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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 MARCH 28, 2004
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]
As of April 28, 2004, there were 14,805,556 shares of the issuer's common stock,
$.01 par value, outstanding.
OVERHILL FARMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 28, 2004
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------- --------
Item 1. Financial Statements
Condensed Balance Sheets as of March 28, 2004 (unaudited) and
September 28, 2003 2
Condensed Statements of Operations for the Three Months Ended
March 28, 2004 and March 30, 2003 (unaudited) 4
Condensed Statements of Operations for the Six Months Ended
March 28, 2004 and March 30, 2003 (unaudited) 5
Condensed Statements of Cash Flows for the Six Months Ended
March 28, 2004 and March 30, 2003 (unaudited) 6
Notes to Condensed Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBITS FILED WITH THIS FORM 10-Q 27
ITEM 1. FINANCIAL STATEMENTS
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS
ASSETS
March 28, September 28,
2004 2003
------------- -------------
(Unaudited) (Note 2)
Current assets:
Cash $ 701,001 $ 513,622
Accounts receivable, net of allowance for doubtful accounts
of $111,000 13,486,207 10,027,543
Inventories 12,052,104 11,059,923
Prepaid expenses and other 1,311,795 1,077,392
Deferred income taxes 733,758 733,758
------------- -------------
Total current assets 28,284,865 23,412,238
------------- -------------
Property and equipment, at cost 21,469,299 21,286,746
Less accumulated depreciation (8,824,336) (8,035,416)
------------- -------------
12,644,963 13,251,330
------------- -------------
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
$102,653 and $4,934,968 753,181 2,507,028
Deferred income taxes 3,880,017 2,522,239
Other 2,816,615 2,300,857
------------- -------------
19,638,248 19,518,559
------------- -------------
Total assets $ 60,568,076 $ 56,182,127
============= =============
The accompanying notes are an integral part
of these condensed financial statements.
-2-
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
March 28, September 28,
2004 2003
------------- -------------
(Unaudited) (Note 2)
Current liabilities:
Accounts payable $ 8,797,625 $ 7,434,945
Accrued liabilities 2,827,334 3,322,554
Current maturities of long-term debt 885,842 813,649
------------- -------------
Total current liabilities 12,510,801 11,571,148
Long-term debt, less current maturities 50,625,044 44,950,438
------------- -------------
Total liabilities 63,135,845 56,521,586
------------- -------------
Shareholders' equity (deficit):
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 14,805,556 shares 148,056 148,056
Additional paid-in capital 9,573,562 9,573,562
Warrants to purchase common stock 400 400
Retained earnings (accumulated deficit) (12,289,787) (10,061,477)
------------- -------------
Total shareholders' equity (deficit) (2,567,769) (339,459)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 60,568,076 $ 56,182,127
============= =============
The accompanying notes are an integral part
of these condensed financial statements.
-3-
OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
--------------------------------
March 28, March 30,
2004 2003
------------- -------------
Net revenues $ 31,137,910 $ 33,610,990
Cost of sales 26,723,796 30,479,285
------------- -------------
Gross profit 4,414,114 3,131,705
Selling, general and administrative expenses 3,168,323 4,305,049
------------- -------------
Operating income (loss) 1,245,791 (1,173,344)
Other expenses:
Interest expense (1,485,003) (1,243,187)
Amortization of deferred financing costs (48,378) (504,724)
Other 14,966 (97,360)
------------- -------------
Total other expenses (1,518,415) (1,845,271)
------------- -------------
Loss before income taxes (272,624) (3,018,615)
Income tax benefit (103,324) (1,211,612)
------------- -------------
Net loss $ (169,300) $ (1,807,003)
============= =============
Net loss per share, basic and diluted $ (.01) $ (.15)
============= =============
The accompanying notes are an integral part
of these condensed financial statements.
-4-
OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Six Months Ended
--------------------------------
March 28, March 30,
2004 2003
------------- -------------
Net revenues $ 61,531,516 $ 71,920,681
Cost of sales 52,521,431 64,481,198
------------- -------------
Gross profit 9,010,085 7,439,483
Selling, general and administrative expenses 6,246,918 8,185,908
------------- -------------
Operating income (loss) 2,763,167 (746,425)
Other expenses:
Interest expense (3,229,593) (2,332,445)
Amortization of deferred financing costs (408,914) (816,451)
Debt extinguishment expenses (2,778,374) --
Other 66,080 (202,851)
------------- -------------
Total other expenses (6,350,801) (3,351,747)
------------- -------------
Loss before income taxes (3,587,634) (4,098,172)
Income tax benefit (1,359,324) (1,644,925)
------------- -------------
Net loss $ (2,228,310) $ (2,453,247)
============= =============
Net loss per share, basic and diluted $ (.15) $ (.22)
============= =============
The accompanying notes are an integral part
of these condensed financial statements.
-5-
OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
------------------------------
March 28, March 30,
2004 2003
------------ ------------
Operating Activities:
Net loss $(2,228,310) $(2,453,247)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,451,479 1,465,114
Provision for doubtful accounts -- 279,046
Noncash debt extinguishment expenses 2,558,374 --
Deferred tax benefit (1,359,324) (1,644,925)
Changes in:
Accounts receivable (3,458,664) 2,733,015
Inventories (992,181) 5,393,327
Prepaid expenses and other (750,161) (584,513)
Accounts payable 1,362,680 383,478
Accrued liabilities (508,276) 1,353,513
------------ ------------
Net cash (used in) provided by operating activities (3,924,383) 6,924,808
------------ ------------
Investing Activities:
Net additions to property and equipment (182,554) (4,733,723)
------------ ------------
Net cash used in investing activities (182,554) (4,733,723)
------------ ------------
The accompanying notes are an integral part
of these condensed financial statements.
