-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GbHSKWLTMnz+gQSi+u18NKKLb00uRC/jKWJtW4LuVpaBL1wYKh9AWdyhJL/RQWjr GMU4djWU13W0aCLsJ33tdw== 0000897101-99-000321.txt : 19990402 0000897101-99-000321.hdr.sgml : 19990402 ACCESSION NUMBER: 0000897101-99-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAEL FOODS INC /MN CENTRAL INDEX KEY: 0000768158 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - LIVESTOCK & ANIMAL SPECIALTIES [0200] IRS NUMBER: 410498850 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15638 FILM NUMBER: 99580863 BUSINESS ADDRESS: STREET 1: 5353 WAYZATA BLVD STREET 2: PARK NATIONAL BANK BLDG STE 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6125461500 MAIL ADDRESS: STREET 1: 610 PARK NATIONAL BANK BUILDING STREET 2: 5353 WAYZATA BOULEVARD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: NORTH STAR UNIVERSAL INC DATE OF NAME CHANGE: 19920703 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ------------------------------------------------------ Commission file number 0-15638 ------------------------------------------------------ MICHAEL FOODS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0498850 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Suite 324, Park National Bank Building 5353 Wayzata Boulevard Minneapolis, Minnesota 55416 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 546-1500 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 4, 1999 was approximately $266 million based on the last price of such stock as reported by the Nasdaq National Market. The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of March 4, 1999, was 20,937,056 shares. 1 DOCUMENTS INCORPORATED BY REFERENCE Pursuant to General Instructions G (2) and G (3), the financial information about industry segments under Item 1 of Part I and the responses to Items 5, 6, 7, and 8 of Part II of this report are incorporated herein by reference to the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1), and the responses to Items 10, 11, 12 and 13 of Part III of this report are incorporated herein by reference to the information contained in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders to be held on April 29, 1999, to be filed with the Securities and Exchange Commission on or about March 26, 1999. PART I ITEM 1 - BUSINESS FORWARD-LOOKING STATEMENTS Certain items in this Form 10-K are forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties, including changes in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for the Company's products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg and feed costs. The Company's actual financial results could differ materially from the results estimated by, forecasted by, or implied by the Company in such forward-looking statements. GENERAL Michael Foods, Inc. (the "Company") is a diversified producer and distributor of food products in four areas - egg products, refrigerated distribution, dairy products, and potato products. The Company, through its Egg Products Division, is the largest producer, processor and distributor of extended shelf-life liquid eggs and precooked, dried, hard-cooked and frozen egg products in the United States. The Refrigerated Distribution Division distributes a broad line of refrigerated grocery products directly to supermarkets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods. The Dairy Products Division processes and distributes soft serve mix, ice cream mix, and extended shelf-life ultrapasteurized milk and specialty dairy products to domestic fast food businesses and other foodservice outlets, independent retailers, ice cream manufacturers and others. The Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Financial information about the Company's business segments is incorporated by reference to "Note K" in the "Notes to Consolidated Financial Statements" on page 25 of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). The Company's strategy is to grow value-added food product sales, primarily in the foodservice market, by focusing on developing, marketing and distributing innovative, refrigerated products. The key to this strategy is "value-added", whether that is in the product, the distribution channel or in the service provided to customers. EGG PRODUCTS The Egg Products Division, comprised of M. G. Waldbaum Company ("Waldbaum") and Papetti's Hygrade Egg Products, Inc. ("Papetti's"), produces, processes and distributes numerous egg products and shell eggs. Management believes that the Egg Products Division is the largest egg products producer in the United States and is believed to be the second largest egg producer 2 in the United States. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs ("Easy Eggs(R)" and "Table Ready(TM)"), egg white-based egg substitutes ("Better 'n Eggs(TM)", "Table Ready(TM)", and "All Whites(TM)") and precooked egg products. Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs, and hard-cooked eggs. The Division is the largest supplier of extended shelf-life liquid eggs, precooked egg patties and omelets, and hard-cooked eggs in the United States and is a leading supplier of frozen, liquid and dried whole eggs, whites and yolks. The Division distributes its egg products to food processors and foodservice customers primarily throughout the United States with some international sales in the Far East and Europe. The largest selling product line within the Division, extended shelf-life liquid eggs, and other egg products are marketed nationally to a wide variety of foodservice and industrial customers. The Division also is a leading supplier of egg white-based egg substitutes sold in the U. S. retail and foodservice markets. Most of the Division's annual shell egg sales are made to the Company's Refrigerated Distribution Division, which, in turn, distributes them throughout its' 23 state territory. In 1998, the Division derived approximately 94% of net sales from egg products, with 6% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States reflects levels reported by Urner Barry Spot Egg Market Quotations ("Urner Barry"), a recognized industry publication. Prices of certain valued-added products, such as extended shelf-life liquid eggs, egg substitutes, and precooked egg products typically are not significantly affected by Urner Barry quoted price levels. Such products accounted for approximately 60% of the Division's 1998 sales. Prices for the Division's other products, including frozen, short shelf-life liquid, certain dried products, hard-cooked items and, particularly, shell eggs, are significantly affected by frequently changing market levels as reported by Urner Barry. In 1998, 35-40% of the Division's egg needs were satisfied by production from Company-owned hens, with the balance being purchased under grower contracts and in the spot market. The cost of eggs from Company-owned facilities is largely dependent upon the cost of feed. The cost of eggs purchased under grower contracts and in the spot market is determined by normal market forces, with prices largely determined by reference to Urner Barry quotations. Historically, feed costs have generally been less volatile than have egg market prices and internally produced eggs generally are lower in cost than are externally sourced eggs. Key feed costs, such as corn and soybean meal, are partially hedged through the use of futures and other purchase contracts. There is no market mechanism for hedging egg prices. The Division has endeavored to moderate the effects of egg market commodity factors through an emphasis on value-added products and the internal production of eggs, where the egg cost is somewhat controllable. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, such as 6-12 months, or more. The former allows the Division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both the egg sourcing cost and the egg products pricing, with each changing as frequently as weekly. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods. The Division's principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania and Iowa. Certain of the Division's facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. Fully automated laying barns, housing approximately 13,750,000, producing hens, are located in Nebraska, Minnesota and Colorado, of which approximately 1,500,000 are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. 3 Further, the production of approximately 2,250,000 hens is under long-term supply agreements, with an additional 21,750,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 2,800,000 pullets located in Nebraska and Minnesota. REFRIGERATED DISTRIBUTION The Refrigerated Distribution Division, comprised of Crystal Farms Refrigerated Distribution Company ("Crystal Farms") and Wisco Farm Cooperative, distributes a wide range of refrigerated grocery products directly to retailers and to wholesale warehouses. The Division believes that its strategy of offering quality branded products at a good value relative to national brands has contributed to its growth. These distributed refrigerated products, which consist principally of cheese, eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic foods, are supplied by vendors, or other divisions of the Company, to the Division's specifications. Cheese accounts for approximately 54% of divisional annual sales. The Company operates a cheese packaging facility in Lake Mills, Wisconsin, which processes and wraps various cheese products for its Crystal Farms brand cheese business and for private label customers. The Division has expanded its market area using both company-owned and leased resources and independent distributors. The Division's market area includes 23 states primarily in the Midwest and Southwest. Retail locations served by the Division number over 1,500. In 1998, sales to the warehouse operations of a major national food wholesaler, and to its owned and franchised stores, represented approximately 40% of Divisional sales. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from ten distribution centers located centrally in its key marketing areas. DAIRY PRODUCTS The Dairy Products Division, comprised of Kohler Mix Specialties, Inc. ("Kohler"), processes and sells soft serve mix, ice cream mix, frozen yogurt mix, milk and specialty dairy products, many of which are ultra-high temperature ("UHT") pasteurized products. The Division sells its products throughout much of the United States from processing facilities in Minnesota and Texas. UHT processing is designed to produce bacteria-free products with delicate flavors, such as milk, ice cream mixes and specialty dairy products such as coffee creamers, whipping cream, half and half and cordials. Many of the Division's products have an extended shelf-life of up to ninety days, which extends the trade territory which can be effectively served by the Division to include most of the United States. Soft serve, frozen yogurt and ice cream mixes are made to customers' specifications. Currently, the Division produces approximately 100 different formulations. The Division believes that the customization of high quality products and high customer service levels are critical to their business. The Division has approximately 300 customers, including branded ice cream manufacturers, quick service restaurants, other foodservice outlets and independent ice cream retailers. The Division's top three customers represented approximately 51% of 1998 Divisional sales. Most of the Division's sales are to customers who purchase products on a cost-plus basis. This includes sales to most of the large quick-service restaurant chains operating in its market areas. Sales of soft serve, milk shake, and ice cream mixes are more seasonal than the Company's other products, with higher sales volume occurring between April and October. The addition of other specialty dairy products in recent years, such as coffee creamers and cartoned items, has somewhat offset the impact on the Division's sales and earnings from this seasonality. 4 POTATO PRODUCTS Potato products are produced and sold by Northern Star Co. ("Northern Star") and Farm Fresh Foods, Inc. ("Farm Fresh"). As a result of a business strategy change in 1997, the Potato Products Division now exclusively processes and sells refrigerated potato products to both the foodservice and retail markets. Products consist of hash browns and diced, sliced, mashed, and other specialty potato products. In 1998, approximately 75% of the Potato Products Division's net sales were to the foodservice market, with the balance to the retail market. The Division maintains its main processing facility in Minnesota, with a smaller facility located in California. The Division typically purchases approximately 80%-90% of its annual potato requirements from contract producers. The balance of potato requirements are purchased on the spot market. The Division maintains a high percentage of its contracted supply from irrigated fields and also has geographical diversification of its potato sources. However, weather remains an important factor in determining raw potato prices and quality. Variations in the purchase price and/or quality of potatoes can effect the Potato Products Division's operating results. SALES, MARKETING AND CUSTOMER SERVICE Each of the Company's four divisions has developed a marketing strategy, which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the sales of Waldbaum, Kohler and Northern Star, primarily for national and regional accounts, and is supported by a centralized order entry and customer service staff. A group of foodservice brokers is used by Michael Foods Sales to supplement its internal sales efforts. Further, the Egg Products Division utilizes two separate nationwide systems of brokers, one for the foodservice market and one for the retail market, and maintains a small sales group which handles certain industrial egg product sales. The Company has a small marketing staff, which executes marketing plans in the foodservice market, with additional resources available from outside agencies and consultants as needed. The Refrigerated Distribution Division's internal and external sales personnel obtain orders from retail stores which are usually placed no more than one day ahead of the requested delivery date. The Division's marketing efforts are primarily focused on in-store and co-op advertising programs, which are executed with grocers on a market-by-market basis. During 1998, Crystal Farms increased its consumer support programs, with largely favorable sales volume results. Also, the Egg Products Division has a consumer support program to support various of its egg products sold in the retail market. ACQUISITIONS The Company has made acquisitions in prior years and anticipates that it will continue to make acquisitions as part of its strategic plan. In a pending transaction, announced in March 1999, the Company's Dairy Products Division will acquire a dairy products facility in Connecticut, allowing for a broader expansion of the dairy mix and creamer business into the eastern United States. This transaction will involve an acquisition of certain production assets and customer list, and a long-term lease for the land and building, with an option to purchase the land and building upon the termination of the lease. It is expected the transaction will be completed by May 1999. The facility generated 1998 net sales of approximately $37 million. Earlier in 1999, the Company made two investments in Europe. The first investment was a 25% interest in Belovo S.A., a specialty egg products company, based in Belgium. The second investment was a 50/50 joint venture with the founding shareholders of Belovo forming, The 5 Lipid Company, a company involved in the extraction of phospholipids from egg yolks for use in the field of nutraceuticals. PROPRIETARY TECHNOLOGIES In 1988, the Company acquired an exclusive license to use a patented process, developed by North Carolina State University, for the ultrapasteurization of liquid eggs. The patents are scheduled to expire in 2006. The process results in liquid eggs that are salmonella and listeria negative, pursuant to United States Department of Agriculture ("USDA") regulations. Salmonella and listeria are bacteria, which can contaminate shell eggs. The process also extends the shelf-life of liquid eggs from less than two weeks to over ten weeks. The Company has an aseptic plant in Gaylord, Minnesota, which processes the ultrapasteurized liquid egg needs of Waldbaum. The Company and the patent holder have initiated litigation against several processors of competing liquid egg products, claiming infringement of the original and subsequent related process patents with respect to ultrapasteurized liquid egg production. In 1992, a jury for the United States District Court for the Middle District of Florida found the original patent to be valid and that a processor, Bartow Food Co., willfully and deliberately infringed the patent. In another action, the United States District Court for the District of New Jersey found in 1992 and 1993 that Papetti's had infringed the patents and that the licensed patents are valid and enforceable. In 1994, the Court of Appeals for the Federal Circuit upheld this judgment. In 1996 there were other developments regarding the patentability of the claims under the patents. See Item 3 "Legal Proceedings." As a result of the 1997 acquisition of Papetti's, the Company also owns an exclusive sublicense to use a patented process for the electro-heating of liquid eggs, which is scheduled to expire in 2006. The process results in liquid eggs that are salmonella and listeria negative, pursuant to USDA regulations. This process also extends the shelf-life of refrigerated liquid eggs from less than two weeks to over ten weeks. The Company has an aseptic plant in Elizabeth, New Jersey, which processes the ultrapasteurized liquid egg needs of Papetti's. TRADENAMES The Egg Products Division maintains numerous tradenames for its products, including "Logan Valley", "Wakefield", "Sunny Side Up(R)", "Michael Foods", "Deep Chill(TM)", "MicroFresh", "MGW", "Simply Eggs(R) Brand", "Better `n Eggs(TM)", "Chef's Omelet(TM) Brand", "Express Eggs", "Quaker State Farms", and "Broke N' Ready". Ultrapasteurized liquid eggs are marketed using the "Easy Eggs(R)" and "Table Ready(TM)" tradenames. Refrigerated Distribution Division products are marketed principally under the "Crystal Farms(R)" tradename. In addition, the Division is the principal distributor of "Bongards" cheese in Minnesota. The Division also distributes eggs, butter, cheese, bagels, and ethnic foods under a number of other customer-owned tradenames. Within the Dairy Products Division, "Kohler" and "Midwest Mix, Inc." are the two primary tradenames. Within the Potato Products Division, Northern Star markets its refrigerated potato products to foodservice customers under a variety of brands, including "Northern Star". The "Simply Potatoes(TM)" and "Diner's Choice(TM)" brands are used for retail refrigerated products. Farm Fresh maintains the "Farm Fresh(TM)" tradename. The "Quality Farms" brand of Interstate Food Processing Corporation is controlled by the Potato Products Division and is used in the sale of foodservice refrigerated potato products. 6 COMPETITION All aspects of the Company's businesses are extremely competitive. In general, food products are price sensitive and affected by many factors beyond the control of the Company, including changes in consumer tastes, fluctuating commodity prices, changes in supply due to weather, production variances and feed costs. The Company's Egg Products Division is considered the largest egg products processor and the second largest egg producer in the United States. The Egg Products Division competes with many suppliers of egg products and eggs. While the shell egg industry is highly fragmented, and the egg products sector is fairly fragmented, there has been a trend toward consolidation in recent years and further consolidation in the industry is expected. Other major egg producers include Cal-Maine Foods, Inc. and Rose Acres Farms, Inc. The Company believes its Egg Products Division is among the lowest cost egg producers in the United States. The Company also believes that Easy Eggs'(R) and Table Ready's(TM) salmonella-negative aspects, extended shelf-lives and ease of use are significant competitive advantages in the foodservice and industrial food markets for eggs. The Company believes its largest competitor in egg products is the Sunny Fresh Foods, Inc. subsidiary of Cargill, Inc. The Company's Refrigerated Distribution Division competes with the refrigerated products of other suppliers such as Beatrice Companies, Inc., Kraft Foods, Inc., Land O' Lakes, Inc., and Sargento Cheese Company, Incorporated. The Division believes that its emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively in its market area with larger national brand companies. Management believes the Dairy Products Division provides the majority of the soft serve mix, and a significant percentage of ice cream mix, sold in Minnesota and Wisconsin. Kohler also has a large percentage of the UHT soft serve mix and UHT fluid milk business with quick service restaurant chains in the central United States. Competitors include local dairies utilizing conventional pasteurization and regional dairies with UHT products. The Potato Products Division has a leading market share in refrigerated potato products sold in the United States foodservice and retail markets, where competitors are generally smaller, local or regional companies. One refrigerated potato products competitor, Reser's Fine Foods, Inc., has a national presence. Certain companies in the frozen potato products business, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra, Inc.), also sell frozen versions of potato products which are sold by the Division in refrigerated form. GOVERNMENT REGULATION All of the Company's subsidiaries are subject to federal and state regulations relating to grading, quality control, product branding and labeling, waste disposal and other aspects of their businesses. The subsidiaries are subject to USDA or Food and Drug Administration regulation regarding grading, quality, labeling and sanitary control. Egg Products Division egg breaking plants are subject to continuous on-site USDA inspection. All other subsidiary plants are subject to periodic USDA inspections. Crystal Farms' cheese and butter products and Kohler's mix products are affected by milk price supports established by the USDA. The support price serves as an artificial minimum price for these products, which may not be indicative of market conditions that would prevail if such supports were abolished. 7 All of the Company's divisions must also comply with federal, state and local waste disposal requirements. Waldbaum disposes of chicken waste primarily to farmers for use as fertilizer. Northern Star disposes of solid waste from potato processing by selling the solid waste to a processor who converts it to animal feed and disposes of effluent under a waste discharge permit issued by the Minneapolis-St. Paul Metropolitan Waste Control Commission. Farm Fresh holds a permit with the Los Angeles County Sanitation District to discharge industrial waste into the Sanitation District's sewage system. Waldbaum and Papetti's have permits to discharge waste products into available sewer systems and maintain discharge ponds for certain wastes. In February 1999, Kohler Mix Specialties, Inc. initiated a recall of certain cartoned dairy products produced at its facility in White Bear Lake, Minnesota. The plant's carton packaging room was reopened on February 17, 1999 after cleaning, inspecting and retraining. The Company worked closely with the Minnesota Department of Agriculture and the United States Food and Drug Administration in connection with the dairy product recall and the resumption of carton-filling processes. EMPLOYEES The Company employed approximately 4,160 employees at December 31, 1998. Of this total, the Egg Products Division employed approximately 2,600 full-time and 400 part-time employees, with approximately 20 of these employees represented by a union. The Refrigerated Distribution Division employed approximately 380 employees, none of whom are represented by a union. The Dairy Products Division employed approximately 230 people, of which the Milk Drivers and Dairy Employees Union represented approximately 80 of its production personnel at the Minnesota facility. The Potato Products Division employed approximately 300 employees, of whom approximately 200 are represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union affiliated with the Teamsters. The Michael Foods Corporate, Sales, Distribution and Customer Service, and Information Systems groups collectively employed approximately 250 people at December 31, 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Officer Name Age Position Since - -------------------------------------------------------------------------------- Gregg A. Ostrander 46 President and Chief Executive Officer 1993 Jeffrey M. Shapiro 51 Executive Vice President and Secretary 1987 John D. Reedy 53 Vice President - Finance, Chief 1988 Financial Officer and Treasurer Mark D. Witmer 41 Assistant Treasurer 1995 James D. Clarkson 46 President - Northern Star 1995 Bill L. Goucher 52 President - Waldbaum 1993 James J. Kohler 45 President - Kohler 1988 Arthur N. Papetti 67 President - Papetti's 1997 Norman A. Rodriguez 56 President - Crystal Farms 1989 8 ITEM 2 - PROPERTIES FACILITIES Corporate The Company maintains leased space for its headquarters, customer service office, sales office and information services group in suburban Minneapolis, Minnesota. Egg Products Division The following table summarizes certain information concerning the Egg Products Division's principal facilities: Owned/ Location Principal Use Approx. Sq. Ft. Leased - -------- ------------- --------------- ------ Elizabeth, NJ Processing 75,000 Leased Elizabeth, NJ Processing 125,000 Leased Elizabeth, NJ Sales and Distribution 80,000 Leased Klingerstown, PA Processing and Distribution 139,000 Leased Klingerstown, PA Processing and Distribution 19,000 Leased Kansas City, MO Processing 63,000 Owned Lenox, IA Processing and Distribution 87,000 Owned Gaylord, MN Processing and Distribution 190,000 Owned LeSueur, MN Processing 29,000 Owned Wakefield, NE Processing and Distribution 323,000 Owned Bloomfield, NE Processing and Distribution 80,000 Owned Hudson, CO Processing and Distribution 49,000 Owned Gaylord, MN Egg Production 349,000 Owned Gaylord, MN Pullet Houses 130,000 Owned LeSueur, MN Egg Production 345,000 Owned Wakefield, NE Pullet Houses 432,000 Owned Wakefield, NE Egg Production 658,000 Owned Plainview, NE Pullet Houses 112,000 Owned Bloomfield, NE Egg Production 619,000 Owned Hudson, CO Egg Production 312,000 Owned The Division leases office space for its headquarters, financial and administrative services staff in suburban Minneapolis and owns approximately 950 acres of land in Nebraska, Minnesota and Colorado, and also leases land in Bloomfield, Nebraska. Refrigerated Distribution Division Crystal Farms leases administrative and sales offices in suburban Minneapolis and several small warehouses across the U. S., and owns a 33,000 square foot distribution center located near LeSueur, Minnesota. The Division also owns and operates a 48,200 square foot refrigerated warehouse and a 19,000 square foot cheese packaging facility on a 19 acre site in Lake Mills, Wisconsin. Dairy Products Division Kohler's facilities in White Bear Lake, Minnesota consist of three owned buildings, with the main plant containing approximately 95,000 square feet. Kohler also leases a UHT dairy