10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2000

or

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

For the transition period from                to                

Commission File Number: 0-15638

Michael Foods, Inc.
(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)	41-0498850 (I.R.S. Employer Identification No.)
Suite 324, Park National Bank Building 5353 Wayzata Boulevard Minneapolis, MN, (Address of principal executive offices)	55416 (Zip code)

(952) 546-1500
(Registrant's telephone number, including area code)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of November 6, 2000 was 18,284,991 shares.

PART I—FINANCIAL INFORMATION

MICHAEL FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

				September 30, 2000			December 31, 1999
ASSETS
CURRENT ASSETS
	Cash and equivalents			$	7,682,000		$	4,961,000
	Accounts receivable, less allowances				98,895,000			92,493,000
	Inventories				82,721,000			71,197,000
	Prepaid expenses and other				4,668,000			4,604,000
		Total current assets			193,966,000			173,255,000
PROPERTY, PLANT AND EQUIPMENT-AT COST
	Land				4,106,000			4,104,000
	Buildings and improvements				133,890,000			133,778,000
	Machinery and equipment				376,741,000			357,724,000
					514,737,000			495,606,000
	Less accumulated depreciation				233,992,000			208,807,000
					280,745,000			286,799,000
OTHER ASSETS
	Goodwill, net				114,146,000			116,729,000
	Joint ventures and other assets				18,660,000			21,134,000
					132,806,000			137,863,000
				$	607,517,000		$	597,917,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
	Current maturities of long-term debt			$	2,881,000		$	3,130,000
	Accounts payable				51,076,000			47,009,000
	Accrued liabilities
		Compensation			13,071,000			13,143,000
		Insurance			7,292,000			7,229,000
		Customer programs			18,567,000			20,999,000
		Income taxes			11,643,000			11,805,000
		Other			13,432,000			18,176,000
			Total current liabilities		117,962,000			121,491,000
LONG-TERM DEBT, less current maturities					203,370,000			175,404,000
DEFERRED INCOME TAXES					37,507,000			36,423,000
COMMITMENTS AND CONTINGENCIES					—			—
SHAREHOLDERS' EQUITY
	Common stock				182,000			203,000
	Additional paid-in capital				58,390,000			102,777,000
	Retained earnings				191,696,000			162,577,000
	Accumulated comprehensive income (loss)				(1,590,000	)		(958,000	)
					248,678,000			264,599,000
				$	607,517,000		$	597,917,000

See accompanying notes to condensed consolidated financial statements.

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MICHAEL FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended September 30, (Unaudited)

		2000		1999
Net sales		$	276,568,000	$	269,911,000
Cost of sales			228,820,000		223,162,000
	Gross profit		47,748,000		46,749,000
Selling, general and administrative expenses			25,506,000		25,355,000
	Operating profit		22,242,000		21,394,000
Interest expense, net			3,524,000		3,241,000
	Earnings before income taxes		18,718,000		18,153,000
Income tax expense			6,900,000		7,440,000
	NET EARNINGS	$	11,818,000	$	10,713,000
Net Earnings Per Share
	Basic	$	0.65	$	0.53
	Diluted	$	0.64	$	0.52
Weighted average shares outstanding
	Basic		18,278,000		20,251,000
	Diluted		18,516,000		20,522,000

See accompanying notes to condensed consolidated financial statements.

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MICHAEL FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Nine Months Ended September 30, (Unaudited)

		2000		1999
Net sales		$	795,110,000	$	781,320,000
Cost of sales			650,872,000		642,301,000
	Gross profit		144,238,000		139,019,000
Selling, general and administrative expenses			79,168,000		77,831,000
	Operating profit		65,070,000		61,188,000
Interest expense, net			9,778,000		8,862,000
	Earnings before income taxes		55,292,000		52,326,000
Income tax expense			21,710,000		21,450,000
	NET EARNINGS	$	33,582,000	$	30,876,000
Net Earnings Per Share
	Basic	$	1.75	$	1.50
	Diluted	$	1.73	$	1.48
Weighted average shares outstanding
	Basic		19,172,000		20,574,000
	Diluted		19,394,000		20,818,000

See accompanying notes to condensed consolidated financial statements.

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MICHAEL FOODS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, (Unaudited)

		2000			1999
Net cash provided by operating activities		$	50,179,000		$	73,327,000
Cash flows from investing activities:
	Capital expenditures		(25,967,000	)		(60,918,000	)
	Investments in joint ventures and other assets		835,000			(20,976,000	)
Net cash used in investing activities			(25,132,000	)		(81,894,000	)
Cash flows from financing activities:
	Payments on long-term debt		(130,383,000	)		(138,696,000	)
	Proceeds from long-term debt		158,100,000			177,200,000
	Proceeds from issuance of common stock		545,000			755,000
	Repurchase of common stock		(46,125,000	)		(18,927,000	)
	Dividends		(4,463,000	)		(4,127,000	)
Net cash provided by (used in) financing activities			(22,326,000	)		16,205,000
Net increase in cash and equivalents			2,721,000			7,638,000
Cash and equivalents at beginning of year			4,961,000			2,047,000
Cash and equivalents at end of period		$	7,682,000		$	9,685,000

See accompanying notes to condensed consolidated financial statements.

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MICHAEL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A—BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

    Michael Foods, Inc. (the "Company") utilizes a fiscal year consisting of either 52 or 53 weeks, ending on the Saturday nearest to December 31 each year. The quarters ended September 30, 2000 and 1999 each included thirteen weeks of operations. For clarity of presentation, the Company has described both periods presented as if the quarters ended on September 30.

    In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2000 and the results of operations for the three and nine month periods ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results for the full year.

    The Company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 657,676 and 681,878 shares of Common Stock, with weighted average exercise prices of $24.91 and $24.87, which were outstanding during the three and nine month periods ended September 30, 2000, were excluded from the computation of common share equivalents for those periods because they were anti-dilutive. Options to purchase 390,275 and 734,824 shares of common stock, with a weighted average exercise price of $25.56 and $24.80, were outstanding during the three and nine month periods ended September 30, 1999, but were excluded from the computation of common share equivalents for those periods because they were anti-dilutive.

NOTE B—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 life of generally one to two years, assuming no salvage value.

    Inventories consist of the following:

	September 30, 2000		December 31, 1999
Raw materials and supplies	$	16,152,000	$	15,720,000
Work in process and finished goods		42,885,000		35,447,000
Flocks		23,684,000		20,030,000
	$	82,721,000	$	71,197,000

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NOTE C—COMMITMENTS AND CONTINGENCIES

Use of Estimates

    Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.

License Agreement

    The Company has an exclusive license agreement for a patented process for the production and sale of extended shelf-life egg products. Under the license agreement, the Company has the right to defend and prosecute infringement of the licensed patents. The U.S. Federal Court of Appeals has upheld the validity of the four patents subject to the license agreement. However, subsequently a patent examiner at the U.S. Patent and Trademark Office ("PTO") rejected the patents. In August 1999, the examiner's rejections were largely overturned by the Board of Appeals and Interferences of the PTO. Reexamination certificates for three of the patents have since been issued by the PTO. In August 2000, the Company and the patent holder received a Notice of Allowability, followed by a Notice of Allowance, regarding the reissuance of the fourth patent, which included the allowance of product claims beyond the process claims previously allowed. These patents are scheduled to expire in 2006. In the second quarter of 2000, the Company and the patent holder completed a new royalty arrangement whereby the Company pays a reduced amount of royalties and, in turn, is responsible for one-half of any litigation expense incurred to defend the patents.

Litigation

    The Company is engaged in routine litigation incidental to its business. Management believes it will not have a material effect upon its consolidated financial position, liquidity or results of operations.

NOTE D—SHAREHOLDERS' EQUITY

    During the third quarters of 2000 and 1999 the Company repurchased no shares of Common Stock under the share repurchase program which began in July 1998 and was expanded in February and May 2000. Repurchases for the first nine months of 2000 and 1999 were 2,109,400 and 920,100 shares of Common Stock.

NOTE E—COMPREHENSIVE INCOME

    Comprehensive income consists of net earnings and foreign currency translation adjustments. Total comprehensive income was $11,644,000 and $10,713,000 for the three months ended September 30, 2000 and 1999. The total comprehensive income was $32,950,000 and $30,876,000 for the nine months ended September 30, 2000 and 1999.

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NOTE F—BUSINESS SEGMENTS

    The Company operates in four reportable segments—Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. Certain financial information on the Company's operating segments is as follows (unaudited, in thousands):

	Egg Products		Refrigerated Distribution		Dairy Products		Potato Products		Corporate		Total
Three Months ended September 30, 2000:
External net sales	$	162,461	$	57,636	$	41,305	$	15,166	N/A		$	276,568
Intersegment sales		2,849		10		22		632	N/A			3,513
Operating profit (loss)		16,665		3,829		1,329		1,548	(1,129	)		22,242
Three Months ended September 30, 1999:
External net sales	$	157,843	$	55,833	$	41,498	$	14,737	N/A		$	269,911
Intersegment sales		3,235		24		415		577	N/A			4,251
Operating profit (loss)		17,935		2,462		319		2,006	(1,328	)		21,394
Nine Months ended September 30, 2000:
External net sales	$	472,849	$	169,073	$	109,237	$	43,951	N/A		$	795,110
Intersegment sales		8,676		68		507		1,800	N/A			11,051
Operating profit (loss)		50,757		11,962		2,271		4,534	(4,454	)		65,070
Nine Months ended September 30, 1999:
External net sales	$	460,481	$	166,382	$	112,251	$	42,206	N/A		$	781,320
Intersegment sales		12,723		69		993		1,775	N/A			15,560
Operating profit (loss)		52,537		7,046		3,272		4,565	(6,232	)		61,188

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Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2000 VS THREE MONTHS ENDED
SEPTEMBER 30, 1999

Results of Operations

    Readers are directed to Note F—Business Segments for data on the unaudited financial results of the Company's four business segments for the three months ended September 30, 2000 and 1999.

    Egg Products Division net sales for the 2000 period reflected unit sales increases, particularly for value-added products, which more than offset significant deflationary pricing impacts on industrial products. Significant unit sales increases were recorded for extended shelf-life liquid eggs, egg substitutes and dried egg products. Unit sales declined in two categories—frozen and short shelf-life eggs—as the Division chose not to pursue sales with little or no profit margin. Egg prices increased approximately 1% compared to third quarter 1999 levels, as reported by Urner Barry Publications—a widely quoted industry pricing service. This increase raised the cost of purchased eggs during a period where prices for industrial egg products were generally lower than normal. Moreover, extreme volatility in egg prices occurred during the quarter, making it difficult to realize typical spreads between raw material costs and finished industrial egg products prices for any significant length of time. However, earnings increases from value-added egg products largely off-set the margin weakness seen from industrial egg product sales.

