**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| x      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
|--------|------------|------------------------------------------------------------------------------|
|   | ** ** | **EXCHANGE ACT OF 1934**                                                     |

 

**For the quarterly period endedJuly 1, 2006**

**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: 333-119336**

**The Wornick Company**(Exact name of registrant as specified in its charter)
| ** Delaware**                                     | ** ** | **30-0225741**                        |
|--------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of                       |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                        |       |                                  |
|                                                   |       |                                  |
| **4701  Creek Road, Suite 200, Cincinnati, Ohio** | ** ** | **45242**                             |
| (Address of principal  executive offices)              |       | (Zip code)                            |

 

**(513) 794-9800** (Registrant’s telephone number, including area code)

**N/A**(Former name, former address and former fiscal year, if changed since lastreport)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. o  Yes    x  No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of The Exchange Act. (Check one):

Large acceleratedfiler  o   Accelerated filer  o   Non-accelerated filer  x  

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes    x    No

As of August 8, 2006, theregistrant had one share of common stock, par value $0.01 per share,outstanding.

 

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**The Wornick Company****Table of Contents**
| **PART I - FINANCIAL INFORMATION**                                                                                                            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item  1.  Financial Statements (unaudited)                                                                                               |   |
| Unaudited  Consolidated Balance Sheets   at December 31, 2005 and July 1, 2006                                                                |   |
| Unaudited Consolidated Statements of Operations  for    the Thirteen Weeks and the Twenty-Six Weeks Ended July 2, 2005 and July 1,  2006 |   |
| Unaudited Consolidated Statements of Cash Flows  for    the Twenty-Six Weeks Ended July 2, 2005 and July 1, 2006                         |   |
| Notes to Unaudited Consolidated Financial Statements                                                                                          |   |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                                    |   |
| Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                     |   |
| Item 4.   Controls and Procedures                                                                                                        |   |
| Forward-Looking  Statements                                                                                                                   |   |
| **PART II - OTHER INFORMATION**                                                                                                               |   |
| Item  1.  Legal Proceedings                                                                                                              |   |
| Item  1A.  Risk Factors                                                                                                                  |   |
| Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                                                    |   |
| Item 3.   Defaults Upon Senior Securities                                                                                                |   |
| Item 4.   Submission of Matters to a Vote of Security Holders                                                                            |   |
| Item  5.  Other Information                                                                                                              |   |
| Item  6.  Exhibits                                                                                                                       |   |

 

2

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**PART I**—**FINANCIAL INFORMATION**

**Item 1.**  **Financial Statements.**

**TheWornick Company****Consolidated Balance Sheets****(Unaudited)**
| ** **                                       | ** ** | **December 31, 2005** | ** **  | **July 1, 2006** | ** ** |
|--------------------------------------------------|------------|---------------------------------|-------------|----------------------------|------------|
| **Assets**                                       |       |                            |        |                       |       |
| Current assets                                   |       |                            |        |                       |       |
| Cash and cash  equivalents                       |       | $                               | 17,330,761  |                       | $          | — |   |
| Trade accounts  receivable, net                  |       | 19,186,813                      |        | 17,619,266                 |       |
| Inventories                                      |       | 27,954,296                      |        | 29,937,978                 |       |
| Prepaid expenses  and other current assets       |       | 625,975                         |        | 939,647                    |       |
| Deferred income  taxes                           |       | 1,403,035                       |        | 654,611                    |       |
| Total current  assets                            |       | 66,500,880                      |        | 49,151,502                 |       |
| Property and equipment,  net                     |       | 42,914,227                      |        | 45,782,697                 |       |
| Goodwill                                         |       | 77,573,207                      |        | 77,573,207                 |       |
| Intangible assets, net                           |       | 17,128,127                      |        | 14,780,836                 |       |
| Other noncurrent assets                          |       | 5,054,735                       |        | 4,519,970                  |       |
| Total assets                                     |       | $                               | 209,171,176 |                       | $          | 191,808,212 |   |
| **Liabilities and Stockholder’s  Equity**   |       |                            |        |                       |       |
| Current liabilities                              |       |                            |        |                       |       |
| Book overdraft                                   |       | $                               | —      |                       | $          | 4,730,888 |   |
| Trade accounts  payable                          |       | 19,802,450                      |        | 13,912,741                 |       |
| Accrued expenses                                 |       | 8,331,770                       |        | 5,603,467                  |       |
| Accrued interest                                 |       | 6,276,896                       |        | 6,305,990                  |       |
| Taxes payable                                    |       | 977,237                         |        | —                     |       |
| Total current  liabilities                       |       | 35,388,353                      |        | 30,553,086                 |       |
| Line of credit                                   |       | —                          |        | 2,800,000                  |       |
| Deferred income taxes                            |       | 4,022,627                       |        | 4,223,628                  |       |
| Other liabilities                                |       | 433,848                         |        | 706,490                    |       |
| Long-term debt                                   |       | 125,000,000                     |        | 125,000,000                |       |
| Total  liabilities                               |       | 164,844,828                     |        | 163,283,204                |       |
| Stockholder’s equity                        |       |                            |        |                       |       |
| Common stock                                     |       | —                          |        | —                     |       |
| Additional  paid-in capital                      |       | 37,732,680                      |        | 37,775,264                 |       |
| Retained  earnings (deficit)                     |       | 6,593,668                       |        | (9,250,256                 | )          |
| Total  stockholder’s equity                 |       | 44,326,348                      |        | 28,525,008                 |       |
| Total liabilities and  stockholder’s equity |       | $                               | 209,171,176 |                       | $          | 191,808,212 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**TheWornick Company****Consolidated Statements of Operations****(Unaudited)**
| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-Six Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **July 2, 2005**         | ** ** | **July 1, 2006**           | ** ** | **July 2, 2005** | ** ** | **July 1, 2006** | ** ** |
| Net sales                                     |       | $                                  | 44,392,948 |                                 | $          | 52,722,928 |   | $ | 103,225,163 |   | $ | 118,473,616 |   |
| Cost of sales                                 |       | 36,418,430                         |       | 48,718,980                           |       | 88,801,955 |   | 109,997,421 |   |
| Gross profit                                  |       | 7,974,518                          |       | 4,003,948                            |       | 14,423,208 |   | 8,476,195 |   |
| Selling, general and  administrative expenses |       | 4,629,384                          |       | 8,421,819                            |       | 9,481,634 |   | 16,428,851 |   |
| Operating profit  (loss)                      |       | 3,345,134                          |       | (4,417,871                           | )          | 4,941,574 |   | (7,952,656 | ) |
| Other (expense) income                        |       |                               |       |                                 |       |   |   |   |   |
| Interest expense                              |       | (3,569,137                         | )          | (3,583,990                           | )          | (7,143,054 | ) | (6,850,239 | ) |
| Interest income                               |       | 65,153                             |       | —                               |       | 98,934 |   | 63,369 |   |
| Other expense,  net                           |       | (107,664                           | )          | (511                                 | )          | (27,225 | ) | (154,973 | ) |
| Total other expense                           |       | (3,611,648                         | )          | (3,584,501                           | )          | (7,071,345 | ) | (6,941,843 | ) |
| Loss before income  taxes                     |       | (266,514                           | )          | (8,002,372                           | )          | (2,129,771 | ) | (14,894,499 | ) |
| Provision for income  taxes                   |       | 404,050                            |       | 486,795                              |       | 960,170 |   | 949,425 |   |
| Net loss                                      |       | $                                  | (670,564   | )                                    | $          | (8,489,167 | ) | $ | (3,089,941 | ) | $ | (15,843,924 | ) |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**TheWornick Company****Consolidated Statements of Cash Flows****(Unaudited)**
| ** **                                                                                 | ** ** | **Twenty-Six Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                 | ** ** | **July 2, 2005**           | ** ** | **July 1, 2006** | ** ** |
| **Cash  flows from operating activities**                                                  |       |                                 |       |   |   |
| Net loss                                                                                   |       | $                                    | (3,089,941 | ) | $ | (15,843,924 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                 |       |   |   |
| Depreciation of property and equipment                                                     |       | 1,911,292                            |       | 4,069,858 |   |
| Amortization of intangibles and bond issuance cost                                         |       | 2,688,692                            |       | 2,370,322 |   |
| Deferred tax asset                                                                         |       | —                               |       | 748,424 |   |
| Deferred tax liability                                                                     |       | 912,000                              |       | 201,001 |   |
| Compensation for stock options                                                             |       | 9,983                                |       | 42,584 |   |
| Changes in assets and liabilities                                                          |       |                                 |       |   |   |
| Trade accounts receivable                                                                  |       | 2,023,183                            |       | 1,567,547 |   |
| Inventories                                                                                |       | 2,849,734                            |       | (1,983,682 | ) |
| Prepaid expenses and other current assets                                                  |       | (389,476                             | )          | (313,671 | ) |
| Other noncurrent assets                                                                    |       | (38,625                              | )          | 527,802 |   |
| Trade accounts payable and accrued expenses                                                |       | 519,439                              |       | (8,618,012 | ) |
| Book overdraft                                                                             |       | —                               |       | 4,730,888 |   |
| Accrued interest                                                                           |       | (566,406                             | )          | 29,094 |   |
| Taxes payable                                                                              |       | (51,950                              | )          | (977,237 | ) |
| Other liabilities                                                                          |       | —                               |       | 272,642 |   |
| Net cash provided by (used in) operating activities                                        |       | 6,777,925                            |       | (13,176,364 | ) |
| **Cash  flows from investing activities**                                                  |       |                                 |       |   |   |
| Capital  expenditures                                                                      |       | (7,185,684                           | )          | (6,954,397 | ) |
| Net cash used in investing activities                                                      |       | (7,185,684                           | )          | (6,954,397 | ) |
| **Cash  flows from financing activities**                                                  |       |                                 |       |   |   |
| Borrowings on  line of credit                                                              |       | —                               |       | 9,500,000 |   |
| Payments on line  of credit                                                                |       | —                               |       | (6,700,000 | ) |
| Net cash provided by financing activities                                                  |       | —                               |       | 2,800,000 |   |
| Net decrease in cash and cash equivalents                                                  |       | (407,759                             | )          | (17,330,761 | ) |
| **Cash  and cash equivalents**                                                             |       |                                 |       |   |   |
| Beginning of  period                                                                       |       | 3,289,030                            |       | 17,330,761 |   |
| End of period                                                                              |       | $                                    | 2,881,271  |   | — |   |
|                                                                                            |            |                                      |            |  |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**THEWORNICK COMPANYNotes to Unaudited Consolidated Financial Statements**

**1.   Description of Business**

TheWornick Company, a Delaware corporation (the “Company” ), an acquisitionvehicle formed by The Veritas Capital Fund II L.P., and its general partner, VeritasCapital Management II, L.L.C. (collectively “Veritas”), entered into an AssetsPurchase and Sale Contract with The Wornick Company, a Nevada corporation (the “Predecessor”),and its subsidiaries, The Wornick Company Right Away Division, a Nevada corporation,The Wornick Company Right Away Division, L.P., a Texas limited partnership, andRight Away Management Corporation, a Texas corporation, that was consummated onJune 30, 2004 (the “Acquisition Date’’), and resulted in the purchase bythe Company and its subsidiaries, and in the sale by the Predecessor and itssubsidiaries, of the business of the Predecessor and its subsidiaries as agoing concern, including substantially all of the operating assets of thePredecessor and its subsidiaries (the “Acquisition”).

