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EX-31.1 - OVERHILL FARMS, INC. EXHIBIT 31.1 7-1-2012 - OVERHILL FARMS INCex31_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2012

OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 1-16699

OVERHILL FARMS, INC.
(Exact name of registrant as specified in its charter)

 
Nevada
 
75-2590292
 
 
(State or other jurisdiction of
 
(IRS Employer
 
 
incorporation or organization)
 
Identification Number)
 
         
 
2727 East Vernon Avenue
     
 
Vernon, California
 
90058
 
 
(Address of principal executive offices)
 
(Zip code)
 


(323) 582-9977
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

        Large Accelerated Filer [  ]
Accelerated Filer [  ]
        Non-Accelerated Filer [  ]
Smaller Reporting Company [X]
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]

As of August 14, 2012, there were 15,823,271 shares of the issuer’s common stock, $.01 par value, outstanding.

 


 
 

 

OVERHILL FARMS, INC.
FORM 10-Q
QUARTER ENDED JULY 1, 2012



TABLE OF CONTENTS

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

 
 

 

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



Assets

 
 
 
 
July 1,
 
October 2,
 
 
 
 
2012 
 
2011 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
$
 4,572,818 
 
$
 5,470,362 
 
Accounts receivable, net of allowance for doubtful accounts of $1,902
 
 15,516,451 
 
 
 13,700,034 
 
 
and $43,402 in 2012 and 2011, respectively
 
 
 
 
 
 
Inventories
 
 19,836,561 
 
 
 18,152,200 
 
Prepaid expenses and other
 
 1,817,254 
 
 
 2,013,222 
 
Deferred income taxes
 
 956,346 
 
 
 956,346 
 
 
 
Total current assets
 
 42,699,430 
 
 
 40,292,164 
 
 
 
 
 
 
 
 
 
Property and equipment, at cost:
 
 
 
 
 
 
Fixtures and equipment
 
 26,574,239 
 
 
 25,981,572 
 
Leasehold improvements
 
 12,574,408 
 
 
 12,757,679 
 
Automotive equipment
 
 90,461 
 
 
 92,886 
 
 
 
Property and equipment gross
 
 39,239,108 
 
 
 38,832,137 
 
Less accumulated depreciation and amortization
 
 (28,035,498)
 
 
 (25,686,444)
 
 
 
Total property and equipment
 
 11,203,610 
 
 
 13,145,693 
 
 
 
 
 
 
 
 
 
Other non-current assets:
 
 
 
 
 
 
Goodwill
 
 12,188,435 
 
 
 12,188,435 
 
Deferred financing costs, net of accumulated amortization of $546,359
 
 
 
 
 
 
 
and $489,129 at July 1, 2012 and October 2, 2011, respectively
 
 69,667 
 
 
 126,897 
 
Other
 
 1,253,490 
 
 
 1,556,656 
 
 
 
Total other non-current assets
 
 13,511,592 
 
 
 13,871,988 
 
 
 
 
 
 
 
 
 
Total assets
$
 67,414,632 
 
$
 67,309,845 

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

1

 
 

 


 
 
 
 
 
 
 
 
 
OVERHILL FARMS, INC.
CONDENSED BALANCE SHEETS (continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 1,
 
 
October 2,
 
 
 
 
 
2012 
 
 
2011 
 
 
 
 
 
(Unaudited)
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
$
 11,437,775 
 
$
 10,586,162 
 
Accrued liabilities
 
 4,242,975 
 
 
 3,820,199 
 
 
 
Total current liabilities
 
 15,680,750 
 
 
 14,406,361 
 
 
 
 
 
 
 
 
 
Long-term accrued liabilities
 
 684,770 
 
 
 616,890 
Deferred tax liabilities
 
 1,001,199 
 
 
 1,001,199 
Long-term debt
 
 6,742,647 
 
 
 10,772,647 
 
 
 
Total liabilities
 
 24,109,366 
 
 
 26,797,097 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
Preferred stock, $0.01 par value, authorized 50,000,000 shares, 4.43
 
 
 
 
 
 
 
designated as Series A Convertible Preferred Stock, 0 shares
 
 
 
 
 
 
 
 issued and outstanding
 
 - 
 
 
 - 
 
Common stock, $0.01 par value, authorized 100,000,000 shares, 15,823,271
 
 
 
 
 
 
 
shares issued and outstanding at July 1, 2012 and October 2, 2011
 
 158,233 
 
 
 158,233 
 
Additional paid-in capital
 
 11,558,479 
 
 
 11,558,479 
 
Retained earnings
 
 31,588,554 
 
 
 28,796,036 
 
 
 
Total stockholders’ equity
 
 43,305,266 
 
 
 40,512,748 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders’ equity
$
 67,414,632 
 
$
 67,309,845 

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

2

 
 

 

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

 
 
 
For the Quarter Ended
 
 
 
July 1,
 
 
July 3,
 
 
 
2012 
 
 
2011 
 
 
 
 
 
 
 
Net revenues
$
 50,364,881 
 
$
 39,666,756 
Cost of sales
 
 46,250,525 
 
 
 37,692,943 
Gross profit
 
 4,114,356 
 
 
 1,973,813 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 2,928,864 
 
 
 2,520,145 
 
 
 
 
 
 
 
Operating income (loss)
 
 1,185,492 
 
 
 (546,332)
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Interest expense
 
 (67,471)
 
 
 (51,885)
 
Amortization of deferred financing costs
 
 (13,933)
 
 
 (27,158)
Total interest expense
 
 (81,404)
 
 
 (79,043)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense (benefit)
 
 1,104,088 
 
 
 (625,375)
 
 
 
 
 
 
 
Income tax expense (benefit)
 
 405,963 
 
 
 (293,404)
 
 
 