    Approximately two-thirds of the Division's annual egg needs are purchased under contracts, or in the spot market. While a portion of these eggs are secured under fixed price contracts, a majority are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were slightly higher in the 2000 period, compared to the 1999 period, due to higher prices for corn and soybean meal. Increased egg costs, for both internally and externally procured eggs, in the 2000 period, compared to the 1999 period, were generally not met with comparable price changes in egg products prices, creating margin pressure for certain industrial egg products. Egg Products results in the 1999 period were impacted by two non-recurring items. First, a gain was recorded on the sale of a shell egg production facility. Second, a Belgium animal feed contamination scare resulted in losses at the Company's two European egg products joint ventures. The net effect of these items was a modest addition to earnings.

    Refrigerated Distribution Division net sales for the 2000 period reflected strong unit sales increases, with cheese and butter showing particular strength. Sales growth resulted from a brand repositioning over the past two years and a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normal product costs for items related to the national butterfat market, resulted in margin expansion in the 2000 period.

    The Dairy Products Division's flat net sales for the 2000 period reflected lower unit sales volumes for the core dairy mix business, in part due to the loss of a major industrial (tanker) customer in late 1999, which offset increased volumes for cartoned specialty products and creamer products, and slightly higher unit pricing compared to the 1999 period. Divisional operating profit increased in the 2000 period as a result of the higher sales of specialty products, and improvements in overhead expenses and operating expenses.

    Potato Products Division net sales for the 2000 period reflected increased unit sales, particularly for both retail and foodservice mashed potato items. New account activity and same-account sales growth contributed to the sales gain. The operating profit decrease in the 2000 period resulted from a less favorable sales mix, reflecting a slight sales decrease for retail shredded products, and increased marketing spending.

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    The gross profit margin of the Company for the period ended September 30, 2000 was comparable to that of the same period in 1999, reflecting the factors discussed above, particularly the margin pressures within the industrial egg products category and the margin increases within the Refrigerated Distribution Division. 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 in most periods.

    Selling, general and administrative expenses decreased slightly as a percent of sales in the period ended September 30, 2000, as compared to the results of the same period in 1999. Favorable impacts from effective expense management more than offset increased expenses related to amortization of the costs associated with the Company's information systems upgrade project and additional marketing efforts.

NINE MONTHS ENDED SEPTEMBER 30, 2000 VS NINE MONTHS ENDED
SEPTEMBER 30, 1999

Results of Operations

    Readers are directed to Note F—Business Segments for data on the unaudited financial results of the Company's four business segments for the nine months ended September 30, 2000 and 1999.

    Egg Products Division net sales for the 2000 period reflected unit sales increases, particularly for value-added products, which more than offset significant deflationary pricing impacts on certain products and an approximate 40% decline in shell egg sales. The latter was by plan and reflects, in part, the sale of a small shell egg facility in the summer of 1999. Sales were particularly strong for extended shelf-life liquid eggs, dried egg products and precooked frozen omelets, patties and curds. Egg prices decreased approximately 3% compared to 1999 levels, as reported by Urner Barry Publications. This decrease lowered the cost of purchased eggs, but this occurred during a period where prices for industrial egg products were generally depressed. Moreover, extreme volatility in egg prices occurred during the 2000 period, making it difficult to realize typical spreads between raw material costs and finished industrial egg products prices for any significant length of time. However, earnings increases from value-added egg products largely off-set the margin weakness seen from industrial egg product sales.

    Approximately two-thirds of the Division's annual egg needs are purchased under contracts, or in the spot market. While a portion of these eggs are secured under fixed price contracts, a majority are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of producing such eggs. Feed costs in the 2000 period were comparable to the 1999 period. Decreased egg costs, for externally procured eggs, in the 2000 period, compared to the 1999 period, and improved value-added egg products earnings, were more than offset by pricing and margin weakness in certain industrial egg products.

    Divisional operating profit for the 2000 period also reflected the benefit of reduced royalty expense, a portion of which was a retroactive adjustment to January 1, 1999. Under an agreement reached during the second quarter of 2000 period, royalties related to products produced and sold by the Company under a license with NCSU are limited to a fixed portion of the annual production. In consideration of the reduced royalty arrangement, the Company is responsible for one-half of any future litigation expense incurred to defend the patented egg ultra-pasteurization processing technology. Egg Products results in the 1999 period were impacted by two non-recurring items.

    First, a gain was recorded on the sale of a shell egg production facility. Second, a Belgium animal feed contamination scare resulted in losses at the Company's two European egg products joint ventures. The net effect of these items was a modest addition to earnings.

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    Refrigerated Distribution Division net sales for the 2000 period reflected strong unit sales increases, with cheese and butter showing particular strength. Sales growth resulted from a brand repositioning over the past two years and a broadening consumer advertising campaign in selected markets, along with notable new account activity and new product introductions. The volume growth, along with more normal product costs for items related to the national butterfat market, resulted in margin expansion in the 2000 period.

    The Dairy Products Division net sales decline for the 2000 period reflected lower unit sales volumes for the core dairy mix business, in part due to the loss of a major industrial (tanker) customer in late 1999, which offset increased volumes for cartoned specialty products and creamer products. Divisional operating profit declined in the 2000 period as a result of the reduced sales volumes, high overhead expenses and above average operating expenses.

    Potato Products Division net sales for the 2000 period reflected a strong unit sales increase, particularly for mashed items and retail shredded products. New account activity, same-account sales growth and new product introductions all contributed to the sales gain. The flat operating profits in the 2000 period compared to the 1999 period reflect benefits from the volume growth, as plant operations at the main potato processing facility benefited from the increased production throughput, which were offset by increased marketing spending.

    The increase in gross profit margin of the Company for the period ended September 30, 2000, as compared to the results of the same period in 1999, reflected the factors discussed above, particularly the strength in the Refrigerated Distribution Division. 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 in most periods.

    Selling, general and administrative expenses remained approximately constant as a percent of sales in the period ended September 30, 2000, as compared to the results of the same period in 1999. Expenses increased due to amortization of the costs associated with the Company's information systems upgrade project, amortization of a non-compete agreement related to a May 1999 Dairy Products acquisition, increases in bad debt expense resulting from a foodservice distributor's bankruptcy filing, and additional marketing efforts. However, these increased expenses were offset by effective expense controls in other areas and the favorable impact of the reduced egg products royalty arrangement, including a one-time retroactive benefit.

General

    Certain of the Company's products are sensitive to changes in commodity prices. The Company's Egg Products Division derived less than 3% of the Division's net sales for the first nine months of 2000 from shell eggs, which are sensitive to commodity price swings. Value-added extended shelf-life liquid egg products lines and precooked egg products accounted for approximately 50% of the Egg Products Division's net sales. The remainder of Egg Products Division sales is derived from the sale of other egg products, which vary from being commodity-sensitive to value-added. Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and the cost of feed, both of which can fluctuate significantly. Shell egg pricing in the 2000 period was approximately 3% below 1999 levels as measured by Urner Barry Publications. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs.

    The Company's Refrigerated Distribution Division derives approximately 70% of its net sales from refrigerated products produced by others, thereby reducing the effects of commodity price swings. The balance of refrigerated distribution sales are from shell eggs, some of which are produced by the Egg

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Products Division and are sold on a distribution, or non-commodity, basis by the Refrigerated Distribution Division.

    The Dairy Products Division sells its products primarily on a cost-plus basis and, therefore, the Division's earnings are not typically affected greatly by raw ingredient price fluctuations, except over short time periods.

    The Potato Products Division typically purchases 70%-90% of its raw potatoes from contract producers under annual contracts. The remainder is purchased at market prices to satisfy short-term production requirements or to take advantage of market prices when they are lower than contracted prices. Moderate variations in the purchase price of raw materials or the selling price per pound of finished products can have a significant effect on Potato Products Division operating results.

    Inflation is not expected to have a significant impact on the Company's business. The Company generally has been able to offset the impact of inflation through a combination of productivity gains and price increases.

Capital Resources and Liquidity

    Acquisitions and capital expenditures have been, and will likely continue to be, a significant capital requirement. 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.

    The Company invested $25,967,000 in capital expenditures during the nine months ended September 30, 2000. The Company plans to spend approximately $45,000,000 in total capital expenditures in 2000, the majority of which is to expand production capacity for value-added products.

    The Company has two unsecured lines of credit for $80,000,000 and $20,000,000 with its principal banks. As of September 30, 2000, $73,000,000 was outstanding under these lines of credit.

    In July 1998, the Company's Board of Directors authorized the purchase of up to 2,000,000 shares of Common Stock on the open market or in privately negotiated transactions. In February 2000, the Board authorized an additional purchase of up to 2,000,000 shares of Common Stock on the open market or in privately negotiated transactions, with an additional 500,000 share authorization made in May 2000. Through September 30, 2000, the Company had repurchased 4,012,200 shares of Common Stock for $89,121,000. During the third quarter of 2000 the Company did not repurchase any shares of Common Stock.

Seasonality

    Consolidated quarterly operating results are affected by the seasonality of the Company's net sales and operating profits. Specifically, shell egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Generally, refrigerated distribution operations experience higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Net sales and operating profits from dairy operations typically are significantly higher in the second and third quarters due to increased consumption of ice milk and ice cream products during the summer months. Operating profits from potato products are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest.

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Forward-Looking Statements

    Certain items in this Form 10-Q may be 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 variances in the demand for the Company's products due to consumer developments 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

    There were no material changes in the Company's market risk during the nine month period ended September 30, 2000.

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PART II—OTHER INFORMATION

Item 5—Other Information

    On November 3, 2000, the Company's Crystal Farms Refrigerated Distribution Company ("Crystal Farms") subsidiary initiated a voluntary recall of two cheese items after learning of their possible contamination with Listeria monocytogenes. It is estimated that less than 80,000 pounds of Crystal Farms cheese are affected by the recall. The cheese was produced by a Wisconsin-based dairy cooperative and packaged for Crystal Farms by a contract packaging company. Management believes the ultimate outcome of this recall will not have a material effect on the Company's consolidated financial position, liquidity or results of operations.

Item 6—Exhibits and Reports on Form 8-K

(a)	Exhibits
10.77	Consolidated, restated and amended License Agreement by and between North Carolina State University and Michael Foods, Inc.
10.78	Settlement Agreement and Mutual Release entered into by and between Nulaid Foods, Inc., Valley Fresh Foods, Inc., and Nulaid Nest-Best, and North Carolina State University and Michael Foods, Inc.
27.1	Financial Data Schedule
(b)	Reports on Form 8-K

    There were no reports on Form 8-K in the three month period ended September 30, 2000.