plant in Sulphur Springs, Texas comprising approximately 40,000 square feet. 9 Potato Products Division Northern Star owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. Farm Fresh leases five buildings in Bell Gardens, California, comprising approximately 28,600 square feet. Management believes that the facilities of the Company, together with budgeted capital projects in each of its four operating divisions, are adequate to meet the Company's anticipated requirements for its current lines of business over the foreseeable future. NEBRASKA CONSTITUTIONAL PROVISION A substantial portion of the egg production operations of Waldbaum are located in the State of Nebraska. With certain exceptions, a provision of the Nebraska constitution generally prohibits corporations from engaging in farming or ranching in Nebraska. Although the constitutional provision contains an exemption for agricultural land operated by a corporation for the purpose of raising poultry, the Nebraska Attorney General has, in written opinions, taken the position that facilities devoted primarily to the production of eggs do not fall within such exemption and therefore are subject to the restrictions contained in the constitutional provision. The Company believes that the egg production facilities of Waldbaum are part of Waldbaum's integrated facilities for the production, processing and distribution of egg products, and therefore, that any agricultural land presently owned by Waldbaum is being used for non-farming and non-ranching purposes. The constitution empowers the Nebraska Attorney General, or if the Attorney General fails to act, a Nebraska citizen, to obtain a court order to, among other things, force divestiture of land held in violation of the constitutional provision. If land subject to such a court order is not divested within a two-year period, the constitutional provision directs the court to declare the land escheated to the State of Nebraska. The Company is not aware of any proceedings under such constitutional provision pending or threatened against either Waldbaum or the Company. Until the scope of such provision has been clarified by further judicial, legislative, or executive action, there can be no assurance as to the effect, if any, that it may have on the business of Waldbaum or the Company. ITEM 3 - LEGAL PROCEEDINGS Four patents for ultrapasteurizing liquid eggs licensed by the Company from North Carolina State University ("NCSU") (see "Proprietary Technologies") are presently involved in proceedings before the United States Patent and Trademark Office ("PTO"). In the first commenced proceeding, a reissue proceeding initiated by NCSU to obtain product claims in addition to existing process claims, the objections of an examiner, which had been sustained by the PTO Board of Patent Appeals and Interferences, were reversed by the Court of Appeals for the Federal Circuit. All four patents are presently involved in ongoing reexamination proceedings in the PTO as requested by various egg industry competitors of the Company. In addition, a second reissue proceeding has been initiated with respect to the patent in which product claims were sought and, in this reissue proceeding, both process and product claims are being reexamined for patentability. In 1996, NCSU received Final Office Actions issued by the PTO. In these Actions, the examiner rejected claims under the four process patents held by NCSU. NCSU and the Company are continuing to process the claims with the examiner and have appealed the rejection to the PTO's Board of Patent Appeals and Interferences. An unsatisfactory result of the PTO appeal would be appealed to the Court of Appeals for the Federal Circuit. Counsel to NCSU and the Company estimates that a full appeal process could take several years to complete. Pending the outcome of 10 such appeals, the patents remain valid and in full force and effect. Parties infringing the patents may be liable for damages based upon their infringement. On December 31, 1998, the following material litigation was pending with respect to the Company: Nulaid Foods, Inc. v. Michael Foods, Inc. and North Carolina State University. U. S. District Court for the Eastern District of California, Civil Action No. CIV-S-93-1319WBSJFM. This is an action commenced by Nulaid Foods, Inc. seeking a declaratory judgment that the patents, which are subject to a license between the Company and NCSU, are invalid. The Company and NCSU have counterclaimed for infringement of the patents by the plaintiff. Further proceedings in this litigation are stayed pending reexamination of the patents in the PTO as described above. The Company is also engaged in routine litigation incidental to its business, which management believes will not have a material effect on its consolidated financial position, liquidity, or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Pursuant to General Instruction G(2), information is incorporated by reference to "Market Price Ranges" and "Listing" on the inside back cover of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). ITEM 6 - SELECTED FINANCIAL DATA Pursuant to General Instruction G(2), information is incorporated by reference to "Summary of Consolidated Financial Data" on page 27 of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to General Instruction G(2), information is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 - 16 of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to General Instruction G (2), information is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations, Market Risk" on page 16 of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pursuant to General Instruction G (2), information is incorporated by reference to "Report of Independent Certified Public Accountants" and "Consolidated Financial Statements of Michael 11 Foods, Inc." on pages 17 - 26, and "Quarterly Financial Data (Unaudited)" on page 27, of the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1). ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3), information is incorporated by reference to "Election of Directors" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 26, 1999. For information with respect to executive officers, reference is made to Part I, Item 1 of this Report on Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION Pursuant to General Instruction G (3), information is incorporated by reference to "Executive Compensation" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 26, 1999. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3), information is incorporated by reference to "Security Ownership" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 26, 1999. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3), information is incorporated by reference to "Election of Directors", "Certain Relationships and Related Party Transactions", and "Security Ownership" in the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or about March 26, 1999. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report: 1. The following consolidated financial statements of the Company, included in the 1998 Annual Report to Shareholders, are incorporated by reference in Item 8 and are also incorporated herein by reference (see Exhibit 13.1): Consolidated balance sheets - December 31, 1998 and 1997 Consolidated statements of operations - Years ended December 31, 1998, 1997 and 1996 Consolidated statements of shareholders' equity - Years ended December 31, 1998, 1997 and 1996 12 Consolidated statements of cash flows - Years ended December 31, 1998, 1997 and 1996 Notes to consolidated financial statements Report of Independent Certified Public Accountants 2. Consolidated Financial Statement Schedules Description Report of Independent Certified Public Accountants on Schedule (see Item 14 (d)) Schedule II - Valuation and Qualifying Accounts (see Item 14(d)) All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements and/or notes filed under Exhibit 13.1. 3. Exhibits Reference is made to Item 14 (c), footnote (5) for exhibits filed with this form. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the fourth quarter of 1998. (c) Exhibits and Exhibit Index Exhibit No. Description - --- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company dated February 28, 1997. (1) 3.2 Amended and Restated Bylaws of the Company as of March 4, 1999. (5) 4.1 Form of Common Stock Certificate. (1) 10.2* Michael Foods, Inc. 1987 Non-Qualified Stock Option Plan and Non-Qualified Stock Option Agreement (filed as Exhibit 10.16 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-1 Registration No. 33-12949 and incorporated herein by reference). (1) 10.3* Form of Michael Foods, Inc. Director Stock Option Agreement (filed as Exhibit 10.25 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-1 Registration No. 33-12949 and incorporated herein by reference). (1) 10.5 Loan Agreement and Promissory Note between Metropolitan Life Insurance Company and Michael Foods, Inc., dated December 1, 1989 (filed as Exhibit 10.43 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (1) 10.6* Amendment to Michael Foods, Inc. Incentive and Non-Qualified Stock Option Plans, dated November 21, 1989 (filed as Exhibit 4.6 to Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective November 21, 1989, Registration No. 33-31914 and incorporated herein by reference). (1) 13 10.7 License Agreement between Michael Foods, Inc. and North Carolina State University, dated November 28, 1989 (filed as Exhibit 10.56 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (1) 10.8 Amendment dated December 18, 1996 to License Agreement between Michael Foods, Inc., a Delaware corporation, and North Carolina State University, dated November 28, 1989. (1) 10.9* Severance Plan for Eligible Employees of Michael Foods, Inc. and its Subsidiaries (incorporated by reference from the Michael Foods, Inc., a Delaware corporation's Form 8, Amendment No. 1 to Report on Form 10-K for the year ended December 31, 1990). (1) 10.10 First Amendment to December 1, 1989 Loan Agreement and Promissory Note between Michael Foods, Inc. and Metropolitan Life Insurance Company, dated October 14, 1992 (filed as Exhibit 10.67 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). (1) 10.11* Amendment to the Michael Foods, Inc. Non-Qualified Stock Option Plan (filed as Exhibit 4.7 to the Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective June 9, 1993 Registration No. 33-64078 and incorporated by reference). (1) 10.12* Stock Option Plan for Non-Employee Directors (filed as Exhibit 4.1 to the Michael Foods, Inc., a Delaware corporation's Registration Statement on Form S-8 effective June 9, 1993 Registration No. 33-64076 and incorporated herein by reference). (1) 10.13* Michael Foods, Inc. 1994 Executive Incentive Plan (filed as Exhibit 10.76 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 10.14* Michael Foods, Inc. 1994 Executive Performance Stock Award Plan (filed as Exhibit 10.77 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 10.16 Second Amendment to December 1, 1989 Loan Agreement and Promissory Note between Michael Foods, Inc. and Metropolitan Life Insurance Company, dated February 23, 1994 (filed as Exhibit 10.81 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). (1) 10.17* Michael Foods, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.88 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (1) 10.24* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1995 (filed as Exhibit 10.97 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (1) 10.25* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1996 (filed as Exhibit 10.98 to Michael Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). (1) 14 10.37* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Arthur J. Papetti dated February 26, 1997. (2) 10.39 Form of Loan Agreement dated as of February 26, 1997 between Michael Foods, Inc., a Delaware corporation and various Lenders with regard to $125,000,000 of 7.58% Senior Notes due February 26, 2009, including form of Note and Novation and Assumption Agreement. (1) 10.40 Form of Amendment Agreement dated as of February 26, 1997 between Michael Foods, Inc., a Delaware corporation and Metropolitan Life Insurance Company regarding up to $50,000,000 of 9.5% Senior Notes due December 1, 1999, including form of Note and Novation and Assumption Agreement. (1) 10.41 Form of Revolving Loan Agreement dated as of February 28, 1997 among Michael Foods, Inc., a Delaware corporation, the Listed Banks and Bank of America National Trust, including exhibits. (1) 10.42* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Stephen Papetti dated February 26, 1997. (2) 10.43* Form of Employment Agreement between Michael Foods, Inc., a Delaware corporation and Arthur N. Papetti dated February 26, 1997. (1) 10.44 Lease by and between ASA Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.45 Lease by and between Rechsteiner/Papetti, et al., as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.46 Lease by and between Jersey Pride Urban Renewal, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.47 Lease by and between Papetti Holding Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.48 Lease by and between Papetti Holding Company, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.49 Lease by and between Papetti Holding Company, Jack Bernstein, Sherwood Weiser and Estate of David Levinson, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.50 Lease by and between A & A Urban Renewal, as Landlord and Michael Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997. (1) 10.51* Resolution adopted by the Board of Directors on May 12, 1998, amending the Severance Plan for Eligible Employees of Michael Foods, Inc. and Subsidiaries and extending its termination date for one additional year. (5) 10.52* Employment Agreement between Michael Foods, Inc. and J. D. Clarkson, dated October 31, 1997. (3) 10.53* Amended and Restated Employment Agreement between Michael Foods, Inc., and Gregg A. Ostrander, dated December 31, 1997. (3) 10.54* Amended and Restated Employment Agreement between Michael Foods, Inc. and Jeffrey M. Shapiro, dated October 31, 1997. (3) 10.55* Amended and Restated Employment Agreement between Michael Foods, Inc. and Norman A. Rodriguez, dated October 31, 1997. (3) 10.56* Amended and Restated Employment Agreement between Michael Foods, Inc. and James J. Kohler, dated October 31, 1997. (3) 15 10.58* Amended and Restated Employment Agreement between Michael Foods, Inc. and John D. Reedy, dated October 31, 1997. (3) 10.59* Amended and Restated Employment Agreement between Michael Foods, Inc. and Bill L. Goucher, dated October 31, 1997. (3) 10.60* Michael Foods, Inc. 1997 Stock Incentive Plan (4) 10.61 Sublicense Agreement between R & P Liquid Egg Technology Limited Partnership and Papetti's Hygrade Egg Products, Inc., dated December 31, 1993. (3) 10.62 Assignment and Acceptance Agreement between Bank of America National Trust & Savings Association and Summit Bank dated November 20, 1997. (3) 10.63 Amendment No. 3 to the Agreement and Plan of Reorganization By and Among Michael Foods, Inc. and Papetti's Hygrade Egg Products, Inc., et. al., dated February 25, 1998. (3) 10.64* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1999. (5) 10.65* Amended and Restated Employment Agreement between Michael Foods, Inc. and Norman A. Rodriguez, dated January 1, 1999. (5) 10.66* Amended and Restated Employment Agreement between Michael Foods, Inc. and Bill L. Goucher, dated January 1, 1999. (5) 10.67* Amended and Restated Employment Agreement between Michael Foods, Inc. and J. D. Clarkson, dated January 1, 1999. (5) 13.1 1998 Annual Report to Shareholders (5) 21.1 Schedule of Michael Foods, Inc. Subsidiaries (5) 23.1 Consent of Independent Certified Public Accountants-- Grant Thornton LLP (5) 27.1 Financial Data Schedule (5) * Management Contract or Compensation Plan Arrangement (1) Incorporated by reference from the Company's Report on Form 8-K filed March 13, 1997. (2) Incorporated by reference from the Company's Report on Form 10-K for the year ended December 31, 1996, filed March 28, 1997. (3) Incorporated by reference from the Company's Report on Form 10-K for the year ended December 31, 1997, filed March 31, 1998. (4) Incorporated by reference from the Company's Form S-8 filed effective March 25, 1997, Registration No. 333-23949. (5) Filed as an exhibit to this Form 10-K. 16 (d) Schedule SCHEDULE II MICHAEL FOODS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
- ----------------------- ------------- --------------------------- --------------- ------------ Col. A Col. B Col. C Col. D Col. E - ----------------------- ------------- --------------------------- --------------- ------------ Additions --------------------------- (1) (2) Charges to Balance at Charged to Other Balance at Beginning Costs and Accounts- Deductions- End of Description of Period Expenses Describe (a) Describe (b) Period - ----------------------- ------------- ------------ -------------- --------------- ------------ Allowance for Doubtful Accounts For the Year Ended December 31, 1996: $783,000 $409,000 $0 $294,000 $898,000 For the Year Ended December 31, 1997: $898,000 $749,000 $658,000 $557,000 $1,748,000 For the Year Ended December 31, 1998: $1,748,000 $861,000 $0 $484,000 $2,125,000
- ----------------------------------- (a) Balance acquired as it relates to the Papetti's acquisition (b) Write-offs of accounts deemed uncollectible - -------------------------------------------------------------------------------- Report of Independent Certified Public Accountants on Schedule Board of Directors Michael Foods, Inc. In connection with our audit of the consolidated financial statements of Michael Foods, Inc. and subsidiaries referred to in our report dated February 15, 1999, which is included in the Michael Foods, Inc. 1998 Annual Report to Shareholders and incorporated by reference in Part II of this form, we have also audited Schedule II for each of the three years in the period ended December 31, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/GRANT THORNTON LLP Minneapolis, Minnesota February 15, 1999 17 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHAEL FOODS, INC. Date: March 31, 1999 By: /s/ Gregg A. Ostrander ---------------------- Gregg A. Ostrander (President and Chief Executive Officer) Date: March 31, 1999 By: /s/ John D. Reedy ----------------- John D. Reedy (Vice-President-Finance, Treasurer, Chief Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Arvid C. Knudtson March 31, 1999 - --------------------- Arvid C. Knudtson (Chairman of the Board) /s/ Gregg A. Ostrander March 31, 1999 - ---------------------- Gregg A. Ostrander (Director, President & Chief Executive Officer) /s/ Maureen B. Bellantoni March 31, 1999 - ------------------------- Maureen B. Bellantoni (Director) /s/ Richard A. Coonrod March 31, 1999 - ---------------------- Richard A. Coonrod (Director) /s/ Daniel P. Dillon March 31, 1999 - -------------------- Daniel P. Dillon (Director) /s/ Miles E. Efron March 31, 1999 - ------------------ Miles E. Efron (Director) /s/ Jerome J. Jenko March 31, 1999 - ------------------- Jerome J. Jenko (Director) /s/ Joseph D. Marshburn March 31, 1999 - ----------------------- Joseph D. Marshburn (Director) /s/ Jeffrey J. Michael March 31, 1999 - ---------------------- Jeffrey J. Michael (Director) 18 /s/ Margaret D. Moore March 31, 1999 - --------------------- Margaret D. Moore (Director) /s/ Arthur J. Papetti March 31, 1999 - --------------------- Arthur J. Papetti (Director) /s/ Stephen T. Papetti March 31, 1999 - ---------------------- Stephen T. Papetti (Director) 19 EXHIBIT INDEX Exhibit No. - --- 3.2 Amended and Restated Bylaws of the Company as of March 4, 1999. 10.51* Resolution adopted by the Board of Directors on May 12, 1998, amending the Severance Plan for Eligible Employees of Michael Foods, Inc. and Subsidiaries and extending its termination date for one additional year. 10.64* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective January 1, 1999. 10.65* Amended and Restated Employment Agreement between Michael Foods, Inc. and Norman A. Rodriguez, dated January 1, 1999. 10.66* Amended and Restated Employment Agreement between Michael Foods, Inc. and Bill L. Goucher, dated January 1, 1999. 10.67* Amended and Restated Employment Agreement between Michael Foods, Inc. and J. D. Clarkson, dated January 1, 1999. 13.1 1998 Annual Report to Shareholders 21.1 Schedule of Michael Foods, Inc. Subsidiaries 23.1 Consent of Independent Certified Public Accountants -- Grant Thornton LLP 27.1 Financial Data Schedule 20 EX-3.2 2 AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF MICHAEL FOODS, INC. (AMENDED THROUGH MARCH 4, 1999) ARTICLE I. OFFICES, CORPORATE SEAL Section 1.01. REGISTERED OFFICE. The registered office of the corporation in Minnesota shall be that set forth in the articles of incorporation or in the most recent amendment of the articles of incorporation or resolution of the directors filed with the Secretary of State of the State of Minnesota changing the registered office. Section 1.02. OTHER OFFICES. The corporation may have such other offices, within or without the State of Minnesota, as the directors shall, from time to time, determine. Section 1.03. CORPORATE SEAL. The corporation shall have no seal. ARTICLE II. MEETINGS OF SHAREHOLDERS Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise by the Minnesota Business Corporation Act, meetings of the shareholders may be held at any place, within or without the State of Minnesota, as may from time to time be designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the state of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at four o'clock p.m. Section 2.02. REGULAR MEETINGS. (a) A regular meeting of the shareholders may be held on such date as the Board of Directors may by resolution establish. (b) At a regular meeting, the shareholders, voting as provided in the articles of incorporation and these bylaws, shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and shall transact such other business as may properly come before them. (c) Any shareholder entitled to vote at a regular meeting of the shareholders who intends to propose for consideration and vote by the shareholders at a regular meeting a matter that is not identified in the notice of such meeting shall give written notice of such proposal to the corporation at least twenty (20) days prior to the date of the regular meeting. The notice shall be delivered to the Secretary of the corporation and shall state with reasonable particularity the substance of the proposal. (ADDED BY AMENDMENT MARCH 4, 1999) Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the chief executive officer, the chief financial officer, two or more directors or by a shareholder or shareholders holding 10% or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the chief executive officer or chief financial officer of the corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the Board of Directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the chief executive officer or the Board of Directors, except that a special meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes as stated in the notice of the meeting. Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority of the shares entitled to vote at a meeting shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, the meeting may be adjourned, and notice shall be given (a) by announcement at the time of adjournment of the date, time and place of the adjourned meeting, or (b) by notice of such adjourned meeting, setting out the date, time and place of the adjourned meeting, mailed to each shareholder entitled to vote at a meeting, at least 3 days before the date of such adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders originally present to leave less than a quorum. Section 2.05. VOTING. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the articles of incorporation or statutes provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by the greater of (1) a majority of the voting power of the shares present and entitled to vote on that item of business, or (2) a majority of the number of shares entitled to vote that would constitute a quorum for the transaction of business at the meeting except if otherwise required by statute, the articles of incorporation, or these bylaws. -2- Section 2.06. DETERMINATION DATE. The Board of Directors may fix a date, not fewer than ten, nor more than 60 days, preceding the date of any meeting of shareholders, as the date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any determination date so fixed. If the Board of Directors fails to fix a date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the determination date shall be the 20th day preceding the date of such meeting. Section 2.07. NOTICE OF MEETINGS. There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at such holder's address as shown by the books of the corporation, a notice setting out the date, time and place of each regular meeting and each special meeting, except (unless otherwise provided in Section 2.04 hereof) where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed at least five days prior thereto (unless otherwise provided in Section 2.04 hereof). Every notice of any special meeting called pursuant to Section 2.03 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purposes stated in the notice. The written notice of any meeting at which a plan of merger or exchange is to be considered shall so state such as a purpose of the meeting. A copy or short description of the plan of merger or exchange shall be included in or enclosed with such notice. Section 2.08. WAIVER OF NOTICE. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting, orally or in a writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at such meeting and does not participate in the consideration of the item at that meeting. ARTICLE III. DIRECTORS Section 3.01. GENERAL POWERS. The business and affairs of the corporation shall be managed by or under the authority of the Board of Directors, except as otherwise permitted by statute. Section 3.02. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. The size of the Board of Directors shall be fixed by the Board of Directors within the limits prescribed by the statute and the articles of incorporation. Directors shall be natural persons, but need not be shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after such director's election and until such director's successor shall have been elected and shall qualify, or until the earlier death, resignation, removal, or disqualification of such director. -3- Section 3.03. BOARD MEETINGS. Meetings of the Board of Directors may be held from time to time at such time and place within or without the state of Minnesota as may be designated in the notice of such meeting. Section 3.04. CALLING MEETINGS; NOTICE. Meetings of the Board of Directors may be called by the chairman of the Board by giving at least twenty-four hours' notice, or by any other director by giving at least five days' notice, of the date, time and place thereof to each director, by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the Board of Directors have been announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting of the Board of Directors need not be given other than by announcement at the meeting at which adjournment is taken. Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the Board of Directors may be waived by any director either before, at, or after such meeting, orally or in a writing signed by such director. A director, by his or her attendance at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and such objecting director does not participate thereafter in the meeting. Section 3.06. QUORUM. A majority of the directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting. Section 3.07. ABSENT DIRECTORS. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted upon at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.08. ELECTRONIC COMMUNICATIONS. Any or all directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.08 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique, unless otherwise specified in the notice of such meeting. Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies on the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by the affirmative vote of a majority of the remaining directors of the Board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the Board of -4- Directors as permitted by Section 3.02 may be filled by the affirmative vote of a majority vote of the directors serving at the time of such increase; and each director elected pursuant to this Section 3.09 shall be a director until such director's successor is elected by the shareholders at their next regular or special meeting. Section 3.10. REMOVAL. Any or all of the directors may be removed from office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors, except as otherwise provided by the Minnesota Business Corporation Act, Section 302A.223, as amended. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire Board or any one or more directors be so removed, new directors may be elected at the same meeting. Section 3.11. COMMITTEES. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors, except as provided by the Minnesota Business Corporation Act, Section 302A.241, Subd. 1. A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. Section 3.12. COMMITTEE OF DISINTERESTED PERSONS. The Board may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right of remedy on behalf of the corporation. The committee, once established, is not subject to the direction or control of, or termination by, the Board. A vacancy on the committee may be filled by a majority vote of the remaining committee members. The good faith determinations of the committee are binding upon the corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations to the Board. Section 3.13. WRITTEN ACTION. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, except for those actions which must be approved by the shareholders, may be taken without a meeting if done in writing and signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present, as permitted by the corporation's articles of incorporation. -5- Section 3.14. COMPENSATION. Directors who are not salaried officers of this corporation, shall receive such fixed sum per Board or committee meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. Salaried officers of this corporation who also serve as directors may also receive such fixed sum per Board or committee meeting attended or such fixed annual sum, in either case, in an amount equal to that paid to the other directors, at the discretion of the Board of Directors. The Board of Directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. ARTICLE IV. OFFICERS Section 4.01. NUMBER. The corporation shall have one or more natural persons exercising the function of Chief Executive Officer and Chief Financial Officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the corporation, with such rights, powers, duties and responsibilities as may be determined by these bylaws, or the Board, including, without limitation, a chairman of the Board, a president, one or more vice presidents, a treasurer and a secretary. Any number of offices may be held by the same person. Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of Directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the president, treasurer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms of office provided for in these bylaws or a resolution of the Board of Directors not inconsistent therewith. The president and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from office by the affirmative vote of a majority of the Board of Directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy in an office of the corporation by reason of death, resignation, removal, disqualification or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. Section 4.04. CHAIRMAN OF THE BOARD. The chairman of the Board, if one is elected, shall preside at all meetings of the directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. Section 4.05. PRESIDENT. The president shall be the chief executive officer and shall have general active management of the business of the corporation. In the absence of the chairman of the Board, the president shall preside at all meetings of the directors. The president shall see that all orders and resolutions of the Board of Directors are carried into effect. The -6- president shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the articles or bylaws or by the Board of Directors to some other officer or agent of the corporation. The president shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders, and in general, shall perform all duties usually incident to the office of the president, and shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.06. VICE PRESIDENT. Each vice president, if one or more is elected, shall have such powers and shall perform such duties as prescribed by the Board of Directors or by the president. In the event of the absence or disability of the president, the vice president(s) shall succeed to the president's power and duties in the order designated by the Board of Directors. Section 4.07. SECRETARY. The secretary, if one is elected, shall be secretary of and shall attend all meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the corporation, shall give or cause to be given proper notice of meetings of shareholders and directors, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the president. Section 4.08. TREASURER. The treasurer shall be the chief financial officer and shall keep accurate financial records for the corporation, and shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation, in such banks and depositories as the Board of Directors shall, from time to time, designate. The treasurer shall have power to endorse, or caused to be endorsed, for deposit, all notes, checks and drafts received by the corporation, and shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. The treasurer shall render to the president and the directors, whenever requested, an account of all transactions as treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the president. Section 4.09. COMPENSATION. The officers of the corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. ARTICLE V. SHARES AND THEIR TRANSFER Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation shall be certificated shares. Every owner of shares of the corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Directors, in accordance with the Minnesota Business Corporation Act, Section 302A.417, Subd. 4. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the president and by the secretary or an assistant secretary or by such officers as the Board of Directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile, if authorized by the -7- Board of Directors. Every certificate surrendered to the corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 5.04. Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the articles of incorporation in such amounts and representing such classes and series, if any, as may be determined by the Board of Directors and as may be permitted by law and the articles of incorporation. Shares may be issued for any consideration, including, without limitation, in consideration of money or other property, tangible or intangible, received or to be received by the corporation under a written agreement, or of services rendered or to be rendered to the corporation under a written agreement. At the time of approval of the issuance of shares, the Board of Directors shall state, by resolution, its determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are to be issued. Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by the Minnesota Business Corporation Act, Section 302A.419, as amended, any shareholder claiming a certificate for shares to be lost, stolen, or destroyed shall make an affidavit of that fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the corporation against any claim which may be made against it on account of the reissuance of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. ARTICLE VI. DISTRIBUTIONS, RECORD DATE Section 6.01. DISTRIBUTIONS. Subject to the provisions of the articles of incorporation, of these bylaws, and of law, the Board of Directors may authorize and cause the corporation to make distributions whenever, and in such amounts or forms as, in its opinion, are deemed advisable. Section 6.02. RECORD DATE. Subject to any provisions of the articles of incorporation, the Board of Directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any distribution as the record date for the determination of the shareholders entitled to receive payment of the distribution and, in such case, only shareholders -8- of record on the date so fixed shall be entitled to receive payment of such distribution notwithstanding any transfer of shares on the books of the corporation after the record date. ARTICLE VII. BOOKS AND RECORDS, FISCAL YEAR Section 7.01. SHARE REGISTER. The Board of Directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the Board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (2) a record of the dates on which certificates or transaction statements representing shares were issued. Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its Minnesota registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by the Minnesota Business Corporation Act, Section 302A.461, as amended, originals or copies of: (1) records of all proceedings of shareholders for the last three years; (2) records of all proceedings of the Board for the last three years; (3) its articles of incorporation and all amendments currently in effect; (4) its bylaws and all amendments currently in effect; (5) financial statements required by the Minnesota Business Corporation Act, Section 302A.463 and the financial statements for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; and (8) any shareholder voting or control agreements of which the corporation is aware. Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall be determined by the Board of Directors. -9- ARTICLE VIII. LOANS, GUARANTEES, SURETYSHIP Section 8.01. The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present, and: (1) is in the usual and regular course of business of the corporation; (2) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations; (3) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board, to benefit the corporation; or (4) has been approved by (a) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (b) the unanimous affirmative vote of the holders of all outstanding shares whether or not entitled to vote. Such loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors present approve, including, without limitation, a grant of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty, surety or warranty of the corporation at common law or under a statute of the state of Minnesota. ARTICLE IX. INDEMNIFICATION OF CERTAIN PERSONS Section 9.01. INDEMNIFICATION. The corporation shall indemnify all persons made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, including without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys' fees and disbursements incurred by the person in connection with the proceeding to the full extent permitted by Section 302A.521 of the Minnesota Business Corporation Act as now enacted or hereafter amended. Such indemnification shall extend to payment or reimbursement of reasonable expenses, including attorneys' fees and disbursements incurred by such person in advance of the final disposition of -10- the proceeding as permitted by Minnesota Statutes Section 302A.521, subd. 3. (AMENDED MARCH 4, 1999) Section 9.02. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person in such person's official capacity against any liability asserted against and incurred by such person in or arising from that capacity, whether or not the corporation would otherwise be required to indemnify the person against the liability. ARTICLE X. AMENDMENTS These bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting. Such authority of the Board of Directors is subject to the power of the shareholders, exercisable in the manner provided in the Minnesota Business Corporation Act, Section 302A.181, Subd. 3, to adopt, amend, or repeal bylaws adopted, amended, or repealed by the Board of Directors. The Board of Directors shall not adopt, amend or repeal any bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board of Directors, or fixing the number of directors or their classifications, qualifications, or terms of office, except that the Board of Directors may adopt or amend any bylaw to increase their number. ARTICLE XI. SECURITIES OF OTHER CORPORATIONS Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise ordered by the Board of Directors, the president shall have full power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the president shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The Board of Directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the president or any other person or persons. Section 11.02. PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered by the Board of Directors, the president shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons. -11- EX-10.51 3 SEVERANCE PLAN EXTENSION RESOLUTION EXHIBIT 10.51 Resolution of the Board of Directors dated May 12, 1998: SEVERANCE PLAN EXTENSION RESOLUTION RESOLVED, that the Severance Pay Plan for Eligible Employees of Michael Foods, Inc. and its subsidiaries (the "Severance Plan"), as approved and implemented in accordance with the directives of the Board of Directors on July 26, 1990 and extended through July 1, 1998, be hereby extended for a period of one additional year to a new Termination Date of July 1, 1999. Number of employees covered under the Severance Plan from July 1, 1997 to July 1, 1998.....................17 Employee added: Ronald W. Bergman - Michael Foods, Inc. Employee deleted: James D. Clarkson - Northern Star Co. (under contract now) Number of employees covered under the Severance Plan from July 1, 1998 to July 1, 1999......................17 EX-10.64 4 1994 EXECUTIVE INCENTIVE PLAN EXHIBIT 10.64 MICHAEL FOODS, INC. 1994 EXECUTIVE INCENTIVE PLAN (AS AMENDED EFFECTIVE JANUARY 1, 1999) I. PURPOSE ------- A. The purpose of the Michael Foods, Inc. Executive Incentive Plan (the "Plan") is to incent and reward the senior management of Michael Foods, Inc. (the "Company") for delivering or exceeding their annual operating plan and to motivate those executives to be planning and focusing on year-over-year trendline earnings growth. Corporate executives will be rewarded based upon attainment of the Company's EPS growth targets. Operating company executives will be rewarded based upon individual operating company growth in profit before taxes ("PBBT"), as well as overall corporate EPS performance. B. The Plan will be effective January 1, 1994, will remain in effect until amended or terminated, and supersedes the Michael Foods, Inc. Amended and Restated Annual Incentive Compensation Plan, which has been terminated. II. ADMINISTRATION -------------- A. The Plan will be administered by the Chief Executive Officer ("CEO") and the Chief Financial Officer of the Company under the direction of the Compensation Committee of the Board of Directors. B. The Board of Directors will have sole authority to establish the Plan's terms and conditions. III. ELIGIBILITY ----------- A. Participation in the Plan will be restricted to those positions which have a clear impact on the Company's financial and operating performance. B. Eligible participants will include principal officers and select key employees of the Company and the Company's operating companies. C. Generally, key employees will be defined as those executive positions which report to the President of an operating subsidiary or, in the case of corporate level employees, to the CEO of the Company. D. Key employees will be recommended by the CEO of the Company and will be approved by the Compensation Committee of the Board of Directors. E. Participation will also be limited to executives who are not covered under another approved incentive plan. IV. INCENTIVE OPPORTUNITY --------------------- The size of the maximum incentive award opportunity level will vary by the position's responsibility level, as outlined below: MAXIMUM INCENTIVE OPPORTUNITY AS A LEVEL POSITION(S) PERCENT OF BASE SALARY ====== =================================================== ================= I Corporate CEO, President, Chief Operating Officer, 100% Executive Vice President, Chief Financial Officer and Operating Company Presidents II Other Officers 75% III Non-Officer Key Employees 50% V. PLAN COMPONENTS --------------- COMPONENT A: CASH AWARD 3/4 of the incentive opportunity for both corporate and operating company participants will be paid based upon PBBT or EPS achievement against target objectives. 1. OPERATING COMPANY PARTICIPANTS - CASH AWARD OPPORTUNITY RE:COMPANY EPS TARGET - ------------------------------------------------------------------------------- A portion of the operating company participants' cash awards will be paid based upon Michael Foods' EPS achievement against the target objective, in accordance with the following table: INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY: LEVEL I LEVEL II LEVEL III - -------------------------------------------------------------------------------- ACHIEVEMENT OF TARGET - --------------------- Below 94% 0.0% 0.0% 0.0% 94% -94.99% 2.9% 2.2% 1.5% 95% -95.99% 5.7% 4.3% 2.9% 96% -96.99% 8.6% 6.5% 4.3% 97% -97.99% 11.4% 8.6% 5.7% 98% -98.99% 14.3% 10.7% 7.2% 99% -99.99% 17.1% 12.8% 8.6% 100% -100.99% 20.0% 15.0% 10.0% 101% -101.99% 24.0% 18.0% 12.0% 102% -102.99% 28.0% 21.0% 14.0% 103% -103.99% 32.0% 24.0% 16.0% 104% -104.99% 36.0% 27.0% 18.0% 105% or greater 40.0% 30.0% 20.0% 2. OPERATING COMPANY PARTICIPANTS - CASH AWARD OPPORTUNITY RE: OPERATING COMPANY TARGETS - -------------------------------------------------------------------------------- A portion of the operating company participants' cash awards will be paid based upon their individual operating company PBBT achievement against the target objective, in accordance with the following table: INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY: LEVEL I LEVEL II LEVEL III - -------------------------------------------------------------------------------- ACHIEVEMENT OF TARGET Below 94% 0.0% 0.0% 0.0% 94% -94.99% 2.5% 1.9% 1.3% 95% -95.99% 5.0% 3.8% 2.5% 96% -96.99% 7.5% 5.6% 3.8% 97% -97.99% 10.0% 7.5% 5.0% 98% -98.99% 12.5% 9.4% 6.3% 99% -99.99% 15.0% 11.3% 7.5% 100% -100.99% 17.5% 13.1% 8.8% 101% -101.99% 19.3% 14.4% 9.6% 102% -102.99% 21.0% 15.8% 10.5% 103% -103.99% 22.8% 17.1% 11.4% 104% -104.99% 24.5% 18.4% 12.3% 105% -105.99% 26.3% 19.7% 13.1% 106% -106.99% 28.0% 21.0% 14.0% 107% -107.99% 29.8% 22.3% 14.9% 108% -108.99% 31.5% 23.6% 15.8% 109% -109.99% 33.3% 24.9% 16.6% 110% or greater 35.0% 26.3% 17.5% 3. CORPORATE, SALES & DISTRIBUTION PARTICIPANTS CASH AWARD OPPORTUNITY The corporate, sales and distribution participants' cash awards will be paid based upon Michael Foods' EPS achievement against the target objective, in accordance with the following table: INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY: LEVEL I LEVEL II LEVEL III - -------------------------------------------------------------------------------- ACHIEVEMENT OF TARGET Below 94% 0.0% 0.0% 0.0% 94% -94.99% 6.0% 4.5% 3.0% 95% -95.99% 11.3% 8.5% 5.7% 96% -96.99% 16.5% 12.4% 8.3% 97% -97.99% 21.8% 16.4% 10.9% 98% -98.99% 27.0% 20.3% 13.5% 99% -99.99% 32.3% 24.2% 16.2% 100% -100.99% 37.5% 28.1% 18.8% 101% -101.99% 45.0% 33.8% 22.5% 102% -102.99% 52.5% 39.4% 26.3% 103% -103.99% 60.0% 45.0% 30.0% 104% -104.99% 67.5% 50.6% 33.8% 105% or greater 75.0% 56.3% 37.5% COMPONENT B: STOCK AWARD 1/4 of the incentive opportunity for both corporate and operating company participants will be paid based upon a three year average trendline earnings growth. For each Plan year, the three year trendline EPS must average 15% growth annually to trigger participation in this component of the Plan. This segment of the Plan is earned over a period of three years and is paid in the Company's common stock. - - Year I earns 50% assuming average annual EPS growth of at least 15% for the three years ending Year I, Year II earns 30% assuming average annual EPS growth of at least 15% for the three years ending Year II, and Year III earns the balance (20%) assuming average annual EPS growth of at least 15% for the three years ending Year III. (If at least 15% three year average EPS growth is not achieved, that yearly portion of the stock award incentive is forfeited, was well as the ability to receive any prior year portion that would have vested in the current year.) The number of shares of common stock that would be awarded to an individual participant is determined by multiplying the appropriate earned percentage by the 25% of the maximum incentive opportunity for each individual at the appropriate level covered by Component B. That amount is then divided by the closing price of the Company's common stock on the third business day following the announcement of year-end financial results to determine the number of shares of common stock to be issued to each participant. Certificates will be issued as soon as practical following the first quarter Board of Directors meeting. Further aspects of Component B are covered in the Michael Foods, Inc. 1994 Executive Performance Stock Award Plan. COMPONENT C: OPTION AWARD Stock options will be awarded to the operating company presidents and certain executive corporate officers for achieving EPS growth in excess of 15% annually. - - Qualified individuals for 1999 and later years: Gregg Ostrander Norman Rodriguez Jeffrey Shapiro JD Clarkson John Reedy James Kohler Bill Goucher - - Stock option awards will be for a specific number of shares of common stock based upon a rising scale which is triggered with a year-over-year increase in EPS of at least 15% as follows:
PRESIDENT /CEO OF MICHAEL ALL OTHER FOODS, INC. PARTICIPANTS --------------------------- -------------------------- MAXIMUM STOCK OPTION OPPORTUNITY (COMMON STOCK SHARES)..................................... 36,000/YR. 24,000/YR. - ----------------------------------------------------------------------------- --------------------------- -------------------------- Below 15% Earnings Per Share Growth.............. 0 0 15% - 19.99%...................................................... 4,500 3,000 20% - 24.99%...................................................... 9,000 6,000 25% - 29.99%...................................................... 13,500 9,000 30% - 34.99%...................................................... 18,000 12,000 35% - 39.99%...................................................... 22,500 15,000 40% - 44.99%...................................................... 27,000 18,000 45% - 49.99%...................................................... 31,500 21,000 50% or Greater..................................................... 36,000 24,000