-6-
OVERHILL FARMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Six Months Ended
------------------------------
March 28, March 30,
2004 2003
------------ ------------
Financing Activities:
Net borrowings on line of credit arrangements $ -- $ 623,809
Proceeds from borrowings on long-term debt 5,000,000 --
Principal payments on long-term debt (301,878) (1,162,742)
Deferred financing costs (403,806) (703,499)
Net advances to or on behalf of former Parent -- (946,168)
------------ ------------
Net cash provided by (used in) financing activities 4,294,316 (2,188,600)
------------ ------------
Net increase in cash 187,379 2,485
Cash at beginning of period 513,622 8,115
------------ ------------
Cash at end of period $ 701,001 $ 10,600
============ ============
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,062,651 $ 1,661,611
Income taxes $ -- $ --
Supplemental Schedule of Noncash Investing and Financing Activities:
The Company, effective upon the completion of its spin-off from its former
Parent in October 2002, netted a total of approximately $11,500,000, consisting
of all accrued income taxes due to and the unpaid receivable due from its former
Parent, against retained earnings (accumulated deficit).
During the six months ended March 30, 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.
The accompanying notes are an integral part
of these condensed financial statements.
-7-
OVERHILL FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 28, 2004
(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 "former
Parent"). 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 financial statements for periods ended prior to September 28, 2003 were
consolidated to include the accounts of Overhill Farms and its wholly-owned
subsidiary, Overhill L.C. Ventures, Inc., which was liquidated during fiscal
2003. All material intercompany accounts and transactions were eliminated.
Certain prior year amounts have been reclassified to conform to the current
period presentation.
The accompanying unaudited condensed financial statements have been prepared
in accordance with 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 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 three and six
months ended March 28, 2004 are not necessarily indicative of the results
that may be expected for the year ended September 26, 2004 or for any other
period.
The condensed balance sheet at September 28, 2003 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.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended September 28, 2003.
-8-
3. INVENTORIES
Inventories are summarized as follows:
March 28, September 28,
2004 2003
------------- -------------
Raw ingredients $ 4,951,218 $ 4,414,292
Finished product 5,653,103 5,313,593
Packaging 1,447,783 1,332,038
------------- -------------
$ 12,052,104 $ 11,059,923
============= =============
4. LONG-TERM DEBT
At September 28, 2003, the Company was not in compliance with certain of the
financial and other covenants of its agreements with Levine Leichtman Capital
Partners II, L.P. ("LLCP") and Pleasant Street Investors, LLC ("Pleasant
Street"). Effective October 31, 2003, the Company reached agreement with each
of LLCP and Pleasant Street wherein the lenders waived specified events of
default by the Company under the then existing agreements and further agreed
to a refinancing of all indebtedness owing by the Company to LLCP and
Pleasant Street as described below.
On October 31, 2003, the Company entered into debt refinancing arrangements
with LLCP and Pleasant Street in order to (1) obtain an aggregate of
$5,000,000 of additional funds to finance the Company's accounts receivable,
to build up its inventory levels and for other working capital purposes, (2)
reduce the base rates of interest on and extend the maturity dates of the
note held by LLCP and the loans made by Pleasant Street, (3) amend the
financial covenants and certain other provisions contained in the relevant
investment documents with respect to LLCP and the relevant loan documents
with respect to Pleasant Street and (4) obtain waivers of specified events of
default under then existing agreements with LLCP and Pleasant Street.
The Company issued to LLCP a second amended and restated secured senior
subordinated note due October 31, 2006 in the stated principal amount of
$28,858,000 in exchange for the surrender by LLCP of the existing $24,658,000
senior subordinated note and $4,200,000 in additional cash funds. The
replacement note has a base rate of interest that was reduced from 15% to
13.5%, subject to increase upon the occurrence of any interest rate event, as
defined in the purchase documents, or event of default, and a maturity date
that was extended from October 31, 2004 to October 31, 2006. The Company paid
LLCP an amendment fee of $184,800 and a new capital fee of $168,000.
Also as part of the October 31, 2003 debt refinancing, the Company and
Pleasant Street amended their existing loan and security agreements to amend
the financial covenants and various other provisions. Pleasant Street waived
certain specified events of default. In addition, Pleasant Street made an
additional term loan to the Company in the principal amount of $800,000 and
surrendered the note evidencing the existing Term A Loan in exchange for a
second amended and restated senior Term A note in the principal amount of
$17,800,000. The annual interest rate on the in-formula portion of the Term A
Loan was reduced from 10% to 5.5%. The annual interest rate on the $5,000,000
Term B Loan was reduced from 15% to 12%. The interest rates on the Term A
Loan and Term B Loan are subject to increase upon the occurrence of any
-9-
interest rate event, as defined in the loan documents, or event of default as
provided in the notes that evidence those loans. The maturity dates of the
Term A Loan and the Term B Loan were extended to October 31, 2006 from
November 30, 2003 and January 30, 2004, respectively. The Term B Loan was
modified to be a monthly amortizing term loan. The prepayment terms of the
Term A Loan and the Term B Loan were modified to provide, among other things,
that the Company will make mandatory prepayments of annual excess cash flow,
if any. The Company paid Pleasant Street an amendment fee of $35,200 and a
new capital fee of $32,000.
The October 31, 2003 debt refinancing has been recorded as a debt
extinguishment. Accordingly, unamortized costs associated with the LLCP and
Pleasant Street debt that existed at October 31, 2003, along with new
amendment fees paid to LLCP and Pleasant Street, were expensed on October 31,
2003. The unamortized costs included original issue debt discounts of
$809,635, unamortized financing fees and expenses of $1,173,519 and
unamortized cost of warrants issued to LLCP in September of 2002 of $575,220.
