UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549








Form 10-K





ANNUAL REPORT


PURSUANT TO SECTIONS 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





(Mark One)


x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended September 26, 2010





OR





o
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)

(I.R.S. Employer Identification Number)2727 East Vernon AvenueVernon, California

90058(Address of principal executive offices)

(Zip code)








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





Securities registered pursuant to Section 12(b) of the Act:





Title of each class

Name of each exchange on which registeredCommon Stock, par value $0.01

NYSE AMEX








Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x










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 o





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 o No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o





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 o
Accelerated Filer o





Non-Accelerated Filer o
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 o No x





The aggregate market value of voting common equity held by non-affiliates of the registrant, on March 26, 2010, which was the last trading day of the registrant’s second fiscal quarter ended March 28, 2010, was approximately $59.1 million based on a closing price of $6.01 per share on such date on the NYSE AMEX. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates.  The registrant has no non-voting common equity.





There were 15,823,271 shares of common stock, par value $0.01, outstanding as of December 8, 2010.





Documents Incorporated By Reference: None





TABLE OF CONTENTS





PART IItem 1

Business

1Item 1A

Risk Factors

3Item 1B

Unresolved Staff Comments

7Item 2

Properties

7Item 3

Legal Proceedings

8Item 4

(Removed and Reserved)

9PART IIItem 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

10Item 6

Selected Financial Data

12Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13Item 7A

Quantitative and Qualitative Disclosures About Market Risk

24Item 8

Financial Statements and Supplementary Data

24Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

24Item 9A

Controls and Procedures

24Item 9B

Other Information

25PART IIIItem 10

Directors, Executive Officers and Corporate Governance

26Item 11

Executive Compensation

29Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

37Item 13

Certain Relationships and Related Transactions, and Director Independence

39Item 14

Principal Accountant Fees and Services

41PART IVItem 15

Exhibits and Financial Statement Schedules

42SIGNATURES

45


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CAUTIONARY STATEMENT








All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements or characterizations of historical fact, are forward-looking statements.  Examples of forward-looking statements include, but are not limited to, statements concerning projected net revenues, costs and expenses and gross margins; our accounting estimates, assumptions and judgments; our success in pending litigation; the demand for our products; the availability and pricing of commodities; the competitive nature of and anticipated growth in our industry; manufacturing capacity and goals; our ability to consummate acquisitions and integrate their operations successfully; and our prospective needs for additional capital.





These forward-looking statements are based on our current expectations, estimates, approximations and/or projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “on-going,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in Item 1A of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.


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PART I





ITEM 1.
Business






History





Overhill Farms, Inc. was formed in 1995 as a Nevada corporation, with the acquisition of substantially all of the assets of IBM Foods, Inc., founded in 1968.  Our headquarters and manufacturing facilities are located in Vernon, California. Our products are sold nationwide.





Products and Services





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.  We provide custom prepared foods to a number of prominent, nationally recognized customers such as Jenny Craig, Inc., American Airlines, Inc., Safeway Inc., Pinnacle Foods Group LLC and Panda Restaurant Group, Inc.





Sales and Marketing





We operate as a single business segment – the development and production of frozen food products. We market our products through an internal sales force, outside food brokers and other business affiliations.  Our customers are foodservice, retail and airline accounts.





A significant portion of our total net revenues during the last three fiscal years was derived from three customers.  Panda Restaurant Group Inc., Jenny Craig, Inc. and Safeway Inc. accounted for approximately 27%, 26% and 18%, respectively, of our revenues for the fiscal year ended September 26, 2010.  For the fiscal year ended September 27, 2009, Panda Restaurant Group, Jenny Craig, Inc. and Safeway Inc. accounted for approximately 22%, 25% and 17%, respectively, of our revenues.  For the fiscal year ended September 28, 2008, Panda Restaurant Group, Inc., Jenny Craig, Inc. and Safeway Inc. accounted for approximately 16%, 24% and 13%, respectively, of our revenues.





Manufacturing and Sourcing





Our headquarters, entrée manufacturing and warehousing, product development, sales and quality control facilities are located at a single location in Vernon, California.  We also maintain a separate protein cooking facility in Vernon, California. In 2007, we invested approximately $7.0 million in capital expenditures to expand the manufacturing capacity of our entrée plant in order to accommodate new business opportunities.





Our ability to cost-effectively produce large quantities of our products, while maintaining a high degree of quality, is partially dependent on our ability to procure raw materials on an economical cost basis.  We rely on several large suppliers for products, including poultry, and we purchase the remaining raw materials from suppliers in the open market.  We do not anticipate any particular difficulty in acquiring these materials in the future.  We store raw materials, packaging and finished goods on-site and in public frozen and dry food storage facilities until shipment.  When possible and practical, we negotiate supply contracts at fixed prices to protect against the risk of market fluctuations.





Backlog





We typically deliver products directly from finished goods inventory.  As a result, we do not maintain a large backlog of unfilled purchase orders.  While at any given time there may be a small backlog of orders, our backlog is not material in relation to our total revenues, nor is it necessarily indicative of trends in our business.


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Competition





Our products compete with those produced by numerous regional and national firms.  Many of these competitors are divisions of larger, highly integrated companies.  Competition is strong, with many firms producing alternative products for the foodservice and retail industries.  Competitive factors include price, food safety standards, product quality, flexibility, product development, customer service and, on a retail basis, name recognition.  We are competitive in this market as a result of our ability to produce mid-sized to large custom product runs within a short time frame on a cost-effective basis and our ability to provide ancillary support services such as research and development, assistance with regulatory matters, production planning and logistics.





Product Development and Marketing





We maintain a comprehensive, fully staffed research and development department that formulates recipes and upgrades specific products for current and prospective customers and establishes production and quality standards.  We develop products based upon customer specifications, conventional recipes, new product trends or our own product initiatives.  We are continuously developing recipes as customers’ tastes and client requirements change.  We also maintain a quality control department for inspection, testing, monitoring and compliance to ensure that our products are produced consistently in accordance with our standards.  In May 2010, our food safety systems were certified as meeting the standards of FSSC 22000: 2010, which is the latest and most complete safety certification standard for food manufacturers.





Intellectual Property





We have registered the “Overhill Farms” and “Chicago Brothers” trademarks with the United States Patent and Trademark Office.   Also, during fiscal year 2008, we entered into a five-year licensing agreement with Better Living Brands tmAlliance (“Alliance”) for the exclusive right to produce and sell frozen entrées under the Eating Right tm and O Organicstm brands.





Subsequent to fiscal year 2010, we entered into a five-year licensing agreement with Boston Market Corporation (“BMC”) for the exclusive right to use BMC’s trademarks, trade dress and copyrights in connection with the manufacturing, advertising, promotion, sales and distribution of frozen food and certain shelf-stable licensed products.  The agreement commences on July 1, 2011.





Employees





Our total hourly and salaried workforce consisted of 768 employees at September 26, 2010.  Most of our operations are labor intensive, generally requiring unskilled employees.  Approximately 79% of our employees are unionized with the United Food & Commercial Workers Union, Local 770 and are covered by a three-year collective bargaining agreement that expires on March 1, 2011.  We believe our relations with our employees and the union are good.





Regulation





Food manufacturers are subject to strict government regulation, particularly in the health and environmental areas, by the United States Department of Agriculture (“USDA”) and the Food and Drug Administration (“FDA”), as well as the Occupational Safety and Health Administration (“OSHA”), the Environmental Protection Agency (“EPA”) and the federal Food, Drug and Cosmetic Act.  Our food processing facilities are subject to continuous on-site examination, inspection and regulation by the USDA.  Compliance with the current applicable federal, state and local environmental regulations has not adversely affected our financial position, results of operations or competitive position.  However, we cannot predict whether regulation by various federal, state or local governmental entities and agencies may adversely affect our future business and financial results.  If a product recall were to occur, we have processes and procedures in place to assist in the recall of products.  Since 1997, we have used a Hazard Analysis Critical Point Plan to ensure proper handling of all food items.  In May 2010, our food safety systems were certified as meeting the standards of FSSC 22000: 2010, which is the latest and most complete safety certification standard for food manufacturers.


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Additional Information





Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are available free of charge on our website at www.overhillfarms.com as soon as reasonably practicable after being filed or furnished to the Securities and Exchange Commission (“Commission”). Our reports filed with the Commission are also made available to read and copy at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the Commission at 1-800-SEC-0330. Reports filed with the Commission are also made available on its website at www.sec.gov.





ITEM 1A.
Risk Factors







Our ability to compete effectively in the highly competitive food industry may affect our operational performance and financial results.





Our continued success depends in part on our ability to be an efficient producer in the highly competitive food industry.  We face competition in all of our markets from large, national companies and smaller, regional operators.  Some of our competitors, including diversified food companies, are larger and have greater financial resources than we do.  From time to time, we experience price pressure in some of our markets as a result of competitors’ promotional pricing practices as well as general market conditions.  Our failure to match or exceed our competitors’ cost reductions through productivity gains and other improvements could weaken our competitive position.  Competition is based on product quality, food safety, distribution effectiveness, brand loyalty, price, effective promotional activities, the ability to identify and satisfy emerging consumer preferences and the ability to provide ancillary support services.  We may not be able to effectively compete with these larger, more diversified companies.  Also, a disruption of our supply chain could impair our ability to manufacture or supply goods.  In addition, products have life cycles, and as the lives of products diminish, we may not be able to replace our existing customers.





The loss or consolidation of any of our key customers could adversely affect our financial results by decreasing our existing sales opportunities and prices and increasing our marketing and promotional expenses.





The largest purchasers of our products, Panda Restaurant Group, Jenny Craig, Inc. and Safeway Inc., accounted for approximately 27%, 26% and 18%, respectively, of our total net revenues during fiscal year 2010.  We expect that our sales to these customers will continue to constitute a significant percentage of our net revenues in fiscal year 2011 and beyond.  The loss of any of these customers as a significant outlet for our products could adversely affect our competitive position and operating results if we do not obtain additional customers to offset any change in these accounts.





Some of our significant customer and supplier contracts are short-term and may not be renewable on terms favorable to us or at all.





Some of our customers and suppliers operate through purchase orders or short-term contracts.  Though we have long-term business relationships with many of our customers and suppliers and alternative sources of supply for key items, we cannot be sure that any of these customers or suppliers will continue to do business with us on the same basis.  Additionally, although we try to renew these contracts as they expire, there can be no assurance that these customers or suppliers will renew these contracts on terms that are favorable to us, if at all.  The termination of, or modification to, any number of these contracts may adversely affect our business and prospects, including our financial performance and results of operations.


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Financial difficulties of foodservice and retail customers due to the economic downturn may adversely affect our revenues, costs and collections.





As the domestic economic recovery continues to stall, collectability of receivables from our customers may be adversely affected, causing an increase in aged receivables and/or a reduced collection rate.  Our margins could be adversely affected if we are forced to write off uncollectible accounts.  In addition, the economic downturn could adversely affect the fiscal health of key customers or impair their ability to continue to operate during a recessionary period, which would decrease our revenues unless we are able to replace any lost business.





Future airline mergers or bankruptcies, additional cost-cutting in the airline industry or other financial difficulties of our airline customers may adversely affect our revenues, costs and collections.





In fiscal year 2010, sales to airline customers were approximately $8.0 million, or 4.1% of total net revenues, compared to sales of $11.1 million in fiscal year 2009 and $20.7 million in fiscal year 2008, representing 5.3% and 8.7% of total net revenues in fiscal years 2009 and 2008, respectively.  Additionally, accounts receivable from airline-related customers accounted for approximately 4.8% and 4.9% of the total accounts receivable balance at September 26, 2010 and September 27, 2009, respectively.  Given the financial and business challenges facing the airline industry, we carefully monitor our receivables from all of our customers in this sector.  The on-going effect of these challenges on the airline industry, airline revenues, and on our business in particular cannot be accurately determined and could further adversely affect our financial position, results of operations or cash flows by, among other things, decreasing our sales to and making it more difficult to collect receivables from airline customers.





We are a major purchaser of many commodities that we use as raw materials and for packaging, and price changes for the commodities we depend on may adversely affect our profitability.





When possible, we enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during the terms of the contracts.  Where appropriate, we attempt to recover our commodity cost increases by increasing prices, promoting a higher-margin product mix and creating additional operating efficiencies.





We also use materials, such as corrugated cardboard, aluminum products, films and plastics to package our products.  Substantial increases in prices of packaging materials or higher prices of our raw materials could adversely affect our operating performance and financial results.  In addition, transportation costs have been unpredictable.  If such costs rise to the levels that were seen in fiscal year 2008, our operating margins could be eroded.





Commodity price changes may result in unexpected increases in raw materials and packaging costs, and we may be unable to increase our prices to offset these increased costs without suffering reduced volume, revenue and income.  Any substantial fluctuation in the prices we pay for raw materials and packaging, if not offset by increases in our sales prices, a higher-margin product mix or additional operating efficiencies, could adversely affect our profitability.





If our food products become adulterated or misbranded, we would need to recall those items and may experience product liability claims if consumers are injured as a result.





Food products occasionally contain contaminants due to inherent defects or improper storage or handling.  Under adverse circumstances, food manufacturers such as us may need to recall some of their products if they become adulterated or misbranded or as a result of a government-mandated recall.





The scope of such a recall could result in significant costs incurred as a result of the recall, potential destruction of inventory, and lost sales. Should consumption of any product cause injury, we may be liable for monetary damages as a result of a settlement or judgment against us.  A widespread product recall could result in changes to one or more of our business processes, product shortages, a loss of customer confidence in our food or other adverse effects on our business.


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If we are required to defend against a product liability claim, whether or not we are found liable under the claim, we could incur substantial costs, our reputation could suffer and our customers might substantially reduce their existing or future orders from us.





Concerns with the safety and quality of food products could cause customers to avoid our products.





We could be adversely affected if our customers and the ultimate consumers of our products lose confidence in the safety and quality of various food products.  Adverse publicity about these types of concerns, such as the publicity about genetically modified organisms and avian influenza, whether or not valid, may discourage our customers from buying our products or cause production and delivery disruptions.  Negative changes in customer perceptions about the safety and quality of products we produce could adversely affect our business and financial condition.





Our business is subject to federal, state and local government regulations that could adversely affect our business and financial position.





Food manufacturing operations are subject to regulation by various federal, state and local government entities and agencies.  As a producer of food products for human consumption, our operations are subject to stringent production, packaging, quality, labeling and distribution standards, including regulations mandated by the federal Food, Drug and Cosmetic Act, the FDA, OHSA, the EPA and the USDA.  Future regulation by various federal, state or local governmental entities or agencies may adversely affect our business and financial results.




In addition, our business operations and the past and present ownership and operation of our properties are subject to extensive and changing federal, state and local environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment.  We cannot predict whether environmental issues relating to presently known matters or identified sites or to other matters or sites will require currently unanticipated investigation, assessment or expenditures.





Future instability or tightening in the credit markets could impair our ability to obtain financing as and when needed.





Future instability or tightening in the credit markets could impair our ability to obtain additional credit if and when needed to finance our operations and fund future plant or business expansions.  In addition, tight credit markets or inflation could eventually result in an increase in interest rates, which would adversely affect us, as we have $7.7 million in long-term debt outstanding as of December 8, 2010 under our senior secured credit facility with Bank of America, with interest rates that adjust quarterly.





If we violate our financial and other covenants under our secured credit facility, our financial condition, results of operations or cash flows may be adversely affected if secured parties foreclose on our assets or impose default rates of interest.





