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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 APRIL 3, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-16699
OVERHILL FARMS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 75-2590292
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2727 EAST VERNON AVENUE
VERNON, CALIFORNIA 90058
------------------ -----
(Address of principal executive offices) (Zip code)
(323) 582-9977
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.). Yes [ ] No [X]
As of April 27, 2005 there were 14,805,556 shares of the issuer's common stock,
$.01 par value, outstanding.
OVERHILL FARMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 3, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Condensed Balance Sheets as of April 3, 2005 (unaudited)
and September 26, 2004 2
Condensed Statements of Operations for the Three Months
Ended April 3, 2005 and March 28, 2004 (unaudited) 4
Condensed Statements of Operations for the Six Months
Ended April 3, 2005 and March 28, 2004 (unaudited) 5
Condensed Statements of Cash Flows for the Six Months
Ended April 3, 2005 and March 28, 2004 (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 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 20
Item 6. Exhibits 20
SIGNATURES 21
EXHIBITS FILED WITH THIS FORM 10-Q 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS
ASSETS
April 3, September 26,
2005 2004
------------ ------------
(Unaudited)
Current assets:
Cash $ 2,045,735 $ 1,609,417
Accounts receivable, net of allowance for doubtful accounts
of $87,000 and $125,000, respectively 14,639,789 12,606,122
Inventories 9,624,746 11,228,548
Prepaid expenses and other 1,696,628 1,641,333
Deferred income taxes 690,380 690,380
------------ ------------
Total current assets 28,697,278 27,775,800
------------ ------------
Property and equipment, at cost:
Fixtures and equipment 12,574,447 13,096,349
Leasehold improvements 9,059,661 9,066,829
Automotive equipment 52,669 52,669
------------ ------------
21,686,777 22,215,847
Less accumulated depreciation (9,444,609) (9,597,566)
------------ ------------
12,242,168 12,618,281
------------ ------------
Other assets:
Excess of cost over value of net assets acquired 12,188,435 12,188,435
Deferred financing costs, net of accumulated amortization
of $311,000 and $199,000, respectively 601,824 710,297
Deferred income taxes 2,789,404 3,935,242
Other 2,005,826 2,321,514
------------ ------------
17,585,489 19,155,488
------------ ------------
Total assets $ 58,524,935 $ 59,549,569
============ ============
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)
April 3, September 26,
2005 2004
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 7,587,465 $ 7,993,200
Accrued liabilities 3,032,900 2,968,813
Current maturities of long-term debt 1,924,017 3,293,187
------------ ------------
Total current liabilities 12,544,382 14,255,200
Long-term debt, less current maturities 46,676,127 47,775,484
------------ ------------
Total liabilities 59,220,509 62,030,684
------------ ------------
Commitments and contingencies -- --
Shareholders' equity (deficit):
Series A Preferred stock, $0.01 par value,
authorized 50,000,000 shares, issued and outstanding,
23.57 shares (liquidation preference of $750,000) -- --
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 9,696,514 9,573,562
Warrants to purchase common stock 400 400
Accumulated deficit (10,540,544) (12,203,133)
------------ ------------
Total shareholders' equity (deficit) (695,574) (2,481,115)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 58,524,935 $ 59,549,569
============ ============
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
-----------------------------
April 3, March 28,
2005 2004
------------ ------------
Net revenues $ 43,338,648 $ 31,137,910
Cost of sales 37,734,108 27,677,887
Gross profit 5,604,540 3,460,023
Selling, general and administrative expenses 2,014,349 2,214,232
------------ ------------
Operating income 3,590,191 1,245,791
Other expenses:
Interest expense (1,579,093) (1,485,003)
Amortization of deferred financing costs (54,802) (48,378)
Other (114,837) 14,966
------------ ------------
Total other expenses (1,748,732) (1,518,415)
------------ ------------
Income (loss) before income taxes 1,841,459 (272,624)
Income tax expense (benefit) 779,894 (103,324)
------------ ------------
Net income (loss) $ 1,061,565 $ (169,300)
============ ============
Net income (loss) per share:
Basic $ 0.07 $ (0.01)
============ ============
Diluted $ 0.07 $ (0.01)
============ ============
Shares used in computing net income (loss) per share:
Basic 14,805,556 14,805,556
Diluted 15,432,348 14,805,556
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
-----------------------------
April 3, March 28,
2005 2004
------------ ------------
Net revenues $ 83,557,483 $ 61,531,516
Cost of sales 73,530,291 54,365,250
------------ ------------
Gross profit 10,027,192 7,166,266
Selling, general and administrative expenses 3,798,410 4,403,099
------------ ------------
Operating income 6,228,782 2,763,167
Other expenses:
Interest expense (3,091,015) (3,229,593)
Amortization of deferred financing costs (112,875) (408,914)
Debt extinguishment expenses -- (2,778,374)
Other (216,465) 66,080
------------ ------------
Total other expenses (3,420,355) (6,350,801)
------------ ------------
Income (loss) before income taxes 2,808,427 (3,587,634)
Income tax expense (benefit) 1,145,838 (1,359,324)
------------ ------------
Net income (loss) $ 1,662,589 $ (2,228,310)
============ ============
Net income (loss) per share:
Basic $ 0.11 $ (0.15)
============ ============
Diluted $ 0.11 $ (0.15)
============ ============
Shares used in computing net income (loss) per share:
Basic 14,805,556 14,805,556
Diluted 15,317,218 14,805,556
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
---------------------------
April 3, March 28,
2005 2004
----------- -----------
Operating Activities:
Net income (loss) $ 1,662,589 $(2,228,310)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 884,766 1,451,479
