UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q


(Mark
One)


T
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended December 27, 2009





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 incorporation or organization)
            (IRS
      Employer Identification Number)2727
      East Vernon AvenueVernon,
      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 T 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 £ 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 T


(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 T





As of
February 3, 2010, there were 15,823,271 shares of the registrant’s common stock,
$.01 par value, outstanding.










OVERHILL FARMS, INC.


FORM
10-Q


QUARTER
ENDED DECEMBER 27, 2009










TABLE
OF CONTENTS





PART I – FINANCIAL
    INFORMATION
            Page No.Item
      1.
            Financial
      StatementsCondensed Balance Sheets as of December 27, 2009 (unaudited)
      and September 27, 2009
            2Condensed Statements of Income (unaudited) for the Quarters
      Ended December 27, 2009 and December 28, 2008
            4Condensed Statements of Cash Flows (unaudited) for the Quarters
      Ended December 27, 2009 and December 28, 2008
            5Notes to Condensed Financial Statements
      (unaudited)
            7Item
      2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            14Item
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            20Item
      4T.
            Controls and Procedures
            20PART II – OTHER INFORMATIONItem
      1.
            Legal Proceedings
            21Item
      6.
            Exhibits
            22SIGNATURES
            23EXHIBITS ATTACHED TO THIS FORM 10-Q
            24


1
 Table of Contents




Item
1.   Financial Statements





OVERHILL FARMS, INC.


CONDENSED
BALANCE SHEETS








Assets





December 27,
              2009
            
            
            September 27,
              2009(Unaudited)Current
      assets:Cash
            
            $
            4,853,317
            
            
            $
            5,430,295Accounts
      receivable, net of allowance for doubtful accounts of $12,000 and $15,000
      as of December 27, 2009 and September 27, 2009,
    respectively
            
            
            19,410,666
            
            
            
            17,854,041Inventories
            
            
            14,703,603
            
            
            
            15,263,224Prepaid
      expenses and other
            
            
            951,839
            
            
            
            1,859,173Deferred
      income taxes
            
            
            1,122,211
            
            
            
            1,122,211Total
      current assets
            
            
            41,041,636
            
            
            
            41,528,944Property
      and equipment, at cost:Fixtures
      and equipment
            
            
            25,060,328
            
            
            
            24,593,878Leasehold
      improvements
            
            
            11,424,687
            
            
            
            11,394,840Automotive
      equipment
            
            
            92,886
            
            
            
            44,60736,577,901
            
            
            
            36,033,325Less
      accumulated depreciation and amortization
            
            
            (20,051,239
            )
            
            
            (19,196,429
            )Total
      property and equipment
            
            
            16,526,662
            
            
            
            16,836,896Other
      non-current assets:Goodwill
            
            
            12,188,435
            
            
            
            12,188,435Deferred
      financing costs, net of accumulated amortization of $439,000 and $419,000
      as of December 27, 2009 and September 27, 2009,
    respectively
            
            
            146,494
            
            
            
            166,620Other
            
            
            2,797,373
            
            
            
            2,916,475Total
      other non-current assets
            
            
            15,132,302
            
            
            
            15,271,530Total
      assets
            
            $
            72,700,600
            
            
            $
            73,637,370








The
accompanying notes are an integral part


of these
condensed financial statements.


2
 Table of Contents


OVERHILL
FARMS, INC.


CONDENSED
BALANCE SHEETS (continued)








Liabilities
and Stockholders’ Equity





December 27,
              2009
            
            
            September 27,
              2009(Unaudited)Current
      liabilities:Accounts
      payable
            
            $
            10,229,997
            
            
            $
            9,338,604Accrued
      liabilities
            
            
            3,978,364
            
            
            
            3,272,770Current
      maturities of long-term debt
            
            
            2,999,295
            
            
            
            5,271,441Total
      current liabilities
            
            
            17,207,656
            
            
            
            17,882,815Long-term
      accrued liabilities
            
            
            483,523
            
            
            
            466,987Deferred
      tax liabilities
            
            
            1,899,658
            
            
            
            1,899,658Long-term
      debt, less current maturities, net of unamortized debt discount of
      $454,000 and $535,000 as of December 27, 2009 and September 27, 2009,
      respectively
            
            
            18,560,262
            
            
            
            21,891,204Total
      liabilities
            
            
            38,151,099
            
            
            
            42,140,664Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par value, authorized 50,000,000 shares, 0 shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.01 par value, authorized 100,000,000 shares, 15,823,271 shares
      issued and outstanding as of December 27, 2009 and September 27,
      2009
            
            
            158,233
            
            
            
            158,233Additional
      paid-in capital
            
            
            11,558,479
            
            
            
            11,558,479Retained
      earnings
            
            
            22,832,789
            
            
            
            19,779,994Total
      stockholders’ equity
            
            
            34,549,501
            
            
            
            31,496,706Total
      liabilities and stockholders’ equity
            
            $
            72,700,600
            
            
            $
            73,637,370








The
accompanying notes are an integral part


of these
condensed financial statements.


3
 Table of Contents


OVERHILL FARMS, INC.


CONDENSED
STATEMENTS OF INCOME


(Unaudited)





For the Quarter EndedDecember 27,
              2009
            
            
            December 28,
              2008Net
      revenues
            
            $
            56,232,538
            
            
            $
            55,272,029Cost
      of sales
            
            
            48,346,408
            
            
            
            47,764,510Gross
      profit
            
            
            7,886,130
            
            
            
            7,507,519Selling,
      general and administrative expenses
            
            
            2,561,781
            
            
            
            2,534,216Operating
      income
            
            
            5,324,349
            
            
            
            4,973,303Interest
      expense:Interest
      expense
            
            
            (331,114
            )
            
            
            (712,584
            )Amortization
      of debt discount and deferred financing costs
            
            
            (101,504
            )
            
            
            (101,504
            )Total
      interest expense
            
            
            (432,618
            )
            
            
            (814,088
            )Other
      expense
            
            
            (1,000
            )
            
            
            -Income
      before income taxes
            
            
            4,890,731
            
            
            
            4,159,215Income
      taxes
            
            
            1,837,936
            
            
            
            1,626,252Net
      income
            
            $
            3,052,795
            
            
            $
            2,532,963Net
      income per share:Basic
            
            $
            0.19
            
            
            $
            0.16Diluted
            
            $
            0.19
            
            
            $
            0.16Shares
      used in computing net income per share:Basic
            
            
            15,823,271
            
            
            
            15,823,271Diluted
            
            
            16,051,619
            
            
            
            16,018,339




The
accompanying notes are an integral part


of these
condensed financial statements.