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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. (Registrant)
Date: November 13, 2000	By:	/s/ GREGG A. OSTRANDER Gregg A. Ostrander (Chairman, President and Chief Executive Officer)
Date: November 13, 2000	By:	/s/ JOHN D. REEDY John D. Reedy (Executive Vice President, Treasurer, Chief Financial Officer and Principal Accounting Officer)

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PART II—OTHER INFORMATION
SIGNATURES

EX-10.77

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CONSOLIDATED. RESTATED AND AMENDED
LICENSE AGREEMENT

    This Agreement entered into on June 9, 2000 but effective as of the 1st day of January, 1999, by and between North Carolina State University ("UNIVERSITY") and Michael Foods, Inc., a Minnesota corporation ("LICENSEE");

    WHEREAS, UNIVERSITY is the owner by assignment of certain Patent Rights (as defined herein) relating to a method for the ultrapasteurization of liquid whole egg products and has the right to grant licenses under said Patent Rights;

    WHEREAS, UNIVERSITY is authorized, in its own name, to license such Patent Rights consistent with its purpose as an educational institution, and desires to have the Patent Rights utilized in the public interest, and is willing to grant licenses thereunder; and

    WHEREAS, UNIVERSITY and LICENSEE did previously enter into license agreements on April 22, 1988 (amended November 28, 1989; September 12, 1991 and December 18, 1996); November 28, 1989 (amended September 12, 1991 and December 18, 1996); and September 1, 1991 (amended December 18. 1996) (collectively, the "License Agreements"); and

    WHEREAS, UNIVERSITY and LICENSEE assume that a product claim will be allowed by the United States Patent and Trademark Office and therefore that a patent will issue to the UNIVERSITY which includes such product claim and recognize that LICENSEE is also licensed to utilize an alternative method for the ultra pasteurization of liquid whole egg products under certain patent rights held by Raztek Corporation licensed to Papetti's Hygrade Egg Products, Inc., a subsidiary of Michael Foods, Inc. (the "Raztek Product"). UNIVERSITY and LICENSEE recognize that the Raztek Product will be a Defined Product (as defined herein) with royalties due hereunder in respect to sales thereof under any such patent issued to UNIVERSITY which includes a product claim.

    WHEREAS, LICENSEE has covenanted to UNIVERSITY for good and sufficient consideration to utilize the method for ultra pasteurization of liquid whole egg products set forth in the Patent Rights in respect to the manufacture of extended shelf life liquid whole egg products for purposes of sale by LICENSEE on an exclusive basis for all such egg products except for a maximum of *** pounds of Raztek Product per calendar year in lieu of any other present methods and such covenant is material to this Agreement and an inducement to and a condition of the agreement by the UNIVERSITY to Section 4.2 hereof.

    WHEREAS, UNIVERSITY and LICENSEE wish to consolidate, restate and amend the License Agreements.

    NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE 1—DEFINITIONS

    For the purposes of this Agreement, the following words and phrases shall have the following meanings:

    1.1. "LICENSEE" shall mean Michael Foods, Inc., a Minnesota corporation, or a related company of Michael Foods, Inc., the voting stock of which is, directly or indirectly, at least fifty percent (50%) owned or controlled by Michael Foods, Inc., or an organization which, directly or indirectly, controls more than fifty percent (50%) of the voting stock of Michael Foods, Inc., or an organization, a majority ownership of which is, directly or indirectly, common to the ownership of Michael Foods, Inc.

*** Redacted text.

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    1.2. "Subsidiary" shall mean any corporation, company or other entity fifty percent (50%) or more of whose voting stock is owned or controlled, directly or indirectly, by Michael Foods, Inc.

    1.3. "Patent Rights" shall mean (a) United States Patent 4,808,425, issued February 28, 1989, entitled "Method for the Ultrapasteurization of Liquid Whole Egg Products"; (b) United States Patent 4,957,759, issued September 18, 1990, entitled "Ultra-Pasteurization of Liquid Whole Egg Products"; (c) United States Patent 4,994,291 issued February 19, 1991 entitled "Method for Pasteurizing Liquid Whole Egg Products"; (d) United States Patent 5,019,408 issued May 28, 1991, entitled "Method for Pasteurizing Liquid Whole Egg Products"; and (e) United States Patent 4.957,760 issued September 18, 1990 entitled "Ultrapasteurization of Liquid Whole Egg Products by Direct Heat" and any continuations, divisions, reissues, reexaminations and extensions thereof (collectively "Patent Rights Patents"); and all existing and later-filed U.S. or foreign patent applications corresponding to or claiming priority benefit of any of the foregoing, and any continuations, divisions, reissues, reexaminations and extensions thereof including without limitation the currently pending reissue application of United States Patent 5,019,408 which includes the product claim referred to in Section 1.4 (collectively "Patent Rights Patent Applications").

    1.4. "Defined Product" shall mean any Licensed Product, or any product produced using any Licensed Process or containing a Licensed Product. UNIVERSITY and LICENSEE assume that a product claim will be allowed by the United States Patent and Trademark Office and therefore that United States Patent 5,019,408 will reissue with a product claim therein. LICENSEE agrees that any manufacture, use, or sale of the Raztek Product will infringe the aforesaid patent as reissued with a product claim contained therein and be a Defined Product hereunder.

    1.5. "Licensed Product" shall mean any product which (a) is covered by a valid and unexpired claim contained in a Patent Rights Patent in the country in which such Licensed Product is made, used or sold; or (b) is covered by a claim which is contained in a pending Patent Rights Patent Application in the country in which such Licensed Product is made, used or sold.

    1.6. "Licensed Process" shall mean any process which (a) is covered by a valid and unexpired claim contained in a Patent Rights Patent in the country in which such Licensed Process is used or practiced; or (b) is covered by a claim which is contained in a pending Patent Rights Patent Application in the country in which such Licensed Process is used or practiced.

    1.7. "Net Sales Proceeds" shall mean LICENSEE's billings (or a sublicensees' billings) for the Defined Product(s) produced hereunder less the sum of the following:

(a)

Discounts allowed in amounts customary in the trade;



(b)

Sales, tariff duties and/or use taxes directly imposed and with reference to particular sales;



(c)

Outbound transportation prepaid or allowed; and



(d)

Amounts allowed or credited on returns.

    No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll, or for costs of collection. Defined Product(s) shall be considered "sold" and Net Sales Proceeds "earned" when billed out or invoiced.

ARTICLE 2—GRANT

    2.1. UNIVERSITY hereby grants to LICENSEE the exclusive, worldwide right and license to make, have made, use and sell Defined Products and Licensed Processes until, as to any particular United States or Foreign patent which is or becomes part of the Patent Rights, the expiration of such

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patent (including any extension of the expiration date by the applicable governmental authority), unless sooner terminated as hereinafter provided.

    2.2. LICENSEE shall have the right to sublicense any of the rights, privileges and licenses granted hereunder, with the prior written consent of UNIVERSITY, which consent shall not be unreasonably withheld.

    2.3. LICENSEE agrees that any sublicenses granted by it shall provide that the obligations of this Agreement shall be binding upon the sublicensee as if it were a party to this Agreement.

    2.4. LICENSEE agrees to inform UNIVERSITY of any and all fully executed sublicense agreements involving the Patent Rights licensed hereunder and, at UNIVERSITY's request, LICENSEE,,N-111 provide copies of such sublicense agreements to UNIVERSITY.

    2.5. With the exception of those rights which UNIVERSITY may expressly grant to LICENSEE for the exclusive use of unpublished Know-How in respect to the Patent Rights, the licenses granted hereunder shall not be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology not part of the Patent Rights licensed hereunder.

ARTICLE 3—BEST EFFORTS; USE OF PATENT RIGHTS

    3.1. LICENSEE shall use best efforts to diligently continue commercialization of the Patent Rights licensed hereunder.

    3.2. LICENSEE shall exclusively use the Licensed Process covered by the Patent Rights licensed hereunder in respect to the manufacture of all extended shelf life liquid whole egg products manufactured or sold by LICENSEE except for a maximum of *** pounds of Raztek Product per calendar year in lieu of any other present methods for the manufacture of extended shelf life liquid whole egg products.

ARTICLE 4—ROYALTIES

    4.1 For the rights, privileges and licenses granted hereunder, LICENSEE shall make royalty payments to UNIVERSITY in the manner hereinafter provided for so long as any of the licenses of Paragraph 2.1 is in effect and LICENSEE and its Subsidiaries do not use or practice the apparatus claims within the Patent Rights:

(a)

A royalty of *** on Net Sales Proceeds earned by LICENSEE and its Subsidiaries from sales of Defined Products covered by a valid and unexpired claim contained in a Patent Rights Patent or a Patent Rights Patent Application.



(b)

A royalty which shall be payable from each bona fide sublicensed activity which shall be the greater of *** of the Net Sales Proceeds earned by the sublicensee from the sales of Defined Products, *** of LICENSEE revenues derived from such sublicensed activity, but in no event shall the sublicensing royalties due UNIVERSITY exceed *** of the Net Sales Proceeds earned by a sublicensee.



(c)

The provisions of this Section 4.1 notwithstanding, in the event LICENSEE issues a sublicense in exchange for a fully paid-up sublicensing fee in lieu of a running royalty based on sublicensed sales of Defined Products, UNIVERSITY and LICENSEE, in good faith, shall negotiate a fair and reasonable alternative royalty and the terms of payment.

    For the rights, privileges and licenses granted hereunder, LICENSEE shall make royalty payments to UNIVERSITY in the manner hereinafter provided for so long as any of the licenses of Paragraph 2.1 is in effect and LICENSEE and its Subsidiaries do use or practice the apparatus claims within the Patent Rights:

*** Redacted text.

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(a)

A royalty of *** on Net Sales Proceeds earned by LICENSEE, and its Subsidiaries from sales of Defined Products covered by a valid and unexpired claim contained in a Patent Rights Patent or a Patent Rights Patent Application.



(b)

A royalty which shall be payable from each bona fide sublicensed activity which shall be the great of *** of the Net Sales Proceeds earned by the sublicensee from the sales of Defined Products, or *** of LICENSEE revenues derived from such sublicensed activity, but in no event shall the sublicensing royalties due UNIVERSITY exceed *** of the Net Sales Proceeds earned by a sublicensee.

    The royalty payable to UNIVERSITY hereunder in respect to a product which is a Defined Product as defined under Section 1.4 solely because it contains a Licensed Product (and which otherwise would not constitute a Defined Product) will be determined on the basis of the Net Sales Proceeds earned in respect to such Defined Product which are attributable to the Licensed Product contained therein as determined on a fair and equitable basis rather than on the basis of the Net Sales Proceeds earned from such Defined Product as a whole. LICENSEE shall identify and account for Net Sales Proceeds earned and royalties payable under this Section 4.1 with respect to any such Defined Products.

    4.2 The UNIVERSITY and LICENSEE have agreed to certain royalty limitations set forth in subparagraph (a) and (b) immediately below (the "Royalty Limitations") in respect to sales of Defined Products by LICENSEE under both subparagraphs (a), in Section 4.1 above as follows:

(a)

Prior to inclusion in the Patent Rights of an issued patent which includes a product claim: (i) royalties shall be paid on sales of Defined Products by LICENSEE as required under Section 4.1 above up to sales of a maximum of *** pounds of Defined Products per calendar year; and (ii) no royalties shall thereafter be payable by LICENSEE under Section 4.1 on sales of Defined Products by LICENSEE in excess of *** pounds in such calendar year.



