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, 1997
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, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
(Address of principal executive offices) (Zip code)
(612) 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. [X]Yes [ ]No
The number of shares outstanding of the registrant's Common Stock, $.01
par value, as of August 1, 1997 was 21,539,039 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 7,614,000 $ 2,585,000
Accounts receivable, less allowances 85,918,000 51,394,000
Inventories 67,913,000 58,976,000
Prepaid expenses and other 2,724,000 2,976,000
------------ ------------
Total current assets 164,169,000 115,931,000
PROPERTY, PLANT AND EQUIPMENT-AT COST
Land 4,205,000 4,110,000
Buildings and improvements 104,040,000 97,470,000
Machinery and equipment 262,789,000 225,215,000
------------ ------------
371,034,000 326,795,000
Less accumulated depreciation 156,779,000 144,556,000
------------ ------------
214,255,000 182,239,000
OTHER ASSETS
Goodwill, net 115,733,000 53,602,000
Other 7,204,000 12,887,000
------------ ------------
122,937,000 66,489,000
------------ ------------
$501,361,000 $364,659,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 8,654,000 $ 8,410,000
Accounts payable 43,860,000 28,412,000
Accrued compensation 6,263,000 4,604,000
Accrued insurance 6,989,000 6,471,000
Other accrued expenses 35,732,000 11,357,000
------------ ------------
Total current liabilities 101,498,000 59,254,000
LONG-TERM DEBT, less current maturities 161,694,000 104,491,000
DEFERRED INCOME TAXES 33,074,000 26,872,000
CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 40,000,000 shares authorized,
shares issued 21,416,970 at June 30, 1997 and 19,459,731 at
December 31, 1996 214,000 195,000
Additional paid-in capital 134,007,000 113,268,000
Retained earnings 70,874,000 60,579,000
------------ ------------
205,095,000 174,042,000
------------ ------------
$501,361,000 $364,659,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, (Unaudited)
1997 1996
------------ ------------
Net sales $237,861,000 $151,678,000
Cost of sales 198,400,000 133,480,000
------------ ------------
Gross profit 39,461,000 18,198,000
Selling, general and administrative expenses 22,176,000 10,917,000
------------ ------------
Operating profit 17,285,000 7,281,000
Other expense
Interest expense, net 3,003,000 1,824,000
------------ ------------
Earnings before income taxes 14,282,000 5,457,000
Income tax expense 5,930,000 2,180,000
------------ ------------
NET EARNINGS $ 8,352,000 $ 3,277,000
============ ============
NET EARNINGS PER SHARE $ .39 $ .17
============ ============
DIVIDENDS PER SHARE $ .05 $ .05
============ ============
Weighted average shares outstanding 21,258,000 19,389,000
============ ============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, (Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales $433,279,000 $295,550,000
Cost of sales 370,089,000 258,439,000
------------ ------------
Gross profit 63,190,000 37,111,000
Selling, general and administrative expenses 36,845,000 22,442,000
------------ ------------
Operating profit 26,345,000 14,669,000
Other expense
Interest expense, net 5,281,000 3,744,000
------------ ------------
Earnings before income taxes 21,064,000 10,925,000
Income tax expense 8,750,000 4,370,000
------------ ------------
NET EARNINGS $ 12,314,000 $ 6,555,000
============ ============
NET EARNINGS PER SHARE $ .60 $ .34
============ ============
DIVIDENDS PER SHARE $ .10 $ .10
============ ============
Weighted average shares outstanding 20,674,000 19,371,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net cash provided by operating activities $ 45,363,000 $ 18,814,000
Cash flows from investing activities:
Capital expenditures (13,692,000) (12,458,000)
Business acquisitions, net of cash acquired, and other assets (43,468,000) 95,000
------------- -------------
Net cash used in investing activities (57,160,000) (12,363,000)
Cash flows from financing activities:
Payments on notes payable and long-term debt (191,187,000) (62,699,000)
Proceeds from notes payable and long-term debt 204,405,000 57,200,000
Purchase of shares -- (500,000)
Proceeds from issuance of common stock 5,628,000 213,000
Cash dividends (2,020,000) (1,936,000)
------------- -------------
Net cash provided by financing activities 16,826,000 (7,722,000)
------------- -------------
Net increase (decrease) in cash and equivalents 5,029,000 (1,271,000)
Cash and equivalents at beginning of year 2,585,000 1,921,000
------------- -------------
Cash and equivalents at end of period $ 7,614,000 $ 650,000
============= =============
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Acquisition:
Cash paid, net of cash acquired $ 42,720,000
Stock issued 38,859,000
Fair value of assets acquired (86,334,000)
Liabilities assumed 68,223,000
-------------
Purchase price in excess of net assets acquired $ 63,468,000
=============
In connection with the merger with North Star Universal, Inc., Michael Foods,
Inc. (the "Company") assumed $21,250,000 of net indebtedness and effectively
repurchased 1,782,961 shares of its common stock (see note D).