TheCompany produces, packages and distributes extended shelf-life foods, bothshelf stable and frozen, in flexible pouches and semi-rigid containers,primarily for the U.S. Department of Defense (the “DoD”) and commercialcustomers, as well as for its own consumer-branded products. The Companysupplies to the DoD Meals Ready-to-Eat ("MREs"), Unitized GroupRations-A("UGR-As") and the polymeric trays used in the Unitized GroupRations-Heat & Serve program.

TheCompany has two operating segments: the Right Away Division (“RAD”) and thePrepared Foods Division (“PFD”). RAD is located in Texas and primarily sellsits product to the DoD. PFD is located in Ohio and also sells directly to the DoDas well as to commercial branded food companies and inter-segment sales to RAD.

**2.   Basis of Presentation**

Theaccompanying unaudited interim consolidated financial statements, also referredto as our interim or unaudited “consolidated financial statements,” have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and the instructionsto Form 10-Q and Article 10 of Regulation S-X under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  Accordingly, theydo not include all of the information and footnotes normally included infinancial statements prepared in conformity with accounting principlesgenerally accepted in the United States of America. In the opinion ofmanagement, the interim consolidated financial statements reflect alladjustments of a normal recurring nature considered necessary for a fairpresentation of the results for the periods presented.  Operating resultsfor interim periods are not necessarily indicative of results that may beexpected for the fiscal year as a whole.  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosures at the date of the financial statements and during thereporting period.  Actual amounts could differ from these estimates. These unaudited interim consolidated financial statements should be read inconjunction with the audited consolidated financial statements for the yearended December 31, 2005 and notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005, filed withthe Securities and Exchange Commission (the “SEC”) on March 31, 2006.

Following are the dates represented by each period reported in thesefinancial statements:

“Thirteen Weeks Ended July 2, 2005":  April 3, 2005 – July 2, 2005

“Thirteen Weeks Ended July 1, 2006":  April 2, 2006 – July 1, 2006"Twenty-Six Weeks Ended July 2, 2005":  January 1, 2005 – July 2, 2005 

"Twenty-SixWeeks Ended July 1, 2006":  January1, 2006 – July 1, 2006.

**3.   Restructuring and OtherRelated Charges**

OnFebruary 6, 2006, the Company announced plans to relocate the assemblyoperations of its RAD Division in McAllen, Texas to the Company’s Cincinnati,Ohio location in order to better position the Company’s production and assemblyoperations from a geographical standpoint, simplify logistics and reduce costand delivery times to customers. The Company anticipates that its consolidationwill be completed at the end of the third quarter of 2006.

TheCompany anticipates that total pretax charges incurred to complete therestructuring will be approximately $4.1 million. Of the $4.1 million,$1.3 million will be paid out to the 244 employees (under pay-to-stay everancearrangements) currently located at the McAllen, Texas assembly facilities.  We anticipate that all of these employeeswill be terminated upon completion of the consolidation. The remaining expensesare related to accelerated depreciation on property and equipment ofapproximately $2.8 million, which the Company anticipates will be abandonedupon its exit from the McAllen facilities.

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Duringthe thirteen weeks and twenty-six weeks ended July 1, 2006, the Companyrecorded total pretax charges of $1,546,946, and $2,733,031, respectively, allof which was recorded in the RAD segment. Of the $1,546,946 and $2,733,031 inpretax charges, $530,207 and $883,678 were included in selling, general andadministrative expenses, during the thirteen and twenty-six weeks ended July 1,2006, respectively.  These costs wereincurred for pay-to-stay severance arrangements for employees, none of whom hadbeen terminated as of  July 1, 2006, and$1,016,739 and $1,849,353, for the thirteen and twenty-six weeks ended July 1,2006 respectively, were related to accelerated depreciation on assets to beabandoned included in cost of goods sold.

Asummary of the costs incurred relating to the restructuring plan is as follows:
| ** **                | ** ** | ** **     | ** ** | ** **  | ** ** | **Non-Cash** | ** ** | ** **   | ** ** | ** **   | ** ** |
|---------------------------|------------|----------------|------------|-------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                | ** ** | **12/31/2005** | ** ** | **Charges** | ** ** | **Charges**  | ** ** | **Payments** | ** ** | **7/1/2006** | ** ** |
| Asset  write-downs        |       | $              | —     |        | $          | 1,849,353    |       | $            | (1,849,353 | )            | $          | — |   | $ | — |   |
| Employee cost             |       | —         |       | 883,678     |       | —       |       | —       |       | 883,678      |       |
|  Remaining Liability |       | $              | —     |        | $          | 2,733,031    |       | $            | (1,849,353 | )            | $          | — |   | $ | 883,678 |   |

 

**4.   SupplementalBalance Sheet Information**

**Inventories**

Asummary of inventories is as follows:
| ** **      | ** ** | **December 31,** | ** ** | **July 1,** | ** ** |
|-----------------|------------|-----------------------|------------|------------------|------------|
| ** **      | ** ** | **2005**              | ** ** | **2006**         | ** ** |
| Raw materials   |       | $                     | 17,389,308 |             | $          | 19,151,020 |   |
| Work in process |       | 1,593,696             |       | 2,453,442        |       |
| Finished goods  |       | 8,971,292             |       | 8,333,516        |       |
|            |       | $                     | 27,954,296 |             | $          | 29,937,978 |   |

 

**Property and Equipment, Net**

Asummary of property and equipment, net is as follows:
| ** **                                       | ** ** | **December 31,** | ** ** | **July 1,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2006**         | ** ** |
| Leasehold  improvements                          |       | $                     | 1,784,800  |             | $          | 3,561,367 |   |
| Machinery and  equipment                         |       | 30,166,266            |       | 45,200,261       |       |
| Office  equipment, fixtures and vehicles         |       | 2,640,021             |       | 3,054,132        |       |
| Construction in  progress                        |       | 14,005,059            |       | 3,718,714        |       |
|                                             |       | 48,596,146            |       | 55,534,474       |       |
| Less:  Accumulated depreciation and amortization |       | 5,681,919             |       | 9,751,777        |       |
|                                             |       | $                     | 42,914,227 |             | $          | 45,782,697 |   |

 

Depreciationexpense for the twenty-six weeks ended July 2, 2005 and July 1, 2006was approximately $1,911,000 and $4,070,000, respectively.  (See Note 3 for further details regardingaccelerated depreciation charges.)

**5.   Intangible Assets**

Inconnection with the Acquisition described in Note 1, a portion of thepurchase price was allocated to identifiable intangible assets related to thevalue of long-term customer supply contracts in place at the AcquisitionDate.  The original value of these contracts was $24,170,000, and theiruseful lives range from three to eight years.  Aggregate accumulatedamortization of intangibles at December 31, 2005 and July 1, 

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2006amounted to $7,041,873 and $9,389,164, respectively.  Expense related toamortization of intangible assets for the twenty-six weeks ended July 1,2006 amounted to $2,347,291.

Scheduledamortization of these assets is as follows:
| July 2, 2006  through December 31, 2006 |   | $         | 2,347,289  |   |
|-----------------------------------------|--------|-----------|------------|--------|
| 2007                                    |   | 4,627,918 |       |
| 2008                                    |   | 4,856,248 |       |
| 2009                                    |   | 2,421,226 |       |
| 2010                                    |   | 496,296   |       |
| Thereafter                              |   | 31,859    |       |
|                                    |   | $         | 14,780,836 |   |

 

**6.   Notes Payable and Long-Term Debt**

Asummary of long-term debt at December 31, 2005 and July 1, 2006 is asfollows:
| ** **                                                                                                 | ** ** | **December 31,** | ** **  | **July 1,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|------------------|------------|
| ** **                                                                                                 | ** ** | **2005**              | ** **  | **2006**         | ** ** |
| Revolving loan  agreement, due 2009 (7.25% and 8.25% at December 31, 2005 and July 1, 2006,  respectively) |       | $                     | —      |             | $          | 2,800,000 |   |
| 10-7/8% Senior  secured notes, due 2011                                                                    |       | 125,000,000           |        | 125,000,000      |       |
| Less: Current  maturities                                                                                  |       | —                |        | —           |       |
| Long-term debt,  excluding current maturities                                                              |       | $                     | 125,000,000 |             | $          | 127,800,000 |   |

 

TheCompany also has a revolving loan agreement (the “Revolving Loan Agreement”)that provides the Company $15.0 million of revolving loan financingthrough June 30, 2009, with an additional revolving credit facility of$10.0 million becoming available upon the occurrence of certain events.Amounts outstanding under the Revolving Loan Agreement ($0 at December 31,2005 and $2,800,000 at July 1, 2006) are due June 30, 2009 and amountsoutstanding are subject to limitations as determined by a calculated borrowingbase.  As of August 12, 2006, we hadoutstanding borrowings of $12.0 million against the Revolving LoanAgreement.  Our most recent calculationof our borrowing base suggests we have sufficient assets to support the full$25.0 million borrowing available under the Revolving Loan Agreement, includingthe additional $10.0 million revolving credit facilities.

Intereston amounts outstanding under the Revolving Loan Agreement will vary at afluctuating rate per annum that is equal to the prime rate (7.25% atDecember 31, 2005 and 8.25% at July 1, 2006) as published daily by TheWall Street Journal. Amounts outstanding under the Revolving Loan Agreementare collateralized by substantially all of the operating assets of the Companyand its subsidiaries. The lien on such collateral is senior to the lien on thecollateral that secures the 10-7/8% senior secured notes (the “Senior SecuredNotes”).  Interest expense incurred onthe Senior Secured Notes and the Revolving Loan Agreement for the twenty-sixweeks ended July 1, 2006 was $6,832,933 and $17,306, respectively.

TheSenior Secured Notes are collateralized by substantially all assets and otherproperty of the Company and its subsidiaries. The lien on such collateral,however, is subordinate to the lien on the collateral securing the RevolvingLoan Agreement. Interest on the Senior Secured Notes is payable semi-annually.

Amountsdue under the Senior Secured Notes and the Revolving Loan Agreement are subjectto an intercreditor agreement. The Company is required to meet certainfinancial covenants related primarily to minimum working capital amounts,minimum working capital ratios, minimum profitability and minimum net worthcalculations. As of July 1, 2006, we were in compliance with all financialcovenants.  However, based on our mostrecent financial forecast, it is possible that we could violate one or more ofour financial covenants at December 31, 2006.

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Aviolation of our financial covenants on either the intercreditor agreement orour Revolving Loan Agreement could cause us to be in default on our otheragreements, including the indentures governing our Senior Secured Notes and theSenior PIK Notes of our Parent Company. In the event we were to violate any of our financial covenants, we wouldseek to resolve the issue either by satisfying the covenant within the allottedperiod or by obtaining the appropriate waivers. If we are unable to mitigate the covenant violation within the allottedperiod or unable to obtain waivers, the outstanding debt on the Senior SecuredNotes and the Revolving Loan Agreement would become payable.

OnFebruary 11, 2005, our parent, TWC Holding LLC (the “Parent Company”) andits wholly-owned finance subsidiary, TWC Holding Corp., co-issued their 13.875%senior PIK notes due 2011, (the “Senior PIK Notes”) in the approximateaggregate principal amount of $62,259,000 with a discount of approximately$36,259,000. The Senior PIK Notes earn interest at the rate of 13.875% perannum, mature on August 15, 2011 and are unsecured obligations of theParent Company and TWC Holding Corp. Neither the Company nor any of itssubsidiaries guaranteed the Senior PIK Notes. The Senior PIK Notes limit theCompany’s ability to incur additional indebtedness, to pay dividends, to makeother distributions, to make certain investments and to sell certain assets ormerge with or into other companies. Because our Parent Company is aholding company with no operations, because it has only its investment in theCompany and because TWC Holding Corp. has no independent operations or assets,future cash flows or assets of the Company through 2011 may be required toservice the $62.3 million Senior PIK Notes upon their maturity.