Our senior secured credit facility with Bank of America, under which $7.7 million was outstanding as of December 8, 2010, is secured by a first-priority lien on substantially all of our assets. The facility contains covenants whereby, among other things, we are required to maintain compliance with agreed levels of fixed charge coverage, total leverage and incremental indebtedness limits.  If we violate these covenants and are unable to obtain waivers or renegotiate the terms of the covenants, we could become subject to, among other things, interest rate increases and acceleration of maturity of the facility, which could adversely affect our financial condition, results of operations or cash flows.


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A change in control could result in an event of default under our secured credit facility, which could adversely affect our financial condition, results of operations or cash flows.





Our secured credit facility with Bank of America provides that a change in control would occur if, among other occurrences, any person or group becomes the beneficial owner of 35% or more of our voting stock, or certain changes in the composition of our board occur during any period of twelve consecutive months.  The occurrence of a change in control could permit Bank of America to terminate the credit facility, declare all or a portion of loans then outstanding to be due and payable, and/or exercise other available rights and remedies.  Depending on our financial condition at the time, we may not be able to raise sufficient funds to repay this indebtedness upon an event of default.  Accordingly, the occurrence of a change in control could adversely affect our financial condition, results of operations or cash flows.





A small number of stockholders beneficially own a significant percentage of our outstanding common stock and therefore could significantly influence or control matters requiring stockholder approval.





Assuming the exercise of the aggregate options issued to our executive officers and directors to purchase shares of our common stock, our executive officers, directors and stockholders who beneficially own greater than 5% of our common stock would collectively beneficially own, in the aggregate, approximately 43% of our outstanding common stock as of December 8, 2010.  These stockholders, if acting together, could be able to significantly influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.





Our failure to attract and retain key management personnel could adversely affect our business.





Our business requires managerial, financial and operational expertise, and our future success depends upon the continued service of key personnel.  As a value-added manufacturer of quality frozen food products and custom prepared foods, we operate in a specialized industry.  Our key personnel have experience and skills specific to this industry, and there are a limited number of individuals with the relevant experience and skills.  Though we have an employment agreement with James Rudis, our CEO and President, the agreement permits the voluntary resignation on the part of Mr. Rudis prior to the end of the term of the agreement.  If we lose any of our key personnel, our business operations could be adversely affected.





We may not be able to protect our intellectual property and proprietary rights or may become subject to claims relating to our use of our customers’ trademarks, which could harm our competitive position, resulting in decreased revenue.





We believe that our trademarks and other proprietary rights, though few in number, are important to our success and competitive position.  Accordingly, we devote what we believe are adequate resources to the establishment and protection of our trademarks and proprietary rights.  However, these actions may be inadequate to prevent imitation of our products by others or to prevent others from claiming violations of their trademarks and proprietary rights by us.





From time to time, we manufacture products under our customers’ trademarks.  While we generally require them to agree to indemnify us in connection with our use of their trademarks, it is possible that we could face infringement actions based upon the content provided by our customers.  If any of these claims are proved valid, through litigation or otherwise, we may be required to cease using the trademarks and/or pay financial damages and/or expenses for which we are not indemnified.





Our common stock price is subject to significant volatility, which could result in substantial losses for investors.







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·
the depth and liquidity of the market for the shares;





·
quarter-to-quarter variations in our operating results;





·
announcements about our performance as well as the announcements of our competitors about the performance of their businesses;





·
investors’ evaluations of our future prospects and the food industry generally;





·
changes in earnings estimates by, or failure to meet the expectations of, securities analysts; and





·
general economic and market conditions.





In addition, the stock market has been experiencing significant volatility that may be unrelated to the operating performance of the specific companies whose stock is traded.  This volatility could adversely affect the trading price of our shares.





The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market.  Investors may be unable to sell their shares of common stock at or above their purchase price, which may result in substantial losses.





Future sales of shares of our common stock by our stockholders could cause our stock price to decline.




We cannot predict the effect, if any, that sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time.  As of December 8, 2010, we had outstanding 15,823,271 shares of common stock, most or all of which were eligible for resale without registration.  Also, as of December 8, 2010, there were outstanding options to purchase up to 521,000 shares of common stock.  All of the shares of common stock underlying these options are covered by an existing effective registration statement.  Sales of shares of our common stock in the public market, or perceptions that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.





Certain provisions of our articles of incorporation, bylaws and Nevada law could make it more difficult for a third party to acquire us, even if doing so could be in our stockholders’ best interest.





Provisions of our articles of incorporation and bylaws require that certain procedures be followed, including advance notice, before matters can be proposed for consideration at meetings of our stockholders. This may make it difficult for a potential acquirer to bring an acquisition proposal to a vote of our stockholders.  In addition, our board of directors has the right to fix the rights and preferences of an issue of shares of preferred stock without stockholder action.  Our board could establish and issue a series of preferred stock with rights that make an acquisition less desirable by certain potential acquirers.





Provisions of Nevada’s business combinations statute also restrict certain business combinations with interested stockholders.  We have elected not to be governed by these provisions in our amended and restated articles of incorporation.  However, this election may not be effective unless we meet certain conditions under the Nevada statute.





ITEM 1B.
Unresolved Staff Comments





Not applicable.





ITEM 2.
Properties








We lease two manufacturing facilities in Vernon, California.  In January 2002, we entered into a ten-year lease, with an option for a five-year renewal, for a facility, Plant No. 1, that has been expanded to 170,000 square feet.  Most of our principal executive office, manufacturing and warehousing, product development and sales and quality control facilities have been consolidated into this single location.  In December 2008, we entered into a 60-month lease, with an option for a 60-month renewal, for a facility, Plant No. 2, that has been expanded to 123,000 square feet.  Plant No. 2 is used primarily for cooking protein as well as dry and cold storage.  In addition, we lease a 25,000 square foot dry goods storage facility in Vernon, California.


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We believe that Plant No. 1, currently operating at approximately 50% capacity, is adequate to meet our requirements for the near future.  In fiscal year 2010, items that were processed at Plant No. 1 (some of which included components that were processed at Plant No. 2) accounted for sales of approximately $136.1 million.  Items that were processed in Plant No. 2 that did not require further processing in Plant No. 1 accounted for the balance of sales in fiscal year 2010 of approximately $59.4 million.  As our sales of cooked protein grow, it may become necessary to augment the cooking capacity that we now have at Plant No. 2.  We continue to monitor our cooking capacity.  If we deem additional cooking capacity to be necessary, we expect capital expenditures for that capacity could range from $5 million to $10 million during fiscal years 2011 and 2012, depending on the amount of additional cooking capacity added.




ITEM 3.
Legal Proceedings








We are involved in certain legal actions and claims arising in the ordinary course of business.  Management believes 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 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.  The defendants thereafter filed an appeal, which was denied by the California court of appeals.





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 engaged in 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.


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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.





On October 7, 2010, the Arbitrator ruled in our favor, upholding our decision to terminate the employment of these former employees.  We do not know whether the NLRB intends to proceed separately with the unfair labor practice charge.





Alma Salinas, et al. v. Overhill Farms.





On May 12, 2010, Alma Salinas filed a 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 seeks allegedly unpaid wages, waiting time penalties, PAGA penalties, interest and attorneys’ fees, the amounts of which are unspecified.





We expect this case to be consolidated with the earlier-filed Agustiana case (described above) because the claims in the two actions substantially overlap each other.





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




ITEM 4.
(Removed and Reserved)


9
 Table of Contents


PART II





ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities








Market Information and Record Holders










Fiscal 2009

High

LowFirst Quarter from September 29, 2008 to December 28, 2008

$5.85

$3.00Second Quarter from December 29, 2008 to March 29, 2009

5.40

2.95Third Quarter from March 30, 2009 to June 28, 2009

5.98

3.40Fourth Quarter from June 29, 2009 to September 27, 2009

6.08

5.05Fiscal 2010

High

LowFirst Quarter from September 28, 2009 to December 27, 2009

$6.60

$4.11Second Quarter from December 28, 2009 to March 28, 2010

6.35

4.25Third Quarter from March 29, 2010 to June 27, 2010

6.67

5.36Fourth Quarter from June 28, 2010 to September 26, 2010

6.16

4.05


10
 Table of Contents


Performance Graph





The following is a line graph comparing the yearly percentage change in the cumulative total return of the Company’s common stock to the cumulative total return of the Standard & Poor’s 500 Index and a peer group for the period commencing October 2, 2005 and ending September 26, 2010.  The peer group is comprised of Tyson Foods, Inc.; Cuisine Solutions, Inc.; ConAgra Foods, Inc.; Armanino Foods of Distinction, Inc.; Smithfield Foods, Inc.; and Bridgford Foods Corporation.





The graph assumes that $100 was invested in the Company’s common stock, the Standard & Poor’s 500 Index and the peer group on October 2, 2005 and that all the dividends were reinvested on a quarterly basis.  Returns for the companies included in the peer group have been weighted on the basis of the market capitalization for each company.









Fiscal Year-Ended2005


2006


2007


2008


2009


2010Overhill Farms, Inc. (OFI)

$
100.00


$
100.31


$
109.84


$
184.10


$
209.85


$
166.62Standard & Poor's 500 Index


100.00



108.75



124.25



98.74



84.99



93.48Peer Group


100.00



101.28



114.69



87.10



102.62



113.43




Dividends





We have never paid cash dividends on our common stock.  We currently anticipate that no cash dividends will be paid on our common stock in the near term.




Recent Sales of Unregistered Securities





None.


11
 Table of Contents


ITEM 6.
Selected Financial Data








The following table sets forth selected historical financial data of Overhill Farms, Inc.  The selected financial data as of and for each of the last five fiscal years are derived from the financial statements of Overhill Farms, Inc., which have been audited by Ernst & Young LLP, independent registered public accounting firm.





The data may not necessarily be indicative of our future results of operations or financial position.  The historical data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operation” and the financial statements and the related notes included elsewhere in this report.





Fiscal Year EndedStatements of Income Data

(in thousands, except per share data):

September 26, 2010


September 27, 2009


September 28, 2008


September 30, 2007


October 1, 2006(52 weeks)


(52 weeks)


(52 weeks)


(52 weeks)


(52 weeks)Net revenues

$
194,482


$
209,877


$
238,780


$
192,642


$
168,310Operating income


13,925



15,579



20,616



11,900



14,288Net income


7,575



8,301



10,321



4,562



5,102Net income per share – Basic

$
0.48


$
0.52


$
0.66


$
0.30


$
0.34Net income per share – Diluted

$
0.47


$
0.52


$
0.65


$
0.29


$
0.32Weighted average shares outstanding – Basic


15,823,271



15,823,271



15,747,434



15,338,038



15,204,424Weighted average shares outstanding - Diluted


16,049,587



16,028,698



15,992,467



15,803,109



15,880,507





As of Fiscal Year EndedBalance Sheet Data

(in thousands)

September 26, 2010


September 27, 2009


September 28, 2008


September 30, 2007


October 1, 2006(52 weeks)


(52 weeks)


(52 weeks)


(52 weeks)


(52 weeks)Total assets

$
65,777


$
73,637


$
79,420


$
76,150


$
58,128Long-term debt


13,198



21,891



33,479



41,383



37,219Total liabilities


26,706



42,141



56,224



63,731



51,191Retained earnings (accumulated deficit)


27,355



19,780



11,479



1,157



(3,405
)Stockholders’ equity


39,071



31,497



23,195



12,419



6,937





No cash dividends on our common stock were declared during any of the periods presented above.


12
 Table of Contents


ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations













·
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 material 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 healthcare and 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 recovery 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;
 
 ·
effects of legal proceedings in which we are or may become involved from time to time, which may be costly and may divert management’s attention, even if unfounded; and
 
 ·
other factors discussed in this report.




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





Any of the factors described above or in the “Risk Factors” contained in Item 1A of this report could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.


13
 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 Jenny Craig, Inc., American Airlines, Inc., Safeway Inc., Pinnacle Foods Group LLC, and Panda Restaurant Group, Inc.





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.





Overall, we have performed well in the midst of a poor economy.  Despite decreased net revenues we continued to pay down our previous debt and were also able to refinance with more favorable terms.  We were also able to increase investment spending in our plants, which enabled us to achieve certification under the new global Food Safety Management Systems standard FSSC 22000.  This new certification will allow us to better compete for new business opportunities.





Sales during the first half of fiscal year 2010 reflected, in great part, rebuilding of customer inventories from low late-calendar year 2009 levels, in anticipation of a rebound in the economy.  As the U.S. economic recovery lagged, most of our customers experienced decreased sales, particularly during our fiscal third quarter of 2010.  While our foodservice accounts increased during fiscal year 2010, these gains were not enough to offset other account decreases.  During the fourth quarter of fiscal year 2010, we were additionally impacted by the seasonality in our retail category, as retailers typically sell fewer frozen meals during warmer months.  Despite all the above, in fiscal year 2010 we generated $16.9 million in net cash from operations, reduced total debt by $14.0 million and increased retained earnings by $7.6 million.  In addition, we paid off an additional $5.5 million on our debt subsequent to fiscal year 2010.





As our top-line revenues decreased during fiscal year 2010, our margins, primarily in our third and fourth quarters, were negatively affected by higher overhead costs as a percentage of net revenues on the lower sales volume.  Although we expect continued margin pressure, we anticipate margins will improve as sales revenues increase as the economy continues to recover.  We believe we can offset the higher overhead costs through reduced purchase prices of raw materials, production efficiencies and a change in mix of customers between retail, foodservice and airlines.





Subsequent to fiscal year 2010, we entered into a five-year licensing agreement with Boston Market Corporation (“BMC”) for the exclusive right to use BMC’s trademarks, trade dress and copyrights in connection with the manufacturing, advertising, promotion, sales and distribution of frozen food and certain shelf-stable licensed products.  The agreement commences on July 1, 2011.  The agreement also contains options for two sixty-month renewal terms.  We will pay BMC an earned royalty computed at four and a half percent of net sales during the initial term with no guaranteed minimum royalties. We will pay a guaranteed minimum royalty of $2.75 million and $3.25 million for the first and second renewal terms, respectively.


14
 Table of Contents


In addition, we have been selected to produce a line of 16 private label frozen meals for a major national retailer.  The multi-year agreement with the national retailer is expected to generate initial annual sales in the range of $7 million, with the opportunity for increased volume over time.  Full production is expected to begin in April of 2011.





Fiscal years 2010, 2009 and 2008 were 52-week periods.  For fiscal year 2010, net revenues of $194.5 million reflected a 7.3% decrease as compared to fiscal year 2009.  During fiscal year 2010, decreased sales in the retail and airline categories contributed to the decline.  We experienced a 12.1% decrease in net revenues for fiscal year 2009, to $209.9 million, compared to $238.8 million for fiscal year 2008.  The decrease in net revenues during fiscal year 2009 was due to decreased sales in the retail and airline categories.





Gross profit was $23.7 million in fiscal year 2010, compared to $25.6 million in fiscal year 2009 and $29.3 million in fiscal year 2008. Gross profit as a percentage of net revenues, or gross margin, during fiscal years 2010, 2009 and 2008 were 12.2%, 12.2% and 12.3%, respectively.  In fiscal year 2010, gross profit decreased due to lower revenues but gross margin remained unchanged due to increased efficiencies and yields and favorable commodity prices offset by increased investment spending in our plants to achieve certification under the new global Food Safety Management Systems standard FSSC 22000 and brokerage paid to Safeway Inc., which now operates as a reduction to net revenues.  During the latter part of the third quarter of fiscal year 2010, Safeway Inc. ended its brokerage agreement and took the function in-house, so the brokerage we pay to Safeway Inc. is now recorded as a reduction of revenue.  The decrease in gross profit in fiscal year 2009 compared to fiscal year 2008 was due to lower net revenues.





