-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sjtf+WZt+GxaGzqTyUlFRKzycG5FsNp2/IKAW0NhQ6DlSeL1DZcVaAv+nrM6mRb+ 5LdSgn7P40wgwZ9s1E3YYw== 0000912057-01-528742.txt : 20010816 0000912057-01-528742.hdr.sgml : 20010816 ACCESSION NUMBER: 0000912057-01-528742 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAEL FOODS INC /MN CENTRAL INDEX KEY: 0000768158 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 410498850 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15638 FILM NUMBER: 1714101 BUSINESS ADDRESS: STREET 1: 5353 WAYZATA BLVD STREET 2: PARK NATIONAL BANK BLDG STE 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6125461500 MAIL ADDRESS: STREET 1: 610 PARK NATIONAL BANK BUILDING STREET 2: 5353 WAYZATA BOULEVARD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: NORTH STAR UNIVERSAL INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M-FOODS DAIRY LLC CENTRAL INDEX KEY: 0001139431 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841582879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-63722-06 FILM NUMBER: 1714104 BUSINESS ADDRESS: STREET 1: C/O MICHAEL FOODS INC STREET 2: 5353 WAYZATA BOULEVARD, STE. 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 95254605111 MAIL ADDRESS: STREET 1: C/O MICHAEL FOODS INC STREET 2: 5353 WAYZATA BOULEVARD, STE. 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M-FOODS DAIRY TXCT LLC CENTRAL INDEX KEY: 0001139429 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841583749 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-63722-05 FILM NUMBER: 1714105 BUSINESS ADDRESS: STREET 1: C/O MICHAEL FOODS INC STREET 2: 5353 WAYZATA BOULEVARD, STE. 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 95254605111 MAIL ADDRESS: STREET 1: C/O MICHAEL FOODS INC STREET 2: 5353 WAYZATA BOULEVARD, STE. 324 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 10-Q 1 a2056861z10-q.txt 10-Q 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 June 30, 2001 ------------------------------------------------- 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 41-0498850 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Suite 324, Signal Bank Building 5353 Wayzata Boulevard Minneapolis, MN 55416 - -------------------------------------------------------------------------------- (Address of principal executive offices) (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 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MICHAEL FOODS, INC. (A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
================================================================================================================================ Company Predecessor --------------------- --------------------- June 30, December 31, 2001 2000 ---------------------- -------------------- ASSETS - ------ CURRENT ASSETS Cash and equivalents $ 10,268,000 $ 4,421,000 Accounts receivable, less allowances 103,279,000 112,767,000 Inventories 79,991,000 75,734,000 Prepaid expenses and other 4,113,000 4,803,000 ---------------------- -------------------- Total current assets 197,651,000 197,725,000 PROPERTY, PLANT AND EQUIPMENT-AT COST Land 4,690,000 4,106,000 Buildings and improvements 89,952,000 143,160,000 Machinery and equipment 220,831,000 377,911,000 ---------------------- -------------------- 315,473,000 525,177,000 Less accumulated depreciation 12,884,000 243,360,000 ---------------------- -------------------- 302,589,000 281,817,000 OTHER ASSETS Goodwill, net 343,627,000 114,255,000 Joint ventures and other assets 42,523,000 19,107,000 ---------------------- -------------------- 386,150,000 133,362,000 ---------------------- -------------------- $886,390,000 $612,904,000 ====================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of long-term debt $ 17,515,000 $ 2,865,000 Accounts payable 49,690,000 54,212,000 Accrued liabilities Compensation 9,445,000 11,795,000 Insurance 8,027,000 7,422,000 Customer programs 15,617,000 19,307,000 Income taxes 3,677,000 10,622,000 Interest 11,295,000 3,713,000 Other 11,980,000 9,161,000 ---------------------- -------------------- Total current liabilities 127,246,000 119,097,000 LONG-TERM DEBT, less current maturities 558,206,000 195,944,000 DEFERRED INCOME TAXES 52,262,000 39,130,000 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST 475,000 - SHAREHOLDERS' EQUITY Common stock - 183,000 Additional paid-in capital 146,761,000 58,506,000 Retained earnings 1,669,000 201,361,000 Accumulated other comprehensive loss (229,000) (1,317,000) ---------------------- -------------------- 148,201,000 258,733,000 ---------------------- -------------------- $886,390,000 $612,904,000 ====================== ====================
============================================================================== See accompanying notes to condensed consolidated financial statements. 2 MICHAEL FOODS, INC. (A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended June 30, (Unaudited) ==============================================================================
Company Predecessor --------------------- --------------------- 2001 2000 --------------------- --------------------- Net sales $295,109,000 $266,616,000 Cost of sales 244,855,000 216,981,000 --------------------- --------------------- Gross profit 50,254,000 49,635,000 Selling, general and administrative expenses 30,294,000 25,706,000 --------------------- --------------------- Operating profit 19,960,000 23,929,000 Interest expense, net 16,241,000 3,304,000 --------------------- --------------------- Earnings before income taxes 3,719,000 20,625,000 Income tax expense 2,050,000 8,350,000 --------------------- --------------------- NET EARNINGS $ 1,669,000 $ 12,275,000 ===================== =====================
============================================================================== See accompanying notes to condensed consolidated financial statements. 3 MICHAEL FOODS, INC. (A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) ==============================================================================
Company Predecessor -------------------- ------------------------------------------ Three Months Three Months Six Months Ended Ended Ended June 30, 2001 March 31, 2001 June 30, 2000 -------------------- -------------------- --------------------- Net sales $295,109,000 $275,627,000 $518,542,000 Cost of sales 244,855,000 227,707,000 422,052,000 -------------------- -------------------- --------------------- Gross profit 50,254,000 47,920,000 96,490,000 Selling, general and administrative expenses 30,294,000 27,376,000 53,662,000 Transaction expenses - 11,050,000 - -------------------- -------------------- --------------------- Operating profit 19,960,000 9,494,000 42,828,000 Interest expense, net 16,241,000 3,293,000 6,254,000 -------------------- -------------------- --------------------- Earnings before income taxes and extraordinary item 3,719,000 6,201,000 36,574,000 Income tax expense 2,050,000 2,430,000 14,810,000 -------------------- -------------------- --------------------- Earnings before extraordinary item 1,669,000 3,771,000 21,764,000 Extraordinary item - early extinguishment of debt, net of taxes - (9,424,000) - -------------------- -------------------- --------------------- NET EARNINGS (LOSS) $ 1,669,000 $ (5,653,000) $ 21,764,000 ==================== ==================== =====================
============================================================================== See accompanying notes to condensed consolidated financial statements. 4 MICHAEL FOODS, INC. (A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ==============================================================================
Company Predecessor -------------------- ------------------------------------------- Three Months Three Months Six Months Ended June 30, Ended March 31, Ended June 30, 2001 2001 2000 -------------------- ---------------------- -------------------- Net cash provided by operating activities $ 39,337,000 $ 14,016,000 $ 27,492,000 Cash flows from investing activities: Capital expenditures (6,299,000) (10,837,000) (15,182,000) Business acquisition (626,925,000) - - Investments in joint ventures and other assets (486,000) 3,888,000 283,000 -------------------- ---------------------- -------------------- Net cash used in investing activities (633,710,000) (6,949,000) (14,899,000) Cash flows from financing activities: Payments on notes payable (46,450,000) (52,000,000) (75,800,000) Proceeds from notes payable 29,500,000 45,500,000 111,100,000 Payments on long-term debt and other (127,479,000) (109,000) (2,679,000) Proceeds from long-term debt 570,000,000 - - Extension of stock options - 310,000 - Proceeds from issuance of common stock 174,800,000 546,000 307,000 Repurchase of common stock - - (46,125,000) Dividends - (1,465,000) (3,000,000) -------------------- ---------------------- -------------------- Net cash provided by (used in) financing activities 600,371,000 (7,218,000) (16,197,000) -------------------- ---------------------- -------------------- Net increase (decrease) in cash and equivalents 5,998,000 (151,000) (3,604,000) Cash and equivalents at beginning of period 4,270,000 4,421,000 4,961,000 -------------------- ---------------------- -------------------- Cash and equivalents at end of period $ 10,268,000 $ 4,270,000 $ 1,357,000 ==================== ====================== ====================
============================================================================== See accompanying notes to condensed consolidated financial statements. 5 MICHAEL FOODS, INC. (A WHOLLY-OWNED SUBSIDIARY OF M-FOODS HOLDINGS, INC.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ (Unaudited) NOTE A - MERGER AGREEMENT On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael Foods", "Company", "we", "us", "our") was acquired in a transaction (the "Merger") led by an investor group comprised of a management group led by Michael Foods' Chairman, President and Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a member of the Michael Foods Board of Directors, and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, "M-Foods Investors, LLC"). Under the terms of the Merger agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per share in cash, or value equal thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the outstanding shares was financed through new equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates (effective rate of 7.5% at April 10, 2001), and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. As a result of the Merger, the stock of pre-merger Michael Foods ("Predecessor") is no longer publicly traded and, therefore, earnings per share calculations are no longer included for financial statement presentation. Immediately after the close of the Merger, the Company contributed the assets of its Dairy division into two limited liability corporations, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the "Dairy LLCs") and in exchange received voting preferred and voting common units from these entities equal to the fair value of the net assets contributed, which collectively were approximately $40,000,000. The preferred units issued to the Company have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, the Company received 5% of the common units issued by the Dairy LLCs, with the common units held by the Company representing 100% of the voting common units issued and outstanding. These common units have a stated value of $25,000. The remaining 95% of the common units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The common unit interests owned by M-Foods Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as minority interest in the accompanying consolidated balance sheet as of June 30, 2001. The Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITF 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed dividend of $66,631,000. For ease of presentation, the Merger was accounted for as if it had occurred on April 1, 2001. Management determined that results of operations were not significant and no material transactions occurred during the period from April 1 through April 9, 2001. The Company's consolidated financial statements have been presented on a comparative basis with the Predecessor's historical consolidated financial statements prior to the date of Merger. Different bases of accounting have been used to prepare the Company and Predecessor consolidated financial statements. The primary differences relate to additional interest expense for new debt and depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of Merger. 6 NOTE A - MERGER AGREEMENT (cont.) For accounting purposes the Merger is considered a leveraged buyout. The total purchase price of approximately $562,881,000 was allocated to the acquired assets and assumed liabilities based on their fair values at April 1, 2001, net of the deemed dividend. The allocation of the purchase price was as follows: Working capital $ 88,663,000 Property, plant & equipment 309,517,000 Other assets 43,001,000 Goodwill 345,819,000 Long-term debt 588,426,000 Other liabilities 52,389,000