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles 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.
The Company utilizes a fiscal year consisting of either 52 or 53 weeks, ending
on the Saturday nearest to December 31 each year. The quarters ended June 30,
1997 and June 30, 1996 each include thirteen weeks of operations. For clarity of
presentation, the Company has described all periods presented as if the three
month and six month periods ended on June 30.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1997 and the results of operations for the three and six month periods ended
June 30, 1997 and 1996 and cash flows for the six months ended June 30, 1997 and
1996. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results for the full year.
NOTE B - NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for periods
ending after December 15, 1997. Early adoption of the new standard is not
permitted. The new standard eliminates primary and fully diluted earnings per
share disclosure and requires presentation of basic and diluted earnings per
share, together with disclosure of how the per share amounts were computed.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The pro forma
effect of adopting the new standard would not have an impact on the reported net
earnings per share for the three and six month periods ended June 30, 1997 and
1996 for both basic and diluted earnings per share.
NOTE C - INVENTORIES
Inventories other than flocks, raw potatoes, and potato products 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.
Raw potatoes and potato products are stated at the lower of average cost for the
year in which produced or at market. Inventories consist of the following:
June 30, December 31,
1997 1996
------------ -----------
Raw materials and supplies $16,487,000 $11,065,000
Work in process and finished goods 29,918,000 21,235,000
Flocks 21,508,000 26,676,000
------------ -----------
$67,913,000 $58,976,000
============ ===========
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
NOTE D - ACQUISITION OF PAPETTI'S AND MERGER WITH NORTH STAR UNIVERSAL
On February 26, 1997, the Company completed the acquisition of Papetti's Hygrade
Egg Products, Inc. and affiliated entities (collectively "Papetti's"). The
acquisition has been accounted for as a purchase. Total consideration of
$83,174,000, together with the assumption of $22,825,000 of notes payable and
long-term debt, was delivered through the issuance of 3,195,455 shares of newly
issued common stock valued at $38,859,000, and $44,315,000 in cash and closing
costs. The total consideration delivered exceeded the fair value of the net
assets acquired by $63,468,000, which has been recorded as goodwill and will be
amortized on a straight line basis over 40 years. The Papetti's results of
operations have been included in the Company's operating results since the date
of acquisition.
On February 28, 1997, Michael Foods, Inc., a Delaware corporation, merged into
North Star Universal, Inc. ("NSU") with NSU immediately distributing NSU's
subsidiary, ENStar Inc., in a tax-free distribution to the former shareholders
of NSU. At the time of the merger, NSU changed its name to Michael Foods, Inc.
and the management and operations of the continuing entity are those of the
Company. The merger has been accounted for as a reverse acquisition utilizing
the purchase method of accounting. The effect of the merger is that the Company
assumed $21,250,000 of net subordinated indebtedness and effectively retired
1,782,961 shares of the Company's common stock of approximately equal value.
The following unaudited pro forma statement of earnings information has been
prepared assuming the Papetti's acquisition, the merger with NSU and the
refinancing of the Company's debt described in Note E had occurred on January 1,
1997 and 1996:
For the six months ended June 30, 1997 1996
- --------------------------------------------------------------------------------
Net sales $481,874,000 $465,706,000
Net earnings $ 12,867,000 $ 7,032,000
Net earnings per share $ .61 $ .34
============ ============
Weighted average shares outstanding 21,099,000 20,783,000
============ ============
This unaudited pro forma information is not necessarily indicative of the
combined results of operations that would have occurred had the acquisition,
merger and refinancing occurred on the respective dates, nor are they indicative
of the results which may occur in the future.