The total expense recognized in connection with the October 31, 2003 debt
extinguishment, including the amendment fees of $184,800 and $35,200 referred
to in the preceding paragraphs, amounted to $2,778,374.
In conjunction with the October 31, 2003 debt refinancing, the Company, James
Rudis and LLCP amended an investor rights agreement among them pursuant to
which the Company granted to LLCP the right to designate for nomination and
election up to three members of the Company's Board of Directors, together
with the right to fill the next available vacancy created on the Board of
Directors after October 31, 2003, which could result in LLCP having up to
four LLCP representatives on the Board at any time. In addition, the parties
extended through 2006 the time period during which annual consulting fees of
$180,000 will be payable to LLCP, agreed that the Company would be liable for
any breach by Mr. Rudis of his liabilities and obligations under the
agreement and included a provision obligating Mr. Rudis to resign, and he did
timely resign, from all of his positions at TreeCon Resources, Inc., the
Company's former Parent, no later than December 31, 2003.
On October 31, 2003, the Company and LLCP also terminated the Company's
equity repurchase option that provided, among other things, that the Company
had the right, under certain conditions, to repurchase from LLCP, in whole
but not in part, all shares of the Company's common stock owned by LLCP or
issuable to LLCP upon the exercise of warrants or conversion of preferred
stock. In addition, the Company entered into amended employment arrangements
with Mr. Rudis and Mr. John Steinbrun pursuant to which salaries were
adjusted and the terms of the agreements extended. Also, LLCP and Pleasant
Street amended their intercreditor and subordination agreement with respect
to the indebtedness, liabilities and obligations owed by the Company to each.
The Company believes, based upon forecasted performance for fiscal year 2004,
that it is probable that the Company will be in compliance with all of its
revised financial and other covenant requirements. Accordingly, and as a
result of the refinancing of the obligations described above, all principal
amounts payable to LLCP and to Pleasant Street, other than currently
scheduled principal payments, have been classified as long-term liabilities
in the accompanying condensed balance sheet as of March 28, 2004. In the
future, the failure of the Company to achieve certain revenue, expense and
profitability levels could result in a violation of the amended financial
covenants under its financing arrangements, which would cause the interest
rates on the above loans to increase substantially and could further result
in acceleration of maturity of the loans, both of which could adversely
affect the Company's financial condition, results of operations or cash
flows.
-10-
5. PER SHARE DATA
The following table sets forth the calculation of net loss per share for the
periods presented:
For the Three Months Ended
--------------------------------
March 28, March 30,
2004 2003
--------------------------------
Numerator:
Net loss attributable to common shareholders $ (169,300) $ (1,807,003)
================================
Denominator:
Denominator for basic earnings per share -
Weighted average shares 14,805,556 12,338,797
--------------------------------
Effect of dilutive securities:
Warrants -- --
Series A Preferred Stock -- --
--------------------------------
Dilutive potential common shares -- --
================================
Denominator for diluted earnings loss per share 14,805,556 12,338,797
================================
Net loss per share - basic and diluted: $ (.01) $ (.15)
================================
For the Six Months Ended
--------------------------------
March 28, March 30,
2004 2003
--------------------------------
Numerator:
Net loss attributable to common shareholders $ (2,228,310) $ (2,453,247)
================================
Denominator:
Denominator for basic earnings per share -
Weighted average shares 14,805,556 11,211,733
--------------------------------
Effect of dilutive securities:
Warrants -- --
Series A Preferred Stock -- --
--------------------------------
Dilutive potential common shares -- --
--------------------------------
Denominator for diluted earnings loss per share 14,805,556 11,211,733
================================
Net loss per share - basic and diluted: $ (.15) $ (.22)
================================
-11-
At March 28, 2004 and March 30, 2003, options to purchase 672,000 shares and
472,000 shares, respectively, were excluded from the calculation of per share
amounts in both years, as their effect, if any, would be antidilutive.
Warrants to purchase 200 shares and preferred stock convertible into 283,076
shares were also excluded from the calculation of per share amounts in both
years, as their effect, if any, would be antidilutive.
6. STOCK OPTIONS
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees" and provides the pro forma
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation expense
for stock options issued to employees is recorded on the date of grant only
if the current market price of the underlying stock exceeds the exercise
price.
For purposes of pro forma disclosures, the estimated fair value of the
options, based on the Black-Scholes option pricing model, is amortized to
expense over the options' vesting periods. The following is the pro forma
information had the fair value method under SFAS No. 123, as amended by SFAS
No. 148, been adopted (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------------------- ---------------------------------
March 28, 2004 March 30,2003 March 28, 2004 March 30, 2003
-------------- ------------- -------------- --------------
Net income (loss), as reported $ (169) $ (1,807) $ (2,228) $ (2,453)
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects $ -- $ -- $ -- $ (396)
Pro forma net income (loss) $ (169) $ (1,807) $ (2,228) $ (2,849)
Net income (loss) per share
Basic, as reported $ (0.01) $ (0.15) $ (0.15) $ (0.22)
Basic, pro forma $ (0.01) $ (0.15) $ (0.15) $ (0.25)
Diluted, as reported $ (0.01) $ (0.15) $ (0.15) $ (0.22)
Diluted, pro forma $ (0.01) $ (0.15) $ (0.15) $ (0.25)
7. INCOME TAXES
Due to operating losses for the three and six months ended March 28, 2004,
the Company has provided a tax benefit, and recorded an increase in its
deferred tax asset to approximately $4,614,000 on the accompanying condensed
balance sheet at March 28, 2004. 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 on its
current operating results, returning to profitable operations, primarily
through (a) improving gross margins by streamlining additional costs and
continuing to leverage the new consolidated manufacturing and storage
-12-
facilities to improve manufacturing efficiency, (b) growing revenues from
profitable product lines and increasing its customer base and (c) maintaining
reduced future interest costs on outstanding debt as a result of the recently
completed refinancing of its indebtedness. Failure by the Company to
successfully improve margins, grow revenues and/or maintain anticipated
savings on 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
adversely affect the Company's financial position and results of operations.