 
 
 
 
Net income (loss)
$
 698,125 
 
$
 (331,971)
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
Basic
$
 0.04 
 
$
 (0.02)
 
Diluted
$
 0.04 
 
$
 (0.02)
 
 
 
 
 
 
 
Shares used in computing net income per share:
 
 
 
 
 
 
Basic
 
 15,823,271 
 
 
 15,823,271 
 
Diluted
 
 16,029,032 
 
 
 15,823,271 

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

3

 
 

 

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

 
 
 
For the Nine Months Ended
 
 
 
July 1,
 
 
July 3,
 
 
 
2012 
 
 
2011 
 
 
 
 
 
 
 
Net revenues
$
 148,076,374 
 
$
 124,967,766 
Cost of sales
 
 134,573,791 
 
 
 113,492,700 
Gross profit
 
 13,502,583 
 
 
 11,475,066 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 8,824,760 
 
 
 6,834,066 
 
 
 
 
 
 
 
Operating income
 
 4,677,823 
 
 
 4,641,000 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
Interest expense
 
 (200,913)
 
 
 (168,330)
 
Amortization of deferred financing costs
 
 (54,646)
 
 
 (82,546)
Total interest expense
 
 (255,559)
 
 
 (250,876)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 4,422,264 
 
 
 4,390,124 
 
 
 
 
 
 
 
Income taxes
 
 1,629,746 
 
 
 1,591,164 
 
 
 
 
 
 
 
Net income
$
 2,792,518 
 
$
 2,798,960 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
Basic
$
 0.18 
 
$
 0.18 
 
Diluted
$
 0.17 
 
$
 0.17 
 
 
 
 
 
 
 
Shares used in computing net income per share:
 
 
 
 
 
 
Basic
 
 15,823,271 
 
 
 15,823,271 
 
Diluted
 
 16,020,495 
 
 
 16,055,684 
 
 
 
 
 
 
 

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

4

 
 

 

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

 
 
 
 
 
For the Nine Months Ended
 
 
 
 
 
July 1,
 
July 3,
 
 
 
 
 
2012 
 
2011 
 
 
 
 
 
 
 
 
 
 
Operating Activities:
 
 
 
 
 
 
Net income
$
 2,792,518 
 
$
 2,798,960 
 
Adjustments to reconcile net income to net cash provided by
 
 
 
 
 
 
 
operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 2,571,745 
 
 
 2,866,946 
 
 
 
Amortization of deferred financing costs
 
 57,230 
 
 
 82,548 
 
 
 
Recovery of doubtful accounts
 
 (41,500)
 
 
 - 
 
 
 
Gain on sale of property and equipment
 
 (2,680)
 
 
 - 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 (1,774,916)
 
 
 1,850,477 
 
 
 
 
Inventories
 
 (1,684,361)
 
 
 (6,271,868)
 
 
 
 
Prepaid expenses and other assets
 
 389,402 
 
 
 (51,045)
 
 
 
 
Accounts payable
 
 851,613 
 
 
 2,579,816 
 
 
 
 
Accrued liabilities
 
 422,775 
 
 
 203,987 
Net cash provided by operating activities
 
 3,581,826 
 
 
 4,059,821 
 
 
 
 
 
 
 
 
 
 
Investing Activities:
 
 
 
 
 
 
Additions to property and equipment
 
 (452,050)
 
 
 (923,987)
 
Proceeds from sale of property and equipment
 
 2,680 
 
 
 - 
Net cash used in investing activities
 
 (449,370)
 
 
 (923,987)
 
 
 
 
 
 
 
 
 
 
Financing Activities:
 
 
 
 
 
 
Principal payments on debt
 
 (4,030,000)
 
 
 (5,525,000)
 
Deferred financing costs
 
 - 
 
 
 (1,117)
Net cash used in financing activities
 
 (4,030,000)
 
 
 (5,526,117)
 
 
 
 
 
 
 
 
 
 
Net decrease in cash
 
 (897,544)
 
 
 (2,390,283)
Cash at beginning of period
 
 5,470,362 
 
 
 5,967,741 
Cash at end of period
$
 4,572,818 
 
$
 3,577,458 
 
 
 
 
 
 
 
 
 
 
Supplemental Schedule of Cash Flow Information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
$
 193,665 
 
$
 166,544 
 
Income taxes
$
 1,235,036 
 
$
 1,671,065 

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

5

 
 

 

OVERHILL FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
July 1, 2012
(Unaudited)

1.
NATURE OF BUSINESS AND ORGANIZATIONAL MATTERS

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

2.
BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the quarter and nine months ended July 1, 2012 are not necessarily indicative of the results that may be expected for the Company’s fiscal year ending September 30, 2012 or for any other period.

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

The condensed balance sheet at October 2, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended October 2, 2011.

3.
RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

 
4.
INVENTORIES

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

 
 
July 1,
 
October 2,
 
 
 
2012 
 
2011 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Raw ingredients
$
 5,986,357 
 
$
 5,978,588 
 
 
Finished product
 
 11,924,713 
 
 
 10,208,600 
 
 
Packaging
 
 1,925,491 
 
 
 1,965,012 
 
 
 
$
 19,836,561 
 
$
 18,152,200 
 

5.
LONG-TERM DEBT

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

 
 
 
 
 
 
 
 
July 1,
 
October 2,
 
 
 
2012 
 
2011 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank of America Revolver
$
 6,742,647 
 
$
 10,772,647 
 
 
 
$
 6,742,647 
 
$
 10,772,647 
 

The Company executed a senior secured credit agreement with Bank of America on September 24, 2010.  The facility is structured as a $30 million three-year senior secured revolving credit facility, secured by a first priority lien on substantially all the Company’s assets.  The Company made an initial loan drawdown of $13.2 million on September 24, 2010, which was used to pay off the Company’s prior credit facility.  Under the Bank of America facility the Company has the ability to increase the aggregate amount of the financing by $20 million (for an aggregate of $50 million) under certain conditions.