(b)

From and after inclusion in the Patent Rights of an issued patent which includes a product claim: (i) royalties shall be paid by LICENSEE as required under Section 4.1 above on sales of up to *** pounds of Defined Products by LICENSEE during the calendar year; (ii) no royalties shall be payable by LICENSEE under Section 4.1 on sales of Defined Products by LICENSEE in excess of *** pounds until the sales of Defined Products by LICENSEE in such calendar year are *** pounds; and (iii) royalties shall thereafter be payable by LICENSEE as required under Section 4.1 above on sales by LICENSEE of Defined Products in excess of sales of *** pounds in such calendar year.

    The covenants and agreements by LICENSEE under Sections 1.4, 3.2, and 9.3, are material to this Agreement including a material inducement to and a condition of the agreement by UNIVERSITY to the Royalty Limitations and such Royalty Limitations shall therefore be contingent on LICENSEE compliance therewith. Such Royalty Limitations have been agreed to by UNIVERSITY at the request of LICENSEE due to a market condition involving the present manufacture and sale by the manufacturers identified at Exhibit A of certain extended shelf life liquid whole egg competitive products which infringe the Patent Rights. Accordingly, the Royalty Limitations shall terminate in the event that such manufacturers as identified at Exhibit A withdraw such competitive products from the market in which infringement is occurring or are licensed by UNIVERSITY and/or LICENSEE to engage in the manufacture and/or sale of such infringing products in the market in which the infringement is occurring or otherwise cease to manufacture or sell such infringing products including through acquisition by LICENSEE.

*** Redacted text.

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    The Royalty Limitations shall not apply in any manner whatsoever in respect to royalties payable in respect to sales of Defined Products by sublicensees.

    The Royalty Limitations shall be calculated on a pro rated basis in respect to any change in the applicability thereof under subparagraph (a) or (b) or the termination thereof during a calendar year.

    4.3 The minimum annual royalty payable by LICENSEE shall be *** which shall include royalties attributable to Net Sales Proceeds earned by LICENSEE and its sublicensees. Annual minimum royalties are intended to be a minimum royalty due UNIVERSITY each year without regard to the applicability of any of the Royalty Limitations. LICENSEE shall pay to UNIVERSITY those royalties earned as a result of direct and sublicensed sales of Defined Products to the extent they are in excess of the specified annual minimum royalty.

    4.4 No multiple royalties shall be payable because any Defined Product or Licensed Process is covered by more than one patent of the Patent Rights licensed under this Agreement.

    4.5 Royalty payments shall be paid in United States Dollars in Raleigh, North Carolina, or at such other place as UNIVERSITY may reasonably designate consistent with the laws and regulations controlling in any foreign country. If any currency conversion shall be required in connection with the payment of royalties hereunder, such conversion shall be made by using the exchange rate prevailing at the Chase Manhattan Bank (N.A.) or its successor on the last business day of the calendar quarterly reporting period to which such royalty payments relate.

ARTICLE 5—PAYMENT, REPORTS AND RECORDS

    5.1. LICENSEE shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to UNIVERSITY hereunder and LICENSEE'S compliance in other respects with this Agreement including the covenant of LICENSEE under Section 3.2 hereof. Said books of account shall be kept at LICENSEE's principal place of business of the appropriate division of LICENSEE to which this Agreement relates. Said books and the supporting data shall be open at all reasonable times for five (5) years following the end of the calendar year to which they pertain, to the inspection of UNIVERSITY or its agents for the purpose of verifying LICENSEE's royalty statement or compliance in other respects with this Agreement.

    5.2. LICENSEE, within forty-five (45) days after March 31, June 30, September 30, and December 31 of each year, shall deliver to UNIVERSITY true and accurate reports, giving such particulars of the business conducted by LICENSEE and its sublicensees during the preceding three-month period under this Agreement as shall be pertinent to a royalty accounting hereunder. These shall include at least the following:

(a)

All Defined Product(s) manufactured and sold with Raztek Products manufactured and sold stated on a separate basis.



(b)

Total billings for Defined Product(s) sold.



(c)

All extended shelf life liquid whole egg products other than Defined Product(s) manufactured and sold and total billings in respect thereto.



(d)

The basis for and calculation of Royalty Limitations, if applicable.



(e)

Accounting for all sublicensing revenues.



(f)

Deductions applicable pursuant to the definition of "Net Sales Proceeds" as provided in Section 1.7.



(g)

Total royalties due.



(h)

Names and addresses of all Subsidiaries and sublicensees of LICENSEE.

*** Redacted text.

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(i)

Legal fees actually incurred by LICENSEE and royalty set-offs in respect thereto under Article 9 of this Agreement and predecessor sections under the License Agreements on a cumulative and quarterly basis.



(j)

The details of any judgments or settlements of infringement matters under Article 8 or Article 9 or predecessor provisions under the License Agreements.

    5.3. LICENSEE shall pay to UNIVERSITY at the time required for submission of the report for each such calendar quarter the royalties due and payable under Article 4 of this Agreement in respect to sublicenses.

    LICENSEE shall also pay to UNIVERSITY at the time required for submission of the report for each such calendar quarter the royalties due and payable under Article 4 of this Agreement in respect to sales of Defined Products by LICENSEE. For purposes of calculating the amount of any Royalty Limitation to which LICENSEE may be entitled under Section 4.2, the average price per pound received by LICENSEE regarding LICENSEE sales of Defined Products during the entire calendar year with respect to which the royalties are payable shall be used. Within forty-five (45) days after December 31 of each calendar year, LICENSEE shall calculate and report to UNIVERSITY the actual amount of any Royalty Limitation to which LICENSEE is entitled for the preceding calendar year and reimburse UNIVERSITY if the Royalty Limitation taken by LICENSEE for the preceding calendar year exceeds the total Royalty Limitation to which LICENSEE is entitled for such calendar year based on such calculation. If the Royalty Limitation taken by LICENSEE for such calendar year is less than the Royalty Limitation to which LICENSEE is entitled for such calendar year based on such calculation, or LICENSEE has otherwise paid royalties in excess of royalties due for such calendar year in respect to sale of Defined Products by LICENSEE, such deficiency shall be carried forward and applied to the royalty payment required from LICENSEE in respect to LICENSEE'S sale of Defined Products for the calendar quarters of the succeeding calendar year.

    5.4. On or before March 31 of each year, LICENSEE shall provide to UNIVERSITY, LICENSEE's certified financial statements for the LICENSEE's preceding fiscal year including, at a minimum, a Balance Sheet and Operating Statement. Upon appropriate marking by LICENSEE as "Confidential" and the treatment by LICENSEE of such information as confidential, UNIVERSITY agrees to hold such financial statements received from LICENSEE in confidence and will not release such reports to any third parties unless required under court order or unless LICENSEE's prior written permission is obtained. No such information or other information marked "Confidential" by LICENSEE shall, however, be treated as confidential hereunder if such information: (i) is known to UNIVERSITY at the time of disclosure of such information; (ii) is or becomes generally known to the public or is routinely disclosed to other persons through no breach of this Agreement; (iii) is received from a third party without restriction on disclosure and without, to the actual knowledge of, a breach of a confidential obligation of such third party; or (iv) has or is approved for release to the general public by authorization of LICENSEE.

    5.5. The royalty payments set forth in this Agreement, if overdue, shall bear interest until payment at a per-annum rate four percent (4%) above the prime rate in effect at the Chase Manhattan Bank (N.A.) or its successor on the due date. However, in no event shall any penalties hereunder exceed eighteen percent (18%) per-annum (1¹/2% monthly). LICENSEE shall also pay all reasonable collection costs at any time incurred by UNIVERSITY in obtaining payment of amounts past due, including reasonable attorneys' fees, whether or not any suit was commenced against LICENSEE. The payment of interest as hereinabove provided shall not foreclose UNIVERSITY from exercising any other rights it may have as a consequence of the delinquency of any payment.

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ARTICLE 6—PATENT PROSECUTION

    UNIVERSITY shall apply for, prosecute and maintain, during the term of this Agreement, the United States Patent Rights Patent Applications and Patents, and such foreign Patent Rights Patent Applications and Patents as the LICENSEE may direct. The application filings, prosecution, and maintenance relating to such United States and foreign Patent Rights Patent Applications and Patents shall be the responsibility of UNIVERSITY, provided that LICENSEE shall have reasonable opportunities to advise UNIVERSITY and shall cooperate with UNIVERSITY in such application filings, prosecution and maintenance. LICENSEE shall reimburse UNIVERSITY for all reasonable fees and expenses, including reasonable legal fees, incurred by UNIVERSITY in such application filings, prosecution, maintenance and any other proceedings before the United States Patent and Trademark Office (or equivalent foreign office) in respect to the Patent Rights including the product claim thereunder. LICENSEE shall be entitled to review and comment upon all actions undertaken in the prosecution of all patents and applications for which it bears expenses.

ARTICLE 7—TERMINATION

    7.1. In the event an order for relief is entered against LICENSEE under the Federal Bankruptcy Code, an order appointing a receiver for substantially all of LICENSEE's assets is entered by a court of competent jurisdiction, or LICENSEE makes an assignment for the benefit of creditors, or a levy of execution is made upon substantially all of the assets of LICENSEE and such levy is not quashed or dismissed within thirty (30) days, this Agreement shall automatically terminate effective the date of such order or assignment or, in the case of such levy, the expiration of such thirty (30) day period; provided, however, that such termination shall not impair or prejudice any right or remedy that UNIVERSITY might have under this Agreement.

    Should LICENSEE fail to pay UNIVERSITY royalties or expense reimbursements due and payable hereunder, UNIVERSITY shall have the right to terminate this Agreement on thirty (30) days' notice, unless LICENSEE shall pay UNIVERSITY, within the thirty (30) day period, all such royalties and interest due and payable. Upon the expiration of the thirty (30) day period, if LICENSEE shall not have paid all such royalties and interest or expense reimbursements due and payable, the rights, privileges and licenses granted hereunder shall terminate.

    7.3. Upon any material breach or default of this Agreement by LICENSEE, other than those occurrences set out in Section 7.1 or 7.2 hereinabove, which shall always take precedence over any material breach or default referred to in this Section 7.3, UNIVERSITY shall have the right to terminate this Agreement and the rights, privileges and licenses granted hereunder by ninety (90) days' notice to LICENSEE. Such termination shall become effective unless LICENSEE shall have cured any such breach or default prior to the expiration of the ninety (90) day period.

    7.4. LICENSEE shall have the right to terminate this Agreement at any time on ninety (90) days' notice to UNIVERSITY, and upon payment of all royalties and expense reimbursements due and payable to UNIVERSITY.