These allocations were based primarily on a preliminary valuation by a third party appraisal firm. Accordingly, the allocations related to property, plant and equipment and intangible assets, including goodwill, could change when the final valuation report is received. However, management believes the final allocations will not vary significantly from the allocations indicated above. In connection with the Merger, the Predecessor incurred transaction expenses of approximately $26,600,000 associated with the Merger and change-in-control provisions of various compensation, debt and other agreements, which have been reflected in the Predecessor financial statements. These transaction expenses include the extraordinary item related to the early extinguishment of debt resulting from the change-in-control. In addition, the Company incurred other merger related and debt issuance costs of approximately $40,000,000, which have been capitalized as direct costs of the Merger and deferred financing costs in the Company's consolidated balance sheet. The following unaudited pro forma revenue and net earnings for the year ended December 31, 2000 and six months ended June 30, 2001 are derived from the application of pro forma adjustments to the Predecessor historical statements of earnings, and assumes the Merger had occurred on January 1, 2000:
Six months Year ended ended June 30, December 31, 2001 2000 --------------------------------------------- Revenue $570,736,000 $1,080,601,000 Net earnings before extraordinary item 3,899,000 11,977,000
NOTE B - 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 utilizes, and the Predecessor utilized, a fiscal year consisting of either 52 or 53 weeks, ending on the Saturday nearest to December 31 each year. The quarters ended June 30, 2001 and 2000 each included thirteen weeks of operations. For clarity of presentation, the Company and Predecessor have described both periods presented as if the quarters ended on June 30. 7 NOTE B - BASIS OF PRESENTATION, (cont.) The accompanying Predecessor Balance Sheet as of December 31, 2000, the Predecessor Statements of Earnings for the three and six months ended June 30, 2000 and the three months ended March 31, 2001, and the Predecessor Statements of Cash Flows for the six months ended June 30, 2000 and the three months ended March 31, 2001 have been prepared from the historical books and records of the Predecessor. The accompanying unaudited financial statements and footnote information for the three and six month periods ended June 30, 2000 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") using the historical cost basis of assets and liabilities of the Predecessor. The accompanying unaudited financial statements and footnote information of the Company as of and for the three month period ended June 30, 2001 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the new basis of assets and liabilities of the Company. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations for the periods indicated. The historical financial results of the Company and Predecessor are not necessarily indicative of their results for a full year. 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. NEWLY ADOPTED ACCOUNTING STANDARDS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This standard establishes accounting and reporting standards for derivative financial instruments and hedge activities. Certain of our operating segments, most notably our Egg Products Division, hold derivative instruments, such as exchange traded corn and soybean meal grain futures that we believe provide an economic hedge of future transactions and are designated as cash flow hedges. As the commodities being hedged are grain ingredients fed to the Company's flocks, the changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of these feed components. The amount of hedge ineffectiveness was immaterial for the three months ended March 31, 2001 and the three months ended June 30, 2001. The Company actively monitors its exposure to commodity price risks and uses derivative commodity instruments to manage the impact of certain of these risks. We use derivatives only for the purpose of managing risks associated with underlying exposures, primarily exchange-traded futures contracts to manage its exposure to changes in corn and soybean meal prices. Our commodity contracts are cash flow hedges of firm purchase commitments and anticipated production requirements, as they reduce our exposure to changes in the cash price of grain and generally extend for less than one year. The Company does not trade or use instruments with the objective of earning financial gains on the commodity price, nor does it use instruments where there are not underlying exposures. Gains and losses on futures contracts are deferred as a component of Accumulated Other Comprehensive Loss ("AOCL") in the Company's equity section of the balance sheet and recognized as an adjustment to the cost of the related inventory item, and subsequently recognized in cost of sales when the associated products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated grain purchase occurs. As a result of the volatility of the grain markets, deferred gains and losses in AOCL may fluctuate until the related contract is closed. 8 Initially, upon adoption of the new derivative accounting standard, and prospectively as required by the standard on the date new derivatives are entered into, we formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and how the hedging instrument's effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. If it is determined that a derivative ceases to be a highly effective hedge or the forecasted transaction being hedged will no longer occur, we will discontinue hedge accounting, and any gains or losses on the derivative instrument would be recognized in earnings during the period it no longer qualifies as a hedge. No such instances occurred in the three months ended March 31, 2001 and the three months ended June 30, 2001. NOTE C - 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 consisted of the following: COMPANY PREDECESSOR June 30, December 31, 2001 2000 --------------------- --------------------- Raw materials and supplies $15,693,000 $15,107,000 Work in process and finished goods 40,812,000 41,366,000 Flocks 23,486,000 19,261,000 --------------------- --------------------- $79,991,000 $75,734,000 ===================== =====================
NOTE D - GOODWILL The Predecessor's acquisitions have been accounted for as purchases and the excess of the total acquisition costs over the fair value of the net assets acquired were recorded as goodwill. Goodwill is amortized on a straight-line basis over 40 years. Predecessor accumulated amortization was $23,549,000 at December 31, 2000, while the Company had accumulated amortization of $2,191,000 at June 30, 2001. At April 1, 2001, goodwill was recorded for the excess of the purchase price of the Merger over the fair value of net assets acquired. The Company amortizes its goodwill over a 40 year period. Goodwill has been assigned to each of the operating subsidiaries down to the reporting unit level. The Company evaluates its goodwill annually to determine potential impairment by comparing its carrying value to the undiscounted future cash flows of the related assets. In July 2001, the FASB issued two statements: Statement 141 BUSINESS COMBINATIONS and Statement 142 GOODWILL AND INTANGIBLE ASSETS. These pronouncements, among other things, eliminated the pooling-of-interests method of accounting for business combinations, requires intangible assets acquired in business combinations be recorded separately from goodwill if certain requirements are met, and eliminates the amortization of goodwill for financial reporting purposes effective for the Company beginning in January 2002. However, thereafter goodwill will be tested for impairment annually or whenever an impairment indicator arises. The amount of goodwill amortization expense for the three months ended June 30, 2001 was $2,191,000. Goodwill amortization for the nine months ending December 31, 2001 is expected to be approximately $6,600,000. 9 NOTE E - COMMITMENTS AND CONTINGENCIES LICENSE AGREEMENT We have an exclusive license agreement for a patented process for the production and sale of extended shelf-life liquid egg products. Under the license agreement, we have the right to defend and prosecute infringement of the patents. We may apply 50% of our costs of defending the patents to future royalty payments under the license agreements. The U.S. Federal Court of Appeals has upheld the validity of the patents which are the subject of the license agreement. Subsequently, a patent examiner at the U.S. Patent and Trademark Office rejected the patents. We and the patent holder appealed the decision of the examiner and the validity of the patents was upheld. In September 2000, the U.S. Patent and Trademark Office allowed product claims beyond the process claims previously allowed under the patents for the extended shelf-life egg product. The patents remain valid and in full force and effect. These patents are scheduled to expire beginning in 2006. In 2000, we settled litigation with one party related to the infringement of these patents and issued a sub-license to the infringing party granting them the right to manufacture and distribute extended shelf-life liquid whole egg products subject to a royalty payable to us and the patent holder on all future product sold. In connection with this settlement the patent holder received a lump sum payment for the past production and sale of the product and other matters related to the infringement. We continue to pursue litigation related to other parties who are infringing these product and process patents. LITIGATION We are engaged in routine litigation incidental to our business. Our management believes the ultimate outcome of this litigation will not have a material adverse effect upon our consolidated financial position, liquidity or results of operations. NOTE F - COMPREHENSIVE INCOME (LOSS) The components and changes in accumulated other comprehensive loss, net of taxes, during the six months ended June 30, 2001 were as follows:
COMPANY Cash Foreign Flow Currency Total Hedges Translation AOCL ------------------ ---------------------- -------------------- Balance at April 1, 2001 $ - $ - $ - Predecessor carry-over basis (506,000) (71,000) (577,000) Foreign currency translation adjustment - (27,000) (27,000) Net unrealized change on cash flow hedges 283,000 - 283,000 Less reclassification adjustments 92,000 - 92,000 -------- ------- -------- Balance at June 30, 2001 $(131,000) $(98,000) $(229,000) ======== ======= ========
10
PREDECESSOR Cash Flow Foreign Currency Total Hedges Translation AOCL ------------------- ----------------------- ------------------- Balance at January 1, 2001 $ - $(1,317,000) $(1,317,000) Foreign currency translation adjustment - (47,000) (47,000) Translation loss realized on termination of joint venture - 1,135,000 1,135,000 Transition adjustment 775,000 - 775,000 Net unrealized change on cash flow hedges (2,651,000) - (2,651,000) Less reclassification adjustments 244,000 - 244,000 ------------------- ----------------------- ------------------- Balance at March 31, 2001 $(1,632,000) $ (229,000) $(1,861,000) =================== ======================= ===================
Comprehensive income (loss), net of taxes, for the three month periods ended March 31 and June 30, 2001 is as follows: COMPANY Net income for the three months ended June 30, 2001 $ 1,669,000 Net gains (losses) arising during the period from cash Flow hedges: Net unrealized derivative gains during period 283,000 Reclassification adjustment 92,000 Foreign currency translation adjustment (27,000) -------------------- Other comprehensive income 348,000 --------------------- Comprehensive income for the three months ended June 30, 2001 $ 2,017,000 ===================== PREDECESSOR Net loss for the three months ended March 31, 2001 $(5,653,000) Net gains (losses) arising during the period from cash flow hedges: Net derivative transition gain 775,000 Net unrealized derivative losses during period (2,651,000) Reclassification adjustment 244,000 Foreign currency translation adjustment (47,000) Foreign currency loss realized 1,135,000 -------------------- Other comprehensive loss (544,000) --------------------- Comprehensive loss for the three months ended March 31, 2001 $(6,197,000) =====================
11 NOTE G - BUSINESS SEGMENTS We operate in four reportable segments - Egg Products, Refrigerated Distribution, Dairy Products and Potato Products. The Merger, as more fully described in Note A, did not have an impact on our segment classification or the interaction between the segments. Certain financial information on our operating segments, and the Predecessor's, is as follows (unaudited, in thousands):
Company ------------------------------------------------------------------------------ Egg Refrigerated Dairy Potato Products Distribution Products Products Corporate Total ------------------------------------------------------------------------------ THREE MONTHS ENDED JUNE 30, 2001: External net sales $162,582 $ 64,431 $51,821 $16,275 N/A $295,109 Intersegment sales 2,862 1 - 845 N/A 3,708 Operating profit (loss) 15,530 2,235 1,999 1,559 (1,363) 19,960 Depreciation and amortization 12,380 642 1,010 1,561 10 15,603 Total assets 632,609 83,729 55,415 81,351 33,286 886,390 Predecessor ------------------------------------------------------------------------------ THREE MONTHS ENDED JUNE 30, 2000: External net sales $156,835 $ 55,189 $39,903 $14,689 N/A $266,616 Intersegment sales 2,942 40 - 613 N/A 3,595 Operating profit (loss) 18,971 3,828 1,128 1,685 (1,683) 23,929 Depreciation and amortization 8,808 333 1,165 1,348 31 11,685 SIX MONTHS ENDED JUNE 30, 2000: External net sales $310,388 $111,437 $67,932 $28,785 N/A $518,542 Intersegment sales 5,827 58 485 1,168 N/A 7,538 Operating profit (loss) 34,092 8,133 942 2,986 (3,325) 42,828 Depreciation and amortization 17,864 677 2,330 2,703 62 23,636 THREE MONTHS ENDED MARCH 31, 2001: External net sales $163,529 $ 61,185 $35,328 $15,585 N/A $275,627 Intersegment sales 4,246 - - 1,003 N/A 5,249 Operating profit (loss) 12,915 3,639 3,958 1,688 (12,706) 9,494 Depreciation and amortization 9,610 316 1,271 1,278 34 12,509
12 NOTE H - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The Company's revolving credit facility, A and B term loans and senior subordinated notes have been guaranteed, on a joint and several basis, by the Company and its domestic subsidiaries. The revolving credit facility and A and B term loans are also guaranteed by the Company's parent, M-Foods Holdings, Inc. The following condensed consolidating financial information presents the Company's consolidated balance sheet as of June 30, 2001 and the Statements of Earnings and Cash Flows for the three months then ended; and the Predecessor's consolidated balance sheet as of December 31, 2000 and the consolidated statements of earnings and cash flows for the three months March 31, 2001 and the six months ended June 30, 2000. These financial statements reflect Michael Foods, Inc. (the parent), the wholly owned guarantor subsidiaries (on a combined basis), the non-wholly owned guarantor subsidiaries, and elimination entries necessary to combine such entities on a consolidated basis. Included elsewhere in this Form 10-Q are the unaudited financial statements of the non-wholly owned guarantor subsidiaries. 13 COMPANY UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS JUNE 30, 2001 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES -------------------------- WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ---------------------------------------------------------------------------------- ASSETS Current Assets: Cash and equivalents $ 12,472 $(1,043) $ (521) $ (640) $ - $ 10,268 Accounts receivable, less allowances 426 87,556 7,084 9,452 (1,239) 103,279 Inventories - 72,105 4,067 3,819 - 79,991 Notes receivable - related party - 386 5,252 - (5,638) - Prepaid expenses and other 429 3,530 102 52 - 4,113 ---------------------------------------------------------------------------------- Total current assets 13,327 162,534 15,984 12,683 (6,877) 197,651 Property, Plant and Equipment - net 97 275,775 15,884 10,833 - 302,589 Other assets: Goodwill, net - 339,693 3,934 - - 343,627 Preferred return receivable for subs - 2,152 - - (2,152) - Joint ventures and other assets 20,995 20,073 - 1,455 - 42,523 Investment in subsidiaries 706,655 - - - (706,655) - ---------------------------------------------------------------------------------- 727,650 361,918 3,934 1,455 (708,807) 386,150 ---------------------------------------------------------------------------------- $741,074 $800,227 $35,802 $24,971 $(715,684) $886,390 ================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 14,700 $ 415 $ - $ 2,400 $ - $ 17,515 Accounts payable 235 42,794 2,729 5,065 (1,133) 49,690 Notes payable - related party - 5,252 - 386 (5,638) - Accrued liabilities 21,783 35,689 1,647 1,028 (106) 60,041 ---------------------------------------------------------------------------------- Total current liabilities 36,718 84,150 4,376 8,879 (6,877) 127,246 Long-term debt, less current maturities 555,300 506 - 2,400 - 558,206 Deferred income taxes 380 51,882 - - - 52,262 Preferred shareholder return payable - - 1,902 250 (2,152) - Minority interest 475 - - - - 475 ---------------------------------------------------------------------------------- Total liabilities 592,873 136,538 6,278 11,529 (9,029) 738,189 Shareholders' Equity 148,201 663,689 29,524 13,442 (706,655) 148,201 ---------------------------------------------------------------------------------- $741,074 $800,227 $35,802 $24,971 $(715,684) $886,390 ==================================================================================
14 PREDECESSOR CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2000 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------ WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------------ ASSETS Current Assets: Cash and equivalents $ 8,787 $ (4,366) $ - $ - $ - $ 4,421 Accounts receivable, less allowances 420 102,968 6,326 5,684 (2,631) 112,767 Inventories - 71,077 2,262 2,395 - 75,734 Prepaid expenses and other 238 4,414 94 57 - 4,803 ------------------------------------------------------------------------------------ Total current assets 9,445 174,093 8,682 8,136 (2,631) 197,725 Property, Plant and Equipment - net 103 255,485 11,800 14,429 - 281,817 Other assets: Goodwill, net - 112,468 1,787 - - 114,255 Joint ventures and other assets 1,343 9,090 7 8,667 - 19,107 Investment in subsidiaries 459,773 - - - (459,773) - ------------------------------------------------------------------------------------ 461,116 121,558 1,794 8,667 (459,773) 133,362 ------------------------------------------------------------------------------------ $470,664 $551,136 $22,276 $31,232 $(462,404) $612,904 ==================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ - $ 465 $ - $ 2,400 $ - $ 2,865 Accounts payable 111 51,636 1,962 3,134 (2,631) 54,212 Accrued liabilities 21,077 38,799 1,381 763 - 62,020 ------------------------------------------------------------------------------------ Total current liabilities 21,188 90,900 3,343 6,297 (2,631) 119,097 Long-term debt, less current maturities 190,500 644 - 4,800 - 195,944 Deferred income taxes 243 38,133 690 64 - 39,130 ------------------------------------------------------------------------------------ Total liabilities 211,931 129,677 4,033 11,161 (2,631) 354,171 Shareholders' Equity 258,733 421,459 18,243 20,071 (459,773) 258,733 ------------------------------------------------------------------------------------ $470,664 $551,136 $22,276 $31,232 $(462,404) $612,904 ====================================================================================
15 COMPANY UNAUDITED CONDENSED CONSOLIDATING EARNINGS STATEMENTS THREE MONTHS ENDED JUNE 30, 2001 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------- WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------------------- Net sales $ - $246,996 $22,942 $28,879 $(3,708) $295,109 Cost of sales - 200,876 20,128 27,559 (3,708) 244,855 ----------------------------------------------------------------------------- Gross profit - 46,120 2,814 1,320 - 50,254 Selling, general and administrative expenses 1,363 27,852 965 1,405 (1,291) 30,294 ----------------------------------------------------------------------------- Operating profit (loss) (1,363) 18,268 1,849 (85) 1,291 19,960 Interest expense, net 16,247 100 (53) (53) - 16,241 Other income 1,291 - - - (1,291) - ----------------------------------------------------------------------------- Earnings (loss) before equity in earnings of subsidiaries and income taxes (16,319) 18,168 1,902 (32) - 3,719 Equity in earnings of subsidiary 9,013 1,870 (1,902) 32 (9,013) - ----------------------------------------------------------------------------- Earnings (loss) before income taxes (7,306) 20,038 - - (9,013) 3,719 Income tax expense (benefit) (8,975) 11,025 - - - 2,050 ----------------------------------------------------------------------------- NET EARNINGS (LOSS) 1,669 9,013 - - (9,013) 1,669 Other comprehensive income (loss): Change in foreign currency translation - (27) - - - (27) Change in cash flow hedges - 375 - - - 375 ----------------------------------------------------------------------------- Comprehensive income (loss) $ 1,669 $ 9,361 $ - $ - $(9,013) $ 2,017 =============================================================================