**7.****   Income Taxes**

TheCompany provides for income taxes utilizing the asset liability method, wherebycurrent income tax expense or benefit represents income taxes expected to bepayable or refundable for the current period. Deferred income taxes arerecognized for the tax consequences in future years as a result of differencesbetween the tax and financial reporting bases of assets and liabilities and forthe expected future tax benefit to be derived from tax credits and losscarryforwards. Valuation allowances are established when necessary to reducedeferred tax assets to the amount management believes is more likely than notto be realized in future tax returns. Tax rate changes are reflected in theperiod such changes are enacted. The Company recorded valuation allowances ondeferred tax assets of approximately $3,022,000 and $6,338,000, respectively,for the thirteen and twenty-six weeks ended July 1, 2006, due to the indefinitereversal period related to goodwill amortization.

**8.****   Share-BasedCompensation Plan**

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (Revised 2004), “*Share-BasedPayments*” (“SFAS No. 123R”), using the prospective adoptionmethod, which requires the application of the accounting standard  on thefirst day of the Company’s fiscal year 2006 for grants issued or modifiedsubsequent to the date of adoption, January 1, 2006.  The adoption of thisnew accounting standard had no impact on the Company’s consolidated financialstatements for the thirteen and twenty-six weeks ended July 1, 2006 since therewere no new awards issued or modified during this period.

TheParent Company  has two classes ofmembership interests, Class A interests and Class B interests. Certainmembers of the Company’s management and outside directors have receivedClass B interests. The Class B interests are subject to a five-yearvesting schedule with any unvested interest reverting to the holders ofClass A interests. Because these Class B interests were issued tomembers of management and directors of the Company, these awards are consideredto be compensatory to the Company over the vesting period. Compensation expenserelated to these awards was $815 and $42,584, respectively, for the thirteenand twenty-six weeks ended July 1, 2006. For the thirteen weeks ended July 1,2006, these compensation arrangements resulted in a benefit of $59,780 due tothe recapture of previously expensed amounts that resulted from the employmentterminations of certain management members during the period.

**9.****   Operating Segment Information**

TheCompany has two operating segments: RAD  and PFD. RAD is located in Texas and primarilysells its product to the DoD.

9

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PFD is locatedin Ohio and also sells directly to the DoD as well as to commercial brandedfood companies and inter-segment sales to RAD. Management evaluates segmentperformance based on several factors, including operating profit.

Duringthe twenty-six weeks ended July 1, 2006, the RAD segment incurred approximately$2,733,000 of restructuring related charges.

The Company’s net sales by product line for theperiods indicated are as follows:
| ** **                                     | ** ** | **(Unaudited)**                    | ** ** | **(Unaudited)**                      | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-Six Weeks Ended** | ** ** |
| ***(in thousands of dollars)*** | ** ** | **July 2, 2005**         | ** ** | **July 1, 2006**           | ** ** | **July 2, 2005** | ** ** | **July 1, 2006** | ** ** |
| DoD Net Sales                                  | ** ** | ** **                         | ** ** | ** **                           |       |   |   |   |   |
| Meals Ready-to-Eat (“MRE”)           |       | $                                  | 25,072     |                                 | $          | 19,090 |   | $ | 58,765 |   | $ | 52,069 |   |
| Unitized Group Rations-A (“UGR-A”)   |       | 7,715                              |       | 9,784                                |       | 22,300 |   | 26,116 |   |
| Military other                                 |       | 2,286                              |       | 1,727                                |       | 3,534 |   | 2,395 |   |
| Total DoD net sales                            |       | 35,073                             |       | 30,601                               |       | 84,599 |   | 80,580 |   |
| Co-manufactured                                |       | 8,570                              |       | 21,699                               |       | 16,774 |   | 36,089 |   |
| Specialty and  Other                           |       | 750                                |       | 423                                  |       | 1,852 |   | 1,805 |   |
|                                           |       | $                                  | 44,393     |                                 | $          | 52,723 |   | $ | 103,225 |   | $ | 118,474 |   |

 

Duringthe twenty-six weeks ended July 2, 2005 and July 1, 2006, the Company hadone major customer, which accounted for approximately $84,599,000 and$80,580,000, or 82.0% and 68%, of net revenue, respectively. Approximately $7,613,000, or 64.3%, and $7,021,000, or 40.2%, of netreceivables were attributable to this customer at July 2, 2005 andJuly 1, 2006, respectively.

Unauditedreportable operating segment financial information for the thirteen weeks endedJuly 2, 2005 and July 1, 2006 is as follows:
| ** **                  | ** ** | ** ** | ** ** | ** **        | ** ** | **Operating** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------|------------|------------|------------|-------------------|------------|---------------|------------|-------------------|------------|------------------|------------|-------------|------------|
| ** **                  | ** ** | **Trade**  | ** ** | **Inter-Segment** | ** ** | **Profit**    | ** ** | **Depreciation/** | ** ** | **Total**        | ** ** | **Capital** | ** ** |
| **Operating Segments** | ** ** | ** ** | ** ** | **Revenue**       | ** ** | **Revenue**   | ** ** | **(Loss)**        | ** ** | **Amortization** | ** ** | **Assets**  | ** ** | **Expenditures** | ** ** |
| **Right  Away Division**    |       |       |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | $          | 33,627,700 |              | $          | —        |       | $                 | 7,190,901  |             | $          | 532,591     |       | $ | 32,928,896 |   | $ | 19,380 |   |
| July 1, 2006                |       | 30,173,993 |       | —            |       | 2,733,877     |       | 1,394,009         |       | 33,038,703       |       | 103,626     |       |
| **Prepared  Foods**         |       |       |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | 10,765,248 |       | 7,465,984         |       | (2,828,248    | )          | 2,748,656         |       | 62,982,950       |       | 5,364,617   |       |
| July 1, 2006                |       | 22,548,935 |       | 5,359,891         |       | 105,174       |       | 1,965,985         |       | 87,755,366       |       | 4,940,350   |       |
| **Corporate**               |       |       |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | —     |       | —            |       | (1,017,519    | )          | 341,400           |       | 112,499,592      |       | —      |       |
| July 1, 2006                |       | —     |       | —            |       | (7,256,922    | )          | 155,224           |       | 94,086,798       |       | —      |       |
| **Eliminations**            |       |       |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | —     |       | (7,465,984        | )          | —        |       | —            |       | (31,003,672      | )          | —      |       |
| July 1, 2006                |       | —     |       | (5,359,891        | )          | —        |       | —            |       | (23,072,655      | )          | —      |       |
| **Total  Company**          |       |       |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | 44,392,948 |       | —            |       | 3,345,134     |       | 3,622,647         |       | 177,407,766      |       | 5,383,997   |       |
| July 1, 2006                |       | 52,722,928 |       | —            |       | (4,417,871    | )          | 3,515,218         |       | 191,808,212      |       | 5,043,976   |       |
|                             |            |            |            |                   |            |               |            |                   |            |                  |            |             |            |  |  |  |  |  |  |  |  |

 

Includedin the total assets of the Corporate segment is approximately $77.5 million ofgoodwill, which is tested annually for impairment.  The recoverability of goodwill is based uponthe fair value of the reporting segments, which is determined by a discountedcash flow analysis.  For our analysis,goodwill was allocated to RAD and PFD at the Acquisition Date in the respectiveamounts of $28.9 million and $48.6 million. The Company has completed its annual impairment test of goodwill and hasdetermined that there was no impairment at December 31, 2005. We are unaware ofany events that may have triggered the need for 

10

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aninterim assessment between our assessment date and issuance of our Form 10-Qfor the twenty-six weeks ended July 1, 2006.

Unauditedreportable operating segment financial information for the twenty-six weeksended July 2, 2005 and July 1, 2006 is as follows:
| ** **                  | ** ** | ** **  | ** ** | ** **        | ** ** | **Operating** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------|------------|-------------|------------|-------------------|------------|---------------|------------|-------------------|------------|------------------|------------|-------------|------------|
| ** **                  | ** ** | **Trade**   | ** ** | **Inter-Segment** | ** ** | **Profit**    | ** ** | **Depreciation/** | ** ** | **Total**        | ** ** | **Capital** | ** ** |
| **Operating Segments** | ** ** | ** **  | ** ** | **Revenue**       | ** ** | **Revenue**   | ** ** | **(Loss)**        | ** ** | **Amortization** | ** ** | **Assets**  | ** ** | **Expenditures** | ** ** |
| **Right  Away Division**    |       |        |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | $           | 82,595,537 |              | $          | —        |       | $                 | 12,077,800 |             | $          | 1,064,279   |       | $ | 32,928,896 |   | $ | 175,325 |   |
| July 1, 2006                |       | 80,516,265  |       | —            |       | 6,436,972     |       | 2,760,175         |       | 33,038,703       |       | 103,839     |       |
| **Prepared  Foods**         |       |        |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | 20,629,626  |       | 20,119,597        |       | (5,064,532    | )          | 3,194,305         |       | 62,982,950       |       | 7,010,359   |       |
| July 1, 2006                |       | 37,957,351  |       | 16,579,594        |       | (671,394      | )          | 3,656,974         |       | 87,755,366       |       | 6,850,558   |       |
| **Corporate**               |       |        |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | —      |       | —            |       | (2,071,694    | )          | 341,400           |       | 112,499,592      |       | —      |       |
| July 1, 2006                |       | —      |       | —            |       | (13,718,234   | )          | 23,031            |       | 94,086,798       |       | —      |       |
| **Eliminations**            |       |        |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | —      |       | (20,119,597       | )          | —        |       | —            |       | (31,003,672      | )          | —      |       |
| July 1, 2006                |       | —      |       | (16,579,594       | )          | —        |       | —            |       | (23,072,655      | )          | —      |       |
| **Total  Company**          |       |        |       |              |       |          |       |              |       |             |       |        |       |
| July 2, 2005                |       | 103,225,163 |       | —            |       | 4,941,574     |       | 4,599,984         |       | 177,407,766      |       | 7,185,684   |       |
| July 1, 2006                |       | 118,473,616 |       | —            |       | (7,952,656    | )          | 6,440,180         |       | 191,808,212      |       | 6,954,397   |       |
|                             |            |             |            |                   |            |               |            |                   |            |                  |            |             |            |  |  |  |  |  |  |  |  |

 

11

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**10.          ConsolidatingFinancial Information**

The following information presents the unauditedconsolidating balance sheets at December 31, 2005 and July 1, 2006, theunaudited consolidating statements of operations for the thirteen andtwenty-six weeks ended July 2, 2005 and July 1, 2006, and the unauditedconsolidating statements of cash flows for the twenty-six weeks ended July 2,2005 and July 1, 2006, respectively.