    7.5. Termination of this Agreement for any reason shall not be construed to release either party from any obligation that matured prior to the effective date of such termination. LICENSEE and any sublicensee thereof may, however, after the effective date of such termination, sell all Defined Product(s) completed and in inventory, provided that royalties are paid in accordance with the provisions of Article 4.

    7.6. Within thirty (30) days of the termination of this Agreement under Section 7.1, 7.2, 7.3, 7.4, or 7.5, LICENSEE shall duly account to UNIVERSITY and transfer to UNIVERSITY all rights which LICENSEE may have in or to all trade names and trademarks used to identify Defined Products and/or Licensed Processes. Provided, however, that this Section 7.6 shall not apply to any trade name or trademark employing the terms "Easy Eggs," "Justin's Farm." "Table Ready" or any adaptation thereof, or any trademark or trade name belonging to LICENSEE.

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    7.7. Upon termination of this Agreement for any reason, each sublicense then in effect of any of the rights, privileges and licenses granted hereunder shall automatically terminate. LICENSEE's rights under all sublicenses shall be deemed assigned to UNIVERSITY upon termination of this Agreement, and LICENSEE agrees to execute any instrument reasonably requested to confirm such assignment. Any sublicensee not in default upon termination of this Agreement for any reason may seek a license from the UNIVERSITY.

    7.8. Unless sooner terminated in accordance with the provisions herein, all licenses granted under this Agreement shall automatically terminate with the last to expire of the Patent Rights (including any extension of the expiration date by the applicable governmental authority) as defined under Section 1.3.

ARTICLE 8—INFRINGEMENT OF THIRD-PARTY RIGHTS

    8.1. In the event that UNIVERSITY or LICENSEE is charged with infringement of a patent by a third party or is made a party in any lawsuit as a result of LICENSEE's or a sublicensee's practice of the Patent Rights under this Agreement, LICENSEE shall:

(a)

defend or settle any such claim of infringement or lawsuit;



(b)

assume all costs, expenses, damages, and other obligations for payments incurred as a consequence of such charges of infringement or lawsuit;



(c)

indemnify and hold UNIVERSITY harmless from any and all damages, losses, liability, and costs resulting from a charge of infringement or lawsuit which shall be brought against UNIVERSITY and attributable to technology added to Defined Product(s) by LICENSEE or a sublicensee or manufacturing processes utilized by LICENSEE or a sublicensee; or



(d)

if such claim of infringement or lawsuit shall be based on patent claims contained in Patent Rights Patent or Patent Rights Patent Application, LICENSEE may decline to defend such claim of infringement or lawsuit in which case UNIVERSITY may defend, or settle the claim at its own expense, or may terminate this License Agreement upon thirty (30) days notice to mitigate any infringement damages or to comply with the terms of a settlement agreement.

LICENSEE's right to withhold royalties and the distribution of proceeds as set forth in Section 9.3 herein shall apply to this Section 8.1.

    8.2. UNIVERSITY shall give LICENSEE assistance in the defense of any such infringement charge or lawsuit, as may be reasonably required.

ARTICLE 9—INFRINGEMENT OF UNIVERSITY'S
PATENT RIGHTS BY THIRD PARTIES

    9.1. LICENSEE shall inform UNIVERSITY promptly in writing of any alleged infringement and of any available evidence of infringement by a third party of any patents within the Patent Rights.

    9.2. If during the term of this Agreement, LICENSEE becomes aware of any alleged infringement by a third party, LICENSEE in its sole discretion shall have the right, but shall not be obligated, to either:

(a)

settle the infringement dispute by sublicensing the alleged infringer or by other means; or



(b)

prosecute at its own expense any infringement of the Patent Rights. In the event LICENSEE prosecutes such infringement, LICENSEE may, for such purposes, request to use the name of UNIVERSITY as party plaintiff, subject to coordination of its legal action with the Attorney General of the State of North Carolina in accordance with applicable statutory requirements. Subject to the approval of the Board of Governors of North Carolina State University, UNIVERSITY may agree to become a party plaintiff.

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    9.3. In the event LICENSEE shall undertake the enforcement and/or defense of the Patent Rights by litigation, including any declaratory judgment action, LICENSEE may (subject to the limitations set forth below) withhold up to *** of all royalty payments payable by LICENSEE in respect to its sales of Defined Products otherwise due UNIVERSITY in any calendar quarter under Articles 4 and 5 of this Agreement. In no event shall LICENSEE'S withholding under Section 9.3 exceed *** of the legal expenses, including reasonable attorneys' fees incurred by LICENSEE in the enforcement and/or defense of the Patent Rights commencing from and after January 1, 1999 which have not been reimbursed or recovered plus *** of the balance of any such legal expenses which were incurred prior to January 1, 1999 in accordance with the License Agreements which have not been reimbursed or recovered.

    All royalty payments withheld pursuant to this Section 9.3 shall be applied by LICENSEE to offset any legal expenses, including reasonable attorneys' fees, actually incurred in the enforcement or defense of the Patent Rights including all such expenses incurred prior to the effective date hereof. LICENSEE'S right to withhold royalties shall extend only until *** of LICENSEE'S unreimbursed and unrecovered legal expenses, including reasonable attorneys' fees, incurred in the enforcement or defense of the Patent Rights from and after January 1, 1999 are reimbursed and *** of any such unreimbursed and unrecovered legal fees incurred prior to January 1, 1999 in accordance with the License Agreements are reimbursed. Any and all sums recovered by LICENSEE as a result of the infringement, whether by judgment, settlement or otherwise (including licensing arrangements), shall be applied first in satisfaction of any unrecovered and unreimbursed legal expenses including reasonable attorneys' fees of LICENSEE; second, toward reimbursement of UNIVERSITY'S legal expenses, including reasonable attorneys' fees relating to the enforcement or defense of the Patent Rights, which have not been previously reimbursed or recovered; and third toward reimbursement of UNIVERSITY for any amounts past due or withheld in accordance with this Article 9 or predecessor provisions under the License Agreements. The balance, if any, remaining from any such recovery shall be distributed to LICENSEE; provided, that LICENSEE shall pay to UNIVERSITY *** of such balance within thirty (30) days of receipt thereof. Such payments to the UNIVERSITY or LICENSEE shall be independent for all purposes of the computation of royalties (including in respect to Royalty Limitations if applicable) otherwise payable under Article 4. LICENSEE shall be entitled to settle any such litigation by agreement, consent judgment, voluntary dismissal or otherwise, with the written consent of the UNIVERSITY, which shall not be unreasonably withheld; provided, however, that LICENSEE hereby agrees to advise UNIVERSITY as soon as practicable after it has entered into any settlement discussions so that UNIVERSITY has a reasonable opportunity to provide LICENSEE with its views on any proposed settlement of any such action or proceeding.

    9.4. In the event LICENSEE does not undertake action to prevent the infringing activity within three (3) months of having been made aware and notified thereof, UNIVERSITY shall have the right, but shall not be obligated, to prosecute at its own expense any such infringements of the Patent Rights and, in furtherance of such right, LICENSEE may join UNIVERSITY as a party plaintiff in any such suit without expense to LICENSEE. The total cost of any such infringement action commenced or defended solely by UNIVERSITY shall be borne by UNIVERSITY. LICENSEE shall continue royalty payments to UNIVERSITY. Any recovery of damages by UNIVERSITY for any infringement shall be applied first in satisfaction of any unreimbursed expenses and attorneys' fees of UNIVERSITY relating to the suit, and second toward reimbursement of LICENSEE's reasonable expenses, including reasonable attorneys' fees, relating to the suit. The balance remaining from any such recovery shall be distributed to UNIVERSITY.

    9.5. In any infringement suit as either party may institute to enforce the Patent Rights pursuant to this Agreement, the other party hereto shall, at the request of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, informations, samples, specimens, and the like.

*** Redacted text.

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    9.6. LICENSEE shall have the sole right in accordance with the terms and conditions herein to sublicense any alleged infringer under the Patent Rights for future infringements.

    9.7. Any of the foregoing notwithstanding, if, at any time during the term of this Agreement, any of the Patent Rights are held invalid or unenforceable, LICENSEE shall have no further obligation to UNIVERSITY with respect to its future use or sale of any product or process covered solely by such Patent Rights, including the obligation of paying royalties. Nevertheless, LICENSEE shall not have a damage claim or a claim for refund or reimbursement against the UNIVERSITY.

ARTICLE 10—PRODUCT LIABILITY

    10.1. LICENSEE shall at all times during the term of this Agreement indemnify, defend and hold UNIVERSITY, its trustees, officers, employees and affiliates, harmless against all claims and expenses, including legal expenses and reasonable attorneys' fees, arising out of the death of or injury to any person or persons or out of any damage to property and against any other claim, proceeding, demand, expense and liability of any kind whatsoever resulting from utilization of the Patent Rights or unpublished Know-How in the production, manufacture, sales, use, lease, consumption or advertisement of the Defined Products and/or Licensed Processes by LICENSEE and its sublicensees or arising from any obligations of LICENSEE hereunder, except for any claims or expenses arising out of the negligence or willful misconduct of UNIVERSITY or its officers, agents or employees. The parties acknowledge that the UNIVERSITY's liability under this paragraph shall be subject to the sovereign immunity of the State of North Carolina and the North Carolina Tort Claims Act, to the extent such Act applies.

    10.2. LICENSEE shall maintain reasonable levels of product liability insurance. UNIVERSITY shall have the right to require such insurance policies to be made available for the UNIVERSITY's inspection and shall be listed as an additional insured party by the insurer under the pertinent insurance coverage.

    10.3. Except as otherwise expressly set forth in Article 12 of this Agreement, UNIVERSITY MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND VALIDITY OF PATENT RIGHTS CLAIMS ISSUED OR PENDING.

ARTICLE 11—ASSIGNMENT

    This Agreement may not be assigned by LICENSEE except in connection with the sale or other transfer of LICENSEE's entire business or that part of LICENSEE's business to which the license granted hereby relates. LICENSEE shall give UNIVERSITY thirty (30) days' prior notice of such assignment or transfer. Any other assignment of this License Agreement without the prior written consent of UNIVERSITY shall be void.

ARTICLE 12—REPRESENTATIONS AND WARRANTIES

    UNIVERSITY represents and warrants to LICENSEE that UNIVERSITY either legally or beneficially owns or controls the entire right, title and interest in and to the Patent Rights licensed hereunder; there are no options or rights in any third party to acquire any of the Patent Rights licensed hereunder. Except as set forth at Exhibit B, UNIVERSITY further represents and warrants to LICENSEE that there is, to its knowledge, no action, suit, claim, proceeding or governmental investigation pending or threatened against UNIVERSITY with respect to the Patent Rights licensed hereunder, either at law or in equity, before any court or administrative agency or before any governmental department, commission, board, bureau, agency or instrumentality, whether United States or foreign.

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    LICENSEE represents and warrants that the sales information set forth at Exhibit C and the information provided pursuant to Article S is and will be accurate in all material respects.