Loss on asset disposals 187,605 --
Provision for doubtful accounts 38,206 --
Noncash debt extinguishment expenses -- 2,558,374
Noncash interest expense 122,952 --
Deferred tax benefit 1,145,838 (1,359,324)
Changes in:
Accounts receivable (2,071,873) (3,458,664)
Inventories 1,603,802 (992,181)
Prepaid expenses and other 260,393 (750,161)
Accounts payable (405,735) 1,362,680
Accrued liabilities 55,550 (508,276)
----------- -----------
Net cash provided by (used in) operating activities 3,484,093 (3,924,383)
----------- -----------
Investing Activities:
Additions to property and equipment (574,846) (182,554)
----------- -----------
Net cash used in investing activities (574,846) (182,554)
----------- -----------
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
---------------------------
April 3, March 28,
2005 2004
----------- -----------
Financing Activities:
Proceeds from borrowings on long-term debt $ -- $ 5,000,000
Principal payments on long-term debt (2,468,527) (301,878)
Deferred financing costs (4,402) (403,806)
----------- -----------
Net cash (used in) provided by financing activities (2,472,929) 4,294,316
----------- -----------
Net increase in cash 436,318 187,379
Cash at beginning of period 1,609,417 513,622
----------- -----------
Cash at end of period $ 2,045,735 $ 701,001
=========== ===========
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,533,429 $ 3,062,651
Income taxes $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Due to the refinancing of the Company's debt with Levine Leichtman
Capital Partners II, L.P. ("LLCP") on October 31, 2003, the unamortized balance
of the discount as of September 28, 2003 of $482,001 was charged to expense in
the fiscal quarter ended December 28, 2003.
The accompanying notes are an integral part
of these condensed financial statements.
-7-
OVERHILL FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 3, 2005
(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.
2. BASIS OF PRESENTATION
Certain prior period 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 April 3, 2005 are not necessarily indicative of the results that
may be expected for the year ending October 2, 2005 or for any other period.
The condensed balance sheet at September 26, 2004 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
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 26, 2004.
3. RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123R")," which is a revision of SFAS No.
123, "Accounting for Stock Based Compensation." SFAS No. 123R supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and amends SFAS No. 95 "Statement of Cash Flows." Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS No. 123.
However, SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is not an alternative.
SFAS No. 123R must be adopted by the Company at the beginning of the
next fiscal year that begins after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet been issued. The
Company currently expects to adopt SFAS No. 123R in the fiscal quarter ending
January 1, 2006.
As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB Opinion No. 25's intrinsic value
method and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, adoption of SFAS No. 123R's fair value method will
have a significant impact on the Company's result of operations, although it
will have no impact on the Company's overall financial position. The impact of
adoption of SFAS No. 123R cannot be predicted at this time because it will
depend on the levels of share-based payments granted in the future. However, had
the Company adopted SFAS No. 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income and earning per share in Note 7 to the
Company's condensed financial statements. SFAS No. 123 also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company cannot estimate what those amounts will be in the future because they
depend on, among other things, when employees exercise stock options. There were
no operating cash flows in prior periods from share-based payments.
-8-
In December 2004, the FASB issued FASB Staff Position No. 109-1,
"Application of FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes,
to the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004" ("FSP 109-1"). FSP 109-1 clarifies that the
manufacturer's deduction provided for under the American Jobs Creation Act of
2004 (the "Act") should be accounted for as a special deduction in accordance
with SFAS No. 109 and not as a tax rate reduction. The adoption of FSP 109-1
will have no impact on the Company's results of operations or financial position
for fiscal year 2005, as the manufacturer's deduction is not available to the
Company until fiscal year 2006. The Company is currently evaluating the effect
that the manufacturer's deduction will have in subsequent years.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs and wasted materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The Company is currently evaluating the impact
that this statement will have on its financial statements.
4. INVENTORIES
Inventories are summarized as follows:
April 3, September 26,
2005 2004
------------- -------------
Raw ingredients $ 3,595,295 $ 3,815,724
Finished product 4,707,432 5,764,418
Packaging 1,322,019 1,648,406
------------- -------------
$ 9,624,746 $ 11,228,548
============= =============
A reserve is established for the estimated aged surplus, spoiled or
damaged products, and discontinued inventory items and components. Historically,
the amount of the reserve was determined by analyzing inventory composition,
expected usage, historical and projected sales information, and other factors.
During the quarter ended January 2, 2005, the Company revised its method to
apply reserve estimation percentages to aging categories. The effect of this
change in estimate resulted in one-time higher cost of sales and lower gross
profit of approximately $650,000 and lowered net income by approximately
$370,000 for the three months ended January 2, 2005.
