SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
MICHAEL FOODS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
[LOGO]
MICHAEL FOODS, INC.
324 PARK NATIONAL BANK BUILDING
5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
April 10, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders
of Michael Foods, Inc. to be held in the Auditorium of the Lutheran Brotherhood
Building, 625 Fourth Avenue South, Minneapolis, Minnesota on Tuesday, May 12,
1998, at 4:00 p.m., local time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting there will
be a report on the operations of the Company. After the business of the meeting
has been concluded, shareholders will be given the opportunity to ask
appropriate questions.
The items requiring shareholder approval are the election of directors and
the ratification of the appointment of auditors for the year 1998. We recommend
that you vote for these proposals, which are set forth in more detail in the
accompanying Proxy Statement.
Whether or not you can attend the Annual Meeting, please complete, sign,
date and mail the enclosed proxy card promptly. This action will not limit your
right to revoke your proxy in the manner described in the accompanying Proxy
Statement or to vote in person if you wish to attend the Annual Meeting and vote
personally.
Sincerely,
/s/ Gregg A. Ostrander
Gregg A. Ostrander
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MICHAEL FOODS, INC.
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 12, 1998
------------------
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Michael
Foods, Inc., a Minnesota corporation, will be held in the Auditorium of the
Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota,
at 4:00 p.m., local time, on Tuesday, May 12, 1998.
This meeting is being held for the following purposes:
1. To elect twelve (12) persons to serve as directors until the next
annual election and until their successors are duly elected and
qualified.
2. To ratify the appointment of Grant Thornton LLP as independent
auditors for the year ending December 31, 1998.
3. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on March 20, 1998 will
be entitled to notice of or to vote at the meeting. Whether or not you plan to
be present at the meeting, please sign and return the accompanying form of proxy
in the enclosed postage prepaid envelope at your earliest convenience.
/s/ Jeffrey M. Shapiro
Jeffrey M. Shapiro
EXECUTIVE VICE PRESIDENT AND SECRETARY
Minneapolis, Minnesota
April 10, 1998
<PAGE>
MICHAEL FOODS, INC.
324 PARK NATIONAL BANK BUILDING
5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
----------------------
PROXY STATEMENT
----------------------
ANNUAL MEETING OF SHAREHOLDERS
MAY 12, 1998
This Proxy Statement is furnished to shareholders of Michael Foods, Inc., a
Minnesota corporation (the "Company"), in connection with the solicitation of
proxies on behalf of the Board of Directors (the "Board") for use at the Annual
Meeting of Shareholders of the Company to be held on May 12, 1998 (the "Annual
Meeting"), for the purposes set forth in the accompanying Notice of Annual
Meeting. The mailing date of this Proxy Statement and enclosed form of proxy is
April 10, 1998.
The cost of preparing, assembling and mailing the Notice of Annual Meeting,
this Proxy Statement and the form of proxy, including the reimbursement of
banks, brokers and other nominees for forwarding proxy materials to beneficial
owners is estimated at $6,000 and will be borne by the Company. Proxies may also
be solicited personally or by telephone by directors, officers and regular
employees of the Company who will receive no additional compensation. A
shareholder giving a proxy may revoke it at any time prior to the voting of the
proxy by filing with any officer of the Company a written notice of revocation
or another proxy bearing a later date. Unless otherwise noted on the proxy, the
proxies will vote for the proposals set forth herein. Any written notice of
revocation or subsequently dated proxy should be mailed or delivered to Jeffrey
M. Shapiro, Executive Vice President and Secretary, Michael Foods, Inc., 324
Park National Bank Building, 5353 Wayzata Boulevard, Minneapolis, Minnesota
55416.
The close of business on March 20, 1998 was fixed by the Board as the
record date for the determination of shareholders entitled to notice of and to
vote at the Annual Meeting. On March 20, 1998, the Company had outstanding
21,886,471 shares of common stock, $.01 par value per share (the "Common
Stock"). The Common Stock is the Company's only class of voting securities and
each share entitles the holder to one vote on all matters to come before the
meeting. There is no cumulative voting in electing directors.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the election inspector appointed for the meeting. The election inspector will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter upon which the shareholder has abstained.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
A copy of the Company's Annual Report for the year 1997, including
financial statements, accompanies this Proxy Statement. The Company will also
provide upon request a copy of its Annual Report on Form 10-K filed with the
Securities and Exchange Commission for its most recent fiscal year. Such request
should be made to the Secretary of the Company at the address shown above.
ELECTION OF DIRECTORS
Pursuant to the by-laws of the Company, the Board has fixed at twelve (12)
the number of directors to be elected at the Annual Meeting. Unless otherwise
indicated thereon, the proxy holders will vote for the election of the nominees
listed below to serve until the next annual meeting of shareholders and until
their successors are elected and qualified. Nine of the nominees are members of
the present Board and three are new nominees -- Mr. Dillon, Mr. Jenko and Ms.
Moore. If any nominee shall be
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<PAGE>
unavailable for election to the Board, the holders of proxies will vote for a
substitute. Management has no reason to believe that any of the nominees will be
unable to serve if elected to office.
The twelve (12) nominees who receive the highest number of votes will be
elected directors of the Company. The Board recommends a vote FOR the election
of each of the nominees listed below.
NOMINEES
The following table sets forth certain information regarding the nominees.
<TABLE>
<CAPTION>
FIRST BECAME
A DIRECTOR OF
NAME AGE BIOGRAPHICAL SUMMARY THE COMPANY
---- --- -------------------- -------------
<S> <C> <C> <C>
Maureen B. Bellantoni ..... 49 President and Chief Operating Officer of Bil Mar 1996
Foods, a division of Sara Lee Corporation,
since November, 1997. Vice President and Chief
Financial Officer of Sara Lee Meat Group, a
division of Sara Lee Corporation, from 1994 to
1997. Vice President of Finance and Chief
Financial Officer of PYA Monarch, a division
of Sara Lee Corporation, from 1993 to 1994.
Richard A. Coonrod ........ 67 President of Coonrod Agriproduction 1993
Corporation, a food and agribusiness
consulting and investment firm, since 1985.
General Partner of The Food Fund, a
Minneapolis-based limited partnership
specializing in food-related investments,
since 1990. Mr. Coonrod is also a director of
Orange-co, Inc.
Daniel P. Dillon .......... 52 President and Chief Executive Officer of Welch --
Foods, Inc., a packaged goods company
specializing in juices, frozen concentrates,
jams and jellies, since 1995. Chief Operating
Officer of Welch Foods, Inc. from 1994 to 1995
and Senior Vice President from 1991 to 1994.
Miles E. Efron ............ 71 Chairman of the Board of Directors of North 1988
Star Universal, Inc. from 1995 to 1997 and its
Chief Executive Officer from 1991 to 1994. Mr.
Efron is also a director of ENStar Inc. and
Medtox Scientific, Inc.
Jerome J. Jenko ........... 60 Chief Executive Officer of Jenko & Associates --
since October, 1997. Senior Advisor --
Goldsmith, Agio, Helms and Company, an
investment banking firm, since June, 1997.
Senior Vice President, General Counsel and
Secretary of The Pillsbury Company from 1989
to 1997.
Arvid C. Knudtson ......... 71 Chairman of the Board since 1997. Consultant. 1987
Principal in ACK Financial, a financial
services firm serving the agricultural market,
from 1988 to 1993.
Joseph D. Marshburn ....... 69 Senior Vice President of Citrus World, Inc., a 1987
citrus processing and marketing cooperative,
since 1993.