16 PREDECESSOR UNAUDITED CONDENSED CONSOLIDATING EARNINGS STATEMENTS THREE MONTHS ENDED JUNE 30, 2000 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------ WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------------------- Net sales $ - $230,309 $18,502 $21,400 $ (3,595) $266,616 Cost of sales - 184,517 15,933 20,126 (3,595) 216,981 ----------------------------------------------------------------------------- Gross profit - 45,792 2,569 1,274 - 49,635 Selling, general and administrative expenses 1,682 22,412 1,113 1,848 (1,349) 25,706 ----------------------------------------------------------------------------- Operating profit (loss) (1,682) 23,380 1,456 (574) 1,349 23,929 Interest expense, net 3,309 (5) - - - 3,304 Other income 1,349 - - - (1,349) - ----------------------------------------------------------------------------- Earnings (loss) before equity in earnings of subsidiaries and income taxes (3,642) 23,385 1,456 (574) - 20,625 Equity in earnings of subsidiaries 14,300 - - - (14,300) - ----------------------------------------------------------------------------- Earnings (loss) before income taxes 10,658 23,385 1,456 (574) (14,300) 20,625 Income tax expense (benefit) (1,617) 9,609 590 (232) - 8,350 ----------------------------------------------------------------------------- NET EARNINGS (LOSS) 12,275 13,776 866 (342) (14,300) 12,275 Foreign currency translation adjustment loss - (29) - - - (29) ----------------------------------------------------------------------------- Comprehensive income (loss) $12,275 $ 13,747 $ 866 $ (342) $(14,300) $ 12,246 =============================================================================
17 PREDECESSOR CONDENSED CONSOLIDATING EARNINGS STATEMENTS THREE MONTHS ENDED MARCH 31, 2001 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------- WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------ Net sales $ - $245,548 $17,684 $ 17,644 $ (5,249) $275,627 Cost of sales - 200,854 14,994 17,108 (5,249) 227,707 ------------------------------------------------------------------------------ Gross profit - 44,694 2,690 536 - 47,920 Selling, general and administrative expenses 1,656 27,720 1,027 1,712 (1,522) 30,593 Recall insurance settlement - - (3,217) - - (3,217) Transaction costs 11,050 - - - - 11,050 ------------------------------------------------------------------------------ Operating profit (loss) (12,706) 16,974 4,880 (1,176) 1,522 9,494 Interest expense, net 3,308 (14) (1) - - 3,293 Other income 1,522 - - - (1,522) - ------------------------------------------------------------------------------ Earnings (loss) before equity in earnings of subsidiaries, income taxes, and extraordinary item (14,492) 16,988 4,881 (1,176) - 6,201 Equity in earnings of subsidiaries 12,573 - - - (12,573) - ------------------------------------------------------------------------------ Earnings (loss) before income taxes and extraordinary item (1,919) 16,988 4,881 (1,176) (12,573) 6,201 Income tax expense (benefit) (5,690) 6,649 1,918 (447) - 2,430 ------------------------------------------------------------------------------ Earnings (loss) before extraordinary item 3,771 10,339 2,963 (729) (12,573) 3,771 Extraordinary item - early extinguishment of debt, net of taxes (9,424) - - - - (9,424) ------------------------------------------------------------------------------ NET EARNINGS (LOSS) (5,653) 10,339 2,963 (729) (12,573) (5,653) Other comprehensive income (loss): Change in foreign currency translation - 1,088 - - - 1,088 Change in cash flow hedges - (1,632) - - - (1,632) ------------------------------------------------------------------------------ Comprehensive income (loss) $ (5,653) $ 9,795 $2,963 $ (729) $(12,573) $ (6,197) ========= ======== ====== ======= ======== ========
18 PREDECESSOR UNAUDITED CONDENSED CONSOLIDATING EARNINGS STATEMENTS SIX MONTHS ENDED JUNE 30, 2000 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------ WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------------------- Net sales $ - $457,664 $33,409 $35,007 $(7,538) $518,542 Cost of sales - 367,382 29,376 32,832 (7,538) 422,052 ----------------------------------------------------------------------------- Gross profit - 90,282 4,033 2,175 - 96,490 Selling, general and administrative expenses 3,324 47,454 1,968 3,799 (2,883) 53,662 ----------------------------------------------------------------------------- Operating profit (loss) (3,324) 42,828 2,065 (1,624) 2,883 42,828 Interest expense, net 6,276 (23) 1 - - 6,254 Other income 2,883 - - - (2,883) - ----------------------------------------------------------------------------- Earnings (loss) before equity in earnings of subsidiaries and income taxes (6,717) 42,851 2,064 (1,624) - 36,574 Equity in earnings of subsidiaries 25,761 - - - (25,761) - ----------------------------------------------------------------------------- Earnings (loss) before income taxes 19,044 42,851 2,064 (1,624) (25,761) 36,574 Income tax expense (benefit) (2,720) 17,352 836 (658) - 14,810 ----------------------------------------------------------------------------- NET EARNINGS (LOSS) 21,764 25,499 1,228 (966) (25,761) 21,764 Foreign currency translation adjustment loss - (278) - - - (278) ----------------------------------------------------------------------------- Comprehensive income (loss) $ 21,764 $ 25,221 $ 1,228 $ (966) $(25,761) $ 21,486 =============================================================================
19 COMPANY UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JUNE 30, 2001 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------- WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC CONSOLIDATED ------------------------------------------------------------- Net cash provided by (used in) operating activities $ 11,625 $ 22,884 $ 1,136 $ 3,692 $ 39,337 Cash flows from investing activities: Capital expenditures (9) (3,855) (1,143) (1,292) (6,299) Business acquisition (626,925) - - - (626,925) Investments in joint ventures and other assets (244) (242) - - (486) ------------------------------------------------------------- Net cash provided by (used in) investing activities (627,178) (4,097) (1,143) (1,292) (633,710) Cash flows from financing activities: Payments on notes payable (46,450) - - - (46,450) Proceeds on notes payable 29,500 - - - 29,500 Payments on long-term debt (125,000) (79) - (2,400) (127,479) Proceeds from long-term debt 570,000 - - - 570,000 Proceeds from issuance of stock 174,800 - - - 174,800 Investment in subsidiaries 20,848 (20,848) - - - ------------------------------------------------------------- Net cash provided by (used in) financing activities 623,698 (20,927) - (2,400) 600,371 ------------------------------------------------------------- Net increase (decrease) in cash and equivalents 8,145 (2,140) (7) - 5,998 Cash and equivalents at beginning of period 4,327 (64) 7 - 4,270 ------------------------------------------------------------- Cash and equivalents at end of period $ 12,472 $ (2,204) $ - $ - $ 10,268 =============================================================
20 PREDECESSOR CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES ------------------------- WHOLLY OWNED M-FOODS M-FOODS GUARANTOR DAIRY, DAIRY PARENT SUBSIDIARIES LLC TXCT, LLC CONSOLIDATED ------------------------------------------------------------- Net cash provided by (used in) operating activities $ 12,000 $ 4,487 $(2,440) $ (31) $ 14,016 Cash flows from investing activities: Capital expenditures - (4,923) (3,664) (2,250) (10,837) Investments in joint ventures and other assets 434 3,454 - - 3,888 ------------------------------------------------------------- Net cash provided by (used in) investing activities 434 (1,469) (3,664) (2,250) (6,949) Cash flows from financing activities: Payments on notes payable (52,000) - - - (52,000) Proceeds on notes payable 45,500 - - - 45,500 Payments on long-term debt - (109) - - (109) Proceeds from issuance of stock 546 - - - 546 Extension of stock options 310 - - - 310 Dividends (1,465) - - - (1,465) Investment in subsidiaries (9,785) 1,393 6,111 2,281 - ------------------------------------------------------------- Net cash provided by (used in) financing activities (16,894) 1,284 6,111 2,281 (7,218) ------------------------------------------------------------- Net increase (decrease) in cash and equivalents (4,460) 4,302 7 - (151) Cash and equivalents at beginning of period 8,787 (4,366) - - 4,421 ------------------------------------------------------------- Cash and equivalents at end of period $ 4,327 $ (64) $ 7 $ - $ 4,270 =============================================================
21 PREDECESSOR UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000 (in thousands)
NON-WHOLLY OWNED GUARANTOR SUBSIDIARIES -------------------------- WHOLLY M-FOODS OWNED M-FOODS DAIRY GUARANTOR DAIRY, TXCT, LLC PARENT SUBSIDIARIES LLC CONSOLIDATED ------------------------------------------------------------------ Net cash provided by (used in) operating activities $ 24,011 $ 2,409 $ 2,879 $(1,807) $ 27,492 Cash flows from investing activities: Capital expenditures - (13,623) (479) (1,080) (15,182) Investments in joint ventures and other assets 119 164 - - 283 ------------------------------------------------------------------ Net cash provided by (used in) investing activities 119 (13,459) (479) (1,080) (14,899) Cash flows from financing activities: Payments on notes payable (75,800) - - - (75,800) Proceeds from notes payable 111,100 - - - 111,100 Payments on long-term debt - (262) (17) (2,400) (2,679) Proceeds from issuance of stock 307 - - - 307 Repurchase of common stock (46,125) - - - (46,125) Dividends (3,000) - - - (3,000) Investment in subsidiaries (11,426) 8,522 (2,383) 5,287 - ------------------------------------------------------------------ Net cash provided by (used in) financing activities (24,944) 8,260 (2,400) 2,887 (16,197) ------------------------------------------------------------------ Net increase (decrease) in cash and equivalents (814) (2,790) - - (3,604) Cash and equivalents at beginning of period 6,677 (1,716) - - 4,961 ------------------------------------------------------------------ Cash and equivalents at end of period $ 5,863 $ (4,506) $ - $ - $ 1,357 ==================================================================
22 M-FOODS DAIRY, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) INDEX TO FINANCIAL STATEMENTS
Page Balance Sheets 24 Statements of Earnings 25 Statements of Cash Flows 26 Notes to Financial Statements 27
23 M-FOODS DAIRY, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) BALANCE SHEETS (unaudited, in thousands) ==============================================================================