4
 Table of Contents


OVERHILL FARMS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





For the Quarter EndedDecember 27,
              2009
            
            
            December 28,
              2008Operating
      Activities:Net
      income
            
            $
            3,052,795
            
            
            $
            2,532,963Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            986,810
            
            
            
            834,227Amortization
      of debt discount and deferred financing costs
            
            
            101,504
            
            
            
            101,504(Gain)
      loss on asset disposals
            
            
            (555
            )
            
            
            415(Recovery)
      provision for doubtful accounts
            
            
            (3,000
            )
            
            
            7,900Changes
      in:Accounts
      receivable
            
            
            (1,553,625
            )
            
            
            2,345,002Inventories
            
            
            559,621
            
            
            
            (2,786,533
            )Prepaid
      expenses and other assets
            
            
            924,501
            
            
            
            451,850Accounts
      payable
            
            
            891,393
            
            
            
            (2,037,375
            )Accrued
      liabilities
            
            
            705,594
            
            
            
            579,922Net
      cash provided by operating activities
            
            
            5,665,038
            
            
            
            2,029,875Investing
      Activities:Additions
      to property and equipment
            
            
            (558,188
            )
            
            
            (166,164
            )Proceeds
      from sale of property, plant and equipment
            
            
            637
            
            
            
            -Net
      cash used in investing activities
            
            
            (557,551
            )
            
            
            (166,164
            )




The
accompanying notes are an integral part


of these
condensed financial statements.


5
 Table of Contents


OVERHILL
FARMS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS (continued)


(Unaudited)





For the Quarter EndedDecember 27,
              2009
            
            
            December 28,
              2008Financing
      Activities:Principal
      payments on debt
            
            
            (5,625,000
            )
            
            
            (3,300,000
            )Principal
      payments on equipment loans
            
            
            (59,465
            )
            
            
            (55,181
            )Principal
      payments on capital lease obligation
            
            
            -
            
            
            
            (74,155
            )Net
      cash used in financing activities
            
            
            (5,684,465
            )
            
            
            (3,429,336
            )Net
      decrease in cash
            
            
            (576,978
            )
            
            
            (1,565,625
            )Cash
      at beginning of period
            
            
            5,430,295
            
            
            
            6,637,576Cash
      at end of period
            
            $
            4,853,317
            
            
            $
            5,071,951Supplemental
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
            
            $
            338,492
            
            
            $
            749,419Income
      taxes
            
            $
            -
            
            
            $
            -




The
accompanying notes are an integral part


of these
condensed financial statements.


6
 Table of Contents


OVERHILL FARMS, INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


December
27, 2009


(Unaudited)





1.
            NATURE
      OF BUSINESS AND ORGANIZATIONAL
MATTERS





Overhill
Farms, Inc. (the “Company” or “Overhill Farms”) is a leading 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 ended December 27, 2009 are not
necessarily indicative of the results that may be expected for the year ending
September 26, 2010 or for any other period.  Certain prior period
amounts have been reclassified to conform to the current period
presentation.





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 September 27, 2009 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
September 27, 2009.





3.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In
February 2008, the Financial Accounting
Standards Board (“FASB”)issued changes to fair value accounting
standards that permit a one-year deferral of the application of fair value
measurements for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The standard became
effective for the Company’s fiscal year that began on September 28,
2009.  The adoption of the standard did not have a material impact on
the Company’s financial position or results of operations.





In
December 2007, the FASB issued a standard on business combinations that
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and the
goodwill acquired. The standard also modifies the recognition for preacquisition
contingencies, such as environmental or legal issues, restructuring plans and
acquired research and development value in purchase accounting.  The
standard amends the standard on accounting for income taxes, and requires the
acquirer to recognize changes in the amount of its deferred tax benefits that
are recognizable because of a business combination either in income from
continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances.  The standard
also establishes disclosure requirements that will enable users to evaluate the
nature and financial effects of the business combination. The standard became
effective for the Company’s fiscal year that began on September 28, 2009. The
adoption of the standard did not have a material impact on the Company’s
financial position or results of operations.




In
December 2007, the FASB issued a standard on the accounting for noncontrolling
interests, which clarifies the classification of noncontrolling interests in
consolidated statements of financial position and the accounting for and
reporting of transactions between the reporting entity and holders of such
noncontrolling interests.  The standard became effective for the
Company’s fiscal year that began on September 28, 2009. The adoption of the
standard did not have a material impact on the Company’s financial position or
results of operations.


7
 Table of Contents


4.
            INVENTORIES





Inventories
are summarized as follows:





December 27,
              2009
            
            
            September 27,
              2009Raw
      ingredients
            
            $
            6,468,192
            
            
            $
            6,677,662Finished
      product
            
            
            6,450,994
            
            
            
            6,658,263Packaging
            
            
            1,784,417
            
            
            
            1,927,299$
            14,703,603
            
            
            $
            15,263,224





5.
            LONG-TERM
      DEBT





Long-term
debt of the Company as of December 27, 2009 and September 27, 2009 is summarized
as follows:





December 27,
              2009
            
            
            September 27,
              2009Tranche
      A Term Loans payable to GCF
            
            $
            13,800,028
            
            
            $
            14,425,028Tranche
      B Term Loans payable to GCF
            
            
            7,850,000
            
            
            
            12,850,000Equipment
      loans
            
            
            363,365
            
            
            
            422,83022,013,393
            
            
            
            27,697,858Less
      current maturities
            
            
            (2,999,295
            )
            
            
            (5,271,441
            )Less
      debt discount
            
            
            (453,836
            )
            
            
            (535,213
            )$
            18,560,262
            
            
            $
            21,891,204





The
Company executed a senior secured credit agreement with Guggenheim Corporate
Funding, LLC (“GCF”) on April 17, 2006. Under the credit agreement, GCF acts as
collateral agent, administrative agent, arranger and syndication agent in
connection with loans made by various lenders, including affiliates of
GCF.  The facility was originally structured as a $7.5 million
non-amortizing revolving loan, a $25.0 million amortizing Tranche A Term Loan
and a $15.0 million non-amortizing Tranche B Term Loan.