5. LONG-TERM DEBT
On October 31, 2003, the Company entered into debt refinancing
arrangements with LLCP and Pleasant Street Investors, LLC ("PSI"). 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. The note has
a base interest rate of 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 of October 31, 2006.
PSI has made two term loans to the Company. The senior Term A Loan, in
the principal amount of $17,800,000, has an annual interest rate on the
in-formula portion equal to the greater of 5.5% or the prime rate in effect from
time to time plus 1.5%. The $5,000,000 Term B Loan amortizes monthly and carries
a base interest rate of 12%. The interest rates on the Term A Loan and Term B
Loan are subject to increase upon the occurrence of any interest rate event, as
defined in the loan documents, or event of default as provided in the notes that
evidence those loans. The Term A Loan and the Term B Loan were to mature on
October 31, 2006. The maturity of the Term B Loan was subsequently amended, as
discussed below. The prepayment terms of the Term A Loan and the Term B Loan
provide, among other things, that the Company will make mandatory prepayments of
annual excess cash flow, if any.
-9-
The amended and restated securities purchase agreement with LLCP and
the amended and restated loan and security agreement with PSI contain various
covenants, including financial covenants covering restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt service
and debt to equity ratios. In addition, those agreements prohibit changes in
control, including ownership and certain management personnel, and contain
customary restrictions on incurring indebtedness and liens, making investments,
paying dividends and making loans or advances. The obligations owing by the
Company to PSI and LLCP are secured by liens on substantially all of the
Company's assets.
On October 6, 2004, the Company executed the fourth amendment to the
existing financing arrangements with PSI and LLCP to amend the financial
covenants and various other provisions. Effective September 26, 2004, the new
amendments to the securities purchase agreement with LLCP and the loan and
securities agreement with PSI eliminated, for the fiscal quarters ending January
2, 2005 and April 3, 2005, the potential for a 2% increase in interest rates
like the increase that occurred on June 27, 2004, and reduced the base rate on
the Term B Loan from 12% to LIBOR plus 7.5%. In exchange, the Company agreed to
increase its payment of principal on the Term B Loan from $69,445 per month to
specified monthly amounts ranging from $254,445 to $274,445. Prior to this
amendment, the Term B Loan was to have a balance of $2.5 million due at maturity
of the loan on October 31, 2006. Under this amendment, the Term B Loan will be
entirely paid off by January 31, 2006. The increase in cash required for
principal repayment is offset, in part, by savings from the reduction in
interest rates.
To counteract the dilutive effect of the proposed 2005 Stock Plan as
discussed in the Company's proxy statement for its 2005 annual meeting of
stockholders, the Company agreed to issue to LLCP 83,641 fully paid and
non-assessable shares of common stock subject to terms specified in the letter
agreement dated February 24, 2005 between LLCP and the Company ("LLCP Letter
Agreement"). The LLCP Letter Agreement also provides restrictions on the
purchase price or exercise price of the shares of the Company's common stock
that may be issued pursuant to awards under the 2005 Stock Plan. LLCP agreed in
the LLCP Letter Agreement to vote all shares of the Company's voting capital
stock beneficially owned by LLCP in favor of approval of the 2005 Stock Plan.
The fair value of the 83,641 shares of common stock (based on the closing sale
price of a share of the Company's common stock on February 1, 2005) of $122,952
was expensed as a component of interest expense during the quarter ended April
3, 2005.
The Company believes, based upon forecasted performance for fiscal year
2005, that it is probable that the Company will be in compliance with all of its
revised financial and other covenant requirements. Accordingly, based upon
projected covenant compliance and as a result of the refinancing of the
obligations described above, all principal amounts payable to LLCP and to PSI,
other than currently scheduled principal payments, have been classified as
long-term liabilities in the accompanying balance sheet as of April 3, 2005. 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 and could result in acceleration of
maturity of the loans, which could adversely affect the Company's financial
condition, results of operations or cash flows.
6. PER SHARE DATA
The Company computes earnings per share ("EPS") pursuant to SFAS No.
128 "Earnings Per Share." Basic EPS is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
based on the weighted average number of common shares outstanding for the period
and potentially dilutive common stock equivalents outstanding for the period.
-10-
A reconciliation of the numerator and denominator of basic earnings per
share and diluted earnings per share is as follows:
Three Months Ended
----------------------------
April 3, March 28,
2005 2004
------------ ------------
Basic EPS Computation:
Numerator:
Net income (loss) $ 1,061,565 $ (169,300)
Denominator:
Weighted average common shares outstanding 14,805,556 14,805,556
------------ ------------
Total shares 14,805,556 14,805,556
============ ============
Basic EPS $ 0.07 $ (0.01)
============ ============
Diluted EPS Computation:
Numerator:
Net income (loss) $ 1,061,565 $ (169,300)
Denominator:
Weighted average common shares outstanding 14,805,556 14,805,556
Incremental shares from assumed conversion
of preferred stock and exercise of stock
option and warrants 626,792 --
------------ ------------
Total shares 15,432,348 14,805,556
============ ============
Diluted EPS $ 0.07 $ (0.01)
============ ============
For the three months ended April 3, 2005, 97,736 shares attributable
to outstanding stock options were excluded from the computation of diluted EPS
because their inclusion would have been anti-dilutive. For the three months
ended March 28, 2004, 672,000 shares attributable to outstanding stock options,
warrants exercisable for 200 shares and 283,076 shares of convertible preferred
stock were excluded from the computation of diluted EPS because their inclusion
would have been anti-dilutive.