COMPANY PREDECESSOR ---------------- ---------------------------- JUNE 30, DECEMBER 31, 2001 2000 ---------------- ---------------------------- ASSETS CURRENT ASSETS Accounts receivable, less allowances $ 7,084 $ 6,326 Note receivable - related party 5,252 - Inventories 4,067 2,262 Prepaid expenses and other 102 94 ---------------- ---------------------- Total current assets 16,505 8,682 PROPERTY, PLANT AND EQUIPMENT - AT COST Land 855 855 Buildings and improvements 3,985 7,828 Machinery and equipment 11,439 13,721 ---------------- ---------------------- 16,279 22,404 Less accumulated depreciation 395 10,604 ---------------- ---------------------- 15,884 11,800 OTHER ASSETS Goodwill, net 3,934 1,787 Other assets - 7 ---------------- ---------------------- 3,934 1,794 ---------------- ---------------------- $36,323 $22,276 ================ ====================== LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY CURRENT LIABILITIES Accounts payable $ 3,250 $ 1,962 Accrued liabilities: Compensation 358 419 Insurance 42 208 Customer programs 942 550 Other 305 204 ---------------- ---------------------- Total current liabilities 4,897 3,343 DEFERRED INCOME TAXES - 690 COMMITMENTS AND CONTINGENCIES - - PREFERRED SHAREHOLDER RETURN PAYABLE 1,902 - UNIT HOLDER AND OPERATING UNIT EQUITY 29,524 18,243 ---------------- ---------------------- $36,323 $22,276 ================ ======================
The accompanying notes are an integral part of these statements. 24 M-FOODS DAIRY, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) STATEMENTS OF EARNINGS (unaudited, in thousands)
COMPANY PREDECESSOR ---------------- ----------------------------------------------------------- THREE MONTHS THREE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, MARCH 31, JUNE 30, 2001 2000 2001 2000 ---------------- ----------------------------------------------------------- Net sales $22,942 $18,502 $17,684 $33,409 Cost of sales 20,128 15,933 14,994 29,376 ---------------- ----------------------------------------------------------- Gross profit 2,814 2,569 2,690 4,033 Selling, general and administrative expenses 965 1,113 1,027 1,968 Recall insurance settlement - - (3,217) - ---------------- ----------------------------------------------------------- Operating profit 1,849 1,456 4,880 2,065 Other income (expense) 53 - 1 (1) ---------------- ----------------------------------------------------------- Earnings before income taxes 1,902 1,456 4,881 2,064 Income tax expense - 590 1,918 836 ---------------- ----------------------------------------------------------- NET EARNINGS $ 1,902 $ 866 $ 2,963 $ 1,228 ================ ===========================================================
The accompanying notes are an integral part of these statements. 25 M-FOODS DAIRY, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) STATEMENTS OF CASH FLOWS (unaudited, in thousands) ==============================================================================
COMPANY PREDECESSOR --------------- ---------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED JUNE 30, MARCH 31, JUNE 30, 2001 2001 2000 --------------- ---------------------------------- Net cash provided by (used in) operating activities $ 1,136 $(2,440) $ 2,879 Cash flows from investing activities: Capital expenditures (1,143) (3,664) (479) --------------- ---------------------------------- Net cash used in investing activities (1,143) (3,664) (479) Cash flows from financing activities: Net additional capital invested or (dividends paid) - 6,111 (2,400) --------------- ---------------------------------- Net cash provided by (used in) financing activities - 6,111 (2,400) --------------- ---------------------------------- Net increase (decrease) in cash and equivalents (7) 7 - Cash and equivalents at beginning of period 7 - - --------------- ---------------------------------- Cash and equivalents at end of period $ - $ 7 $ - =============== ==================================
The accompanying notes are an integral part of these statements. 26 M-FOODS DAIRY, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) NOTES TO FINANCIAL STATEMENTS ============================================================================== NOTE A - ORGANIZATION, BUSINESS AND MERGER ORGANIZATION M-Foods Dairy, LLC (the "Company") is a majority owned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc. Prior to the Merger described below, Kohler Mix - MN (the "Predecessor," "Operating Unit" or the "Unit") was an operating unit of Michael Foods, Inc. The change in control of Michael Foods, Inc. and the reorganization of the operating unit into the Company are more fully described below. BUSINESS The Company processes and distributes soft serve ice cream mix, frozen yogurt mix, milk and specialty dairy products, many of which are ultra-high temperature pasteurized, from its facility in Minnesota. MERGER On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael Foods") was acquired in a transaction (the "Merger") led by an investor group comprised of a management group led by Michael Foods' Chairman, President and Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a member of the Michael Foods Board of Directors, and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, "M-Foods Investors, LLC"). Under the terms of the Merger agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per share in cash, or value equal thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the outstanding shares was financed through new equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates (effective rate of 7.5% at April 10, 2001), and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. Immediately after the close of the Merger, Michael Foods contributed the assets of its Dairy division into two limited liability corporations, the Company and M-Foods Dairy TXCT, LLC (collectively, the "Dairy LLCs") and in exchange received voting preferred and voting common units from these entities equal to the fair value of the net assets contributed, which collectively were approximately $40,000,000 (the approximate fair value contributed to the Company was $30,000,000). The preferred units issued to Michael Foods have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, Michael Foods received 5% of the common units issued by each of the Dairy LLCs with the common units held by Michael Foods representing 100% of the voting common units issued and outstanding. These common units have a stated value of $25,000. The remaining 95% of the common units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, which is owned by the same owners, or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The Dairy LLCs common unit interest owned by M-Foods Dairy Holdings, LLC was purchased for $475,000 as of April 1, 2001. Following the Merger, Michael Foods, Inc. became an indirect wholly-owned subsidiary of M-Foods Investors, LLC and the Company became a majority owned subsidiary of Michael Foods, Inc. 27 The Merger has been accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITF 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities are assigned new values, which are part Predecessor cost and part fair value, in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family and the new interests acquired by the new investors. The deemed dividend related to the Michael Foods investment in the assets and liabilities of the Dairy LLCs was pushed down to these majority owned subsidiaries, as if they were wholly owned subsidiaries since Michael Foods owns all of the voting stock and the Dairy LLCs are being operated by the management of Michael Foods. The amount of the deemed dividend at Michael Foods was $66,631,000 and the portion attributable to the Company was $832,000. For ease of presentation, the Merger has been reflected in the accompanying financial statements as if it had occurred on April 1, 2001. Management determined that no material transactions occurred during the period from April 1 through April 9, 2001. The Company's financial statements have been presented on a comparative basis with the Predecessor's historical operating unit financial statements, prior to the date of Merger. Different bases of accounting have been used to prepare the Company and Predecessor financial statements. The primary differences relate to the 10% yield on preferred units, depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of acquisition, and income taxes which are payable by the Company's unit holders. The fair value contributed by Michael Foods to the Company was $30,000,000. In addition, $356,250 was contributed by new investors in exchange for Class B non-voting common units. This combined amount was allocated to the acquired assets and liabilities based on their fair values at April 1, 2001, net of the deemed dividend. The fair values of long-term assets were obtained from a preliminary valuation report issued by a third party appraisal firm. The allocations were as follows: Working capital $10,427,000 Property, plant & equipment 15,135,000 Other assets, including goodwill 3,962,000
The following unaudited pro forma revenue and net earnings for the year ended December 31, 2000 and for the six months ended June 30, 2001 are derived from the application of pro forma adjustments to the Predecessor historical statements of earnings and assumes the Merger had occurred on January 1, 2000:
Six months ended Year ended June 30, 2001 December 31, 2000 -------------------------------------- -------------------------------------- Revenue $40,626,000 $68,102,000 Net earnings 4,072,000 2,693,000
28 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying Predecessor Balance Sheet as of December 31, 2000, the Predecessor Statements of Earnings for the three and six months ended June 30, 2000 and the three months ended March 31, 2001, and the Predecessor Statements of Cash Flows for the six months ended June 30, 2000 and the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. The respective Statements of Earnings include an allocation of general and administrative costs incurred by Michael Foods and allocations from this Operating Unit to the other Dairy operating unit, M-Foods Dairy TXCT, LLC. The accompanying unaudited financial statements and footnote information for the three and six month periods ended June 30, 2000 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") using the historical cost basis of assets and liabilities of the Predecessor. The accompanying unaudited financial statements and footnote information as of and for the three month period ended June 30, 2001 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of assets and liabilities of the Company. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods indicated. The Unit's financial statements include an allocation for general and administrative costs incurred by Michael Foods. Management believes its allocations to these Operating Unit financial statements are reasonable. Additionally, Operating Unit equity includes the cumulative net advances between the Operating Unit and Michael Foods, which are considered additional capital invested from, or constructive dividends to, Michael Foods. Accordingly, the accompanying financial statements may not necessarily be indicative of the results that could have been obtained if the Operating Unit had been operated during the periods presented as a stand-alone entity. The historical results of the Company and Predecessor for the periods indicated are not necessarily indicative of their results for a full year. The accounting policies of the Predecessor have been adopted by the Company. USE OF ESTIMATES Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