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.
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 six months ended March 28, 2004 and March 30, 2003, revenues from
airline-related customers, a group that is subject to certain business risks,
accounted for approximately 19.6% and 20.9% of total net revenues,
respectively. Additionally, accounts receivable from airline-related
customers accounted for approximately 22.3% and 30.9% of the total accounts
receivable balance at each of March 28, 2004 and March 30, 2003,
respectively.
-13-
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 document. This report, and our condensed financial
statements and notes to our 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.
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on current expectations or beliefs, including, but not
limited to, statements concerning our operations and financial performance and
condition. 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, which include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," "forecasts," "projects," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing 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:
o the impact of competitive products and pricing;
o market conditions such as the increase in the market price of raw chicken
that occurred in late January and early February 2004 as a result of the
Asian bird flu outbreak in Indochina, and weather patterns that may affect
the cost of raw material as well as the market for our products;
o changes in our business environment, including actions of competitors and
changes in customer preferences, as well as disruptions to our customers'
businesses, such as the recently settled Southern California grocery
strike that began in October 2003;
o the occurrence of acts of terrorism, such as the events of September 11,
2001, or acts of war;
o changes in governmental laws and regulations, including income taxes;
o market demand for new and existing products; and
o other factors as may be discussed in this report and other reports we file
with the Securities and Exchange Commission, including those described in
Item 7 of our annual report on Form 10-K for the fiscal year ended
September 28, 2003 under the heading "Risk Factors Related to Our Business
and Industry."
-14-
OVERVIEW
Our strategy is to be the leading developer and manufacturer of value-added food
products and provider of custom prepared foods. We intend to create superior
value for our stockholders by continuing to execute our growth and operating
strategies. We employ the following corporate strategies:
o diversify our customer base, focusing on sectors with attractive growth
characteristics, such as foodservice and retail;
o invest in and operate efficient production facilities;
o provide customer service-oriented distribution;
o offer a broad range of products to customers in multiple channels of
distribution; and
o continue to pursue growth through strategic acquisitions and investments.
In evaluating our financial condition and operating performance, we look for
evidence of progress toward our primary goals: meeting profitability goals on a
customer-by-customer basis, realizing the cost efficiencies made possible by our
new manufacturing facility, and growing profitable sales in order to further
utilize the increased manufacturing capacity provided by our new facility.
Progress towards these goals is apparent in the increase in gross profit as a
percentage of net revenues to 14.6% for the first six months of fiscal 2004, as
opposed to 10.3% for the first six months of fiscal 2003. Sales have declined,
in some cases due to external factors such as the Southern California grocery
strike, and in other cases due to our decision not to bid aggressively on
business that did not meet our profitability goals.
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 these 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. Our significant accounting policies are described in the notes to the
audited financial statements that are included in our 2003 annual report on Form
10-K for the year ended September 28, 2003. We believe the following critical
accounting policies are related to our more significant estimates and
assumptions used in the preparation of our financial statements.
CONCENTRATIONS OF CREDIT RISK. Our financial instruments that are exposed to
concentrations of credit risk consist primarily of trade receivables. We perform
ongoing credit evaluations of our customers' financial condition and generally
require no collateral from our customers. Our allowance for doubtful accounts is
calculated based primarily upon historical bad debt experience and current
market conditions. Until fiscal 2003, bad debt expense and accounts receivable
write-offs, net of recoveries, had historically been immaterial as we generally
transact the substantial portion of our business with large, established food or
service related businesses. However, a bankruptcy or other significant financial
deterioration of any significant customers could impact their future ability to
satisfy their receivables with us.
-15-
For the first six months of fiscal 2004 and 2003, our revenues from
airline-related customers, a group that is subject to certain business risks,
accounted for approximately 19.6% and 20.9% of total net revenues, respectively.
Additionally, accounts receivable from airline-related customers accounted for
approximately 22.3% and 30.9% of the total accounts receivable balance at each
of March 28, 2004 and March 30, 2003, respectively.
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 determine
the market value of our raw ingredients, finished product and packaging
inventories based upon references to current market prices for such items as of
the end of each reporting period and record a write-down of inventory standard
cost to market, when applicable. We periodically review our inventory for excess
items, and we establish a valuation reserve based upon the age of specific items
in inventory and the expected recovery from the disposition of the items.
A reserve is established for the estimated aged, surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined 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 materially different amounts for this item.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost over
fair value of net assets acquired (goodwill) is evaluated at least annually for
impairment in accordance with FASB Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). 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. No impairment of
goodwill was recorded during fiscal 2003. At March 28, 2004, we had goodwill of
$12,188,000. 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. Due to operating losses for the three and six months ended March
28, 2004, we have provided a tax benefit, and recorded an increase in our
deferred tax asset to approximately $4,614,000 on the accompanying condensed
balance sheet at March 28, 2004. We have not recorded a valuation allowance
against any of our deferred tax assets, since we believe that such assets are
more likely than not to be recoverable through estimated future profitable
operations. We currently expect to improve on our current operating results,
returning to profitable operations, primarily through (a) improving gross
margins achieved by streamlining additional costs and continuing to leverage our
new consolidated manufacturing and storage facilities to improve manufacturing
efficiency, (b) growing revenues from profitable product lines and increasing
our customer base and (c) maintaining reduced future interest costs on
outstanding debt as a result of the recently completed refinancing of our
indebtedness. Failure to successfully improve margins, grow revenues and/or
maintain anticipated savings on future interest costs, and return to profitable
operations in the near term, could adversely impact our expected realization of
some or all of our deferred tax assets and could require us to record a
valuation allowance against some or all of those assets, which could adversely
affect our financial position and results of operations.