ARTICLE 13—NON-USE OF NAMES

    LICENSEE shall not use the name of North Carolina State University or of any of its employees in conjunction with such employees' positions with UNIVERSITY, or any adaptation thereof, in any advertising, promotional, or sales literature without prior written consent obtained from an authorized officer of UNIVERSITY in each case, except that LICENSEE may state that it is licensed by UNIVERSITY under one or more of the patents and/or applications comprising the Patent Rights. Failure by LICENSEE to comply with this restriction shall be deemed a material breach of this Agreement pursuant to Paragraph 7.3. Such material breach shall be deemed cured if the offending use is terminated within ninety (90) days of LICENSEE's receipt of a written notice from UNIVERSITY.

ARTICLE 14—EXPORT CONTROLS

    It is understood that UNIVERSITY is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities (including the Arms Export Control Act, as amended, and the Export Administration Act of 1979) and that its obligations hereunder are contingent on compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without prior approval of such agency. UNIVERSITY neither represents that a license shall not be required nor that, if required, it shall be issued.

ARTICLE 15—PAYMENTS, NOTICES AND OTHER COMMUNICATIONS

    Any payment, notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent by one party to the other by certified, first-class mail. postage prepaid, to the address below or as may otherwise be designated in writing by the receiving party.

In the case of UNIVERSITY:

Mark Crowell
Associate Vice Chancellor
Technology Transfer and Industry Research
North Carolina State University
Box 7003
Raleigh, NC 27695-7003

In the case of LICENSEE:

Chief Executive Officer
Michael Foods, Inc.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416

ARTICLE 16—MISCELLANEOUS PROVISIONS

    16.1. This Agreement shall be construed, governed, interpreted and applied in accordance with the laws of the State of North Carolina, except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent was granted.

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    16.2. The parties hereto acknowledge that this Agreement supersedes all License Agreements and constitutes a merger and together with the recitals and exhibits hereto which are incorporated herein sets forth the entire agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument subscribed to by the parties hereto.

    16.3. The provisions of this Agreement are severable, and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof.

    16.4. The parties understand and agree that where any provisions of this Agreement are in violation of any of the laws and/or regulations of the United States Government and/or the State of North Carolina, such provision(s) shall be automatically rendered null and void, and such provisions will be modified to the extent necessary to be enforceable and substituted for the unenforceable or violative provision(s).

    16.5. LICENSEE agrees to mark the Defined Product(s) sold in the United States with all applicable United States patent numbers. All Defined Product(s) shipped to or sold in other countries shall be marked in such a manner as to conform with the patent laws and practices of the country of manufacture or sale.

    16.6. LICENSEE shall be solely responsible for the payment and discharge of any taxes or duties relating to any transaction of LICENSEE, its employees, contractors, agents, or sublicensees, in connection with the manufacture, use, or sale in any country of the Defined Product(s) or Licensed Processes.

    16.7. The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party.

    16.8. All terms and conditions of this Agreement regarding business matters including but not limited to royalties or other payments shall be held in confidence by each party to the extent permitted by law unless authorized in writing by the other party subject to the exceptions to confidential information set forth at 5.4.

    16.9. This Consolidated, Restated and Amended License Agreement shall be effective as o f January 1, 1999.

    16.10. The UNIVERSITY and LICENSEE agree to exercise good faith and best efforts to: keep the other fully informed concerning the status of the Patent Rights and the claims thereunder; and assist in the advancement, prosecution and protection of such Patent Rights and the claims thereunder. Each party will respond in respect to any consent which may be required hereunder within seven (7) business days of receipt of sufficient information from the other party which is reasonably necessary to an informed decision thereon.

    16.11. Time shall be of the essence in all things pertaining to the performance of this Agreement.

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    IN WITNESS WHEREOF, the parties have hereunto set their hands and seals and duly executed this Agreement effective as of the date first above written.

SIGNATURE PAGE FOLLOWS

NORTH CAROLINA STATE UNIVERSITY		MICHAEL FOODS, INC.
By:	Charles Moreland. Vice Chancellor	By:	Jeff Shapiro, Vice President
Dated:	June 9, 2000	Dated:

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EXHIBIT A

IDENTIFICATION OF MANUFACTURERS
OF INFRINGING COMPETITIVE PRODUCTS
UNDER
ARTICLE 4

Cutler Egg Products, Inc.
Nulaid Foods, Inc.
Rose Acres Farms, Inc.
Wilcox Farms, Inc.
Willamette Egg Farms, Inc.
Sunny Fresh Foods, division of Cargill, Inc.

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EXHIBIT B

DISCLOSURE OF ACTIONS
AND
PROCEEDINGS REGARDING
PATENT RIGHTS UNDER
ARTICLE 12

Pending Suit:

    Nulaid Foods, Inc., Valley Fresh Foods, Inc., and Nulaid-Nest Best v. Michael Foods, Inc. and North Carolina State University; Michael Foods, Inc. and North Carolina State University v. Nulaid Foods, Inc., Valley Fresh Foods, Inc., and Nulaid-Nest Best, U.S. District Court, Eastern District of California; Case No. CIV-S-93-1314 WBS(PAN)

Threatened Suit:

    Sunny Fresh Foods, Inc. v. Michael Foods and North Carolina State University, U.S. District Court, District of Minnesota, Fourth Division, Case No. 4-92-635, to be initiated upon issuance of Notice of Allowance by the United States Patent and Trademark Office of a Reissue Patent relating to U.S. Patent No. 5,019,408.

Pending Agency Proceedings:

    U.S. Patent No. 4,808,425, awaiting formal issuance of a Reexamination Certificate by United States Patent and Trademark Office

    U.S. Patent No. 5,019.408, awaiting action by Examiner Weier consistent with decision of United States Patent and Trademark Office Board of Appeals. Pending are protests filed by: 1/5/95 Papetti Protest; 1/18/95 Papetti Rule 1.182 Protest; 1/24/95 Whale; 1/26/95 Sharpe; 1 /27/95 Low Rule 1.182 Protest; 1 /31 /95 Nulaid Protest; 1 /31 /95 Low Protest; 2/9/95 Papetti Supplemental Protest; 2/16/95 Cutler Protest by Oblon; 3/7/95 Papetti Second Supplemental Protest; 4/18/95 Papetti's Revision to Second Supplemental Protest; 7/11/95 Papetti Revised Second Supplemental Protest; 9/5/95 Nulaid Protest; 9/28/95 Papetti Petition 1.182; 10/6/95 Nulaid 1.291 and 1.182 Supplemental Protests; 11/9/95 United Egg Association Protest by Forman; 12/18/95 Nulaid Protest; 1/9/96 Sunny Fresh Protest by Jones; and 12/14/99 Sunny Fresh Protest.

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EXHIBIT C

MICHAEL FOODS, INC. REPRESENTATION
OF EASY EGGS© AND TABLE READY™
EGG PRODUCTS SOLD BY QUARTER
(IN POUNDS) FOR CALENDAR YEARS
1997  - 1999

		Easy Eggs©	Table Ready™		Total
lst Qtr 1997		50,025,736	10,200,875	*	60,226,611
2nd Qtr 1997		52,155,700	29,064,619		81,220,319
3rd Qtr 1997		54,843,138	28,957,769		83,800,907
4th Qtr 1997		57,388,977	33,077,341		90,466,318
	1997	214,413,551	101,300,604		315,714,155
lst Qtr 1998		50,815,929	30,551,037		81,366,966
2nd Qtr 1998		53,160,509	32,190,988		85,351,497
3rd Qtr 1998		51,440,445	30,392,205		81,832,650
4th Qtr 1998		48,674,374	29,822,311		78,496,685
	1998	204,091,257	122,956,541		327.047,798
1st Qtr 1999		43,594,536	29,117,140		72,711,676
2nd Qtr 1999		46,518,970	30,761,864		77,280,834
3rd Qtr 1999		46,152,760	32,136,786		78,289,546
4th Qtr 1999		46,341,802	34,304,884		80,646,686
	1999	182,608,068	126,320,674		308,928,742
Total All Years		601,112,876	350,577,819		951,690,695

*

Papetti's Hygrade Egg Products was acquired on February 26, 1997, therefore the first quarter of 1997 is for the month of March only.

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CONSOLIDATED. RESTATED AND AMENDED LICENSE AGREEMENT
ARTICLE 1—DEFINITIONS
ARTICLE 2—GRANT
ARTICLE 3—BEST EFFORTS; USE OF PATENT RIGHTS
ARTICLE 4—ROYALTIES
ARTICLE 5—PAYMENT, REPORTS AND RECORDS
ARTICLE 6—PATENT PROSECUTION
ARTICLE 7—TERMINATION
ARTICLE 8—INFRINGEMENT OF THIRD-PARTY RIGHTS
ARTICLE 9—INFRINGEMENT OF UNIVERSITY'S PATENT RIGHTS BY THIRD PARTIES
ARTICLE 10—PRODUCT LIABILITY
ARTICLE 11—ASSIGNMENT
ARTICLE 12—REPRESENTATIONS AND WARRANTIES
ARTICLE 13—NON-USE OF NAMES
ARTICLE 14—EXPORT CONTROLS
ARTICLE 15—PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
ARTICLE 16—MISCELLANEOUS PROVISIONS
EXHIBIT A
IDENTIFICATION OF MANUFACTURERS OF INFRINGING COMPETITIVE PRODUCTS UNDER ARTICLE 4
Cutler Egg Products, Inc. Nulaid Foods, Inc. Rose Acres Farms, Inc. Wilcox Farms, Inc. Willamette Egg Farms, Inc. Sunny Fresh Foods, division of Cargill, Inc.
EXHIBIT B
DISCLOSURE OF ACTIONS AND PROCEEDINGS REGARDING PATENT RIGHTS UNDER ARTICLE 12
EXHIBIT C
MICHAEL FOODS, INC. REPRESENTATION OF EASY EGGS© AND TABLE READY™ EGG PRODUCTS SOLD BY QUARTER (IN POUNDS) FOR CALENDAR YEARS 1997 - 1999

EX-10.78

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Exhibit 10.78

SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE

THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (the "Agreement") is entered into by and between NULAID FOODS, INC., VALLEY FRESH FOODS, INC., and NULAID NEST-BEST, on the one hand, and NORTH CAROLINA STATE UNIVERSITY ("NCSU") and MICHAEL FOODS, INC. ("Michael Foods"), on the other hand. The "Effective Date" of this Agreement shall be the date by which the last party executes the agreement and the Pre-Settlement Royalties are paid.

RECITALS

    A.  NCSU is the holder, and Michael Foods is the exclusive licensee, of U.S. Patents Nos. 4,808,425 (the "425 Patent"), 4,957,759 (the "759 Patent"), 4,994,291 (the "291 Patent"), 5,019,408 (the "408 Patent"), and reissue application, U.S. Serial No. 08/061,985 ("Reissue Application") and the associated re-examination certificates (collectively the "Patents-In-Suit"), which patents relate to the manufacture of extended shelf life liquid whole egg product (as disclosed in the "425 patent at column 8 lines 45-68) (the "Product").