Options will be priced based upon the closing price of the Company's common stock on the third business day following the announcement of year-end financial results each year and will be issued following the March Board of Directors meeting. The diluted earnings per share for each year will be computed in accordance with Generally Accepted Accounting Principles ("GAAP"), but before accrual of bonuses and stock option awards under this plan. VI. ORGANIZATION AND INDIVIDUAL PERFORMANCE MEASURES ------------------------------------------------ The following measures of organization performance will be used to determine actual incentive awards: Michael Foods, Inc. Diluted net earnings per share. Measured by actual diluted earnings per share for the current year as compared to the target level. Calculated in accordance with GAAP. Operating Companies. A portion of cash award based upon profit before bonus and taxes (PBBT). Measured by actual pre-tax profits for the Plan year as compared to the target level. For the purposes of the Plan, PBBT will be defined as operating profits, calculated in accordance with GAAP, before federal and state taxes, any interest charges associated with acquisition debt, and before accrual of bonuses. The remaining portion of the cash award to Operating Company participants will be based upon the relative achievement of the Michael Foods, Inc. diluted net earnings per share target, as defined above. VII. ADMINISTRATIVE PROCEDURES ------------------------- A. Additions of Individuals. All eligible participants must be designated by the CEO of the Company as of the beginning of the Plan year. B. Establishment of "Target or Maximum" Goals. The CEO retains the right to set or adjust the operating company and corporate "target or maximum" incentive goals based upon an assessment of overall business conditions at the beginning of the Plan year. C. Adjustments to Targets and/or Goals. The CEO retains the right to adjust the targets and/or goals of the Plan based upon his/her assessment of business conditions at the end of the second quarter of the Plan year. D. Down Earnings Year. No cash incentive shall be paid to a participant if their operating company or, in the case of corporate level participants, the Company has a decline in earnings for the Plan year, except at the discretion of the CEO with the approval of the Compensation Committee. However, this provision would not preclude an individual from participating in a Component B Stock Incentive Award. E. Termination/Death/Disability. Plan participants must be in the employ of the Company on the day the incentive award is actually paid in order to be eligible for incentive award payments except at the discretion of the CEO. However, should a participant die or become disabled, the incentive award for the year in which such death or disability occurs shall be prorated by the number of months of service during the applicable Plan year and shall be paid to the participant or the participant's estate, as the case may be. F. Change in Position. Eligible employees under the Plan who have a change in position during a Plan year will have their incentive award calculated under the Plan award levels for both positions, prorating the incentive award by the months of service at each level. G. Interpolation. When the actual performance figure does not result in a whole number, the individual calculating the formula should interpolate to the closest percent. H. Exceptions. In each instance, exceptions must be approved in advance by the appropriate officer and the CEO of the Company, and must be submitted to the Compensation Committee of the Board of Directors for their concurrence. VIII. AMENDMENT AND TERMINATION ------------------------- The Board of Directors may at any time amend the Plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose that may be permitted by law. The Board of Directors may also terminate the Plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) with regard to any award previously made. IX. RIGHT TO CONTINUED EMPLOYMENT ----------------------------- No participant shall have any claim or right to be granted an incentive (bonus) award under this Plan and the granting of an incentive (bonus) award shall not be construed as giving the participant the right of continued employment with the Company. The Company further reserves the right to dismiss a participant at any time, with or without cause, free from any claim or liability other than provided under this Plan document. X. CHANGE IN CONTROL ----------------- If the Company is merged into, acquired by or consolidated with another corporation, or if all or substantially all of the assets of the Company are sold or transferred to another party or if more than fifty percent (50%) of the outstanding Common Stock is transferred to one or more parties so as to affect a change in the control of the Company, the Common Stock granted under Component B of the Plan and the options granted under Component C of the Plan shall become immediately exercisable. Accordingly, said immediate vesting shall not apply to any transaction where the Company stockholders, directly or indirectly, retain in excess of fifty percent (50%) of the voting control over the Company. EX-10.65 5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.65 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into as of this 31st day of December, 1994, and amended as of the 31st day of December 1995, the 31st day of October 1997, and the 1st day of January 1999 by and between MICHAEL FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael Foods") and NORMAN A. RODRIGUEZ (hereinafter referred to as "Rodriguez"). WHEREAS, Rodriguez has served as President of Crystal Farms Refrigerated Distribution Company since May 1989; and WHEREAS, Michael Foods and Rodriguez have agreed to enter into this Agreement effective as of January 1, 1995. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties agree that this Agreement is effective as of January 1, 1995 as follows: 1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Rodriguez to serve as President of Crystal Farms Refrigerated Distribution Company and in such capacity Rodriguez shall perform such duties as the Bylaws provide and as the CEO of Michael Foods may from time to time determine. 2. TERM. This Agreement shall be effective as of January 1, 1995 and shall continue through December 31, 1999, unless earlier terminated as provided herein. This Agreement may be extended thereafter upon the written agreement of the parties hereto. 3. BASE SALARY. For all services rendered by Rodriguez, Michael Foods agrees to pay to Rodriguez an annual Base Salary for each of the calendar years of this Agreement from January 1, 1999 through December 31, 1999 of at least $203,000 payable in substantially equal semi-monthly installments. 4. ADDITIONAL BENEFITS AND WORKING FACILITIES. a. For each calendar year during the term of this Agreement, Rodriguez shall be entitled to participate in the Executive Incentive Compensation Plan of Michael Foods. Any Incentive Compensation or Options earned under said Plan shall be determined and paid or granted in accordance with the Plan. b. Michael Foods shall provide Rodriguez with medical insurance and shall permit Rodriguez to participate in other fringe benefit plans as Michael Foods may from time to time establish for its executive officers. The terms of said benefits shall be no less generous than those offered to other executive officers of Michael Foods. c. Rodriguez is entitled to take vacations at reasonable times and for customary and reasonable lengths of time consistent with his overall responsibilities as President of Crystal Farms Refrigerated Distribution Company. 1 d. Michael Foods shall reimburse Rodriguez for all reasonable expenses incurred by Rodriguez in connection with Michael Foods' business, including but not limited to, expenses of travel and entertainment, upon presentation of itemized statements therefor. 5. EVENTS OF TERMINATION. The employment of Rodriguez hereunder shall terminate as follows: a. Upon the Incapacity or death of Rodriguez; b. Upon thirty (30) days' written notice by either party, other than as provided in sub-paragraphs c. and d., below; c. Without notice by Michael Foods for Cause; or d. By Michael Foods without Cause if there is a Change in Control of Michael Foods and thereafter Rodriguez's Duties are Substantially Reduced or Negatively Altered without his prior written consent. "Cause" for purposes hereof shall mean a determination by Michael Foods that Rodriguez has (i) committed an illegal or dishonest act that directly reflects upon his fitness to act as President of Crystal Farms Refrigerated Distribution Company; (ii) intentionally breached his fiduciary obligations to Michael Foods; or (iii) refused or is unable to perform his duties hereunder, other than as a result of illness or disability, for a period of thirty (30) days. "Incapacity" for purposes hereof shall mean a determination by Michael Foods in its sole discretion that Rodriguez is unable to perform his job responsibilities as President of Crystal Farms Refrigerated Distribution Company as a result of chronic illness, physical, mental or any other disability for a period of six (6) months or more. If Rodriguez's employment is terminated under subsection (a) or by Michael Foods under subsection (b), Rodriguez shall receive as a termination payment an amount equal to one year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in substantially equal monthly installments beginning on the first day of the month following termination of employment for twelve (12) months. If Rodriguez's employment is terminated by Rodriguez under subsection (b), Rodriguez shall receive no termination payment; however, Rodriguez will be entitled to receive any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination shall be due and payable in full within 15 days of the determination by the Board of Directors of the amount of Incentive Compensation to which Rodriguez is entitled to receive, but in no event shall the date of payment be more 2 than 90 days following termination of employment. If Michael Foods terminates Rodriguez under subsection (c) above, no amount shall be paid beyond the last day of service by Rodriguez and Rodriguez shall not be deemed to have earned any Incentive Compensation or Options for the year of termination. In the case of Incapacity or death, or termination by Michael Foods without Cause in accordance with sub-paragraphs a., b. and d. above, all options to purchase common stock previously granted to Rodriguez shall become fully vested and not subject to Rodriguez's forfeiture. If Rodriguez's employment is terminated by Michael Foods under subsection (d), Rodriguez shall receive as a termination payment an amount-equal to two year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in a lump sum within 15 days following termination of employment. "CHANGE IN CONTROL" means a Change in Control of Michael Foods of a nature that would be required to be reported in response to Item l(a) of Michael Food's Current Report on Form 8-K, as in effect on the effective date of this agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as any "person" within the meaning of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of Michael Foods or any employee benefit plan sponsored by Michael Foods or a subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause the election or appointment of at least a majority of the members of the Board of Directors of Michael Foods through the acquisition of beneficial ownership of capital stock of Michael Foods or otherwise, or (2) all, or substantially all, of the properties and assets of Michael Foods; provided, however, that a Change in Control shall not be deemed to have occurred if (x) the acquisition of such power or properties and assets is pursuant to a merger, consolidation, or sale of properties and assets and (y) by reason of such transaction no person, or related persons constituting a "group" for purposes of Section 13(d) of the Exchange Act shall acquire the power to elect, appoint or cause the election or appointment of a majority of the members of the Board of Directors of such successor or transferee. "DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after any Change in Control and without Rodriguez's express written consent: (i) the assignment to Rodriguez of any duties inconsistent with Rodriguez's positions, duties, responsibilities and status with Michael Foods immediately prior to a Change in Control, or a change in Rodriguez's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of Rodriguez from, or any failure to re-elect Rodriguez to, any of such positions, except in connection with the termination of Rodriguez's employment for Cause, upon the Incapacity or death of Rodriguez, or upon the voluntary termination by Rodriguez; 3 (ii) a reduction in Rodriguez's base salary in effect immediately prior to any Change in Control; or the failure by Michael Foods to increase such base salary each year after a Change in Control by an amount which at least equals, on a percentage basis, the mean average percentage increase in base salary for all employees similarly situated during the two (2) full calendar years immediately preceding a Change in Control, (iii) Michael Foods requiring Rodriguez to be based anywhere other than the geographic location at which Rodriguez was based immediately preceding the Change in Control except for required travel on business to an extent substantially consistent with the business travel obligations Rodriguez experienced immediately preceding a Change in Control; (iv) the failure by Michael Foods to continue in effect benefit and compensation plans substantially equivalent to the benefit or compensation plans or arrangements in which Rodriguez was participating immediately preceding any Change in Control; the taking of any action by Michael Foods not required by law which would adversely affect Rodriguez's participation in or materially reduce Rodriguez's benefits under any of such plans or deprive Rodriguez of any material fringe benefit enjoyed by Rodriguez at the time of the Change in Control, but this provision shall not apply to any stock option plan maintained by Michael Foods prior to the Change in Control; or the failure by Michael Foods to provide Rodriguez with the number of paid vacation days, holidays and personal days to which Rodriguez was then entitled in accordance with Michael Foods' normal leave policy in effect immediately preceding a Change in Control. 6. ADDITIONAL DOCUMENTS. The parties shall each, without further consideration, execute such additional documents as may be reasonably required in order to carry out the purposes and intent of this Agreement and to fulfill the obligations of the respective parties hereunder. 7. WAIVER. Any waiver of any term or condition of this Agreement shall not operate as a waiver of any other breach of such term or condition, or of any other term or condition, nor shall any failure to enforce a provision hereof operate as a waiver of such provisions or of any other provision hereof. 8. NOTICES. All communications with respect to this Agreement shall be considered given if delivered or sent as follows: a. To Rodriguez by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: NORMAN A. RODRIGUEZ 3626 France Avenue So. St. Louis Park, MN 55416 4 b. To Michael Foods by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: Michael Foods, Inc. 5353 Wayzata Boulevard 324 Park National Bank Building Minneapolis, MN 55416 or mailed to such other addresses as the parties hereto may designate by notice given in like manner. Notice shall be effective three (3) days after mailing or upon personal delivery. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of the parties hereto with respect to the subject matter hereof and no party shall be liable or bound to another in any manner by any warranties, representations or guarantees, except as specifically set forth herein. 10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time may by written agreement extend or modify this Agreement. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing executed by the parties hereto. 11. SEVERABILITY. No finding or adjudication that any provision of this Agreement is invalid or unenforceable shall affect the validity or enforceability of the remaining provisions herein, and this Agreement shall be construed as though such invalid or unenforceable provisions were omitted. 12. MISCELLANEOUS. a. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective legal representatives, successors and assigns of the party thereto. b. This Agreement is made pursuant to and shall be construed under the laws of the State of Minnesota. c. This Agreement may be executed in one or more counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement the date and year above written. MICHAEL FOODS, INC. By /s/ John Reedy ------------------------------------- Its Vice President - Finance --------------------------------- /s/ Norman A. Rodriguez ---------------------------------------- NORMAN A. RODRIGUEZ 5 EX-10.66 6 AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.66 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into as of this 31st day of December 1995, and amended as of the 31st day of October 1997, and the 1st day of January 1999, by and between MICHAEL FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael Foods") and BILL L. GOUCHER (hereinafter referred to as "Goucher"). WHEREAS, Goucher has served as President of M. G. Waldbaum Company since March 1993; and WHEREAS, Michael Foods and Goucher have agreed to enter into this Agreement effective as of January 1, 1996. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties agree that this Agreement is effective as of January 1, 1996 as follows: 1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Goucher to serve as President of M. G. Waldbaum Company and in such capacity Goucher shall perform such duties as the Bylaws provide and as the CEO of Michael Foods may from time to time determine. 2. TERM. This Agreement shall be effective as of January 1, 1999 and shall continue through December 31, 1999, unless earlier terminated as provided herein. This Agreement may be extended thereafter upon the written agreement of the parties hereto. 3. BASE SALARY. For all services rendered by Goucher, Michael Foods agrees to pay to Goucher an annual Base Salary for each of the calendar years of this Agreement from January 4, 1999 through December 31, 1999 of at least $230,000 payable in substantially equal semi-monthly installments. 4. ADDITIONAL BENEFITS AND WORKING FACILITIES. a. For each calendar year during the term of this Agreement, Goucher shall be entitled to participate in the Executive Incentive Compensation Plan of Michael Foods. Any Incentive Compensation or Options earned under said Plan shall be determined and paid or granted in accordance with the Plan. b. Michael Foods shall provide Goucher with medical insurance and shall permit Goucher to participate in other fringe benefit plans as Michael Foods may from time to time establish for its executive officers. The terms of said benefits shall be no less generous than those offered to other executive officers of Michael Foods. c. Goucher is entitled to take vacations at reasonable times and for customary and reasonable lengths of time consistent with his overall responsibilities as President of M. G. Waldbaum Company. d. Michael Foods shall reimburse Goucher for all reasonable expenses incurred by Goucher in connection with Michael Foods' business, including but not limited to, 1 expenses of travel and entertainment, upon presentation of itemized statements therefor. 5. EVENTS OF TERMINATION. The employment of Goucher hereunder shall terminate as follows: a. Upon the Incapacity or death of Goucher; b. Upon thirty (30) days' written notice by either party, other than as provided in sub-paragraphs c. and d. , below; c. Without notice by Michael Foods for Cause; or d. By Michael Foods without Cause if there is a Change in Control of Michael Foods and thereafter Goucher's Duties are Substantially Reduced or Negatively Altered without his prior written consent. "CAUSE" for purposes hereof shall mean a determination by Michael Foods that Goucher has (i) committed an illegal or dishonest act that directly reflects upon his fitness to act as President of M. G. Waldbaum Company; (ii) intentionally breached his fiduciary obligations to Michael Foods; or (iii) refused or is unable to perform his duties hereunder, other than as a result of illness or disability, for a period of thirty (30) days. "Incapacity" for purposes hereof shall mean determination by Michael Foods in its sole discretion that Goucher is unable to perform his job responsibilities as President of M. G. Waldbaum Company as a result of chronic illness, physical, mental or any other disability for a period of six (6) months or more. If Goucher's employment is terminated under subsection (a) or by Michael Foods under subsection (b), Goucher shall receive as a termination payment an amount equal to one year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in substantially equal monthly installments beginning on the first day of the month following termination of employment for twelve (12) months. If Goucher's employment is terminated by Goucher under subsection (b), Goucher shall receive no termination payment; however, Goucher will be entitled to receive any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination shall be due and payable in full within 15 days of the determination by the Board of Directors of the amount of Incentive Compensation to which Goucher is entitled to receive, but in no event shall the date of payment be more than 90 days following termination of employment. If Michael Foods terminates Goucher under subsection (c) above, no amount shall be paid beyond the last day of service by Goucher and Goucher shall not be deemed to have earned any Incentive Compensation or Options for the year of termination. In the case of Incapacity or death, or termination by Michael 2 Foods without Cause in accordance with sub-paragraphs a., b. and d. above, all options to purchase common stock previously granted to Goucher shall become fully vested and not subject to Goucher's forfeiture. If Goucher's employment is terminated by Michael Foods under subsection (d), Goucher shall receive as a termination payment an amount equal to two year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in a lump sum within 15 days following termination of employment. "CHANGE IN CONTROL" means a Change in Control of Michael Foods of a nature that would be required to be reported in response to Item 1(a) of Michael Food's Current Report on Form 8-K, as in effect on the effective date of this agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as any "person" within the meaning of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of Michael Foods or any employee benefit plan sponsored by Michael Foods or a subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause the election or appointment of at least a majority of the members of the Board of Directors of Michael Foods through the acquisition of beneficial ownership of capital stock of Michael Foods or otherwise, or (2) all, or substantially all, of the properties and assets of Michael Foods; provided, however, that a Change in Control shall not be deemed to have occurred if (x) the acquisition of such power or properties and assets is pursuant to a merger, consolidation, or sale of properties and assets and (y) by reason of such transaction no person, or related persons constituting a "group" for purposes of Section 13(d) of the Exchange Act shall acquire the power to elect, appoint or cause the election or appointment of a majority of the members of the Board of Directors of such successor or transferee. "DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY A1TERED" means, after any Change in Control and without Goucher's express written consent: (i) the assignment to Goucher of any duties inconsistent with Goucher's positions, duties, responsibilities and status with Michael Foods immediately prior to a Change in Control, or a change in Goucher's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of Goucher from, or any failure to re-elect Goucher to, any of such positions, except in connection with the termination of Goucher's employment for Cause, upon the Incapacity or death of Goucher, or upon the voluntary termination by Goucher; (ii) a reduction in Goucher's base salary in effect immediately prior to any Change in Control; or the failure by Michael Foods to increase such base salary each year after a Change in Control by an amount which at least equals, on a percentage basis, the mean average percentage increase in base salary for all employees similarly situated during the two (2) full calendar years immediately preceding a Change in Control; 3 (iii) Michael Foods requiring Goucher to be based anywhere other than the geographic location at which Goucher was based immediately preceding the Change in Control except for required travel on business to an extent substantially consistent with the business travel obligations Goucher experienced immediately preceding a Change in Control; (iv) the failure by Michael Foods to continue in effect benefit and compensation plans substantially equivalent to the benefit or compensation plans or arrangements in which Goucher was participating immediately preceding any Change in Control; the taking of any action by Michael Foods not required by law which would adversely affect Goucher's participation in or materially reduce Goucher's benefits under any of such plans or deprive Goucher of any material fringe benefit enjoyed by Goucher at the time of the Change in Control, but this provision shall not apply to any stock option plan maintained by Michael Foods prior to the Change in Control; or the failure by Michael Foods to provide Goucher with the number of paid vacation days, holidays and personal days to which Goucher was then entitled in accordance with Michael Foods' normal leave policy in effect immediately preceding a Change in Control. 6. ADDITIONAL DOCUMENTS. The parties shall each, without further consideration, execute such additional documents as may be reasonably required in order to carry out the purposes and intent of this Agreement and to fulfill the obligations of the respective parties hereunder. 7. WAIVE. Any waiver of any term or condition of this Agreement shall not operate as a waiver of any other breach of such term or condition, or of any other term or condition, nor shall any failure to enforce a provision hereof operate as a waiver of such provisions or of any other provision hereof. 8. NOTICES. All communications with respect to this Agreement shall be considered given if delivered or sent as follows: a. To Goucher by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: BILL L. GOUCHER 3060 Quinwood Ln. Plymouth, MN 55441 b. To Michael Foods by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: Michael Foods, Inc. 5353 Wayzata Boulevard 324 Park National Bank Building Minneapolis, MN 55416 4 or mailed to such other addresses as the parties hereto may designate by notice given in like manner. Notice shall be effective three (3) days after mailing or upon personal delivery. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of the parties hereto with respect to the subject matter hereof and no party shall be liable or bound to another in any manner by any warranties, representations or guarantees, except as specifically set forth herein. 10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time may by written agreement extend or modify this Agreement. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing executed by the parties hereto. 11. SEVERABILITY. No finding or adjudication that any provision of this Agreement is invalid or unenforceable shall affect the validity or enforceability of the remaining provisions herein, and this Agreement shall be construed as though such invalid or unenforceable provisions were omitted. 12. MISCELLANEOUS. a. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective legal representatives, successors and assigns of the party thereto. b. This Agreement is made pursuant to and shall be construed under the laws of the State of Minnesota. c. This Agreement may be executed in one or more counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement the date and year above written. MICHAEL FOODS, INC. By /s/ John Reedy ------------------------------------- Its Vice President - Finance --------------------------------- /s/ Bill L. Goucher ---------------------------------------- BILL L. GOUCHER 5 EX-10.67 7 AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.67 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into as of this 31st day of October 1997, and amended as of the 1st day of January 1999, by and between MICHAEL FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael Foods") and JAMES D. CLARKSON (hereinafter referred to as "Clarkson"). WHEREAS, Clarkson has served as President of Northern Star Company since 1995; and WHEREAS, Michael Foods and Clarkson have agreed to enter into this Agreement effective as of October 31, 1997. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties agree that this Agreement is effective as of October 31, 1997 as follows: 1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Clarkson to serve as President of Northern Star Company and in such capacity Clarkson shall perform such duties as the Bylaws provide and as the CEO of Michael Foods may from time to time determine. 2. TERM. This Agreement shall be effective as of January 1, 1999 and shall continue through December 31, 1999, unless earlier terminated as provided herein. This Agreement may be extended thereafter upon the written agreement of the parties hereto. 3. BASE SALARY. For all services rendered by Clarkson, Michael Foods agrees to pay to Clarkson an annual Base Salary for each of the calendar years of this Agreement from January 1, 1999 through December 31, 1999 of at least $194,000 payable in substantially equal semi-monthly installments. 4. ADDITIONAL BENEFITS AND WORKING FACILITIES. a. For each calendar year during the term of this Agreement, Clarkson shall be entitled to participate in the Executive Incentive Compensation Plan of Michael Foods. Any Incentive Compensation or Options earned under said Plan shall be determined and paid or granted in accordance with the Plan. b. Michael Foods shall provide Clarkson with medical insurance and shall permit Clarkson to participate in other fringe benefit plans as Michael Foods may from time to time establish for its executive officers. The terms of said benefits shall be no less generous than those offered to other executive officers of Michael Foods. c. Clarkson is entitled to take vacations at reasonable times and for customary and reasonable lengths of time consistent with his overall responsibilities as President of Northern Star Company. d. Michael Foods shall reimburse Clarkson for all reasonable expenses incurred by Clarkson in connection with Michael Foods' business, including but not limited to, 1 expenses of travel and entertainment, upon presentation of itemized statements therefor. 