Operating income as a percentage of net revenues for fiscal year 2010 was 7.1% compared to 7.4% in fiscal year 2009 and 8.6% in fiscal year 2008, due primarily to decreased net revenues and increased selling, general and administrative (“SG&A”) expenses as a percentage of net revenues.  SG&A expenses as a percentage of net revenues increased to 5.0% in fiscal year 2010 compared to 4.8% in fiscal year 2009 and 3.6% in fiscal year 2008.  SG&A expenses decreased $241,000 in fiscal year 2010 but increased as a percentage of the lower net revenues.  Net income of $7.6 million decreased as a percentage of net revenues to 3.9% in fiscal year 2010 versus 4.0% in fiscal year 2009 and 4.3% in fiscal year 2008.





As described under “Liquidity and Capital Resources” below, during fiscal year 2010 we refinanced our then existing debt of $13.2 million. The new credit facility with Bank of America, N.A. is a $30 million three-year senior secured credit facility and is secured by a first priority lien on substantially all of our assets. We made an initial loan drawdown of $13.2 million, the proceeds of which were used to pay-off our prior credit facility with Guggenheim Corporate Funding, LLC (“GCF”).  Subsequent to fiscal year 2010, we paid off an additional $5.5 million on our debt leaving us with a balance of $7.7 million.





Results of Operations





The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues.  The columns present the following:





·
First four data columns in each table show the absolute results for each period presented and results for each period as a percentage of net revenues.





·
Last two columns entitled “Dollar Variance” and “% Variance” show the change in results, both in dollars and percentages for the fiscal years presented. These two columns show favorable changes as positives and unfavorable changes as negatives. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.


15
 Table of Contents


Fiscal Year Ended September 26, 2010 Compared to Fiscal Year Ended September 27, 2009





Fiscal Year Ended


Change 2010 vs 2009September 26, 2010


September 27, 2009


Dollar Variance


% VarianceDollars


% of Net Revenues


Dollars


% of Net Revenues


Favorable (Unfavorable)


Favorable (Unfavorable)(Dollars in thousands)Net revenues

$
194,482



100.0
%

$
209,877



100.0
%

$
(15,395
)


(7.3
)%Cost of sales


170,826



87.8



184,326



87.8



13,500



7.3Gross profit


23,656



12.2



25,551



12.2



(1,895
)


(7.4
)Selling, general and administrative expenses


9,731



5.0



9,972



4.8



241



2.4Operating income


13,925



7.1



15,579



7.4



(1,654
)


(10.6
)Interest and other (income) expense, net


1,668



0.9



2,279



1.1



611



26.8Income before income taxes


12,257



6.3



13,300



6.3



(1,043
)


(7.8
)Income tax provision


4,682



2.4



4,999



2.4



317



6.3Net income

$
7,575



3.9
%

$
8,301



4.0
%

$
(726
)


(8.7
)%





Net Revenues.Net revenues for fiscal year 2010 decreased $15.4 million (7.3%) (5.5% was attributable to a volume/mix decrease and 1.8% was attributable to a pricing decrease) to $194.5 million from $209.9 million for fiscal year 2009, due to decreases in airline and retail net revenues offset partially by higher Foodservice revenue as discussed below.





Retail net revenues decreased $18.4 million (12.6%) to $128.0 million for fiscal year 2010 from $146.4 million for fiscal year 2009.  The decrease in retail net revenues was largely due to the previously disclosed reduced volume from H. J. Heinz Company.  This reduction in volume resulted in a decrease in retail net revenues of approximately $14.3 million.  Fiscal year 2010 includes $10.1 million in net revenues from sales to Heinz as Heinz was delayed in transitioning to its own plants.  The remaining decrease in retail net revenues is attributable to a $4.5 million decline in three other customers from the retail category due to the lagging economic recovery and their inventory management plans. For fiscal year 2010, the retail category as a percentage of net revenues decreased to 65.8% from 69.7%.





Foodservice net revenues increased $6.2 million (11.9%) to $58.5 million for fiscal year 2010 from $52.3 million for fiscal year 2009 due to the introduction of new products and increased volume from an existing customer offset by the conclusion of an existing customer’s promotional item ($2.4 million). For fiscal year 2010, the foodservice category as a percentage of net revenues increased to 30.1% from 24.9%.  We continue to increase our sales efforts in this category and believe that foodservice represents a significant opportunity for us in 2011 and beyond.





Airline net revenues decreased $3.1 million (27.9%) to $8.0 million for fiscal year 2010 from $11.1 million for fiscal year 2009. Due to consolidation of airlines combined with continued efforts in the airline industry to cut costs, airline net revenues may continue to decrease in future periods. For fiscal year 2010, the airline category as a percentage of net revenues decreased to 4.1% from 5.3% as we continue our transition to opportunities outside of this category.


16
 Table of Contents


Gross Profit.  Gross profit for fiscal year 2010 decreased $1.9 million (7.4%) to $23.7 million from $25.6 million for fiscal year 2009.  Gross margin remained unchanged at 12.2% for fiscal years 2010 and 2009 due to increased efficiencies and yields and favorable commodity prices offset by increased investment spending in the plants to achieve certification under the new global Food Safety Management Systems standard FSSC 22000 and brokerage paid to Safeway Inc. of $262,000 as a reduction to net revenues.  During the latter part of the third quarter of fiscal year 2010, Safeway Inc. ended its brokerage agreement and took the function in-house, so the brokerage we pay to Safeway Inc. is now recorded as a reduction of revenue.





Selling, General and Administrative Expenses.  SG&A expenses decreased $241,000 (2.4%) to $9.7 million for fiscal year 2010 from $10.0 million for fiscal year 2009. SG&A expenses as a percentage of net revenues increased slightly to 5.0% for fiscal year 2010 from 4.8% for fiscal year 2009 due to the year-over-year decrease in net revenues. The decrease in SG&A expenses resulted from a decrease in brokerage fees ($315,000) stemming primarily from the change in recording of brokerage expense for Safeway Inc. as described above and a decrease in personnel related expenses ($146,000). These reductions were partially offset by an increase in professional service fees ($178,000) relating primarily to litigation described in item 3 of this report.  We expect to incur increased legal fees during FY 2011 as we continue to vigorously contest the claims and grievances described in Item 3 of this report.





Operating Income.Operating income decreased $1.7 million (10.9%) to $13.9 million for fiscal year 2010 from $15.6 million for fiscal year 2009.  The decrease in operating income was the result of the decrease in gross profit as noted above.





Interest and Other (Income) Expense, net.Interest expense decreased $611,000 (26.6%) to $1.7 million for fiscal year 2010 from $2.3 million for fiscal year 2009 due to lower debt balances and lower variable interest rates offset by an increase of $301,000 in debt extinguishment expenses stemming from the refinancing of the GCF credit facility.




Income Tax Provision.  Income tax expense was $4.7 million for fiscal year 2010 compared to $5.0 million for fiscal year 2009.  The difference was a result of income before taxes decreasing $1.0 million from $13.3 million for fiscal year 2009 to $12.3 million during fiscal year 2010.  The effective tax rates were 38.2% and 37.6% for fiscal years 2010 and 2009, respectively.





Net Income.Net income for fiscal year 2010 was $7.6 million, or $0.48 per basic share and $0.47 per diluted share, compared to net income of $8.3 million, or $0.52 per basic and diluted share for fiscal year 2009.





We currently expect to continue profitable operations primarily through (a) growing revenues from profitable product lines, increasing our customer base and replacing lower margin accounts; (b) improving gross margins by increasing prices to customers where appropriate, streamlining additional costs and continuing to leverage our manufacturing and storage facilities to improve manufacturing efficiency; and (c) reducing future interest costs on outstanding debt through pre-payments on our debt.  However, no assurance can be given that we will be successful in any of these initiatives.  As discussed in “Risk Factors” contained in Item 1A of this report, we may be unable to improve our operating results if we suffer a decline in our manufacturing efficiency, the loss of major customers, continued cost-cutting measures in the airline industry, adverse changes in our operating costs or raw materials costs or other adverse changes to our business.


17
 Table of Contents


Fiscal Year Ended September 27, 2009 Compared to Fiscal Year Ended September 28, 2008





Fiscal Year Ended


Change 2009 vs 2008September 27, 2009


September 28, 2008


Dollar Variance


% VarianceDollars


% of Net Revenues


Dollars


% of Net Revenues


Favorable (Unfavorable)


Favorable (Unfavorable)(Dollars in thousands)Net revenues

$
209,877



100.0
%

$
238,780



100.0
%

$
(28,903
)


(12.1
)%Cost of sales


184,326



87.8



209,517



87.7



25,191



12.0Gross profit


25,551



12.2



29,263



12.3



(3,712
)


(12.7
)Selling, general and administrative expenses


9,972



4.8



8,647



3.6



(1,325
)


(15.3
)Operating income


15,579



7.4



20,616



8.6



(5,037
)


(24.4
)Interest and other (income) expense, net


2,279



1.1



3,663



1.5



1,384



37.8Income before income taxes


13,300



6.3



16,953



7.1



(3,653
)


(21.5
)Income tax provision


4,999



2.4



6,632



2.8



1,634



24.6Net income

$
8,301



4.0
%

$
10,321



4.3
%

$
(2,020
)


(19.6
)%





Net Revenues.Net revenues for fiscal year 2009 decreased $28.9 million (12.1%) (13.1% of the decrease was attributed to volume/mix offset by a 1.0% pricing increase) to $209.9 million from $238.8 million for fiscal year 2008, due to decreases in airline and retail net revenues as discussed below.





Retail net revenues decreased $27.6 million (15.9%) to $146.4 million for fiscal year 2009 from $174.0 million for fiscal year 2008.  The decrease in retail net revenues was largely due to the previously disclosed reduced volume from H. J. Heinz Company.  This reduction in volume resulted in a decrease in net revenues of approximately $19.1 million. The remaining decrease in retail net revenues is attributable to a $5.8 million decline in sales to Jenny Craig, Inc. due to the economic downturn and their inventory management plans. For fiscal year 2009, the retail category as a percentage of net revenues decreased to 69.7% from 72.9%.





Foodservice net revenues increased $8.2 million (18.6%) to $52.3 million for fiscal year 2009 from $44.1 million for fiscal year 2008 due to the anticipated increased sales to an existing customer as well as sales to a new customer. For fiscal year 2009, the foodservice category as a percentage of net revenues increased to 24.9% from 18.5%.





Airline net revenues decreased $9.6 million (46.4%) to $11.1 million for fiscal year 2009 from $20.7 million for fiscal year 2008. Due to continued efforts in the airline industry to cut costs, airline net revenues may continue to decrease in future periods. For fiscal year 2009, the airline category as a percentage of net revenues decreased to 5.3% from 8.7%.





Gross Profit.  Gross profit for fiscal year 2009 decreased by $3.7 million (12.6%) to $25.6 million from $29.3 million for fiscal year 2008.  Gross margin decreased slightly to 12.2% for fiscal year 2009 from 12.3% for fiscal year 2008 due primarily to higher overhead costs as a percentage of net revenues on lower sales volume in the fourth quarter of fiscal year 2009 as well as minor price reductions to some of our largest customers.  Prior to our fourth quarter, our gross margin was higher than fiscal year 2008 due largely to a more favorable sales mix along with increased efficiencies and yields, favorable commodity prices, lower freight charges, lower product development costs and modest increases in sales prices to several customers, offset partially by higher overhead costs as a percentage of net revenues on lower sales volume. In addition, in order to improve our gross margins, we continue to analyze our lower margin accounts and expect to move away from some of the accounts that do not meet our profit objectives towards higher margin business currently available to us.


18
 Table of Contents


Selling, General and Administrative Expenses.  SG&A expenses increased $1.3 million (15.3%) to $10.0 million for fiscal year 2009 from $8.6 million for fiscal year 2008. SG&A expenses increased as a percentage of net revenues from 3.6% in fiscal year 2008 to 4.8% in fiscal year 2009.  The increases were driven by higher brokerage and licensing fees ($461,000) stemming predominately from higher sales to Safeway Inc. and higher professional and legal fees relating primarily to litigation ($878,000) described in Item 3 of this report.





Operating Income.Operating income decreased $5.0 million (24.4%) to $15.6 million for fiscal year 2009 from $20.6 million for fiscal year 2008.  The decrease in operating income was the result of the decrease in gross profit and an increase in SG&A expenses as noted above.





Interest and Other (Income) Expense, net. Interest expense decreased $1.4 million (37.8%) for fiscal year 2009 to $2.3 million from $3.7 million for fiscal year 2008 due to lower debt balances and lower variable interest rates.





Income Tax Provision.  Income tax expense was $5.0 million for fiscal year 2009 compared to $6.6 million for fiscal year 2008.  The difference was a result of income before taxes decreasing $3.7 million from $17.0 million for fiscal year 2008 to $13.3 million during fiscal year 2009.  The effective tax rates were 37.6% and 39.1% for fiscal years 2009 and 2008, respectively.





Net Income.Net income for fiscal year 2009 was $8.3 million, or $0.52 per basic and diluted share, compared to net income of $10.3 million, or $0.66 per basic share and $0.65 per diluted share for fiscal year 2008.





Liquidity and Capital Resources





For fiscal years ended 2010 and 2009, our operating activities provided cash of $16.9 million and $14.7 million, respectively.  Cash generated from operations before working capital changes for fiscal year 2010 was $11.4 million.  Cash generated by changes in working capital was $5.5 million for fiscal year 2010 and resulted from decreases in accounts receivable, inventory and prepaid expenses and other assets of $4.3 million, $2.2 million and $376,000, respectively.  This was partially offset by a decrease in accounts payable and accrued liabilities of $1.1 million and $191,000, respectively.  At September 26, 2010, we had working capital of $24.4 million compared to working capital of $23.6 million at September 27, 2009.  We were able to fund our operations during fiscal year 2010 internally, without increasing our external debt, by executing the cash management procedures noted above.





During fiscal year 2010, our investing activities, consisting primarily of capital expenditures of $1.8 million, resulted in a net use of cash of approximately $1.8 million, compared to a net use of cash of approximately $3.1 million during fiscal year 2009.  The property and equipment additions were made to accommodate additional business opportunities, meet anticipated growth and improve operating efficiency, as well as achieve certification under the new global Food Safety Management Systems standard FSSC 22000.  We believe the short-term cash outlay for this certification will allow us future growth opportunities as we will now be able to compete for new customers and products.  We anticipate that cash generated from operating activities and borrowing availability under our existing credit facility will fund revenue growth and working capital needs in the near term.





During fiscal year 2010, our financing activities used cash of $14.6 million, compared to cash used by financing activities of $12.9 million during fiscal year 2009.  The net use of cash consisted primarily of $14.1 million of principal payments that reduced our outstanding debt.  Financing activities during fiscal year 2010 also included principal payment on equipment loans of $423,000 and cash paid in association with new financing arrangements of $71,000.  Subsequent to fiscal year 2010, we paid off an additional $5.5 million on our debt leaving us with a balance of $7.7 million.


19
 Table of Contents


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 is initially 1.75% and beginning no later than December 25, 2010, and adjusted quarterly thereafter, shall be 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 MarginGreater 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%





At September 26, 2010, there was $13.2 million outstanding under the Bank of America facility with an applicable interest rate of 2.01%.  In addition, the Company will pay an unused fee equal to 0.25% per annum.  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.  We recorded a pretax charge of approximately $301,000 in connection with the termination of the former financing arrangements in the fourth quarter of fiscal year 2010.   As of September 26, 2010, we had $16.8 million available to borrow under the new credit facility.





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.





For fiscal year 2010, we incurred $959,000 in interest expense, excluding amortization of deferred financing costs.  For fiscal year 2009, we incurred $1.9 million in interest expense, excluding amortization of deferred financing costs.  For fiscal year 2008, we incurred $3.3 million in interest expense, excluding amortization of deferred financing costs, net of $43,000 in capitalized interest.  During fiscal year 2010, the outstanding balance of the previous credit facility was reduced by mandatory and voluntary principal payments on the Tranche A Term Loan of $2.6 million and $6.5 million, respectively.  In addition, we also made a voluntary principal payment on the Tranche B Term Loan of $5.0 million during the first quarter of fiscal year 2010.