    B.  On August 12, 1993, Nulaid Foods, Inc. filed a declaratory relief action in the United States District Court, Eastern District of California, Civil Action No. CIV-S-93-1314 WBS (PAN), seeking a judgment that the Patents-In-Suit are invalid, unenforceable and not infringed by Nulaid Foods, Inc. NCSU and Michael Foods answered Nulaid Foods, Inc.'s complaint denying the allegations, asserting various affirmative defenses, and asserting a counterclaim against Nulaid Foods, Inc. for damages and injunctive relief alleging that Nulaid Foods, Inc. infringed the Patents-In-Suit.

    C.  On August 13, 1993, Michael Foods and NCSU filed an action for damages and injunctive relief against Nulaid Foods, Inc. alleging that Nulaid Foods, Inc. infringed the four Patents-In-Suit. Nulaid Foods, Inc. answered Michael Foods' and NCSU's complaint denying the allegations, asserting various affirmative defenses, and asserting a counterclaim for declaratory judgment that the Patents-In-Suit are invalid, unenforceable and not infringed by Nulaid Foods, Inc.

    D.  The two actions were consolidated under Case No. CIV-S-93-1314 WBS (PAN) (the "Pending Litigation").

    E.  On or about July 1, 1994, the pleadings were amended to add Valley Fresh Foods and Nulaid Nest-Best as plaintiffs and cross-defendants.

    F.  Nulaid Nest-Best, a general partnership between Nulaid Foods, Inc and Valley Fresh Foods, Inc. was formed on or about February 27, 1994. Nulaid Nest-Best sold 1,727,144 pounds of the Product. Nulaid Nest-Best ceased doing business, wound-up and dissolved on or about July 31, 1994.

    G.  The parties to this Agreement wish to reach full and final settlement of the disputes noted above.

AGREEMENT

    In consideration of the mutual covenants and promises set forth below, and for good and fair consideration, receipt of which is hereby acknowledged, the parties agree and stipulate as follows:

    1.  Warranties and Disclosures

    a.  NCSU Warranty.

    NCSU represents and warrants that it is the owner of the right, title and interest in the Patents-In-Suit and is authorized to enter into this Agreement and has the right to grant the rights granted herein.

    b.  Michael Foods Warranty.

    Michael Foods represents and warrants that it is the holder of an exclusive license to use the Patents-In-Suit and is authorized to enter into this Agreement and has the right to grant the rights granted herein.

    c.  Disclosure by Nulaid.

    In connection with the disclosure requirements as set forth below, the parties agree that the protective order in the Pending Litigation shall remain in full force and effect during the term of this Agreement. Nulaid Foods, Inc. shall mark all material produced with the appropriate level of confidentiality identifying any claimed trade secret information as such on the face of the material.

      i. Within five days of the execution of this Agreement, Nulaid Foods, Inc. and Valley Fresh Foods shall disclose to counsel for Michael Foods and NCSU in the Pending Litigation, on an attorneys' eyes only basis subject to the protective order in the Pending Litigation, their current and contemplated processes for pasteurizing and packaging liquid whole egg products with a shelf life in excess of four weeks.

     ii. Within five days of the execution of this Agreement, Nulaid Foods, Inc. and Valley Fresh Foods shall disclose to counsel for Michael Foods and NCSU in the Pending Litigation, on an attorneys' eyes only basis subject to the protective order in the Pending Litigation, any and all of their pending patent applications or applications to the United States Department of Agriculture ("USDA") for pasteurizing and packaging liquid whole egg products with a shelf life in excess of four weeks.

     iii. Nulaid Foods, Inc. shall promptly disclose in writing to counsel for Michael Foods and NCSU in the Pending Litigation, on an attorneys' eyes only basis subject to the protective order in the Pending Litigation, any changes in the process or equipment used by Nulaid Foods, Inc. to pasteurize or package liquid whole egg products with a USDA approved or requested shelf life in excess of four weeks made at anytime after the date hereof and before expiration of the last of the Patents-in-Suit. Nulaid Foods, Inc. shall also promptly disclose, on an attorneys' eyes only basis subject to the protective order in the Pending Litigation, any additional procedures, processes or equipment used to pasteurize or package liquid whole egg product with USDA approved shelf life in excess of four weeks made at anytime after the date hereof and before expiration of the last of the Patents-in-Suit. The written disclosure shall be made within 30 days of implementation of the change and/or addition.

    2.  Non-exclusive Sublicense.

    a.  Michael Foods grants to Nulaid Foods, Inc. on the Effective Date a non-exclusive sublicense to make, use and sell, ***. Nulaid Foods, Inc. will not be precluded from having Michael Foods co-pack the Product. The sublicense granted herein does not extend to the manufacture of Product ***.

*** Redacted text.

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    b.  This non-exclusive sublicense shall apply to all production, use and sale by Nulaid Foods, Inc. of Product prior to and through the term of this Agreement.

    c.  After current inventories of containers of the Product are used up or within 120 days of the Effective Date, whichever is sooner, Nulaid Foods, Inc. shall mark all containers in the manner prescribed below.

    The marking shall include the following in easily legible type: "Covered by one or more of the following U.S. Patents 4,808,425; 4,957,759; 4,994,291; 5,019,408." Should a subsequent patent issue from the Reissue Application, Nulaid Foods, Inc. shall include that patent number in its patent marking within 120 days of notification of issue

    d.  This non-exclusive sublicense granted to Nulaid Foods, Inc. is non-assignable, even with a sale of Nulaid Foods, Inc.'s business or assets. Nulaid Foods, Inc. may not directly or indirectly assign, license, sublicense, or otherwise convey this non-exclusive sublicense nor any of the rights or licenses granted herein to any third party without the prior written consent of Michael Foods. A direct or indirect change of new membership or new ownership of greater than 35% of the equity interests of Nulaid Foods, Inc. (a "Material Change of Membership ") pursuant to a transaction or series of transactions regarding the same Person shall be deemed an assignment. In the event of a Material Change of Membership of Nulaid Foods, Inc. in respect to a Person who is not engaged in, or subject to the control of a Person engaged in, the manufacture or sale of extended shelf life liquid whole egg product prior to the proposed assignment, the written consent of Michael Foods shall not be unreasonably withheld and a determination in respect thereto shall be made and communicated within 5 business days of receiving complete information concerning the proposed assignee. This agreement does not restrict changes of ownership of a member of Nulaid Foods, Inc. and such a change shall not constitute an assignment unless the new owner of a Nulaid Foods, Inc. member is engaged or is controlled by a Person who is engaged in the manufacture or sale of extended shelf life liquid whole egg product. ***.

    3.  Royalty and Reports.

    a.  For the sales or Transfers, less returns, ("Transfer, Transferred or Transfers" for this agreement means exchange of Product for non-monetary consideration) of Product prior to January 1, 2000 by Nulaid Foods, Inc., and/or Nulaid Nest-Best, Nulaid Foods, Inc. agrees to pay an amount equal to *** for all sales or Transfers, less returns, of Product that occurred prior to 1/1/00 (Pre-Settlement Royalties). The number of pounds sold, less returns, on which Pre-Settlement Royalties are due shall be certified in writing marked appropriately on the face of the document as to confidentiality pursuant to the protective order, including designation as a trade secret if appropriate, and delivered to Michael Foods' and NCSU's counsel prior to the Effective Date. Nulaid Foods, Inc. shall pay Michael Foods the Pre-Settlement Royalties in one lump-sum payment on the Effective Date of this Agreement.

    The Pre-Settlement Royalties shall not be adjusted, forgiven or returnable if the Patents-in-Suit, or any of them, are subsequently found invalid, unenforceable or not infringed.

    b.  For the sale or Transfer, of all Product on or after January 1, 2000, until the expiration of the last of the Patents-In-Suit, Nulaid Foods, Inc., on behalf of itself, its brokers, distributors and customers, shall pay a royalty on the number of pounds sold or Transferred, less returns, at the rate of ***:

    ***

*** Redacted text.

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Said royalties under this Paragraph 3(b) of this Agreement (Paragraph 3(b) Royalties) shall be due and payable with respect to all sales or Transfers of the Product using Nulaid Foods, Inc.'s current process or any process or product covered by any claim or claims of the Patents-in-Suit. Nulaid Foods, Inc. agrees and acknowledges that its future manufacture, sale or Transfer of extended shelf life liquid whole egg products is covered by one or more of the Patents-in-Suit.

    c.  Paragraph 3(b) Royalties shall be paid solely to Michael Foods, payable on the last day of April, July, October and January for the preceding quarter. Nonpayment of any such royalty within the 30 day cure period as provided in paragraph 6 below shall constitute breach of this Agreement. Regardless of whether any royalties are due, Nulaid Foods, Inc. shall report on the last day of April, July, October, and January the amount of Product sold or Transferred in the prior quarter by both pounds and by net sales. Net Sales is defined as Nulaid Foods Inc.'s billings for the Product less: discounts; sales and/or use taxes; tariff duties or taxes directly imposed on sales of the product; prepaid outbound transportation; and returns. On the effective date of this agreement, Nulaid Foods, Inc. shall tender the royalty report and check under this section for 1/1/2000-6/30/2000.

    d.  With respect to the Paragraph 3(b) Royalties, Nulaid Foods, Inc. shall provide to Michael Foods a certified public accountant's verified audit of each year's production within six months following the close of the year. Shortages shall be paid with the provision of the CPA's verified audit. Overages shall be posted to the current year. All information contained in such verified audit shall be kept confidential by Michael Foods and shall not be disclosed to anyone outside Michael Foods.

    4.  Audit.

    a.  At Michael Foods' sole cost and expense, and upon reasonable notice, Nulaid Foods, Inc. agrees to allow an independent, certified public accountant selected by Michael Foods to audit Nulaid Foods, Inc.'s books and records, during Nulaid Foods, Inc.'s normal business hours, to ascertain compliance with Nulaid Foods, Inc.'s reporting and royalty payment obligations under this Agreement, provided, however, that said certified public accountant shall first agree in writing (1) to retain Nulaid Foods, Inc.'s confidential customer information in confidence and not disclose it to Michael Foods or any other party and (2) to retain all other information in confidence and not disclose it to any party other than Michael Foods. All information reviewed during, and all reports based on the audit shall be kept confidential by Michael Foods and shall not be disclosed to anyone outside Michael Foods. Michael Foods will only audit for the time periods covered by or previous to the last verified audit provided by Nulaid Foods, Inc. pursuant to paragraph 3(d).