5. EVENTS OF TERMINATION. The employment of Clarkson hereunder shall terminate as follows: a. Upon the Incapacity or death of Clarkson; b. Upon thirty (30) days' written notice by either party, other than as provided in sub-paragraphs c. and d. , below; c. Without notice by Michael Foods for Cause; or d. By Michael Foods without Cause if there is a Change in Control of Michael Foods and thereafter Clarkson's Duties are Substantially Reduced or Negatively Altered without his prior written consent. "CAUSE" for purposes hereof shall mean a determination by Michael Foods that Clarkson has (i) committed an illegal or dishonest act that directly reflects upon his fitness to act as President of Northern Star Company; (ii) intentionally breached his fiduciary obligations to Michael Foods; or (iii) refused or is unable to perform his duties hereunder, other than as a result of illness or disability, for a period of thirty (30) days. "Incapacity" for purposes hereof shall mean determination by Michael Foods in its sole discretion that Clarkson is unable to perform his job responsibilities as President of Northern Star Company as a result of chronic illness, physical, mental or any other disability for a period of six (6) months or more. If Clarkson's employment is terminated under subsection (a) or by Michael Foods under subsection (b), Clarkson shall receive as a termination payment an amount equal to one year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in substantially equal monthly installments beginning on the first day of the month following termination of employment for twelve (12) months. If Clarkson's employment is terminated by Clarkson under subsection (b), Clarkson shall receive no termination payment; however, Clarkson will be entitled to receive any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination shall be due and payable in full within 15 days of the determination by the Board of Directors of the amount of Incentive Compensation to which Clarkson is entitled to receive, but in no event shall the date of payment be more than 90 days following termination of employment. If Michael Foods terminates Clarkson under subsection (c) above, no amount shall be paid beyond the last day of service by Clarkson and Clarkson shall not be deemed to have earned any Incentive Compensation or Options for the year of termination. In the case of Incapacity or death, or termination by Michael 2 Foods without Cause in accordance with sub-paragraphs a., b. and d. above, all options to purchase common stock previously granted to Clarkson shall become fully vested and not subject to Clarkson's forfeiture. If Clarkson's employment is terminated by Michael Foods under subsection (d), Clarkson shall receive as a termination payment an amount equal to two year's Base Salary, plus any Incentive Compensation earned for any year prior to the year of termination which is unpaid at the date of termination. Such termination payment shall be made in a lump sum within 15 days following termination of employment. "CHANGE IN CONTROL" means a Change in Control of Michael Foods of a nature that would be required to be reported in response to Item 1(a) of Michael Food's Current Report on Form 8-K, as in effect on the effective date of this agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as any "person" within the meaning of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of Michael Foods or any employee benefit plan sponsored by Michael Foods or a subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause the election or appointment of at least a majority of the members of the Board of Directors of Michael Foods through the acquisition of beneficial ownership of capital stock of Michael Foods or otherwise, or (2) all, or substantially all, of the properties and assets of Michael Foods; provided, however, that a Change in Control shall not be deemed to have occurred if (x) the acquisition of such power or properties and assets is pursuant to a merger, consolidation, or sale of properties and assets and (y) by reason of such transaction no person, or related persons constituting a "group" for purposes of Section 13(d) of the Exchange Act shall acquire the power to elect, appoint or cause the election or appointment of a majority of the members of the Board of Directors of such successor or transferee. "DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY A1TERED" means, after any Change in Control and without Clarkson's express written consent: (i) the assignment to Clarkson of any duties inconsistent with Clarkson's positions, duties, responsibilities and status with Michael Foods immediately prior to a Change in Control, or a change in Clarkson's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of Clarkson from, or any failure to re-elect Clarkson to, any of such positions, except in connection with the termination of Clarkson's employment for Cause, upon the Incapacity or death of Clarkson, or upon the voluntary termination by Clarkson; (ii) a reduction in Clarkson's base salary in effect immediately prior to any Change in Control; or the failure by Michael Foods to increase such base salary each year after a Change in Control by an amount which at least equals, on a percentage basis, the mean average percentage increase in base salary for all employees similarly situated during the two (2) full calendar years immediately preceding a Change in Control; 3 (iii) Michael Foods requiring Clarkson to be based anywhere other than the geographic location at which Clarkson was based immediately preceding the Change in Control except for required travel on business to an extent substantially consistent with the business travel obligations Clarkson experienced immediately preceding a Change in Control; (iv) the failure by Michael Foods to continue in effect benefit and compensation plans substantially equivalent to the benefit or compensation plans or arrangements in which Clarkson was participating immediately preceding any Change in Control; the taking of any action by Michael Foods not required by law which would adversely affect Clarkson's participation in or materially reduce Clarkson's benefits under any of such plans or deprive Clarkson of any material fringe benefit enjoyed by Clarkson at the time of the Change in Control, but this provision shall not apply to any stock option plan maintained by Michael Foods prior to the Change in Control; or the failure by Michael Foods to provide Clarkson with the number of paid vacation days, holidays and personal days to which Clarkson was then entitled in accordance with Michael Foods' normal leave policy in effect immediately preceding a Change in Control. 6. ADDITIONAL DOCUMENTS. The parties shall each, without further consideration, execute such additional documents as may be reasonably required in order to carry out the purposes and intent of this Agreement and to fulfill the obligations of the respective parties hereunder. 7. WAIVE. Any waiver of any term or condition of this Agreement shall not operate as a waiver of any other breach of such term or condition, or of any other term or condition, nor shall any failure to enforce a provision hereof operate as a waiver of such provisions or of any other provision hereof. 8. NOTICES. All communications with respect to this Agreement shall be considered given if delivered or sent as follows: a. To Clarkson by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: JAMES D. CLARKSON 10464 Shelter Grove Eden Prairie, MN 55347 b. To Michael Foods by first class, certified mail, postage prepaid, return receipt requested, addressed as follows: Michael Foods, Inc. 5353 Wayzata Boulevard 324 Park National Bank Building Minneapolis, MN 55416 4 or mailed to such other addresses as the parties hereto may designate by notice given in like manner. Notice shall be effective three (3) days after mailing or upon personal delivery. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of the parties hereto with respect to the subject matter hereof and no party shall be liable or bound to another in any manner by any warranties, representations or guarantees, except as specifically set forth herein. 10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time may by written agreement extend or modify this Agreement. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing executed by the parties hereto. 11. SEVERABILITY. No finding or adjudication that any provision of this Agreement is invalid or unenforceable shall affect the validity or enforceability of the remaining provisions herein, and this Agreement shall be construed as though such invalid or unenforceable provisions were omitted. 12. MISCELLANEOUS. a. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective legal representatives, successors and assigns of the party thereto. b. This Agreement is made pursuant to and shall be construed under the laws of the State of Minnesota. c. This Agreement may be executed in one or more counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement the date and year above written. MICHAEL FOODS, INC. By /s/ John Reedy ------------------------------------- Its Vice President - Finance --------------------------------- /s/ James D. Clarkson ---------------------------------------- JAMES D. CLARKSON 5 EX-13.1 8 1998 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13.1 ANNUAL REPORT [Lab Technician Photo here] 1998 Michael Foods [Logo Art here] Michael Foods, Inc. is a diversified food processor and distributor with businesses in egg products, refrigerated grocery products, specialty dairy products and refrigerated potato products. Our strategic thrust is to further transition Michael Foods into a value-added food products company by being a leader in the food industry in introducing innovative food technology and customer solutions. The key to this strategy is "value-added", whether that is in the product, the distribution channel or in the service we provide to our customers. For further information, please visit Michael Foods, Inc. on the internet: www.michaelfoods.com [Light Bulb Art here] TABLE OF CONTENTS PRESIDENT'S LETTER 1 CORPORATE OVERVIEW 3 EGG PRODUCTS DIVISION 4 REFRIGERATED DISTRIBUTION DIVISION 8 DAIRY PRODUCTS DIVISION 10 POTATO PRODUCTS DIVISION 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 CONSOLIDATED FINANCIAL STATEMENTS 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21
FINANCIAL SUMMARY (In thousands, except per share amounts) YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales ........................................... $1,020,484 $956,223 $616,395 Net earnings (loss) ................................. 40,257 32,439 (3,073) =========================================== Net earnings (loss) per share - diluted ........... $ 1.83 $ 1.51 $ (.16) Dividends per share ............................... $ .23 $ .20 $ .20 Weighted average shares outstanding - diluted ..... 21,980 21,446 19,386 =========================================== AT DECEMBER 31, - ----------------------------------------------------------------------------------------------------------- Working capital ..................................... $ 61,297 $ 54,788 $ 56,677 Total assets ........................................ 551,516 503,655 364,659 Long-term debt, including current maturities ........ 166,107 146,028 112,901 Shareholders' equity ................................ 244,149 229,246 174,042 ===========================================
Certain items in this annual report are forward-looking statements, which are made in reliance upon the safe FRESHER THINKING harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties, [Light Bulb Art here] including change in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for the Company's products due to consumer and industry developments as well as variances in the costs to produce such products, including normal volatility in egg and feed costs. The Company's actual financial results could differ materially from the results estimated by, forecasted by, or implied by the Company in such forward-looking statements. TO OUR SHAREHOLDERS [CEO PHOTO HERE] Your company had a record-setting 1998. Unit sales gains, particularly of value-added products, and improved operating efficiencies resulted in record annual net earnings. 1998 FINANCIAL RESULTS * Record net sales for the year exceeded $1 billion, an increase of 7%. * Record net earnings of $40 million were achieved, with record diluted earnings per share of $1.83, an increase of 21%. * Return on average shareholders' equity increased to 17%. * Excellent cash flows continued. Our balance sheet remains strong, with debt to total capital at 40%. INVESTING IN OUR FUTURE * Two investments in Europe were completed in early 1999: we acquired a 25% interest in Belovo S.A., a specialty egg products company based in Bastogne, Belgium, and we entered into a 50/50 joint venture with Belovo's founding shareholders to form The Lipid Company ("TLC"), a company involved in the extraction of phospholipids from egg yolks. TLC will build a phospholipid extraction plant in Luxembourg which should be operational the first half of 2000. This investment will be our first move into the field of nutraceuticals, whereby specialty ingredients extracted from egg yolks will be used to enhance other food items, such as infant formulas. [EMPLOYEE PHOTO HERE] * We are acquiring a dairy products operation in Connecticut from HP Hood. This transaction will allow us to expand our dairy products operations to the East Coast and is the next step in our strategy to build Kohler Mix Specialties into a nationwide business. [EMPLOYEE PHOTO HERE] * We had record capital spending in 1998. Spending on capital projects is projected to be even higher in 1999. This spending is focused on expanding our production capacity for value-added products, particularly further-processed egg and specialty dairy products, in order to meet rising demand. [EMPLOYEE PHOTO HERE] * During the year, we repurchased nearly one million shares of our stock, resulting in higher earnings per share. OUR PEOPLE * The focus of our annual report this year is on the people of Michael Foods. Our company is over 4,000 people strong and our employees come to work each day dedicated to improving our business and delivering value to our customers and, in turn, providing growth for our investors. I thank them for their considerable efforts and look forward with them to a future filled with growth opportunities, both for Michael Foods as a company and for them as individuals as they grow with us in their careers. [EMPLOYEE PHOTO HERE] [EMPLOYEE PHOTO HERE] * Late last year we filled a new position, Vice President of Operations, for the Dairy Products Division. * Early in 1999, we made a number of promotions within our Michael Foods Sales Group, broadening and strengthening the management group running our foodservice sales efforts. * At the beginning of 1999, we had a voluntary, precautionary recall of certain cartoned dairy products made by our Dairy Products Division. This recall was handled expertly and efficiently by a team of dedicated employees, including the Kohler Mix staff, the Sales Group, company-wide Quality Assurance personnel and, particularly, our customer service and distribution employees. Their superb responsiveness and professionalism helped us manage this unforeseen situation with the utmost concern for our customers and the consuming public. I personally thank those employees directly involved in the recall efforts for going the "extra mile" to help safeguard the public health and to take care of our customers' needs. * On behalf of my fellow directors, and all of the shareholders and employees of Michael Foods, I thank Miles Efron, who is retiring after 11 years of dedicated service to our Board of Directors, for his valuable contributions to Michael Foods. Miles' insightful comments and wise counsel will be missed. THE OUTLOOK * In 1995, we established the first strategic plan for Michael Foods, which we called MFI 2000. Among its goals was to achieve $1 billion in annual net sales by the year 2000. We were pleased to achieve this goal two years early. With this goal and other MFI 2000 goals reached, or being within reach, this past year we established new goals for the next five years. Our new strategic plan, which we call MFI 2003, includes the following goals: - $2 billion in net sales by the year 2003, with the growth coming from both internal and external sources (i.e., acquisitions). - Compounded average annual net earnings per share gains of 15% per year, driven by internal growth from value-added products as well as acquisitions and joint ventures. - A return on average shareholders' equity of 18% per year. On behalf of all of the employees of Michael Foods, I thank you for your ongoing support as shareholders. We take our commitment to our customers and to our owners very seriously, and are working diligently to meet your expectations and grow Michael Foods in order to provide you with the return on your investment which you expect. We see ample opportunities to deliver this growth in the years ahead. New product introductions, cost savings from operating synergies, and new opportunities presented by both acquisitions and joint ventures, should all provide sources for earnings growth in the years ahead. Our employees are justifiably proud of what they have accomplished in recent years, but they believe, as do I, that our best days lie ahead. Sincerely, [CEO SIGNATURE HERE] Gregg A. Ostrander President and Chief Executive Officer 2 CORPORATE OVERVIEW 1998 FINANCIAL HIGHLIGHTS NET SALES: $1.02 BILLION +7% NET EARNINGS: $40.3 MILLION +24% EARNINGS PER SHARE (DILUTED): $1.83 +21% RETURN ON AVERAGE SHAREHOLDERS'EQUITY: 17%
CONTRIBUTION TO COMPANY TOTALS EGG PRODUCTS DIVISION NET SALES OPERATING PROFIT * VALUE-ADDED PRODUCTS 60% OF SALES (extended shelf-life, precooked, egg substitutes, dried) * OTHER EGG PRODUCTS 34% OF SALES 59% 79% (frozen, hardcooked, short shelf-life) * SHELL EGGS 6% OF SALES Chart Art here Chart Art here REFRIGERATED DISTRIBUTION DIVISION * PRIMARILY CRYSTAL FARMS(R) BRANDED PRODUCTS * CHEESE, BAGELS, BUTTER, MARGARINE, 22% 8% MUFFINS, CARTONED EGGS, JUICE AND ETHNIC FOODS Chart Art here Chart Art here * 23 STATE TERRITORY * 400+ PRODUCTS AND LINE EXTENSIONS DAIRY PRODUCTS DIVISION * ULTRA-PASTEURIZED DAIRY PRODUCTS- PRIMARILY FOODSERVICE 14% 8% * ICE MILK AND ICE CREAM MIXES Chart Art here Chart Art here * COFFEE CREAMERS * SPECIALTY RETAIL PRODUCTS POTATO PRODUCTS DIVISION * REFRIGERATED HASH BROWNS, MASHED, SLICED, AND RED SKIN POTATOES 5% 5% * FOODSERVICE MARKET 75% OF SALES Chart Art here Chart Art here * RETAIL GROCERY MARKET 25% OF SALES (Simply Potatoes(TM), Diner's Choice(TM))
3 [EMPLOYEE PHOTO HERE] EGG PRODUCTS DIVISION JOHN BURKE SANTOS REYES (FOREGROUND) PLANT MANAGER BREAKING LINE OPERATOR 46 YEARS OF SERVICE 7 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] RICH MEYERS VICE PRESIDENT-NATIONAL ACCOUNTS 9 YEARS OF SERVICE SANDY HABERMAN [EMPLOYEE CUSTOMER SERVICE PHOTO HERE] REPRESENTATIVE 3 YEARS OF SERVICE 4 "GOOD PROGRESS HAS BEEN MADE IN MELDING THE TWO EGG PRODUCTS OPERATIONS WITH INCREASINGLY COORDINATED SALES, LUIS DINIS PRODUCTION AND DISTRIBUTION TRAFFIC MANAGER EFFORTS." 15 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] Sales and earnings rose to record levels for the Egg Products Division in 1998. This was on the heels of very substantial growth in 1997. Since the acquisition of Papetti's Hygrade Egg Products, Inc. two years ago, good progress has been made in melding the two egg products operations, with increasingly coordinated sales, production and distribution efforts. The benefits from the synergies achieved within the Egg Products Division, along with the Division's sources of growth, are discussed below: * COST SAVINGS FROM SYNERGIES--We estimate that we have achieved approximately $12 million in pretax cost savings through the end of 1998 from synergies. These savings have come from improvements in the areas of plant operations, purchasing and distribution. We estimate that further opportunities exist to realize another $2-3 million in 1999, mostly from transportation savings. * STRONG GROWTH IN PRECOOKED ITEMS--The precooked patty and omelet business experienced tremendous growth in 1998. These microwaveable products directly meet consumers' interest in high quality foods that can be easily prepared, while also satisfying foodservice operators' heightened interest in reducing labor costs in the restaurant kitchen. Divisional sales volumes of these precooked products increased over 100% in 1998, with more growth ahead. Among the factors driving this growth was the conversion of a major customer from extended shelf-life liquid eggs to precooked items in late 1998 and early 1999. * STRONG EGG SUBSTITUTES GROWTH--The growth of egg substitutes (egg white based, low-or no-fat/cholesterol products) was impressive in 1998. Sales gains were approximately 20%. The growth came from consumers' greater focus on healthier eating, market share gains in the private label sector, plus the introduction of All Whites(TM) late in the year. * NEW PRODUCTS--All Whites(TM), as the name implies, is an all-whites egg product that has been ultra-pasteurized for an extended, refrigerated shelf-life. It is ideal for health drinks, as a protein supplement, and specialty cooking and baking applications. Another new product launch in late 1998 was the Chef's Omelet(TM) line. These high quality frozen, microwaveable omelets come in six varieties and are being distributed on the east coast through major retail customers. As production capacity is expanded in 1999, distribution will be broadened. The above items were earnings growth drivers in 1998 and should provide additional growth in 1999 (CONTINUED ON PAGE 7) [EMPLOYEE ED HAGLUND (L) PHOTO HERE] BIG RED FARMS PRODUCTION SUPERVISOR 9 YEARS OF SERVICE BRENDA HENDERSON (R) HUSKER PRIDE FARMS LEAD PERSON 14 YEARS OF SERVICE 5 EGG PRODUCTS DIVISION [EMPLOYEE PHOTO HERE] [EMPLOYEE PHOTO HERE] GEORGE SERRANO MANUFACTURING SUPPORT DRIVER 19 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] MARIA KLEIN DELANA BARNO CUSTOMER SERVICE MANAGER RECEPTIONIST 20 YEARS OF SERVICE 12 YEARS OF SERVICE 6 "...ANTICIPATE A FUTURE WITH AMPLE OPPORTUNITIES FOR PROFITABLE GROWTH AS WE FURTHER THE DIVISION'S MISSION TO BE THE WORLD-LEADER IN VALUE- ADDED EGG PRODUCTS." [EMPLOYEE PHOTO HERE] LORI MISCHKE LEAD PERSON-HARDCOOKED 9 YEARS OF SERVICE and beyond. Additional sources of future earnings growth include: * EXPANDING CAPACITY FOR VALUE-ADDED PRODUCTS-The Division had record spending in 1998 to build capacity for the production of value-added egg products, mainly precooked items. Capital spending will remain high in 1999 in order to meet customers' rising orders for precooked products. The Lenox, Iowa egg products plant will be expanded to handle precooked products production, becoming the third facility in the Division with these capabilities. Additionally, the Division is building a new dried products plant in Wakefield, Nebraska where an expanded line of specialty egg powders will be made for both domestic and international industrial food customers. JON SINDELAR MAINTENANCE LEADMAN 4 YEARS OF SERVICE * DECLINING COSTS: FEED AND EGGS-1999 should see a continuation of the trend toward lower feed costs, which began in 1997. Declines in grain costs helped Divisional earnings in 1998, thanks to large domestic crops for corn and soybeans along with depressed export demand. These trends appear intact for the new year. Regarding egg procurement costs, prices in the egg market are projected by experts to be modestly below 1998 levels this year, which should keep costs at reasonable levels. LAURA MCCARTHY SYSTEMS ANALYST 1 YEAR OF SERVICE [EMPLOYEE PHOTO HERE] * EUROPEAN INVESTMENTS-Two investments were made in Europe in early 1999. The first investment was a 25% interest in Belovo S.A., a 29 year old firm based in Bastogne, Belgium. Belovo specializes in customized dried egg products, lysozyme extractions from eggs and certain nutraceutical egg products. We plan on bringing the proprietary dried egg products technology that Belovo has developed to the U.S. at our Nebraska location. Belovo will explore taking Michael Foods' in-shell pasteurization technology to the European egg products market. CARINE BERG [EMPLOYEE REGIONAL SALES ANALYST PHOTO HERE] 2 YEARS OF SERVICE The second investment was a 50% interest in a joint venture with the founding shareholders of Belovo. This joint venture, called The Lipid Company ("TLC"), will build a plant in Luxembourg, which is scheduled to open in the first half of 2000. TLC, which has a pilot plant at the Belovo facility in Bastogne, is in the business of commercialized phospholipid extractions from egg yolks. These extractions provide highly absorbable content of omega-3 and omega-6 long-chain fatty acids for use in infant formulas, such that they better replicate mother's milk, and in senior citizen dietary supplements to help the elderly with their mental acuity. TLC and its customers are also exploring using highly purified egg phospholipids with omega-3 fatty acid, called DHA, in pharmaceutical applications. The technologies we have gained access to through these two investments represent the highest value-added applications for eggs in the world. We are excited to be partners with Belovo and its founders and anticipate a future with ample opportunities for profitable growth as we further the Division's mission to be the world-leader in value-added egg products. 7 REFRIGERATED DISTRIBUTION DIVISION [EMPLOYEE PHOTO HERE] VIRGIL HEIMKES TRUCK DRIVER 17 YEARS OF SERVICE SCOTT ADAMS [EMPLOYEE LEAD BATCHER PHOTO HERE] 3 YEARS OF SERVICE WAYNE SANDEEN FUELER/DRIVER 4 YEARS OF SERVICE GINI LOCH INSIDE SALES REPRESENTATIVE MICHELLE SCHNITZLER 2 YEARS OF SERVICE RECEPTIONIST/INVENTORY CONTROL CLERK [EMPLOYEE 4 YEARS OF SERVICE PHOTO HERE] 8 "...SUCCESS IN RECENT YEARS SERVING THE LARGE GROCERY RETAILING CUSTOMERS THROUGH DISTRIBUTION TO THEIR WAREHOUSES WILL GROW IN IMPORTANCE AS THE RETAIL GROCERY MARKET CONTINUES TO CONSOLIDATE." 1998 was a mixed year for the Refrigerated Distribution Division. Net sales rose 3%, despite the loss of two chain accounts. The Division had its second best year ever financially, but operating earnings were below those of 1997's record levels. Unusually high cheese and butter costs during the latter part of the year compressed Crystal Farms' operating margins. Since year end, these costs have declined to levels more in line with historical averages and sales volumes have improved, leaving Crystal Farms well positioned for 1999. [EMPLOYEE PHOTO HERE] MIKE JOHNSON (L) VICE PRESIDENT-SALES, MIDWEST DIVISION 19 YEARS OF SERVICE CHRIS JOHNSON (R) REGIONAL SALES MANAGER 11 YEARS OF SERVICE Divisional highlights for 1998 included: * Crystal Farms gained entry into a 100+ store supermarket chain in the fourth quarter and is seeking additional CHAIN STORE GROWTH opportunities in 1999 to supplement its direct - store - delivery ("DSD") system. * BUILDING BRAND AWARENESS by consumers for the Crystal Farms name was continued through TV advertising in limited markets, billboards, point-of-sale materials, and theme promotions. * SIGNIFICANT NEW PRODUCT ACTIVITY during the year included the introductions of: - Cheezoids(R) aerosol and string cheese products (oriented toward fun snacking) - Cheese Waves(R) bite-sized cheese squares (available in three flavors) DONNIE BENZ [EMPLOYEE RECEIVER PHOTO HERE] 41 YEARS OF SERVICE - Crystal Farms Bread Sticks-Original and Garlic varieties - Crystal Farms Soft Cream Cheese-Garden Vegetable and Cranberry varieties - Crystal Farms Real Whipped Light Cream * PRODUCT DEVELOPMENT WORK will also lead to these introductions slated for the first half of 1999: - Honey Wheat Bagels (under the David's Deli and Manhattan Bagel Exchange brands) - Aerosol Cream Cheese-Plain and Strawberry varieties - 2 lb. Finely Shredded Cheddar Cheese * Crystal Farms LEVERAGED ITS DISTRIBUTION CAPABILITIES by becoming the regional distributor for Papetti's Better `n Eggs(TM) retail egg substitute product in 1998. Growth opportunities for the Refrigerated Distribution Division include new product introductions, such as those noted above, growing with existing supermarket customers as they open new locations, adding new grocery accounts in current marketing areas, and expanding Crystal's operations beyond its current 23 state territory. Further, the Division has seen success in recent years serving large grocery retailing customers through distribution to their warehouses. This channel of distribution, complimenting the core DSD business, will grow in importance as the retail grocery market continues to consolidate. 