Consolidatingbalance sheet at December 31, 2005 (unaudited):
| ** **                                       | ** ** | ** **  | ** **  | **Subsidiary** | ** ** | ** **       | ** ** | ** **  | ** **  |
|--------------------------------------------------|------------|-------------|-------------|----------------|------------|------------------|------------|-------------|-------------|
| ** **                                       | ** ** | **Parent**  | ** **  | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**   | ** **  |
| **Assets**                                       | ** ** | ** **  | ** **  | ** **     | ** ** | ** **       | ** ** | ** **  | ** **  |
| Current assets                                   | ** ** | ** **  |        |           |       |             |       |        |        |
| Cash and cash  equivalents                       |       | $           | 509,176     |           | $          | 16,821,585       |       | $           | —      |   | $ | 17,330,761 |   |
| Trade accounts  receivable                       |       | 4,891,849   |        | 14,294,964     |       | —           |       | 19,186,813  |        |
| Interdivision  receivables                       |       | 3,784,303   |        | (3,784,303     | )          | —           |       | —      |        |
| Inventories                                      |       | 12,043,759  |        | 15,910,537     |       | —           |       | 27,954,296  |        |
| Prepaid expenses  and other current assets       |       | 234,304     |        | 391,671        |       | —           |       | 625,975     |        |
| Deferred income  taxes                           |       | 1,403,035   |        | —         |       | —           |       | 1,403,035   |        |
| Total current  assets                            |       | 22,866,426  |        | 43,634,454     |       | —           |       | 66,500,880  |        |
| Investments in  subsidiary guarantors            |       | 38,298,917  |        | —         |       | (38,298,917      | )          | —      |        |
| Property and equipment,  net                     |       | 36,850,845  |        | 6,063,382      |       | —           |       | 42,914,227  |        |
| Goodwill                                         |       | 77,573,207  |        | —         |       | —           |       | 77,573,207  |        |
| Intangible assets, net                           |       | 14,563,125  |        | 2,565,002      |       | —           |       | 17,128,127  |        |
| Other noncurrent assets                          |       | 4,884,798   |        | 169,937        |       | —           |       | 5,054,735   |        |
| Total assets                                     |       | $           | 195,037,318 |           | $          | 52,432,775       |       | $           | (38,298,917 | ) | $ | 209,171,176 |   |
| **Liabilities and Stockholder’s  Equity**   |       |        |        |           |       |             |       |        |        |
| Current liabilities                              |       |        |        |           |       |             |       |        |        |
| Trade accounts  payable                          |       | $           | 9,743,912   |           | $          | 10,058,538       |       | $           | —      |   | $ | 19,802,450 |   |
| Accrued expenses                                 |       | 4,256,450   |        | 4,075,320      |       | —           |       | 8,331,770   |        |
| Accrued interest                                 |       | 6,276,896   |        | —         |       | —           |       | 6,276,896   |        |
| Taxes payable                                    |       | 977,237     |        | —         |       | —           |       | 977,237     |        |
| Total current  liabilities                       |       | 21,254,495  |        | 14,133,858     |       | —           |       | 35,388,353  |        |
| Deferred income tax                              |       | 4,022,627   |        | —         |       | —           |       | 4,022,627   |        |
| Other liabilities                                |       | 433,848     |        | —         |       | —           |       | 433,848     |        |
| Long-term debt,  excluding current maturities    |       | 125,000,000 |        | —         |       | —           |       | 125,000,000 |        |
| Total  liabilities                               |       | 150,710,970 |        | 14,133,858     |       | —           |       | 164,844,828 |        |
| Stockholder’s equity                        |       |        |        |           |       |             |       |        |        |
| Common stock                                     |       | —      |        | —         |       | —           |       | —      |        |
| Additional  paid-in capital                      |       | 37,732,680  |        | 26,624,729     |       | (26,624,729      | )          | 37,732,680  |        |
| Retained  earnings                               |       | 6,593,668   |        | 11,674,188     |       | (11,674,188      | )          | 6,593,668   |        |
| Total  stockholder’s equity (deficit)       |       | 44,326,348  |        | 38,298,917     |       | (38,298,917      | )          | 44,326,348  |        |
| Total liabilities and  stockholder’s equity |       | $           | 195,037,318 |           | $          | 52,432,775       |       | $           | (38,298,917 | ) | $ | 209,171,176 |   |

 

12

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Consolidatingbalance sheet at July 1, 2006 (unaudited):
| ** **                                       | ** ** | ** **  | ** **  | **Subsidiary** | ** ** | ** **       | ** ** | ** **  | ** **  |
|--------------------------------------------------|------------|-------------|-------------|----------------|------------|------------------|------------|-------------|-------------|
| ** **                                       | ** ** | **Parent**  | ** **  | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**   | ** **  |
| **Assets**                                       |       |        |        |           |       |             |       |        |        |
| Current assets                                   |       |        |        |           |       |             |       |        |        |
| Trade accounts  receivable                       |       | $           | 10,174,255  |           | $          | 7,445,011        |       | $           | —      |   | $ | 17,619,266 |   |
| Interdivision  receivables                       |       | (6,671,966  | )           | 6,671,966      |       | —           |       | —      |        |
| Inventories                                      |       | 17,571,267  |        | 12,366,711     |       | —           |       | 29,937,978  |        |
| Prepaid expenses  and other current assets       |       | 429,922     |        | 509,725        |       | —           |       | 939,647     |        |
| Deferred income  taxes                           |       | 654,611     |        | —         |       | —           |       | 654,611     |        |
| Total current  assets                            |       | 22,158,089  |        | 26,993,413     |       | —           |       | 49,151,502  |        |
| Investments in  subsidiary guarantors            |       | 23,072,655  |        | —         |       | (23,072,655      | )          | —      |        |
| Property and equipment,  net                     |       | 42,055,215  |        | 3,727,482      |       | —           |       | 45,782,697  |        |
| Goodwill                                         |       | 77,573,207  |        | —         |       | —           |       | 77,573,207  |        |
| Intangible assets, net                           |       | 12,627,500  |        | 2,153,336      |       | —           |       | 14,780,836  |        |
| Other noncurrent assets                          |       | 4,355,498   |        | 164,472        |       | —           |       | 4,519,970   |        |
| Total assets                                     |       | $           | 181,842,164 |           | $          | 33,038,703       |       | $           | (23,072,655 | ) | $ | 191,808,212 |   |
| **Liabilities and Stockholder’s  Equity**   |       |        |        |           |       |             |       |        |        |
| Current liabilities                              |       |        |        |           |       |             |       |        |        |
| Book overdrafts                                  |       | $           | 4,393,333   |           | $          | 337,555          |       | $           | —      |   | $ | 4,730,888 |   |
| Trade accounts  payable                          |       | 6,329,909   |        | 7,582,832      |       | —           |       | 13,912,741  |        |
| Accrued expenses                                 |       | 3,557,806   |        | 2,045,661      |       | —           |       | 5,603,467   |        |
| Accrued interest                                 |       | 6,305,990   |        | —         |       | —           |       | 6,305,990   |        |
| Taxes payable                                    |       | —      |        | —         |       | —           |       | —      |        |
| Total current  liabilities                       |       | 20,587,038  |        | 9,966,048      |       | —           |       | 30,553,086  |        |
| Line of credit                                   |       | 2,800,000   |        | —         |       | —           |       | 2,800,000   |        |
| Deferred income taxes                            |       | 4,223,628   |        | —         |       | —           |       | 4,223,628   |        |
| Other liabilities                                |       | 706,490     |        | —         |       | —           |       | 706,490     |        |
| Long-term debt,  excluding current maturities    |       | 125,000,000 |        | —         |       | —           |       | 125,000,000 |        |
| Total  liabilities                               |       | 153,317,156 |        | 9,966,048      |       | —           |       | 163,283,204 |        |
| Stockholder’s equity                        |       |        |        |           |       |             |       |        |        |
| Common stock                                     |       | —      |        | —         |       | —           |       | —      |        |
| Additional  paid-in capital                      |       | 37,775,264  |        | 26,624,729     |       | (26,624,729      | )          | 37,775,264  |        |
| Retained  earnings (deficit)                     |       | (9,250,256  | )           | (3,552,074     | )          | 3,552,074        |       | (9,250,256  | )           |
| Total  stockholder’s equity (deficit)       |       | 28,525,008  |        | 23,072,655     |       | (23,072,655      | )          | 28,525,008  |        |
| Total liabilities and  stockholder’s equity |       | $           | 181,842,164 |           | $          | 33,038,703       |       | $           | (23,072,655 | ) | $ | 191,808,212 |   |

 

13

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Consolidatingstatement of operations for the thirteen weeks ended July 2, 2005 (unaudited):
| ** **                                    | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $          | 18,231,232 |           | $          | 33,627,700       |       | $          | (7,465,984 | ) | $ | 44,392,948 |   |
| Cost of sales                                 |       | 18,807,855 |       | 25,076,559     |       | (7,465,984       | )          | 36,418,430 |       |
| Gross profit (loss)                           |       | (576,623   | )          | 8,551,141      |       | —           |       | 7,974,518  |       |
| Selling, general  and administrative expenses |       | 3,269,144  |       | 1,360,240      |       | —           |       | 4,629,384  |       |
| Operating profit (loss)                       |       | (3,845,767 | )          | 7,190,901      |       | —           |       | 3,345,134  |       |
| Other (expense)  income                       |       |       |       |           |       |             |       |       |       |
| Interest expense                              |       | (3,569,137 | )          | —         |       | —           |       | (3,569,137 | )          |
| Interest income                               |       | 4,163      |       | 60,990         |       | —           |       | 65,153     |       |
| Executive/administrative income (expense)     |       | 5,786,998  |       | (5,786,998     | )          | —           |       | —     |       |
| Other expense, net                            |       | (95,337    | )          | (12,327        | )          | —           |       | (107,664   | )          |
| Equity in earnings of subsidiary guarantor    |       | 1,452,566  |       | —         |       | (1,452,566       | )          | —     |       |
| Total other income (expense)                  |       | 3,579,253  |       | (5,738,335     | )          | (1,452,566       | )          | (3,611,648 | )          |
| (Loss) income  before income taxes            |       | (266,514   | )          | 1,452,566      |       | (1,452,566       | )          | (266,514   | )          |
| Provision for  income taxes                   |       | 404,050    |       | —         |       | —           |       | 404,050    |       |
| Net income  (loss)                            |       | $          | (670,564   | )              | $          | 1,452,566        |       | $          | (1,452,566 | ) | $ | (670,564 | ) |

 

Consolidatingstatement of operations for the thirteen weeks ended July 1, 2006 (unaudited):
| ** **                                    | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $          | 27,908,826 |           | $          | 30,173,993       |       | $          | (5,359,891 | ) | $ | 52,722,928 |   |
| Cost of sales                                 |       | 28,289,244 |       | 25,789,627     |       | (5,359,891       | )          | 48,718,980 |       |
| Gross profit (loss)                           |       | (380,418   | )          | 4,384,366      |       | —           |       | 4,003,948  |       |
| Selling, general  and administrative expenses |       | 6,771,330  |       | 1,650,489      |       | —           |       | 8,421,819  |       |
| Operating profit (loss)                       |       | (7,151,748 | )          | 2,733,877      |       | —           |       | (4,417,871 | )          |
| Other (expense)  income                       |       |       |       |           |       |             |       |       |       |
| Interest expense                              |       | (3,582,239 | )          | (1,751         | )          | —           |       | (3,583,990 | )          |
| Interest income                               |       | 3,963      |       | (3,963         | )          | —           |       | —     |       |
| Executive/administrative (expense) income     |       | 4,707,899  |       | (4,707,899     | )          | —           |       | —     |       |
| Other (expense)income, net                    |       | (2,130     | )          | 1,619          |       | —           |       | (511       | )          |
| Equity in earnings of subsidiary guarantor    |       | (1,978,117 | )          | —         |       | 1,978,117        |       | —     |       |
| Total other (expense) income                  |       | (850,624   | )          | (4,711,994     | )          | 1,978,117        |       | (3,584,501 | )          |
| (Loss) income  before income taxes            |       | (8,002,372 | )          | (1,978,117     | )          | 1,978,117        |       | (8,002,372 | )          |
| Provision for  income taxes                   |       | 486,795    |       | —         |       | —           |       | 486,795    |       |
| Net income  (loss)                            |       | $          | (8,489,167 | )              | $          | (1,978,117       | )          | $          | 1,978,117  |   | $ | (8,489,167 | ) |