We previously executed a senior secured credit agreement with Guggenheim Corporate Funding, LLC (“GCF”) on April 17, 2006. Under the credit agreement, GCF acted 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, we 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 September 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.  At September 27, 2009, interest rates on the Tranche A Term Loans and Tranche B Term Loans were 3.5% and 6.0%, respectively.  The GCF facility was paid off on September 24, 2010 with the initial proceeds from the Bank of America facility.


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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.  On February 4, 2010, we repaid the balance of all three equipment loans.





We amended our existing operating lease agreements related to certain manufacturing equipment 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 September 26, 2010 the net book value of the assets was $212,000.





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.





Contractual Obligations and Other Commitments





We are obligated to make future payments under various contracts such as debt agreements, lease obligations and other purchase obligations.





Following is a summary of our contractual obligations at September 26, 2010:





Payments Due By PeriodContractual Obligations

Total


Within 1 Year


2-3 Years


4-5 Years


More than 5 YearsDebt maturities

$
13,197,647


$
-


$
13,197,647


$
-


$
-Interest expense(1)


935,483



316,664



618,819



-



-Operating lease    obligations (2)


11,787,815



3,323,624



4,914,742



2,470,928



1,078,521Other contractual     obligations


752,918



626,534



126,384



-



-Open purchase orders


10,410,776



10,410,776



-



-



-Total contractual    obligations

$
37,084,639


$
14,677,598


$
18,857,592


$
2,470,928


$
1,078,521


____________


(1)
Assumes only mandatory principal pay-down and the use of LIBOR as of September 26, 2010 on the Bank of America debt.


(2)
Includes real estate leases.





The above table outlines our obligations as of September 26, 2010 and does not reflect the changes in our obligations that occurred after that date. Subsequent to fiscal year 2010, we paid off an additional $5.5 million on our debt.  There have been no other material changes to our obligations as of December 9, 2010.


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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.





Critical Accounting Policies





Management’s discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  See Note 2 to the financial statements contained elsewhere in this report 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.





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.  Bad debt expense and accounts receivable write-offs, net of recoveries, historically have been relatively small, as we generally transact the substantial portion of our business with large, established food or service related businesses.  For fiscal years 2010, 2009 and 2008, our write-offs, net of recoveries, to the allowance for doubtful accounts were approximately $23,000, $2,000 and $20,000, respectively.





A significant portion of our total net revenues during the last two fiscal years was derived from three customers.  Panda Restaurant Group, Inc., Jenny Craig, Inc. and Safeway Inc., accounted for approximately 27%, 26% and 18%, respectively of our net revenues for fiscal year 2010 and approximately 22%, 25% and 17%, respectively, of our net revenues for fiscal year 2009.  Receivables related to Panda Restaurant Group, Inc. (through its distributors), Jenny Craig, Inc., Safeway Inc. and Pinnacle Foods Group LLC, accounted for approximately 29%, 24%, 17% and 16%, respectively of our total accounts receivable balance at September 26, 2010 and approximately 37%, 21%, 20% and 6%, respectively, of our total accounts receivable balance at September 27, 2009.


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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.  At September 26, 2010, 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 adopted the provisions of FASB guidance on accounting for uncertainty of income taxes on October 1, 2007.  The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with the standard on accounting for income taxes.  This guidance prescribes 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.  It also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.  As a result of the implementation of the guidance, we recorded no increase in the liability for unrecognized tax benefits, and the balance of unrecognized tax benefits was zero at September 26, 2010.


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We have also adopted the accounting policy that interest and penalties recognized are classified as part of income taxes.  No interest and penalties were recognized in the statement of income for fiscal year 2010.





ITEM 7A.
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 $27,000 the annual interest expense on our debt outstanding as of September 26, 2010.




ITEM 8.
Financial Statements and Supplementary Data








See the index to financial statements included in Part IV, Item 15.  The supplementary financial information required by Item 302 of Regulation S-K is contained in Note 12 of the notes to financial statements included in this report.




ITEM 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure






None.




ITEM 9A.
Controls and Procedures








Evaluation of Disclosure 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 September 26, 2010, that the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-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.





Management’s Report on Internal Control Over Financial Reporting





Management is responsible for establishing and maintaining adequate“internal control over financial reporting”as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Interim Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:





(i) pertainto the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofour assets;
  (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresare being made only in accordance with authorizations ofour management and directors; and


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Inherent Limitations on the Effectiveness of Controls




Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.




These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.




Changes in Internal Control Over Financial Reporting





During the quarter ended September 26, 2010, 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.





ITEM 9B.
Other Information








Not applicable.


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PART III





ITEM 10.
Directors, Executive Officers and Corporate Governance












Name

Age

Positions Held

DirectorSinceJames Rudis

61

Chairman of the Board, President, Chief Executive Officer and Director

1995Tracy E. Quinn

56

Interim Chief Financial Officer

-Robert A. Olivarez

31

Vice President-Finance and Secretary

-Harold Estes(1)

70

Director

2002Geoffrey A. Gerard(1)(2)(3)

65

Director

2002Alexander Auerbach(2)(3)

66

Director

2004Alexander Rodetis, Jr.(1)

68

Director

2004


____________




(1)
Member of audit committee.


(2)
Member of compensation committee.


(3)
Member of nominating and governance committee.





The following information regarding the principal occupations and other employment of our directors and executive officers during the past five years and their directorships in certain companies is as reported to us by each of them.





James Rudis was elected to our board of directors in April 1995 and has served as our President and Chief Executive Officer since June 1997. He also served as a director of TreeCon Resources, Inc. (our former parent company) from December 1992 to December 2003, and until December 2003 served as president of TreeCon Resources since July 1997 and chairman and chief executive officer of TreeCon Resources since February 1998.  He served as executive vice president of TreeCon Resources from March 1994 until July 1997.  Prior to his employment with us and with TreeCon Resources, Mr. Rudis was president of Quorum Corporation, a private consulting firm involved in acquisitions and market development.  From 1970 until 1984, he held various executive positions in CIT Financial Corporation, including vice president and regional manager of that company’s commercial finance division.





Mr. Rudis’ experience as our President and Chief Executive Officer gives him unique insights into our challenges, opportunities and operations.  He contributes to our board his strategic vision for growth, business strategy and strategic planning skills and marketing acumen.  In addition, Mr. Rudis’ prior experience sitting on the boards of other publicly-traded companies and exposure to different industries provide our board with insights regarding governance, finance, compensation, and other key matters.





Tracy E. Quinnhas served as our Interim Chief Financial Officer since September 2007.  Ms. Quinn filled various senior-level finance and operating positions for the H. J. Heinz Company prior to taking early retirement in 2005 after 21 years with that company. At Heinz, she served as corporate controller and chief accounting officer; vice president-finance with one of its U.S. frozen foods divisions; vice president-strategy development at the corporate level; managing director of its U.S. infant foods business unit; and chief financial officer or chief executive officer of various Heinz international operations.


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Robert A. Olivarez has served as our Secretary since May 2010, after the retirement of Richard A. Horvath.   Mr. Olivarez has also served as our Vice President-Finance since February 2010.  Prior to becoming Vice President-Finance, Mr. Olivarez was our Manager-Finance from June 2007.  Prior to his employment with us, Mr. Olivarez was in the assurance practice of PricewaterhouseCoopers, LLP in the Los Angeles, California office since 2001.





Harold Estes was appointed to our board of directors in October 2002.  Mr. Estes is the president of Texas Timberjack, Inc. (“TTI”), a wholly-owned subsidiary of TreeCon Resources.  Mr. Estes was appointed to the board of directors of TreeCon Resources in March 2004.He was previously elected as a director of TreeCon Resources in February 1996 and resigned in April 1997.  TTI is a distributor of industrial and commercial timber and logging equipment and is also engaged in certain related timber and sawmill operations.  Mr. Estes has been president of TTI since 1984, when he acquired TTI from Eaton Corporation.  Mr. Estes previously served as a director of Newton Bancshares, Inc., the parent of First National Bank of Newton (Texas), for approximately ten years until the sale of the bank in October 2001.





Mr. Estes management, operations and leadership experience as president of TTI as well as his experience on the boards of TreeCon Resources and Newton Bancshares, Inc., provides him with broad experience on manufacturing and business issues facing public companies.





Geoffrey A. Gerard was elected to our board of directors in February 2002.  Mr. Gerard served as secretary and general counsel of Equivest, Inc. from 1975 to 1977.  Mr. Gerard then served as secretary and general counsel for two privately held oil and gas exploration companies until 1978.  Mr. Gerard has been in the private practice of law in Dallas County, Texas since 1978, specializing in business transactions.  Mr. Gerard received a B.S. in Business-Finance and a J.D. from Indiana University.





Mr. Gerard’s legal and business experience provides a unique prospective to our board.  Mr. Gerard has been a registered principal through the Financial Industry Regulatory Authority (“FINRA”) for several years and has over 30 years experience as an attorney practicing in Dallas, TX, emphasizing on business organizations and investments.  Mr. Gerard has written many private-placement memorandums for entities seeking investment capital and prepared several registration statements for public offerings and reviewed and analyzed numerous public and private offerings for potential investors.





Alexander Auerbach was appointed to our board of directors in September 2004.  Mr. Auerbach is president of Alexander Auerbach & Co., Inc., a public relations and marketing services firm that he founded in 1986.  Prior to establishing Alexander Auerbach & Co., Inc., Mr. Auerbach served as chief operating officer of two magazine publishing companies.  Earlier in his career, Mr. Auerbach was a senior member of the business and financial news staff of The Los Angeles Times and a financial writer for The Boston Globe.  Mr. Auerbach holds a B.A. from Columbia University and an M.B.A. from the University of California at Los Angeles.





As president of his own public relations and marketing services firm, Mr. Auerbach advises many national, regional and early-stage companies in a wide range of industries on strategic issues and dealing with institutional and individual investors.  Mr. Auerbach provides our board with broad marketing, account management and customer service experience.





Alexander Rodetis, Jr. was appointed to our board of directors in September 2004. Mr. Rodetis is currently president and co-founder of Fairway Financial Services LLC, organized in October 2005, which provides financial and due diligence guidance to bank and non-bank lending institutions as well as to companies seeking solutions to their corporate finance requirements.  In addition, Mr. Rodetis is president of Pegasus Financial Services, L.L.C., which he founded in September 1996 and is currently engaged, on a project basis, to perform loan reviews and credit assessments for the loan portfolio of a community bank located on the East Coast.  Mr. Rodetis has been in the financial services community for over thirty-five years. Mr. Rodetis was the marketing and strategic planning coordinator of the Daley-Hodkin Group from March 2004 to September 2007, a business valuation, asset disposition and consulting organization, and previously held the position of inventory appraisal business head for the Group.  He served as senior vice president of General Motors Acceptance Corporation’s commercial finance division from 2002 to 2003, where he co-founded the special assets group.  From 1998 to 2002, Mr. Rodetis served as executive vice president of the Merchants Bank of New York, where he co-founded the asset-based lending corporation for the bank.  Prior to that, he served as vice president of Fremont Financial Corp. and of National Westminster Bancorp and held various credit and marketing positions at other banking institutions, including The Chase Manhattan Bank and Citibank North America, Inc.  Mr. Rodetis earned a B.S. in Accounting, a B.A. in Business Administration and an M.B.A. in finance from Fairleigh Dickinson University.  He has also completed financial analysis and corporate finance courses at The Harvard School of Business.


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Mr. Rodetis has numerous years experience in investments and management as the president and senior lending officer of various financial services companies and provides our board with strong financial and accounting skills.




Term of Office and Family Relationships





Our directors are elected at each annual stockholders’ meeting or at such other times as reasonably determined by our board of directors.  Each of our directors is to hold office until his successor is elected and qualified or until his earlier death, resignation or removal.  Each of our executive officers serves at the discretion of our board of directors.  There are no family relationships among our executive officers or directors.





Code of Ethics





Our board of directors has adopted a code of ethics that appliesto all of our directors, officers and employees.  The code of ethics constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and is our “code of conduct” within the meaning of the listing standards of NYSE AMEX.  We will provide a copy of our code ofethics to any person without charge, upon written request to Overhill Farms, Inc., Attention:  Investor Relations, 2727 East Vernon Avenue, Vernon, California 90058.





Audit Committee Composition





During fiscal year 2010, our audit committee was composed of Messrs. Rodetis, Gerard and Estes, with Mr. Rodetis serving as the committee chairman.  Our board of directorshas determined that Mr. Rodetis is an “audit committee financial expert” and that each of Messrs. Rodetis, Gerard and Estes are “independent” as defined in Sections 803A and 803B of the NYSE AMEX listing standards.




Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our common stock, to file initial reports of ownership and reports of changes in ownership with the Commission.  These officers, directors and stockholders are required by Commission regulations to furnish us with copies of all reports that they file.





Based solely upon a review of copies of the reports furnished to us during the fiscal year ended September 26, 2010 and thereafter, or any written representations received by us from directors, officers and beneficial owners of more than 10% of our common stock (“reporting persons”) that no other reports were required, we believe that, during fiscal year 2010, except as set forth below, all Section 16(a) filing requirements applicable to our reporting persons were met.





Geoffrey A. Gerard filed one late Form 4 reporting two transactions.


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ITEM 11.
Executive Compensation







Compensation Discussion and Analysis





Compensation Governance










Compensation Philosophy and Objectives










·
To provide an executive compensation structure and system that is both competitive in the marketplace and also internally equitable based upon the weight and level of responsibilities of each executive;





·
To attract, retain and motivate qualified executives within this structure, and reward them for outstanding performance-to-objectives and business results; and





·
To structure our compensation policy so that the compensation of executive officers is dependent in part on the achievement of our current year business plan objectives and dependent in part on the long-term increase in our net worth and the resultant improvement in stockholder value, and to maintain an appropriate balance between short and long-term performance objectives.



















Executive Compensation for Fiscal Year 2010







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Executive Bonuses





Upon recommendation of the compensation committee, our board of directors approved bonuses for fiscal year 2010 for our named executive officers, based upon their contributions to our success during fiscal year 2010.  The bonuses will be paid in fiscal year 2011.





For fiscal year 2010, Mr. Rudis served as our Chairman of the board of directors, Chief Executive Officer and President.  As part of the function of all three roles, Mr. Rudis served as the relationship manager to stockholders, lenders and all four of our previously disclosed significant customers.  In addition to setting the long-term strategy for us, Mr. Rudis was responsible for our overall profitability and maintained a close working relationship with all significant parties to help ensure positive results were achieved.





For fiscal year 2010, Ms. Quinn served as our Interim Chief Financial Officer and was responsible for overseeing: all of our accounting practices and policies; Commission and other regulatory interaction and correspondence; the establishment and maintenance of adequate control over financial reporting; and the implementation of new rules and regulations resulting from recently enacted legislation relating to proxy statements, healthcare and financial regulatory reform.  Ms. Quinn is also responsible for directing our financial strategy and forecasts and also overseeing our risk management process.  Under Ms. Quinn’s leadership as Interim Chief Financial Officer, during fiscal year 2010, we were able to reduce our debt by additional voluntary payments of $11.5 million and acquire more favorable terms under a new credit facility.