9 DAIRY PRODUCTS DIVISION [EMPLOYEE PHOTO HERE] [EMPLOYEE PHOTO HERE] MARK DVORAK FORK LIFT OPERATOR 4 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] CHRIS COLLINS FLUID HANDLER 6 YEARS OF SERVICE 10 "...[WITH] ONLY A 12% SHARE OF THE 230 MILLION GALLON U.S. MIX MARKET AND JUST 5% OF THE 35-40 MILLION CASE NATIONAL CREAMER MARKET... KOHLER MIX HAS SIGNIFICANT OPPORTUNITIES FOR GROWTH." [EMPLOYEE PHOTO HERE] LINDA BOHRER QUALITY ASSURANCE MANAGER 11 YEARS OF SERVICE 1998 was a challenging, but strong, year for the Dairy Products Division. Sales were at new record levels, driven by outstanding unit sales growth. Volume rose over 15%, the twelfth annual record in a row, paced by notable success with value-added items such as ultra-high temperature ("UHT") pasteurized ice milk mixes and shelf-stable coffee creamers. Unit sales of mixes rose over 20% and creamer sales rose more than 35% compared to 1997 levels. During the summer, this strong growth presented challenges for the Division, with sales growth pushing both the Minnesota and Texas plants to near capacity levels, resulting in additional labor costs to meet orders. Last year also saw unprecedented dairy ingredient costs, with the butter fat market skyrocketing for most of the year. As a result, the Division was unable to adjust pricing quickly enough to keep pace with rising costs. Further, costs were charged against 1998 results related to an early 1999 product recall. These issues kept earnings from being as strong as they otherwise could have been. DAVE KIRCHOFF CARTON LINE OPERATOR 1 YEAR OF SERVICE A number of factors are driving strong growth for the Division, among them: * a consumer TREND TOWARD MORE INDULGENCE, where there is less guilt involved with treating oneself to a creamy dessert; * a focus by foodservice operators on the INCREASED FOOD SAFETY, and accompanying reduction in spoilage and waste, offered by dairy products which have been ultra-pasteurized, as opposed to standard pasteurization; * a focus by both public health departments and foodservice chains on the BENEFITS OF ASEPTIC (NO-CHILL) COFFEE CREAMERS, with fewer food safety concerns and improved ease of use; * foodservice customers have begun PROMOTING THE MILK SHAKE AND DESSERT PORTIONS OF THEIR MENUS more aggressively, finding that these items offer profitable growth opportunities. To meet rising demand for its products, the Dairy Products Division has expanded its production capacity in a number of areas: * cartoned products capacity was expanded at the Minnesota plant in early 1998; * aseptic creamer capacity was expanded at the Texas plant in mid-1998; * UHT mix capacity was expanded at the Texas plant by over 40% in late 1998 and early 1999. Overseeing the rising output of the Division's plants is Erich Fritz who joined Kohler Mix as Vice President of Operations in December. Erich brings a wealth of processing knowledge from his years at Nabisco and is a key addition to the management team at Kohler. Plans call for the Dairy Products Division to become the nation's leader in specialty UHT foodservice dairy products. Such growth, by acquisition and/or building new facilities, would allow Kohler Mix to capture a larger share of the national markets for packaged mix and creamers. It is estimated that Kohler Mix only has a 12% share of the 230 million gallon U. S. mix market and just 5% of the 35-40 million case national creamer market. As a result, Kohler Mix has significant opportunities for growth. [EMPLOYEE PHOTO HERE] SUZIE SMITH ADMINISTRATIVE ASSISTANT 9 YEARS OF SERVICE 11 [EMPLOYEE PHOTO HERE] POTATO PRODUCTS DIVISION [EMPLOYEE PHOTO HERE] TERESA CERVANTES (L) CUSTOMER SERVICE REPRESENTATIVE 3 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] ALEJANDRA TAMAYO (R) JEANETTE WEIDNER HUMAN RESOURCES/SAFETY ADMINISTRATOR PRODUCTION PLANNING 1 YEAR OF SERVICE 19 YEARS OF SERVICE 12 "...AN EXPANDING CUSTOMER BASE, A STRONG FOCUS ON NEW PRODUCT INTRODUCTIONS AND MUCH IMPROVED PRODUCTION CAPABILITIES..." ELIZABETH HERNANDEZ LINE OPERATOR 6 YEARS OF SERVICE [EMPLOYEE PHOTO HERE] The Potato Products Division saw a strong turn-around in 1998, with a return to profitability. With the frozen french fry business closed in 1997, the Division was able, for the first time in its history, to focus all of its energies on value-added refrigerated potato products--mainly hash browns and mashed items. These efforts met with notable success. Unit sales rose 5%-10% in 1998 and are poised for further gains in 1999. The improvements during 1998 in the Potato Products Division came from three different areas: ESTHER BROOKS MACHINE OPERATOR 30 YEARS OF SERVICE * RISING SALES VOLUME--While more national accounts are targeted, good success was seen with regional foodservice customers in the second half of the year. These customers have collectively added significant new business to the Division. Much of this is driven by the success of Northern Star's mashed potato products and the Division's ability to create customized mashed potatoes for chain restaurant customers. Mashed potatoes are "hot" as a side dish and Northern Star is playing strongly into that consumer trend. A case in point is that the Division's foodservice mashed potato unit sales rose by over 20%. Another major development in 1998 was the signing of multi-year contracts with several major foodservice distributors. These partnering arrangements should provide for growth in the years ahead. JACOBO GARCIA [EMPLOYEE RECEIVING CLERK PHOTO HERE] 13 YEARS OF SERVICE * NEW PRODUCTS--Beyond the customized mashed recipes developed for certain customers, there were several product line extensions for foodservice mashed products last year, including red skin garlic, onion, sour cream and other varieties. The retail side saw the introduction of a mashed potatoes with gravy "heat `n eat" line in late 1998 under the Diner's Choice(TM) label. There are two sizes--an individual serving size and a family pack--and two gravies, soon to be three. Also, red skin wedges were introduced in early 1998. These new items are meeting with good success in the grocery market. * PLANT OPERATIONS--The main potato products plant in Minneapolis was re-engineered and revamped in 1997 after the french fry equipment was removed. As a result of these re-engineering efforts, the plant is operating better than ever, achieving record yields of finished product from raw material and significant labor savings. The Farm Fresh unit in suburban Los Angeles also enjoyed a very successful 1998, with strong sales and improved production costs. The Potato Products Division is the national leader, in both the foodservice and retail markets, in producing and distributing refrigerated potato products. The high quality of these products and their ease-of-use are resulting in good growth for the category. With an expanding customer base, a strong focus on new product introductions and much improved production capabilities, the Division is poised for an exciting future. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF MICHAEL FOODS, INC. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. Readers are also encouraged to read the letter to shareholders and the operating division overviews contained on pages 1-13 of this annual report. GENERAL The Company utilizes a fifty-two, fifty-three week fiscal year. The years ended December 31, 1998 and 1996 consisted of fifty-two weeks, whereas the year ended December 31, 1997 consisted of fifty-three weeks. Certain financial information of the Company's operating segments is as follows (in thousands):
EGG REFRIGERATED DAIRY POTATO PRODUCTS DISTRIBUTION PRODUCTS PRODUCTS CORPORATE TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 External net sales ........... $607,688 $221,586 $138,865 $ 52,345 $ - $1,020,484 Operating profit (loss) ...... 69,295 7,288 6,748 3,890 (7,668) 79,553 YEAR ENDED DECEMBER 31, 1997 External net sales ........... $575,684 $214,892 $104,902 $ 60,745 $ - $ 956,223 Operating profit (loss) ...... 55,708 8,900 6,823 (505) (4,647) 66,279 YEAR ENDED DECEMBER 31, 1996 External net sales ........... $231,336 $210,177 $ 90,860 $ 84,022 $ - $ 616,395 Operating profit (loss) ...... 19,364 6,117 (a) 5,871 (23,601) (b) (3,930) 3,821
(a) includes a $1,300 impairment loss (b) includes charges of $9,172 and $12,225 relating to the exit of the frozen french fry product line RESULTS OF OPERATIONS The Egg Products Division had higher unit sales in 1998, compared to 1997 levels, most notably for value-added product lines such as precooked patties and omelets, and dried egg products. Sales of value-added egg products represented approximately 60 percent of the Division's 1998 dollar sales. Egg prices decreased approximately 6 percent in 1998, as compared to 1997 levels, as reported by Urner Barry Publications--a widely quoted industry pricing service. This decrease helped reduce the cost of purchased eggs, while also reducing selling prices for certain egg products and shell eggs. Feed costs, which typically represent two-thirds of the cost of producing an egg, were lower in 1998 as compared to 1997 levels. This decrease lowered the cost of eggs from Division owned flocks. Approximately two-thirds of the Division's annual egg needs come from external sources, either from contract flocks or open market purchases, with approximately one-third of egg needs coming from flocks owned by the Division. The Division also realized benefits from economies of scale and synergistic savings as a result of the Papetti acquisition in 1997. The Division's higher sales and earnings in 1997, as compared to the results of 1996, reflected the added volume and earnings from Papetti's, sales increases for egg products, particularly value-added lines such as extended shelf-life liquid eggs and precooked items, and pricing and productivity improvements. Feed costs also declined in 1997, as compared to 1996 levels, which reduced the cost of internally supplied eggs for the Division. Approximately three-fourths of the Division's 1996 egg needs came from owned flocks. Feed costs were unusually high in 1996 as a result of poor domestic crops and strong export demand. The Refrigerated Distribution Division had higher unit sales in 1998, as compared to 1997 levels, particularly for core distributed products. Volume growth and effective expense controls were not enough to offset margin pressures caused by an unprecedented increase in costs of products tied to the national butterfat market, particularly cheese and butter. Normal delays in adjusting product pricing for raw material cost changes reduced margins and earnings for the Division. The Division's higher sales and higher earnings in 1997, as compared to the results of 1996, were due primarily to increased unit sales and related productivity gains. The Dairy Products Division had significantly higher unit sales in 1998, compared to 1997 levels, due mainly to an increase in core UHT ("ultra-high temperature" pasteurized) dairy mixes and strong growth in shelf-stable coffee creamers. Margins were lower in 1998 than 1997 as a result of unusually high dairy ingredient costs related to an elevated national butterfat market. Strong volume gains, while generally beneficial to Division earnings, also resulted in some margin pressure due to the Division's plants running near capacity. This resulted in higher than expected processing costs, including additional labor costs for overtime. Costs charged against 1998 results for an early 1999 product recall also affected earnings. The Division's higher sales and higher earnings in 1997, as compared to the results of 1996, were mainly due to a significant increase in unit sales of UHT dairy mixes and coffee creamers. The Potato Products Division had higher refrigerated products unit sales in 1998, compared to 1997 levels, and plant operations improved significantly (see below). Foodservice units sales were particularly strong, with mashed potatoes showing meaningful sales gains, and new products also contributing to the sales increase. The Division's lower dollar sales in 1998 and 1997 related primarily to the discontinuation of the unprofitable frozen french fry business in 1997. The remaining refrigerated potato products business recorded higher retail sales volumes in 1997 than in 1996, while the larger foodservice segment saw lower unit sales volumes. Starting in late 1996, and continuing into 1997, certain refrigerated potato products production lines were upgraded. Also during 1997, the main potato products plant was reconfigured after removing the french fry production equipment. These efforts have resulted in more efficient production of refrigerated potato products. Production yield improvements and reduced production costs allowed for a significantly reduced loss in 1997 and a return to profitability in 1998. The Division's loss in 1996 was due primarily to losses in the frozen french fry business and to the recording of an asset impairment and a product line inventory markdown related to exiting the frozen french fry business. 14 The gross profit margin of the Company was 17.0 percent in 1998, as compared to 14.9 percent in 1997 and 9.6 percent in 1996. The increase in gross profit margin in 1998 reflected a higher portion of value-added product sales relative to the Company's total net sales, reduced feed and egg costs, synergistic savings in the Egg Products Division as a result of the Papetti's acquisition, and a decrease in potato products processing costs. The 1997 increase reflected a decrease in feed and potato products processing costs, synergistic savings in the Egg Products Division, and the discontinuation of the unprofitable french fry business. The 1996 gross profit included the frozen french fry product line inventory markdown, which reduced the gross profit margin. It is management's strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products' contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins. Selling, general and administrative expenses were 9.2 percent of net sales in 1998, as compared to 8.0 percent in 1997 and 7.3 percent in 1996. The increase in 1998 reflected, among other factors, increased staffing for certain functions such as information systems and sales support, increased marketing and advertising, expenses related to company-wide information systems upgrades, and increased incentive compensation accruals. The increase in 1997 reflected, among other factors, increased spending on foodservice marketing activities, including increased promotional activities for certain products, staffing additions related to the Papetti's acquisition and increased incentive compensation. The french fry production assets were sold in 1997, resulting in a gain of approximately $1,300,000. Also in 1997, severance expenses for certain potato products employees and sales personnel affected by a restructuring, connected to the discontinuation of the frozen french fry business, were approximately $2,400,000. Net interest expense declined slightly in 1998, as compared to 1997. Strong cash flows resulted in reduced bank line of credit borrowings on average in 1998. Net interest expense in 1997 was nearly 50 percent higher than 1996 levels. Bank line of credit borrowings declined during 1997 and were eliminated by year end, but incremental interest expense was recorded on $125 million of senior notes issued in early 1997. Certain of the Company's products are sensitive to changes in commodity prices. Currently, the Company's Egg Products Division derives approximately six percent of net sales from shell eggs, which are sensitive to commodity egg price changes. The remainder of Egg Products Division sales are derived from the sale of egg products that are value-added to varying degrees. Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and feed costs, both of which can fluctuate significantly and at variance to each other. While certain egg products exhibit commodity price sensitivity, gross margins from egg products are generally less sensitive to commodity price fluctuations than shell eggs. The Company's Refrigerated Distribution Division derives approximately 80 percent of net sales from refrigerated products, with the balance coming from shell egg sales. A majority of these eggs are supplied by the Egg Products Division and are, in-turn, sold on a distribution or non-commodity basis by the Refrigerated Distribution Division. The Potato Products Division typically purchases approximately 80 to 90 percent of its estimated annual potato needs under annual grower contracts. The remainder is purchased at market prices to satisfy short-term production requirements or to take advantage of spot prices when they are lower than contract prices. Variances in potato prices or selling prices of end products can effect the earnings of the Potato Products Division. The Dairy Products Division sells its products primarily on a cost-plus basis. Therefore, the earnings of this division are typically not greatly affected by raw ingredient price fluctuations, although 1998 saw unprecedented increases in dairy ingredient costs. Other than fluctuations in raw material costs, largely related to supply and demand variances, in recent years, inflation has not been a significant factor in the Company's operations. The Company generally has been able to offset the impact of inflation through a combination of productivity gains and price increases. Competitors have infringed the Company's exclusive license for a patented technology to safely extend the shelf-life of liquid eggs and the Company is pursuing its legal rights. The Company has prevailed in U.S. District Court cases in Florida and New Jersey. The judgment in the New Jersey case was appealed in 1994 and the Court of Appeals for the Federal Circuit upheld the summary judgment of the U.S. District Court, which found the patents valid and enforceable. Since then, present and potential extended shelf-life liquid egg competitors have filed protests with the U. S. Patent and Trademark Office ("PTO") challenging the validity of one or more of the claims under the patents. As a result, litigation in two patent infringement lawsuits where the Company is a plaintiff were stayed and another lawsuit was dismissed without prejudice. One of the stayed suits was settled as a result of the Company's acquisition of Papetti's in 1997. During 1995 and 1996, the PTO issued actions in which an examiner rejected claims under the patents licensed by the Company. The Company and patent holder are appealing the rejections to the PTO's Board of Patent Appeals and Interferences and will, if necessary, appeal further to the Court of Appeals for the Federal Circuit. The patents remain valid and in full force and effect during this appeal process. While management is resolved to protect the Company's proprietary rights and expects those rights to continue to be upheld, the number of present and potential competitors in this egg product category continues to increase. As a result of such competition, pricing pressure in the category may increase beyond that which has already been experienced. Sales of extended shelf-life liquid eggs represent the largest contributor to operating profits within the Egg Products Division. CAPITAL RESOURCES AND LIQUIDITY The Company's investments in acquisitions and capital expenditures have been a significant use of capital. The Company plans to continue to invest in state-of-the-art production facilities to enhance its competitive position. Historically, the Company has financed its growth principally from internally generated funds, bank borrowings, issuance of senior debt and the sale of common stock. The Company believes that these financing alternatives will continue to meet its anticipated needs. CAPITAL SPENDING The Company plans to invest approximately $70 million in capital projects in 1999 and expects to fund such spending from operating cash flow and bank borrowings. The Company invested $65 million in capital expenditures in 1998, $37 million in 1997 and $29 million in 1996. Capital expenditures in 1998 were mainly related to expanding capacity for the Company's value-added products, especially egg products and dairy products. Significant capital was also devoted to implementing an enterprise-wide financial and operations software system. In 1997, the Company acquired Papetti's for approximately $83.2 million and the assumption of $22.8 million of debt. Also during 1997, a merger with North Star Universal, Inc. ("NSU") was completed, with the Company being the surviving post-merger entity. As a result of the NSU merger, the Company effectively repurchased approximately 1.8 million shares of its common stock through the assumption of $21.25 million of NSU debt. There were no acquisitions in 1998 or 1996. 15 DEBT STRUCTURE During 1997, the Company issued $125 million of unsecured notes. The proceeds were used in the Papetti's acquisition, the NSU merger and for general working capital purposes. The Company has an unsecured line of credit for $80 million with its principal banks. As of December 31, 1998, there were borrowings of $28,800,000 outstanding under this line of credit. MARKET RISK COMMODITY HEDGING The Company is exposed to cash flow and earnings market risk from changes in grain prices, primarily corn and soybean meal, relative to the cost to feed its 14 million hens. To minimize this risk, the Company utilizes derivative commodity instruments, principally futures contracts. The following table is a sensitivity analysis that estimates the Company's exposure to market risk associated with these futures contracts. The notional value of the Company's monthly commodity position represents the notional value of the corn and soybean meal futures contracts for 1998. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in commodity prices (amounts in thousands). NOTIONAL VALUE MARKET RISK - -------------------------------------------------------------------------------- Corn futures contracts Highest position .......... $15,596 $1,560 Lowest position ........... 6,205 621 Average position .......... 12,479 1,248 Soybean meal futures contracts Highest position .......... $11,165 $1,117 Lowest position ........... 4,817 482 Average position .......... 8,841 884 INTEREST RATES At December 31, 1998, the fair value of the Company's fixed rate debt was $144,540,000, and the fair value of the Company's variable rate line of credit was $28,800,000. The fair value of the Company's debt was determined using discounted future cash flows based upon the Company's current incremental borrowing rates for similar types of borrowings. Market risk on the Company's fixed rate debt, which represents the impact on the fair value from a hypothetical 100 basis point adjustment in interest rates, is $7,727,000. DIVIDENDS The Company maintains a cash dividend that is paid quarterly. Historically, the dividend pay-out rate has approximated 15%-20% of the prior year's net earnings. The Company strives to increase dividends in-line with the long-term growth of earnings per share, while sustaining dividends in down years. The current annualized dividend rate of $0.24 per share represents approximately 13% of 1998 diluted earnings per share. SHARE REPURCHASE PROGRAM During 1998, the Company repurchased and retired 982,700 shares of common stock on the open market for $24.1 million, or an average cost of $24.49 per share. These purchases were made under an authorization of the Board of Directors to repurchase up to two million shares of Company common stock. It is likely additional purchases will occur in 1999 given the Company's cash flow trends and debt capacity. YEAR 2000 The Company's Year 2000 initiative is separated into several projects: legacy systems, personal computer components, wide area network components, local area network components, and non-computer components. The approach for each of these projects includes an inventory of possible Year 2000 components, an assessment of Year 2000 compliance of each component, and identification and execution of corrective actions for items that fail the assessment phase. In 1995, Michael Foods undertook implementation of the SAP Enterprise Resource Planning system as a means to present a single interface with customers and to have better information available for management to make more effective decisions. The SAP system encompasses all significant processes and has been certified Year 2000 compliant by an outside party. This project addresses a majority of the Company's legacy systems and is scheduled for completion before the end of 1999. In addition, if needed, the Company has the ability to modify and test any remaining legacy systems for Year 2000 compliance prior to the end of 1999. Beyond the SAPproject, several non-critical legacy systems are being addressed throughout 1999. The costs to modify and test any remaining legacy systems, if necessary, would not be material to the consolidated financial position, liquidity or results of operations of the Company. The Company completed corrective actions for all personal computer hardware in late 1998. An evaluation and any needed remediation of personal computer software is expected to be completed by July 1999. The remaining information technology systems for wide area networking and local area networking are currently being assessed for Year 2000 compliance, with corrective action to be completed by June 1999. The Company's overall business risk from these systems is not significant. The Company's non-computer components are now being assessed for Year 2000 compliance. The assessment of these systems will be completed by spring 1999. Any corrective actions are expected to be completed by September 1999. The Year 2000 projects also include an evaluation of critical vendors, suppliers and customers relative to their Year 2000 readiness. Electronic data communications with customers will be tested. Information is being solicited from these important business partners and will be evaluated as it is received. Based upon the assessment completed at this time, the Company does not anticipate any significant Year 2000 issues. All Year 2000 projects are proceeding according to management's expectations. However, if there are significant delays in their completion, or if major suppliers or customers experience Year 2000 issues with their systems, Year 2000 issues could adversely affect the operations of the Company. After assessing the information received from customers and suppliers and evaluating the status of the Year 2000 projects, the Company will develop an appropriate contingency plan, as required. It is anticipated that this plan will be developed by September 1999. Achieving Year 2000 compliance for the Company will largely be a by-product of the SAP system installation. The costs of achieving Year 2000 compliance for software not affected by the SAP system, computer components, and non-computer components is estimated to be less than $3,000,000, of which approximately $2,000,000 has already been incurred and expensed through December 31, 1998. 16 CONSOLIDATED BALANCE SHEETS MICHAEL FOODS, INC.