-16-
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 2004 COMPARED TO THREE MONTHS ENDED MARCH 30, 2003
NET REVENUES. Net revenues for the three months ended March 28, 2004 decreased
$2,473,000 (7.4%) to $31,138,000 from $33,611,000 for the three months ended
March 30, 2003. While we operate as a single business unit, manufacturing
various products on common production lines, revenue from similar customers are
grouped into the following natural categories: retail, foodservice, airlines and
weight loss.
Retail net revenues were $5,918,000 for the second quarter of fiscal 2004 as
compared to $7,381,000 for the second quarter of fiscal 2003, a decrease of
$1,463,000. Retail sales for the period were impacted by the Southern California
grocery strike, which was settled in late February 2004. Among our retail
customers, recurring sales to Albertson's decreased by over $1,100,000 for the
second quarter as compared to the second quarter of fiscal 2003. Management
continues to believe that existing and new retail customers represent a near
term opportunity for growth. We have recently received orders from new grocery
chain customers, and we have expanded our penetration in the club store market,
including our first orders from Sam's Clubs and what appear to be successful
presentations to Wal-Mart, the nation's largest retailer. We have also retained
one of the leading retail grocery brokers to increase near-term opportunities in
this sector. The broker, together with our internal sales force, will focus both
on developing our Chicago Brothers(R) brand and increasing retail business
through our recently announced agreement with Panda Restaurant Group to
manufacture, market and distribute Panda's frozen meals to nationwide grocery
outlets.
Foodservice net revenues were $12,798,000 for the second quarter of fiscal 2004
as compared to $13,146,000 for the second quarter of fiscal 2003, a decrease of
$348,000. This reduction was principally the result of activity in two customer
accounts, one of which we decided not to re-bid aggressively based on our
profitability objectives, and a second of which reduced the number of products
offered to its customers. As with retail sales, we maintain our belief that
foodservice sales represent another opportunity for sales growth. We have
retained additional sales personnel to focus on this market and have shifted
responsibilities internally to capitalize on this opportunity. We are also in
the process of initiating an incentive-based compensation program for our sales
representatives, which will more effectively tie sales compensation to
performance.
Airline net revenues were $5,811,000 for the second quarter of fiscal 2004 as
compared to $7,221,000 for the second quarter of fiscal 2003, a decrease of
$1,410,000. This was largely the result of decreased sales to Delta Airlines
which stopped offering meals on all but long haul and international flights.
During the second quarter of fiscal 2004, we were awarded business from a
carrier not previously served and have won bids for new items from present
airline customers. Due to the current situation, including the financial
condition of certain airline customers, we are being cautious in our approach to
the airline sector.
-17-
Weight loss net revenues were $6,611,000 for the second quarter of fiscal 2004,
as compared to $5,863,000 for the second quarter of fiscal 2003, an increase of
$748,000.
During the quarter, we began to receive orders to produce frozen meals for a
large, multi-national privately-owned food company. This new venture represents
a departure from our customary operations in that it is our first entree into a
pure contract manufacturing arrangement. The customer has supplied all recipes,
some costly equipment and has either provided raw materials or given us access
to some of its material and packaging purchase contracts. While the business
will net gross margins lower than our customary business, the potential volume
and contribution to overall plant efficiency of this business could represent
significant revenue and profit potential for us.
GROSS PROFIT. Gross profit for the second quarter of fiscal 2004 increased to
$4,414,000 from $3,132,000 for the second quarter of fiscal 2003. The increase
in gross profit, despite lower net revenues, was the result of several positive
factors. Gross profit margin as a percentage of net revenues increased to 14.2%
for the second quarter of fiscal 2004 from 9.3% for the second quarter of fiscal
2003 due to (1) the realization of planned efficiencies in our new production
facility; (2) our efforts to increase profitability on new accounts and
management's decision to forgo business that did not meet our profitability
objectives; and (3) decreased intracompany product transfers and reduced costs
resulting from the full utilization of our new on site cold storage facility.
Gross profits for the quarter were negatively affected by the increases in raw
poultry prices due to the Asian bird flu situation, which has created a surge in
the export market for domestically raised poultry. We have reacted to this
increase by increasing our selling price to our customers, where possible, and
by substituting products to customers, when feasible. We were particularly hard
hit by the historic poultry price increases in the early part of the quarter and
were able to offset much of the increase in March. We continue to closely manage
and monitor this situation as we enter the summer months, which is traditionally
the season for increased poultry prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) for the second quarter of fiscal 2004 decreased
$1,137,000 (26.4%) to $3,168,000 (10.2% of net revenues) from $4,305,000 (12.8%
of net revenues) for the second quarter of fiscal 2003. The decrease in SG&A for
the quarter relates primarily to reductions from the prior year in compensation,
professional services and bad debt expenses. Additionally, outbound freight
decreased $332,000 due to reduced sales volume and better management of freight
costs.
OPERATING INCOME. Operating income increased $2,419,000 to $1,246,000 for the
second quarter of fiscal 2004 from an operating loss of $1,173,000 for the
second quarter of fiscal 2003. The increase in operating income for the period,
on a lower revenue base, is the result of improvements in gross margins and
reductions in SG&A as noted above. We intend to closely manage our cost
structure with increased emphasis on individual account profitability as we
continue to develop additional revenue opportunities.