Inventories consist of the following: Company Predecessor ----------------- ------------------- June 30, December 31, 2001 2000 ----------------- ------------------- Raw materials and supplies $1,231,000 $ 919,000 Work in process and finished goods 2,836,000 1,343,000 ----------------- ------------------- $4,067,000 $2,262,000 ================= ===================
29 GOODWILL At April 1, 2001, goodwill was recorded for the excess of total acquisition costs over the fair value of net assets acquired based on the total cost of the Merger. The Company amortizes its goodwill over a 40 year period. The Company evaluates its goodwill annually to determine potential impairment by comparing the carrying value of the goodwill to the undiscounted future cash flows of the related assets. In July 2001, the FASB issued two statements: Statement 141 BUSINESS COMBINATIONS and Statement 142 GOODWILL AND INTANGIBLE ASSETS. These pronouncements, among other things, eliminated the pooling-of-interest method of accounting for business combinations and eliminated the amortization of goodwill for financial reporting purposes. However, goodwill will then be tested for impairment annually or whenever an impairment indicator arises. The elimination of goodwill amortization becomes effective for the Company in January 2002. The amount of goodwill amortization expense for the three months ended June 30, 2001 was $28,000. NOTE C - SETTLEMENT OF RECALL INSURANCE CLAIM During the three months ended March 31, 2001, the Unit settled its insurance claim related to a product recall, which occurred in early 1999. The settlement reimbursed the Unit for recall related costs incurred as well as a partial reimbursement for lost business as a result of the recall. NOTE D - INCOME TAXES PREDECESSOR The activity of the Operating Unit has been included in the income tax return of Michael Foods, Inc. for financial reporting purposes. The Unit has been allocated a provision for income taxes in an amount generally equivalent to the provision that would have resulted had the Unit filed a separate income tax return. COMPANY For income tax purposes the Company is a pass-through entity, therefore, income taxes have not been reflected on the Company's financial statements. NOTE E - COMMITMENTS AND CONTINGENCIES LITIGATION The Company is engaged in routine litigation incidental to its business. Management believes the ultimate outcome of such litigation will not have a material adverse effect on the Unit's financial position, liquidity or results of operations. 30 M-FOODS DAIRY TXCT, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) INDEX TO FINANCIAL STATEMENTS
Page Balance Sheets 32 Statements of Operations 33 Statements of Cash Flows 34 Notes to Financial Statements 35
31 M-FOODS DAIRY TXCT, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) BALANCE SHEETS (unaudited, in thousands) ==============================================================================
COMPANY PREDECESSOR ------------------ ----------------------- JUNE 30, DECEMBER 31, 2001 2000 ------------------ ----------------------- ASSETS CURRENT ASSETS Accounts receivable, less allowances $ 9,452 $ 5,684 Inventories 3,819 2,395 Prepaid expenses and other 52 57 ------------------ ----------------------- Total current assets 13,323 8,136 PROPERTY, PLANT AND EQUIPMENT - AT COST Land - - Buildings and improvements 2,338 3,853 Machinery and equipment 8,925 13,769 ------------------ ----------------------- 11,263 17,622 Less accumulated depreciation 430 3,193 ------------------ ----------------------- 10,833 14,429 OTHER ASSETS Non-compete agreement 1,455 8,667 ------------------ ----------------------- 1,455 8,667 ------------------ ----------------------- $25,611 $31,232 ================== ======================= LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY CURRENT LIABILITIES Current maturities of non-compete commitment $ 2,400 $ 2,400 Accounts payable 5,705 3,134 Notes payable - related parties 386 - Accrued liabilities: Compensation 221 187 Insurance 37 34 Customer programs 323 139 Other 447 403 ------------------ ----------------------- Total current liabilities 9,519 6,297 DEFERRED INCOME TAXES - 64 NON-COMPETE COMMITMENT, less current maturities 2,400 4,800 COMMITMENTS AND CONTINGENCIES - - PREFERRED SHAREHOLDER RETURN PAYABLE 250 - UNIT HOLDER AND OPERATING UNIT EQUITY 13,442 20,071 ------------------ ----------------------- $25,611 $31,232 ================== =======================
The accompanying notes are an integral part of these statements. 32 M-FOODS DAIRY TXCT, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) STATEMENTS OF OPERATIONS (unaudited, in thousands) ==============================================================================
COMPANY PREDECESSOR ---------------- ----------------------------------------------------------- THREE MONTHS THREE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, MARCH 31, JUNE 30, 2001 2000 2001 2000 ---------------- ----------------------------------------------------------- Net sales $28,879 $21,400 $17,644 $35,007 Cost of sales 27,559 20,126 17,108 32,832 ------------- ------------------------------------------------------ Gross profit 1,320 1,274 536 2,175 Selling, general and administrative expenses 1,405 1,848 1,712 3,799 ------------- ------------------------------------------------------ Operating profit (85) (574) (1,176) (1,624) Other income (expense) 53 - - - ------------- ------------------------------------------------------ Earnings before income taxes (32) (574) (1,176) (1,624) Income tax expense - (232) (447) (658) ------------- ------------------------------------------------------ NET EARNINGS $ (32) $ (342) $ (729) $ (966) ============= ======================================================
The accompanying notes are an integral part of these statements. 33 M-FOODS DAIRY TXCT, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) STATEMENTS OF CASH FLOWS (unaudited, in thousands) ==============================================================================
COMPANY PREDECESSOR --------------------- -------------------------------------- THREE MONTHS THREE MONTHS SIX MONTHS ENDED ENDED ENDED JUNE 30, 2001 MARCH 31, 2001 JUNE 30, 2000 --------------------- ---------------------------------------- Net cash provided by (used in) operating activities $ 3,692 $ (31) $(1,807) Cash flows from investing activities: Capital expenditures (1,292) (2,250) (1,080) --------------------- ---------------------------------------- Net cash used in investing activities (1,292) (2,250) (1,080) Cash flows from financing activities: Payments on non-compete commitment (2,400) - (2,400) Net additional capital invested - 2,281 5,287 --------------------- ---------------------------------------- Net cash provided by financing activities (2,400) 2,281 2,887 --------------------- ---------------------------------------- Net decrease in cash and equivalents - - - Cash and equivalents at beginning of period - - - --------------------- ---------------------------------------- Cash and equivalents at end of period $ - $ - $ - ===================== ========================================
The accompanying notes are an integral part of these statements. 34 M-FOODS DAIRY TXCT, LLC (A MAJORITY OWNED SUBSIDIARY OF MICHAEL FOODS, INC.) NOTES TO FINANCIAL STATEMENTS ============================================================================== NOTE A - ORGANIZATION, BUSINESS AND MERGER ORGANIZATION M-Foods Dairy TXCT, LLC (the "Company") is a majority owned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc. Prior to the Merger described below, Kohler Mix - TXCT (the "Predecessor," "Operating Unit" or the "Unit") was an operating unit of Michael Foods, Inc. The change in control of Michael Foods, Inc. and the reorganization of the operating unit into the Company are more fully described below. BUSINESS The Company processes and distributes soft serve ice cream mix, frozen yogurt mix, milk and specialty dairy products, many of which are ultra-high temperature pasteurized, from its facilities in Texas and Connecticut. MERGER On April 10, 2001, Michael Foods, Inc. and its subsidiaries ("Michael Foods") was acquired in a transaction (the Merger") led by an investor group comprised of a management group led by Michael Foods' Chairman, President and Chief Executive Officer, Gregg Ostrander, affiliates of Jeffrey Michael, a member of the Michael Foods Board of Directors, and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated, (collectively, "M-Foods Investors, LLC"). Under the terms of the Merger agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per share in cash, or value equal thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the outstanding shares was financed through new equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates (effective rate of 7.5% at April 10, 2001), and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. Immediately after the close of the Merger, Michael Foods contributed the assets of its Dairy division into two limited liability corporations, M-Foods Dairy, LLC and the Company (collectively, the "Dairy LLCs") and in exchange received voting preferred and voting common units from the Dairy LLCs equal to the fair value of the net assets contributed, which collectively were approximately $40,000,000 (the approximate fair value contributed to the Company was $10,000,000). The preferred units issued to Michael Foods have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In addition, Michael Foods received 5% of the common units issued by each of the Dairy LLCs with the common units held by Michael Foods representing 100% of the voting common units issued and outstanding. These common units have a stated value of $25,000. The remaining 95% of the common units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, which is owned by the same owners, or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The Dairy LLCs common unit interest owned by M-Foods Dairy Holdings, LLC was purchased for $475,000 as of April 1, 2001. Following the Merger, Michael Foods, Inc. became an indirect wholly-owned subsidiary of M-Foods Investors, LLC and the Company became a majority owned subsidiary of Michael Foods, Inc. 35 The Merger has been accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and EITF 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities are assigned new values, which are part Predecessor cost and part fair value, in the same proportions as the carryover basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family and the new interests acquired by the new investors. The deemed dividend related to the Michael Foods investment in the assets and liabilities of the Dairy LLCs was pushed down to these majority owned subsidiaries, as if they were wholly owned subsidiaries since Michael Foods owns all of the voting stock and the Dairy LLCs are being operated by the management of Michael Foods. The amount of the deemed dividend at Michael Foods was $66,631,000. However, the historical cost basis equity of the continuing investors of the Company was $21,623,000, which exceeded the Company's fair market value by $11,623,000. This resulted in an allocation of carryover basis in excess of the fair market value of the Company in the amount of $3,603,000. For ease of presentation, the Merger has been reflected in the accompanying financial statements as if it had occurred on April 1, 2001. Management determined that no material transactions occurred during the period from April 1 through April 9, 2001. The Company's financial statements have been presented on a comparative basis with the Predecessor's historical operating unit financial statements, prior to the date of Merger. Different bases of accounting have been used to prepare the Company and Predecessor financial statements. The primary differences relate to the 10% yield on preferred units, depreciation and amortization of fixed assets and other intangible assets recorded at fair value at the date of acquisition, and income taxes which are payable by the Company's unit holders. The fair value contributed by Michael Foods to the Company was $10,000,000 and this amount, plus an additional carryover basis of $3,603,000 was allocated to the acquired assets and liabilities based on their fair values at April 1, 2001. In addition, $118,750 was contributed by new investors in exchange for Class B - non voting common units. The fair values of long-term assets was obtained from a preliminary valuation report issued by a third party appraisal firm. The allocations were as follows: Working capital $6,968,000 Property, plant & equipment 9,971,000 Other assets, including goodwill 1,583,000 Other liabilities 4,800,000
