine months ended June 30, 2002.
Due to operating losses for the three and nine month periods ended June 29,
2003, the Company has provided tax benefits representing operating loss
carryforwards. As of June 29, 2003, the Company has recorded $2.8 million in
deferred tax assets, most of which are related to the operating loss
carryforwards. The Company has not recorded a valuation allowance against any
of its deferred tax assets, since it is believed that such assets are more
likely than not to be recoverable through estimated future profitable
operations. The Company currently expects to improve its operating results
from those experienced over the last nine months, which have been negatively
affected by significant plant consolidation activities and additional
interest expense associated with amendments to debt agreements. The Company's
return to profitable operating results is anticipated to be achieved through
(a) improved gross margins achieved by streamlining additional costs and
continuing to leverage its newly consolidated manufacturing and storage
facilities to improve manufacturing efficiency, (b) growing revenues from
profitable product lines and (c) reducing future interest costs on
outstanding debt upon refinancing its short-term debt within the next five
months. Failure by the Company to successfully improve margins, grow revenues
and/or reduce future interest costs, and return to profitable operating
results in the near term, could adversely impact the Company's expected
realization of some or all of its deferred tax assets and could require the
Company to record a valuation allowance against some or all of such assets,
which could have a material adverse effect on the Company's financial
position and results of operations.
NET INCOME (LOSS). The net result for the nine months ended June 29, 2003 was
a loss of $4,204,000 ($.36 per share) as compared to net income of $683,000
($.06 per share) for the comparable period in the prior year. If the Company
is able to obtain financing on more favorable terms, reduced financing costs
could improve net income in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Principal sources of liquidity are cash flows from operations and existing
financing arrangements. The Company's cash and cash equivalents increased by
$736,000 to $744,000 during the nine months ended June 29, 2003.
During the nine months ended June 29, 2003, the Company's operating
activities resulted in cash provided of approximately $1,773,000, as compared
to cash provided of $980,000 during the comparable period in the prior year.
During the current period, operating losses were more than offset by cash
favorable changes in accounts receivable and inventories, after giving effect
to a substantial reduction of accounts payable. As of June 29, 2003, the
Company had a working capital deficit of approximately $7.9 million.
-21-
During the nine months ended June 29, 2003, the Company's investing
activities resulted in a use of cash of approximately $5,226,000, as compared
to $2,451,000 during the same period in the previous year. The use of cash in
the current year consisted exclusively of additions to property and
equipment, primarily related to the consolidation of most of the Company's
operations into a new facility in Vernon, California.
During the nine months ended June 29, 2003, the Company's financing
activities resulted in cash provided of approximately $4,189,000, as compared
to cash provided of $1,398,000 during the comparable period in fiscal 2002.
The cash provided in the current period resulted primarily from new
borrowings, after giving effect to the repayment of all amounts payable on
the Company's line of credit, additional deferred financing costs and
advances to or on behalf of the Parent in connection with the spin-off.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of trade receivables. The Company performs
ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers.
For the nine months ended June 29, 2003 and June 30, 2002, revenues
from airline-related customers accounted for approximately 20.9% and 23.9% of
total net revenues, respectively. Additionally, accounts receivable from
airline-related customers accounted for approximately 37.0% and 31.8% of the
total accounts receivable balance at June 29, 2003 and June 30, 2002,
respectively.
For the nine months ended June 29, 2003 and June 30, 2002, the Company's
largest airline customer, American Airlines, accounted for approximately 7.5%
and 8.8% of total net revenues, respectively. Additionally, accounts
receivable from American accounted for approximately 18.3% and 10.1% of the
total accounts receivable balance at June 29, 2003 and June 30, 2002,
respectively. The tragic events of September 11, 2001 have significantly
impacted the Company's sales to airlines. The long-term effect of these
events on the airline industry, airline revenues, and on Overhill Farms'
business in particular, still cannot be accurately determined at this time.
These events have resulted in a decreased demand for air travel and a
reduction in the number of meals served as a result of airlines' cost savings
measures. These effects, depending upon their scope and duration, which
cannot be predicted at this time, could negatively impact the Company's
financial position, results of operations or cash flows.
In December 2002, United Airlines filed a petition for bankruptcy
reorganization. As of the date of United's bankruptcy filing, the Company's
outstanding receivable balance from United was approximately $180,000. The
Company will continue to pursue collection of pre-bankruptcy receivables from
United through the normal course of bankruptcy proceedings. However, as of
June 29, 2003, the Company has fully reserved all of its pre-bankruptcy
receivables from United due to uncertainty with respect to their ultimate
collectibility. The Company no longer does business with United.