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Mr. Olivarez served as our Vice President-Finance (since February 2010) and Secretary (since May 2010) and was responsible for ensuring that our board of directors and Audit Committee met regularly in accordance with NYSE AMEX standards and also for creating and gathering materials needed for the meetings as well as preparing the minutes for each meeting.  Mr. Olivarez was also responsible for: implementing accounting practices and policies; interaction and correspondence with the Commission and other regulatory agencies; creating and submitting publicly filed documents; establishing and maintaining adequate internal control over financial reporting; and implementing new rules and regulations resulting from recently enacted legislation relating to proxy statements, healthcare and financial regulatory reform.  Mr. Olivarez was also responsible for shareholder interaction and correspondence.





For fiscal year 2010, Mr. Horvath served as the relationship manager with numerous customers until his retirement in April 2010.  Since Mr. Horvath retired prior to the end of fiscal year 2010, he was not eligible for a bonus.





To determine the amounts of the executive bonuses for fiscal year 2010, the compensation committee considered these individual accomplishments and also reviewed some of the Company’s more significant financial benchmarks, including but not limited to net revenue growth, gross margin improvement, earnings per share, cash flow and earnings before interest, taxes, depreciation and amortization (“EBITDA”).





For the fiscal year ended September 26, 2010, amid a sluggish economic recovery and the loss of $14.3 million in revenues from H. J. Heinz Company, Inc., we were able to remain profitable and not violate any of our debt covenants.  Although our net revenues and gross profit decreased $15.4 million and $1.9 million, respectively, in fiscal year 2010 compared to fiscal year 2009, our gross margin remained unchanged at 12.2%.  For fiscal year 2010, we had earnings per share of $0.48 per basic share and $0.47 per diluted share.  Lastly, our EBITDA for fiscal year 2010 was $17.6 million.  EBITDA for the fiscal year ended September 26, 2010, was calculated using the following measurements: net income of $7.6 million; interest expense of $959,000; tax expense of $4.7 million; depreciation and amortization expense of $3.9 million; and amortization expense of debt discount and deferred financing costs of $404,000.





The $194,350 bonus approved for James Rudis consisted of $187,000 in cash (approximately 42% of his base salary) and a $7,350 401(k) contribution.  The bonus approved for Tracy E. Quinn of $32,350, consisted of $25,000 in cash (approximately 7% of her base salary) and a $7,350 401(k) contribution.  The $16,642 bonus approved for Robert A. Olivarez consisted of $12,500 in cash  (approximately 9% of his base salary) and a $4,142 401(k) contribution, which represented 3% of Mr. Olivarez’ gross W-2 earnings for calendar year 2010.





Conclusion












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Summary Compensation Table





The following table sets forth for fiscal years 2010, 2009 and 2008 compensation awarded or paid to Mr. James Rudis, our Chairman, Chief Executive Officer and President, Ms. Tracy E. Quinn, our Interim Chief Financial Officer, Mr. Robert A. Olivarez, our Vice President-Finance and Secretary and Mr. Richard A. Horvath, our former Senior Vice President and Secretary, for services rendered to us.  Messrs. Rudis, Olivarez and Horvath and Ms. Quinn are also referred to as “named executive officers.”  Other than as indicated in the table below, none of our executive officers received total compensation in excess of $100,000 for fiscal year 2010.





Name and Principal Positions

Year

Salary ($)


Bonus ($)


All Other Compensation ($)


Total ($)James Rudis,

2010

$
439,849


$
194,350


$
232,715
(1)

$
866,914Chairman, President and

2009


371,178



177,850



227,407



776,435Chief Executive Officer

2008


352,075



251,900



196,117



800,092Tracy E. Quinn,

2010


354,462



32,350



72,054
(2)


458,866Interim Chief Financial

2009


360,000



57,350



80,253



497,603Officer

2008


358,269



6,900



120,290



485,459Robert A. Olivarez,

2010


134,808



16,642



—



151,450Vice President-Financeand SecretaryRichard A. Horvath, (3)

2010


110,663



—



—



110,663Senior Vice President

2009


157,200



29,716



—



186,916and Secretary

2008


149,886



25,552



—



175,438





(1)
Mr. Rudis received certain perquisites and other personal benefits in fiscal year 2010, which consist of the following:


a.
Premium paid of $17,966 for term life insurance for the benefit of Mr. Rudis’ spouse; and


b.
Mr. Rudis maintains offices in both Vernon, California and New York. $214,749 represents perquisites or other benefits relating to payment of or reimbursement for commuting expenses between New York and California, including $168,369 for airfare, $29,610 for lodging and $16,770 for transportation, meals and other miscellaneous expenses.





(2)
Ms. Quinn received certain perquisites and other personal benefits in fiscal year 2010, which consist of the following:


Ms. Quinn maintains her principal residence in Pennsylvania.  $72,054 represents perquisites or other benefits relating to payment of or reimbursement for commuting expenses between Pennsylvania and California, including $50,473 for airfare, $19,806 for lodging and $1,775 for transportation, meals and other miscellaneous expenses.





(3)
Mr. Horvath retired from the Company in April 2010.





Executive Employment Agreements and Arrangements





James Rudis





Mr. Rudis’ previous employment agreement expired on December 31, 2009.  On February 18, 2010, our board of directors approved a new employment agreement for Mr. Rudis.  The new agreement became effective on January 1, 2010 and will expire on December 31, 2011.  After the initial term, the relationship will be at-will and may be terminated by us at any time or by Mr. Rudis upon at least 60 days’ written notice.  Upon termination, Mr. Rudis would be entitled to receive accrued and unpaid base salary, unreimbursed business expenses and accrued but unused vacation and unused sick pay.


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Mr. Rudis’ base salary, as of September 26, 2010, was $450,000 per year and we will review his compensation annually and increase it in a percentage not less than that of the annual increase in the cost of living.  The employment agreement contains a covenant by Mr. Rudis not to compete with us during the term of his employment and for a period of one year thereafter.  We have agreed to provide at our expense a $1.0 million life insurance policy on Mr. Rudis’ life, payable to a beneficiary of his choice, and to pay to him up to $800 per month for an automobile lease and to reimburse him for all operating expenses relating to the leased automobile.  In addition, if Mr. Rudis chooses not to participate in our existing group medical insurance plan, we have agreed to reimburse him for health insurance premiums he pays through the term of the employment agreement and any extensions for him and his immediate family, up to the amounts he paid for such coverage immediately prior to the effective date of the employment agreement.  Mr. Rudis is entitled to four weeks vacation time annually and we have agreed to cash out and pay Mr. Rudis for the portion of any vacation time not used by the end of the calendar year in which it was earned or at such a later date as may be specified by Mr. Rudis.





Mr. Rudis is also entitled to receive a minimum payment of $300,000 (in addition to any other payments our compensation committee may award in its sole discretion) upon:





•
an individual, entity or group becoming the beneficial owner of more than 50% of the total voting power of our total outstanding voting securities on a fully-diluted basis;





•
an individual or entity acquiring substantially all of our assets and business; or





•
a merger, consolidation, reorganization, business combination or acquisition of assets or stock of another entity, other than in a transaction that results in our voting securities outstanding immediately before the transaction continuing to represent at least 50% of the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction.





However, a change in control does not include a financing transaction approved by our board of directors and involving the offering and sale of shares of our capital stock.





The employment agreement also provides that if Mr. Rudis is terminated by reason of his death or disability, he or his estate is entitled to receive:





•
any accrued, unpaid base salary payable in effect on the date of termination





•
any unreimbursed business expenses outstanding as of the date of termination; and





•
any accrued but unused vacation pay as of the date of termination.





If Mr. Rudis voluntarily resigns prior to the end of the term, he will not be entitled to receive any bonus payments.  If we terminate Mr. Rudis without cause, then subject to certain requirements, Mr. Rudis will be entitled to:





•
a severance benefit in the form of continuation of his base salary in effect at the date of termination and payment of COBRA health insurance premiums for the longer of twelve months or the remaining unexpired portion of the initial term of the agreement; and





•
a pro rated bonus payment under the terms of a bonus plan, if any, pursuant to which a bonus has been earned, payable at the time provided in the bonus plan.





Mr. Rudis was awarded a signing bonus of $50,000 in consideration of his execution of the agreement and is eligible to receive annual bonuses during the employment period as determined in the sole and absolute discretion of the Compensation Committee.


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In addition, Mr. Rudis maintains offices in both Vernon, California and New York.  As of September 26, 2010 we paid $214,749 in perquisites or other benefits relating to payment of or reimbursement for commuting expenses between New York and California.  This includes $168,369 for airfare, $29,610 for lodging and $16,770 for transportation, meals and other miscellaneous expenses.




Tracy E. Quinm Ms. Quinn’s employment arrangement commenced on September 10, 2007.  The initial term of Ms. Quinn’s employment was for 90 days, but is reviewable by us every 30 days, and terminable at-will by either party.   Ms. Quinn receives a monthly base salary of $30,000.  In addition, we have agreed to pay or reimburse Ms. Quinn for all reasonable travel expenses from the Pittsburgh, Pennsylvania area to southern California and all reasonable living expenses while she is conducting business on our behalf in southern California.  As of September 26, 2010, we paid  $72,054 in perquisites or other benefits relating to payment of or reimbursement for commuting expenses between Pennsylvania and California, including $50,473 for airfare, $19,806 for lodging and $1,775 for transportation, meals and other miscellaneous expenses.


Robert A. Olivarez
 
 Mr. Olivarez receives an annual base salary of $140,000.  Our board of directors determines Mr. Olivarez’ discretionary bonus based on performance and his contributions to our success.
 
 Richard A. Horvath





Mr. Horvath received an annual base salary of $150,000 and an automobile allowance of $600 per month until his retirement in April 2010.  Since Mr. Horvath retired prior to the end of fiscal year 2010, he was not eligible for a bonus.





Outstanding Equity Awards at Fiscal Year-End





The following table provides information regarding the number of shares of common stock underlying options held by the named executive officers at September 26, 2010.





Option AwardsName

Number of Securities Underlying Unexercised Options (#) Exercisable


Number of Securities Underlying Unexercised Options (#) Unexercisable


Option Exercise Price ($)


Option Expiration DateJames Rudis


300,000



-


$
1.60



(1
)69,136



-



1.47



(2
)10,288



-



1.50



(2
)10,288



-



2.00



(2
)10,288



-



2.50



(2
)Tracy E. Quinn


-



-



-



-Robert A. Olivarez


-



-



-



-Richard A. Horvath


20,000



-


$
1.60



(1
)7,000



-



1.47



(2
)


___________


(1)
Option expiration date is September 30, 2012.





(2)
Option expiration date is February 1, 2015.


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Potential Payments Upon Termination or Change in Control





Executive Employment Agreements and Arrangements.  We have entered into agreements with our named executive officers that provide certain benefits upon the termination of their employment under certain prescribed circumstances.  Those agreements are described above under   “ Executive Employment Agreements and Arrangements.”





Calculation of Potential Payments upon Termination or Change of Control.In accordance with the rules of the Commission, the following table presents our estimate of the benefits payable to the named executive officers under their employment agreements or arrangements assuming that their service to us terminated on September 24, 2010, the last business day of fiscal year 2010, under the following circumstances:  (A) a change in control occurred, as defined under Mr. Rudis’ employment agreement; (B) a qualifying termination occurred, which is a termination by Mr. Rudis for “good reason” or by us without “cause” under his employment agreement; or (C) a non-qualifying termination occurred, which is a voluntary resignation by Mr. Rudis for other than “good reason,” by us for “cause,” as defined under Mr. Rudis’ employment agreement, or by us prior to renewal as provided in the executive employment agreements or by us upon Mr. Rudis’ death or disability, or any termination of Ms. Quinn or Mr. Olivarez.




Name

Trigger

Salary and Bonus


Continuation of Benefits


Total Value (5)James Rudis

Change in Control

$
300,000
(1)

$
-


$
300,000Qualifying Termination


908,129
(2)


30,961
(3)


939,090Non-Qualifying Termination


174,933
(4)


-



174,933Tracy E. Quinn

Change in Control


-



-



-Qualifying Termination


-



-



-Non-Qualifying Termination


22,722
(4)


-



22,722
(4)Robert A. Olivarez

Change in Control


-



-



-Qualifying Termination


-



-



-Non-Qualifying Termination


4,366
(4)


-



4,366
(4)


____________




(1)
Pursuant to Mr. Rudis’ employment agreement, Mr. Rudis is entitled to a $300,000 lump sum change in control payment.




(2)
Includes base salary for the remainder of the term of employment or twelve months, whichever is longer, any bonus earned through the date of termination, accrued but unused vacation and unused sick pay.




(3)
Includes monthly premiums required to maintain his health insurance for the remainder of the term of employment or twelve months, whichever is longer.




(4)
Includes accrued base salary, accrued but unused vacation and unused sick pay.




(5)
Excludes the value to the executive of the continuing right to indemnification and continuing coverage under our directors’ and officers’ liability insurance, if applicable.


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Director Compensation





Non-employee directors are entitled to cash payments of $2,500 per month in consideration for their service on our board of directors.  We may also periodically award options to our directors under our existing option and stock plans or otherwise.





Mr. Rudis was compensated as a full-time employee and officer and received no additional compensation for service as a board member during fiscal year 2010.  Information regarding the compensation awarded to Mr. Rudis is included in the “Summary Compensation Table” above.





Director Compensation Table





The following table summarizes the compensation of our directors for the year ended September 26, 2010:


Name

Fees Earned or Paid in Cash

($)(1)


Option Awards

($)(2)


Total

($)Geoffrey A. Gerard

$
30,000


$
—


$
30,000Alexander Auerbach (3)


30,000



—



30,000Alexander Rodetis, Jr.


30,000



—



30,000Harold Estes


30,000



—



30,000


__________


(1)
For a description of annual director fees, see the disclosure above under “Director Compensation.” The value of perquisites and other personal benefits was less than $10,000 in aggregate for each director.





(2)
There were no stock options awarded during fiscal 2010.  Outstanding options held by each director as of September 26, 2010 are as follows:


·
Geoffrey A. Gerard – 27,000 options, which are fully vested.


·
Alexander Auerbach – 25,000 options, which are fully vested.


·
Alexander Rodetis, Jr. – 25,000 options, which are fully vested.





(3)
Mr. Auerbach’s firm, Alexander Auerbach & Co. Inc., also provides us with public relations and marketing services, for which we paid $47,000 with respect to fiscal year 2010.  See “Certain Relationships and Related Transactions, and Director Independence” in Item 13 of this report.




Compensation Committee Interlocks and Insider Participation





During fiscal year 2010, the compensation committee was composed of Messrs. Auerbach and Gerard, with Mr. Auerbach serving as the committee chairman.  No director who was a member of the compensation committee during fiscal year 2010 was an officer or employee of Overhill Farms, Inc. during fiscal year 2010, was formerly an officer of Overhill Farms, Inc., or had any relationship requiring disclosure pursuant to Item 404 of Regulation S-K under the Securities Act of 1933, as amended, except that as disclosed in Item 13 of this report, Mr. Auerbach is a stockholder, director and officer of a company that provided us with public relations and marketing services in exchange for fees that constituted more than 5%, or approximately $47,000, for our fiscal year 2010, of that company’s gross revenues for its fiscal year ended January 31, 2010.





During fiscal year 2010, none of our executive officers served as a member of a compensation committee of another entity (or other board committee of such company performing similar functions or, in the absence of any such committee, the entire board of directors of such corporation), one of whose executive officers serves on our compensation committee.  During 2010, none of our executive officers served as a director of another entity, one of whose executive officers served on our compensation committee.  During fiscal year 2010, none of our executive officers served as a member of the compensation committee of another entity, one of whose executive officers served as a director of our company.


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The following Compensation Committee Report is not deemed filed with the Commission.  Notwithstanding anything to the contrary set forth in any of our previous filings made under the Securities Act or under the Exchange Act that might incorporate future filings made by us under those statutes, the Compensation Committee Report will not be incorporated by reference into any such prior filings or into any future filings made by us under those statutes.