Jeffrey J. Michael ........ 41 President and Chief Executive Officer of 1990
ENStar Inc., a holding company owning 25% of
CorVel Corporation and businesses engaged in
voice and data connectivity and networking
products and services, since 1997. Held same
positions with North Star Universal, Inc. from
1990 to 1996. Mr. Michael is also a director
of ENStar Inc. and CorVel Corporation.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FIRST BECAME
A DIRECTOR OF
NAME AGE BIOGRAPHICAL SUMMARY THE COMPANY
---- --- -------------------- -------------
<S> <C> <C> <C>
Margaret D. Moore ... 50 Vice President of Investor Relations of Pepsico, Inc., a --
manufacturer and marketer of snack foods and
non-alcoholic beverages.
Gregg A. Ostrander .. 45 President and Chief Executive Officer of the Company 1994
since 1994. Chief Operating Officer of the Company in
1993. Mr. Ostrander is also a director of Arctic Cat Inc.
Arthur J. Papetti ... 33 Executive Vice President of Operations of Papetti's 1997
Hygrade Egg Products, Inc., a wholly-owned subsidiary
of the Company, since 1992.
Stephen T. Papetti .. 40 Executive Vice President of Papetti's Hygrade Egg 1997
Products, Inc., a wholly-owned subsidiary of the
Company, since 1992.
</TABLE>
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
AUDIT COMMITTEE. The Company has a standing Audit Committee which
currently consists of Mr. Michael as Chairman, Mr. Marshburn and Mr. Knudtson.
The Audit Committee reviews, recommends and reports to the Board on (1) the
independent auditors, (2) the quality and effectiveness of internal controls,
(3) the engagement or discharge of the independent auditors, (4) the
professional services provided by the independent auditors, and (5) the review
and approval of major changes in the Company's accounting principles and
practices. During 1997, the Audit Committee held five meetings.
COMPENSATION COMMITTEE. The Company has a standing Compensation Committee
which currently consists of Mr. Efron as Chairman, Ms. Bellantoni and Mr.
Coonrod. The Compensation Committee considers and recommends to the Board
salary schedules and other remuneration for the Company's executive officers.
This committee also administers the Company's 1987 Non-Qualified Stock Option
Plan, 1994 Executive Incentive Plan, 1994 Executive Performance Stock Award
Plan and the 1997 Stock Incentive Plan of Michael Foods, Inc. and Affiliated
Companies. During 1997, the Compensation Committee met twice.
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE. The Company has a standing
Corporate Governance and Nominating Committee which currently consists of Mr.
Marshburn as Chairman, Ms. Bellantoni, Mr. Knudtson and Mr. Ostrander. The
Corporate Governance and Nominating Committee acts on behalf of the Board to
review the size, composition and effectiveness of the Board and to consider
corporate governance matters. During 1997, the Corporate Governance and
Nominating Committee held five meetings.
During the year ended December 31, 1997, the Board held four regular
meetings and three special meetings. All directors attended more than 75% of the
meetings of the Board and committees on which they sit.
Directors who are not officers or employees of the Company receive an
annual retainer of $20,000. The Chairman of the Board is paid an annual retainer
of $28,000. Directors are paid $500 for each committee meeting attended, with
committee chairs paid $1,000 per meeting. Directors incurring travel expenses to
attend meetings are reimbursed in full. Directors' fees and travel expense
reimbursements in 1997 totaled $191,227.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The rules of the Securities and Exchange Commission require disclosure of
late Section 16 filings by Company directors and executive officers. Based on
the information provided to the Company, the Company is not aware of any
director or executive officer who failed to timely file any report required to
be filed.
3
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
of the Company's Chief Executive Officer and each of the Company's four other
most highly compensated executive officers during each of the last three fiscal
years.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
FISCAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- --------------------------- ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gregg A. Ostrander ................... 1997 $326,850 $319,000 124,500 $6,965
President & Chief Executive Officer 1996 309,000 -- 40,000 6,528
1995 294,000 201,230 44,500 6,410
Jeffrey M. Shapiro ................... 1997 250,538 245,988 34,000 7,096
Executive Vice President & Secretary 1996 250,000 -- -- 6,696
1995 238,000 162,850 18,000 6,316
John D. Reedy ........................ 1997 197,019 193,169 34,000 7,235
Vice President -- Finance, Chief 1996 195,000 -- -- 6,835
Financial Officer & Treasurer 1995 185,000 126,618 30,000 6,227
Norman A. Rodriguez .................. 1997 193,789 189,339 32,000 7,597
President, Crystal Farms Refrigerated 1996 182,730 35,267 -- 6,726
Distribution Company 1995 176,000 167,200 3,000 6,212
Bill L. Goucher ...................... 1997 191,708 187,858 39,000 7,195
President, M. G. Waldbaum Company 1996 188,000 -- 15,000 6,349
1995 179,000 155,919 23,000 6,372
</TABLE>
- ------------------
(1) 1997 amounts include Common Stock incentive awards paid under the 1994
Executive Incentive Plan, as Amended Effective January 1, 1996, for 1997
performance, plus Common Stock incentive awards paid under the 1994
Executive Incentive Plan, as Amended Effective January 1, 1995, for 1995
performance, as such awards vested based upon 1997 performance, as follows
(total dollar value of awards/1997 shares/1995 shares): Mr. Ostrander
$73,875/1,634/1,321; Mr. Shapiro $58,075/1,253/1,070; Mr. Reedy
$45,400/985/831; Mr. Rodriguez $44,000/969/791; Mr. Goucher
$44,075/959/804. Awards for 1997 represent 50% of the amount conditionally
earned for 1997 performance under the vesting schedule of the 1994
Executive Incentive Plan, as Amended Effective January 1, 1996, and 20% of
the amount conditionally earned for 1995 performance under the vesting
schedule of the 1994 Executive Incentive Plan, as Amended Effective January
1, 1995 (see "REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION").
1995 amounts include Common Stock incentive awards paid under the 1994
Executive Incentive Plan, as Amended Effective January 1, 1995, and
represent 50% of the amount conditionally earned for 1995 performance under
the vesting schedule for such awards and 30% of the amount earned for 1994
performance under the vesting schedule of the 1994 Executive Incentive
Plan. The 1995 awards were as follows (total dollar value of awards/1995
shares/1994 shares): Mr. Ostrander $57,750/3,303/1,888; Mr. Shapiro
$46,703/2,674/1,524; Mr. Reedy $36,334/2,079/1,187; Mr. Rodriguez
$35,211/1,978/1,187; Mr. Goucher $35,088/2,011/1,143. Common Stock
incentive share awards made for 1997 performance were valued using the
closing price of the Common Stock on March 3, 1998 of $25.00. Common Stock
incentive awards made for 1995 performance were calculated using the
closing price of the Common Stock on February 20, 1996 of $11.125, which
were then valued when finally earned, using the closing price of the Common
Stock on March 3, 1998 of $25.00. There were no Common Stock incentive
awards under the 1994 Executive Incentive Plan, as Amended Effective
January 1, 1996, for 1996 performance.
(2) Number of shares of Common Stock purchasable under option grants. Pursuant
to the 1994 Executive Incentive Plan, as Amended Effective January 1, 1996,
stock option awards were made to certain executive officers in March, 1998
based upon 1997 performance. The number of shares of Common Stock
purchasable under such option awards made to named executive officers were:
Mr. Ostrander 36,000 shares; Mr. Shapiro 24,000 shares; Mr. Reedy 24,000
shares; Mr. Rodriguez 24,000 shares; and Mr. Goucher 24,000 shares.