 

14

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Consolidatingstatement of operations for the twenty-six weeks ended July 2, 2005(unaudited):
| ** **                                    | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** ** | ** **  |
|-----------------------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|-------------|
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**  | ** **  |
| Net sales                                     |       | $          | 40,749,223 |           | $          | 82,595,537       |       | $          | (20,119,597 | ) | $ | 103,225,163 |   |
| Cost of sales                                 |       | 41,238,078 |       | 67,683,474     |       | (20,119,597      | )          | 88,801,955 |        |
| Gross profit (loss)                           |       | (488,855   | )          | 14,912,063     |       | —           |       | 14,423,208 |        |
| Selling, general  and administrative expenses |       | 6,647,371  |       | 2,834,263      |       | —           |       | 9,481,634  |        |
| Operating profit (loss)                       |       | (7,136,226 | )          | 12,077,800     |       | —           |       | 4,941,574  |        |
| Other (expense)  income                       |       |       |       |           |       |             |       |       |        |
| Interest expense                              |       | (7,142,960 | )          | (94            | )          | —           |       | (7,143,054 | )           |
| Interest income                               |       | 10,578     |       | 88,356         |       | —           |       | 98,934     |        |
| Executive/administrative income (expense)     |       | 9,881,150  |       | (9,881,150     | )          | —           |       | —     |        |
| Other (expense) income, net                   |       | (166,029   | )          | 138,804        |       | —           |       | (27,225    | )           |
| Equity in earnings of subsidiary guarantor    |       | 2,423,716  |       | —         |       | (2,423,716       | )          | —     |        |
| Total other income (expense)                  |       | 5,006,455  |       | (9,654,084     | )          | (2,423,716       | )          | (7,071,345 | )           |
| (Loss) income  before income taxes            |       | (2,129,771 | )          | 2,423,716      |       | (2,423,716       | )          | (2,129,771 | )           |
| Provision for  income taxes                   |       | 960,170    |       | —         |       | —           |       | 960,170    |        |
| Net income  (loss)                            |       | $          | (3,089,941 | )              | $          | 2,423,716        |       | $          | (2,423,716  | ) | $ | (3,089,941 | ) |

 

Consolidatingstatement of operations for the twenty-six weeks ended July 1, 2006(unaudited):
| ** **                                    | ** ** | ** **  | ** **  | **Subsidiary** | ** ** | ** **       | ** ** | ** **  | ** **  |
|-----------------------------------------------|------------|-------------|-------------|----------------|------------|------------------|------------|-------------|-------------|
| ** **                                    | ** ** | **Parent**  | ** **  | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**   | ** **  |
| Net sales                                     |       | $           | 54,536,945  |           | $          | 80,516,265       |       | $           | (16,579,594 | ) | $ | 118,473,616 |   |
| Cost of sales                                 |       | 55,345,723  |        | 71,231,292     |       | (16,579,594      | )          | 109,997,421 |        |
| Gross profit (loss)                           |       | (808,778    | )           | 9,284,973      |       | —           |       | 8,476,195   |        |
| Selling, general  and administrative expenses |       | 13,580,850  |        | 2,848,001      |       | —           |       | 16,428,851  |        |
| Operating profit (loss)                       |       | (14,389,628 | )           | 6,436,972      |       | —           |       | (7,952,656  | )           |
| Other (expense)  income                       |       |        |        |           |       |             |       |        |        |
| Interest expense                              |       | (6,848,488  | )           | (1,751         | )          | —           |       | (6,850,239  | )           |
| Interest income                               |       | 18,572      |        | 44,797         |       | —           |       | 63,369      |        |
| Executive/administrative (expense) income     |       | 21,707,899  |        | (21,707,899    | )          | —           |       | —      |        |
| Other (expense) income, net                   |       | (156,592    | )           | 1,619          |       | —           |       | (154,973    | )           |
| Equity in earnings of subsidiary guarantor    |       | (15,226,262 | )           | —         |       | 15,226,262       |       | —      |        |
| Total other (expense) income                  |       | (504,871    | )           | (21,663,234    | )          | 15,226,262       |       | (6,941,843  | )           |
| (Loss) income  before income taxes            |       | (14,894,499 | )           | (15,226,262    | )          | 15,226,262       |       | (14,894,499 | )           |
| Provision for  income taxes                   |       | 949,425     |        | —         |       |             |       | 949,425     |        |
| Net income  (loss)                            |       | $           | (15,843,924 | )              | $          | (15,226,262      | )          | $           | 15,226,262  |   | $ | (15,843,924 | ) |

 

15

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Consolidatingstatement of cash flows for the twenty-six weeks ended July 2, 2005(unaudited):
| ** **                                                                                           | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| **Cash  flows from operating activities**                                                            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                                   |       | $          | (3,089,941 | )              | $          | 2,423,716        |       | $          | (2,423,716 | ) | $ | (3,089,941 | ) |
| Adjustments to  reconcile net (loss) income to net cash provided by (used-in) operating  activities: |       |       |       |           |       |             |       |       |       |
| Depreciation of property and equipment                                                               |       | 1,258,680  |       | 652,612        |       | —           |       | 1,911,292  |       |
| Amortization of intangibles and bond cost                                                            |       | 2,277,025  |       | 411,667        |       | —           |       | 2,688,692  |       |
| Equity in earnings of subsidiary guarantors                                                          |       | (2,423,716 | )          | —         |       | 2,423,716        |       | —     |       |
| Deferred tax liability                                                                               |       | 912,000    |       | —         |       | —           |       | 912,000    |       |
| Compensation for stock options                                                                       |       | 9,983      |       | —         |       | —           |       | 9,983      |       |
| Changes in assets and liabilities                                                                    |       |       |       |           |       |             |       |       |       |
| Trade accounts receivable                                                                            |       | 219,486    |       | 1,803,697      |       | —           |       | 2,023,183  |       |
| Interdivisional receivables/payables, net                                                            |       | 4,720,661  |       | (4,720,661     | )          | —           |       | —     |       |
| Inventories                                                                                          |       | (937,878   | )          | 3,787,612      |       | —           |       | 2,849,734  |       |
| Prepaid expenses and other current assets                                                            |       | (212,798   | )          | (176,678       | )          | —           |       | (389,476   | )          |
| Other noncurrent asset                                                                               |       | (24,074    | )          | (14,551        | )          | —           |       | (38,625    | )          |
| Trade accounts payable and accrued expenses                                                          |       | 1,346,958  |       | (827,519       | )          | —           |       | 519,439    |       |
| Accrued interest                                                                                     |       | (566,406   | )          | —         |       | —           |       | (566,406   | )          |
| Taxes payable                                                                                        |       | (51,950    | )          | —         |       | —           |       | (51,950    | )          |
| Net cash provided by operating activities                                                            |       | 3,438,030  |       | 3,339,895      |       | —           |       | 6,777,925  |       |
| **Cash  flows from investing activities**                                                            |       |       |       |           |       |             |       |       |       |
| Capital  expenditures                                                                                |       | (7,010,359 | )          | (175,325       | )          | —           |       | (7,185,684 | )          |
| Net cash used in investing activities                                                                |       | (7,010,359 | )          | (175,325       | )          | —           |       | (7,185,684 | )          |
| Net (decrease) increase in cash and cash equivalents                                                 |       | (3,572,329 | )          | 3,164,570      |       | —           |       | (407,759   | )          |
| **Cash  and cash equivalents**                                                                       |       |       |       |           |       |             |       |       |       |
| Beginning of  period                                                                                 |       | 1,085,474  |       | 2,203,556      |       | —           |       | 3,289,030  |       |
| End of period                                                                                        |       | $          | (2,486,855 | )              | $          | 5,368,126        |       | $          | —     |   | $ | 2,881,271 |   |

 

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Consolidatingstatement of cash flows for the twenty-six weeks ended July 1, 2006(unaudited):
| ** **                                                                                          | ** ** | ** ** | ** **  | **Subsidiary** | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|-------------|----------------|------------|------------------|------------|-------------|------------|
| ** **                                                                                          | ** ** | **Parent** | ** **  | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
| **Cash  flows from operating activities**                                                           | ** ** | ** ** | ** **  | ** **     | ** ** | ** **       | ** ** | ** **  | ** ** |
| Net (loss)  income                                                                                  |       | $          | (15,843,924 | )              | $          | (15,226,262      | )          | $           | 15,226,262 |   | $ | (15,843,924 | ) |
| Adjustments to  reconcile net (loss) income to net cash provided by (used-in) operating  activities |       |       |        |           |       |             |       |        |       |
| Depreciation of property and equipment                                                              |       | 1,721,349  |        | 2,348,509      |       | —           |       | 4,069,858   |       |
| Amortization of intangibles and bond issuance cost                                                  |       | 1,958,656  |        | 411,666        |       | —           |       | 2,370,322   |       |
| Fixed asset transfers                                                                               |       | (91,230    | )           | 91,230         |       |             |       | —      |       |
| Equity in earnings of subsidiary guarantors                                                         |       | 15,226,262 |        | —         |       | (15,226,262      | )          | —      |       |
| Deferred tax asset                                                                                  |       | 748,424    |        | —         |       | —           |       | 748,424     |       |
| Deferred tax liability                                                                              |       | 201,001    |        | —         |       | —           |       | 201,001     |       |
| Compensation expense for stock options                                                              |       | 42,584     |        | —         |       | —           |       | 42,584      |       |
| Changes in assets and liabilities                                                                   |       |       |        |           |       |             |       | —      |       |
| Trade accounts receivable                                                                           |       | (5,282,406 | )           | 6,849,953      |       | —           |       | 1,567,547   |       |
| Interdivisional receivables/payables, net                                                           |       | 10,456,269 |        | (10,456,269    | )          | —           |       | —      |       |
| Inventories                                                                                         |       | (5,527,508 | )           | 3,543,826      |       | —           |       | (1,983,682  | )          |
| Prepaid expenses and other current assets                                                           |       | (195,618   | )           | (118,053       | )          | —           |       | (313,671    | )          |
| Other noncurrent asset                                                                              |       | 522,337    |        | 5,465          |       | —           |       | 527,802     |       |
| Trade accounts payable and accrued expenses                                                         |       | (4,112,646 | )           | (4,505,366     | )          | —           |       | (8,618,012  | )          |
| Accounts payable change in book overdraft                                                           |       | 4,393,333  |        | 337,555        |       | —           |       | 4,730,888   |       |
| Accrued interest                                                                                    |       | 29,094     |        | —         |       | —           |       | 29,094      |       |
| Taxes payable                                                                                       |       | (977,237   | )           | —         |       | —           |       | (977,237    | )          |
| Other liabilities                                                                                   |       | 272,642    |        | —         |       | —           |       | 272,642     |       |
| Net cash provided by (used in) operating activities                                                 |       | 3,541,382  |        | (16,717,746    | )          | —           |       | (13,176,364 | )          |
| **Cash  flows from investing activities**                                                           |       |       |        |           |       |             |       |        |       |
| Capital  expenditures                                                                               |       | (6,850,558 | )           | (103,839       | )          | —           |       | (6,954,397  | )          |
| Net cash (used in) investing activities                                                             |       | (6,850,558 | )           | (103,839       | )          | —           |       | (6,954,397  | )          |
| **Cash  flows from financing activities**                                                           |       |       |        |           |       |             |       |        |       |
| Borrowings on  line of credit                                                                       |       | 9,500,000  |        | —         |       | —           |       | 9,500,000   |       |
| Payments on line  of credit                                                                         |       | (6,700,000 | )           | —         |       | —           |       | (6,700,000  | )          |
| Net cash provided by financing activities                                                           |       | 2,800,000  |        | —         |       | —           |       | 2,800,000   |       |
| Net decrease in cash and cash equivalents                                                           |       | (509,176   | )           | (16,821,585    | )          | —           |       | (17,330,761 | )          |
| **Cash  and cash equivalents**                                                                      |       |       |        |           |       |             |       |        |       |
| Beginning of  period                                                                                |       | 509,176    |        | 16,821,585     |       | —           |       | 17,330,761  |       |
| End of period                                                                                       |       | $          | —      |           | $          | —           |       | $           | —     |   | $ | — |   |