On March
9, 2007, the Company executed a second amendment to the senior secured credit
agreement allowing for $7.0 million of additional capital expenditures to
facilitate new business by increasing plant capacity and improving line
efficiency, to be funded by increases of $3.5 million in each of the Tranche A
and Tranche B Term Loans.





As of
December 27, 2009, the facility with GCF, reflecting principal payments and the
March 9, 2007 amendment, was a $49.7 million senior secured credit facility
maturing in May 2011, secured by a first priority lien on substantially all of
the Company’s assets. As of December 27, 2009, the facility was structured as a
$7.5 million non-amortizing revolving loan, a $26.5 million amortizing Tranche A
Term Loan and a $15.7 million non-amortizing Tranche B Term Loan. The facility
bears interest, adjustable quarterly, at the London Inter Bank Offered Rate
(“LIBOR”) plus the applicable margin for LIBOR loans or, at the Company’s option
in the case of the revolving loans, an alternate base rate equal to the greater
of the prime rate and the federal funds effective rate plus 0.50%, plus the
applicable margin for alternate base rate loans, as follows:


8
 Table of Contents




Total Debt to EBITDA Ratio for Last Twelve
      Months
            
            Applicable Margin for Alternate Base Rate
      Loans
            
            
            Applicable Margin for
                LIBOR LoansRevolving Loan
            
            
            Revolving Loan
            
            
            Tranche A
                Term Loan
            
            
            Tranche B
                Term LoanGreater
      than
            
            3.00:1.00
            
            
            2.50
            %
            
            
            3.50
            %
            
            
            3.75
            %
            
            
            6.25
            %Greater
      than or equal to but less than or equal to
            
            2.00:1.003.00:1.00
            
            
            2.25
            %
            
            
            3.25
            %
            
            
            3.50
            %
            
            
            6.00
            %Less than
            
            2.00:1.00
            
            
            2.00
            %
            
            
            3.00
            %
            
            
            3.25
            %
            
            
            5.75
            %





As of
December 27, 2009, the Company’s principal balances on the loans totaled $21.7
million, consisting of $13.8 million in Tranche A Term Loans and $7.9 million in
Tranche B Term Loans.  As of December 27, 2009, interest rates on the
Tranche A Term Loans and Tranche B Term Loans were 3.5% and 6.0%,
respectively.  As of December 27, 2009 and September 27, 2009, the
Company’s total debt to EBITDA ratio for the last twelve months was 1.14 and
1.47, respectively. Therefore, for the quarter ended December 27, 2009, the
Company qualified for the lowest applicable margin for the alternate base rate
and LIBOR loans.  For the quarter ended December 27, 2009, the Company
incurred $331,000 in interest expense, excluding amortization of deferred
financing costs.  For the quarter ended December 28, 2008, the Company
incurred $713,000 in interest expense, excluding amortization of deferred
financing costs.  During the quarter ended December 27, 2009, the
outstanding balance of the facility was reduced by mandatory principal payments
on the Tranche A Term Loan of $625,000 and a voluntary principal payment on the
Tranche B Term Loan of $5.0 million.  As of December 27, 2009, the
Company had $7.5 million available to borrow under the revolving loan, as the
balance was zero.





Initial
proceeds from the GCF facility, received on or about May 16, 2006, were used to
repay approximately $44.5 million in existing debt and related fees and expenses
in connection with the termination of the Company’s former financing
arrangements and to pay approximately $1.6 million in fees and expenses relating
to the new financing.  Of these fees, $454,000 is recorded as debt
discount, net of accumulated amortization, on the accompanying balance sheet as
of December 27, 2009. The Company paid GCF an additional $132,000 in fees and
expenses on March 9, 2007 related to the second amendment, which was recorded as
a debt discount.





The GCF
facility contains covenants whereby, among other things, the Company is required
to maintain compliance with agreed levels of earnings before interest, taxes,
depreciation and amortization, interest coverage, fixed charge coverage,
leverage targets, annual capital expenditures and incremental indebtedness
limits. Mandatory prepayments under the facility are required based on excess
cash flow, as defined in the agreement, and upon receipt of proceeds from a
disposition or payment from a casualty or condemnation of the collateralized
assets, and voluntary prepayments under the facility are generally permitted as
provided in the agreement.  The facility also contains customary
restrictions on incurring indebtedness and liens, making investments, paying
dividends and making loans or advances.





As of
December 27, 2009, the Company was in compliance with the covenant requirements
of the agreement with GCF.  The Company believes it is probable that
it will remain in compliance with all of those covenant requirements for the
foreseeable future.  However, if the Company fails to achieve certain
revenue, expense and profitability levels, a violation of the financial
covenants under its financing arrangements could result and interest rate
increases and acceleration of maturity of the loans could occur, which could
adversely affect its financial condition, results of operations and cash
flows.





The
Company entered into the following amortizing loans with Key Bank to finance the
purchase of machinery used for manufacturing processes: a 5-year loan in the
principal amount of $324,000 at a fixed interest rate of 7.5% on September 21,
2006, a 5-year loan in the principal amount of $216,617 at a fixed interest rate
of 7.5% on November 27, 2006 and a 4-year loan in the principal amount of
$476,043 at a fixed interest rate of 7.5% on January 9, 2007.





The
Company amended its existing operating lease agreements with General Electric
Capital Corporation on October 2, 2006. The amended lease resulted in a
three-year capital lease in the principal amount of $842,168 at a fixed interest
rate of 8.15%, with a $1 bargain purchase option at the expiration of the
lease.  The assets acquired under this capital lease have an
acquisition cost of $911,647.  On September 2, 2009, the Company
purchased the manufacturing equipment from General Electric Capital
Corporation.   As of December 27, 2009 the net book value of the
assets was $343,531.


9
 Table of Contents


6.
            PER
      SHARE DATA





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





Quarter EndedDecember 27,
              2009
            
            
            December 28,
              2008Basic
      EPS Computation:Numerator:Net
      income
            
            $
            3,052,795
            
            
            $
            2,532,963Denominator:Weighted
      average common shares outstanding
            
            
            15,823,271
            
            
            
            15,823,271Total
      shares
            
            
            15,823,271
            
            
            
            15,823,271Basic
      EPS
            
            $
            0.19
            
            
            $
            0.16Diluted
      EPS Computation:Numerator:Net
      income
            
            $
            3,052,795
            
            
            $
            2,532,963Denominator:Weighted
      average common shares outstanding
            
            
            15,823,271
            
            
            
            15,823,271Incremental
      shares from assumed exercise of stock options
            
            
            228,348
            
            
            
            195,068Total
      shares
            
            
            16,051,619
            
            
            
            16,018,339Diluted
      EPS
            
            $
            0.19
            
            
            $
            0.16





7.
            STOCK
      OPTIONS





The
Company measures the cost of all employee stock-based compensation awards based
on the grant date fair value of those awards using a Black-Scholes model and
records that cost as compensation expense over the period during which the
employee is required to perform service in exchange for the award (generally
over the vesting period of the award). No options were granted during quarters
ended December 27, 2009 or December 28, 2008.  Therefore, there was no
impact on the income statement or cash flow statement as a result of stock-based
compensation for any of these periods.