36 The following unaudited pro forma revenue and net earnings for the year ended December 31, 2000 and for the six months ended June 30, 2001 are derived from the application of pro forma adjustments to the Predecessor historical statements of earnings and assumes the Merger had occurred on January 1, 2000:
Six months ended Year ended June 30, 2001 December 31, 2000 -------------------------------------- -------------------------------------- Revenue $46,523,000 $73,814,000 Net earnings (605,000) (1,883,000)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying Predecessor Balance Sheet as of December 31, 2000, the Predecessor Statements of Operations for the three and six months ended June 30, 2000 and the three months ended March 31, 2001, and the Predecessor Statements of Cash Flows for the six months ended June 30, 2000 and the three months ended March 31, 2001 have been prepared from the historical books and records of Michael Foods. The respective Statements of Operations include an allocation of general and administrative costs incurred by Michael Foods and allocations from this Operating Unit to the other Dairy operating unit, M-Foods Dairy, LLC. The accompanying unaudited financial statements and footnote information for the three and six month periods ended June 30, 2000 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") using the historical cost basis of assets and liabilities of the Predecessor. The accompanying unaudited financial statements and footnote information as of and for the three month period ended June 30, 2001 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of assets and liabilities of the Company. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods indicated. The Unit's financial statements include an allocation for general and administrative costs incurred by Michael Foods. Management believes its allocations to these Operating Unit financial statements are reasonable. Additionally, Operating Unit equity includes the cumulative net advances between the Operating Unit and Michael Foods, which are considered additional capital invested from or, constructive dividends to, Michael Foods. Accordingly, the accompanying financial statements may not necessarily be indicative of the results that could have been obtained if the Operating Unit had been operated during the periods presented as a stand-alone entity. The historical results of the Company and Predecessor for the periods indicated are not necessarily indicative of their results for a full year. The accounting policies of the Predecessor have been adopted by the Company. USE OF ESTIMATES Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management. 37 INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
Inventories consist of the following: Company Predecessor ----------------- ------------------- June 30, December 31, 2001 2000 ----------------- ------------------- Raw materials and supplies $2,525,000 $1,504,000 Work in process and finished goods 1,294,000 890,000 ----------------- ------------------- $3,819,000 $2,394,000 ================= ===================
NOTE C - INCOME TAXES PREDECESSOR The activity of the Operating Unit has been included in the income tax return of Michael Foods, Inc. for financial reporting purposes. The Unit has been allocated a provision for income taxes in an amount generally equivalent to the provision that would have resulted had the Unit filed a separate income tax return. COMPANY For income tax purposes the Company is a pass-through entity, therefore, income taxes have not been reflected on the Company's financial statements. NOTE D - COMMITMENTS AND CONTINGENCIES LITIGATION The Company is engaged in routine litigation incidental to its business. Management believes the ultimate outcome of such litigation will not have a material adverse effect on the accompanying statements of financial position, liquidity or results of operations. 38 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 RESULTS OF OPERATIONS Readers are directed to Note G - Business Segments for data on the unaudited financial results of the Company's four business segments for the three months ended June 30, 2001 and for data on the unaudited financial results of the Predecessor's four business segments for the three months ended June 30, 2000. Net sales for the 2001 period were $295,109,000, an increase of 11% compared to the Predecessor's net sales of $266,616,000 in the 2000 period. Net sales increased because of the factors discussed in the below divisional reviews, but were higher in the 2001 period due largely to strong unit sales growth in three divisions and inflationary impacts in two divisions. Egg Products Division net sales for the 2001 period reflected approximately flat unit sales and slight price increases for certain egg products. Unit sales rose for egg substitutes, hardcooked items and precooked products, and declined slightly for other products, except for dried products, where a moderate decline was recorded. Graded shell egg prices increased approximately 2% compared to second quarter 2000 levels, as reported by Urner Barry Publications - a widely quoted industry pricing service. Related egg market increases raised the cost of purchased eggs slightly during a period where prices for industrial egg products were generally weak. Approximately two-thirds of the Division's annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs 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 higher in the 2001 period, compared to the 2000 period, due mainly to higher prices for soybean meal. Increased egg costs, for both internally and externally procured eggs, in the 2001 period as compared to the 2000 period, were generally not met with comparable price changes in egg products prices, creating margin pressure for certain egg products, particularly frozen products. Also contributing to the divisional operating profit decline was the impact of incremental depreciation and amortization related to the Merger completed in April 2001. Refrigerated Distribution Division net sales for the 2001 period reflected unit sales increases for several product lines, with cheese, butter, bagels, and ethnic items showing particular strength. Unit sales growth resulted primarily from new customers gained over the past year, as the Crystal Farms brand continues to expand beyond its traditionally Midwestern core business base. Margins declined in the key cheese category and for butter items, in both cases as a result of product costs rising more rapidly than the Division's selling prices, particularly butterfat, which rose sharply in the first half of 2001. These impacts decreased divisional operating profit margins and dollars compared to strong 2000 levels when the relationship between product costs and retail pricing was more favorable. Dairy Products Division net sales for the 2001 period reflected higher unit sales due to strong creamer and specialty cartoned products sales. Further, sales of the division's main product line, ultra-high 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2000, CONT. temperature pasteurized ("UHT") dairy mixes, rose on a unit basis. Inflationary impacts from a year-over-year rise in the national dairy ingredient markets added to dollar sales growth. The divisional operating profit margin increased as a result of the strong volume growth, improved sales mix, and more efficient plant operations. Potato Products Division net sales for the 2001 period reflected unit sales increases in all product categories. Sales were particularly strong for retail items. New account activity, same-account sales growth and higher marketing spending levels all contributed to the sales gain. The operating profit decrease in the 2001 period reflected increased marketing spending and the impact of incremental depreciation and amortization related to the Merger completed in April 2001. The decrease in our gross profit margin for the period ended June 30, 2001, as compared to the results of the 2000 period, reflected the factors discussed above, particularly increased raw material costs, which were not able to be fully recovered within the Egg Products and Refrigerated Distribution segments. It is our 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 increased as a percent of sales in the period ended June 30, 2001, as compared to the results of the 2000 period. This increased expense ratio reflected the impact of incremental amortization related to the Merger completed in April 2001. Without such Merger effects, operating expenses would have been a comparable percentage of net sales between periods. SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 RESULTS OF OPERATIONS Readers are directed to Note G - Business Segments for data on the unaudited financial results of the Company's and the Predecessor's four business segments and must combine three month periods to evaluate the six months ended June 30, 2001 with six months ended June 30, 2000. Net sales for the Company and the Predecessor in the 2001 period were $570,736,000, an increase of 10% compared to the Predecessor's net sales of $518,542,000 in the 2000 period. Net sales increased because of the factors discussed in the below divisional reviews, but were higher in the 2001 period due largely to strong unit sales growth in three divisions and inflationary impacts in two divisions. 