The Company continues to do business with American Airlines. The Company will
evaluate its business relationship with American Airlines on an ongoing basis
to determine the manner in which the relationship should be continued.
-22-
The Company's material contractual obligations and commercial commitments
consist primarily of long-term debt arrangements and commitments under
operating leases. As of June 29, 2003, there have been no significant changes
in the Company's commitments related to future minimum lease payments, and
significant changes in the Company's long-term debt arrangements are
discussed further below.
The Company's long-term debt arrangements at March 30, 2003 primarily
consisted of a $20.0 million revolving line of credit with its senior
creditor, Union Bank of California, N.A. (the "Bank"), a term loan payable in
an original principal amount of $2.4 million to the Bank, and a term loan
payable in an original principal amount of $28.0 million to its senior
subordinated creditor, Levine Leichtman Capital Partners, L.P. ("LLCP"). At
March 30, 2003, amounts outstanding under these arrangements payable to Union
Bank were $12.6 million on the revolving line of credit and $850,000 on term
loans, and $24.7 million payable to LLCP on a term loan.
The Company's revolving line of credit, senior subordinated note and term
loan agreements all contain various financial covenants, including
restrictions on changes in control, capital expenditures, minimum EBITDA and
net worth levels, specified debt service and debt-to-equity ratios, and
prohibitions on certain loans, advances and dividend payments. As of March
30, 2003, the Company was not in compliance with certain financial covenants
with respect to its financing arrangements with both Union Bank and LLCP and
was also experiencing a liquidity shortfall.
To assist the Company in meeting its liquidity needs, effective April 4,
2003, the Company entered into amendments to its then-existing securities
purchase agreement with LLCP, the note and certain related agreements,
pursuant to which LLCP waived the Company's non-compliance with certain
covenants under the various financing and related agreements with LLCP, and
LLCP purchased from the Company a secured senior subordinated bridge note in
the principal amount of $3.0 million, bearing interest at 15% and due and
payable January 30, 2004, thereby providing the Company with the liquidity it
needed to meet its short-term payment obligations. In a related transaction,
LLCP also agreed with Union Bank that it or an LLCP affiliate would acquire
Union Bank's senior secured loans to the Company. Finally, as part of the
bridge financing and in substantial consideration for LLCP's financial
accommodations, the Company agreed to issue and sell to LLCP, and LLCP agreed
to purchase from the Company, 2,466,759 shares of the Company's common stock
for a purchase price of $0.01 per share. The Company was originally required
to issue and sell these shares to LLCP by April 16, 2003; subsequently, LLCP
agreed to extend the issuance date to April 24, 2003, and then, in
consideration of the payment by the Company to LLCP of an amendment fee of
$125,000, to July 20, 2003. As discussed below, this deadline was further
extended to August 20, 2003.
After completing the bridge financing and submitting an application to the
American Stock Exchange ("AMEX") requesting listing of the shares to be
issued to LLCP, AMEX advised the Company that its approval of the Company's
listing application with respect to the issuance and sale of these shares to
LLCP is subject to approval of the Company's stockholders. The Company has
obtained a waiver from LLCP for its failure to deliver these shares by July
20, 2003, provided that delivery of these shares is made on or before August
-23-
20, 2003. At a meeting of the Company's stockholders held on August 11, 2003,
the stockholders approved the issuance of these shares to LLCP; accordingly
the Company expects to obtain AMEX approval and to deliver the shares prior
to the expiration of the waiver. In connection with this transaction, a debt
discount of approximately $1.65 million was recorded and is being amortized
over a 10-month period ending in January 2004.