Compensation Committee Report




The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management, and based on that review and discussion, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the Annual Report on Form 10-K for the fiscal year ended September 26, 2010.




Respectfully submitted,Compensation CommitteeAlexander Auerbach, ChairmanGeoffrey A. Gerard




ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters








As of December 8, 2010, a total of 15,823,271 shares of our common stock were outstanding.  The following table sets forth certain information as of that date regarding the beneficial ownership of our common stock by:





•
each of our directors;





•
each of the named executive officers included in the Summary Compensation Table contained in Item 11 of this report;





•
all of our directors and executive officers as a group; and





•
each person known by us to beneficially own more than 5% of the outstanding shares of our common stock.





Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by the Commission and generally includes voting or investment power with respect to securities.  Except as indicated below, we believe each holder possesses sole voting and investment power with respect to all of the shares of common stock owned by that holder, subject to community property laws where applicable.  In computing the number of shares beneficially owned by a holder and the percentage ownership of that holder, shares of common stock subject to options held by that holder that are currently exercisable or are exercisable within 60 days after the date of the table are deemed outstanding.  Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person or group.





The inclusion of shares in this table as beneficially owned is not an admission of beneficial ownership.  Except as indicated below, the address for each named beneficial owner is the same as ours.


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Name and Address of Beneficial Owner

Amount and Nature of Beneficial Ownership


Percent of ClassHotchkis and Wiley Capital Management, LLC


2,624,352
(1)


16.6
%Lord Abbett & Co. LLC


2,507,575
(2)


15.8
%Harold Estes


1,111,565
(3)


7.0
%James Rudis


605,550
(4)


3.7
%Geoffrey A. Gerard


36,500
(5)


*Alexander Auerbach


35,000
(6)


*Richard A. Horvath


27,000
(7)


*Alexander Rodetis, Jr.


26,700
(8)


*Tracy E. Quinn


-



-Robert A. Olivarez


-



-All directors and executive officers as a group(8 persons)


1,842,315
(9)


11.3
%





*
Less than 1.0%.





(1)
Based upon Schedule 13F-HR filed with the Commission for September 30, 2010. On behalf of its investment advisory clients, the holder has sole voting power over 1,286,400 shares and sole dispositive power over 2,624,352 shares.  The address for the holder is 725 S. Figueroa Street 39th Floor, Los Angeles, California 90017.





(2)
Based upon Schedule 13F-HR filed with the Commission for September 30, 2010.  On behalf of its investment advisory clients, the holder has sole voting power over 2,081,061 shares and sole dispositive power over 2,507,575 shares.  The address for the holder is 90 Hudson Street, Jersey City, New Jersey 07302.





(3)
Mr. Estes’ address is 6004 South US Highway 59, Lufkin, Texas 75901.





(4)
Includes 400,000 shares of common stock underlying options.





(5)
Includes 27,000 shares of common stock underlying options.





(6)
Includes 25,000 shares of common stock underlying options.





(7)
Includes 27,000 shares of common stock underlying options.





(8)
Includes 25,000 shares of common stock underlying options.





(9)
Includes 504,000 shares of common stock underlying options.


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Equity Compensation Plan Information





The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 26, 2010.





Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and right


Weighted-average exercise price of outstanding options, warrants and rights


Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(a)


(b)


(c)Equity compensation plans approved by security holders


521,000
(1)

$
1.61



139,000
(2)Equity compensation plans not approved by security holders


-



-



-Total


521,000


$
1.61



139,000


_______




(1)
Represents shares of common stock underlying options granted under our Amended and Restated 2002 Employee Stock Option Plan and Amended and Restated 2005 Stock Plan.




(2)
Represents shares of common stock authorized for issuance under our Amended and Restated 2002 Employee Stock Option Plan, which plan was originally adopted by our board of directors and then majority stockholder on September 25, 2002, to be effective as of October 29, 2002; the plan was further approved by our stockholders at our 2003 annual meeting and was amended and restated by our compensation committee (further stockholder approval was not required) on December 3, 2008.  Also represents shares of common stock authorized for issuance under our Amended and Restated 2005 Stock Plan, which was adopted by our board of directors on February 1, 2005, approved by then majority stockholder on February 24, 2005 and approved by our stockholders at our 2005 annual meeting and was amended and restated by our compensation committee (further stockholder approval was not required) on December 3, 2008.  Our Amended and Restated 2002 Employee Stock Option Plan and Amended and Restated 2005 Stock Plan each provide that if, at any time while that plan is in effect or unexercised options granted under that plan are outstanding, there is an increase or decrease in the number of issued and outstanding shares of common stock of Overhill Farms, Inc. through the declaration of a stock dividend or through a recapitalization that results in a stock split, combination or exchange of shares, then appropriate adjustment shall be made in the maximum number of shares authorized for issuance under that plan so that the same proportion of our issued and outstanding shares of common stock will continue to be subject to being optioned under the plan and appropriate adjustment will be made in the number of shares and the exercise price per share then subject to outstanding options so that the same proportion of our issued and outstanding shares will remain subject to purchase at the same aggregate exercise price.





ITEM 13.
Certain Relationships and Related Transactions, and Director Independence







Review, Approval or Ratification of Transactions with Related Persons





Our board of directors has the responsibility to review and discuss with management and approve material transactions with related parties.  These transactions are governed by our Policies and Procedures for the Approval of Related Party Transactions.  During the review process, the material facts as to the related party’s interest in a transaction are disclosed to all board members.  Under the policies and procedures, the board is to review each interested transaction with a related party that requires approval and either approve or disapprove of the entry into the related party transaction.  A related party transaction is any transaction in which we are a participant and any related party has or will have a direct or indirect interest.  Transactions that are in the ordinary course of business and would not require either disclosure pursuant to Item 404(a) of Regulation S-K or approval of the board would not be deemed a related party transaction.  No director may participate in any discussion or approval of a related party transaction with respect to which he or she is a related party.  Our board intends to approve only those related party transactions that are in our best interests.


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Transactions with Related Persons





Other than as described below, there were no transactions or series of transactions to which we were or are a party involving an amount in excess of $120,000 and in which any director, executive officer, holder of more than 5% of our voting stock, or members of the immediate family of any foregoing persons, had or will have a direct or indirect material interest.  The transaction listed below was approved by our board of directors, and the interest of Mr. Auerbach in this matter described below was disclosed to our board of directors before our board of directors approved the matter.





In February 2004, we engaged Alexander Auerbach & Co., Inc. (“AAPR”) to provide us with public relations and marketing services.  AAPR provides public relations, media relations and communications marketing services to support our sales activities.  Alexander Auerbach, who is one of our directors, is a stockholder, director and officer of AAPR.  We paid to AAPR $47,000 for services rendered under this engagement during fiscal year 2010.  These fees totaled more than 5% of AAPR’s gross revenues for its fiscal year ended January 31, 2010.





Director Independence





NYSE AMEX rules and the charters of our board committees provide that a majority of our board of directors and all members of our audit, compensation and nominating and governance committees of our board of directors will be independent.  On an annual basis, each director and executive officer is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with us in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest.  Following completion of these questionnaires, the board of directors, with the assistance of the nominating and governance committee, makes an annual determination as to the independence of each director using the current standards for “independence” established by the Commission and NYSE AMEX and consideration of any other material relationship a director may have with us.





Our board of directors has determined that each of our non-employee directors is “independent” as defined in the general board independence standard contained in Section 803A of the NYSE AMEX listing standards.  Our board of directors also has determined that each of Messrs. Rodetis, Gerard,and Estes are “independent” as defined in Sections 803A and 803B of the NYSE AMEX listing standards applicable to audit committee members. In addition, our board of directors has determined that Mr. Auerbach is “independent” under Section 803A of the NYSE AMEX listingstandards applicable to compensation committee members. Also, our board of directors has determined that Messrs. Gerard and Auerbach are  “independent” under Section 803A of the NYSE AMEX listing standards applicable to nominating and governance committee members.


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ITEM 14.
Principal Accountant Fees and Services







Audit and Non-Audit Fees




The following table presents fees for professional audit services rendered by Ernst & Young LLP for the audit of our annual financial statements for fiscal years 2010 and 2009.





2010


2009Audit Fees

$
430,000


$
430,000Audit-Related Fees


--



--Tax Fees


--



--All Other Fees


--



--





Audit Fees.  Audit fees consist of amounts billed for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K, and reviews of our interim financial statements included in our Quarterly Reports on Form 10-Q and our Registration Statement on Form S-3, including amendments thereto.





Audit-Related Fees.  Audit-Related Fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements but are not reported under “Audit Fees.”





Tax Fees.Tax Fees consist of fees for professional services for tax compliance activities, including the preparation of federal and state tax returns and related compliance matters.





All Other Fees.  Consists of amounts billed for services other than those noted above.





Pre-Approval Policy





Our audit committee’s policy is to pre-approve all auditing services and permitted non-audit services to be performed for us by our independent auditors, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the audit committee prior to the completion of the audit.  During fiscal year 2009, all services performed by Ernst & Young LLP were pre-approved by our audit committee in accordance with these policies and applicable Commission regulations.


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PART IV





ITEM 15.
Exhibits and Financial Statement Schedules








(a)      The following financial statements are filed as part of this report:





Report of Independent Registered Public Accounting Firm





Balance Sheets — September 26, 2010 and September 27, 2009





Statements of Income — Years Ended September 26, 2010, September 27, 2009 and September 28, 2008





Statements of Stockholders’ Equity — Years Ended September 26, 2010, September 27, 2009 and September 28, 2008





Statements of Cash Flows — Years Ended September 26, 2010, September 27, 2009 and September 28, 2008





Notes to Financial Statements





(b)      The following exhibits are attached to or incorporated by reference herein:





Exhibit Number

Exhibit Title3.1(2)

Second Amended and Restated Articles of Incorporation of Overhill Farms, Inc. filed on June 1, 2009 with the Nevada Secretary of State (Exhibit 3.1)3.2(12)

Second Amended and Restated Bylaws of Overhill Farms, Inc., adopted effective as of April 2, 2009 (Exhibit 3.1)4.1 (1)

Form of the specimen common stock certificate of Overhill Farms, Inc. (Exhibit 4.1)10.1 (11)

Lease dated November 15, 2008 between U.S. Growers Cold Storage, Inc. and Overhill Farms, Inc. regarding premises located at 3055 E. 44th Street, 3021 E. 44th Street, 3009 E. 44th Street and 3001 E. 44th Street Vernon, California (Exhibit 10.1)10.2 (3)

Master Lease Agreement dated as of August 1, 2002 between General Electric Capital Corporation and Overhill Farms, Inc. and related documentation regarding freezers and various other equipment (Exhibit 10.35)10.3 (3)

Industrial Real Estate Lease (Single-Tenant Facility) dated April 22, 1994 between Vernon Associates and Ernest Paper Products, Inc. and related addendum regarding premises located at 2727 E. Vernon Avenue, Vernon, California (Exhibit 10.86)10.4 (3)

Standard Industrial/Commercial Single-Tenant Lease – Net dated January 1, 2002 by and between Vernon Associates, LLC and Overhill Farms, Inc. regarding premises located at 2727 E. Vernon Avenue, Vernon, California (Exhibit 10.88)10.5 (3)

Addendum to Standard Industrial/Commercial Single-Tenant Lease – Net regarding premises located at 2727 E. Vernon Avenue, Vernon, California (Exhibit 10.89)10.6 (4)

Consulting Agreement dated February 18, 2004 between Overhill Farms, Inc. and Alexander Auerbach & Co., Inc. (Exhibit 10.1)




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10.7 # (11)

Amended and Restated 2002 Employee Stock Option Plan of Overhill Farms, Inc. (Exhibit 10.8)10.8 # (11)

Amended and Restated 2005 Stock Plan of Overhill Farms, Inc. (Exhibit 10.9)10.9 # (5)

Form of Restricted Stock Purchase Agreement Under 2005 Stock Plan (Exhibit 10.3)10.10 # (6)

Form of Stock Option Agreement Under 2005 Stock Plan (Exhibit 10.2)10.11 # (10)

Form of Stock Option Agreement Under 2002 Employee Stock Option Plan (Exhibit 4.7)10.12 (7)

Credit Agreement, dated September 24, 2010, between Overhill Farms, Inc. and Bank of America, N.A. (Exhibit 10.1)10.13 (8)

Summary of Director Compensation (Exhibit 10.22)10.14 # (9)

Description of Employment Arrangement between Overhill Farms, Inc. and Tracy E. Quinn10.15 # (13)

Employment Agreement, entered into as of February 18, 2010 between Overhill Farms, Inc., and James Rudis (Exhibit 10.1)10.16 # **

Description of Employment Arrangement between Overhill Farms, Inc. and Robert A. Olivarez23**

Consent of Independent Registered Public Accounting Firm31.1**

Certification of Principal 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**

Certification of Principal 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**

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






**    Filed herewith


#      Management contract or compensatory plan or arrangement


(1)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Registration Statement on Form 10 (File No. 1-16699).


(2)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2009.


(3)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 28, 2003.


(4)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for September 17, 2004.


(5)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for February 1, 2005.


(6)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for February 24, 2005.


(7)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for September 30, 2010.


(8)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended October 1, 2006.


(9)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007.


43
 Table of Contents


(10)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Registration Statement on Form S-8 (Registration No. 333-127022).


(11)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 28, 2008.


(12)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for April 9, 2009.


(13)
Incorporated by reference to the exhibit shown in parentheses included in the Registrant’s Current Report on Form 8-K for February 18, 2010.





(c)    The following schedule is included herein:





Schedule II – Valuation and Qualifying Accounts and Reserves





Schedules for which provision is made in the applicable rules and regulations of the Commission and are not required under the related instructions or are inapplicable have been omitted.


44
 Table of Contents


SIGNATURES




Pursuant to the requirements of Section 13 or 15(d) 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.




By:
/s/ James RudisName: James RudisTitle: Chairman, President and Chief Executive OfficerDate: December 9, 2010




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




Signature

Title

Date/s/ James Rudis

Chairman of the Board of Directors, President and Chief

December 9, 2010James Rudis

Executive Officer (principal executive officer)/s/ Tracy E. Quinn

Interim Chief Financial Officer  (principal financial and

December 9, 2010Tracy E. Quinn

accounting officer)/s/ Alexander Auerbach

Director

December 9, 2010Alexander Auerbach/s/ Harold Estes

Director

December 9, 2010Harold Estes/s/ Geoffrey A. Gerard

Director

December 9, 2010Geoffrey A. Gerard/s/ Alexander Rodetis, Jr.

Director

December 9, 2010Alexander Rodetis, Jr.


45
 Table of Contents


OVERHILL FARMS, INC.





INDEX TO FINANCIAL STATEMENTS








Audited Financial Statements:

Page:Report of Independent Registered Public Accounting Firm

F-2Balance Sheets as of September 26, 2010 and September 27, 2009

F-3Statements of Income for the Years Ended September 26, 2010, September 27, 2009 and September 28, 2008

F-5Statements of Stockholders’ Equity for the Years Ended September 26, 2010, September 27, 2009 and September 28, 2008

F-6Statements of Cash Flows for the Years Ended September 26, 2010, September 27, 2009 and September 28, 2008

F-7Notes to Financial Statements

F-9Schedule II – Valuation and Qualifying Accounts and Reserves

F-23


F-1
 Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of Directors and Stockholders of Overhill Farms, Inc.




We have audited the accompanying balance sheets of Overhill Farms, Inc. as of September 26, 2010 and September 27, 2009, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 26, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(c). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.




We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.




In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Overhill Farms, Inc. at September 26, 2010 and September 27, 2009, and the results of its operations and its cash flows for each of the three years in the period ended September 26, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.