Six Months Ended
-----------------------------
April 3, March 28,
2005 2004
------------ ------------
Basic EPS Computation:
Numerator:
Net income (loss) $ 1,662,589 $ (2,228,310)
Denominator:
Weighted average common shares outstanding 14,805,556 14,805,556
------------ ------------
Total shares 14,805,556 14,805,556
============ ============
Basic EPS $ 0.11 $ (0.15)
============ ============
Diluted EPS Computation:
Numerator:
Net income (loss) $ 1,662,589 $ (2,228,310)
Denominator:
Weighted average common shares outstanding 14,805,556 14,805,556
Incremental shares from assumed conversion
of preferred stock and exercise of stock
option and warrants 511,662 --
------------ ------------
Total shares 15,317,218 14,805,556
============ ============
Diluted EPS $ 0.11 $ (0.15)
============ ============
-11-
For the six months ended April 3, 2005, 569,736 shares attributable to
outstanding out-of-the-money stock options were excluded from the computation of
diluted EPS because their inclusion would have been anti-dilutive. For the six
months ended March 28, 2004, 672,000 shares attributable to outstanding stock
options, warrants exercisable for 200 shares and 283,076 shares of convertible
preferred stock were excluded from the computation of diluted EPS because their
inclusion would have been anti-dilutive.
7. STOCK OPTIONS
Under the Company's 2005 Stock Plan ("Plan"), which is subject to
stockholder and other approvals, the Company's board of directors or a committee
thereof may grant incentive stock options ("ISOs"), non-qualified stock options
("NQOs") and stock purchase rights ("SPRs") to employees, consultants and
directors of the Company.
ISOs granted under the Plan must have an exercise price of not less
than 100% of the fair market value of a share of our common stock on the date
the ISO is granted and must be exercised, if at all, within ten years from the
date of grant. In the case of an ISO granted to an optionee who owns more than
10% of the Company's total voting securities on the date of grant, the exercise
price shall be not less than 110% of the fair market value of a share of the
Company's common stock on the date of grant, and the option period may not
exceed five years. The exercise price of NQOs will be determined by the
committee and may be less than, equal to or greater than the fair market value
of our common stock on the date of the grant.
Notwithstanding the preceding paragraph, the LLCP Letter Agreement
contains restrictions on the purchase price or exercise price of the shares of
the Company's common stock that may be issued pursuant to awards under the Plan.
Plan awards for not less than 50,000 shares must be issued at a price of not
less than $1.50 per share. Plan awards for not less than 50,000 shares must be
issued at a price of not less than $2.00 per share. Plan awards for not less
than 50,000 shares must be issued at a price of not less than $2.50 per share.
The remaining Plan awards must be issued at a price not less than the fair
market value per share at the time of issuance of the Plan awards. Options may
be exercised during a period of time fixed by the committee except that no
option may be exercised more than ten years after the date of grant.
An aggregate of 550,000 shares of the Company's common stock is
reserved for issuance under the Plan. On February 1, 2005, options to purchase
up to 539,000 shares of the Company's common stock at exercise prices per share
ranging from $1.47 to $2.50 were granted subject to stockholder and other
approvals. Because LLCP and two of the Company's directors who own in the
aggregate a majority of the Company's outstanding voting common stock have each
indicated their separate intentions to vote in favor of the adoption of the Plan
at the Company's 2005 annual meeting of stockholders, the effect of the options
has been considered in the diluted earnings per share computation at April 3,
2005.
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and provides the pro forma disclosure provisions of
SFAS 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):
-12-
Three Months Ended Six Months Ended
------------------------------ ------------------------------
April 3, 2005 March 28, 2004 April 3, 2005 March 28, 2004
------------- -------------- ------------- --------------
Net income (loss), as reported $ 1,062 $ (169) $ 1,663 $ (2,228)
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all
awards, net of related tax effects $ 280 $ -- $ 280 $ --
Pro forma net income (loss) $ 782 $ (169) $ 1,383 $ (2,228)
------------- -------------- ------------- --------------
Net income (loss) per share
Basic, as reported $ 0.07 $ (0.01) $ 0.11 $ (0.15)
Basic, pro forma $ 0.05 $ (0.01) $ 0.09 $ (0.15)
Diluted, as reported $ 0.07 $ (0.01) $ 0.11 $ (0.15)
Diluted, pro forma $ 0.05 $ (0.01) $ 0.09 $ (0.15)
8. INCOME TAXES
The effective tax rates for the first six months of fiscal years 2005
and 2004 were based upon the estimated annual effective tax rates of
approximately 40.8% in 2005 and (37.9%) in 2004, respectively. The effective tax
rate for the first six months of fiscal year 2005 approximated the statutory
rate. The effective tax rate for the first six months of fiscal year 2004 was
lower than the statutory rate based upon California's limitation on net
operating (benefit) loss carryovers, which permits only 50% of the net operating
loss to be used in future periods.