OTHER EXPENSES. Other expenses for the second quarter of fiscal 2004, which
consist primarily of various financing-related charges, decreased $327,000 to
$1,518,000 from $1,845,000 for the second quarter of fiscal 2003. This decrease
is primarily due to the $456,000 decline in amortization of deferred financing
costs to $48,000 from $505,000 for the second quarter of fiscal 2003. The
amortization expense in the second quarter of fiscal 2003 included the
amortization of costs related to previous financing arrangements. All costs
associated with previous financing arrangements were written off as debt
extinguishment expense as part of the October 2003 refinancing. The decline in
amortization was partially offset by increased interest expense resulting from
increased borrowings and interest rates during the second quarter of fiscal
2004.
-18-
INCOME TAX PROVISION (BENEFIT). Due to operating losses for the three months
ended March 28, 2004, we have provided a tax benefit of $103,000, and recorded
an increase in our deferred tax asset to approximately $4,614,000 on the
accompanying condensed balance sheet at March 28, 2004. A similar tax benefit of
$1,211,000 was recorded for the second quarter of fiscal 2003. The effective tax
rates for both quarters were based upon the estimated annual effective tax rates
of approximately 37.9% in 2004 and 40.1% in 2003. We have not recorded a
valuation allowance against any of our deferred tax assets, since we believe
that such assets are more likely than not to be recoverable through estimated
future profitable operations. If we fail to successfully improve margins, grow
revenues and/or maintain anticipated savings on future interest costs, and
return to profitable operation in the near term, we may not realize some or all
of our deferred tax assets, which could require us to record a valuation
allowance against some or all of those assets, which could adversely affect our
financial position and results of operations.
NET LOSS. The net result for the second quarter of fiscal 2004 was a loss of
$169,000 ($.01 per share) as compared to a loss of $1,807,000 ($.15 per share)
for the second quarter of fiscal 2003.
SIX MONTHS ENDED MARCH 28, 2004 COMPARED TO SIX MONTHS ENDED MARCH 30, 2003
NET REVENUES. Net revenues for the six months ended March 28, 2004 decreased
$10,389,000 (14.4%) to $61,532,000 from $71,921,000 for the six months ended
March 30, 2003. While we operate as a single business unit, manufacturing
various products on common production lines, revenue from similar customers are
grouped into the following natural categories: retail, foodservice, airlines and
weight loss.
Retail net revenues were $11,274,000 for the first six months of fiscal 2004 as
compared to $16,665,000 for the first six months of fiscal 2003, a decrease of
$5,391,000. Retail sales for the period were impacted by the Southern California
grocery strike, which was settled in late February 2004. Among our retail
customers, recurring sales to Albertson's decreased by over $2,100,000 for the
first six months, as compared to the first six months of fiscal 2003. Management
continues to believe that existing and new retail customers represent a near
term opportunity for growth. As mentioned above, we have recently received
orders from new grocery chain customers and have expanded our penetration in the
club store market.
Foodservice net revenues were $25,681,000 for the first six months of fiscal
2004 as compared to $29,101,000 for the first six months of fiscal 2003, a
decrease of $3,420,000. This reduction was principally the result of activity in
two customer accounts, one of which we decided not to re-bid aggressively based
on our profitability objectives, and a second of which reduced the number of
products offered to their customers. As with retail sales, we maintain our
belief that foodservice sales represent another growth opportunity. We have
retained additional sales personnel to focus on this market and have shifted
responsibilities internally to capitalize on this opportunity.
Airline net revenues were $12,049,000 for the first six months of fiscal 2004 as
compared to $15,060,000 for the first six months of fiscal 2003, a decrease of
$3,011,000. This was largely the result of decreased sales to Delta Airlines
which stopped offering meals on all but long haul and international flights.
During the second quarter of fiscal 2004, we were awarded business from a
carrier not previously served and have won bids for new items from present
airline customers. While we continue to pursue additional airline business, we
are doing so cautiously in recognition of the financial condition of certain
airline customers.
-19-
Weight loss net revenues were $12,528,000 for the first six months of fiscal
2004, as compared to $11,095,000 for the first six months of fiscal 2003, an
increase of $1,433,000.
GROSS PROFIT. Gross profit for the first six months of fiscal 2004 increased to
$9,010,000 from $7,439,000 for the first six months of fiscal 2003. The increase
in gross profit, despite lower net revenues, was the result of several positive
factors. Gross profit margin as a percentage of net revenues increased to 14.6%
for the first six months of fiscal 2004 from 10.3% for the first six months of
fiscal 2003 due to (1) the realization of planned efficiencies in our new
production facility; (2) our efforts to increase profitability on new accounts
and management's decision to forgo business that did not meet our profitability
objectives; and (3) decreased intracompany product transfers and reduced costs
resulting from the full utilization of our new on site cold storage facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) for the first six months of fiscal 2004 decreased
$1,939,000 (23.7%) to $6,247,000 (10.1% of net revenues) from $8,186,000 (11.4%
of net revenues) for the first six months of fiscal 2003. The decrease in SG&A
for the first six months of fiscal 2004 relates primarily to reductions from the
prior year in compensation, professional services and bad debts. Additionally,
outbound freight decreased $906,000 due to reduced sales volume and better
management of freight costs.
OPERATING INCOME. Operating income increased $3,509,000 to $2,763,000 for the
first six months of fiscal 2004 from an operating loss of $746,000 for the first
six months of fiscal 2003. The increase in operating income for the period, on a
lower revenue base, is the result of improvements in gross margins and
reductions in SG&A as noted above. We intend to closely manage our cost
structure with increased emphasis on individual account profitability as we
continue to develop additional revenue opportunities.