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

 
 
 
 
 
 
Ratio of aggregate outstanding funded
commitments under the facility (including letter
of credit obligations) to EBITDA for the
preceding four quarters
 
Applicable Margin
 
 
Greater than or equal to 1.50:1
 
2.00%
 
 
 
 
 
 
 
Greater than or equal to 0.50:1
 
 
 
 
but less than 1.50:1
 
1.75%
 
 
 
 
 
 
 
Less than 0.50:1
 
1.50%
 
 
         As of July 1, 2012, there was $6.7 million outstanding under the Bank of America facility with an applicable interest rate of 2.2%.  In addition, the Company pays an unused line fee equal to 0.25% per annum.  For the first nine months of fiscal years 2012 and 2011, the Company incurred $201,000 and $168,000, respectively, in interest expense, excluding amortization of deferred financing costs.  As of July 1, 2012, the Company had $23.3 million available to borrow under the Bank of America facility, subject to certain covenant requirements.  During the first half of fiscal year 2012, the Company reduced the outstanding balance of the facility by voluntary payments of $4.0 million.
 
        The Bank of America facility contains covenants whereby, among other things, the Company is required to maintain compliance with agreed levels of fixed charge coverage and total leverage.  The facility also contains customary restrictions on incurring indebtedness and liens, making investments and paying dividends.  As of July 1, 2012, the Company was in compliance with the amended covenant requirements of the Bank of America facility.
 
 
 
 
7
 
 

 
6.
PER SHARE DATA

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

 
 
 
 
Quarter Ended
 
 
 
 
(unaudited)
 
 
 
 
July 1,
 
July 3,
 
 
 
 
2012 
 
2011 
Basic EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
 698,125 
 
$
 (331,971)
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Total shares
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Basic EPS
$
 0.04 
 
$
(0.02)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
 698,125 
 
$
 (331,971)
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
Incremental shares from assumed
 
 
 
 
 
 
 
exercise of stock options
 
 205,761 
 
 
 - 
 
 
 
Total shares
 
 16,029,032 
 
 
 15,823,271 
 
 
 
Diluted EPS
$
 0.04 
 
$
(0.02)

 
 
 
 
Nine Months Ended
 
 
 
 
(unaudited)
 
 
 
 
July 1,
 
July 3,
 
 
 
 
2012 
 
2011 
Basic EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 2,792,518 
 
$
 2,798,960 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Total shares
 
 15,823,271 
 
 
 15,823,271 
 
 
 
Basic EPS
$
0.18 
 
$
0.18 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS Computation:
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
 2,792,518 
 
$
 2,798,960 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 15,823,271 
 
 
 15,823,271 
 
Incremental shares from assumed
 
 
 
 
 
 
 
exercise of stock options
 
 197,224 
 
 
 232,413 
 
 
 
Total shares
 
 16,020,495 
 
 
 16,055,684 
 
 
 
Diluted EPS
$
0.17 
 
$
0.17 

7.
INCOME TAXES

The Company accounts for any uncertainty in income taxes based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The balance of unrecognized tax benefits was zero as of July 1, 2012 and October 2, 2011.

The Company recognizes interest and penalties, if any, as part of income taxes. The total amount of interest and penalties recognized in the statements of income was zero for the quarters and nine months ended July 1, 2012 and July 3, 2011.
 
 
 
 
8
 
 

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

The effective tax rates were 36.9% and 36.2% for the first nine months of fiscal years 2012 and 2011, respectively.

8.
CONTINGENCIES

Legal Proceedings

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

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

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

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

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

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

Agustiana, et al. v. Overhill Farms.

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

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

On May 12, 2010, Alma Salinas filed a separate purported “class action” in Los Angeles County Superior Court against the Company in which she asserted claims on behalf of herself and all other similarly situated current and former production workers for failure to provide meal periods, failure to provide rest periods, failure to pay minimum wage, failure to make payments within the required time, unfair business practice in violation of Section 17200 of the California Business and Professions Code and Labor Code Section 2698 (known as the Private Attorney General Act (“PAGA”)). Salinas is a former employee who had been terminated because she had used an invalid social security number in connection with her employment with the Company. Salinas sought allegedly unpaid wages, waiting time penalties, PAGA penalties, interest and attorneys’ fees, the amounts of which are unspecified. The Salinas action has been consolidated with the Agustiana action. The plaintiffs thereafter dropped their rest break and PAGA claims when they filed a consolidated amended complaint.
 
 
 
9
 
 

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

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

On June 26, 2012, the court denied the plaintiffs’ motion to certify the case as a class action.  The five remaining plaintiffs can pursue their individual wage claims against the Company, but the court has ruled that they cannot assert those claims on behalf of the class of current and former production employees they sought to represent.  The Company believes it has valid defenses to the plaintiffs’ remaining claims, and that the Company paid all wages due to these employees.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with a major financial institution. The account balances as of July 1, 2012 exceeded the Federal Deposit Insurance Corporation insurance limits.  If the financial banking markets experience disruption, the Company may need to temporarily rely on other forms of liquidity, including borrowing under its credit facility.

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables.  The Company performs on-going credit evaluations of each customer’s financial condition and generally requires no collateral from its customers.  A bankruptcy or other significant financial deterioration of any customer could impact its future ability to satisfy its receivables with the Company.  Allowance for doubtful accounts is calculated based primarily upon historical bad debt experience and current market conditions.  For the first nine months of fiscal years 2012 and 2011, write-offs, net of recoveries, to the allowance for doubtful accounts were immaterial.