NOTE E - LONG-TERM DEBT
In February, 1997, the Company issued senior notes in the principal amount of
$125,000,000 to finance the cash portion of the acquisition of Papetti's, to
retire certain Company debt, and to refinance all or a portion of the debt
assumed in the Papetti's acquisition and the NSU merger. The senior notes bear
interest at 7.58% and are due in five equal annual payments beginning in 2005.
In addition, the Company also obtained a new $80,000,000 unsecured revolving
line of credit with its principal banks. The revolving line of credit will
mature in February, 2002 and bears interest at the banks' reference rate, or at
Eurodollar rates as defined, at the Company's option. Proceeds from the
revolving line of credit were used to retire the outstanding balance of the
preexisting line of credit and to assist with completing the acquisition of
Papetti's and the merger with NSU. At June 30, 1997, the Company had $60,000,000
available under this revolving line of credit.
<PAGE>
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
NOTE F - CONTINGENCIES
Use of Estimates
In preparation of the Company's consolidated financial statements, management is
required 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.
Patent Litigation
The Company has an exclusive license agreement for the production and sale of
extended shelf-life liquid egg products. Under the terms of this license
agreement the Company has the right to defend and prosecute infringement of the
patents which are the basis of the exclusive license agreement. The Company can
offset up to 50% of the required royalty payments under the agreement with costs
associated with the legal defense of the licensed patents. To the extent defense
costs exceed the required royalty payments, the agreement permits the Company to
defer the excess costs and apply them to future royalty payments. At June 30,
1997 and December 31, 1996, the Company had prepaid royalty payments of
approximately $1,580,000 and $7,923,000 included in other assets related to the
defense of its licensed patent rights against several infringing parties. In
connection with the February 26, 1997 acquisition of Papetti's, which was a
defendant in one of these patent infringement cases, a settlement of $6,000,000
was received by the Company. Under the terms of its license agreement, the
Company was required to apply this settlement as a reduction of its prepaid
royalty payments.
During 1996, the Company was informed by the U.S. Patent and Trademark Office
that a patent examiner rejected the claims under the four process patents which
are the subject of the license agreement. The Company and the holder of the
patents are appealing the decision of the examiner and the Company believes the
validity of the patents will ultimately be upheld. During the appeal process,
the patents remain valid and in full force and effect. There can be no assurance
that the Company will be able to fully recover its prepaid royalty payments. If
the patents are ultimately denied, the Company would continue to produce and
market the products currently subject to the license agreement without incurring
royalty cost.
Product Litigation
In the fall of 1994, a customer of the Company recalled product which was
potentially contaminated and the customer has settled claims with consumers who
became ill after eating the product. The customer had filed a suit, whereby the
Company was a co-defendant with other companies alleged to have supplied
contaminated product to the customer's plant. The customer sought damages for
losses incurred, as well as alleged loss of past and future profits. In May,
1997 the suit was settled within the Company's insurance coverage.
Other Litigation
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material effect upon its consolidated
financial position, liquidity or results of operations.
NOTE G - RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 VS THREE MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
The Company completed the acquisition of Papetti's on February 26, 1997.
Papetti's results of operations since the date of acquisition are included in
the Company's Egg Products Division operating results.