OTHER EXPENSES. Other expenses for the first six months of fiscal 2004, which
consist primarily of various financing-related charges, increased $2,999,000 to
$6,351,000 from $3,352,000 for the first six months of fiscal 2003. The increase
includes a $2,778,000 charge, substantially noncash, for debt extinguishment
expenses related to the write-off of deferred financing costs and debt issue
costs in connection with the refinancing of substantially all indebtedness in
October 2003. The increase also includes an increase in interest expense of
$897,000 due to increases in borrowings and interest rates, which was offset by
decreases in amortization of deferred financing costs of $408,000 and other
expenses of $268,000.
INCOME TAX PROVISION (BENEFIT). Due to operating losses for the six months ended
March 28, 2004, we have provided an income tax benefit of $1,359,000, and
recorded an increase in our deferred tax asset to approximately $4,614,000 on
the accompanying condensed balance sheet at March 28, 2004. A similar tax
benefit of $1,645,000 was recorded for the first six months of fiscal 2003. The
effective tax rates for both years were based upon the estimated annual
effective tax rates of approximately 37.9% in 2004 and 40.1% in 2003. We have
not recorded a valuation allowance against any of our deferred tax assets, since
we believe that such assets are more likely than not to be recoverable through
estimated future profitable operations. If we fail to successfully improve
margins, grow revenues and/or maintain anticipated savings on future interest
costs, and return to profitable operations in the near term, it could adversely
impact our expected realization of some or all of our deferred tax assets and
could require us to record a valuation allowance against some or all of those
assets, which could adversely affect our financial position and results of
operations.
-20-
NET LOSS. The net result for the six months ended March 28, 2004 was a loss of
$2,228,000 ($.15 per share) as compared to a loss of $2,453,000 ($.22 per share)
for the six months ended March 30, 2003.
We currently expect to improve on our current operating results, and return to
profitable operations, primarily through (a) improved gross margins on existing
business, achieved by streamlining additional costs and continuing to leverage
our new consolidated manufacturing and storage facilities to improve
manufacturing efficiency, (b) increasing our customer base, (c) growing revenues
from existing profitable product lines and (d) maintaining reduced future
interest costs on outstanding debt due to the recent refinancing of our long and
short-term debt. As discussed in "Risk Factors Related to Our Business and
Industry," included in Item 7 of our 2003 annual report on Form 10-K, we may be
unable to improve our operating results if we suffer a decline in our
manufacturing efficiency, the loss of major customers, further declines in air
travel, a work stoppage similar to the recently settled grocery strike, adverse
changes in our operating costs, or other adverse changes to our business. Our
profitability may also be adversely impacted by prolonged increases in raw
material costs, such as the increases in the market price of raw chicken that
occurred in late January and early February 2004 as a result of the Asian bird
flu outbreak in Indochina, if such raw material cost increases are not offset by
increases in sales prices.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our principal sources of liquidity have been cash flows from
operations and existing financing arrangements. Our cash and cash equivalents
increased by $187,000 to $701,000 during the six months ended March 28, 2004.
During the first six months of fiscal 2004, our operating activities resulted in
a use of cash of $3,924,000, as compared to cash provided of $6,925,000 during
the first six months of fiscal 2003. During the current period, operating losses
and noncash expenses generally offset one another, with the use of cash
resulting primarily from a $3,459,000 increase in accounts receivable, a
$992,000 increase in inventories and a $750,000 increase in prepaid expenses
which were reduced by a $1,363,000 increase in accounts payable. As of March 28,
2004, we had working capital of $15,774,000.
During the first six months of fiscal 2004, our investing activities resulted in
a use of cash of $183,000, as compared to a use of cash of $4,734,000 during the
first six months of fiscal 2003. The use of cash in both years consisted
exclusively of additions to property and equipment. The prior year additions
related primarily to the consolidation of most of our operations into our new
facility in Vernon, California.
During the six months ended March 28, 2004, our financing activities provided
cash of $4,294,000, as compared to a use of cash of $2,189,000 during the six
months ended March 30, 2003. The cash provided in 2004 resulted primarily from
new borrowings, net of related deferred financing costs, in connection with the
debt refinancing in October 2003.
At September 28, 2003, we were not in compliance with certain of the financial
and other covenants of our agreements with our two major lenders, including,
among other things, our failure to observe the limitations on indebtedness
relating to trade accounts payable, failure to comply with certain payment plans
and our failure to liquidate Overhill Ventures before August 20, 2003. Effective
-21-
October 31, 2003, we reached agreement with each of LLCP and Pleasant Street
wherein the lenders waived specified events of default by us under the then
existing agreements and further agreed to a refinancing of all indebtedness
owing by us to LLCP and Pleasant Street as described below.
On October 31, 2003, we entered into debt refinancing arrangements with LLCP and
Pleasant Street in order (1) to obtain an aggregate of $5,000,000 of additional
funds to finance our accounts receivable, to build up our inventory levels and
for other working capital purposes, (2) to reduce the base rates of interest on
and extend the maturity dates of the note held by LLCP and the loans made by
Pleasant Street, (3) to amend the financial covenants and certain other
provisions contained in the relevant investment documents with respect to LLCP
and the relevant loan documents with respect to Pleasant Street and (4) to
obtain waivers of specified events of default under then existing agreements
with LLCP and Pleasant Street.