/s/ ERNST & YOUNG LLP




Los Angeles, California


December 9, 2010


F-2
 Table of Contents


OVERHILL FARMS, INC.





BALANCE SHEETS





Assets








September 26, 2010


September 27, 2009Current assets:Cash

$
5,967,741


$
5,430,295Accounts receivable, net of allowance for doubtful accounts of zero and $15,000 in 2010 and 2009, respectively


14,121,600



17,854,041Inventories


13,059,063



15,263,224Prepaid expenses and other


1,611,049



1,859,173Deferred income taxes


1,073,897



1,122,211Total current assets


35,833,350



41,528,944Property and equipment, at cost:Fixtures and equipment


25,041,914



24,593,878Leasehold improvements


12,528,025



11,394,840Automotive equipment


92,886



44,60737,662,825



36,033,325Less accumulated depreciation and amortization


(22,524,036
)


(19,196,429
)Total property and equipment


15,138,789



16,836,896Other non-current assets:Goodwill


12,188,435



12,188,435Deferred financing costs, net of accumulated amortization of $379,000 and $419,000 in 2010 and 2009, respectively


235,484



166,620Other


2,381,261



2,916,475Total other non-current assets


14,805,180



15,271,530Total assets

$
65,777,319


$
73,637,370








The accompanying notes are an integral


part of these financial statements.


F-3
 Table of Contents


OVERHILL FARMS, INC.





BALANCE SHEETS (continued)





Liabilities and Stockholders’ Equity








September 26, 2010


September 27, 2009Current liabilities:Accounts payable

$
8,203,803


$
9,338,604Accrued liabilities


3,248,436



3,272,770Current maturities of long-term debt


-



5,271,441Total current liabilities


11,452,239



17,882,815Long-term accrued liabilities


536,730



466,987Deferred tax liabilities


1,519,463



1,899,658Long-term debt, less current maturities, net of unamortized debt discount of zero and $535,000 in 2010 and 2009, respectively


13,197,647



21,891,204Total liabilities


26,706,079



42,140,664Commitments and contingencies (Note 10)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, issued and outstanding 15,823,271 shares in 2010 and 2009.


158,233



158,233Additional paid-in capital


11,558,479



11,558,479Retained earnings


27,354,528



19,779,994Total stockholders’ equity


39,071,240



31,496,706Total liabilities and stockholders’ equity

$
65,777,319


$
73,637,370








The accompanying notes are an integral


part of these financial statements.


F-4
 Table of Contents


OVERHILL FARMS, INC.




STATEMENTS OF INCOME








For the Years EndedSeptember 26, 2010

(52 weeks)


September 27, 2009

(52 weeks)


September 28, 2008

(52 weeks)Net revenues

$
194,481,635


$
209,877,039


$
238,780,014Cost of sales


170,825,958



184,326,050



209,516,642Gross profit


23,655,677



25,550,989



29,263,372Selling, general and administrative expenses


9,730,674



9,971,692



8,647,533Operating income


13,925,003



15,579,297



20,615,839Interest expense:Interest expense


(958,973
)


(1,873,574
)


(3,300,041
)Amortization of debt discount and deferred financing costs


(404,076
)


(406,016
)


(406,016
)Debt extinguishment cost


(300,808
)


-



-Total interest expense


(1,663,857
)


(2,279,590
)


(3,706,057
)Other (expense) income


(3,991
)


-



42,964Income before income taxes


12,257,155



13,299,707



16,952,746Income taxes


4,682,621



4,998,495



6,631,442Net income

$
7,574,534


$
8,301,212


$
10,321,304Net income per share – basic

$
0.48


$
0.52


$
0.66Weighted-average shares outstanding – basic


15,823,271



15,823,271



15,747,434Net income per share – diluted

$
0.47


$
0.52


$
0.65Weighted-average shares outstanding – diluted


16,049,587



16,028,698



15,992,467








The accompanying notes are an integral


part of these financial statements.


F-5
 Table of Contents


OVERHILL FARMS, INC.





STATEMENTS OF STOCKHOLDERS' EQUITY








Preferred Stock


Common Stock


Additional Paid-In


Retained


Accumulated Other ComprehensiveShares


Amount


Shares


Amount


Capital


Earnings


Loss


TotalBalance, September 30, 2007


-


$
-



15,620,271


$
156,203


$
11,116,989


$
1,157,478


$
(11,644
)

$
12,419,026Exercise of stock options


-



-



203,000



2,030



292,249



-



-



294,279Tax deduction from option exercises


-



-



-



-



149,241



-



-



149,241Comprehensive income:Net income


-



-



-



-



-



10,321,304



-



10,321,304Unrealized loss on marketable securities


-



-



-



-



-



-



11,644



11,644Total comprehensive income






























10,332,948Balance, September 28, 2008


-



-



15,823,271



158,233



11,558,479



11,478,782



-



23,195,494Comprehensive income:Net income


-



-



-



-



-



8,301,212



-



8,301,212Total comprehensive income






























8,301,212Balance, September 27, 2009


-



-



15,823,271



158,233



11,558,479



19,779,994



-



31,496,706Comprehensive income:Net income


-



-



-



-



-



7,574,534



-



7,574,534Total comprehensive income






























7,574,534Balance, September 26, 2010


-


$
-



15,823,271


$
158,233


$
11,558,479


$
27,354,528


$
-


$
39,071,240








The accompanying notes are an integral


part of these financial statements.


F-6
 Table of Contents


OVERHILL FARMS, INC.





STATEMENTS OF CASH FLOWS






For the Years EndedSeptember 26, 2010

(52 weeks)


September 27, 2009

(52 weeks)


September 28, 2008

(52 weeks)Operating Activities:Net income

$
7,574,534


$
8,301,212


$
10,321,304Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


3,999,687



3,455,560



3,138,269Amortization of debt discount and deferred financing costs


404,076



406,016



406,016Debt extinguishment cost


300,808



-



-Loss (gain) on asset disposals


3,973



(56,582
)


66,351(Recovery) loss on recalled products


(525,000
)


-



885,540(Recovery) provision of doubtful accounts


(15,000
)


15,000



(18,202
)Deferred income tax (benefit) provision


(331,881
)


270,503



(44,267
)Loss on sale of marketable securities


-



-



8,325Changes in:Accounts receivable


4,272,441



2,384,592



37,989Inventories


2,204,161



2,030,852



717,742Prepaid expenses and other


375,595



(323,192
)


(1,245,243
)Accounts payable


(1,134,801
)


(1,839,082
)


(3,827,708
)Accrued liabilities


(191,490
)


71,222



219,890Net cash provided by operating activities


16,937,103



14,716,101



10,666,006Investing Activities:Additions to property and equipment


(1,828,703
)


(2,053,413
)


(1,359,090
)Proceeds from sale of property and equipment


637



61,980



-Sale of marketable securities


-



-



53,976Acquisition of wastewater capacity units


-



(1,060,741
)


-Net cash used in investing activities


(1,828,066
)


(3,052,174
)


(1,305,114
)








The accompanying notes are an integral


part of these financial statements.


F-7
 Table of Contents


OVERHILL FARMS, INC.





STATEMENTS OF CASH FLOWS (continued)








For the Years EndedSeptember 26, 2010

(52 weeks)


September 27, 2009

(52 weeks)


September 28, 2008

(52 weeks)Financing Activities:Borrowings under previous credit facility


-



-



1,000,000Borrowings under new credit facility


13,197,647



-



-Principal payments on equipment loans


(422,831
)


(227,052
)


(210,695
)Principal payments on previous credit facility


(27,275,028
)


(12,364,734
)


(5,000,000
)Principal payments on capital lease obligation


-



(279,422
)


(282,009
)Cash paid in association with previous financing arrangements


(71,379
)


-



-Exercise of stock options, including tax benefit


-



-



443,520Net cash used in financing activities


(14,571,591
)


(12,871,208
)


(4,049,184
)Net increase (decrease) in cash


537,446



(1,207,281
)


5,311,708Cash at beginning of year


5,430,295



6,637,576



1,325,868Cash at end of year

$
5,967,741


$
5,430,295


$
6,637,576Supplemental Schedule of Cash Flow Information:Cash paid during the year for:Interest

$
1,060,037


$
1,997,961


$
3,097,552Income taxes

$
4,803,946


$
5,075,000


$
6,869,000








The accompanying notes are an integral


part of these financial statements.


F-8
 Table of Contents


OVERHILL FARMS, INC.





NOTES TO FINANCIAL STATEMENTS





September 26, 2010








1.
COMPANY AND ORGANIZATIONAL MATTERS





Nature of Business





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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Fiscal Year





The Company utilizes a 52- to 53- week accounting period, which ends on the last Sunday of September in each fiscal year if September 30 does not fall on a Saturday, or October 1 if September 30 falls on a Saturday.  The fiscal years ended September 26, 2010, September 27, 2009 and September 28, 2008 were 52-week periods.





Deferred Financing Costs and Debt Discount





Debt financing costs are deferred and amortized as additional interest expense over the term of the related debt.  Amortization of these costs totaled $404,000, $406,000 and $406,000 for the fiscal years ended September 26, 2010, September 27, 2009 and September 28, 2008, respectively.   On September 24, 2010, the unamortized portions of the deferred financing costs ($18,000) and debt discount ($211,000) associated with the Guggenheim Corporate Funding, LLC (“GCF”) credit facility was written off in connection with the termination of the GCF facility.





Financial Instruments





The fair value of financial instruments is determined by reference to market data and by other valuation techniques as appropriate.  The Company believes the carrying value of the debt approximates fair value at both September 26, 2010 and September 27, 2009, as the debt bears interest at variable rates based on prevailing market conditions.  The fair values of other financial instruments approximate their recorded values due to their short-term nature.





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.  The Company uses a standard costing system to estimate its FIFO cost of inventory at the end of each reporting period.  Historically, standard costs have been materially consistent with actual costs.  The Company periodically reviews its inventory for excess items, and writes it down based upon the age of specific items in inventory and the expected recovery from the disposition of the items.


F-9
 Table of Contents


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





Inventory write-offs were $487,000, $720,000 and $1.4 million for fiscal years 2010, 2009 and 2008 respectively.





The Company classifies costs related to shipping as cost of sales in the accompanying statements of income.





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 the Company’s 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 life 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.  Depreciation expense was $3.5 million, $3.2 million and $3.0 million for fiscal years 2010, 2009 and 2008, respectively.





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.  The fixtures and equipment balances included $1.4 million and $2.3 million of construction in process at September 26, 2010 and September 27, 2009, respectively.  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.





Licensing Fee





During fiscal year 2008, the Company entered into a five-year licensing agreement (with two renewable five-year terms) with Better Living Brands tmAlliance (“Alliance”) for the exclusive right to produce and sell frozen entrées under the Eating Right tm and O Organicstm brands.  The Company agreed to pay a one-time $1.25 million licensing fee that it is amortizing over five years.  For fiscal years 2010, 2009 and 2008, amortization expense related to the licensing fee was $261,000, $226,000 and $84,000 respectively.  In addition, the Company made royalty fee prepayments of $125,000 each in May 2008 and in October 2008 that will be applied as a credit against future earned royalties.





Goodwill





Goodwill is evaluated at least annually for impairment.  The Company has one reporting unit and estimates fair value based upon a variety of factors, including discounted cash flow analysis, market capitalization and other market-based information.  The Company performed its evaluation of goodwill for impairment as of September 26, 2010, which indicated that goodwill was not impaired.





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 fiscal years 2010, 2009 or 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.


F-10
 Table of Contents


Revenue Recognition





The Company’s revenues arise from one business segment – the development and manufacture of frozen food products.  Revenues are recognized when title and risk of loss of product pass to the customer, which is either at point of shipping or at destination, depending on customer terms.  The Company provides for estimated returns and allowances, which have historically been immaterial, at the time of sale.  Shipping and handling revenues are included as a component of net revenue.





The Company classifies customer rebate costs and slotting fees as a reduction in net revenues.  Fiscal year 2009 was the first year that the Company incurred slotting fees which were directly related to sales under the Alliance.    Customer rebate costs and slotting fees were $650,000, $650,000 and $43,000 for fiscal years 2010, 2009 and 2008, respectively.





Income Taxes





Deferred income taxes are recorded using the liability method, reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.





The Company adopted the provisions of FASB guidance on accounting for uncertainty of income taxes on October 1, 2007.  The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with the standard on accounting for income taxes.  This guidance prescribes 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.  It also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.  As a result of the implementation of the guidance, the Company recorded no increase in the liability for unrecognized tax benefits, and the balance of unrecognized tax benefits was zero at September 26, 2010 and September 27, 2009.





The Company has also adopted the accounting policy that interest and penalties recognized are classified as part of income taxes.  No interest and penalties were recognized in the statement of income for fiscal years 2010, 2009 and 2008.





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





Asset Retirement Obligations





The Company records liabilities related to asset retirement obligations in the period in which they are incurred and measures them at the net present value of the future estimated cost.  The offset to the liability is capitalized as part of the carrying amount of the related long-lived asset.  Changes in the liability due to the passage of time are recognized over the operating term in the income statement in cost of sales.





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.


F-11
 Table of Contents


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.





Reclassifications





Certain prior year amounts have been reclassified to conform to the current period presentation.





Use of Estimates





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 materially from those estimates.





3.
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.  The Company paid to AAPR $47,000, $51,000 and $41,000 for services rendered under this engagement during fiscal year 2010, 2009 and 2008, respectively.  These fees totaled more than 5% of AAPR’s gross revenues for its fiscal years ended January 31, 2010, 2009 and 2008, respectively.





4.
INVENTORIES





Inventories are summarized as follows:





September 26, 2010


September 27, 2009Raw ingredients

$
5,223,444


$
6,677,662Finished product


6,225,935



6,658,263Packaging


1,609,684



1,927,299$
13,059,063


$
15,263,224


F-12
 Table of Contents


5.
LONG-TERM DEBT





Long-term debt of the Company is summarized as follows:





September 26, 2010


September 27, 2009Bank of America Revolver

$
13,197,647


$
-Tranche A Term Loans payable to GCF


-



14,425,028Tranche B Term Loans payable to GCF


-



12,850,000Equipment loans


-



422,83013,197,647



27,697,858Less current maturities


-



(5,271,441
)Less debt discount


-



(535,213
)$
13,197,647


$
21,891,204





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, which was used to pay off the 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 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 is initially 1.75% and beginning no later than December 25, 2010, and adjusted quarterly thereafter, shall be 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 MarginGreater 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%





At September 26, 2010, there was $13.2 million outstanding under the Bank of America facility with an applicable interest rate of 2.01%.  In addition, the Company will pay an unused fee equal to 0.25% per annum.  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 the Company’s former financing arrangements.  The Company recorded a pretax charge of approximately $301,000 in connection with the termination of the former financing arrangements in the fourth quarter of fiscal year 2010.   As of September 26, 2010, the Company had $16.8 million available to borrow under the new credit facility.





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 September 26, 2010, the Company was in compliance with the covenant requirements of the agreement with Bank of America.  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.


F-13
 Table of Contents


For fiscal year 2010, the Company incurred $959,000 in interest expense, excluding amortization of deferred financing costs.  For fiscal year 2009, the Company incurred $1.9 million in interest expense, excluding amortization of deferred financing costs.  For fiscal year 2008, the Company incurred $3.3 million in interest expense, excluding amortization of deferred financing costs, net of $43,000 in capitalized interest.  During fiscal year 2010, the outstanding balance of the previous credit facility was reduced by mandatory and voluntary principal payments on the Tranche A Term Loan of $2.6 million and $6.5 million, respectively.  In addition, the Company also made a voluntary principal payment on the Tranche B Term Loan of $5.0 million during the first quarter of fiscal year 2010.