Pursuant to the 1994 Executive Incentive Plan, as Amended Effective January
1, 1995, stock option awards were made to certain executive officers in
February, 1996 based upon 1995 performance. The number of shares of Common
Stock purchasable under such option awards made to named executive officers
were: Mr. Ostrander 4,500 shares; Mr. Shapiro 3,000 shares; Mr. Reedy 3,000
shares; Mr. Rodriguez 3,000 shares; and Mr. Goucher 3,000 shares. Option
grants are reflected in year earned, rather than year of grant. In
addition, the following stock option grants were made at the discretion of
the Compensation Committee in the years indicated (number of shares covered
by grants): Mr. Ostrander 68,500 in 1997, 40,000 in 1996, 40,000 in 1995;
Mr. Shapiro
4
<PAGE>
10,000 in 1997, 15,000 in 1995; Mr. Reedy 10,000 in 1997, 27,000 in 1995;
Mr. Rodriguez 8,000 in 1997; Mr. Goucher 15,000 in 1997, 15,000 in 1996,
20,000 in 1995.
(3) Reflects the value of the Company's contributions under the Retirement
Savings Plan and the value of life insurance premiums paid by the Company.
OSTRANDER EMPLOYMENT AGREEMENT
Effective January 1, 1994, the Company entered into a three year employment
agreement with Mr. Ostrander (the "Ostrander Employment Agreement") in
connection with his appointment as President and Chief Executive Officer. The
agreement provided for an annual base salary of $280,000 and entitles Mr.
Ostrander to participate in the Michael Foods, Inc. 1994 Executive Incentive
Plan ("1994 Executive Incentive Plan") and other fringe benefit plans
established by the Company for its executive officers. The agreement also
provided for a non-qualified stock option to purchase 20,000 shares of Common
Stock at an exercise price of $8.125, which was granted to Mr. Ostrander on
January 3, 1994. The option vests ratably over five years and expires January 3,
2004.
In the event Mr. Ostrander's employment is terminated by incapacity, death
or thirty days' written notice by the Company, Mr. Ostrander will receive a
termination payment equal to two year's base salary, plus 50% of such base
salary amount in lieu of any incentive compensation or options to purchase
Common Stock for the remaining term of the agreement, plus any incentive
compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. In the case of incapacity or death, or
termination by the Company without cause (which is defined to include
termination after a change in control), all options to purchase Common Stock
granted to Mr. Ostrander become fully vested. If Mr. Ostrander's employment is
terminated by the Company without cause due to a change in control of the
Company and thereafter Mr. Ostrander's duties are substantially reduced or
negatively altered without his prior written consent, Mr. Ostrander will receive
as a termination payment all amounts due under the agreement as base salary,
plus 50% of such base salary amount in lieu of any incentive compensation and
options to purchase Common Stock for the remaining term of the agreement, plus
any incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination, but in any event not less than two
year's base salary. If the Company terminates Mr. Ostrander without notice for
cause, no amount will be paid beyond the last day of service by Mr. Ostrander
and he will not be entitled to any incentive compensation or options to purchase
Common Stock for the year of termination.
Effective January 1, 1995, the Company and Mr. Ostrander entered into
Amendment No. 1 to the Ostrander Employment Agreement. The amendment provided
for an annual base salary of at least $294,000 effective January 1, 1995. The
amendment also provided for a non-qualified stock option to purchase 40,000
shares of Common Stock at an exercise price of $10.00 per share, which was
granted to Mr. Ostrander on January 3, 1995. The option vests ratably over five
years and expires January 3, 2005. The amendment further provided for a
non-qualified stock option to purchase 40,000 shares of Common Stock to be
granted on January 2, 1996 at an exercise price equal to the price of the Common
Stock as of the close of business on that date, or $10.00 per share, whichever
is greater. This non-qualified option was awarded January 2, 1996 at an exercise
price of $11.875 per share. The option vests ratably over five years and expires
on January 2, 2006.
Effective January 1, 1996, the Company and Mr. Ostrander entered into
Amendment No. 2 to the Ostrander Employment Agreement, which extended the
termination date of the agreement one year to December 31, 1997 and established
Mr. Ostrander's annual base salary as being at least $309,000 from January 1,
1996 through December 31, 1997. Effective April 1, 1997, the Compensation
Committee established Mr. Ostrander's annual base salary as $345,000.
An Amended and Restated Employment Agreement between Mr. Ostrander and the
Company executed in early 1998 provides for Mr. Ostrander to receive an annual
base salary of at least $405,000 as of January 1, 1998 and provides that the
Ostrander Employment Agreement is extended automatically and shall continue for
successive two-year terms unless otherwise terminated in accordance with certain
provisions. Under the Amended and Restated Employment Agreement, if Mr.
Ostrander's employment is terminated by Mr. Ostrander providing the Company with
thirty days' written notice, he is to receive no termination payment, but he
will receive any incentive compensation earned for any year prior to the
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<PAGE>
year of termination which is unpaid at the date of termination. The Amended and
Restated Employment Agreement also provides that the Company will deliver to Mr.
Ostrander a non-qualified stock option to purchase 68,500 shares of Common Stock
with an effective grant date of December 31, 1997 and an exercise price of
$24.375 per share. This option was granted in early 1998.
SHAPIRO EMPLOYMENT AGREEMENT
Effective January 1, 1995, the Company and Mr. Shapiro entered into a two
year employment agreement (the "Shapiro Employment Agreement"). The agreement
provides for an annual base salary of at least $238,000 and entitles Mr. Shapiro
to participate in the 1994 Executive Incentive Plan and other fringe benefit
plans established by the Company for its executive officers. In the event Mr.
Shapiro's employment is terminated by incapacity, death, or by thirty days'
written notice by the Company, Mr. Shapiro will receive as a termination payment
all amounts due under the agreement as base salary, but in any event not less
than one year's base salary, plus 50% of such base salary amount in lieu of any
incentive compensation and options to purchase Common Stock for the remaining
term of the agreement, plus any incentive compensation earned for any year prior
to the year of termination unpaid at the date of termination. In the case of
incapacity or death, or termination by the Company without cause (which is
defined to include termination after a change in control), all options to
purchase Common Stock granted to Mr. Shapiro become fully vested.
If Mr. Shapiro's employment is terminated by Mr. Shapiro, he will receive
no termination payment. However, Mr. Shapiro is entitled to receive any
incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. If the Company terminates Mr.
Shapiro without notice for cause, no amount is to be paid beyond the last day of
service by Mr. Shapiro and he will not be entitled to any incentive compensation
or options to purchase Common Stock for the year of termination. If Mr.
Shapiro's employment is terminated by the Company without cause due to a change
in control of the Company and thereafter Mr. Shapiro's duties are substantially
reduced or negatively altered without his prior written consent, Mr. Shapiro
will receive as a termination payment all amounts due under the agreement as
base salary, plus 50% of such base salary amount in lieu of any incentive
compensation and options to purchase Common Stock for the remaining term of the
agreement, plus any incentive compensation earned for any year prior to the year
of termination which is unpaid at the date of termination, but in any event not
less, or more, than two year's base salary.
Effective January 1, 1996, the Company and Mr. Shapiro entered into
Amendment No. 1 to the Shapiro Employment Agreement, which extended the
termination date of the agreement one year to December 31, 1997 and established
Mr. Shapiro's annual base salary as being at least $250,000 from January 1, 1996
through December 31, 1997. Effective April 1, 1997, the Compensation Committee
established Mr. Shapiro's annual base salary as $260,000.
Effective October 31, 1997, the Company and Mr. Shapiro entered into
Amendment No. 2 to the Shapiro Employment Agreement, which extended the
termination date of the agreement two years to December 31, 1999, provides that
the Shapiro Employment Agreement is extended automatically and shall continue
for successive two-year terms unless otherwise terminated in accordance with
certain provisions, and established Mr. Shapiro's annual base salary as being at
least $260,000 from January 1, 1998 through December 31, 1999. Effective January
1, 1998, the Compensation Committee established Mr. Shapiro's annual base salary
as $270,000.