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
Three Months Ended June 30,
---------------------------
1997 1996
---- ----
Egg Products 65% 43%
Refrigerated Distribution 20 32
Dairy Products 11 16
Potato Products 6 14
Intercompany Sales (2) (5)
---- ----
TOTAL 100% 100%
==== ====
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
Three Months Ended June 30,
---------------------------
1997 1996
---- ----
Egg Products 82% 54%
Refrigerated Distribution 8 19
Dairy Products 9 22
Potato Products 1 5
---- ----
TOTAL 100% 100%
==== ====
The Egg Products Division had higher dollar sales and higher dollar earnings in
the period ended June 30, 1997, as compared to the results of the same period in
1996, due, in part, to the acquisition of Papetti's. Strong unit sales,
favorable spot market egg prices and earnings contributions from Papetti's
operations benefited divisional earnings. Sales were particularly strong for
certain value-added egg products, notably Easy Eggs(R) and Table Ready(R)
(extended shelf-life liquid whole eggs) and MicroFresh (frozen omelets, patties
and curds). Egg prices decreased approximately 10% compared to second quarter
1996 levels, as reported by Urner Barry Publications - a widely quoted industry
pricing service, although pricing for egg products is not necessarily directly
effected by changes in shell egg pricing. With the acquisition of Papetti's, a
substantially greater portion of the Company's egg needs are now purchased in
the open market relative to prices reported by Urner Barry. The relationship of
open market egg prices to egg products prices was generally favorable during the
second quarter of 1997. Feed costs, which typically represent roughly two-thirds
of the cost of producing an egg, were lower in the 1997 period than in the 1996
period, due principally to lower corn prices, which benefited margins.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the period ended June 30, 1997, as compared to the results of the
same period in 1996. Unit sales were higher for core refrigerated grocery items,
reflecting, in part, new customers and new product introductions. This
significant volume improvement allowed for divisional earnings growth.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
THREE MONTHS ENDED JUNE 30, 1997 VS THREE MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS, CONT.
The Dairy Products Division had higher dollar sales and higher dollar earnings
in the period ended June 30, 1997, as compared to the results of the same period
in 1996. Unit sales increased and were helped by improved sales volumes with
certain large fast-food customers and by a growing coffee creamer business. Raw
material costs declined during the quarter due to decreases in the pricing of
certain ingredients tied to the national butter fat market.
The Potato Products Division had lower dollar sales, largely due to a planned
exiting of the frozen french fry business, and lower dollar earnings in the
period ended June 30, 1997, as compared to the same period in 1996, although
earnings in both periods were modest. Frozen french fry operations continued to
generate losses in the second quarter of 1997, totaling approximately $0.015 per
share. These losses were somewhat less than the losses experienced in the second
quarter of 1996. The Company announced earlier in 1997 that it would exit the
frozen french fry business in mid-1997 and it completed that process in the
second quarter. Value-added refrigerated potato product sales generated earnings
in the second quarter of 1997, but at levels below those experienced in the
second quarter of 1996. Unit sales declined for such products, resulting in a
lower utilization of refrigerated products production lines, which pressured
margins.
The increase in gross profit margin of the Company for the period ended June 30,
1997, as compared to the results of the same period in 1996, reflected the
factors discussed above, particularly the strength of Egg Products Division
earnings. It is management's strategy to increase value-added product sales as a
percent of total sales over time, while decreasing commodity-sensitive products'
contribution to consolidated sales. These efforts historically have been
beneficial to gross profit margins in most periods. Selling, general and
administrative expenses increased as a percent of sales in the period ended June
30, 1997, as compared to the results of the same period in 1996, due primarily
to increased sales training, staffing additions related, in part, to the
Papetti's acquisition, and increased foodservice marketing activities.
Additionally, non-recurring severance expenses, and other costs, of
approximately $2.4 million (pretax) were recorded in the second quarter of 1997
related to the exiting of the frozen french fry business, including a
reorganization of the Company's sales group.
SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Egg Products 60% 43%
Refrigerated Distribution 24 34
Dairy Products 11 14
Potato Products 8 15
Intercompany Sales (3) (6)
---- ----
TOTAL 100% 100%
==== ====
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS, CONT.
The following table sets forth the percentage of divisional operating earnings
(before corporate, interest and income tax expenses) accounted for by each of
the Company's operating divisions for the periods indicated:
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Egg Products 82% 59%
Refrigerated Distribution 12 21
Dairy Products 9 16
Potato Products (3) 4
---- ----
TOTAL 100% 100%
==== ====
The Egg Products Division had higher dollar sales and higher dollar earnings in
the period ended June 30, 1997, as compared to the results of the same period in
1996, due, in part, to the acquisition of Papetti's. Strong unit sales,
favorable spot market egg prices and earnings contributions from the recently
acquired Papetti's operations benefited divisional earnings. Sales were
particularly strong for certain value-added egg products, notably Easy Eggs(R)
and Table Ready(R) and MicroFresh. Egg prices decreased approximately 7%
compared to first half 1996 levels, as reported by Urner Barry, although pricing
for egg products is not necessarily directly effected by changes in shell egg
pricing. With the acquisition of Papetti's, a substantially greater portion of
the Company's egg needs are now purchased in the open market relative to prices
reported by Urner Barry. The relationship of open market egg prices to egg
products prices was generally favorable during the second quarter of 1997. Feed
costs, which typically represent roughly two-thirds of the cost of producing an
egg, were modestly lower in the 1997 period than in the 1996 period, due
principally to lower corn prices, which benefited margins.