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

 
Net Revenues
 
 
 
(unaudited)
 
 
 
 
 
July 1,
 
July 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc.
 
29%
 
26%
 
 
 
Jenny Craig, Inc.
 
21%
 
31%
 
 
 
Safeway Inc.
 
15%
 
15%
 
 

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

 
Receivables
 
 
 
(unaudited)
 
 
 
 
 
July 1,
 
July 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc. (through its distributors)
 
36%
 
32%
 
 
 
Jenny Craig, Inc.
 
16%
 
27%
 
 
 
Bellisio Foods, Inc. (for various third party customers)
 
18%
 
0%
 
 
 
Safeway Inc.
 
12%
 
12%
 
 

9.
RELATED PARTY TRANSACTIONS

In February 2004, the Company engaged Alexander Auerbach & Co., Inc. (“AAPR”) to provide the Company with public relations and marketing services.  AAPR provides public relations, media relations and communications marketing services to support the Company’s sales activities.  Alexander Auerbach, who is a director and stockholder of the Company, is a stockholder, director and officer of AAPR.  Fees paid to AAPR for services rendered under this engagement during the first nine months of fiscal years 2012 and 2011 were $41,000 and $47,000, respectively.
 
 
 
10
 
 

 
10.
FINANCIAL INSTRUMENTS

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

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

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

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

The carrying amount of the Company’s financial instruments, which are not marked to fair value at each reportable date and principally include trade receivables and accounts payable, approximate fair value due to the relatively short maturity of such instruments.  The Company believes the carrying value of the debt approximates the fair value at both July 1, 2012 and October 2, 2011, as the debt bears interest at variable rates based on prevailing market conditions.  As of July 1, 2012, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on variable rate debt approximated rates currently available to the Company.

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

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

11.
COLLABORATIVE ARRANGEMENT

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

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

The agreement is considered a collaborative arrangement between the Company and Bellisio regarding the co-manufacture, sale and distribution of Boston Market products.  The agreement provides that the Company and Bellisio will each manufacture approximately 50% of the total production volume of current and future Boston Market products during the term of the agreement. The Company began its manufacturing in June 2011, and Bellisio began its manufacturing in August 2011 at its Jackson, Ohio facility.
 
11
 
 

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

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

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

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

 
 
 
 
 
 
 
 
For the Quarter Ended
 
 
 
 
July 1, 2012
 
 
 
 
 
 
 
Net Revenues
$
 8,419,763 
 
 
 
 
 
 
 
Cost of Sales
$
 7,161,825 
 
 
 
 
 
 
 
Gross Profit
$
 1,257,938 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
 799,299 
 
 
 
 
 
 
 
Net income
$
 458,639 
 

In addition to the expenses noted above, during the third quarter of fiscal year 2012, the Company incurred marketing expenses of $45,000.

 
 
 
 
 
 
 
 
For the Nine Months Ended
 
 
 
 
July 1, 2012
 
 
 
 
 
 
 
Net Revenues
$
 23,586,254 
 
 
 
 
 
 
 
Cost of Sales
$
 20,863,215 
 
 
 
 
 
 
 
Gross Profit
$
 2,723,039 
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
 2,294,426 
 
 
 
 
 
 
 
Net income
$
 428,613 
 

In addition to the expenses noted above, during the first nine months of fiscal year 2012, the Company incurred marketing expenses of $167,000.

12.
SUBSEQUENT EVENTS

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements, and concluded no subsequent events occurred that require recognition or disclosure.
 
12
 
 

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

Forward-Looking Statements

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

·  
the uncertainty of the domestic economic outlook;

·  
the impact of competitive product and pricing;

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

·  
the impact of rising fuel pricing and surcharges;

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

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

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

·  
seasonality in the retail category;

·  
loss of key customers due to competitive environment or production being self-manufactured by customers with such capabilities;

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

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

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

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

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

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

·  
voluntary or government-mandated food recalls;

·  
effects of legal proceedings or labor disputes in which we are or may become involved from time to time; and
 
 
13
 
 

 
·  
other factors discussed in this report and other reports we file with the Securities and Exchange Commission (“Commission”), including those described in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended October 2, 2011 and any updates to that report.

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

Overview

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

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

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

·  
investing in and operating efficient production facilities;

·  
providing value-added ancillary support services to customers;
 
·  
offering a broad range of products to customers in multiple channels of distribution; and
 
·  
exploring strategic acquisitions and investments and other shareholder value enhancement initiatives.

Despite some seasonality as consumers purchase fewer frozen meals during warmer summer months, we were profitable with significant improvements in gross margin and net revenues in our third quarter of fiscal year 2012, which ended on July 1, 2012 compared to our third quarter of fiscal year 2011.  The improved financial results for our third quarter of fiscal year 2012 as compared our third quarter of fiscal year 2011 was largely due to the addition of the Boston Market frozen food line during fiscal year 2012.  While we are pleased with the progress of this significant and profitable line we have not, as of our third quarter for the fiscal year 2012, reached the targeted profit potential for this important part of our business.

The initial launch of the Boston Market frozen food line was impacted by both higher than normal commodity prices and fuel costs.  Since our launch, we have taken a number of actions to improve profitability and are implementing additional cost saving initiatives, which we anticipate will have a positive impact in the near term.  For the long term, we are reviewing several distribution model alternatives to mitigate the significant freight costs of moving the products we produce to retailers who sell the Boston Market frozen food line (which are mostly located in the eastern half of the United States).  For the third quarter of fiscal year 2012, the freight cost of shipping and warehousing Boston Market products from our facility to customers was $1.4 million.

Gross profit, both in dollars and as a percentage of revenues (gross margin), was higher due to increased production efficiencies and yields as a result of higher production runs during our third quarter of fiscal year 2012. These were partially offset by higher freight costs driven by higher fuel and energy cost.