In fiscal year 2004, the Company recorded a $425,000 valuation
allowance against a portion of its deferred tax assets, since it believed that
such assets did not meet the more likely than not criteria to be recoverable
through projected future profitable operations in the foreseeable future.
9. CONTINGENCIES
LEGAL PROCEEDINGS. From time to time, the Company is involved in
various lawsuits, claims and proceedings related to the conduct of the Company's
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. The
Company charges off uncollectible accounts at the point in time when no recovery
is expected.
A significant portion of the Company's total net revenues was derived
from two customers. Panda Restaurant Group and Jenny Craig Products accounted
for approximately 29.4% and 16.7%, respectively, of the Company's revenues for
the six months ended April 3, 2005. Distributors for Panda Restaurant Group and
Jenny Craig Products accounted for approximately 33.0% and 22.3%, respectively,
of the Company's total accounts receivable balance at April 3, 2005. Panda
Restaurant Group and Jenny Craig Products accounted for approximately 28.6% and
18.9%, respectively, of the Company's revenues for the six months ended March
28, 2004. Distributors for Panda Restaurant Group and Jenny Craig Products
accounted for approximately 18.0% and 24.1%, respectively, of the Company's
total accounts receivable balance at September 26, 2004. The Company intends to
reduce its reliance on a small concentration of accounts by further expansion
into custom products for retail and foodservice customers nationwide.
-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," "projects," "forecasts," "goal," "probable" 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, that 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 that may affect the cost of raw materials as
well as the markets 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 Southern
California grocery strike that occurred during the period from
October 2003 to February 2004;
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; 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 26, 2004 under the heading "Risk
Factors Related to Our Business and Industry."
OVERVIEW
Our goal is to be a 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.
-14-
Our total hourly and salaried workforce consisted of approximately 796
employees at April 3, 2005. Approximately 81% of our workforce is covered by a
collective bargaining agreement that we renewed effective March 1, 2005 with
substantially equivalent terms as the prior contract. The new contract has a
term of three years.
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 generally accepted accounting principles 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 2004 annual report
on Form 10-K for the year ended September 26, 2004. 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. A bankruptcy or other
significant financial deterioration of any customers could impact their future
ability to satisfy their receivables with us. Our allowance for doubtful
accounts is calculated based primarily upon historical bad debt experience and
current market conditions. Write-offs, net of recoveries, to the allowance for
doubtful accounts was $16,300 and $0 for the six months ended April 3, 2005 and
March 28, 2004, respectively.
A significant portion of our total net revenues was derived from two
customers. Panda Restaurant Group and Jenny Craig Products accounted for
approximately 29.4% and 16.7%, respectively, of our revenues for the six months
ended April 3, 2005. Distributors for Panda Restaurant Group and Jenny Craig
Products accounted for approximately 33.0% and 22.3%, respectively, of our total
accounts receivable balance at April 3, 2005. Panda Restaurant Group and Jenny
Craig Products accounted for approximately 28.6% and 18.9%, respectively, of our
revenues for the six months ended March 28, 2004. Distributors for Panda
Restaurant Group and Jenny Craig Products accounted for approximately 18.0% and
24.1%, respectively, of our total accounts receivable balance at September 26,
2004.
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. Historically,
the amount of the reserve was determined by analyzing inventory composition,
expected usage, historical and projected sales information, and other factors.
During the quarter ended January 2, 2005, we revised our method to apply reserve
estimation percentages to aging categories. The effect of this change in
estimate resulted in one-time higher cost of sales and lower gross profit of
approximately $650,000 and lowered net income by approximately $370,000 for the
three months ended January 2, 2005.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. We evaluate the
excess of cost over fair value of net assets acquired (goodwill) at least
annually for impairment in accordance with SFAS No. 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 year 2004. At April
3, 2005, 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. The effective tax rates for the first six months of
fiscal years 2005 and 2004 were based upon the estimated annual effective tax
rates of approximately 40.8% in 2005 and (37.9%) in 2004, respectively. The
effective tax rate for the first six months of fiscal year 2005 approximated the
statutory rate. The effective tax rate for the first six months of fiscal year
2004 was lower than the statutory rate based upon California's limitation on net
operating (benefit) loss carryovers, which permits only 50% of the net operating
loss to be used in future periods.
-15-
In fiscal year 2004, we recorded a $425,000 valuation allowance against
a portion of our deferred tax assets, since we believed that such assets did not
meet the more likely than not criteria to be recoverable through projected
future profitable operations in the foreseeable future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 3, 2005 COMPARED TO THREE MONTHS ENDED MARCH 28, 2004
While we operate as a single business unit, manufacturing various
products on common production lines, revenues from similar customers are grouped
into the following natural categories for purposes of this discussion: retail
(including weight loss), foodservice and airlines.
The three months ended April 3, 2005 and March 28, 2004 were each
13-week periods.