8.
            INCOME
      TAXES





The Company accounts 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 December 27, 2009 and September 27, 2009.





The
Company recognizes interest and penalties as part of income taxes. The total
amount of interest and penalties recognized in the statements of income was zero
for the quarters ended December 27, 2009 and December 28, 2008.





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 37.6% and 39.1% for the first quarter of each of fiscal
years 2010 and 2009, respectively.


10
 Table of Contents


9.
            CONTINGENCIES





Legal
Proceedings





The
Company is involved in certain legal actions and claims arising in the ordinary
course of business.  Management believes (based, in part, on advice of
legal counsel) that such contingencies, including the matters described below,
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.





The
following cases arise out of the same background facts. The Company reports
wages of its employees to the Internal Revenue Service (“IRS”) using the social
security numbers provided by the Company’s employees.  In about
January 2009, the IRS threatened to impose substantial penalties against the
Company because it said the Company was using invalid social security numbers,
which had been provided by a large number of its employees.  On April
6, 2009, the Company gave notice of the invalid social security numbers to
approximately 260 employees.  The Company gave each employee
approximately 60 days to provide a legitimate explanation for having furnished
it a false number, but most employees failed to do so.  The Company
then terminated the employees who were unable to provide it a legitimate
explanation, effective May 31, 2009, after concluding that their continued
employment would expose the Company to IRS penalties, scrutiny and potential
additional criminal and civil sanctions.





Local
770 v. Overhill Farms.





On April
28, 2009, Local 770 of the United Food and Commercial Workers Union submitted an
unsigned grievance regarding “the proposed terminations of workers regarding
invalid social security numbers,” which the grievance alleged was a violation of
the parties’ collective bargaining agreement.  The Union demanded
binding arbitration under the collective bargaining agreement.





On
January 11, 2010, an arbitrator dismissed the Union’s grievance.  On
January 29, 2010, the Union filed a petition to vacate the arbitration
decision.  The Company believes that the Union has no legitimate basis
to vacate the arbitrator's decision, and the Company intends to seek dismissal
of the Union’s petition and pursue any other appropriate remedies.





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 an 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 the Company’s 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 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 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.





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.


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 Table of Contents


The
parties are beginning the discovery phase of the case.  The Company
believes it has valid defenses to the plaintiffs’ remaining claims and that it
paid all wages due to these employees.





Marcelino
Arteaga, et al. v. Overhill Farms.





On July
7, 2009, the Company received an unfair labor practice charge that had been
filed with the National Labor Relations Board (“NLRB”) on June 29, 2009. The
charge was filed by Marcelino Arteaga on behalf of himself and two other
ex-employees, Agapita Padilla and Fernando Morales Lira.  In addition,
on June 30, 2009, these three ex-employees separately submitted grievances and
demanded arbitration arising out of the Company’s decision on June 26, 2009, to
terminate their employment because they had publicly accused it of being
“racist.”  On August 7, 2009, the NLRB granted the Company’s request
to defer further proceedings pending the resolution of the grievance and
arbitration process.  The Company is currently working with the Union
to select an arbitrator and to schedule the arbitration as soon as reasonably
practicable.





Department
of Justice.





On August
7, 2009, the Office of Special Counsel for the Civil Rights Division of the U.S.
Department of Justice (“OSC”) requested information from the Company in
connection with an investigation about whether the Company terminated employees
in May 2009 for whom the Company had received Social Security Administration
no-match letters on the basis of national origin or citizenship
status.  The Company responded in detail on September 11, 2009,
explaining that all affected employees had been identified by the IRS (not the
SSA) as having invalid social security numbers, that the Company did not select
them, and that the Company applied the same workplace rules against furnishing
false information to all employees, regardless of national origin or citizenship
status.





On
September 9, 2009, the Company received a second letter from the OSC, which
related to its investigation of a discrimination charge filed by an ex-employee,
Lucia Vasquez (a/k/a Gyneth Garcia).  On September 25, 2009, the
Company responded in detail to this discrimination charge, explaining that it
terminated Vasquez’ employment, along with over 200 other employees, because she
failed to explain why she had provided
 an invalid name and
social security number at the time of hire, and that the termination decision
had nothing to do with her national origin or citizenship status.





The OSC
has not made any determination about the merits of the discrimination
charge.





In the
meantime, Vasquez separately filed a claim for unemployment
benefits.  She was initially awarded the benefits, but the Company
appealed.  Following an evidentiary hearing before an Administrative
Law Judge (“ALJ”) on September 29, 2009, the ALJ rejected Vasquez’s claim for
unemployment benefits.  The ALJ found that she had engaged in serious
dishonesty, which included both making a false statement at the time of hire in
2003 and lying to the Company in May 2009 when confronted about her false
statement.  Vasquez appealed that determination.  On
February 2, 2010, the appeals board denied her appeal and rejected her claim for
benefits.





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
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 quarters ended
December 27, 2009 and December 28, 2008, 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 quarter
of fiscal years 2010 and 2009 was derived from four customers. Panda Restaurant
Group, Inc., Jenny Craig, Inc., Safeway Inc. and H. J. Heinz Company accounted
for approximately 31%, 25%, 17% and 7%, respectively, of the Company’s total net
revenues for the quarter ended December 27, 2009 and approximately 15%, 23%, 17%
and 20%, respectively, of the Company’s total net revenues for the quarter ended
December 28, 2008.  Receivables related to Panda Restaurant Group,
Inc. (through its distributors), Jenny Craig, Inc., Safeway Inc. and H. J. Heinz
Company accounted for approximately 40%, 20%, 14% and 11%, respectively, of the
Company’s total accounts receivable balance for the quarter ended December 27,
2009 and approximately 21%, 21%, 12% and 23%, respectively, of the Company’s
total accounts receivable balance for the quarter ended December 28,
2008.