Effective April 16, 2003, Pleasant Street Investors, LLC, an affiliate of
LLCP, acquired the senior secured loans previously made to the Company by
Union Bank, and the Company and Pleasant Street Investors amended and
restated the senior secured loan arrangements on mutually acceptable terms
and conditions. As a result of the repayment of Union Bank, the Company wrote
off unamortized deferred financing costs of approximately $450,000 related to
the arrangements with the Bank. Under the new agreement, amounts owing to
Union Bank on the effective date, $12.117 million, plus additional amounts
advanced to the Company by Pleasant Street Investors, $1.883 million,
together with the amounts owing to LLCP under the bridge financing agreement
described above, $3.0 million, were combined into a new $17.0 million Term
Loan A, bearing interest at no less than 10%, subject to periodic
adjustments, and due and payable on November 30, 2003. During the three
months ended June 29, 2003 the average rate of interest paid on Term Loan A
was 11.6%. Additional amounts advanced by Pleasant Street Investors to the
Company as of the effective date amounted to $5.0 million and are evidenced
by Term Loan B, bearing interest at 15%, and is due and payable January 30,
2004. The Company used $3.0 million of proceeds from Term Loan A to repay the
outstanding principal amounts of the term note issued to LLCP on April 4,
2003.
Due to the fact that a substantial portion of the Company's financing matures
within the next twelve months (Term Loan A in the amount of $17.0 million is
due November 30, 2003, and Term Loan B in the amount of $5.0 million is due
January 30, 2004, as described above), the Company is actively seeking new
financing arrangements both from LLCP, the Company's current lender, as well
as other potential sources of financing. No assurances can be made that such
financing arrangements would be obtained by the Company on substantially the
same terms and conditions, or at all.
As of June 29, 2003, the Company was in compliance with all of its amended
financial covenants. The Company believes, based upon historical performance,
current results of operations for the nine months ended June 29, 2003 and
forecasted performance for the remainder of fiscal 2003, that it is probable
that the Company will be in compliance with all of its revised financial and
other covenant requirements. Accordingly, the Company's senior subordinated
debt, which matures in November 2004, has been classified as a long-term
obligation in the accompanying consolidated balance sheet as of June 29,
2003. In the future, the failure of the Company to achieve certain revenue,
expense and profitability forecasts could result in a violation of the
amended financial covenants under its financing arrangements, which could
have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
-24-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not own, nor does it have an interest in any market risk
sensitive instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) as of a date (the
"Evaluation Date") which was within 90 days of this quarterly report on Form
10-Q, has concluded in its judgment that, as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and designed to
ensure that material information relating to the Company and its subsidiary
would be made known to them. There were no significant changes in the
Company's internal controls or, to the Company management's knowledge, in
other factors that could significantly affect the Company's disclosure
controls subsequent to the Evaluation Date.
-25-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in various lawsuits, claims and
proceedings related to the conduct of its business. Management does not
believe that the disposition of any pending claims is likely to have a
material adverse affect on the Company's financial condition, results of
operations or cash flows.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 30, 2003, the Company was not in compliance with certain
financial covenants under borrowing arrangements with its two senior lenders.
In connection with a bridge financing agreement entered into in April, 2003,
each of Union Bank and LLCP agreed to waive all events of noncompliance that
were in existence as of the date of the bridge financing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Action With Respect to Bylaws of OFI, certified by the
Secretary of OFI as of June 13, 2003 (1)
10.1 Letter agreement dated April 3, 2003 between Overhill Farms,
Inc. ("OFI") and John Steinbrun confirming the terms of
employment (#) (1)
10.2 Amendment to Amended and Restated Security Agreement dated as
of April 4, 2003 by OFI and Overhill L.C. Ventures, Inc.