 
 
14
 
 

 
Net revenues of $50.4 million for the third quarter of fiscal year 2012 reflected an increase of $10.7 million or 27.0% compared to the third quarter of fiscal year 2011. The retail category increased $5.8 million due primarily to $8.4 million in sales of our portion of Boston Market products (sold to numerous retail accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $2.4 million. The foodservice category increased $5.5 million or 47.4% due primarily to increased sales to the Panda Restaurant Group, Inc. (“Panda Restaurant Group”).  The airline category decreased by $661,000 or 33.1%.  We continue to be optimistic and anticipate further growth in net revenues as we continue to improve sales of the Boston Market brand products, increase foodservice sales, introduce new initiatives and benefit from any improvement in the economy.

Gross profit was $4.1 million for the third quarter of fiscal year 2012, compared to $2.0 million for the third quarter of fiscal year 2011.  Gross margin (gross profit as a percentage of net revenues) increased to 8.1% for the third quarter of fiscal year 2012, from 5.0% for the third quarter of fiscal year 2011. Increases in gross profit dollars and margin are due largely to increased production efficiencies and yields as a result of higher volume production runs. These were partially offset by increased freight and storage expense of $1.3 million due primarily to shipments for Boston Market products in the third quarter of fiscal year 2012 (there were no similar freight and storage costs in the third quarter of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).  We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.

Operating income for the third quarter of fiscal year 2012 was $1.2 million (2.4% of net revenues), up $1.7 million compared to an operating loss of $546,000 (1.4% of net revenues) for the third quarter of fiscal year 2011, due primarily to higher gross margin as noted above partially offset by higher selling, general and administrative (“SG&A”) expenses, although SG&A did decrease as a percentage of net revenues.  SG&A increased $409,000 to $2.9 million (5.8% of net revenues) for the third quarter of fiscal year 2012, from $2.5 million (6.3% of net revenues) for the third quarter of fiscal year 2011, primarily due to higher brokerage and royalty expenses of $486,000 and $352,000, respectively. These increases were offset by decreases of $175,000 for start up brokerage and management fees paid to Bellisio Foods and $134,000 associated with one-time start up marketing expenses incurred in the third quarter of fiscal year 2011 in relation with the launch of the Boston Market product line. In addition, we had decreases in our license fee amortization expense and travel expense of $65,000 and $36,000 respectively.  We expect SG&A expenses to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.
 
Net income for the third quarter of fiscal year 2012 was $698,000 (1.4% of net revenues), compared to net loss of $332,000 million (0.8% of net revenues) for the third quarter of fiscal year 2011, due to higher operating income partially offset by an increase in income tax expense.

For the first nine months of fiscal year 2012, net revenues of $148.1 million reflected a 18.5% increase compared to the first nine months of fiscal year 2011.  Retail net revenues increased $14.6 million primarily due to $23.6 million in our portion of sales of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $7.7 million.  Foodservice net revenues increased $9.7 million or 26.4% due to increased sales to Panda Restaurant Group. These increases were partially offset by a decrease in airline net revenues of $1.2 million or 19.7%.

Gross profit was $13.5 million for the first nine months of fiscal year 2012, compared to $11.5 million for the first nine months of fiscal year 2011.  Gross margin remained relatively unchanged at 9.1% for the first nine months of fiscal years 2012 compared to gross margin of 9.2% for the first nine months of fiscal year 2011.  The increase in gross profit dollars was driven largely by increased sales volume plus production efficiencies as a result of higher volume production runs and more favorable commodity pricing. These were partially offset by increased freight and storage expense of $3.6 million, which reduced the gross margin, due primarily to shipments for Boston Market products in the first nine months of fiscal year 2012 (there were no similar storage costs in the first nine months of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).

Operating income for the first nine months of fiscal year 2012 was $4.7 million (3.2% of net revenues), compared to $4.6 million (3.7% of net revenues) for the first nine months of fiscal year 2011, due primarily to higher gross profit dollars as described above partially offset by higher SG&A expenses.  SG&A expenses for the first nine months of fiscal year 2012 increased by $2.0 million compared to the first nine months of fiscal year 2011 due primarily to higher brokerage and royalty expenses of $1.2 million and $1.0 million, respectively, related to the Boston Market brand. These increases were partially offset by a decrease to our license fee amortization expense of $201,000. We expect SG&A expense to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Net income for the first nine months of fiscal years 2012 and 2011 was $2.8 million in each such period, or 1.9% of net revenues for fiscal year 2012 compared to 2.2% of net revenues for fiscal year 2011.
 
 
15
 
 

 
Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  See Note 2 to the financial statements contained in our annual report on Form 10-K for the year ended October 2, 2011 for a summary of our significant accounting policies.  Management believes the following critical accounting policies are related to our more significant estimates and assumptions used in the preparation of our financial statements.

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

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

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

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

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

Goodwill.  We evaluate goodwill at least annually for impairment.  We have one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow analysis, market capitalization, and other market-based data.  As of July 1, 2012, we had goodwill of $12.2 million.  A deterioration of our operating results and the related cash flow effect could decrease the estimated fair value of our business and, thus, cause our goodwill to become impaired and cause us to record a charge against operations in an amount representing the impairment.

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

We account for uncertainty in income taxes based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The balance of unrecognized tax benefits was zero as of July 1, 2012 and October 2, 2011.

We recognize interest and penalties as part of income taxes.  No interest and penalties were recognized in the statement of income for the first nine months of fiscal year 2012.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with a major financial institution. The account balances as of July 1, 2012 exceeded the Federal Deposit Insurance Corporation insurance limits.  If the financial banking markets experience disruption, we may need to temporarily rely on other forms of liquidity, including borrowing under our credit facility.