12
 Table of Contents


Cash used
primarily for working capital purposes is maintained in two accounts with one
major financial institution. Account balances as of December 27, 2009 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.





10.
            RELATED
      PARTY TRANSACTIONS





In
February 2004, the Company engaged Alexander Auerbach & Co., Inc. (“AAPR”)
to provide the Company with public relations and marketing
services.  AAPR provides public relations, media relations and
communications marketing services to support the Company’s sales
activities.  Alexander Auerbach, who is a director and stockholder of
the Company, is a stockholder, director and officer of AAPR.  Fees
paid to AAPR for services rendered under this engagement during the first
quarter of each of fiscal years 2010 and 2009 were $14,000 and $9,000,
respectively.





11.
            FAIR
      VALUE MEASUREMENTS





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 principally
include cash and cash equivalents, trade receivables, accounts payable and
accrued expenses, approximates fair value due to the relatively short maturity
of such instruments.  The Company believes the carrying value of the
debt approximates fair value at both December 27, 2009 and September 27, 2009,
as the debt bears interest at variable rates based on prevailing market
conditions.  As of December 27, 2009, 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.





12.
            SUBSEQUENT
      EVENTS





The
Company has completed an evaluation of all subsequent events through February 4,
2010, which is the issuance date of these financial statements, and concluded no
subsequent events occurred that required recognition or disclosure other than
the legal matters noted in footnote 9 to these financial
statements.


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 Table of Contents


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.  The 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,”
“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
      impact of competitive products 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;
 
 ·
              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 moved
      in-house by customers;
 
 ·
              fulfillment
      by suppliers of existing raw materials
  contracts;
 
 ·
              natural
      disasters that can impact, among other things, costs of fuel and raw
      materials;
 
 ·
              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 downturn 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;
 
 ·
              voluntary
      or government-mandated food recalls;
and
 
 ·
              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 September 27, 2009 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.








14
 Table of Contents





Overview





We are a
leading 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., H. J. Heinz Company, American Airlines, Inc. and Pinnacle Foods
Group LLC.





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
create superior value for our stockholders by continuing 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.





In spite
of a continued slow economy, for the first quarter of fiscal year 2010, which
ended December 27, 2009, net revenues of $56.2 million reflected a 1.7% increase
compared to the first quarter of fiscal year 2009, which ended December 28,
2008.  Approximately $1.5 million of the increase is attributable to
January 2010 orders that were shipped early as a result of our facilities being
closed over the Christmas and New Year holidays (the first week of our second
quarter of fiscal year 2010).  These sales will not have a
material impact on net revenues in our second quarter of fiscal year
2010.  For the first quarter of fiscal year 2010, an increase in sales
in the foodservice category more than offset declines in the retail category
resulting from the anticipated reduced volume from one retail customer and
continued softness in the airline industry caused by a weak
economy.





Gross
profit was $7.9 million for the first quarter of fiscal year 2010, compared to
$7.5 million for the first quarter of fiscal year 2009. Gross profit increased
as a percentage of net revenues during the first quarter of fiscal year 2010 to
14.0% from 13.6% for the first quarter of fiscal year 2009.  Gross
profit as a percentage of revenues increased due to increased efficiencies and
yields and favorable commodity prices.  As previously disclosed, in
order to improve our gross profit margins, we continue to analyze our lower
margin accounts in order to increase margins or change to more profitable
business and are working on other cost saving initiatives.





Operating
income as a percentage of net revenues for the first quarter of fiscal year 2010
increased to 9.4% compared to 9.0% for the first quarter of fiscal year 2009 due
primarily to improvements in gross profit margins as noted
above.  SG&A expenses as a percentage of net revenues increased to
4.6% for the first quarter of fiscal year 2010 compared to 4.5% for the first
quarter of fiscal year 2009. Net income of $3.1 million increased as a
percentage of net revenues to 5.5% for the first quarter of fiscal year 2010
compared to 4.5% for the first quarter of fiscal year 2009 due to higher profits
and to lower interest expense as a result of pay downs under our credit
facility.





As
described under “Liquidity and Capital Resources” below, on March 9, 2007, we
executed a second amendment to the senior credit agreement allowing for $7.0
million of additional financing for capital expenditures.  The
facility is now a $49.7 million senior secured credit facility and is structured
as a $7.5 million non-amortizing revolving loan, a $26.5 million amortizing
Tranche A Term Loan and a $15.7 million non-amortizing Tranche B Term
Loan.





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
2009 annual report on Form 10-K for the year ended September 27, 2009 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.


15
 Table of Contents


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 December 27, 2009, 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 were to 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 December 27, 2009 and September 27, 2009.





We
recognize interest and penalties as part of income taxes.  No interest
and penalties were recognized in the statement of income for the first quarter
of fiscal year 2010.





Concentrations
of Credit Risk





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.  A bankruptcy or other significant
financial deterioration of any customer could impact its future ability to
satisfy its receivables with us.  Our allowance for doubtful accounts
is calculated based primarily upon historical bad debt experience and current
market conditions.  For the quarters ended December 27, 2009 and
December 28, 2008, our write-offs, net of recoveries, to the allowance for
doubtful accounts were immaterial.


16
 Table of Contents


A
significant portion of our total net revenues during the first quarter of fiscal
years 2010 and 2009 was derived from four customers. Panda Restaurant Group,
Inc., Jenny Craig, Inc., Safeway Inc. and H. J. Heinz Company, accounted for
approximately 31%, 25%, 17% and 7%, respectively, of our total net revenues for
the quarter ended December 27, 2009 and approximately 15%, 23%, 17% and 20%,
respectively, of our total net revenues for the quarter ended December 28,
2008.  Receivables related to Panda Restaurant Group, Inc. (through
its distributors), Jenny Craig, Inc., Safeway Inc. and H. J. Heinz Company
accounted for approximately 40%, 20%, 14% and 11%, respectively, of our total
accounts receivable balance for the quarter ended December 27, 2009 and
approximately 21%, 21%, 12% and 23%, respectively, of our total accounts
receivable balance for the quarter ended December 28, 2008.





Cash used
primarily for working capital purposes is maintained in two accounts with one
major financial institution. Account balances as of December 27, 2009 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.





Results
of Operations





Quarter
Ended December 27, 2009 Compared to Quarter Ended December 28, 2008





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 airline.





