Cordoba Asset Delivers Letter To The Board Of Overhill Farms Urging Sale Of The Company

NEW YORK, March 18, 2013 /PRNewswire/ -- Cordoba Asset, LLC ("Cordoba"), a significant shareholder of Overhill Farms, Inc. (NYSE: OFI) ("Overhill" or the "Company") announced today that it has delivered a letter to the Board of Directors of Overhill (the "Board").  In the letter, Cordoba expressed concern that at its current stock price the market is giving little value to the future earnings power of the business and appears to value Overhill slightly above its liquidation value. Cordoba set forth details of its analysis of the Company's underperformance, which it believes is largely attributable to poor management execution.  Cordoba stated that the best path to maximize value for shareholders is through the sale of the Company as a whole.  Accordingly, Cordoba concluded that the Board should immediately abandon all non-sale transactions and take the necessary steps to commence a formal process to fully explore the sale of the Company to the highest bidder.

The full text of the letter follows:

Cordoba Asset, LLC
521 Middle River Drive
Fort Lauderdale, Florida 33304

March 18, 2013

Overhill Farms, Inc.
2727 East Vernon Avenue
Vernon, California 90058
Attention: Board of Directors

Dear Members of the Board,

Cordoba Asset, LLC owns an aggregate of 250,000 shares of common stock, $.01 par value (the "Common Stock") of Overhill Farms, Inc. ("Overhill" or the "Company") and we have carefully followed the Company for over four years.  We are writing to you because we are deeply concerned that Overhill is undervalued and at Overhill's current closing stock price of $3.90 as of March 15, 2013, the market is giving little value to the future earnings power of the business and appears to value the Company slightly above its liquidation value.  Based on our analysis of the Company and review of its prospects, we have grown confident that value can be maximized for the benefit of all shareholders only through the sale of the Company as a whole.  Accordingly, we urge the Board of Directors of Overhill (the "Board"), with the help of its financial advisor, Piper Jaffray & Co., to abandon all non-sale transactions immediately and take the steps necessary to commence a formal process to fully explore the sale of the Company to the highest bidder.  

We believe the market's lack of confidence in Overhill is largely a result of the poor management execution that has caused enormous destruction of shareholder value.  Based on discussions we have had with other shareholders, we are confident that our sentiments are broadly shared. In the past few years, Overhill has consistently failed to attract meaningful new business or increase production volume enough to reach optimum asset utilization.  Management has also been too slow to implement necessary changes to reduce the Company's bloated cost structure and generate profitability. 

Private label food production economics are very sensitive to throughput levels due to the inherent high levels of fixed costs (i.e. plant costs, utilities and labor). Without adequate throughput, economic margins decrease resulting in subpar profits, as illustrated by Overhill's financial underperformance. 

Yet despite these poor results, management has continued to hide behind excuses, blaming a poor economy and high commodity costs for its failures.  Meanwhile Overhill's publicly traded competitors are announcing record profits and are experiencing roaring stock performance.  As demonstrated by the table below, Overhill's returns place it at the bottom of its peer group.

Management has regularly blamed the lackluster financial performance on a poor economy in earnings press releases and conference calls.  As a result of their failure to address the underlying causes for underperformance, we feel the Company has missed on all opportunities to participate in an improving economy.  Further, management has repeatedly failed to deliver on promises of possible deals and cost cutting initiatives.  Instead, Overhill is risking shareholder value by entering unchartered territory in its attempt to take on deals such as its licensing deal with Boston Market Corporation ("Boston Market") that require operational know-how that the Company does not possess.