REEDY EMPLOYMENT AGREEMENT
Effective January 1, 1995, the Company and Mr. Reedy entered in a two year
employment agreement (the "Reedy Employment Agreement"). The agreement provides
for an annual base salary of at least $185,000 and entitles Mr. Reedy to
participate in the 1994 Executive Incentive Plan and other fringe benefit plans
established by the Company for its executive officers. In the event Mr. Reedy's
employment is terminated by incapacity, death, or by thirty days' written notice
by the Company, Mr. Reedy will receive as a termination payment all amounts due
under the agreement as base salary, but in any event not less than one year's
base salary, plus 50% of such base salary amount in lieu of any incentive
compensation and options to purchase Common Stock for the remaining term of the
agreement, plus any incentive compensation earned for any year prior to the year
of termination which
6
<PAGE>
is unpaid at the date of termination. In the case of incapacity or death, or
termination by the Company without cause (which is defined to include
termination after a change in control), all options to purchase Common Stock
granted to Mr. Reedy become fully vested.
If Mr. Reedy's employment is terminated by Mr. Reedy, he will receive no
termination payment. However, Mr. Reedy will be entitled to receive any
incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. If the Company terminates Mr. Reedy
without notice for cause, no amount will be paid beyond the last day of service
by Mr. Reedy and he will not be entitled to any incentive compensation or
options to purchase Common Stock for the year of termination. If Mr. Reedy's
employment is terminated by the Company without cause due to a change in control
of the Company and thereafter Mr. Reedy's duties are substantially reduced or
negatively altered without his prior written consent, Mr. Reedy will receive as
a termination payment all amounts due under the agreement as base salary, plus
50% of such base salary amount in lieu of any incentive compensation and options
to purchase Common Stock for the remaining term of the agreement, plus any
incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination, but in any event not less, or more,
than two year's base salary.
Effective January 1, 1996, the Company and Mr. Reedy entered into Amendment
No. 1 to the Reedy Employment Agreement, which extended the termination date of
the agreement one year to December 31, 1997 and established Mr. Reedy's annual
base salary as being at least $195,000 from January 1, 1996 through December 31,
1997. Effective April 1, 1997, the Compensation Committee established Mr.
Reedy's annual base salary as $205,000.
Effective October 31, 1997, the Company and Mr. Reedy entered into
Amendment No. 2 to the Reedy Employment Agreement, which extended the
termination date of the agreement two years to December 31, 1999, provides that
the Reedy Employment Agreement is extended automatically and shall continue for
successive two-year terms unless otherwise terminated in accordance with certain
provisions, and established Mr. Reedy's annual base salary as being at least
$205,000 from January 1, 1998 through December 31, 1999. Effective January 1,
1998, the Compensation Committee established Mr. Reedy's annual base salary as
$225,000.
RODRIGUEZ EMPLOYMENT AGREEMENT
Effective January 1, 1995, the Company and Mr. Rodriguez entered into a two
year employment agreement (the "Rodriguez Employment Agreement"). The agreement
provides for an annual base salary of at least $176,000 and entitles Mr.
Rodriguez to participate in the 1994 Executive Incentive Plan and other fringe
benefit plans established by the Company for its executive officers. In the
event Mr. Rodriguez's employment is terminated by incapacity, death, or by
thirty days' written notice by the Company, Mr. Rodriguez will receive a
termination payment equal to one year's base salary, plus any incentive
compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. In the case of incapacity or death, or
termination by the Company without cause (which is defined to include
termination after a change in control), all options to purchase Common Stock
granted to Mr. Rodriguez become fully vested.
If Mr. Rodriguez's employment is terminated by Mr. Rodriquez, he will
receive no termination payment. However, Mr. Rodriguez will be entitled to
receive any incentive compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. If the Company
terminates Mr. Rodriguez without notice for cause, no amount will be paid beyond
the last day of service by Mr. Rodriguez and he will not be entitled to any
incentive compensation or options to purchase Common Stock for the year of
termination. If Mr. Rodriguez's employment is terminated by the Company without
cause due to a change in control of the Company and thereafter Mr. Rodriguez's
duties are substantially reduced or negatively altered without his prior written
consent, Mr. Rodriguez will receive as a termination payment an amount equal to
two year's base salary, plus any incentive compensation earned for any year
prior to the year of termination which is unpaid at the date of termination.
Effective January 1, 1996, the Company and Mr. Rodriguez entered into
Amendment No. 1 to the Rodriguez Employment Agreement, which extended the
termination date of the agreement one year to December 31, 1997 and established
Mr. Rodriguez's annual base salary as being at least $183,000 from
7
<PAGE>
January 1, 1996 through December 31, 1997. Effective April 1, 1997, the
Compensation Committee established Mr. Rodriguez's annual base salary as
$193,000.
Effective October 31, 1997, the Company and Mr. Rodriguez entered into
Amendment No. 2 to the Rodriguez Employment Agreement, which extended the
termination date of the agreement one year to December 31, 1998 and established
Mr. Rodriguez's annual base salary as being at least $193,000 from January 1,
1998 through December 31, 1998. Effective January 1, 1998, the Compensation
Committee established Mr. Rodriguez's annual base salary as $203,000.
GOUCHER EMPLOYMENT AGREEMENT
Effective January 1, 1996, the Company and Mr. Goucher entered into a two
year employment agreement (the "Goucher Employment Agreement"). The agreement
provides for an annual base salary of at least $188,000 and entitles Mr. Goucher
to participate in the 1994 Executive Incentive Plan and other fringe benefit
plans established by the Company for its executive officers. In the event Mr.
Goucher's employment is terminated by incapacity, death, or by thirty days'
written notice by the Company, Mr. Goucher will receive a termination payment
equal to one year's base salary, plus any incentive compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination. In the case of incapacity or death, or termination by the Company
without cause (which is defined to include termination after a change in
control), all options to purchase Common Stock granted to Mr. Goucher become
fully vested.
If Mr. Goucher's employment is terminated by Mr. Goucher, he will receive
no termination payment. However, Mr. Goucher will be entitled to receive any
incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. If the Company terminates Mr.
Goucher without notice for cause, no amount will be paid beyond the last day of
service by Mr. Goucher and he will not be entitled to any incentive compensation
or options to purchase Common Stock for the year of termination. If Mr.
Goucher's employment is terminated by the Company without cause due to a change
in control of the Company and thereafter Mr. Goucher's duties are substantially
reduced or negatively altered without his prior written consent, Mr. Goucher
will receive as a termination payment an amount equal to two year's base salary,
plus any incentive compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. The Goucher Employment
Agreement had no bearing on Mr. Goucher's 1995 compensation. Effective April 1,
1997, the Compensation Committee established Mr. Goucher's annual base salary as
$200,000.
Effective October 31, 1997, the Company and Mr. Goucher entered into
Amendment No. 1 to the Goucher Employment Agreement, which extended the
termination date of the agreement one year to December 31, 1998 and established
Mr. Goucher's annual base salary as being at least $200,000 from January 1, 1998
through December 31, 1998. Effective January 1, 1998, the Compensation Committee
established Mr. Goucher's annual base salary as $220,000.
1994 EXECUTIVE INCENTIVE PLAN
On January 1, 1994, the Company established the 1994 Executive Incentive
Plan. The 1994 Executive Incentive Plan and 1994 Executive Incentive Plan, as
Amended Effective January 1, 1996, are described in the "REPORT OF COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION."