The first
quarters of fiscal years 2010 and 2009 ended December 27, 2009 and December 28,
2008, respectively, were both 13-week periods.





Net Revenues.Net
revenues for the first quarter of fiscal year 2010 increased $961,000 or 1.7%
(2.7% of the increase was attributed to volume/mix offset by a 1.0% pricing
decrease) to $56.2 million from $55.3 million for the first quarter of fiscal
year 2009 due to an increase in foodservice revenues offset partially by a
decline in revenues from one retail customer.





Retail
net revenues decreased $7.3 million (17.3%) to $35.1 million for first quarter
of fiscal year 2010 from $42.5 million for the first quarter of fiscal year
2009. The decrease was due primarily to reduced volume from one customer, H.J.
Heinz Company.  As previously disclosed, this customer had informed us
that it intended to move most of its remaining volume to self-manufacture
beginning after their contract expired at the end of calendar year 2009. The
decrease in revenue is consistent with our previously projected revenue
reduction of approximately $18 million for fiscal year 2010.  However,
we believe other retail customers and committed foodservice business will
continue to offset the reduction of H. J. Heinz Company sales in fiscal and
calendar year 2010.





Foodservice
net revenues increased $9.7 million (102.1%) to $19.2 million for first quarter
of fiscal year 2010 from $9.5 million for the first quarter of fiscal year 2009
due to increased volume from existing customers and new products for existing
and new customers.  We continue our sales efforts in this category and
believe that foodservice continues to represent a significant opportunity for
us.





Airline
net revenues decreased $1.4 million (42.4%) to $1.9 million for the first
quarter of fiscal year 2010 from $3.3 million for the first quarter of fiscal
year 2009. Due to airline initiatives to cut costs, airline net revenues may
continue to decrease in future periods.  For the first quarter of
fiscal year 2010, the airline category as a percentage of net revenues decreased
to 3.4% from 6.0% as we continue our transition to opportunities outside of this
category.





Gross
Profit.  Gross profit for the first quarter of fiscal year 2010
increased by $379,000 (5.1%) to $7.9 million from $7.5 million for the first
quarter of fiscal year 2009.  Gross profit as a percentage of net
revenues increased to 14.0% for the first quarter of fiscal year 2010 from 13.6%
for the first quarter of fiscal year 2009 due to increased efficiencies and
yields and favorable commodity prices offset partially by price reductions to
certain customers.





Selling, General and Administrative
Expenses.  Selling, general and administrative (“SG&A”)
expenses were $2.6 million (4.6% of net revenues) for the first quarter of
fiscal year 2010 versus $2.5 million (4.5% of net revenues) for the first
quarter of fiscal year 2009.  Higher legal fees relating primarily to
litigation described in Item 1 of this report were nearly offset by reductions
in other expenses, primarily other professional service fees.


17
 Table of Contents


Operating
Income.Operating income increased $351,000 (7.0%) to $5.3
million for the first quarter of fiscal year 2010 from $5.0 million for the
first quarter of fiscal year 2009.  The increase in operating income
was the result of improvements in gross profit as noted above.





Interest and Other Expense.Interest expense for the first quarter of fiscal year 2010 was $433,000,
compared to $814,000 for the first quarter of fiscal year 2009.  The
decrease in interest expense is due to lower debt balances and lower variable
interest rates.  We expect interest to decline going forward as we
continue to accelerate our debt repayment plan.





Income Tax
Provision.  Income tax expense was $1.8 million for the first
quarter of fiscal year 2010, compared to $1.6 million for the first quarter of
fiscal year 2009.  The increase in income tax expense
corresponded to the $732,000 increase in income before taxes from $4.2
million for the first quarter of fiscal year 2009 to $4.9 million for the first
quarter of fiscal year 2010.  The effective tax rates were 37.6% and
39.1% for the first quarter of fiscal years 2010 and 2009,
respectively.





Net Income.Net income for
the first quarter of fiscal year 2010 was $3.1 million, or $0.19 per basic and
diluted share, compared to net income of $2.5 million, or $0.16 per basic and
diluted share, for the first quarter of fiscal year 2009.





Liquidity
and Capital Resources





During
the first quarter of fiscal years 2010 and 2009, our operating activities
provided cash of $5.7 million and $2.0 million, respectively.  Cash
generated from operations before working capital changes for the first quarter
of fiscal year 2010 was $4.1 million.  Cash generated by changes in
working capital was $1.5 million during the first quarter of fiscal year 2010
and resulted from decreases in inventory and prepaid expenses and other assets
of $560,000 and $925,000, respectively, as well as an increase in accrued
liabilities and accounts payable of $706,000 and $891,000,
respectively.  This was partially offset by an increase in accounts
receivable of $1.6 million.  For the first quarter of fiscal year
2010, Panda Restaurant Group, Inc. (through its distributors), accounted for a
larger portion of our receivables due to January 2010 orders, of approximately
$1.5 million, that were shipped early as a result of our facilities being closed
over the Christmas and New Year holidays.  As of December 27, 2009, we
had working capital of $23.8 million compared to $27.3 million as of December
28, 2008. We were able to fund our operations in the first quarter of 2010
internally while decreasing our external debt.





During
the first quarter of fiscal year 2010, our investing activities, consisting
primarily of capital expenditures, resulted in a net use of cash of
approximately $558,000 compared to approximately $166,000 during the first
quarter of fiscal year 2009.  The property and equipment additions
were made to accommodate additional business opportunities, meet anticipated
growth and improve operating efficiency. We anticipate that cash generated from
operating activities and borrowing availability under our existing credit
facilities will fund revenue growth and working capital needs in the near
term.





During
the first quarter of fiscal year 2010, our financing activities resulted in a
use of cash of $5.7 million, compared to a use of cash of $3.4 million during
the first quarter of fiscal year 2009.  The increased use of cash was
largely due to a voluntary principal payment we made on our Tranche B Term loan
of $5 million prior to December 27, 2009.





We
believe that our cash and financial liquidity positions are sufficient to fund
current working capital needs and future growth initiatives.  We
intend to continue to reduce our debt with regularly scheduled debt reduction
payments and additional voluntary prepayments where liquidity and loan
agreements allow.





On March
9, 2007, we executed a second amendment to the senior secured credit agreement
with Guggenheim Corporate Funding, LLC (“GCF”) allowing for $7.0 million of
additional capital expenditures to facilitate new business by increasing plant
capacity and improving line efficiency, to be funded by increases of $3.5
million in each of the Tranche A and Tranche B Term Loans.