 

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**Item 2.   Management’s Discussionand Analysis of Financial Condition and Results of Operations**

**Our Company**

We arethe leading supplier of individual and group military field rations to the DoD.We specialize in the production, packaging and distribution of extendedshelf-life, shelf stable and frozen foods in flexible pouches and semi-rigidcontainers. With over 30 years of experience in the food manufacturing and foodprocessing businesses, we believe we have a reputation for superior quality andservice in developing and producing unique meal solutions for the military andfor the consumer and foodservice markets. We are a primary supplier to the DoDof Meals Ready-to-Eat (the “MREs”), Unitized Group Rations-A (the “UGR-As”) andthe polymeric trays (the “Tray-Packs”) used in the Unitized GroupRations-Heat & Serve program. Our customers also include KraftFoods, Inc. (“Kraft”), Gerber Products Company  (“Gerber”), the Quaker Oats Company (“Quaker”),Delmonte Food Company (“Delmonte”) and the Canadian Ministry of Defense.

Through ourco-manufacturing program, which began in 1998, we manufacture a variety ofextended shelf-life products for leading branded food companies, includingDelmonte, Gerber, Keefe, Kraft, Quaker and other co-manufacturing customers.These products are marketed and sold by our customers into their retail andfoodservice channels under nationally recognized brands. We target brandedcompanies that are leaders in their respective categories and have productsthat align well with our core competencies in heat seal and thermostabilizedproducts. Many of these products require us to use a combination of ourexisting manufacturing equipment and newly purchased equipment, the cost ofwhich is partially borne by our contracted co-manufacturing customers. Ourco-manufacturing program utilizes many of the technologies and processes thatwe have developed for our military business.

OnMarch 30, 2006, we were notified by the Defense Supply Center Philadelphia (the“DSCP”) that the Company had been awarded a 25% share level in the MRE-26-to-30DoD contract that runs from fiscal 2006 through 2010.  Most recently, our share of similar MREcontracts has been 35%.  While this sharelevel is slightly below historical levels, we do not anticipate that it will havea significant impact on our results of operations or cash flows, because weexpect increased revenues during fiscal 2006 through 2010 from othermilitary-type contracts and from other co-manufacturing and branded businesses.

On June 6, 2006, theCompany entered into a series of agreements with Advocacy and ResourcesCorporation, a Tennessee Not-For-Profit Corporation (“AARC”), and it’saffiliate ARC Diversified, Inc., also a Tennessee Not-For-Profit Corporation (“ARCDI”and collectively, “AARC”). In the agreement, AARC agreed to transfer its rightsand obligations under its existing UGR-A contract # SPM300-04-D-Z215 with theDSCP.  In exchange for these rights, theCompany executed an exclusive service agreement with AARC whereby AARC agreedto provide UGR-A assembly services to the Company on a fixed fee basis. Theseagreements are subject to pending approval by the DSCP.  Since the execution of these agreements, AARChas filed for bankruptcy, and therefore, we do not anticipate that theseagreements will generate additional UGR-A CONUS (Continental United States)revenues.

**Restructuring**

OnFebruary 6, 2006, the Company announced plans to relocate the assemblyoperations of its Right Away Division in McAllen, Texas to the Company’sCincinnati, Ohio location in order to better position the Company’s productionand assembly operations from a geographical standpoint, simplify logistics andreduce cost and delivery times to customers. The Company anticipates that itsconsolidation will be completed at the end of the third quarter of 2006.

TheCompany anticipates that the total pretax charges incurred to complete therestructuring will be approximately $4.1 million. Of the $4.1 million,$1.3 million will be paid to the 244 employees (under pay-to-stayseverance arrangements) currently located at the McAllen, Texas assemblyfacilities.  We anticipate that all ofthese employees will be terminated upon completion of the consolidation. Theremaining expenses are related to accelerated depreciation on property andequipment of approximately $2.8 million, which the Company anticipates will beabandoned upon its exit from the McAllen facilities.

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Duringthe thirteen weeks and twenty-six weeks ended July 1, 2006, the Companyrecorded total pretax charges of $1,546,946, and $2,733,031, respectively, allof which was recorded in the RAD segment. Of the $1,546,946 and $2,733,031 inpretax charges, $530,207 and $883,678 were included in selling, general and administrativeexpenses, during the thirteen and twenty-six weeks ended July 1, 2006,respectively.  These costs were incurred forpay-to-stay severance arrangements for employees, none of whom had beenterminated as of  July 1, 2006, and$1,016,739 and $1,849,353, for the thirteen and twenty-six weeks ended July 1,2006 respectively, were related to accelerated depreciation on assets to beabandoned included in cost of goods sold. We anticipate that the majority of the remaining liabilities incurredwill occur during the third quarter of 2006 and will be settled during the sametime period with funds from operations and temporary borrowings against ourworking line of capital. For more information related to our restructuringliabilities, see Note 3 in our unaudited consolidated financial statements fora reconciliation of liabilities at July 1, 2006.

**Results of Operations**

The amounts provided below have been rounded and aretherefore approximates that may or may not fully agree with the informationprovided for in the financial statements.

**Comparison of the thirteen weeks ended July 1, 2006 to thethirteen weeks ended July 2, 2005**

***Net Sales*.**   Our net sales for the thirteen weeks endedJuly 1, 2006 were $52.7 million, an increase of approximately $8.3million, or 18.8%, compared to net sales of $44.4 million for the thirteenweeks ended July 2, 2005.  The increasein net sales resulted from (i) increased co-manufacturing sales ofapproximately $13.1 million, which was offset by (ii) (a) decreased salesto our other co-manufacturing customers and decreased branded product sales of$0.3 million and (b) decreased military sales of approximately $4.5million to the DoD.  The $4.5 milliondecrease in military sales consisted of a $6.0 million decrease in MRE salesand a $0.6 million decrease in other military sales (primarily Tray-Packsales), offset by a $2.1 million increase in UGR-A sales.  The significant increase in co-manufacturingsales of $13.1 million was attributable to an increase of $6.5 million in newbusiness initiatives with a new co-manufacturing customer, NutriSystem, Inc.,at the end of fiscal year 2005 that did not exist during the first twenty-sixweeks of 2005 and to an increase in sales to existing co-manufacturingcustomers of approximately $6.6 million, of which $2.1 million, $3.6 millionand $0.6 million, $0.3 million, respectively, are attributable to increasedKraft sales, increased Gerber sales, increased Quaker sales and net otherco-manufacturing.

***Gross Profit.*** Our gross profit for the thirteen weeks ended July 1, 2006 was $4.0 million, adecrease of approximately $4.0 million, or 50%, compared to gross profitof $8.0 million for the thirteen weeks ended July 2, 2005. As a percentage ofnet sales, our gross profit was 7.6% and 18.0% for the thirteen weeks endedJuly 1, 2006 and July 2, 2005, respectively.  Gross profit was unfavorablyimpacted by accelerated depreciation of approximately $1.0 million of theMcAllen facilities due to the consolidation, unfavorable production variancesof approximately $1.6 million, of which $1.4 million is related to ourco-manufacturing business and $0.2 million related to our branded productsbusiness.  Of the $1.4 millionco-manufacturing production variances, approximately $1.0 million was relatedto our start-up inefficiencies on the Gerber line that were resolved during thesecond quarter and to our labor inefficiencies on our other co-manufacturinglines of business.   The remainingdecrease in gross profit was attributable to decreased contribution marginearned on sales of MREs to the DoD of approximately $1.7 million due to thelower price earned on MRE-25 surge orders during the second quarter of fiscal2006 as compared to MRE-25 base pricing during the second quarter of fiscal2005. This decrease in contribution margin earned on DoD MRE sales waspartially offset by co-manufacturing shipments due to higher volumes.

***Selling, General andAdministrative Expenses.***  Our selling, general andadministrative expenses for the thirteen weeks ended July 1, 2006 were $8.4million, representing an increase of approximately $3.8 million, or82%, compared to selling, general and administrative expenses of $4.6million for the thirteen weeks ended July 2, 2005.  This increase was theresult of (i) approximately $530,000 in severance expenses for employeepay-to-stay severance arrangements associated with the shutdown of our McAllen,Texas assembly facilities; (ii) approximately $1.1 million inemployee-related expenditures for salary, wages and benefits associated withour new corporate facility in Cincinnati, Ohio; (iii) approximately$241,000 in severance expenses for corporate employees following theirtermination; (iv) approximately $1.1 million in one-time expenditures forour on-going corporate consolidation projects and for consulting and 

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professionalservices; and approximately (v) $684,000 in travel and relatedexpenditures primarily in support of  ournew product initiatives and the consolidation of our McAllen assembly facilities.

***Operating Profit (Loss)***.  For the thirteen weeks ended July 1, 2006, we incurred an operating loss ofapproximately $4.4 million, a decrease of $7.8 million compared to ouroperating profit of $3.3 million for the thirteen weeks ended July 2, 2005.

***Interest Expense.*** Our interest expense for the thirteen weeks ended July 1, 2006 wasapproximately $3.6 million, representing an increase of approximately $15,000compared to interest expense of approximately $3.6 million for the thirteenweeks ended July 2, 2005. The increase in interest expense resulted frominterest expense incurred on our Revolving Loan Agreement.

***Interest Income.*** Our interest income for the thirteen weeks ended July 1, 2006 was $0,representing a decrease of approximately $65,000 compared to interest income ofapproximately $65,000 for the thirteen weeks ended July 2, 2005. The decreasein interest income is due to lower average daily balances in fiscal 2006 insupport of on-going project and capital expenses and inventory builds tosupport new customer initiatives.

***Other Expense, Net.*** Our other expense, net for the thirteen weeks ended July 1, 2006 wasapproximately $500, representing a decrease of expenses of approximately $107,000compared to other expense, net of approximately $108,000 for the thirteen weeksended July 2, 2005.  The decrease inother expense, net is primarily attributable to expenses incurred in fiscal2005 that did not recur in 2006.

***Provision For Income Taxes.*** Expenses related to federal, state and local taxes for the thirteen weeks endedJuly 1, 2006 was approximately $487,000 compared to approximately $404,000 forthe thirteen weeks ended July 2, 2005.  No tax benefit has been recognized associated with the operating lossesas management believes that it is more likely than not that these tax benefitswill not be realized based on the existing uncertainty whether the Company willgenerate future taxable income due to ongoing additional tax deductions relatedto goodwill amortization. As such, we have recorded approximately $463,000 ofadditional valuation allowance on net deferred tax assets associated with theindefinite reversal period related to goodwill amortization.