CHANGE IN CONTROL ARRANGEMENTS
Certain key employees of the Company and its subsidiaries are covered under
the Severance Plan for Eligible Employees of Michael Foods, Inc. and its
Subsidiaries (the "Severance Plan") should they be terminated without cause
within 24 months following a change in control. Generally, the Severance Plan
defines a change in control as occurring when a person acquires the power to
elect, appoint or cause the election or appointment of at least a majority of
the Board or purchases all or substantially all of the properties and assets of
the Company; provided, however, that a change in control does not include
certain acquisitions pursuant to a merger, consolidation or sale of properties
and assets. Under the Severance Plan, certain key employees would be entitled to
receive a lump sum payment equal to two times total annual compensation. Annual
compensation is defined as the employee's highest annual rate
8
<PAGE>
of salary (excluding bonuses, benefits, allowances, etc.) within the three
calendar year periods prior to the date of termination of employment; provided,
however, that if the employee has been employed by the Company or a predecessor
for less than three years, total annual compensation means the highest
annualized salary during the period of employment.
The Company's severance compensation agreements with Messrs. Ostrander,
Shapiro, Rodriguez, Reedy and Goucher are contained in their respective
employment agreements (see "--Ostrander Employment Agreement," "--Shapiro
Employment Agreements," "--Reedy Employment Agreement," "--Rodriguez Employment
Agreement," and "--Goucher Employment Agreement") and they are effective upon
termination of employment without cause, which includes termination after a
change in control of the Company. In the event of a change in control of the
Company, all options to purchase Common Stock become fully vested.
DESCRIPTION OF STOCK OPTION PLANS FOR KEY EMPLOYEES
Options to purchase Common Stock may be granted under the 1997 Stock
Incentive Plan of Michael Foods, Inc. and Affiliated Companies ("1997 Plan"), as
adopted by the Company's Board and approved by the shareholders in 1997. One
million (1,000,000) shares of Common Stock were available for grants under the
1997 Plan when it was established; 516,500 shares are currently available for
grants. The 1997 Plan provides the Committee with the discretion to make grants
during the life of the 1997 Plan to key employees, officers, consultants or
independent contractors providing services to the Company or its affiliates.
Grants can be in the form of non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock and restricted stock units,
performance awards and other stock-based awards. Generally, options granted
under the 1997 Plan cannot be exercised during the first 12 months after the
date of grant, become exercisable ratably over the first five years, and expire
not later than 10 years after the grant. The option price per share for options
granted is not less than the fair market value of a share of Common Stock on the
date of grant. Under the 1997 Plan, an optionee may pay the full exercise price
of an option in cash or by delivering shares of Common Stock which have been
held by such person for more than six months, or a combination thereof.
The Company had two plans, which expired by their terms in 1997, under
which options to purchase Common Stock were granted: the 1987 Incentive Stock
Option Plan (the "Incentive Stock Option Plan") and the 1987 Non-Qualified Stock
Option Plan (the "Non-Qualified Stock Option Plan") (collectively, the "Stock
Option Plans"). The Stock Option Plans provided for the grant of options to
purchase shares of Common Stock to key employees of the Company and its
subsidiaries as determined by the Compensation Committee of the Board (the
"Committee"). The aggregate number of shares of Common Stock as to which options
could be awarded under the Stock Option Plans was 2,332,500. The maximum
aggregate number of shares of Common Stock as to which options could be granted
under the Stock Option Plans to any one employee was 337,500 shares. The Stock
Option Plans played a critical role in the Company's compensation strategy of
providing performance incentives to attract and retain certain key individuals
and to give such individuals a direct financial interest in the future success
and profitability of the Company.
No options were granted under the Incentive Stock Option Plan. The
Non-Qualified Stock Option Plan provided for the granting of options which did
not qualify as "incentive stock options" within the meaning of Section 422A of
the Internal Revenue Code of 1986 (the "Code"). Options granted under the
Non-Qualified Stock Option Plan cannot, in general, be exercised during the
first 12 months after the date of grant, become exercisable ratably over the
first five years, and expire not later than 10 years after the grant. The option
price per share for options granted under the Stock Option Plans was not less
than the fair market value of a share of Common Stock on the date of grant.
Under the Stock Option Plans, an optionee may pay the full exercise price of an
option in cash or by delivering shares of Common Stock which have been held by
such person for more than six months, or a combination thereof. The Stock Option
Plans expired by their terms in March, 1997. Hence, no further stock option
grants will be made under the Stock Option Plans, although exercises may occur
over the next nine years.
DESCRIPTION OF STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In 1992, the Company adopted the Stock Option Plan for Non-Employee
Directors (the "Director Plan"). The purpose of the Director Plan is to aid the
Company in attracting and retaining non-employee
9
<PAGE>
directors by enabling the acquisition of a financial interest in the Company by
non-employee directors through the issuance of shares of Common Stock with
respect to his or her services as a director of the Company. The Director Plan
memorialized the Company's practice of granting options to purchase Common Stock
to non-employee directors upon their election or appointment as a director.
The Director Plan provides that non-employee directors will receive, upon
their initial election or appointment, an option to purchase 5,000 shares of
Common Stock at the then fair market value of the Common Stock. The Director
Plan also provides for the grant of an option to purchase an additional 5,000
shares of Common Stock upon each director's subsequent five year anniversary of
participation on the Board. The options become exercisable in full one year
after the date of grant and expire 10 years from the date of grant. The Board
currently has six non-employee directors and will have nine non-employee
directors if all the directors who have been nominated are elected at the Annual
Meeting.
There are 50,000 shares of Common Stock currently subject to options
granted to non-employee directors under the Director Plan. The number of shares
of Common Stock remaining available for issuance under the Director Plan is
100,000. This number will be subject to adjustment in the event of stock splits,
reclassifications of shares of Common Stock, recapitalizations, stock dividends
or similar adjustments in the Common Stock.
The Board may amend the Director Plan to conform it to securities laws or
other laws, or to comply with stock exchange rules or requirements. However, the
Board may not, without shareholder approval, amend the Director Plan to change:
(i) the total number of shares of Common Stock as to which options may be
granted; (ii) the class of persons eligible to receive options under the
Director Plan; (iii) the manner of determining option prices; (iv) the period
during which the options may be granted or exercised; or (v) the provisions
relating to the administration of the Director Plan by the Board. The Board may
terminate the Director Plan without shareholder approval.
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE PRICE OPTION TERM(4)
OPTIONS EMPLOYEES IN PER SHARE -------------------------
NAME GRANTED(1) LAST YEAR ($/Sh)(2) EXPIRATION DATE(3) 5% 10%
- ---- ---------- ------------ -------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gregg A. Ostrander ...... 88,500 40.0 $11.00 & 24.38 03/17/07 & 12/31/07 $1,188,400 $3,011,700
Jeffrey M. Shapiro ...... 10,000 4.5 11.00 03/17/07 69,200 175,300
John D. Reedy ........... 10,000 4.5 11.00 03/17/07 69,200 175,300
Norman A. Rodriguez ..... 8,000 3.6 11.00 03/17/07 55,300 140,200
Bill L. Goucher ......... 15,000 6.8 12.63 01/02/07 119,100 301,800
</TABLE>
- ------------------
(1) All options granted are exercisable in cumulative 20% installments
commencing one year from date of grant, with full vesting occurring on the
fifth anniversary date. Vesting may be accelerated in certain events
relating to a change in control of the Company.
(2) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares. The tax withholding
obligations related to exercises may also be paid by offset of the
underlying shares, subject to certain conditions.