As of
December 27, 2009, the facility with GCF, reflecting principal payments and the
March 9, 2007 amendment, was a $49.7 million senior secured credit facility
maturing in May 2011, secured bya first priority lien on
substantially all of our assets. As of December 27, 2009, the facility was
structured as a $7.5 million non-amortizing revolving loan, a $26.5 million
amortizing Tranche A Term Loan and a $15.7 million non-amortizing Tranche B Term
Loan. The facility bears interest, adjustable quarterly, at the London Inter
Bank Offered Rate (“LIBOR”) plus the applicable margin (listed below) for LIBOR
loans or, at our option in the case of the revolving loans, an alternate base
rate equal to the greater of the prime rate and the federal funds effective rate
plus 0.50%, plus an applicable margin, as follows:


18
 Table of Contents




Total Debt to EBITDA Ratio for Last Twelve
      Months
            
            Applicable Margin for Alternate Base Rate
      Loans
            
            
            Applicable Margin for
                LIBOR LoansRevolving Loan
            
            
            Revolving Loan
            
            
            Tranche A
                Term Loan
            
            
            Tranche B
                Term LoanGreater
      than
            
            3.00:1.00
            
            
            2.50
            %
            
            
            3.50
            %
            
            
            3.75
            %
            
            
            6.25
            %Greater
      than or equal to but less than or equal to
            
            2.00:1.003.00:1.00
            
            
            2.25
            %
            
            
            3.25
            %
            
            
            3.50
            %
            
            
            6.00
            %Less than
            
            2.00:1.00
            
            
            2.00
            %
            
            
            3.00
            %
            
            
            3.25
            %
            
            
            5.75
            %





As of
December 27, 2009, our principal balances on the loans totaled $21.7 million,
consisting of a $13.8 million Tranche A Term Loan and a $7.9 million Tranche B
Term Loan.  As of December 27, 2009, interest rates on the Tranche A
Term Loan and Tranche B Term Loan were 3.5% and 6.0%,
respectively.  As of December 27, 2009 and September 27, 2009, our
total debt to EBITDA ratio for the last twelve months was 1.14 and 1.47,
respectively. Therefore, for the first quarter of fiscal year 2010, we qualified
for the lowest applicable margin for the alternate base rate and LIBOR
loans.  For the first quarter of fiscal year 2010, we incurred
$331,000 in interest expense, excluding amortization of deferred financing
costs.  For the first quarter of fiscal year 2009, we incurred
$713,000 in interest expense, excluding amortization of deferred financing
costs.  During the first quarter of fiscal year 2010, we reduced the
outstanding balance of the facility by mandatory principal payments on the
Tranche A Term Loan of $625,000 and a voluntary principal payment on the Tranche
B Term Loan of $5.0 million.  As of December 27, 2009, we had $7.5
million available to borrow under the revolving loan, as the balance was
zero.





Initial proceeds from the GCF facility,
received on or about May 16, 2006, were used to repay approximately $44.5
million in existing debt and related fees and expenses in connection with the
termination of our former financing arrangements and to pay approximately $1.6
million in fees and expenses relating to the new financing.  Of these
fees, $454,000 is recorded as debt discount, net of accumulated amortization, on
our balance sheet as of December 27, 2009.  We recorded a pretax
charge of approximately $176,000 in connection with the termination of the
former financing arrangements in the third quarter of fiscal year
2006.  We paid GCF an additional $132,000 in fees and expenses on
March 9, 2007 related to the second amendment, which we recorded as a debt
discount.





The GCF
facility contains covenants whereby, among other things, we are required to
maintain compliance with agreed levels of earnings before interest, taxes,
depreciation and amortization, interest coverage, fixed charge coverage,
leverage targets, annual capital expenditures and incremental indebtedness
limits.  Mandatory prepayments under the facility are required based
on excess cash flow, as defined in the agreement, and upon receipt of proceeds
from a disposition or payment from a casualty or condemnation of the
collateralized assets, and voluntary prepayments under the facility are
generally permitted as provided in the agreement.  The facility also
contains customary restrictions on incurring indebtedness and liens, making
investments, paying dividends and making loans or advances.





As of
December 27, 2009, we were in compliance with the covenant requirements of the
agreement with GCF.  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 and interest rate increases and acceleration of
maturity of the loans could occur, which could adversely affect our financial
condition, results of operations or cash flows.





We
entered into the following amortizing loans with Key Bank to finance the
purchase of machinery used for manufacturing processes: a 5-year loan in the
principal amount of $324,000 at a fixed interest rate of 7.5% on September 21,
2006, a 5-year loan in the principal amount of $216,617 at a fixed interest rate
of 7.5% on November 27, 2006 and a 4-year loan in the principal amount of
$476,043 at a fixed interest rate of 7.5% on January 9, 2007.  It is
our intention to pay off the remaining balances of all the amortizing loans with
Key Bank by the end of the second quarter of fiscal year 2010 as the last
prepayment penalty period expires in the second quarter of fiscal year
2010.


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 Table of Contents


We
amended our existing operating lease agreements with General Electric Capital
Corporation on October 2, 2006. The amended lease resulted in a three-year
capital lease in the principal amount of $842,168 at a fixed interest rate of
8.15%, with a $1 bargain purchase option at the expiration of the
lease.  The assets acquired under this capital lease have an
acquisition cost of $911,647.  On September 2, 2009, we purchased the
manufacturing equipment from General Electric Capital
Corporation.   As of December 27, 2009 the net book value of the
assets was $343,531.





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 as of December 27,
2009:





Payments Due By PeriodContractual
              Obligations
            
            Total
            
            
            Remainder of Fiscal Year
    2010
            
            
            2-3 Years
            
            
            4-5 Years
            
            
            More than
              5 YearsDebt
      maturities
            
            $
            22,013,393
            
            
            $
            2,185,213
            
            
            $
            19,828,180
            
            
            $
            -
            
            
            $
            -Interest
      expense(1)
            
            
            2,131,357
            
            
            
            1,160,816
            
            
            
            970,541
            
            
            
            -
            
            
            
            -Operating
      lease obligations (2)
            
            
            14,194,709
            
            
            
            2,545,758
            
            
            
            5,735,636
            
            
            
            3,756,273
            
            
            
            2,157,042Open
      purchase orders
            
            
            7,167,093
            
            
            
            7,068,061
            
            
            
            99,032
            
            
            
            -
            
            
            
            -Total
      contractual obligations
            
            $
            45,506,552
            
            
            $
            12,959,848
            
            
            $
            26,633,389
            
            
            $
            3,756,273
            
            
            $
            2,157,042


____________


(1)
            Assumes
      only mandatory principal pay-downs and the use of LIBOR as of December 27,
      2009 on the GCF debt and fixed rate interest payments on equipment
      loans.