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

16
 
 
 

 
A significant portion of our total net revenues during the first nine months of fiscal years 2012 and 2011 were derived from three customers as described below:


 
Net Revenues
 
 
 
(unaudited)
 
 
 
 
 
July 1,
 
July 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc.
 
29%
 
26%
 
 
 
Jenny Craig, Inc.
 
21%
 
31%
 
 
 
Safeway Inc.
 
15%
 
15%
 
 

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

 
Receivables
 
 
 
(unaudited)
 
 
 
 
 
July 1,
 
July 3,
 
 
 
Customer
 
2012 
 
2011 
 
 
 
Panda Restaurant Group, Inc. (through its distributors)
 
36%
 
32%
 
 
 
Jenny Craig, Inc.
 
16%
 
27%
 
 
 
Bellisio Foods, Inc. (for various third party customers)
 
18%
 
0%
 
 
 
Safeway Inc.
 
12%
 
12%
 
 

Results of Operations

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

Quarter Ended July 1, 2012 Compared to Quarter Ended July 3, 2011

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

Net Revenues.  Net revenues for the third quarter of fiscal year 2012 increased $10.7 million (27.0%) to $50.4 million from $39.7 million for the third quarter of fiscal year 2011 due to higher sales volume in retail and foodservice categories partially offset by decreases in airline net revenues.

Retail net revenues increased $5.8 million (22.2%) to $31.9 million for the third quarter of fiscal year 2012 from $26.1 million for the third quarter of fiscal year 2011.  The increase in retail net revenues was primarily due to sales of our portion of Boston Market branded products (sold to various third party customers) of $8.4 million partially offset by reduced sales to Jenny Craig, Inc. of $2.4 million. The decrease in sales to Jenny Craig, Inc. was due to their inventory management plans and the slow economic recovery.

Foodservice net revenues increased $5.5 million (47.4%) to $17.1 million for the third quarter of fiscal year 2012 from $11.6 million for the third quarter of fiscal year 2011 due primarily to increased sales volume to Panda Restaurant Group of $5.5 million.  We continue to increase our sales efforts in this category and believe that foodservice represents a significant opportunity for us in 2012 and beyond, through increased sales to a major existing account and new initiatives. 

Airline net revenues decreased $661,000 (33.1%) to $1.4 million for the third quarter of fiscal year 2012 from $2.0 million for the third quarter of fiscal year 2011 due to decreased sales to an existing customer stemming from continuing airline industry initiatives to cut costs.

Gross Profit. Gross profit for the third quarter of fiscal year 2012 increased by $2.1 million (105.0%) to $4.1 million for the third quarter of fiscal year 2012 from $2.0 million for the third quarter of fiscal year 2011.  Gross margin increased to 8.1% of net sales for the third quarter of fiscal year 2012 from 5.0% for the third quarter of fiscal year 2011. Increases to gross profit dollars and margin are due largely to increased sales volume and production efficiencies and yields as a result of higher volume production runs. These were partially offset by increased freight and storage expense of $1.3 million due primarily to shipments for Boston Market products in the third quarter of fiscal year 2012 (there were no similar freight and storage costs in the third quarter of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).  We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.
 
 
17
 
 

 
Selling, General and Administrative Expenses.  SG&A expenses increased $409,000 (16.4%) to $2.9 million (5.8% of net revenues) for the third quarter of fiscal year 2012 from $2.5 million (6.3% of net revenues) for the third quarter of fiscal year 2011 but decreased as a percentage of net revenues.  SG&A expenses increased during the third quarter of fiscal year 2012 compared to the third quarter of fiscal year 2011 due to higher brokerage and royalty expenses primarily related to the Boston Market brand of $486,000 and $352,000, respectively. These increases were partially offset by decreases of $175,000 for start up brokerage and management fees paid to Bellisio Foods and $134,000 associated with one-time start up marketing expenses incurred in the third quarter of fiscal year 2011 in relation with the launch of the Boston Market product line. In addition, we had a decrease in our license fee amortization expense of $65,000 due to the write-off of the Better Living Brands tm Alliance (“Alliance”) license fee intangible asset during the fourth quarter of fiscal year 2011.  We expect SG&A expenses to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Operating Income.  Operating income increased $1.7 million to $1.2 million (2.4% of net revenues) for the third quarter of fiscal year 2012 from an operating loss of $546,000 (1.4% of net revenues) for the third quarter of fiscal year 2011.  The increase in operating income was the result of higher gross margin slightly offset by higher SG&A expenses as noted above.

Total Interest Expense.  Total interest expense for the third quarter of fiscal year 2012 was $81,000, compared to $79,000 for the third quarter of fiscal year 2011.

Income Tax Provision (benefit). Income tax expense was $406,000 for the third quarter of fiscal year 2012, compared to an income tax benefit of $293,000 for the third quarter of fiscal year 2011.  The difference was a result of income before taxes increasing $1.7 million from a loss of $625,000 for the third quarter of fiscal year 2011 to income before taxes of $1.1 million for the third quarter of fiscal year 2012.  The effective tax rate was 36.8% for the third quarter of fiscal year 2012 compared to a tax benefit of 46.9% for the third quarter of fiscal year 2011.

Net Income. Net income for the third quarter of fiscal year 2012 was $698,000 or $0.04 per basic and diluted share, compared to a net loss of $332,000, or $(0.02) per basic and diluted share, for the third quarter of fiscal year 2011.
 
Nine Months Ended July 1, 2012 Compared to Nine Months Ended July 3, 2011

The nine month period ended July 1, 2012 was a 39 week period compared to the nine month period ended July 3, 2011 which was a 40 week period.
 