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    b.  Although allowed to audit, Michael Foods is not required to audit and may rely upon figures and reports submitted on behalf of Nulaid Foods, Inc. Nulaid Foods, Inc. will report in good faith. Should an audit disclose that Nulaid has underreported annual amounts due by more than 10% or $10,000 of royalties due, Nulaid Foods, Inc. shall reimburse Michael Foods for the reasonable costs of the audit. If Michael Foods elects to use an accounting firm not located in Northern California, Nulaid Foods, Inc. shall not be required to pay the travel related expenses incurred by that firm.

    5.  Adjustment of Royalties.  Royalties shall not be adjusted based on any future license or settlement absent written consent of each of Nulaid Foods, Inc., Michael Foods and NCSU.

    6.  Termination of Sublicense.  The sublicense terminates automatically on the filing of bankruptcy by Nulaid Foods, Inc. or upon the assignment of the license or any rights under it to the benefit of creditors or any pledge or hypothecation of the license. Michael Foods shall have the right to terminate the sublicense granted by this Agreement by giving written notice upon the failure of Nulaid Foods, Inc. to make any payment required under this agreement when due, provided that Michael Foods shall first have given written notice of said failure to Nulaid Foods, Inc. and Nulaid Foods, Inc. shall have failed to cure the non-payment within thirty (30) days of receipt of said notice. In order to preserve its right to contest whether a disputed payment is due, Nulaid Foods, Inc. shall have the right to cure any default in payment by paying Michael Foods under protest.

    7.  Cooperation.  Nulaid Foods, Inc. and Valley Fresh Foods will not aid third parties in subsequent suits or proceedings where those third parties are trying to prove the Patents-in-Suit, or any of them, are invalid, unenforceable or not infringed, except in accordance with service of process or court order and after notification to Michael Foods and NCSU.

    8.  Agreement To Have Preclusive Effect.  Nulaid Foods, Inc. and Valley Fresh Foods will not contest the validity or enforceability of any claim or claims of the Patents-in-Suit in any subsequent suit or proceeding. Nulaid Foods, Inc. and Valley Fresh Foods will not contest their infringement of the claims of the Patents-in-Suit by its current and previous methods in any subsequent suits or proceedings. The parties intend this resolution of validity, enforceability, and infringement to be res judicata between the parties and to have preclusive effect so any party is foreclosed from challenging validity, enforceability, and/or infringement in a subsequent suit under the doctrine of collateral estoppel.

    9.  Michael Foods' General Release.  In consideration of the promises and covenants set forth in this Agreement, Michael Foods hereby fully releases and forever discharges Nulaid Foods, Inc., Valley Fresh Foods, Nulaid Nest-Best, their successors, assigns, officers, and directors, from any and all liabilities, claims, demands, contracts, debts, obligations, arbitrations, actions, or causes of action, known or unknown, in law or equity, asserted or unasserted, arising out of, or in any way connected with, or related to the claims alleged in the Pending Litigation, including but not limited to any claim of liability for any alleged past infringement of the Patents-in-Suit.

    10.  NCSU's General Release.  In consideration of the promises and covenants set forth in this Agreement, NCSU hereby fully releases and forever discharges Nulaid Foods, Inc., Valley Fresh Foods, Nulaid Nest-Best, their successors, assigns, officers, and directors, from any and all liabilities, claims, demands, contracts, debts, obligations, arbitrations, actions, or causes of action, known or unknown, in law or equity, asserted or unasserted, arising out of, or in any way connected with, or related to the claims alleged in the Pending Litigation, including but not limited to any claim of liability for any alleged past infringement of the Patents-in-Suit.

    11.  Nulaid Foods, Inc.'s General Release.  In consideration of the promises and covenants set forth in this Agreement, Nulaid Foods, Inc. hereby fully releases and forever discharges Michael Foods, NCSU, their affiliates, successors, assigns, officers, and directors from any and all liabilities, claims,

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demands, contracts, debts, obligations, arbitrations, actions, or causes of action, known or unknown, in law or equity, asserted or unasserted, arising out of, or in any way connected with, or related to the claims alleged in the Pending Litigation, including but not limited to any claims for declaratory relief regarding the validity, infringement, or enforceability of the Patents-in-Suit.

    12.  Valley Fresh Foods' General Release.  In consideration of the promises and covenants set forth in this Agreement, Valley Fresh Foods hereby fully releases and forever discharges Michael Foods, NCSU, their affiliates, successors, assigns, officers, and directors from any and all liabilities, claims, demands, contracts, debts, obligations, arbitrations, actions, or causes of action, known or unknown, in law or equity, asserted or unasserted, arising out of, or in any way connected with, or related to the claims alleged in the Pending Litigation, including but not limited to any claims for declaratory relief regarding the validity, infringement, or enforceability of the Patents-in-Suit.

    13.  Consent Judgment and Dismissal of the Pending Litigation.  With the execution of this Agreement, Nulaid Foods, Inc., Valley Fresh Foods, and a representative for the now defunct entity Nulaid Nest-Best shall execute the Consent Judgement and Injunction in the form of Attachment A and deliver it to counsel for Michael Foods and NCSU in the Pending Litigation upon receipt of the Agreement executed by Michael Foods and NCSU. Within two (2) business days of the execution of the consent judgment, Michael Foods and/or NCSU shall file the executed Consent Judgment and Injunction with the Court for entry.

    14.  No Other Pending Claims.  The parties hereto hereby represent and warrant that they have not filed or served any claim, demand, suit or legal proceeding against any other party hereto which is now pending, other than the Pending Litigation.

    15.  No Prior Assignments.  The parties hereto represent and warrant that they have not heretofore assigned or transferred, or purported to assign or transfer, to any other person, entity, firm or corporation whatsoever, any claim, debt, liability, demand, obligation, expense, action or cause of action herein released.

    16.  Confidentiality.  The parties shall have the right to disclose the existence of this Agreement; however, the parties, including their counsel and employees, shall keep the specific terms of this Agreement confidential and shall not now or hereafter divulge these terms to any third party except (a) with the prior written consent of the other parties; or (b) to any governmental body having jurisdiction to call therefor; or (c) in confidence to their legal counsel, accountants, banks and financing sources and their advisors solely in connection with complying with financial transactions; or (d) as otherwise may be required by law or legal process, including to legal and financial advisors in their capacity of advising a party in such matters, except that if disclosure is sought in any legal proceeding, it shall be pursuant to a court-endorsed protective order.

    17.  Advice of Counsel.  The parties hereto have made such investigation of the facts pertaining to the settlement and this Agreement, and all matters pertaining thereto, as they deem necessary. The parties represent that: (1) they are represented by the attorneys of their choice; (2) prior to the execution of this Agreement each party's attorney reviewed this Agreement, made all desired changes, and approved this Agreement as to substance and form; (3) the terms of this Agreement and its consequences (including risks, complications, and costs) have been fully explained to them by their attorneys; (4) they fully understand the terms and consequences of this Agreement; (5) they are not relying upon any representation or statement made by any other party hereto, or by such other party's employees, agents, representatives or attorneys regarding this Agreement or its preparation except to the extent such representations are expressly and explicitly incorporated herein; (6) they are not relying upon a legal duty, if one exists, on the part of any other party, or upon the part of such other party's employees, agents, representatives or attorneys, to disclose any information in connection with the execution of this Agreement or its preparation; and (7) they have freely signed this Agreement. It is

6

expressly understood that no party shall ever assert any failure to disclose information by any other party as a ground for challenging this Agreement.

    18.  Construction.  The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party.

    19.  Captions.  The parties acknowledge, agree and understand that the captions of the various portions of this Agreement are for convenience and organization only, are not intended to constitute the substance of this Agreement, and are not intended to be referred to in construing or interpreting any provision contained in this Agreement.

    20.  Terms.  The terms of this Agreement are contractual in nature and not a mere recital.

    21.  Authority.  Each signer of this Agreement hereby represents and covenants that he or she is authorized to execute this Agreement on behalf of the party for which he or she is signing and that all necessary approvals have been obtained.

    22.  Successors Bound.

    This Settlement Agreement is binding upon and inures to the benefit of Michael Foods and NCSU, as well as their successors, assigns, officers, directors, agents, servants, employees, and representatives.

    23.  Severability.  If any provision of this Agreement is found to be unenforceable in any respect, such unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if the unenforceable provision had not been contained herein.

    24.  Integrated Agreement.  This Agreement supersedes all prior agreements, if any, whether oral or written, pertaining to all or any portion of its provisions. This Agreement may not be changed, modified, altered, interlineated, or supplemented, nor may any covenant, representation, warranty, or other provision be waived, except by agreement in writing signed by the party against whom enforcement of the change, modification, alteration, interlineation, supplementation or waiver is charged.

7

    25.  Notices.  All notices required under this Agreement must be in writing, and may be given either personally or by registered or certified (return receipt requested) mail as follows:

For Nulaid:	Chief Executive Officer Nulaid Foods, Inc. 200 W. Fifth St. Ripon, CA 95366
For Valley Fresh Foods:	Chief Executive Officer Valley Fresh Foods, Inc. P.O. Box 910 Turlock, CA 95381
For Michael Foods:	Chief Executive Officer Michael Foods, Inc. 324 Park National Bank Bldg. 5353 Wayzata Blvd. Minneapolis, MN 55416
For NCSU:	Associate Vice Chancellor for Technology Transfer North Carolina State University Box 7003 Raleigh, North Carolina 27695-7003
	With copy to: Office of Legal Affairs North Carolina State University Box 7008 Raleigh, North Carolina 27695-7008

    26.  Choice of Law and Forum Selection.  This Agreement shall be governed by and interpreted pursuant to North Carolina law. The parties hereto submit to venue and personal jurisdiction in North Carolina for any enforcement action under this Agreement.

    Any action for violation of the Consent Judgement and Injunction is subject to the full enforcement powers of the Federal Court for the Eastern District of California.

    27.  Attorneys Fees and Costs.  The parties agree that they will each bear their own attorneys' fees and cost related to the Pending Agreement and this Agreement. In the event of any dispute under this Agreement in which either the claimed amount or the award is less than One Hundred Thousand dollars ($100,000), the prevailing party shall be entitled to recover its reasonable attorneys' fees, costs, costs of investigation, expert expenses, and other related expenses.

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    28.  Counterparts.  This Agreement may be executed in one or more counterparts, including by facsimile copies, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

DATED: August  , 2000	NULAID NEST-BEST, a California partnership By Nulaid Foods, Inc. Its General Partner
	By
	Its
DATED: August  , 2000.	NULAID FOODS, INC.
	By
	Its
DATED: August  , 2000.	VALLEY FRESH FOODS, INC.
	By
	Its
DATED: August  , 2000.	MICHAEL FOODS, INC.
	By
	Its
DATED: August  , 2000.	NORTH CAROLINA STATE UNIVERSITY
	By
	Its

9

QuickLinks

SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
RECITALS
AGREEMENT

EX-27.1

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS INCLUDED
HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.

<MULTIPLIER> 1000

                             
<PERIOD-TYPE>                   9-MOS
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