The Company previously executed a senior secured credit agreement with GCF on April 17, 2006.  Under the credit agreement, GCF acted 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 September 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.  At September 27, 2009, interest rates on the Tranche A Term Loans and Tranche B Term Loans were 3.5% and 6.0%, respectively.  The GCF facility was paid off on September 24, 2010 with the initial proceeds from the Bank of America facility.





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.  On February 4, 2010, the Company repaid the balance of all three equipment loans.





The Company amended their existing operating lease agreements related to certain manufacturing equipment 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 September 26, 2010 the net book value of the assets was $212,000.





Mandatory payments on the Company’s long-term debt as of September 26, 2010 were as follows:





2011

$
-2012


-2013


13,197,647Total payments

$
13,197,647




6.
STOCKHOLDERS' EQUITY





Stock Options





The Company adopted stock option plans in October 2002 and May 2005.  The Company reserved 800,000 and 550,000 shares of common stock under the plans adopted in October 2002 and May 2005, respectively, for the issuance to eligible directors and employees of, and consultants to, the Company under the plans.  The plans provide for the grant of both incentive stock options (at exercise prices no less than fair value at the date of grant) and non-qualified stock options (at exercise prices as determined by the Company’s Compensation Committee).  Such options may be exercisable as determined by such Committee.  The plans expire ten years following their adoption.


F-14
 Table of Contents


A summary of the Company’s stock option activity and related information follows:




For the Fiscal Years EndedSeptember 26, 2010


September 27, 2009


September 28, 2008Options


Weighted-Average Exercise Price


Options


Weighted-Average Exercise Price


Options


Weighted Average Exercise PriceOutstanding at beginning of year


521,000


$
1.61



521,000


$
1.61



749,000


$
1.56Granted


-



-



-



-



-



-Exercised


-



-



-



-



203,000


$
1.45Canceled


-



-



-



-



25,000


$
1.63Outstanding at end of year


521,000


$
1.61



521,000


$
1.61



521,000


$
1.61Exercisable at end of year


521,000


$
1.61



521,000


$
1.61



521,000


$
1.61





Exercise prices for the 521,000 options outstanding as of September 26, 2010 ranged from $1.47 to $2.50.  The weighted-average remaining contractual life of those options is 2.9 years.  The following table summarizes information about stock options outstanding as of September 26, 2010:





Options Outstanding


Options ExercisableNumber Outstanding


Weighted-Average Remaining Contractual Life


Weighted -Average Exercise Price


Aggregate Intrinsic Value(1)


Number Exercisable


Weighted- Average Exercise Price


Aggregate Intrinsic Value(1)$2.50



18,004



4.4


$
2.50


$
40,329



18,004


$
2.50


$
40,329$2.00



18,004



4.4


$
2.00


$
49,331



18,004


$
2.00


$
49,331$1.60



322,000



2


$
1.60


$
1,011,080



322,000


$
1.60


$
1,011,080$1.50



18,004



4.4


$
1.50


$
58,333



18,004


$
1.50


$
58,333$1.47



144,988



4.4


$
1.47


$
474,111



144,988


$
1.47


$
474,111$1.47 - $2.50



521,000



2.9


$
1.61


$
1,633,184



521,000


$
1.61


$
1,633,184


___________________


(1)
Based on the last reported sale price of the Company’s common stock of $4.74 on September 24, 2010 (the last trading day of fiscal year 2010).


F-15
 Table of Contents


7.
NET INCOME PER SHARE





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





For the Fiscal Years EndedSeptember 26, 2010


September 27, 2009


September 28, 2008Basic EPS Computation:Numerator:Net income

$
7,574,534


$
8,301,212


$
10,321,304Denominator:Weighted-average common shares outstanding


15,823,271



15,823,271



15,747,434Total shares


15,823,271



15,823,271



15,747,434Basic EPS

$
0.48


$
0.52


$
0.66Diluted EPS Computation:Numerator:Net income

$
7,574,534


$
8,301,212


$
10,321,304Denominator:Weighted-average common shares outstanding


15,823,271



15,823,271



15,747,434Incremental shares from assumed conversion of preferred stock and exercise of stock option and warrants


226,316



205,427



245,033Total shares


16,049,587



16,028,698



15,992,467Diluted EPS

$
0.47


$
0.52


$
0.65





8.
ACCRUED LIABILITIES





Accrued liabilities consisted of the following:





September 26, 2010


September 27, 2009Compensation

$
2,289,598


$
2,220,694Taxes other than income taxes


53,244



35,181Interest


-



101,064Other


1,442,324



1,382,818$
3,785,166


$
3,739,757


F-16
 Table of Contents


9.
INCOME TAXES





Income tax provision consisted of the following:





For the Fiscal Years EndedSeptember 26, 2010


September 27, 2009


September 28, 2008Current:Federal

$
3,843,948


$
3,515,271


$
5,226,233State


1,170,554



1,212,721



1,449,476Total current


5,014,502



4,727,992



6,675,709Deferred:Federal


(257,245
)


303,322



(100,270
)State


(74,636
)


(32,819
)


56,003Total deferred


(331,881
)


270,503



(44,267
)Total income tax provision

$
4,682,621


$
4,998,495


$
6,631,442





The total income tax provision was 38.2%, 37.6% and 39.1% of pretax income for fiscal years 2010, 2009 and 2008, respectively.  A reconciliation of income taxes with the amounts computed at the statutory federal rate follows:





For the Fiscal Years EndedSeptember 26, 2010


September 27, 2009


September 28, 2008Computed tax provision at federal statutory rate (35%)

$
4,290,004


$
4,654,897


$
5,933,461State income tax provision, net of federal benefit


712,347



766,936



978,085Permanent items


(220,193
)


(232,879
)


(305,915
)Valuation allowance change


–



–



3,808Other


(99,537
)


(190,459
)


22,003$
4,682,621


$
4,998,495


$
6,631,442





The deferred tax assets and deferred tax liabilities recorded on the balance sheet are as follows:





September 26, 2010


September 27, 2009Deferred Tax Assets


Deferred Tax Liabilities


Deferred Tax Assets


Deferred Tax LiabilitiesCurrent:Inventory and accounts receivable

$
258,411


$
–


$
333,359


$
–Accrued liabilities


1,045,996



–



1,015,118



–Prepaid expenses


–



(230,510
)


–



(226,265
)1,304,407



(230,510
)


1,348,477



(226,265
)Noncurrent:Deposits and deferrals

$
220,680


$
–


$
219,180


$
–Depreciation


627,200



–



191,490



–Amortization


113,638



–



–



–Goodwill


–



(2,676,969
)


–



(2,477,913
)Accrued liabilities


218,696



–



190,278



–Valuation allowance


(20,964
)


–



(20,964
)


–Other


–



(1,744
)


–



(1,730
)1,159,250



(2,678,713
)


579,984



(2,479,643
)Total deferred taxes net of valuation allowance

$
2,463,657


$
(2,909,223
)

$
1,928,461


$
(2,705,908
)


F-17
 Table of Contents


As of September 26, 2010, the Company had no net operating losses or alternative minimum tax credits available for carryforward for federal tax purposes.





10.
COMMITMENTS AND CONTINGENCIES





Commitments





The Company enters into monthly and long-term leases.  Future minimum lease payments for all long-term operating leases, including facilities and equipment, at September 26, 2010 were as follows:





2011

$
3,323,6242012


2,504,9322013


2,409,8102014


1,391,4742015 and thereafter


2,157,975$
11,787,815





The Company leases its facilities, both Plant No. 1 and Plant No. 2, under operating leases expiring through September 2011, with an option for a five-year extension and expiring December 2013, with an option for a 60-month extension, respectively.  Both facilities operate in Vernon, California.  Certain of the other leases provide for renewal options at substantially the same terms as the current leases.





The Company’s lease of its primary operating facility requires the premises to be restored to its original condition upon the termination of the lease.  Accordingly, the Company has recorded a liability of $537,000 and $467,000 representing the present value of the estimated restoration costs at September 26, 2010 and September 27, 2009, respectively.  The corresponding asset is being depreciated over 13 years, and the present value of the liability is being accreted over the term in order to establish a reserve at the end of the lease equal to the refurbishment costs.





Certain of the Company’s equipment leases provide for declining annual rental amounts.  Rent expense is recorded on a straight-line basis over the term of the lease.  Accordingly, deferred rent is recorded in the accompanying balance sheets in other assets as the difference between rent expense and amounts paid under the terms of the lease agreements.





Rent expense, including monthly equipment rentals, was approximately $2.8 million, $2.7 million and $2.4 million, for fiscal years 2010, 2009 and 2008, respectively.





The Company maintains an employment agreement with its Chief Executive Officer, James Rudis.  Mr. Rudis’ previous employment agreement expired on December 31, 2009.  On February 18, 2010, our board of directors approved a new employment agreement for Mr. Rudis.  The new agreement became effective on January 1, 2010 and will expire on December 31, 2011.  After the initial term, the relationship will be at-will and may be terminated by us at any time or by Mr. Rudis upon at least 60 days’ written notice. The value of the remaining compensation obligations under Mr. Rudis’ existing employment agreement as of September 26, 2010 was $628,000.


F-18
 Table of Contents


The Company’s open purchase orders for raw materials and contractual obligations to purchase raw protein in the year subsequent to September 26, 2010 totals $10.4 million.





Contingencies





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.





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 our 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.





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.





The parties are engaged in the discovery phase of the case.  The Company believes it has valid defenses to the plaintiffs’ remaining claims and that the Company 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 the Company 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.


F-19
 Table of Contents


On October 7, 2010, the Arbitrator ruled in favor of the Company, upholding the Company’s decision to terminate the employment of these former employees.  The Company does not know whether the NLRB intends to proceed separately with the unfair labor practice charge.





Alma Salinas, et al. v. Overhill Farms.





On May 12, 2010, Alma Salinas filed a 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 seeks allegedly unpaid wages, waiting time penalties, PAGA penalties, interest and attorneys’ fees, the amounts of which are unspecified.





The Company expects this case to be consolidated with the earlier-filed Agustiana case (described above) because the claims in the two actions substantially overlap each other.





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





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.  The Company charges off uncollectible accounts at the point in time when no recovery is expected.





Receivables related to Panda Restaurant Group, Inc. (through its distributors), Jenny Craig, Inc., Safeway Inc. and Pinnacle Foods Group LLC accounted for approximately 29%, 24%, 17% and 16% respectively of the Company’s total accounts receivable balance at September 26, 2010 and approximately 37%, 21%, 20% and 6% respectively, of the Company’s total accounts receivable balance at September 27, 2009.





Significant Customers





Significant customers accounted for the following percentages of the Company’s revenues:





For the Fiscal Years EndedSeptember 26, 2010


September 27, 2009


September 28, 2008Panda Restaurant Group, Inc.


27
%


22
%


16
%Jenny Craig, Inc.


26
%


25
%


24
%Safeway Inc.


18
%


17
%


13
%H. J. Heinz Company


5
%


12
%


18
%





No other customer accounted for revenues of 10% or more in the periods presented.





Concentration of Sources of Labor





The Company’s total hourly and salaried workforce consisted of approximately 768 employees at September 26, 2010.  Approximately 79% of the Company’s workforce is covered by a three-year collective bargaining agreement renewed effective March 1, 2008.


F-20
 Table of Contents


11.
EMPLOYEE BENEFIT PLANS





In April 1997, Overhill Farms introduced a retirement savings plan under Section 401(k) of the Internal Revenue Code.  The plan covers substantially all non-union employees meeting minimum service requirements.





Effective March 1, 2005, Overhill Farms executed a new three-year contract with the UFCW Union, Local 770, that eliminated the need for a previous provision in its 401(k) plan established in January 2002 for its union employees that required an annual contribution to be made by the Company in the event that revenues exceeded specific thresholds.  On January 1, 2009, the Company merged the union and non-union 401(k) plans into a single plan.





Employees voluntarily make contributions into the new plan.  The Company does not provide for a match to the employees’ contributions, and expenses related to the plans have not been significant.  The Company’s 2009 bonus program permitted a discretionary bonus equal to 3% of non-union employees’ gross W-2 earnings in the form of a 401(k) contribution. The total contribution under the 2009 bonus program of $335,000 was made during fiscal year 2010.  The Company’s 2010 bonus program permits a discretionary bonus equal to 3% of non-union employees’ gross W-2 earnings in the form of a 401(k) contribution to be made during fiscal year 2011.





12.
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 September 26, 2010 and September 27, 2009, as the debt bears interest at variable rates based on prevailing market conditions.  As of September 26, 2010, 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.


F-21
 Table of Contents


13.
SUBSEQUENT EVENTS





Subsequent to fiscal year 2010, the Company entered into a five-year licensing agreement with Boston Market Corporation (“BMC”) for the exclusive right to use BMC’s trademarks, trade dress and copyrights in connection with the manufacturing, advertising, promotion, sales and distribution of frozen food and certain shelf-stable licensed products.  The agreement commences on July 1, 2011.  The agreement also contains options for two sixty-month renewal terms.  The Company will pay BMC an earned royalty computed at four and a half percent of net sales during the initial term and a guaranteed minimum royalty of $2.75 million and $3.25 million for the first and second renewal terms, respectively.





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 required recognition or disclosure other than the legal matters noted in footnote 10 to these financial statements.





14.
QUARTERLY FINANCIAL DATA (unaudited)





For the Fiscal Year Ended September 26, 2010December 27, 2009

(13 weeks)


March 28, 2010

(13 weeks)


June 27,    2010

(13 weeks)


September 26, 2010

(13 weeks)Net revenues

$
56,232,538


$
50,459,303


$
43,360,677


$
44,429,117Gross profit


7,886,130



6,819,068



4,312,784



4,637,695Operating income


5,324,349



4,127,556



1,807,233



2,665,865Net income


3,052,795



2,360,626



930,333



1,230,780Net income per share – basic

$
0.19


$
0.15


$
0.06


$
0.08Net income per share – diluted (1)

$
0.19


$
0.15


$
0.06


$
0.08


_________


(1) EPS totals may not add due to rounding.




For the Fiscal Year Ended September 27, 2009December 28, 2008

(13 weeks)


March 29, 2009

(13 weeks)


June 28,    2009

(13 weeks)


September 27, 2009

(13 weeks)Net revenues

$
55,272,029


$
51,583,412


$
54,501,049


$
48,520,549Gross profit


7,507,519



5,767,638



7,386,029



4,889,803Operating income


4,973,303



3,472,107



4,714,498



2,419,389Net income


2,532,963



1,794,270



2,571,969



1,402,010Net income per share – basic

$
0.16


$
0.11


$
0.16


$
0.09Net income per share – diluted

$
0.16


$
0.11


$
0.16


$
0.09


F-22
 Table of Contents




Schedule II





OVERHILL FARMS, INC.





VALUATION AND QUALIFYING ACCOUNTS AND RESERVES








Description

Balance at Beginning of Year


Additions


Deductions(1)


Balance at End of yearAllowance for Doubtful Accounts2010

$
(15,000
)

$
(8,000
)

$
23,000


$
-2009


-



(17,000
)


2,000


$
(15,000
)2008


(18,000
)


(2,000
)


20,000



-Income Tax Valuation Allowance2010

$
(21,000
)

$
-


$
-


$
(21,000
)2009


(21,000
)


-



-


$
(21,000
)2008


(17,000
)


(4,000
)


-



(21,000
)


__________________


(1)Deductions to the allowance for doubtful accounts consist of write-offs, net of recoveries.


F-23
 Table of Contents





Exhibit Number

Index of Exhibits Attached to this Report10.16

Description of Employment Arrangement with Robert A. Olivarez23

Consent of Independent Registered Public Accounting Firm31.1

Certification of Principal 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 Principal 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002