("OLCV") in favor of Levine Leichtman Capital Partners II,
L.P. ("LLCP") (1)
10.3 Amendment to Amended and Restated Secured Senior Subordinated
Note due 2003 dated as of April 4, 2003 between OFI and LLCP
(2)
10.4 Secured Senior Subordinated Bridge Note dated April 4, 2003 in
the principal amount of $3,000,000 made by OFI in favor of
LLCP (2)
10.5 First Amendment to Amended and Restated Securities Purchase
Agreement dated as of April 4, 2003, among OFI, the entities
from time to time parties thereto as Guarantors and LLCP (2)
10.6 Letter agreement dated April 15, 2003 between OFI and William
Shatley regarding restructuring of salary payments (#) (1)
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EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.7 Letter agreement dated April 15, 2003 between OFI and Andrew
Horvath regarding restructuring of salary payments (#) (1)
10.8 Second Amended and Restated Loan and Security Agreement, dated
as of April 16, 2003, among OFI, OLCV and Pleasant Street
Investors, LLC ("PSI") (3)
10.9 Amended and Restated Secured Senior Term A Note, dated as of
April 16, 2003 in the stated principal amount of $17,000,000,
made by OFI and payable to the order of PSI (3)
10.10 Secured Senior Term B Note, dated as of April 16, 2003 in the
stated principal amount of $5,000,000, made by OFI and payable
to the order of PSI (3)
10.11 Second Amended and Restated Securities Purchase Agreement,
dated as of April 16, 2003, by and among OFI, the entities
identified therein as Guarantors and LLCP (3)
10.12 Agreement Regarding Repayment of Bridge Note, dated as of
April 16, 2003, by and among OFI, OLCV, LLCP and PSI (3)
10.13 Amendment to Investor Rights Agreement, dated as of April 16,
2003, by and among OFI, James Rudis, William E. Shatley and
LLCP (3)
10.14 Second Amendment to Amended and Restated Security Agreement,
dated as of April 16, 2003, by OFI and OLCV in favor of LLCP
(3)
10.15 Amendment to Equity Repurchase Option Agreement, dated as of
April 16, 2003, by and between OFI and LLCP (3)
10.16 Second Amended and Restated Intercreditor and Subordination
Agreement dated as of April 16, 2003 between PSI and LLCP (4)
10.17 Amendment to Continuing Guaranty dated as of April 16, 2003
between OLCV and PSI (1)
10.18 Acknowledgment and Reaffirmation of Loan Documents dated as of
April 16, 2003 made by OFI in favor of PSI (1)
10.19 Conditional Waiver Letter dated July 18, 2003 between LLCP and
OFI relating to Second Amended and Restated Securities
Purchase Agreement dated as of April 16, 2003, as amended (1)
10.20 Assignment of Patent, Trademark and Copyright Security
Agreement dated as of April 16, 2003 among UBOC, PSI, OFI and
OLCV (1)
10.21 Termination Agreement regarding Alternative Dispute Resolution
Agreements dated as of April 16, 2003 between OFI, OLCV and
UBOC (1)
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10.22 Limited Release and Indemnity Agreement dated as of April 16,
2003, among UBOC, LLCP and OFI (4)
10.23 First Amendment to Second Amended and Restated Securities
Purchase Agreement dated as of May 16, 2003, among OFI, the
entities from time to time parties thereto as Guarantors and
LLCP (1)
10.24 First Amendment to Second Amended and Restated Loan and
Security Agreement dated as of May 16, 2003, among OFI, OLCV
and LLCP (1)
10.25 Second Amendment to Second Amended and Restated Securities
Purchase Agreement dated as of June 19, 2003, among OFI, the
entities from time to time parties thereto as Guarantors and
LLCP (1)
10.26 Second Amendment to Second Amended and Restated Loan and
Security Agreement dated as of June 19, 2003, among OFI, OLCV
and LLCP (1)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
---------------
(#) Management contract or compensatory plan or arrangement.
(1) Filed with the Securities and Exchange Commission
("Commission") on August 7, 2003 as an exhibit to OFI's Form
8-K for August 7, 2003 and incorporated herein by reference.
(2) Filed with the Commission on April 14, 2003 as an exhibit to
Amendment No. 2 to Schedule 13D for April 4, 2003 relating to
LLCP's ownership of securities of OFI and incorporated herein
by reference.
(3) Filed with the Commission on May 19, 2003 as an exhibit to
OFI's Form 10-Q for the quarter ended March 30, 2003 and
incorporated herein by reference.
(4) Filed with the Commission on April 25, 2003 as an exhibit to
Amendment No. 3 to Schedule 13D for April 16, 2003 relating to
LLCP's ownership of securities of OFI and incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
-------------------
On June 5, 2003, the Company filed a Form 8-K for June 5, 2003 that
contained Item 5 - Other Events and Required FD Disclosure and discussed matters
relating to OFI's 2003 annual stockholders' meeting. The Form 8-K subsequently
was amended on July 25, 2003.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OVERHILL FARMS, INC.
(REGISTRANT)
Date: August 13, 2003 By: /S/ James Rudis
------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: August 13, 2003 By: /S/ John L. Steinbrun
----------------------
John L. Steinbrun
Senior Vice President and
Chief Financial Officer
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CERTIFICATIONS
I, James Rudis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Overhill Farms,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 13, 2003 /S/ James Rudis
-----------------------------
James Rudis
President and Chief Executive Officer
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CERTIFICATIONS
I, John L. Steinbrun, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Overhill Farms,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 13, 2003 /S/ John L. Steinbrun
------------------------------------
John L. Steinbrun
Senior Vice President and Chief
Financial Officer
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