***Net Loss.*** As a result of the foregoing, we incurred a net loss of approximately $8.5 millionfor the thirteen weeks ended July 1, 2006, a decrease in net income ofapproximately $7.8 million compared to net loss of approximately $671,000 inthe thirteen weeks ended July 2, 2005.

**Comparison of the twenty-six weeks ended July 1, 2006 to thetwenty-six weeks ended July 2, 2005**

***Net Sales.***   Our net sales for the twenty-six weeks endedJuly 1, 2006 were $118.5 million, an increase of approximately $15.3 million,or 14.8%, compared to net sales of $103.2 million for the twenty-six weeksended July 2, 2005. The increase in net sales resulted primarily from(i) decreased net sales to the DoD of approximately $4.0 million, whichconsisted of a $3.8 million increase in UGR-A sales, a $6.7 million decrease inMRE sales and a $1.1 million decrease in other military sales, and(ii) increased co-manufacturing net sales of approximately $19.3 million,of which approximately $9.0 million was attributable to increased sales volumesto existing co-manufacturing customers while $10.3 million was attributable tonew co-manufacturing projects, including an $8.8 million NutriSystem, Inc.project and a $1.5 million Delmonte soup bowls project, both of which began in thesecond half of fiscal 2005.  Theremaining change in our sales for the twenty-six weeks is related to minorchanges in our branded other product sales which were immaterial for the periodended July 1, 2006.  During the firstquarter of fiscal 2006, Delmonte announced the sale of its soup bowl line to athird party and during the second quarter of 2006, we were notified by thesubsequent third party that it intended to produce the soup bowl lineinternally.  We have since stoppedproduction and sales of the soup bowl products to either party and do notanticipate any significant liabilities arising from the discontinuance of thisproduct.

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***GrossProfit*.**  Our gross profit for the twenty-six weeksended July 1, 2006 was $8.5 million, representing a decrease of approximately$5.9 million, or 41.2%, compared to gross profit of $14.4 million for thetwenty-six weeks ended July 2, 2005, respectively.  As a percentage of net sales, our grossprofit was 7.2% and 14.0% for the twenty-six weeks ended July 1, 2006 and July2, 2005, respectively.  The decrease ingross profit was caused by (i) a decrease in gross profit on sales to the DoDby approximately 19.1%, or $4.5 million and (ii) a increase in unfavorableproduction variances on our co-manufacturing lines of approximately $1.5million.  The $4.5 million decrease ingross profit from the DoD was attributable to $1.8 million in accelerateddeprecation expense on those fixed assets that we intend to abandon upon thecompletion of the McAllen consolidation, The remaining $2.7 million decrease inDoD gross profit is directly attributable to lost gross profit on sales of MREsto the DoD of approximately $2.1 million related to lower volumes and salesprices and approximately $632,000 related to lower margins on UGR-A OCONUSsales.  The $1.5 million in unfavorableproduction variances, of which approximately $1.2 million is related to ourGerber line’s start-up inefficiencies, where were largely resolved during thesecond quarter of fiscal 2006, and approximately $300,000 related to labor andprice inefficiencies on our other co-manufacturing lines.

***Selling,General and Administrative Expenses.***   Our selling, general and administrativeexpenses for the twenty-six weeks ended July 1, 2006 were $16.4 million, anincrease of $6.9 million, or 73.3%, compared to selling, general andadministrative expenses of approximately $9.5 million for the twenty-six weeksended July 2, 2005.  Our selling, general and administrative expensesincreased over the prior period due to additional (i) severance costs ofapproximately $884,000 for employee pay-to-stay severance arrangementsassociated with our McAllen facilities; (ii) employee-related costs of$3.3 million for increased headcount, salary, wages and benefits; (iii)severance and employee recruiting costs of approximately $402,000;(iv) research and development, and increased travel primarily in supportof product initiatives and related to the McAllen consolidation ofapproximately $1.3 million; and(v) consulting and professionalfees of approximately $1.1 million for project initiatives and consolidationefforts.

***Operating Profit (Loss) .***  Our loss from operations was approximately$8.0 million for the twenty-six weeks ended July 1, 2006, a decrease ofapproximately $12.9 million compared to operating profit of approximately $4.9million for the twenty-six weeks ended July 2, 2005.

***Interest Expense.*** Our interest expense for the twenty-six weeks ended July 1, 2006 wasapproximately $6.9 million, representing a decrease of approximately $300,000,compared to interest expense of approximately $7.1 million for the twenty-sixweeks ended July 2, 2005. The decrease is due primarily to interest cost onadvances under our revolving line of credit during the twenty-six week periodended July 2, 2005 that did not recur in 2006.

***Interest Income.*** Our interest income for the twenty-six weeks ended July 1, 2006 wasapproximately $63,000, a decrease of approximately $36,000 compared to interestincome of approximately $99,000 for the twenty-six weeks ended July 2, 2005.The decrease in interest income is due to higher interest earned on averagedaily balances maintained in fiscal 2005 as compared to fiscal 2006.

***Other Expense, Net.*** Our other expense, net for the twenty-six weeks ended July 1, 2006 wasapproximately $155,000, representing a increase of approximately $128,000,compared to other expense of $27,000 for the twenty-six weeks ended July 2,2005. The increase in other expense, net is attributable to no valueengineering income being earned in fiscal 2005 as compared to fiscal 2006.

***Provision For Income Taxes.*** Expenses related to federal, state and local taxes for the twenty-six weeksended July 1, 2006 were approximately $949,000 compared to approximately$960,000 for the twenty-six weeks ended July 2, 2005. No tax benefit hasbeen recognized associated with the operating losses as management believesthat it is more likely than not that these tax benefits will not be realizedbased on the existing 

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uncertaintywhether the Company will generate future taxable income due to ongoingadditional tax deductions related to goodwill amortization. As such, we haverecorded approximately $949,000 of additional valuation allowance on netdeferred tax assets associated with the indefinite reversal period related togoodwill amortization.  The remainingdifference is related to state franchise taxes recorded in the prior year thatdid not recur during fiscal 2006.

***Net Loss.**** *As a result of the foregoing, weincurred a net loss of approximately $15.8 million for the twenty-six weeksended July 1, 2006, an increase in net loss of approximately $12.7 millioncompared to net loss of approximately $3.1 million for the twenty-six weeksended July 2, 2005.

**Operating Segment Results**

**Comparison of the thirteen weeks ended July 1, 2006 to thethirteen weeks ended July 2, 2005**

***NetSales.* **Net salesfor our RAD segment for the thirteen weeks ended July 1, 2006 decreased byapproximately $3.5 million compared to the thirteen weeks ended July 2, 2005primarily due to a decrease in sales to the DoD.  This decrease resulted from a $6.0 milliondecrease in MRE sales, which was offset by a $2.1 million increase in UGR-Asales and approximately $400,000 increase in military other and other sales.

Net sales for our PFDsegment for the thirteen weeks ended July 1, 2006 increased approximately $11.8million compared to the thirteen weeks ended July 2, 2005 primarily due to anincrease in co-manufacturing sales of approximately $13.1 million, which wasoffset by approximately $1.5 million in decreased DoD sales for the PFD segmentrelated to the delay in the DoD Tray-Pack award.  The remaining difference is due to immaterialincreases in other branded product sales. (This PFD Segment net sales increase of $11.8 million excludesinter-segment sales of approximately $5.4 million for the thirteen weeks endedJuly 1, 2006 and $7.5 million for the thirteen weeks ended July 2, 2005.)

***OperatingProfit.***  Profitfrom operations for our RAD segment for the thirteen weeks ended July 1, 2006decreased by approximately $4.5 million compared to the thirteen weeks endedJuly 2, 2005.  Included in the decreasedoperating profit are restructuring charges of approximately $1.5 millionrelated to pay-to-stay severance arrangements and accelerated depreciation, asdiscussed in note 3 to the unaudited consolidated financial statements.  The remaining decrease is attributable todecreased margins earned on MRE-25 surge contract pricing in the second quarterof 2006 as compared to MRE-25 base contract pricing in the second quarter of2005.

Profitfrom operations for our PFD segment for the thirteen weeks ended July 1, 2006increased $2.9 million compared to the thirteen weeks ended July 2, 2005 due tothe transfer of all selling, general and administrative expenses to ourcorporate headquarters.  At the grossprofit level, our PFD segment decreased approximately $300,000 because ofco-manufacturing production inefficiencies previously discussed which wereoffset by the increased sales volumes.

**Comparison of the twenty-six week ended July 1, 2006 to thetwenty-six weeks ended July 2, 2005**

***Net Sales.***   Net sales for the RAD segment for thetwenty-six weeks ended July 1, 2006 decreased by $2.1 million compared to thetwenty-six weeks ended July 2, 2005 because of decreased sales to the DoD.  This $2.1 million decrease resulted from a$6.7 million decrease in MRE sales and an $800,000 decrease in other militarysales, which were offset by a $3.8 million increase in UGR-A sales.

Netsales for the PFD segment for the twenty-six weeks ended July 1, 2006 increasedapproximately $17.3 million compared to the twenty-six weeks ended July 2, 2005due to an increase in co-manufacturing net sales of approximately $19.3 million,which was offset by approximately $2.0 million in decreased branded and traypack sales.  (This PFD segment net salesincrease of $17.3 million excludes inter-segment sales of approximately $16.6million for the twenty-six weeks ended July 1, 2006 and $20.1 million for thetwenty-six weeks ended July 2, 2005.)

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***Operating Profit.***     Profit from operations decreased byapproximately $5.6 million for the RAD segment for the twenty-six weeks endedJuly 1,2006 compared to the twenty-six weeks ended July 2, 2005. This decreasein profit from operations was primarily the result of approximately $1.9 millionin accelerated depreciation expenses related to our decision to relocate ourassembly operations from McAllen, Texas to Cincinnati, Ohio and approximately$884,000 in expenses related to pay-to-stay severance arrangements.  The remaining decrease was due to lowerprices earned on MRE-25 surge orders, the lower prices of which occurred in thefirst five months of fiscal 2006, coupled with the delay in shipments of MRE-26base contracts. 

Profitfrom operations increased by approximately $4.4 million for the PFD segment forthe twenty-six weeks ended July 1, 2006 compared to the twenty-six weeks endedJuly 2, 2005.  The increase in operatingprofit was primarily attributable to selling, general and administrativeexpenses that are now being recorded at the corporate facility.  These selling, general and administrativeexpenses are consolidated for presentation in our financial statements but aresegregated in Note 9 to the unaudited consolidated financial statements.  Gross profit decreased approximately $183,000largely because of $1.2 million in production inefficiencies related to thestart-up of our new Gerber line and further impacted by the $509,000 in spareparts expense, which were offset by higher co-manufacturing sales volumes.