(3) All options have a ten year term, with vesting subject to discontinuation
if employment is terminated in the first five years.
(4) Potential gains are reported net of the option exercise price, but before
taxes associated with an exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall stock
market conditions, as well as the optionholder's continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be realized.
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<PAGE>
OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
The following table provides information related to stock option exercises
in 1997 and the number and value of stock options held at December 31, 1997 by
the named executive officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregg A. Ostrander .......... -- -- 96,900 77,600 $1,436,900 $1,065,200
Jeffrey M. Shapiro .......... 56,250 $190,625 38,693 19,400 486,000 266,100
John D. Reedy ............... 21,000 314,943 38,260 24,200 503,400 335,100
Norman A. Rodriguez ......... -- -- 70,382 11,400 753,100 153,100
Bill L. Goucher ............. -- -- 37,600 35,400 552,700 465,800
</TABLE>
- ------------------
(1) The closing price for the Common Stock on December 31, 1997 was $24.375 per
share. The value is calculated on the basis of the difference between the
option exercise prices and $24.375 multiplied by the number of shares of
Common Stock underlying the options.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Arthur J. Papetti and Stephen T. Papetti are first cousins. Another
affiliate and president of Papetti's Hygrade Egg Products, Inc., Arthur N.
Papetti, is Arthur J. Papetti's father and Stephen T. Papetti's uncle. Other
immediate family members of affiliates who were parties to material
transactions with the Company in 1997 were Anthony Papetti, Alfred Papetti and
Tina M. Noll. Anthony Papetti is the brother of Arthur N. Papetti, the father
of Stephen T. Papetti and Alfred Papetti, and the uncle of Arthur J. Papetti
and Tina M. Noll. Alfred Papetti is the son of Anthony Papetti, the brother of
Stephen T. Papetti, the nephew of Arthur N. Papetti, and the first cousin of
Arthur J. Papetti and Tina M. Noll. Tina M. Noll is the daughter of Arthur N.
Papetti, the sister of Arthur J. Papetti, the first cousin of Stephen T.
Papetti and Alfred Papetti, and the niece of Anthony Papetti.
In February 1997, the Company acquired Papetti's Hygrade Egg Products, Inc.
and affiliated companies ("Papetti's"). Consideration included the issuance of
3,195,455 shares of Common Stock, which are held by Papetti family members (the
"Papetti Family Shareholders") as follows: Arthur J. Papetti, 1,597,727 shares;
Stephen T. Papetti, 798,864 shares; Alfred Papetti, 798,864 shares (see
"SECURITY OWNERSHIP"). Consideration also included $42,913,000 in cash, payable
to various Papetti family members, Papetti family trusts and limited
partnerships, and others. In conjunction with the acquisition, the Company
entered into various agreements with certain Papetti family members and related
entities. These agreements included several leases as discussed below. These
agreements also included employment contracts with six Papetti family members
for a period of three years each, with annual base salary amounts as follows:
Arthur N. Papetti at least $225,000; Anthony Papetti at least $225,000; Alfred
Papetti at least $180,000; Arthur J. Papetti at least $180,000; Stephen T.
Papetti at least $180,000; Tina M. Noll at least $150,000. Additionally, in
early 1998 the Board approved various discretionary incentive payments related
to 1997 performance to certain Papetti family members as follows: Arthur N.
Papetti $100,000; Anthony Papetti $75,000; Alfred Papetti $75,000; Arthur J.
Papetti $75,000; Stephen T. Papetti $75,000. The Board also added Arthur N.
Papetti, Alfred Papetti, Arthur J. Papetti and Stephen T. Papetti as
participants in the Executive Incentive Plan for 1998. The Employment Agreement
with Arthur N. Papetti also specifies that he will be the president of Papetti's
for the term of the agreement.
A shareholder agreement executed between the Company and the Papetti Family
Shareholders (the "Shareholder Agreement") at the time of acquisition provides
that the Papetti Family Shareholders may, for a three year period, nominate one
or two directors depending upon the percent of the Papetti Family Shareholder's
Common Stock holdings relative to the total shares outstanding. Current Common
Stock holdings allow the family to nominate two directors. Those nominees, who
are also current directors, are Arthur J. Papetti and Stephen T. Papetti (see
"ELECTION OF DIRECTORS -- Nominees"). Further, the Shareholder Agreement
provides the Papetti Family Shareholders with registration rights during the
same three year period should the Company register equity securities for a
public offering under the
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<PAGE>
Securities Act of 1933, as amended. Also, the Shareholder Agreement places
restrictions on the Papetti Family Shareholders' ability to sell shares of
Common Stock in the period two years from the date of acquisition. Further, for
a period three years from the date of acquisition, or until the Papetti Family
Shareholders own less than 5% of the shares of Common Stock outstanding (or the
voting power thereof), whichever is earlier, the Papetti Family Shareholders may
not sell more than 5% of the outstanding shares of Common Stock (or the voting
power thereof), or sell any shares to a person or group that holds, or would
hold as a result of such a transaction, 5% or more of the shares of Common
Stock, without giving the Company a right to first purchase said shares.
Effective February 25, 1998, the Company and the parties to the various
Papetti's acquisition agreements entered into an amendment to the acquisition
documents. The amendment provides that neither party shall make a claim for
indemnification unless and until either party has incurred such losses for which
such party is entitled to indemnification in the sum of $700,000, and then only
for cumulative losses in excess of $700,000. This level had been previously
established at $200,000.
One month following the acquisition's closing, Arthur N. Papetti, Stephen
T. Papetti and Alfred Papetti reimbursed the Company for costs and other
obligations pursuant to the acquisition documents which totaled $771,098. No
interest was charged during the one month period. Also, at the time of closing
of the Papetti's acquisition five Papetti family trusts reimbursed the Company
the sum of $179,678 related to certain tax obligations of the Papetti Foods,
Inc. trust shareholders pursuant to the acquisition documents.
In connection with the Papetti's acquisition, in February, 1997, the
Company entered into six separate leases for the principal properties used by
Papetti's in its operations. The properties are owned by six separate
partnerships, of which four are wholly-owned by Papetti family members and two
are fifty percent owned by Papetti family members. The leases all expire in 2007
and are renewable for two successive five-year terms. The aggregate annual net
rent paid by the Company under the leases is $2,157,348. In addition, the
Company pays all real estate taxes, utilities, insurance and other operating
expenses associated with the properties and is required to maintain the
properties.
The Company's Egg Products Division purchases eggs under an egg supplier
agreement with a partnership in which certain affiliates are general partners.
Such purchases totaled approximately $10,400,000 in 1997. Papetti Farms, Inc.
is a 50% general partner in the partnership, Sunbest-Papetti Farms, and is
owned as follows: Arthur J. Papetti, 50%; Alfred Papetti, 25%; Stephen T.
Papetti, 25%.
In February 1997, the Company completed an Agreement and Plan of
Reorganization between North Star Universal, Inc. ("North Star"), Michael Foods,
Inc. and NSU Merger Co. The effect of these transactions was that Michael Foods,
Inc., a Delaware corporation, merged with North Star, with the Company emerging
as the post-merger entity. Members of the James H. Michael family, including
James H. Michael, former Chairman of the Board, were the controlling
shareholders of North Star. An effect of the merger transaction was that
approximately 76% of the shares of Common Stock formerly held by North Star were
transferred directly to North Star's shareholders, with the balance being
effectively retired. As a result, two limited partnerships established for the
benefit of certain Michael family members ("Michael Family Shareholders") now
hold 1,588,489 and 1,459,514 shares of Common Stock, respectively (see "SECURITY
OWNERSHIP"). James H. Michael's son, Jeffrey J. Michael, is a partner in both
limited partnerships and is a director of the Company. An agreement entered into
with the Michael Family Shareholders at the time of the merger provides that the
Michael family may, for a two year period, nominate two representatives to the
Board should their Common Stock holdings exceed 10% of the outstanding shares.