40 Egg Products Division net sales for the 2001 period reflected higher unit sales and price increases for certain egg products. Unit sales rose for most product categories, though dried products showed a moderate decline. Graded shell egg prices increased approximately 10% compared to first half 2000 levels, as reported by Urner Barry. Related egg market increases raised the cost of purchased eggs during a period where prices for industrial egg products were generally weak. Approximately two-thirds of the Division's annual egg needs are purchased under contracts, or in the spot market. A substantial majority of these eggs 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 higher in the 2001 period, compared to the 2000 period, due mainly to higher prices for soybean meal. Increased egg costs, for both internally and externally procured eggs, in the 2001 period as compared to the 2000 period, were generally not met with comparable price changes in egg products prices, creating margin pressure for certain egg products. Also contributing to the divisional operating profit decline was the impact of incremental depreciation and amortization related to the Merger completed in April 2001. Refrigerated Distribution Division net sales for the 2001 period reflected unit sales increases for several product lines, with cheese, bagels, potato products and ethnic items showing particular strength. Unit sales growth resulted primarily from new customers gained over the past year, as the Crystal Farms brand continues to expand beyond its traditionally Midwestern core business base. Margins declined in the key cheese category and for butter items, in both cases as a result of product costs rising more rapidly than the Division's selling prices. Dairy ingredient costs, particularly for butterfat, rose sharply in the first half of 2001. These impacts decreased divisional operating profit margins and dollars compared to strong 2000 levels when the relationship between product costs and retail pricing was more favorable. Dairy Products Division net sales for the 2001 period reflected higher unit sales due to strong creamer, and specialty cartoned, products sales. Further, sales of the division's main product line, UHT dairy mixes, rose on a unit basis. Inflationary impacts from a year-over-year rise in the national dairy ingredient markets added to dollar sales growth. The divisional operating profit margin increased as a result of the strong volume growth, an improved sales mix, and more efficient plant operations. Potato Products Division net sales for the 2001 period reflected unit sales increases in all product categories. Sales were particularly strong for retail items. New account activity, same-account sales growth and higher marketing spending levels all contributed to the sales gain. The operating profit increase in the 2001 period reflected the benefits of rising sales in the higher margin retail segment, which offset increased marketing spending and the impact of incremental depreciation and amortization related to the Merger completed in April 2001. The decrease in our gross profit margin for the period ended June 30, 2001, as compared to the results of the 2000 period, reflected the factors discussed above, particularly the increased raw material costs within the Egg Products and Refrigerated Distribution segments. It is our 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. 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2000, CONT. Selling, general and administrative expenses decreased slightly as a percent of sales for the period ended June 30, 2001, as compared to the results of the 2000 period. Operating expenses reflected the impact of incremental amortization related to the Merger of the Company (see Note A) completed in April 2001 and expenses associated with terminating our investment in a Egg Products Division joint venture, which were offset by the final insurance settlement related to a Dairy Products Division product recall in 1999. Separate from selling, general and administrative expenses in the 2001 period, the Predecessor recorded non-recurring expenses related to the Merger for financial, legal, advisory and regulatory filing fees. These expenses of $11,050,000 are reflected in the Predecessor Consolidated Statements of Earnings as transaction expenses. GENERAL Certain of our products are sensitive to changes in commodity prices. Value-added egg products, such as extended shelf-life liquid and precooked products, account for approximately 60% of the Egg Products Division's net sales. The remainder of Egg Products Division sales is derived from the sale of other egg products and shell eggs, which vary from being very commodity-sensitive to somewhat 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. Graded shell egg pricing in the 2001 period was approximately 10% above 2000 levels, as measured by a widely quoted pricing service, and feed costs also rose year-over-year. Gross profit margins for extended shelf-life liquid eggs, egg substitutes, and precooked and hardcooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. Our Refrigerated Distribution Division derives approximately 75% 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 mainly from shell eggs, some of which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis. 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 75%-95% 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. We plan to continue to invest in state-of-the-art production facilities to enhance our competitive position. Historically, we have financed our growth principally from internally generated funds, bank borrowings, and the issuance of senior debt. We believe such sources remain viable financing alternatives to meet our anticipated needs. 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED ================================================================================ CAPITAL RESOURCES AND LIQUIDITY, CONT. We invested approximately $6,300,000 in capital expenditures during the three months ended June 30, 2001. The Predecessor invested approximately $10,800,000 in capital expenditures during the three months ended March 31, 2001. On a combined basis, we plan to spend approximately $43,000,000 on capital expenditures in 2001, the majority of which is to expand or update production capacity for value-added products. Earnings before interest, taxes, depreciation and amortization ("EBITDA") in the three month 2001 period were $37,033,000, an increase of 4% compared to the Predecessor's EBITDA of $35,755,000 in the three month 2000 period. EBITDA for the Company and the Predecessor in the six month 2001 period was $68,777,000, an increase of 3% compared to the Predecessor's EBITDA of $66,907,000 in the six month 2000 period. EBITDA increased because of the factors discussed in the above results of operations divisional reviews. Our management believes that EBITDA is a relevant measurement of the Company's financial results, as it is indicative of the relative strength of the Company's cash flows and is a key measurement contained in the financial covenants of our senior indebtedness. In addition, as a highly leveraged company, the holders of the Company's debt have a significant interest in our cash flows. We compute EBITDA as it is defined in our senior credit agreement (see Exhibit 10.1 of our Amendment No. 1 to Form S-4 filed with the Securities and Exchange Commission on July 18, 2001). This definition may not be comparable to that used by other companies reporting similar financial information. We believe EBITDA is a widely accepted financial indicator used to analyze and compare companies on the basis of operating performance. It should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles and is not indicative of operating profit or cash flow from operations as determined under generally accepted accounting principles. We have senior secured credit facilities in the amount of $470,000,000 with numerous banks, other financial institutions and investment groups, which includes a $100,000,000 line of credit expiring in 2007. At June 30, 2001, there were no borrowings under the line of credit. The senior credit facility contains various restrictive covenants. It prohibits us from prepaying other indebtedness, including the notes, and it requires us to maintain specified financial ratios, such as a minimum ratio of EBITDA to interest expense, a minimum fixed charge coverage ratio and a maximum ratio of total debt to EBITDA, and satisfy financial condition tests. In addition, the senior credit facility prohibits us from declaring or paying any dividends and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or fail to meet the conditions of, the senior credit facility or if payment create a default under the senior credit facility. The indenture governing the notes, among other things, (a) restricts the ability of the issuer and its subsidiaries, including the guarantors of the notes, to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates, (b) prohibits certain restrictions on the ability of certain of the issuer's subsidiaries, including the guarantors of the notes, to pay dividends or make certain payments to the issuer and (c) places restrictions on the ability of the issuer and its subsidiaries, including the guarantors of the notes, to merge or consolidate with any other person or sell, assign, transfer,lease, convey or otherwise dispose of all or substantially all of the assets of the issuer. The indenture related to these notes and the senior credit facility also contain various covenants which limit our discretion in the operation of our businesses. Our principal sources of funds are anticipated to be cash flows from operating activities and borrowings under our senior credit facility. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our current and future financial obligations, as well as to provide funds for our working capital, capital expenditures and other needs for at least the next 12 months. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements or to fund our acquisition activities, if any. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to us. 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. 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. Our actual financial results could differ materially from the results estimated by, forecasted by, or implied by us in such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in the Company's or the Predecessor's market risk during the six month period ended June 30, 2001. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Shareholders of Michael Foods, Inc. (Predecessor) was held on April 9, 2001. The items voted upon and the results of the vote follow: 1. To approve and adopt the merger agreement as described in the Proxy Statement dated March 12, 2001: For Against Abstain --- ------- ------- 15,249,659 40,428 34,288 2. To transact other business: For Against Abstain --- ------- ------- 10,845,432 3,320,268 1,158,675 43 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K The Company filed a Form 8-K on July 26, 2001 regarding a news release issued to the Company's debtholders pertaining to the Company's financial results for the three months and six months ended June 30, 2001. 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: August 14, 2001 By: /s/ Gregg A. Ostrander ------------------------------ Gregg A. Ostrander (Chairman, President and Chief Executive Officer) Date: August 14, 2001 By: /s/ John D. Reedy ------------------------------- John D. Reedy (Executive Vice President, Treasurer, Chief Financial Officer and Principal Accounting Officer) 44 -----END PRIVACY-ENHANCED MESSAGE-----