NET REVENUES. Net revenues for the three months ended April 3, 2005
increased $12,201,000 (39.2%) to $43,339,000 from $31,138,000 for the three
months ended March 28, 2004. The increase in net revenues resulted from growth
in all business categories. New customer accounts contributed 43% of the
increase in net revenues from the three months ended March 28, 2004 to the three
months ended April 3, 2005, while growth from existing customers accounted for
the remaining increase in net revenues.
Retail (including weight loss) net revenues increased $9,080,000
(72.5%) to $21,610,000 for the three months ended April 3, 2005 as compared to
$12,530,000 for the three months ended March 28, 2004, primarily attributable to
sales to new retail customers added during the second half of fiscal year 2004.
Foodservice net revenues increased $2,262,000 (17.7%) to $15,060,000 for the
three months ended April 3, 2005 as compared to $12,798,000 for the three months
ended March 28, 2004 due to increased production requirements of an existing
customer initiated in the second half of fiscal year 2004 and the addition of
new customers. Airline net revenues increased $858,000 (14.8%) to $6,669,000 for
the three months ended April 3, 2005 as compared to $5,811,000 for the three
months ended March 28, 2004. Sales generated from the addition of new airline
accounts and improvements in air travel from early fiscal year 2004 levels have
offset the impact of many airline carriers' decisions to offer meals on only
long-haul and international flights.
GROSS PROFIT. Gross profit increased $2,145,000 (62.0%) to $5,605,000
for the three months ended April 3, 2005 as compared to $3,460,000 for the three
months ended March 28, 2004. The majority of this increase is attributable to
net revenues increasing $12,201,000. The balance of the increase was the result
of improvement in gross margin as a percentage of net revenues to 12.9% for the
three months ended April 3, 2005 from 11.1% for the three months ended March 28,
2004. Gross margin as a percentage of net revenues improved due to better
leveraging of fixed costs, better pricing of raw material costs and changes in
production mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses decreased $200,000 (9.0%) to $2,014,000 (4.6% of
net revenues) for the three months ended April 3, 2005 as compared to $2,214,000
(7.1% of net revenues) for the three months ended March 28, 2004. Demonstration
and promotional expenses have declined from previous levels as a result of a
decline in sales to a customer who required us to pay a portion of those costs.
Accordingly, SG&A expenses related to point-of-sale demonstration and
promotional activity have declined. These declines were offset by increases in
professional fees and payroll, which are expected to continue at their current
levels. Barring changes in our sales mix, we expect the current level of
spending on demonstrations and promotions to remain constant.
OPERATING INCOME. Operating income increased $2,344,000 (188.1%) to
$3,590,000 for the three months ended April 3, 2005 as compared to $1,246,000
for the three months ended March 28, 2004 due to revenue growth and improvements
in production and material costs and SG&A expenses discussed above.
OTHER EXPENSES. Other expenses increased $231,000 (15.2%) for the three
months ended April 3, 2005 to $1,749,000 as compared to $1,518,000 for the three
months ended March 28, 2004. The increase was largely attributable to the
expense related to the issuance of common stock discussed in Note 5 to the
accompanying condensed financial statements.
NET INCOME (LOSS). The net result for the three months ended April 3,
2005 was net income of $1,062,000 ($.07 per basic and diluted share) as compared
to a net loss of $169,000 ($.01 per basic and diluted share) for the three
months ended March 28, 2004.
-16-
SIX MONTHS ENDED APRIL 3, 2005 COMPARED TO SIX MONTHS ENDED MARCH 28, 2004
The six months ended April 3, 2005 and March 28, 2004 were 27-week and
26-week periods, respectively.
NET REVENUES. Net revenues for the six months ended April 3, 2005
increased $22,025,000 (35.8%) to $83,557,000 from $61,532,000 for the six months
ended March 28, 2004. The increase in net revenues resulted from growth in all
business categories through the continued development of existing accounts (51%
of the increase) and from the addition of new customers (49% of the increase).
Retail (including weight loss) net revenues increased $14,437,000 (60.7%) to
$38,238,000 for the six months ended April 3, 2005 as compared to $23,801,000
for the six months ended March 28, 2004, attributable to sales to new retail
customers added during the second half of fiscal year 2004 as well as an
increase in sales to existing retail customers who had been impacted by the
grocery strike in the six months ended March 28, 2004. Airline net revenues
increased $3,111,000 (25.8%) to $15,160,000 for the six months ended April 3,
2005 as compared to $12,049,000 for the six months ended March 28, 2004. This
was the result of growth from existing customers due to increased air travel and
the addition of new airline accounts. Foodservice net revenues increased
$4,478,000 (17.4%) to $30,159,000 for the six months ended April 3, 2005 as
compared to $25,681,000 for the six months ended March 28, 2004 primarily due to
increased production requirements of an existing customer.
GROSS PROFIT. Gross profit increased $2,861,000 (39.9%) to $10,027,000
for the six months ended April 3, 2005 as compared to $7,166,000 for the six
months ended March 28, 2004. The majority of this increase is attributable to
net revenues increasing $22,025,000. The balance of the increase was the result
of improvement in gross margin as a percentage of net revenues to 12.0% for the
six months ended April 3, 2005 from 11.6% for the six months ended March 28,
2004. Gross margin as a percentage of net revenues improved due to better
leveraging of fixed costs, better pricing of raw material costs and changes in
production mix.