The Refrigerated Distribution Division had higher dollar sales and higher dollar
earnings in the period ended June 30, 1997, as compared to the results of the
same period in 1996. Unit sales were higher for core refrigerated grocery items,
reflecting, in part, new customers and new product introductions. This
significant volume improvement allowed for divisional earnings growth.
The Dairy Products Division had higher dollar sales and higher dollar earnings
in the period ended June 30, 1997, as compared to the results of the same period
in 1996. Unit sales increased and were helped by promotional activity with
certain customers, improved sales volumes with certain large fast-food customers
and by a growing coffee creamer business.
The Potato Products Division had lower dollar sales, largely due to a planned
exiting of the frozen french fry business, and operated at a loss in the period
ended June 30, 1997, as compared to the profitable results of the same period in
1996. Frozen french fry operations generated losses totaling approximately $0.05
per share in the first half of 1997, compared to a loss of approximately $0.07
per share recorded in the first half of 1996. Value-added refrigerated potato
product sales generated earnings in the first half of 1997, but at levels below
those experienced in the first half of 1996. Unit sales declined for such
products, resulting in a lower utilization of refrigerated products production
lines, which pressured margins.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
SIX MONTHS ENDED JUNE 30, 1997 VS SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS, CONT.
The increase in gross profit margin of the Company for the period ended June 30,
1997, as compared to the results of the same period in 1996, reflected the
factors discussed above, particularly the strength of Egg Products Division
earnings. It is management's strategy to increase value-added product sales as a
percent of total sales over time, while decreasing commodity-sensitive products'
contribution to consolidated sales. These efforts historically have been
beneficial to gross profit margins in most periods. Selling, general and
administrative expenses increased as a percent of sales in the period ended June
30, 1997, as compared to the results of the same period in 1996, due primarily
to increased sales training, staffing additions related, in part, to the
Papetti's acquisition, and increased foodservice marketing activities.
Additionally, non-recurring severance expenses, and other costs, of
approximately $2.4 million (pretax) were recorded in the second quarter of 1997
related to the exiting of the frozen french fry business, including a
reorganization of the Company's sales group.
GENERAL
Certain of the Company's products are sensitive to changes in commodity prices.
The Company's egg products operations derived approximately 7% of that
division's first half 1997 net sales from shell eggs, which are sensitive to
commodity price swings. The value-added Easy Eggs(R) and Table Ready(R) extended
shelf-life liquid egg product lines accounted for approximately 40% of the Egg
Products Division's first half 1997 net sales. The remainder of Egg Products
Division sales are derived from the sale of other egg products, which vary from
being commodity-sensitive to being value-added. Gross profit from shell eggs is
primarily dependent upon the relationship between shell egg prices and the cost
of feed, both of which can fluctuate significantly. Shell egg pricing in the
first half of 1997 was approximately 7% below first half 1996 levels as measured
by a widely quoted pricing service. Gross profit margins for extended shelf-life
liquid whole eggs and specialty prepared egg products are less sensitive to
commodity price fluctuations than are other egg products or shell eggs.
The Company's refrigerated distribution operations derive approximately 70% of
that division's net sales from refrigerated products produced by others, thereby
reducing the effect of commodity price swings. The balance of refrigerated
distribution sales are from shell eggs, some of which are produced by the Egg
Products Division and are sold on a distribution, or non-commodity, basis by the
Refrigerated Distribution Division.