Those nominees are Jeffrey J. Michael and Miles E. Efron (see "ELECTION OF
DIRECTORS -- Nominees"). During the two year period, the Michael Family
Shareholders may nominate one person to the Board should their holdings be less
than 10% of the outstanding shares. Further, the agreement provides the Michael
Family Shareholders with registration rights during the same two year period
should the Company register equity securities for a public offering under the
Securities Act of 1933, as amended. Also, the agreement places restrictions on
the Michael Family Shareholders' ability to sell shares of Common Stock in the
two year period ending February, 1999. Should the Michael Family Shareholders
desire to sell more than 5% of the outstanding shares of Common Stock during the
two year period, the Company has a first right to purchase the shares.
12
<PAGE>
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation of the Company's executive officers is based on four
components: base salary, incentive cash payments, incentive Common Stock
payments and Common Stock option awards. Base salary is fixed by contract in
the case of the Chief Executive Officer and certain other executive officers.
The employment agreements, which specified 1997 base salary levels, between the
Company and Mr. Ostrander, Mr. Shapiro, Mr. Reedy and Mr. Rodriguez were
entered into in early 1995 and were subsequently amended effective January 1,
1996, while Mr. Goucher's 1997 base salary was established in an employment
agreement effective as of January 1, 1996. Mr. Ostrander's original employment
agreement was entered into in 1994. The named executive officers' compensation
for 1997 was determined principally by reference to those agreements. See
"EXECUTIVE COMPENSATION -- Ostrander Employment Agreement," "--Shapiro
Employment Agreement," "--Reedy Employment Agreement," "--Rodriguez Employment
Agreement," and "--Goucher Employment Agreement."
The Company has established the base salaries for its executive officers,
including the Chief Executive Officer, by reference to competitive salaries of
executives with similar positions and responsibilities. These base salaries are
established through negotiations and are not dependent upon the Company's
performance. As part of this process, the Company has referenced national
executive compensation studies. In the case of the named executive officers, the
compensation provided for under their employment agreements for 1997 was
principally determined by recommendations made by the Chief Executive Officer to
the Compensation Committee ("Committee"). The Committee believes the Company
should provide the Chief Executive Officer and other executive officers with
base salaries that are competitive with those offered by food companies of
comparable size. In 1997, executive officers' annual base salary adjustments
were made which aggregated approximately $104,500 as compared to the base salary
levels which prevailed as of December 31, 1996 for the then executive officer
group. (Most of the adjustments were made as of April 1, 1997; hence, the base
salary amounts realized in 1997 by most officers were less than the annual
adjusted levels.) Of this amount, $36,000 was pursuant to Mr. Ostrander's
employment agreement, $10,000 was pursuant to Mr. Shapiro's employment
agreement, $10,000 was pursuant to Mr. Reedy's employment agreement, $10,000 was
pursuant to Mr. Rodriguez's employment agreement, and $12,000 was pursuant to
Mr. Goucher's employment agreement, with the balance paid to other executive
officers.
The Committee periodically reviews its compensation criteria and programs
to consider changing business conditions and the Company's needs. The executive
compensation program presently in-place, known as the 1994 Executive Incentive
Plan, provides for three incentive components: cash awards, Common Stock awards
and Common Stock option awards. All participants in the 1994 Executive Incentive
Plan are eligible to earn awards under the first two components, with cash
awards being limited to a maximum of 75% of base salary and with Common Stock
awards being limited to a maximum of 25% of base salary. Additionally, certain
executive officers can qualify for Common Stock option awards if a targeted
earnings per share level is met for a given year. Since its adoption, the 1994
Executive Incentive Plan has been amended twice -- effective January 1, 1995 and
effective January 1, 1996 ("Incentive Plan").
The Incentive Plan rewards participants upon the attainment of specific
performance goals. Corporate executives are rewarded based upon the attainment
of the Company's earnings per share growth targets and operating company
executives are rewarded partially based upon individual operating company growth
in profit before bonuses and taxes, and partially based upon overall corporate
earnings per share growth. Cash awards under the Incentive Plan are dependent
upon attainment of annually established guidelines, or targets, determined by
the Chief Executive Officer and approved by the Committee. The purpose of the
Incentive Plan is to incent and reward the senior management of the Company for
delivering or exceeding their annual operating plan and to motivate those
executives to be planning and focusing on long-term earnings growth. Generally,
there is no provision for incentive awards when there is a decrease in earnings
year-over-year at the appropriate business unit level, except at the discretion
of the Chief Executive Officer with the concurrence of the Committee. However,
should an operating company have an earnings decline, but the Company still
achieves an earnings per share level within, or above, the established target
range for the same year (see discussion in following paragraph), officers of
such operating company are eligible to receive that
13
<PAGE>
portion of their incentive opportunity tied to overall Company results as
specified in the Incentive Plan. Additionally, the Incentive Plan attempts to
foster longer-term performance by tying Common Stock awards to year-over-year
earnings per share growth over a three year period.
As described above, all participants are eligible to receive cash awards
and Common Stock awards under the Incentive Plan. Cash awards are determined by
the relative attainment of target profit amounts using a scale of increasing
percentages, which starts at the attainment of 94% of the target profit amount,
with maximum awards achieved upon the attainment of 110% of the target profit
amount. The calculation of the relative performance level, in turn, determines
the percent of a participant's base salary which can be awarded under the cash
award component of the Incentive Plan. Maximum incentive cash awards are: 75% of
base salary for corporate executive officers and operating company presidents,
56.25% of base salary for other officers and 37.5% of base salary for key
employees.
Effective January 1, 1997, the Committee established target levels for 1997
performance under the Incentive Plan. For 1997 performance, there were $869,929
in cash incentive awards paid to the named executive officers under the
Incentive Plan, with Mr. Ostrander earning a $245,125 cash incentive award. The
awards were determined in accordance with the Incentive Plan, based upon the
achieved 1997 earnings per share as compared to the target level and, in the
case of operating company officers, partially based upon 1997 profit before
bonuses and taxes as compared to the target levels for the respective operating
companies. The Company achieved 167% of targeted earnings per share in 1997 and
individual operating companies achieved from 108% to 269% of their operating
profit targets.
Common Stock awards are triggered by the Company attaining at least 15%
year-over-year earnings per share growth. Common Stock incentive awards are 25%
of base salary for corporate executive officers and operating company
presidents, 18.75% of base salary for other officers and 12.5% of base salary
for key employees. When the 15% earnings per share growth threshold is achieved,
participants receive a fixed percentage of their base salary, as previously
described, dependent upon their participation level in the Incentive Plan. This
is an "all or nothing" award. That is, if the 15% earnings per share growth
threshold is not achieved, the Common Stock incentive award opportunity for that
year is forfeited. Such a forfeiture occurred in 1996. Fifty percent of the
earned Common Stock award amount vests immediately in the year it is earned, 30%
vests the next year if at least 15% earnings per share growth is achieved in the
second year, and the remaining 20% vests the subsequent year if at least 15%
earnings per share growth is achieved in the third year.
For 1997 performance, the Company exceeded the 15% earnings per share
growth threshold. Relative to this performance, there were 10,617 shares of
Common Stock awarded to the named executive officer participants in the
Incentive Plan, including 2,955 shares awarded to Mr. Ostrander. A portion of
the awarded Common Stock shares related to the 20% amount provisionally earned
for 1995 performance, which vested based upon 1997 performance (see footnote (1)
of "EXECUTIVE COMPENSATION -- Summary Compensation Table"). Additionally, for
1997 performance, there were grants of stock options covering 204,000 shares of
Common Stock under the Incentive Plan, including a grant covering 36,000 shares
made to Mr. Ostrander. These incentive Common Stock awards and stock option
grants were made in March, 1998.