DECEMBER 31, 1998 1997 - --------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and equivalents................................ $ 2,047,000 $ 4,038,000 Accounts receivable, less allowances................ 97,639,000 83,495,000 Inventories......................................... 74,250,000 68,929,000 Prepaid expenses and other.......................... 3,884,000 1,676,000 --------------------------------- Total current assets............................. 177,820,000 158,138,000 PROPERTY, PLANT AND EQUIPMENT - AT COST Land................................................ 4,336,000 4,336,000 Buildings and improvements.......................... 105,567,000 99,023,000 Machinery and equipment............................. 328,067,000 274,980,000 --------------------------------- 437,970,000 378,339,000 Less accumulated depreciation and amortization...... 187,759,000 160,800,000 --------------------------------- 250,211,000 217,539,000 OTHER ASSETS Goodwill, net....................................... 120,172,000 123,711,000 Other............................................... 3,313,000 4,267,000 --------------------------------- 123,485,000 127,978,000 --------------------------------- $551,516,000 $503,655,000 ================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt................ $ 10,663,000 $ 8,509,000 Accounts payable.................................... 44,376,000 46,910,000 Accrued liabilities Compensation..................................... 11,034,000 10,064,000 Insurance........................................ 7,369,000 4,782,000 Customer programs................................ 19,624,000 15,217,000 Other............................................ 23,457,000 17,868,000 --------------------------------- Total current liabilities 116,523,000 103,350,000 LONG-TERM DEBT, less current maturities................ 155,444,000 137,519,000 DEFERRED INCOME TAXES.................................. 35,400,000 33,540,000 COMMITMENTS AND CONTINGENCIES.......................... - - SHAREHOLDERS' EQUITY Common stock........................................ 211,000 218,000 Additional paid-in capital.......................... 119,871,000 140,188,000 Retained earnings................................... 124,067,000 88,840,000 --------------------------------- 244,149,000 229,246,000 --------------------------------- $551,516,000 $503,655,000 =================================
The accompanying notes are an integral part of these statements. 17 CONSOLIDATED STATEMENTS OF OPERATIONS MICHAEL FOODS, INC.
YEARS ENDED DECEMBER 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Net sales .................................. $1,020,484,000 $956,223,000 $ 616,395,000 Cost of sales .............................. 847,383,000 813,771,000 545,055,000 Product line inventory markdown ............ - - 12,225,000 ------------------------------------------------ Gross profit ......................... 173,101,000 142,452,000 59,115,000 Selling, general and administrative expenses 93,548,000 76,173,000 44,822,000 Product line asset impairment .............. - - 10,472,000 ------------------------------------------------ Operating profit ..................... 79,553,000 66,279,000 3,821,000 Interest expense, net ...................... 10,136,000 10,830,000 7,264,000 ------------------------------------------------ Earnings (loss) before income taxes .. 69,417,000 55,449,000 (3,443,000) Income tax expense (benefit) ............... 29,160,000 23,010,000 (370,000) ------------------------------------------------ NET EARNINGS (LOSS) .................. $ 40,257,000 $ 32,439,000 $ (3,073,000) ================================================= NET EARNINGS (LOSS) PER SHARE Basic ................................ $ 1.86 $ 1.53 $ (.16) Diluted .............................. 1.83 1.51 (.16) ================================================= Weighted average shares outstanding Basic ................................ 21,642,000 21,181,000 19,386,000 Diluted .............................. 21,980,000 21,446,000 19,386,000 =================================================
The accompanying notes are an integral part of these statements. 18 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MICHAEL FOODS, INC.
COMMON STOCK ADDITIONAL TOTAL ---------------------------- PAID-IN RETAINED SHAREHOLDERS' SHARES ISSUED AMOUNT CAPITAL EARNINGS EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996.................. 19,332,001 $193,000 $112,374,000 $ 67,528,000 $180,095,000 Repurchase of common stock............... (13,543) - (500,000) - (500,000) Incentive plan stock compensation........ 47,273 1,000 525,000 - 526,000 Stock options exercised.................. 94,000 1,000 869,000 - 870,000 Net loss ................................ - - - (3,073,000) (3,073,000) Dividends ($.20 per share)............... - - - (3,876,000) (3,876,000) --------------------------------------------------------------------------------- Balance at December 31, 1996................ 19,459,731 195,000 113,268,000 60,579,000 174,042,000 Acquisition of Papetti's................. 3,195,455 32,000 38,827,000 - 38,859,000 Merger with North Star Universal......... (1,783,036) (18,000) (23,711,000) - (23,729,000) Stock options exercised.................. 943,948 9,000 9,721,000 - 9,730,000 Tax benefit from stock options exercised. - - 2,083,000 - 2,083,000 Net earnings............................. - - - 32,439,000 32,439,000 Dividends ($.20 per share)............... - - - (4,178,000) (4,178,000) --------------------------------------------------------------------------------- Balance at December 31, 1997................ 21,816,098 218,000 140,188,000 88,840,000 229,246,000 Repurchase of common stock............... (982,700) (10,000) (24,058,000) - (24,068,000) Incentive plan stock compensation........ 24,532 1,000 613,000 - 614,000 Stock options exercised, net of shares surrendered for exercise price and income taxes.......................... 237,137 2,000 2,099,000 - 2,101,000 Tax benefit from stock options exercised. - - 1,029,000 - 1,029,000 Net earnings............................. - - - 40,257,000 40,257,000 Dividends ($.23 per share)............... - - - (5,030,000) (5,030,000) --------------------------------------------------------------------------------- Balance at December 31, 1998................ 21,095,067 $211,000 $119,871,000 $124,067,000 $244,149,000 =================================================================================
The accompanying notes are an integral part of these statements. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS MICHAEL FOODS, INC.
YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss).................................................... $40,257,000 $ 32,439,000 $ (3,073,000) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization....................................... 32,105,000 30,152,000 24,732,000 Amortization of other assets........................................ 3,699,000 3,171,000 1,944,000 Deferred income taxes............................................... 1,860,000 8,230,000 (2,894,000) Product line impairment and inventory markdowns..................... - - 22,697,000 Changes in operating assets and liabilities, net of effect of product line impairment and inventory markdowns and business acquisitions: Accounts receivable.............................................. (14,144,000) 2,409,000 (10,811,000) Inventories...................................................... (5,321,000) 7,733,000 (12,356,000) Prepaid expenses and other....................................... (2,208,000) 28,000 (1,354,000) Accounts payable................................................. (2,534,000) (6,317,000) 4,784,000 Accrued liabilities.............................................. 15,196,000 9,156,000 (1,859,000) -------------------------------------------------- Net cash provided by operating activities................................. 68,910,000 87,001,000 21,810,000 Cash flows from investing activities: Capital expenditures................................................... (64,777,000) (36,901,000) (29,334,000) Business acquisition, net of cash acquired............................. - (42,720,000) - Other.................................................................. 794,000 (531,000) 214,000 -------------------------------------------------- Net cash used in investing activities..................................... (63,983,000) (80,152,000) (29,120,000) Cash flows from financing activities: Payments on long-term debt............................................. (58,221,000) (238,541,000) (146,934,000) Proceeds from long-term debt........................................... 78,300,000 227,593,000 158,414,000 Repurchase of common stock ............................................ (24,068,000) - (500,000) Proceeds from issuance of common stock................................. 2,101,000 9,730,000 870,000 Dividends.............................................................. (5,030,000) (4,178,000) (3,876,000) -------------------------------------------------- Net cash provided by (used in) financing activities....................... (6,918,000) (5,396,000) 7,974,000 -------------------------------------------------- Net increase (decrease) in cash and equivalents........................... (1,991,000) 1,453,000 664,000 Cash and equivalents at beginning of year................................. 4,038,000 2,585,000 1,921,000 -------------------------------------------------- Cash and equivalents at end of year....................................... $ 2,047,000 $ 4,038,000 $ 2,585,000 ================================================== Non-cash investing and financing transactions Acquisition of Papetti's: Cash paid, net of cash acquired........................................ $ 42,720,000 Stock issued........................................................... 38,859,000 Fair value of assets acquired.......................................... (82,405,000) Liabilities assumed.................................................... 73,874,000 ------------- Purchase price in excess of fair value of assets acquired..................................................... $ 73,048,000 ============= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................................................ $11,414,000 $ 9,449,000 $ 7,810,000 Income taxes........................................................ 20,415,000 11,750,000 2,953,000
Tax benefits derived from the exercise of stock options reduced income tax obligations and increased additional paid-in capital by $1,029,000 in 1998 and $2,083,000 in 1997. In connection with the merger with North Star Universal, Inc., Michael Foods, Inc. assumed $21,250,000 of net indebtedness in exchange for 1,783,036 shares of its common stock (see Note H). The accompanying notes are an integral part of these statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management. PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR The consolidated financial statements include the accounts of Michael Foods, Inc. ("Company") and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest to December 31, but for clarity of presentation, describes all periods as if the year end is December 31. The year ended December 31, 1997 consisted of fifty-three weeks and the years ended December 31, 1998 and 1996 consisted of fifty-two weeks. CASH AND EQUIVALENTS The Company considers all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock inventory represents the cost of purchasing and raising flocks to laying maturity, at which time their cost is amortized to operations over their expected useful lives of generally one to two years. Inventories consist of the following: DECEMBER 31, 1998 1997 - ---------------------------------------------------------------- Raw materials and supplies ........ $15,389,000 $16,047,000 Work in process and finished goods ................. 36,977,000 30,374,000 Flocks ............................ 21,884,000 22,508,000 -------------------------- $74,250,000 $68,929,000 ========================== The Company purchases exchange traded futures contracts to manage its exposure to changes in grain prices, primarily corn and soybean meal which are the main components of chicken feed. Such contracts are hedges of the Company's firm purchase commitments and anticipated production requirements as they reduce the Company's exposure to changes in grain prices. These contracts generally extend for less than one year. Gains and losses on futures contracts are deferred and recognized as an adjustment to the cost of the related inventory item, with the ultimate recognition in cost of sales when the finished egg products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated grain purchase occurs. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on the straight-line basis. Estimated service lives range from 10-40 years for buildings and improvements and 3-10 years for machinery and equipment. Accelerated and straight-line methods are used for income tax purposes. The Company capitalized $1,048,000, $720,000 and $743,000 of interest costs during 1998, 1997 and 1996 relating to the construction and installation of property, plant and equipment. GOODWILL The Company's acquisitions have been accounted for as purchases and the excess of the total acquisition costs over the fair value of the net assets acquired were recorded as goodwill. Goodwill is amortized on a straight-line basis over 40 years. Accumulated amortization was $16,662,000 and $13,123,000 at December 31, 1998 and 1997. The Company evaluates its goodwill annually to determine potential impairment by comparing the carrying value of the goodwill to the undiscounted future cash flows of the related assets (see Note C). REVENUE RECOGNITION Sales are recognized when goods are shipped to customers and are recorded net of estimated customer programs. STOCK-BASED COMPENSATION The Company utilizes the intrinsic value method of accounting for its stock-based employee compensation plans. Pro forma information related to the fair value method of accounting is provided in Note H. NET EARNINGS (LOSS) PER SHARE Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares. Diluted net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 12,060, 141,311 and 1,948,721 shares of common stock with weighted average exercise prices of $29.39, $13.94 and $10.91 were outstanding during 1998, 1997 and 1996, but were excluded from the computation of common share equivalents because they were anti-dilutive. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS 133 also specifies new methods of accounting for derivatives used in risk management strategies (hedging activities), prescribes the items and transactions that may be hedged, and specifies detailed criteria required to qualify for hedge accounting. Management believes the adoption of SFAS 133 will not have a material effect on the consolidated financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 is effective for the Company beginning in 1999 and should not have a material effect on the financial position, results of operations, or cash flows of the Company when adopted. RECLASSIFICATIONS Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. NOTE B ACQUISITION OF PAPETTI'S On February 26, 1997, the Company completed its acquisition of Papetti's Hygrade Egg Products, Inc. and affiliated companies (collectively "Papetti's"). The acquisition was accounted for as a purchase and the results of Papetti's operations are included in the consolidated financial statements from the date of acquisition. Total consideration included the issuance of 3,195,455 of newly issued common shares valued at $38,859,000, $44,315,000 in cash and closing costs, and the assumption of $22,825,000 of notes payable and long-term debt. The total consideration exceeded the fair value of the net assets acquired by $73,048,000, which has been recorded as goodwill and is being amortized on a straight-line basis over forty years. In connection with the acquisition, the Company received $6,000,000 as a settlement for existing patent litigation between Papetti's and the Company and the patent licensor (see Note G). The Company also entered into leases with the previous owners of Papetti's for the majority of Papetti's operating facilities. The future minimum rental commitments under these leases are approximately $2,100,000 per year through February 2007. The following unaudited consolidated pro forma information combines the audited information of the Company with the unaudited information for Papetti's for the period from January 1, 1997 through February 26, 1997 and for 1996. The pro forma data assumes the Papetti's acquisition, the merger with North Star Universal, Inc. (see Note H) and the 1997 long-term debt borrowings had occurred on January 1, 1997 and 1996, respectively (in thousands of dollars except per share amounts). YEARS ENDED DECEMBER 31, 1997 1996 - -------------------------------------------------------------------------------- Net sales ....................... $1,004,818 $982,532 Net earnings (loss) ............. 32,992 (1,146) Net earnings (loss) per share Basic ........................ $ 1.54 $ (.06) Diluted ...................... 1.52 (.06) The unaudited consolidated pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition, merger and borrowings occurred on those dates, nor is it indicative of the results that may occur in the future. NOTE C PRODUCT LINE AND ASSET IMPAIRMENT FROZEN FRENCH FRY PRODUCT LINE The Company's frozen french fry product line experienced significant profit margin and volume declines during the second half of 1996. Continued projected losses for this product line resulted in management's decision that this product line's long-lived assets had incurred an impairment of its carrying cost. In December 1996, a loss of $9,172,000 was recorded to eliminate goodwill directly attributable to this product line and to reduce the carrying value of the remaining long-lived assets to their estimated fair market value, based upon the projected future cash flows of these assets. In addition, the Company recorded a fourth quarter 1996 markdown of $12,225,000 to reduce its frozen french fry inventory to the lower of cost or market. This adjustment also reduced the product line's raw potato costs, that were estimated to be in excess of the Company's production plans, to estimated net realizable value. During 1997, the Company disposed of this product line. The approximate revenues and expenses directly associated with this frozen french fry product line, prior to the impairment loss and inventory markdown, for each of the years 1997 and 1996 were as follows: net sales were $10,281,000 and $26,908,000; cost of sales were $10,112,000 and $28,572,000; and selling, general and administrative expenses were $1,814,000 and $2,987,000. Operating losses directly attributable to this product line were $1,645,000 in 1997 and $4,651,000 in 1996. CONSTRUCTION PROJECT IMPAIRMENT During 1996, the Company recorded a loss of $1,300,000 related to management's decision to abandon completion of a building that was determined to not be consistent with the current needs of the business. This loss is included in the caption "Product line asset impairment" in the statement of operations. Note D LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, 1998 1997 - ---------------------------------------------------------------- Revolving line of credit (a) .......... $ 28,800,000 $ - 7.58% senior promissory notes (b) .............. 125,000,000 125,000,000 9.5% senior promissory note (c) ............... 10,000,000 18,000,000 Other ..................... 2,307,000 3,028,000 - ---------------------------------------------------------------- 166,107,000 146,028,000 Less current maturities ... 10,663,000 8,509,000 - ---------------------------------------------------------------- $155,444,000 $137,519,000 ================================================================ 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. Aggregate maturities of long-term debt are as follows: YEARS ENDING DECEMBER 31, - ---------------------------------------------------------------- 1999 ........................................ $ 10,663,000 2000 ........................................ 707,000 2001 ........................................ 465,000 2002 ........................................ 29,107,000 2003 ........................................ 114,000 Thereafter .................................. 125,051,000 ------------ $166,107,000 ============ (a) At December 31, 1998, the Company had an unsecured revolving line of credit with its principal banks for $80,000,000. This line is due February 2002 and bears interest at the principal bank's reference rate, or at eurodollar rates at the Company's option (effective rate of 6.9% at December 31, 1998). (b) These notes are due in five equal annual principal installments beginning in February 2005, are unsecured, and require semi-annual interest payments. (c) This note is due in varying semi-annual installments through December 1999, is unsecured, and requires semi-annual interest payments. The majority of the long-term debt agreements contain restrictive covenants, including minimum net worth, interest coverage and limitations on additional indebtedness and liens. The fair value of long-term debt is approximately $173,340,000, determined using discounted future cash flows based upon the Company's current incremental borrowing rates for similar types of borrowings. NOTE E INCOME TAXES Income tax expense (benefit) consists of the following: YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------- Current Federal ...... $22,757,000 $11,342,000 $2,013,000 State ........ 4,543,000 3,438,000 511,000 ------------------------------------------- 27,300,000 14,780,000 2,524,000 Deferred Federal ...... 1,691,000 7,410,000 (2,621,000) State ........ 169,000 820,000 (273,000) ------------------------------------------- 1,860,000 8,230,000 (2,894,000) ------------------------------------------- $29,160,000 $23,010,000 $ (370,000) =========================================== Tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes are as follows: DECEMBER 31, 1998 1997 - ----------------------------------------------------------------- Depreciation ................. $31,442,000 $29,930,000 Flock inventories ............ 5,747,000 5,959,000 Goodwill ..................... 1,998,000 1,653,000 Other ........................ (3,787,000) (4,002,000) --------------------------- $35,400,000 $33,540,000 =========================== The following is a reconciliation of the Federal statutory income tax rate to the consolidated effective tax rate: YEARS ENDED DECEMBER 31, 1998 1997 1996 - ---------------------------------------------------------------- Federal statutory rate .......... 35.0% 35.0% (35.0)% State taxes ..................... 4.2 5.0 (3.4) Goodwill ........................ 1.4 1.4 40.0 Other ........................... 