         Net Revenues.  Net revenues increased $23.1 million (18.5%) to $148.1 million for the first nine months of fiscal year 2012 from $125.0 million for the first nine months of fiscal year 2011, despite there being one fewer week in the period, due to increases in retail and foodservice net revenues partially offset by decrease in airline net revenues.
 
         Retail net revenues increased $14.6 million (17.8%) to $96.7 million for the first nine months of fiscal year 2012 from $82.1 million for the first nine months of fiscal year 2011.  The increase in retail net revenues was largely due to $23.6 million in sales of our portion of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $7.7 million. The decrease to Jenny Craig, Inc. was due to their inventory management plans and a slow economic recovery.
 
         Foodservice net revenues increased $9.7 million (26.4%) to $46.5 million for the first nine months of fiscal year 2012 from $36.8 million for the first nine months of fiscal year 2011.  The increase was attributable primarily to increased sales volume to Panda Restaurant Group of $9.4 million. We continue our sales efforts in this category and continue to believe that foodservice represents a significant opportunity for us through increased sales to a major existing account and new initiatives.
 
        Airline net revenues decreased $1.2 million (19.7%) to $4.9 million for the first nine months of fiscal year 2012 from $6.1 million for the first nine months of fiscal year 2011 due to decreased volume to an existing customer stemming from continuing airline industry initiatives to cut costs. Airline net revenues are likely to continue to decrease in future periods.
 
        Gross Profit.  Gross profit increased by $2.0 million (17.4%) to $13.5 million for the first nine months of fiscal year 2012 from $11.5 million for the first nine months of fiscal year 2011.  Gross margin remained relatively unchanged at 9.1% for the first nine months of fiscal year 2012 compared to 9.2% for the first nine months of fiscal year 2011. The increase in gross profit dollars was driven largely to increased sales volume and production efficiencies as a result of higher volume production runs and more favorable commodity pricing. These were offset by increased freight and storage expense of $3.6 million due primarily to shipments for Boston Market products in the first nine months of fiscal year 2012 (there were no similar storage costs in the first nine months of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).
 
 
18
 
 
 

 
         Selling, General and Administrative Expenses. SG&A expenses increased $2.0 million (29.4%) to $8.8 million (5.9% of net revenues) for the first nine months of fiscal year 2012 from $6.8 million (5.4% of net revenues) for the first nine months of fiscal year 2011. The increase in SG&A expenses were driven by higher brokerage and royalty expenses of $1.2 million and $1.0 million, respectively, related primarily to the Boston Market brand. These increases were partially offset by a decrease to our license fee amortization expense of $201,000 due to the write-off of the Better Living Brands tm Alliance (“Alliance”) license fee intangible asset during the fourth quarter of fiscal year 2011. We expect SG&A expense to remain at or near the current level as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.
 
        Operating Income.  Operating income increased $37,000 (0.8%) to $4.7 million for the first nine months of fiscal year 2012 from $4.6 million for the first nine months of fiscal year 2011.  The increase in operating income was the result of increased gross profit partially offset by higher SG&A expenses as noted above.
 
        Total Interest Expense.  Total interest expense for the first nine months of fiscal year 2012 was $256,000, compared to $251,000 for the first nine months of fiscal year 2011.
 
         Income Tax Provision.  Income tax expense was $1.6 million for the first nine months of fiscal year 2012 and 2011.  The effective tax rates were 36.9% for the first nine months of fiscal year 2012 and 36.2% for the first nine months of fiscal year 2011.
 
         Net Income. Net income for the first nine months of fiscal year 2012 and 2011 was $2.8 million, or $0.18 per basic and $0.17 per diluted share.

Liquidity and Capital Resources

During the first nine months of fiscal year 2012 and 2011, our operating activities provided cash of $3.6 million and $4.1 million, respectively.  Cash generated from operations before working capital changes for the first nine months of fiscal year 2012 was $5.4 million.  Cash used in changes in working capital was $1.8 million during the first nine months of fiscal year 2012 and resulted from increases to accounts receivable and inventory of $1.8 million and $1.7 million, respectively. The increases were driven by higher sales and inventory build up for Boston Market and other major customers. Changes in working capital were further impacted by a decrease to accrued liabilities by $423,000.  This was partially offset by increases in accounts payable of $852,000, as well as a decrease in prepaid and other expenses of $389,000.  As of July 1, 2012, we had working capital of $27.0 million compared to working capital of $25.9 million at fiscal year end 2011.  The increase in working capital was due primarily to increases in accounts receivable and inventory.  We were able to fund our operations in the first nine months of fiscal year 2012 internally while decreasing our external debt.

During the first nine months of fiscal year 2012, our investing activities, consisting primarily of capital expenditures, resulted in a net use of cash of approximately $449,000, compared to a net use of cash of approximately $924,000 during the first nine months of fiscal year 2011.  The property and equipment additions were made to accommodate additional business opportunities, meet anticipated growth and improve operating efficiency.

During the first nine months of fiscal year 2012, our financing activities resulted in a use of cash of $4.0 million, compared to a use of cash of $5.5 million during the first nine months of fiscal year 2011.  The use of cash during the first nine months of fiscal year 2012 was primarily the result of $4.0 million in voluntary payments we made on our revolving credit facility. The use of cash during the first six months of fiscal year 2011 was primarily due to $5.5 million in voluntary payments made on our revolving credit facility.

We believe that our cash, financial liquidity position and financial strength are sufficient to fund current working capital needs and future growth initiatives, including potential acquisitions and the expansion of the Boston Market products.
 
We executed a senior secured credit agreement with Bank of America on September 24, 2010.  The facility is structured as a $30 million three-year senior secured revolving credit facility, secured by a first priority lien on substantially all of our assets.  We made an initial loan drawdown of $13.2 million, which was used to pay off our prior credit facility.  Under the Bank of America facility, we have the ability to increase the aggregate amount of the financing by $20 million under certain conditions.