We modified our estimate for recording inventory reserves during the
first quarter of fiscal year 2005 to apply estimated reserve percentages to
aging categories. The impact of this change in estimate resulted in a one-time
increase to cost of sales and decrease in gross profit of approximately $650,000
or a 0.8% decline in gross profit as a percentage of net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased
$605,000 (13.7%) to $3,798,000 (4.5% of net revenues) for the six months ended
April 3, 2005 as compared to $4,403,000 (7.2% of net revenues) for the six
months ended March 28, 2004. Demonstration and promotional expenses have
declined from previous levels as a result of a decline in sales to a customer
who required us to pay a portion of those costs. Accordingly, SG&A expenses
related to point-of-sale demonstration and promotional activity have declined.
These declines were offset by increases in professional fees and payroll, which
are expected to continue at their current levels. Barring changes in our sales
mix, we expect the current level of spending on demonstrations and promotions to
remain constant.
OPERATING INCOME. Operating income increased $3,466,000 (125.4%) to
$6,229,000 for the six months ended April 3, 2005 as compared to $2,763,000 for
the six months ended March 28, 2004 due to revenue growth and improvements in
production costs and SG&A expenses discussed above.
OTHER EXPENSES. Other expenses decreased $2,931,000 (46.2%) for the six
months ended April 3, 2005 to $3,420,000 as compared to $6,351,000 for the six
months ended March 28, 2004. The decrease was attributable to savings realized
from the debt refinancing discussed below. In particular, interest expense and
amortization costs declined 4.3% and 72.4%, respectively, for the six months
ended April 3, 2005 from the six months ended March 28, 2004. However, included
in other expenses for the six months ended March 28, 2004 was a substantially
noncash charge of $2,778,000 for debt extinguishment expenses related to the
write-off of deferred financing costs and debt issue costs in connection with
the October 2003 refinancing discussed below.
NET INCOME (LOSS). The net result for the six months ended April 3,
2005 was net income of $1,663,000 ($.11 per basic and diluted share) as compared
to a net loss of $2,228,000 ($.15 per basic and diluted share) for the six
months ended March 28, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is cash generated from our operating
activities. Our cash and cash equivalents increased $437,000 to $2,046,000 at
April 3, 2005 from $1,609,000 at September 26, 2004.
-17-
During the six months ended April 3, 2005, our operating activities
provided cash of $3,484,000 as compared to a use of cash of $3,924,000 during
the six months ended March 28, 2004. Cash generated from operations before
working capital changes was $4,042,000. Cash generated from changes in working
capital resulted from decreases of $1,604,000 and $260,000 in inventory and
prepaid expenses and other, respectively, and a $56,000 increase in accrued
liabilities, reduced by decreases in cash that resulted from an increase of
$2,072,000 in accounts receivable and a decrease in accounts payable of
$406,000. As of April 3, 2005, we had working capital of $16,153,000.
During the six months ended April 3, 2005, our investing activities
resulted in a use of cash of $575,000 as compared to a use of cash of $183,000
during the six months ended March 28, 2004. Current year additions to property
and equipment relate to the purchase of new machinery to automate certain
manufacturing processes. Capital expenditures for additional capacity will
likely increase in the second half of fiscal year 2005.
During the six months ended April 3, 2005, our financing activities
resulted in a use of cash of $2,473,000 as compared to cash provided of
$4,294,000 during the six months ended March 28, 2004. The use of cash during
the current fiscal year resulted from principal payments on our long-term debt.
The cash provided in the six months ended March 28, 2004 resulted primarily from
new borrowings, net of related deferred financing costs, in connection with the
debt refinancing in October 2003 (as discussed below), offset by principal
payments during the period on our long-term debt.
On October 31, 2003, we entered into debt refinancing arrangements with
LLCP and PSI. 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. The note has a base interest rate of 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 of October 31, 2006.
PSI has made two term loans to us. The senior Term A Loan, in the
principal amount of $17,800,000, has an annual interest rate on the in-formula
portion equal to the greater of 5.5% or the prime rate in effect from time to
time plus 1.5%. The $5,000,000 Term B Loan amortizes monthly and carried a base
interest rate of 12%. The interest rates on the Term A Loan and Term B Loan are
subject to increase upon the occurrence of any interest rate event, as defined
in the loan documents, or event of default as provided in the notes that
evidence those loans. The Term A Loan and the Term B Loan were to mature on
October 31, 2006. The maturity and interest rate of the Term B Loan were
subsequently amended, as discussed below. The prepayment terms of the Term A
Loan and the Term B Loan provide, among other things, that we will make
mandatory prepayments of annual excess cash flow, if any.