(2)
            Includes
      real estate leases.





Item
      3.
            Quantitative
      and Qualitative Disclosures about Market
Risk





Interest Rate Risk –
Obligations. We are subject to
interest rate risk on variable interest rate obligations.  A
hypothetical 10% increase in average market interest rates would increase by
approximately $101,000, the annual interest expense on our debt outstanding as
of December 27, 2009.  We are also subject to interest rate risk on
our fixed interest rate obligations.  Based upon outstanding amounts
of fixed rate obligations as of December 27, 2009, a hypothetical 10% decrease
in average market interest rates would increase the fair value of outstanding
fixed rate debt by approximately $2,000.





Item
      4T.
            Controls
      and Procedures





Our Chief
Executive Officer and Interim Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have concluded, based on
their evaluation as of December 27, 2009, 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 Interim Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.





During
the quarter ended December 27, 2009, 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.


20
 Table of Contents


PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings





We are
involved in certain legal actions and claims arising in the ordinary course of
business. We believe (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.





The
following cases arise out of the same background facts. We report wages of our
employees to the Internal Revenue Service (“IRS”) using the social security
numbers provided to us by our employees.  In about January 2009, the
IRS threatened to impose substantial penalties against us because the IRS said
we were using invalid social security numbers, which had been provided by a
large number of our employees.  On April 6, 2009, we gave notice of
the invalid social security numbers to approximately 260
employees.  We gave each employee approximately 60 days to provide a
legitimate explanation for having furnished a false number to us, but most
employees failed to do so. We then terminated the employees who were unable to
provide a legitimate explanation, effective May 31, 2009, after concluding that
their continued employment would expose us to IRS penalties, scrutiny and
potential additional criminal and civil sanctions.





Local
770 v. Overhill Farms.





On April
28, 2009, Local 770 of the United Food and Commercial Workers Union submitted an
unsigned grievance regarding “the proposed terminations of workers regarding
invalid social security numbers,” which the grievance alleged was a violation of
the parties’ collective bargaining agreement.  The Union demanded
binding arbitration under the collective bargaining agreement.





On
January 11, 2010, an arbitrator dismissed the Union’s grievance.  On
January 29, 2010, the Union filed a petition to vacate the arbitration
decision.  We believe that the Union has no legitimate basis to vacate
the arbitrator's decision, and we intend to seek dismissal of their petition and
any pursue other appropriate remedies.





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 an 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.





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.





The
parties are beginning the discovery phase of the case.  We believe we
have valid defenses to the plaintiffs’ remaining claims and that we paid all
wages due to these employees.








21
 Table of Contents




Marcelino Arteaga, et al.
v. Overhill Farms.




On July
7, 2009, we received an unfair labor practice charge that had been filed with
the National Labor Relations Board (“NLRB”) on June 29, 2009. The charge was
filed by Marcelino Arteaga on behalf of himself and two other ex-employees,
Agapita Padilla and Fernando Morales Lira.  In addition, on June 30,
2009, these three ex-employees separately submitted grievances and demanded
arbitration arising out of our decision on June 26, 2009, to terminate their
employment because they had publicly accused us of being “racist.”  On
August 7, 2009, the NLRB granted our request to defer further proceedings
pending the resolution of the grievance and arbitration process.  We
are currently working with the Union to select an arbitrator and to schedule the
arbitration as soon as reasonably practicable.





Department
of Justice.





On August
7, 2009, the Office of Special Counsel for the Civil Rights Division of the U.S.
Department of Justice (“OSC”) requested information from us in connection with
an investigation about whether we terminated employees in May 2009 for whom we
had received Social Security Administration no-match letters on the basis of
national origin or citizenship status.  We responded in detail on
September 11, 2009, explaining that all affected employees had been identified
by the IRS (not the SSA) as having invalid social security numbers, that we did
not select them, and that we applied the same workplace rules against furnishing
false information to all employees, regardless of national origin or citizenship
status.





On
September 9, 2009, we received a second letter from the OSC, which related to
its investigation of a discrimination charge filed by an ex-employee, Lucia
Vasquez (a/k/a Gyneth Garcia).  On September 25, 2009, we responded in
detail to this discrimination charge, explaining that we terminated Vasquez’
employment, along with over 200 other employees, because she failed to explain
why she had provided an invalid name and social security number at the time of
hire, and that the termination decision had nothing to do with her national
origin or citizenship status.





The OSC
has not made any determination about the merits of the discrimination
charge.





In the
meantime, Vasquez separately filed a claim for unemployment
benefits.  She was initially awarded the benefits, but we
appealed.  Following an evidentiary hearing before an Administrative
Law Judge (“ALJ”) on September 29, 2009, the ALJ rejected Vasquez’s claim for
unemployment benefits. The ALJ found that she had engaged in serious dishonesty,
which included both making a false statement at the time of hire in 2003 and
lying to us in May 2009 when confronted about her false
statement.  Vasquez appealed that determination.  On
February 2, 2010, the appeals board denied her appeal and rejected her claim for
benefits.





Item
      6.
            Exhibits





(a)
            Exhibits





Number
            Description31.1(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 (2)31.2(1)
            Certification
      of Interim 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 (2)32(1)
            Certification
      of Chief Executive Officer and Interim Chief Financial Officer Pursuant to
      18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (2)(1)
            Attached
      hereto.


22
 Table of Contents


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:  February
      4, 2010
            By:
            /s/ James RudisJames
      RudisChairman,
      President andChief
      Executive OfficerDate:  February
      4, 2010
            By:
            /s/ Tracy E. QuinnTracy
      E. QuinnInterim
      Chief Financial Officer


23
 Table of Contents


EXHIBITS ATTACHED TO THIS FORM 10-Q








Number
            Description31.1
            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 200231.2
            Certification
      of Interim 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 200232
            Certification
      of Chief Executive Officer and Interim Chief Financial Officer Pursuant to
      18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002






24