The Potato Products Division derived approximately 70% of its first half 1997
net sales from the refrigerated potato products line. The Potato Products
Division typically purchases 70%-90% of its raw potatoes from contract producers
under annual contracts. The remainder is purchased at market prices to satisfy
short-term production requirements or to take advantage of market prices when
they are lower than contracted prices. Small variations in the purchase price of
raw materials or the selling price per pound of end products can have a
significant effect on Potato Products Division operating results. The impact of
raw material costs within the Potato Products Division has been reduced in
recent years due to significant increases in higher value-added refrigerated
potato products sales. Beginning in the third quarter of 1997, essentially all
of the Potato Products Division's sales will be of value-added refrigerated
potato products.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
GENERAL, CONT.
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of inflation
through a combination of productivity gains and price increases.
CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and capital expenditures have been, and will likely continue to be,
a significant capital requirement. The Company plans to continue to invest in
state-of-the-art production facilities to enhance its competitive position,
although the annual rate of spending has declined in recent years. Historically,
the Company has financed its growth principally from internally generated funds,
bank borrowings, issuance of senior debt and the sale of Common Stock. The
Company believes that these financing alternatives will continue to meet its
anticipated needs.
The Company invested approximately $13,700,000 in capital expenditures during
the six months ended June 30, 1997. The Company plans to spend approximately
$50,000,000 in total capital expenditures in 1997.
The Company has an unsecured line of credit for $80,000,000 with its principal
banks. As of June 30, 1997, approximately $20,000,000 was borrowed under this
line of credit.
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. 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. 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 26, 1997, the Company settled patent litigation with and Papetti's
as part of the acquisition of Papetti's. The Company received $6,000,000 under
the settlement (see Note F - CONTINGENCIES - Patent Litigation).
On May 13, 1997, the Company's Kohler Mix Specialties, Inc. subsidiary ("Kohler
Mix"), along with two other defendants, settled a lawsuit filed in May, 1995 by
Schwan's Sales Enterprises, Inc. (see Note F- CONTINGENCIES Product Litigation).
As a result of the settlement, the suit was dismissed. The terms of the
settlement are confidential, although the Kohler Mix portion of the settlement
was within the Company's insurance coverage. There was no determination of
liability and no admission of guilt by any of the defendants.
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders of Michael Foods, Inc. was held on June
5, 1997. The items voted upon and the results of the vote follow:
1. The election of nine persons to serve as directors until the next
annual election and until their successors are duly elected and
qualified:
For Withhold Authority
--- ------------------
Maureen B. Bellantoni 17,872,963 48,785
Richard A. Coonrod 17,875,048 46,700
Miles E. Efron 17,872,548 49,200
Arvid C. Knudtson 17,872,548 49,200
Joseph D. Marshburn 17,872,348 49,400
Jeffrey J. Michael 17,873,957 47,791
Gregg A. Ostrander 17,846,746 75,002
Arthur J. Papetti 17,875,133 46,615
Stephen T. Papetti 17,874,831 46,917
2. Proposal to ratify the 1997 Stock Incentive Plan of Michael Foods, Inc.
and affiliated companies:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
16,743,769 971,440 30,872 175,667
3. Proposal to approve the appointment of Grant Thornton as independent
auditors for 1997:
For Against Abstain
--- ------- -------
17,867,830 36,570 17,348
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended June 30,
1997.
<PAGE>
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 11, 1997 By: /s/ Gregg A. Ostrander
---------------------------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: August 11, 1997 By: /s/ John D. Reedy
---------------------------------------
John D. Reedy
(Vice President - Finance, Treasurer,
Chief Financial Officer and Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS INCLUDED
HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,614
<SECURITIES> 0
<RECEIVABLES> 87,837
<ALLOWANCES> 1,919
<INVENTORY> 67,913
<CURRENT-ASSETS> 164,169
<PP&E> 371,034
<DEPRECIATION> 156,779
<TOTAL-ASSETS> 501,361
<CURRENT-LIABILITIES> 101,498
<BONDS> 161,694
0
0
<COMMON> 214
<OTHER-SE> 204,881
<TOTAL-LIABILITY-AND-EQUITY> 501,361
<SALES> 433,279
<TOTAL-REVENUES> 433,279
<CGS> 370,089
<TOTAL-COSTS> 370,089
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<INTEREST-EXPENSE> 5,281
<INCOME-PRETAX> 21,064
<INCOME-TAX> 8,750
<INCOME-CONTINUING> 12,314
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