In November 2010, almost 27 months ago, Overhill announced it had won a multi-year agreement to license the Boston Market line of frozen foods.  This seemed like a potential "home run" deal for the small private label producer.  However, the Boston Market deal was unlike Overhill's legacy private label business.  Unfortunately, the deal required Overhill to develop new skills, like an internal sales function as well as its own distribution, and step outside of its core competency.  If executed incorrectly, this large ($85m in revenues) piece of business could further jeopardize the health of the Company.  A few months later, after realizing the complexities of the deal, Overhill announced it partnered with a frozen food heavy weight Bellisio Foods, Inc. ("Bellisio") to obtain sales and distribution capabilities. The two companies agreed to split the production 50/50 and Bellisio would cover the responsibilities that Overhill could not manage alone. Overall, the Boston Market deal has only dragged down margins, even as revenues have increased, and has soaked up excess cash flow due to increased working capital requirements.  We believe the partnership with Bellisio is too onerous and does not allow Overhill to profit from the arrangement. In addition, most of the excess cash flow produced from the legacy business while ramping up Boston Market has gone into working capital, which shareholders would have liked to see paid out as a dividend, as made clear in many conference calls.

We further see the Boston Market deal as being unsuccessful because it does not solve the Company's real problem -- its very low plant capacity utilization. Even though the deal increased revenues over $25 million, or 15%, Boston Market only improved utilization by two to three hundred basis points, according to our calculations.

Unfortunately, given the continued deterioration of the legacy business, we do not believe the Company would be in any better position without the Boston Market line. Any available alternative, other than an outright sale, will only further jeopardize the shareholders' investment. For example, management's proposed idea to move the Company's production facility fails to address the serious issues with Overhill's business model and only serves to perpetuate unprofitability and further increase the Company's already high expenses in the short-term.

The Company's customer base has eroded to a level where new business is needed just to break even.  The production plants are too large for the current level of business. By our calculations, the Company is currently operating at 58% capacity utilization (plant #1 -- 50% and plant #2 -- 70%). Problem areas include: Safeway, Jenny Craig and the Airline business.  Announced new deals like the one with Target Corporation have failed to generate material revenue and have been quickly phased out.  Unsuccessful partnerships like the one with J.R. Simplot cause further concern. We estimate that Overhill's cost structure is too high to profitably attract new business in its highly competitive industry.  We believe that only if Overhill achieved scale through a business combination with a larger Company with deeper core competencies like sales and distribution, can the business generate healthy cash flow.  Overall, at this juncture, we believe a sale of the Company is the optimal way to maximize shareholder value.

Overhill does not benefit from, and is in fact burdened by, being a public Company.  The Company is too small to generate attention from Wall Street firms and stock analysts.  In addition, the management has failed to provide the responsiveness to shareholder concerns or transparency of financial results, that a public company's shareholders expect.  It was not until the last few years that the Company began hosting quarterly earnings conference calls. Further, in the private label business customers frown upon public disclosure of new business deals and projects, adding additional layers of disclosure complexity.

Where does this leave us? Management has indicated that the Bellisio arrangement is up for renewal this summer. In addition, during the Q1 2013 conference call management indicated that the business could produce less Boston Market product and earn more money, a clear sign that the deal with Boston Market is not a good fit for Overhill. When asked by an analyst on the Q1 2013 conference call if the Boston Market deal was a better fit for a larger Company, James Rudis, the Company's Chairman, President and Chief Executive Officer, declined. After 18 months, Boston Market license has been dilutive to margins and free cash flow.  Overall, the shareholders have been more than patient with management persistent failure to deliver on their promises. We no longer have time. Action must be taken decisively and urgently.

We firmly believe that there is a clear path to maximize value at Overhill through a fair and thorough process for the sale of the Company as a whole.  We urge the Board to immediately take the necessary steps to commence such a process in a manner consistent with its fiduciary duties to shareholders.  Should the Board fail to pursue such a course we are fully prepared to pursue our rights as shareholders of Overhill to seek change in the composition of the Board and ensure that the best interests of shareholders are properly served.

Sincerely,

Vito Garfi
Managing Member

Investor contact:
Vito Garfi, (561)302-7004 

SOURCE Cordoba Asset, LLC