We issued to LLCP a second amended and restated secured senior subordinated note
due October 31, 2006 in the stated principal amount of $28,858,000 in exchange
for the surrender by LLCP of the existing $24,658,000 senior subordinated note
and $4,200,000 in additional cash funds. The replacement note has a base rate of
interest that was reduced from 15% to 13.5%, subject to increase upon the
occurrence of any interest rate event, as defined in the purchase documents, or
event of default, and a maturity date that was extended from October 31, 2004 to
October 31, 2006. We paid LLCP an amendment fee of $184,800 and a new capital
fee of $168,000.
Also as part of the October 31, 2003 debt refinancing, Pleasant Street and we
amended our existing loan and security agreement to amend the financial
covenants and various other provisions. Pleasant Street waived certain specified
events of default. In addition, Pleasant Street made an additional term loan to
us in the principal amount of $800,000 and surrendered the note evidencing the
existing Term A Loan in exchange for a second amended and restated senior Term A
note in the principal amount of $17,800,000. The annual interest rate on the
in-formula portion of the Term A Loan was reduced from 10% to 5.5%. The annual
interest rate on the $5,000,000 Term B Loan was reduced from 15% to 12%. The
interest rates on the Term A Loan and Term B Loan are subject to increase upon
the occurrence of an interest rate event, as defined in the loan documents, or
event of default as provided in the notes that evidence those loans. The
maturity dates of the Term A Loan and the Term B Loan were extended to October
31, 2006 from November 30, 2003 and January 30, 2004, respectively. The Term B
Loan was modified to be a monthly amortizing term loan. The prepayment terms of
the Term A Loan and the Term B Loan were modified to provide, among other
things, that we will make mandatory prepayments of annual excess cash flow, if
any. We paid Pleasant Street an amendment fee of $35,200 and a new capital fee
of $32,000.
The October 31, 2003 debt refinancing has been recorded as a debt
extinguishment. Accordingly, unamortized costs associated with the LLCP and
Pleasant Street debt that existed at October 31, 2003, along with new amendment
fees paid to LLCP and Pleasant Street, were expensed on October 31, 2003. The
unamortized costs included original issue debt discounts of $809,635,
unamortized financing fees and expenses of $1,173,519 and unamortized cost of
warrants issued to LLCP in September of 2002 of $575,220. The total expense
recognized in connection with the October 31, 2003 debt extinguishment,
including the amendment fees of $184,800 and $35,200 referred to in the
preceding paragraphs, amounted to $2,778,374.
We believe, based upon forecasted performance for fiscal year 2004, that it is
probable that we will be in compliance with all of our revised financial and
other covenant requirements. Accordingly, and as a result of the refinancing of
the obligations described above, all principal amounts payable to LLCP and to
-22-
Pleasant Street, other than currently scheduled principal payments, have been
classified as long-term liabilities in the accompanying balance sheet as of
March 28, 2004. In the future, our failure to achieve certain revenue, expense
and profitability levels could result in a violation of the amended financial
covenants under our financing arrangements, which would cause the interest rates
on the above loans to increase substantially and could further result in
acceleration of maturity of the loans, both of 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.
Following is a summarization of our contractual obligations at March 28, 2004:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------
MORE THAN 5
TOTAL WITHIN 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
------------ ------------ ------------ ------------ ------------
DEBT MATURITIES $51,510,886 $ 442,216 $ 1,773,043 $49,295,627 $ --
CONTRACTUAL
OBLIGATIONS 13,155,001 1,260,495 3,522,198 1,944,336 6,427,972
OPEN PURCHASE
ORDERS 2,071,000 2,071,000 -- -- --
------------ ------------ ------------ ------------ ------------
TOTAL CONTRACTUAL
OBLIGATIONS $66,736,887 $ 3,773,711 $ 5,295,241 $51,239,963 $ 6,427,972
============ ============ ============ ============ ============
Other than the October 31, 2003 debt refinancing, there have been no material
changes, outside of the ordinary course of business, in the contractual
obligations summarized above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk - Obligations. We are currently subject to interest rate risk
on variable interest rate obligations. A hypothetical 10% increase in average
market interest rates would increase annual interest expense on currently
outstanding debt by approximately $107,000. We are also subject to interest rate
risk on our fixed interest rate obligations. Based upon outstanding amounts of
fixed rate obligations as of March 28, 2004, a hypothetical 10% decrease in
average market interest rates would increase the fair value of outstanding fixed
rate debt by approximately $331,000.
We do not own, nor do we have an interest in, any other market risk sensitive
instruments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial
Officer (our principal executive officer and principal financial officer,
respectively) has concluded, based on its evaluation as of March 28, 2004, that
the design and operation of our "disclosure controls and procedures" (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act")) are effective to ensure that information required to be
disclosed by us in the reports filed or submitted under the Exchange Act is
accumulated, recorded, processed, summarized and reported to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding whether or not disclosure is
required.
-23-
During the quarter ended March 28, 2004, there were no changes in our "internal
controls 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 controls over financial reporting.
-24-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various lawsuits, claims and proceedings
related to the conduct of our business. Our management does not believe that the
disposition of any pending claims is likely to adversely affect our financial
condition, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
10* Executive search services agreement dated effective December
15, 2003 between Steinbrun Hughes and Assoc. and Overhill
Farms, Inc.
31* Certifications 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
* Filed herewith
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended March 28, 2004.
-25-
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 7, 2004 By: /s/ James Rudis
-------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: May 7, 2004 By: /s/ John L. Steinbrun
----------------------
John L. Steinbrun
Senior Vice President and
Chief Financial Officer
-26-
EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q
Number Description
------ -----------
10 Executive search services agreement dated effective December
15, 2003 between Steinbrun Hughes and Assoc. and Overhill
Farms, Inc.
31 Certifications 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
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