The Bank of America facility bears annual interest at the British Bankers Association LIBOR Rate, or LIBOR, plus an applicable margin (listed below). The margin was initially 1.75%.  Beginning January 1, 2011, and adjusted quarterly thereafter, the margin is calculated as follows:
 
 
19
 
 

 
 
 
 
 
 
 
Ratio of aggregate outstanding funded
commitments under the facility (including letter
of credit obligations) to EBITDA for the
preceding four quarters
 
Applicable Margin
 
 
Greater than or equal to 1.50:1
 
2.00%
 
 
 
 
 
 
 
Greater than or equal to 0.50:1
 
 
 
 
but less than 1.50:1
 
1.75%
 
 
 
 
 
 
 
Less than 0.50:1
 
1.50%
 
 
         As of July 1, 2012, there was $6.7 million outstanding under the Bank of America facility with an applicable interest rate of 2.2%.  In addition, we will pay an unused fee equal to 0.25% per annum.  For the first nine months of fiscal years 2012 and 2011, we incurred $201,000 and $168,000, respectively, in interest expense, excluding amortization of deferred financing costs.  During the first nine months of fiscal year 2012, we reduced the outstanding balance of the facility by $4.0 million in voluntary payments.  As of July 1, 2012, we had $23.3 million available to borrow under the new credit facility, subject to certain covenant requirements.
 
         Initial proceeds from the Bank of America facility, received September 24, 2010, were used to repay approximately $13.2 million in existing debt in connection with the termination of our former financing arrangements.
 
        The Bank of America facility contains covenants whereby, among other things, we are required to maintain compliance with agreed levels of fixed charge coverage and total leverage.  The facility also contains customary restrictions on incurring indebtedness and liens, making investments and paying dividends.
 
         As of July 1, 2012, we were in compliance with the amended covenant requirements of the Bank of America facility.  We believe it is probable that we will remain in compliance with all of those covenant requirements for the foreseeable future.  However, if we fail to achieve certain revenue, expense and profitability levels, a violation of the financial covenants under our financing arrangements could result, interest rate increases and acceleration of maturity of the loans could occur, which could adversely affect our financial condition, results of operations and/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 July 1, 2012:

 
 
 
Payments Due By Period
 
 
CONTRACTUAL OBLIGATIONS
 
Total
 
 
Remainder of Fiscal Year 2012
 
 
2-3 Years
 
 
4-5 Years
 
 
More than 5 Years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt maturities
$
 6,742,647 
 
$
 - 
 
$
 6,742,647 
 
$
 - 
 
$
 - 
 
 
Interest Expense(1)
 
 262,055 
 
 
 53,457 
 
 
 208,598 
 
 
 - 
 
 
 - 
 
 
Operating lease
    obligations(2)
 
 6,910,852 
 
 
 633,164 
 
 
 3,990,887 
 
 
 2,286,801 
 
 
 - 
 
 
Other Contractual
    obligations
 
 1,325,540 
 
 
 132,554 
 
 
 1,060,432 
 
 
 132,554 
 
 
 - 
 
 
Open purchase
    orders
 
 7,677,684 
 
 
 7,085,158 
 
 
 592,526 
 
 
 - 
 
 
 - 
 
 
Total contractual
    obligations
$
 22,918,778 
 
$
 7,904,333 
 
$
 12,595,090 
 
$
 2,419,355 
 
$
 - 
 
 
________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Assumes only mandatory principal pay-down and the use of LIBOR as of July 1, 2012 on the Bank of America debt.
 
 
(2)  Includes real estate leases.
 
 
 
20
 
 

 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk – Obligations.  We are subject to interest rate risk on variable interest rate obligations.  A hypothetical 10% increase in average market interest rates would increase by approximately $15,000 the annual interest expense on our debt outstanding as of July 1, 2012.

Item 4.
Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of July 1, 2012, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) are effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended July 1, 2012, there were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

 
 

 


PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

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

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

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

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

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

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

Agustiana, et al. v. Overhill Farms.

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

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

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

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

The remaining plaintiff added four former employees as additional plaintiffs.   Three of the four new plaintiffs are former employees that we terminated one month before this case was filed because they had used invalid social security numbers in connection with their employment with us.  The fourth new plaintiff has not worked for us since February 2007.
 
 
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On June 26, 2012, the court denied the plaintiffs’ motion to certify the case as a class action.  The five remaining plaintiffs can pursue their individual wage claims against the Company, but the court has ruled that they cannot assert those claims on behalf of the class of current and former production employees they sought to represent.  We believe we have valid defenses to the plaintiffs’ remaining claims, and that we paid all wages due to these employees.

Item 6.
Exhibits


 
Exhibit
Number
Description
     
     
 
31.1 (1)
Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
31.2 (1)
Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
32 (1)
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
(1)
 
 
Attached hereto.
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Schema Document
 
101.CAL
XBRL Calculation Linkbase Document
 
101.DEF
XBRL Definition Linkbase Document
 
101.LAB
XBRL Label Linkbase Document
 
101.PRE
XBRL Presentation Linkbase Document

23

 
 

 

SIGNATURES


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


                           
OVERHILL FARMS, INC.
                           
(Registrant)
                             
                             
Date: August 14, 2012
                       
By:
/s/ James Rudis
                           
James Rudis
                           
Chief Executive Officer
                           
(principal executive officer)
                             
                             
                             
Date:  August 14, 2012
                       
By:
/s/  Robert C. Bruning
                           
Robert C. Bruning
                           
Chief Financial Officer
                           
(principal financial officer)

24

 
 

 

EXHIBITS ATTACHED TO THIS FORM 10-Q



 
Exhibit
Number
Description
     
     
 
31.1
Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
31.2
Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
 
25