**Liquidity and Capital Resources**

Thefollowing table summarizes our net cash provided by or (used in) our operatingactivities, investing activities and financing activities and our capitalexpenditures for twenty-six weeks ended July 1, 2006 and July 2, 2005:
| ** **                       | ** ** | **26 Weeks**          | ** ** | **26 Weeks**          | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                       | ** ** | **July 2, 2005** | ** ** | **July 1, 2006** | ** ** |
| Net cash  provided by (used-in): |       |                       |       |                       |       |
| Operating activities             |       | $                          | 6,777,925  |                       | $          | (13,176,364 | ) |
| Investing activities             |       | (7,185,684                 | )          | $                          | (6,954,397 | ) |
| Financing activities             |       | —                     |       | 2,800,000                  |       |
| Capital expenditures             |       | (7,185,684                 | )          | (6,954,397                 | )          |
|                                  |            |                            |            |                            |            |  |  |

 

***Operating Activities*****.**  Net cash (used-in)provided by operating activities was approximately ($13.2) million and $6.8 millionfor the twenty-six weeks ended July 1, 2006 and July 2, 2005, respectively.Cash generated from operating activities decreased during the first twenty-sixweeks of 2006 as compared to 2005 due primarily to payments made againstoutstanding current trade accounts payable, taxes and acquisition of inventoryof approximately $8.6 million resulting from increased first quarter 2006working capital requirements, income taxes payments of approximately $1.0million and inventory purchases due to new customer initiatives and inventorybuild related to our restructuring efforts in Texas of approximately $2.0million and further impacted by lower margins on product mix and productioninefficiencies related to start-up efforts on the Gerber line.

***Investing Activities*****.**  Net cash used in investingactivities was approximately $7.0 million and $7.2 million for the twenty-sixweeks ended July 1, 2006 and July 2, 2005, respectively and primarilyattributable to capital expenditures in support of additional capacity andimprovement of both military and co-manufacturing lines as well asinfrastructure.

***Financing Activities***.  Net cash provided by financing activities was approximately $2.8 million and $0for the twenty-six weeks ended July 1, 2006 and July 2, 2005,respectively.  Sources of financing wereobtained from $2.8 million of borrowing on our Revolving Loan Agreement.

As ofAugust 12, 2006, we had outstanding borrowings of $12.0 million against ourRevolving Loan Agreement. Significant uses of cash during the second quarter of2006 and the first two weeks of August 

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2006included interest payment on the Senior Secured Notes of approximately $6.8million, purchases with an associated material cost of approximately $12.5million to support UGR-A sales orders that shipped in the first two weeks ofAugust, build out of our new assembly facilities located adjacent to ourmanufacturing facility in Cincinnati, Ohio of approximately $5.0 million andinventory builds primarily in support of our new Eversafe product and MREcomponent parts of approximately $6.0 million.

Ourcurrent cash flow and financial statement forecast for the remainder of fiscal2006 suggest that we will have repaid all borrowings against the Revolving LoanAgreement during November of 2006 and will remain cash positive for theremainder of fiscal 2006.  However, thissame financial forecast also suggests that it is possible we could violate oneor more of the financial covenants governing our borrowing arrangements, andthrough the inter-creditor agreement, our Senior Secured Notes.

In theevent of a violation of one or more of our financial covenants, we would seekto resolve the issue either by satisfying the covenant within the allottedperiod or by obtaining the appropriate waivers. If we were unable to mitigate the covenant violation within the allottedperiod or unable to obtain the waivers, the Senior Secured Notes and amountsoutstanding under the Revolving Loan Agreement would become payable.

***Long-Term Debt Expenditures*****.**   In connection with our $125 million SeniorSecured Notes and our  working capital facility, we will continue to incursignificant debt service payments including interest in future years. Totalcash interest payments related to the Senior Secured Notes will be approximately$13.6 million on an annual basis. We incurred approximately $6.9 millionof interest expense (including bond amortization cost) relating to the SeniorSecured Notes and our working capital facilities in the twenty-six week periodended July 1, 2006. To the extent we have borrowings outstanding under ourworking capital facility, we will have additional cash interest payments. Ourborrowings against our working capital facility was $2.8 million July 1, 2006.

Theindenture governing the Senior Secured Notes, and our working capital facility,impose significant operating and financial restrictions on us. Theserestrictions limit or prohibit, among other things, our ability to incuradditional indebtedness, repay indebtedness prior to stated maturities, paydividends on or redeem or repurchase our stock, issue capital stock, makeinvestments, create liens, sell certain assets or merge with or into othercompanies, enter into certain transactions with stockholders and affiliates,make capital expenditures, sell stock in our subsidiaries and restrictdividends, distributions or other payments from our subsidiaries. In addition,our new working capital facility requires us to meet certain financial ratiosand financial condition tests. At July 1, 2006, we were in compliance with allcovenants related to our Senior Secured Notes and working capital facility.

OnFebruary 11, 2005, our Parent Company and its wholly-owned financesubsidiary, TWC Holding Corp., co-issued their 13.875% Senior PIK Notes due2011, in the approximate aggregate principal amount of $62,259,000 net of adiscount of approximately $36,259,000. The Senior PIK Notes earn interest atthe rate of 13.875% per annum, mature on August 15, 2011 and are unsecuredobligations of the Parent Company and TWC Holding Corp. Neither the Company norany of its subsidiaries guaranteed the Senior PIK Notes. The Senior PIK Noteslimit the Company’s ability to incur additional indebtedness, pay dividends,make other distributions, make certain investments, certain assets or mergewith or into other companies. Because our Parent Company is a holdingcompany with no operations and has only its investment in the Company andbecause TWC Holding Corp. has no independent operations or assets, future cashflows or assets of the Company through 2011 may be required to service the$62.3 million Senior PIK Notes, upon their maturity.

Weexpect our remaining capital expenditures in 2006 to be approximately$9.0 million, primarily related to support plant renewal and consolidations,efficiency improvements and expansion of our co-manufacturing business.

Ourprincipal sources of liquidity are cash flow generated from operations andborrowings under our working capital facility. As of July 1, 2006, we had borrowings under the Revolving LoanAgreement. of $2.8 million.  In addition to fluctuations in businessvolume, cash flows from operations are affected by contract terms for billingand collection. Our liquidity will also continue to be dependent on a number ofother 

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factors,including the timing of collection on our contract receivables, processing ofweekly and bi-weekly payroll and associated taxes and payments to oursuppliers. Our principal uses of cash will meet debt service requirements, financeour capital expenditures and provide working capital. Our future operatingperformance and ability to extend or refinance our indebtedness will bedependent on future economic conditions and financial, business and otherfactors that are beyond our control.

**Item 3.   Quantitative andQualitative Disclosures About Market Risk.**

We areexposed to market risk, primarily from the impact of interest rate changes onour potential use of variable rate debt which was $2.8 million at July 1, 2006.Our exposure to market risks from foreign currency and commodity pricefluctuations is limited since all of our fiscal year 2006 and 2005 purchasesand sales are denominated in U.S. dollars and since raw commodities do notcomprise a significant percentage of our costs. Other than with respect to oursales to the Canadian military, we generally do not have exposure to foreigncurrency risk. In addition, because our customary contract terms pass throughincreases in the costs of commodities underlying our products to our customers,we generally do not have exposure to commodity price risk. Other than withrespect to potential hedges on sales to the Canadian military, we do not hedgeour exposure to foreign currency or commodity price risk. We do not hold anyderivatives for trading or speculative purposes. Changes in the fair value ofderivatives are recorded in current earnings along with the change in the fairvalue of the underlying hedged item.

All ofour outstanding bank debt bears interest at variable interest rates tied to theprime interest rate. The use of variable rate debt to finance our operationsand capital improvements exposes us to variability in interest payments due tochanges in interest rates. We had limited exposure to variable rates atJuly 1, 2006. We believe that a hypothetical 1% increase in interest rateson our variable rate debt for a one-year period would have had no significantimpact on our net income.

**Item 4.   Controls andProcedures.**

**a.  Evaluation of Disclosure Controls andProcedures**Our management, with the participation of our Chief Executive Officer and ourChief Financial Officer, has evaluated our disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) of the ExchangeAct).  Based on that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, our disclosure controls andprocedures were effective to ensure that information required to be disclosedin reports that we file or submit under the Exchange Act are:(1) recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms; and (2) accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

**b.* *Changes in InternalControls**

Therehave been no changes in our internal controls over financial reporting thathave occurred during the twenty-six weeks ended July 1, 2006  that have materially affected, or arereasonably likely to materially affect, our internal controls over financial reporting.

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**FORWARD-LOOKINGSTATEMENTS**

Thisreport includes “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements are thosethat do not relate solely to historical fact. They include, but are not limitedto, any statement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as “believe,” “anticipate,”“expect,” “estimate,” “intend,” “project,” “plan,” “will,” or words or phrasesof similar meaning. They may relate to, among other things:

·  our liquidity and capital resources;

·  our contracts with the U.S. government;

·  the U.S. Department of Defense budget ingeneral and the U.S. military activity in particular;

·  our co-manufacturing plans;

·  competitive pressures and trends in ourindustry;

·  prevailing interest rates;

·  legal proceedings and regulatory matters;

·  other risks related to our Senior SecuredNotes (including the value of the collateral);

·  general economic conditions; and

·  our development and expansion plans andexpectations for the future.

Theseforward-looking statements reflect our current views with respect to futureevents and are based on assumptions and subject to risks and uncertainties,including, but not limited to, economic, competitive and governmental factorsoutside of our control, that may cause actual results to differ materially fromtrends, plans or expectations set forth in the forward-looking statements andthat may adversely affect us. It is not possible for us to predict all of theserisks, nor can we assess the extent to which any factor, or combination offactors, may cause actual results to differ from those contained inforward-looking statements. The foregoing list of important factors and otherrisk detailed from time to time in the Company’s reports filed with the SEC arenot exhaustive.  The Company assumes noobligation to update its forward-looking statements.

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**PART II—OTHERINFORMATION**

**Item 1.   LegalProceedings.**

During the twenty-sixweeks ended July 1, 2006, there were no material changes to the Company’spreviously disclosed legal proceedings. Additionally, we are, and from time totime may be, a party to routine legal proceedings incidental to the operationof our business. The outcome of any pending or threatened proceedings is notexpected to have a material adverse effect on our financial condition,operating results or cash flows, based on our current understanding of therelevant facts. Legal expenses incurred related to these contingencies areexpensed as incurred.

**Item 1A.   Risk Factors.**

There have been no material changes in risk factors from thosedescribed in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005, filed with the SECon March 31, 2006.

**Item 2.   UnregisteredSales of Equity Securities and Use of Proceeds.**

None.

**Item 3.   DefaultsUpon Senior Securities.**

None.

**Item 4.   Submissionof Matters to a Vote of Security Holders.**

None.

**Item 5.   OtherInformation.**

None.

**Item 6.    Exhibits.**
| No.  | ** ** | **Description**                                                                                          | ** ** | ** ** |
|------|------------|----------------------------------------------------------------------------------------------------------|------------|------------|
| 31.1 |       | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of  2002 |
| 31.2 |       | Certification of  the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act  of 2002 |
| 32.1 |       | Certification of  the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act  of 2002 |
| 32.2 |       | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of  2002 |

 

 

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**Signatures**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                       |   | THE WORNICK COMPANY |
|-----------------------|--------|---------------------|
|                  |   | (Registrant)        |
|                  |   |                |   |   |
| Date: August 15, 2006 |   | By:                 |   | /s/ MICHAEL M. THOMPSON |
|                  |   |                |   | Michael M. Thompson |
|                  |   |                |   | President and Chief Executive Officer |
|                  |   |                |   | (Principal Executive Officer) |
|                  |   |                |   |   |
| Date: August 15, 2006 |   | By:                 |   | /s/ BRIAN A. LUTES |
|                  |   |                |   | Brian A. Lutes |
|                  |   |                |   | Chief Financial Officer and Treasurer |
|                  |   |                |   | (Principal Financial Officer and |
|                  |   |                |   | Principal Accounting Officer) |

 

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