1.4 0.1 (12.3) ------------------------ 42.0% 41.5% (10.7)% ======================== NOTE F EMPLOYEE RETIREMENT PLAN Full-time employees who meet certain service requirements are eligible to participate in a defined contribution retirement plan. The Company matches up to 4% of each participant's eligible compensation. Company contributions totaled $1,786,000, $1,520,000 and $1,488,000 in 1998, 1997 and 1996. NOTE G COMMITMENTS AND CONTINGENCIES PATENT LITIGATION The Company has an exclusive license agreement for a patented process for the production and sale of extended shelf-life liquid egg products. Under the license agreement, the Company has the right to defend and prosecute infringement of the patents. The Company may apply costs of defending the patents to future royalty payments. In connection with the acquisition of Papetti's, a defendant in one of the patent infringement cases, a settlement of $6,000,000 was received. Under the terms of the license agreement, the Company applied this settlement as a reduction of its prepaid royalty payments. The U.S. Federal Court of Appeals has upheld the validity of the patents subject to the license agreement. Subsequently, a patent examiner at the U.S. Patent and Trademark Office rejected the patents. The Company is appealing the decision of the examiner and believes the validity of the patents will ultimately be upheld. During the appeal process, the patents remain valid and in full force and effect. These patents are scheduled to expire in 2006. OTHER LITIGATION The Company is engaged in routine litigation incidental to its business. Management believes the ultimate outcome of this litigation 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. will not have a material effect on the Company's consolidated financial position, liquidity or results of operations. NOTE H SHAREHOLDERS' EQUITY MERGER WITH NORTH STAR UNIVERSAL At December 31, 1996, North Star Universal, Inc. ("NSU") held approximately 38% of the Company's common stock. On February 28, 1997, the Company merged into NSU and immediately distributed NSU's subsidiary, ENStar Inc., in a tax-free distribution to the former shareholders of NSU. At the time of the merger, NSU changed its name to Michael Foods, Inc. and the management and operations of the continuing entity are those of the Company. The merger was accounted for as a reverse acquisition utilizing the purchase method of accounting. As a result of the merger, the Company assumed approximately $21,250,000 of net subordinated indebtedness and received 1,783,036 shares of its common stock of approximately equal value, which were effectively retired in the form of a treasury stock redemption. The Company extinguished the subordinated indebtedness during 1997. CAPITAL STOCK Authorized capital stock of 50,000,000 shares consists of 40,000,000 shares of $.01 par value common stock and 10,000,000 shares of undesignated stock. The Board of Directors has the authority to determine voting, conversion and other rights of the undesignated stock. There were no shares of undesignated stock issued or outstanding at December 31, 1998 or 1997. REPURCHASES OF COMMON STOCK During 1998, the Board of Directors authorized the repurchase of up to 2,000,000 shares of its common stock. During 1998, the Company repurchased and retired 982,700 shares for $24,068,000. During 1996, the Company repurchased and retired 13,543 shares of its common stock for $500,000, related to put agreements issued in certain business acquisitions. INCENTIVE PLAN The Company has an incentive compensation plan for certain key employees. The Company utilizes unissued common stock for a portion of the incentive compensation in this plan. The Company accrues for all incentive compensation as earned. STOCK OPTION PLANS The Company maintains non-qualified stock option plans. The officer and key employee plans had 261,000 shares of common stock available for issue at December 31, 1998 and the non-employee director plan had 80,000 shares available for issue at December 31, 1998. The stock options granted under these plans generally have a ten year term, vest ratably over five years, and have an exercise price equal to the fair market value of the stock on the date of grant. Stock options totaling 631,098, 809,656 and 1,574,304 shares with weighted average exercise prices of $12.18, $11.65 and $10.91 were exercisable at December 31, 1998, 1997 and 1996. Option transactions under these plans for each of the three years ended December 31 are summarized as follows: WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE - ------------------------------------------------------------------- Outstanding at January 1, 1996 ......... 1,931,016 $10.73 Granted .............. 149,620 11.74 Exercised ............ (94,000) 7.52 Canceled ............. (33,860) 13.67 ---------------------------------- Outstanding at December 31, 1996 ....... 1,952,776 10.91 Granted .............. 221,500 16.07 Exercised ............ (943,948) 10.31 Canceled ............. (5,500) 7.66 ---------------------------------- Outstanding at December 31, 1997 ....... 1,224,828 12.33 Granted .............. 683,000 24.95 Exercised ............ (269,960) 11.23 ---------------------------------- Outstanding at December 31, 1998 ....... 1,637,868 $17.79 ================================== The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 1998: OPTIONS OUTSTANDING ------------------- WEIGHTED WEIGHTED RANGE OF REMAINING NUMBER AVERAGE AVERAGE EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE - -------------------------------------------------------------------------------- $ 7.63 - $11.13 472,372 5.4 years $ 9.97 11.50 - 15.13 336,106 4.8 years 12.67 17.83 - 24.38 161,390 6.4 years 21.43 24.69 - 29.75 668,000 9.5 years 25.02 --------- 1,637,868 17.79 ========= OPTIONS EXERCISABLE ------------------- WEIGHTED RANGE OF NUMBER AVERAGE EXERCISE PRICES OF SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- $ 7.63 - $11.13 310,772 $ 9.66 11.50 - 15.13 234,736 12.90 17.83 - 24.38 85,590 19.36 --------- 631,098 12.18 ========= Pro forma net earnings (loss) and diluted net earnings (loss) per share would have been $39,273,000, $32,160,000 and $(3,261,000), or $1.81, $1.50 and $(.17) per share had the fair value method been used for valuing options granted in 1998, 1997 and 1996. The impact on net earnings (loss) may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The weighted average fair value of options granted in 1998, 1997 and 1996 were $11.95, $8.51 and $4.20 per share, computed by applying the following weighted average assumptions to the Black Scholes options pricing model: dividend yield of 1% in 1998 and 2% in 1997 and 1996; risk-free rate of return of 5.9% in 1998 and 6.6% in 1997 and 1996; volatility of 40% in 1998, 48% in 1997 and 31% in 1996; and an average term of 7 years. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC. NOTE I RISKS AND UNCERTAINTIES The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the Year 2000. The potential effect of the Year 2000 issue on the Company and its business partners will not be fully determinable until the year 2000 and thereafter. If Year 2000 modifications are not properly completed either by the Company or entities with whom the Company conducts business, the Company's revenues and financial condition could be adversely impacted. NOTE J SUBSEQUENT EVENTS Subsequent to December 31, 1998, the Company's subsidiary, Kohler Mix Specialties, Inc., initiated a voluntary product recall for certain cartoned dairy products due to potential contamination. Management believes this product recall will not have a material effect on the Company's consolidated financial statements. NOTE K BUSINESS SEGMENTS During 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Company operates in four reportable segments: Egg Products produces, processes and distributes numerous egg products and shell eggs primarily through its facilities in the upper Midwest and northeastern United States. Sales of egg products are made through an internal sales force and independent brokers to the foodservice and retail markets primarily throughout the United States. Refrigerated Distribution distributes a wide range of refrigerated grocery products, including various cheese products packaged at its Wisconsin cheese packaging facility. Sales of refrigerated grocery products are made through an internal sales force to retail and wholesale markets primarily throughout the Midwest and southwestern United States. Dairy Products processes and distributes soft serve mix, ice cream mix, frozen yogurt mix, milk and specialty dairy products, many of which are ultra-high temperature pasteurized, from its facilities in Minnesota and Texas. Sales of dairy products are made through an internal sales force to domestic quick service restaurants and other foodservice outlets, independent retailers and ice cream manufacturers throughout the United States. Potato Products processes and distributes refrigerated potato products from its manufacturing facilities in Minnesota and California. Sales of potato products are made through an internal sales force to foodservice and retail markets throughout the United States. The Company identifies its segments based on the Company's organizational structure, which is primarily by principal products. Operating profit represents earnings before interest expense, interest income, and income taxes. Intersegment sales are made at market prices. Corporate maintains a majority of the Company's cash under its cash management policy. Sales to one customer, primarily by the Refrigerated Distribution segment, accounted for 12% of 1996 consolidated net sales. Certain financial information on the Company's operating segments is as follows (in thousands):
EGG REFRIGERATED DAIRY POTATO PRODUCTS DISTRIBUTION PRODUCTS PRODUCTS CORPORATE TOTAL - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 External net sales .......................... $607,688 $221,586 $138,865 $52,345 $ - $1,020,484 Intersegment sales .......................... 21,224 127 1,846 2,048 - 25,245 Operating profit (loss) ..................... 69,295 7,288 6,748 3,890 (7,668) 79,553 Total assets ................................ 425,568 39,886 28,097 50,385 7,580 551,516 Depreciation and amortization ............... 26,712 1,518 1,755 5,710 109 35,804 Capital expenditures ........................ 54,443 1,132 4,477 4,671 54 64,777 YEAR ENDED DECEMBER 31, 1997 External net sales .......................... $575,684 $214,892 $104,902 $60,745 $ - $ 956,223 Intersegment sales .......................... 23,583 144 1,803 1,435 - 26,965 Operating profit (loss) ..................... 55,708 8,900 6,823 (505) (4,647) 66,279 Total assets ................................ 377,740 35,272 25,824 53,307 11,512 503,655 Depreciation and amortization ............... 24,407 1,973 1,723 5,098 122 33,323 Capital expenditures ........................ 28,260 (a) 1,043 2,505 9,225 29 41,062 (b) YEAR ENDED DECEMBER 31, 1996 External net sales .......................... $231,336 $210,177 $ 90,860 $84,022 $ - $ 616,395 Intersegment sales .......................... 31,997 301 1,873 1,395 - 35,566 Operating profit (loss) ..................... 19,364 6,117 (c) 5,871 (23,601) (d) (3,930) 3,821 Total assets ................................ 242,216 33,192 20,423 59,028 9,800 364,659 Depreciation and amortization ............... 16,512 2,040 1,718 6,087 319 26,676 Capital expenditures ........................ 19,971 912 1,877 6,446 128 29,334
(a) Excludes the Papetti's acquisition (see Note B) (b) Consolidated financial statement amount is net of $4,161 of proceeds from the sale of property, plant and equipment (c) Includes a $1,300 impairment loss (see Note C) (d) Includes charges of $9,172 and $12,225 relating to the exit of the frozen french fry product line (see Note C) 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MICHAEL FOODS, INC. [LOGO HERE] BOARD OF DIRECTORS MICHAEL FOODS, INC. We have audited the accompanying consolidated balance sheets of Michael Foods, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Michael Foods, Inc. and subsidiaries as of December 31, 1998 and 1997 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Minneapolis, Minnesota February 15, 1999 26 SUMMARY OF CONSOLIDATED FINANCIAL DATA MICHAEL FOODS, INC. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1998 1997* 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA Net sales.............................................. $1,020,484 $956,223 $616,395 $536,627 $505,965 Cost of sales.......................................... 847,383 813,771 545,055 454,652 430,917 Product line inventory markdown........................ - - 12,225 - - ----------------------------------------------------------------------- Gross profit........................................... 173,101 142,452 59,115 81,975 75,048 Selling, general and administrative expenses........... 93,548 76,173 44,822 45,729 41,851 Product line asset impairment.......................... - - 10,472 - - ----------------------------------------------------------------------- Operating profit....................................... 79,553 66,279 3,821 36,246 33,197 Interest expense, net.................................. 10,136 10,830 7,264 7,635 8,498 ----------------------------------------------------------------------- Earnings (loss) before income taxes.................... 69,417 55,449 (3,443) 28,611 24,699 Income tax expense (benefit)........................... 29,160 23,010 (370) 11,020 9,510 ----------------------------------------------------------------------- Net earnings (loss)................................. $ 40,257 $ 32,439 $ (3,073) $ 17,591 $ 15,189 ======================================================================= Net earnings (loss) per share Basic............................................... $ 1.86 $ 1.53 $ (.16) $ .91 $ .79 Diluted............................................. 1.83 1.51 (.16) .90 .78 ======================================================================= Weighted average shares outstanding Basic............................................... 21,642 21,181 19,386 19,328 19,315 Diluted............................................. 21,980 21,446 19,386 19,530 19,460 Dividends per common share............................. $ .23 $ .20 $ .20 $ .20 $ .20 BALANCE SHEET DATA (At December 31,) Working capital........................................ $ 61,297 $ 54,788 $ 56,677 $ 42,095 $ 33,589 Total assets........................................... 551,516 503,655 364,659 359,227 336,645 Long-term debt, including current maturities........... 166,107 146,028 112,901 101,421 100,604 Shareholders' equity................................... 244,149 229,246 174,042 180,095 166,029 =======================================================================
QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ---------------------------------------------------- FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------------------------------ 1998 Net sales................................................................. $245,589 $243,685 $253,790 $277,420 Gross profit.............................................................. 40,156 44,454 43,433 45,058 Net earnings.............................................................. 8,258 11,313 10,516 10,170 Net earnings per share Basic................................................................. $ .38 $ .52 $ .49 $ .48 Diluted............................................................... .37 .51 .48 .47 Weighted average shares outstanding Basic................................................................. 21,846 21,939 21,627 21,156 Diluted............................................................... 22,208 22,337 21,922 21,454 1997* Net sales................................................................. $195,418 $237,861 $245,868 $277,076 Gross profit.............................................................. 23,729 39,461 38,354 40,908 Net earnings.............................................................. 3,962 8,352 10,828 9,297 Net earnings per share Basic................................................................. $ .20 $ .39 $ .50 $ .43 Diluted............................................................... .20 .39 .49 .42 Weighted average shares outstanding Basic................................................................. 20,091 21,258 21,583 21,793 Diluted............................................................... 20,233 21,423 21,947 22,184
* Amounts include 53 weeks of operations and the results of Papetti's operations only from February 26, 1997, the date of acquisition. 27 [PHOTO HERE] [PHOTO HERE] BOARD OF DIRECTORS SEATED, LEFT TO RIGHT: GREGG A. OSTRANDER, MILES E. EFRON, ARVID C. KNUDTSON; STANDING, LEFT TO RIGHT: MARGARET D.MOORE, JEROME J. JENKO, ARTHUR J. PAPETTI, JOSEPH D. MARSHBURN, JEFFREY J. MICHAEL, RICHARD A. COONROD, MAUREEN B. BELLANTONI, DANIEL P. DILLON, STEPHEN T. PAPETTI CORPORATE OFFICERS SEATED: GREGG A. OSTRANDER; STANDING, LEFT TO RIGHT: JOHN D. REEDY, JEFFREY M. SHAPIRO, MARK D. WITMER BOARD OF DIRECTORS ARVID C. KNUDTSON CHAIRMAN OF THE BOARD OF DIRECTORS CONSULTANT MAUREEN B. BELLANTONI CONSULTANT RICHARD A. COONROD (CHAIR, COMPENSATION COMMITTEE) PRESIDENT COONROD AGRIPRODUCTION CORP. DANIEL P. DILLON PRESIDENT AND CHIEF EXECUTIVE OFFICER WELCH FOODS, INC. MILES E. EFRON RETIRED CHIEF EXECUTIVE OFFICER NORTH STAR UNIVERSAL, INC. JEROME J. JENKO CHIEF EXECUTIVE OFFICER JENKO & ASSOCIATES JOSEPH D. MARSHBURN (CHAIR, CORPORATE GOVERNANCE AND NOMINATING COMMITTEE) SENIOR VICE PRESIDENT CITRUS WORLD, INC. JEFFREY J. MICHAEL (CHAIR, AUDIT COMMITTEE) PRESIDENT AND CHIEF EXECUTIVE OFFICER ENSTAR INC. MARGARET D. MOORE SENIOR VICE PRESIDENT AND TREASURER THE PEPSI BOTTLING GROUP GREGG A. OSTRANDER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY ARTHUR J. PAPETTI EXECUTIVE VICE PRESIDENT PAPETTI'S HYGRADE EGG PRODUCTS, INC. STEPHEN T. PAPETTI EXECUTIVE VICE PRESIDENT PAPETTI'S HYGRADE EGG PRODUCTS, INC. 28 CORPORATE INFORMATION ANNUAL MEETING: Shareholders and members of the investment community are cordially invited to attend the Annual Meeting of Shareholders, which is scheduled to be held at 4:00 p.m., local time, on April 29, 1999, in the auditorium of the Lutheran Brotherhood Building, 625 Fourth Avenue South in Minneapolis, Minnesota. INVESTOR INQUIRIES: Requests for financial publications, including Form 10-K filed with the Securities and Exchange Commission, should be addressed to: MICHAEL FOODS, INC. Attention: Mark D. Witmer Assistant Treasurer 324 Park National Bank Bldg. 5353 Wayzata Boulevard Minneapolis, Minnesota 55416 CERTIFIED PUBLIC ACCOUNTANTS: Grant Thornton LLP 200 South Sixth Street 500 Pillsbury Center North Minneapolis, Minnesota 55402 CORPORATE COUNSEL: Maun & Simon 2000 Midwest Plaza 801 Nicollet Mall Minneapolis, Minnesota 55402 TRANSFER AGENT AND REGISTRAR: Norwest Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164-0854 Shareholder Inquiries: 800-468-9716 LISTING: The Company's common stock trades on the National Market tier of the Nasdaq Stock Market under the symbol: MIKL. MARKET PRICE RANGES: The following table sets forth the high and low daily sale prices for the common stock for each quarter of 1998 and 1997. 1998 LOW HIGH - ----------------------------------------------- First Quarter......... 22 1/2 29 Second Quarter........ 25 1/2 31 1/8 Third Quarter......... 21 1/4 29 5/8 Fourth Quarter........ 20 1/4 30 1997 LOW HIGH - ----------------------------------------------- First Quarter......... 10 1/4 13 Second Quarter........ 10 19 Third Quarter......... 18 3/8 25 3/4 Fourth Quarter........ 19 3/4 28 3/8 The following table sets forth the regular quarterly cash dividends per share paid in 1998 and 1997. 1998 1997 - ----------------------------------------------- First Quarter...... $.05 $.05 Second Quarter..... .06 .05 Third Quarter...... .06 .05 Fourth Quarter..... .06 .05 At year end 1998 the Company had 387 common shareholders of record and an estimated 4,000 beneficial owners whose shares were held by nominees or broker dealers. OTHER INFORMATION CORPORATE HEADQUARTERS: MICHAEL FOODS, INC. 324 Park National Bank Building 5353 Wayzata Boulevard Minneapolis, Minnesota 55416 612-546-1500 CORPORATE EXECUTIVE OFFICERS: GREGG A. OSTRANDER PRESIDENT AND CHIEF EXECUTIVE OFFICER JEFFREY M. SHAPIRO EXECUTIVE VICE PRESIDENT AND SECRETARY JOHN D. REEDY VICE PRESIDENT-FINANCE, CHIEF FINANCIAL OFFICER AND TREASURER MARK D. WITMER ASSISTANT TREASURER PRINCIPAL SUBSIDIARY OFFICES: CRYSTAL FARMS REFRIGERATED DISTRIBUTION COMPANY Park Place West, Suite 200 6465 Wayzata Boulevard Minneapolis, Minnesota 55426 FARM FRESH FOODS, INC. 6602 Clara Street Bell Gardens, California 90201 KOHLER MIX SPECIALTIES, INC. 4041 Highway 61 White Bear Lake, Minnesota 55110 M.G. WALDBAUM COMPANY 500 Park National Bank Building 5353 Wayzata Boulevard Minneapolis, Minnesota 55416 NORTHERN STAR CO. 3171 Fifth Street Southeast Minneapolis, Minnesota 55414 PAPETTI'S HYGRADE EGG PRODUCTS, INC. 1 Papetti Plaza Elizabeth, New Jersey 07206 WISCO FARM COOPERATIVE 450 North CP Avenue Lake Mills, Wisconsin 53551 MICHAEL FOODS [LOGO ART HERE] 324 PARK NATIONAL BANK BUILDING 5353 WAYZATA BOULEVARD MINNEAPOLIS, MINNESOTA 55416 www.michaelfoods.com EX-21.1 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF MICHAEL FOODS, INC. STATE OF NAME INCORPORATION - -------------------------------------------------------------------------------- Crystal Farms Refrigerated Distribution Company Minnesota Northern Star Company Minnesota Kohler Mix Specialties, Inc. Minnesota Kohler Mix Specialties of Connecticut, Inc. Connecticut M. G. Waldbaum Company Nebraska Papetti's Hygrade Egg Products, Inc. Minnesota Casa Trucking, Inc. Minnesota Wisco Farm Cooperative Wisconsin WFC, Inc. Wisconsin Farm Fresh Foods, Inc. California Michael Foods of Delaware, Inc. Delaware Midwest Mix, Inc. Minnesota Minnesota Products, Inc. Minnesota MFI Food Canada, Ltd. Canada MIKLFS Corporation Virgin Islands R & P Liquid Egg Technology Limited Partnership New Jersey Papetti Electroheating Corporation New Jersey EX-23.1 10 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS EXHIBIT 23.1 Consent of Independent Certified Public Accountants We have issued our reports dated February 15, 1999 accompanying the consolidated financial statements and schedule of Michael Foods, Inc. and subsidiaries which are incorporated by reference or included in the Annual Report on Form 10-K of Michael Foods, Inc. for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Michael Foods, Inc. on Forms S-8 (File No. 33-31914 effective November 21, 1989, and March 25, 1997 as amended; File Nos. 33-64076 and 33-64078 effective June 9, 1993, and March 25, 1997 as amended; File No. 33-57969 effective March 7, 1995, and March 25, 1997 as amended; and File No. 333-23949 effective March 25, 1997). /s/GRANT THORNTON LLP Minneapolis, Minnesota February 15, 1999 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,047 0 99,764 2,125 74,250 177,820 437,970 187,759 551,516 116,523 155,444 0 0 211 243,938 551,516 1,020,484 1,020,484 847,383 847,383 0 861 10,136 69,417 29,160 40,257 0 0 0 40,257 1.86 1.83
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