The amended and restated securities purchase agreement with LLCP and
the amended and restated loan and security agreement with PSI contain various
covenants, including financial covenants covering restrictions on capital
expenditures, minimum EBITDA and net worth levels, and specified debt service
and debt to equity ratios. In addition, those agreements prohibit changes in
control, including ownership and certain management personnel, and contain
customary restrictions on incurring indebtedness and liens, making investments,
paying dividends and making loans or advances. The obligations owing by us to
PSI and LLCP are secured by liens on substantially all of our assets.
On October 6, 2004, we executed the fourth amendment to the existing
financing arrangements with PSI and LLCP to amend the financial covenants and
various other provisions. Effective September 26, 2004, the new amendments to
the securities purchase agreement with LLCP and the loan and securities
agreement with PSI eliminated, for the first and second quarters of fiscal year
2005, the potential for a 2% increase in interest rates like the increase that
occurred on June 7, 2004, and reduced the base rate on the Term B Loan from 12%
to LIBOR plus 7.5%. In exchange, we agreed to increase our payment of principal
on the Term B Loan from $69,445 per month to specified monthly amounts ranging
from $254,445 to $274,445. Prior to this amendment, the Term B Loan was to have
a balance of $2.5 million due at maturity of the loan on October 31, 2006. Under
this amendment, the Term B Loan will be entirely paid off by January 31, 2006.
The increase in cash required for principal repayment is offset, in part, by
savings from the reduction in interest rates.
To counteract the dilutive effect of the proposed 2005 Stock Plan as
discussed in the our proxy statement for our 2005 annual meeting of
stockholders, we agreed to issue to LLCP 83,641 fully paid and non-assessable
shares of common stock subject to terms specified in the letter agreement dated
February 24, 2005 between LLCP and us ("LLCP Letter Agreement"). The LLCP Letter
Agreement also provides restrictions on the purchase price or exercise price of
the shares of our common stock that may be issued pursuant to awards under the
2005 Stock Plan. LLCP agreed in the LLCP Letter Agreement to vote all shares of
our voting capital stock beneficially owned by LLCP in favor of approval of the
2005 Stock Plan. The fair value of the 83,641 shares of common stock (based on
the closing sale price of a share of our common stock on February 1, 2005) of
$122,952 was expensed as a component of interest expense during the quarter
ended April 3, 2005.
-18-
We believe, based upon forecasted performance for fiscal year 2005,
that it is probable that we will be in compliance with all of the revised
financial and other covenant requirements. Accordingly, based upon projected
covenant compliance and as a result of the refinancing of the obligations
described above, all principal amounts payable to LLCP and to PSI, other than
currently scheduled principal payments, have been classified as long-term
liabilities in the accompanying balance sheet as April 3, 2005. 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 and could result in acceleration of maturity of the loans, 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 summary of our contractual obligations at April 3, 2005:
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL REMAINDER OF MORE THAN
OBLIGATIONS TOTAL FISCAL YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
-------------------- ----------- ----------- ----------- ----------- -----------
Debt maturities $48,600,144 $ 1,625,480 $46,974,664 $ -- $ --
Contractual obligations 14,162,233 1,168,773 4,048,651 2,896,564 6,048,245
Open purchase orders 33,048,086 24,139,136 8,908,950 -- --
----------- ----------- ----------- ----------- -----------
Total contractual
obligations $95,810,463 $26,933,389 $59,932,265 $ 2,896,564 $ 6,048,245
=========== =========== =========== =========== ===========
During the six months ended April 3, 2005, we made three voluntary
principal prepayments on our Term B Loan totaling $800,820.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK - OBLIGATIONS. We are subject to interest rate risk
on variable interest rate obligations. A hypothetical 10% increase in average
market interest rates would increase by approximately $155,000 annual interest
expense on our debt outstanding as of April 3, 2005. We are also subject to
interest rate risk on our fixed interest rate obligations. Based upon
outstanding amounts of fixed rate obligations as of April 3, 2005, a
hypothetical 10% decrease in average market interest rates would increase the
fair value of outstanding fixed rate debt by approximately $253,000.
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 April 3,
2005 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.
During the quarter ended April 3, 2005, 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.
-19-
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. 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
(a) Exhibits
Number Description
------ -----------
10.1 2005 Stock Plan of Overhill Farms, Inc. (1)
10.2 Form of Stock Option Agreement under 2005 Stock Plan (2)
10.3 Form of Restricted Stock Purchase Agreement under 2005
Stock Plan (1)
10.4 Letter Agreement dated February 24, 2005 between Levine
Leichtman Capital Partners II, L.P. and Overhill Farms,
Inc. regarding 2005 Stock Plan (2)
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 (3)
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 (3)
-----------
(1) Filed as an exhibit to our Form 8-K for February 1, 2005
and incorporated herein by reference.
(2) Filed as an exhibit to our Form 8-K for February 24,
2005 and incorporated herein by reference.
(3) Filed herewith.
-20-
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: April 27, 2005 By: /s/ James Rudis
-----------------------------------
James Rudis
Chairman, President and
Chief Executive Officer
Date: April 27, 2005 By: /s/ John L. Steinbrun
-----------------------------------
John L. Steinbrun
Senior Vice President and
Chief Financial Officer
-21-
EXHIBITS FILED WITH THIS FORM 10-Q
Number Description
- ------ -----------
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
-22-