In 1997, the Committee commissioned a study prepared by a national
consulting firm specializing in executive compensation. The study indicated that
the Company's salary structure and longer-term compensation incentives for its
senior executive officers were generally below those levels prevailing in the
market for companies of similar annual sales and assets, including,
specifically, food companies of comparable size. Based upon these findings, the
Committee revised its base salary determinations for certain executive officers,
including Mr. Ostrander, which were effective as of April 1, 1997. Further base
salary adjustments were made effective January 1, 1998. Such adjustments were
made after the Committee received further input from the consulting firm
regarding mean compensation levels for executives of companies with annual sales
and earnings comparable to the Company's. See "EXECUTIVE COMPENSATION --
Ostrander Employment Agreement," "--Shapiro Employment Agreement," "--Reedy
Employment Agreement," "--Rodriguez Employment Agreement," and "--Goucher
Employment Agreement."
14
<PAGE>
The Company has no policy with respect to Section 162(m) of the Code, which
precludes a deduction by any publicly-held corporation for certain compensation
paid to any covered employee to the extent that the compensation for the taxable
year exceeds $1,000,000.
The Compensation Committee
Miles E. Efron, Chairman
Maureen B. Bellantoni
Richard A. Coonrod
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock during the five years
ended December 31, 1997 with the cumulative total return on the S&P 500 Index
and the S&P Food Group Index. The comparison assumes $100 was invested on
December 31, 1992 in the Company's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends.
[PLOT POINTS GRAPH]
<TABLE>
<CAPTION>
DEC 92 DEC 93 DEC 94 DEC 95 DEC 96 DEC 97
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Michael Foods, Inc. $ 100.00 $ 80.81 $ 101.54 $ 121.59 $ 135.75 $ 262.80
S&P Food Group Index 100.00 91.77 102.58 130.85 155.03 222.19
S&P 500 Index 100.00 110.08 111.53 153.45 188.68 251.63
</TABLE>
15
<PAGE>
SECURITY OWNERSHIP
The following table sets forth certain information as of March 20, 1998
with respect to the beneficial holdings of each person or entity known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock.
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS
- ---------------- --------------------- --------
Arthur J. Papetti .................. 1,597,727 7.3%
480 South Horizon Way
Neshanic Station, NJ 08853
4J2R1C Ltd. Partnership ............ 1,588,489 7.3%
6479 City West Pkwy.
Eden Prairie, MN 55344
3J2R Ltd. Partnership .............. 1,459,514 6.7%
6479 City West Pkwy.
Eden Prairie, MN 55344
George D. Bjurman & Assoc. ......... 1,122,405 5.1%
10100 Santa Monica Blvd.
Los Angeles, CA 90067
- ------------------
(1) Owned of record and beneficially, except as otherwise noted.
The following table sets forth certain information as of March 20, 1998
with respect to the beneficial holdings of each director and nominee, each named
executive officer, and all executive officers and directors as a group.
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
- ------------------------ --------------------- --------
Directors and Nominees:
Maureen B. Bellantoni ........................ 5,300(2) *
Richard A. Coonrod ........................... 6,000(2) *
Daniel P. Dillon. ............................ -- --
Miles E. Efron ............................... 108,550(2) *
Jerome J. Jenko .............................. -- --
Arvid C. Knudtson ............................ 7,000(2) *
Joseph D. Marshburn .......................... 5,000(2) *
Jeffrey J. Michael ........................... 3,061,718(2)(4) 14.0%
Margaret D. Moore ............................ -- --
Gregg A. Ostrander ........................... 129,092(3) *
Arthur J. Papetti ............................ 1,597,727 7.3%
Stephen T. Papetti ........................... 803,864 3.7%
Executive Officers:
Jeffrey M. Shapiro ........................... 169,482(5) *
John D. Reedy ................................ 58,920(6) *
Norman A. Rodriguez .......................... 84,609(7) *
Bill L. Goucher .............................. 50,022(8) *
All Directors and Executive Officers as a
Group: (21 persons) .......................... 6,260,710(9) 28.0%
- ------------------
* Less than 1%
(1) Owned of record and beneficially, except as otherwise noted.
(2) Includes 5,000 shares of Common Stock as to which Ms. Bellantoni and
Messrs. Coonrod, Efron, Knudtson, Marshburn, and Michael each have the
right to acquire beneficial ownership within 60 days by the exercise of
options granted to non-employee directors upon their election or
appointment. See "Description of Stock Option Plan for Non-Employee
Directors."
(3) Includes 1,000 shares of Common Stock held in Mr. Ostrander's Individual
Retirement Account and 111,800 shares of Common Stock as to which Mr.
Ostrander has the right to acquire beneficial ownership within 60 days by
the exercise of options granted.
16
<PAGE>
(4) Includes two limited partnership holdings of 1,588,489 and 1,459,514 shares
of Common Stock, respectively, as noted in the above Security Ownership
table, of which Mr. Michael disclaims beneficial ownership except to the
extent of his pecuniary interest in the limited partnerships' assets. Also
includes 730 shares held by a minor child.
(5) Includes 3,110 shares of Common Stock held in Mr. Shapiro's Individual
Retirement Account and includes 42,293 shares of Common Stock as to which
Mr. Shapiro has the right to acquire beneficial ownership within 60 days by
the exercise of options granted.
(6) Includes 10,000 shares of Common Stock held for Mr. Reedy's benefit in a
Money Purchase Pension (Keogh) Account and includes 41,860 shares of Common
Stock as to which Mr. Reedy has the right to acquire beneficial ownership
within 60 days by the exercise of options granted.
(7) Includes 1,668 shares of Common Stock held in Mr. Rodriguez's Individual
Retirement Account and includes 73,582 shares of Common Stock as to which
Mr. Rodriguez has the right to acquire beneficial ownership within 60 days
by the exercise of options granted.
(8) Includes 42,200 shares of Common Stock as to which Mr. Goucher has the
right to acquire beneficial ownership within 60 days by the exercise of
options granted.
(9) Includes 120 shares and 750 shares of Common Stock held in two other
executive officers' Individual Retirement Accounts, 384 shares held in a
Simplified Employee Plan for another executive officer, 144 shares held by
two minor children of another executive officer, and 441,451 shares of
Common Stock as to which certain executive officers and directors have the
right to acquire beneficial ownership within 60 days by the exercise of
options granted.
APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board recommends that the shareholders ratify the Board's appointment
of Grant Thornton LLP as independent auditors of the Company for the year ending
December 31, 1998. Grant Thornton LLP has served as the Company's principal
auditors since the Company's formation in 1987.
Representatives of Grant Thornton LLP will be present at the Annual Meeting
and will have an opportunity to make a statement if they desire to do so. They
also will be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR THE 1999
ANNUAL MEETING OF SHAREHOLDERS
Any shareholder who wishes to present a proposal for action at the next
Annual Meeting of Shareholders and who wishes to have it set forth in the Proxy
Statement and identified in the form of proxy prepared by the Company must
notify the Company so that such notice is received by the Secretary by January
1, 1999. Any such proposal must be in the form required under the rules and
regulations promulgated by the Securities and Exchange Commission.
OTHER MATTERS
The Board knows of no other matters that are intended to be brought before
the Annual Meeting. If other matters, of which the Board is not aware, are
presented for action, it is the intention of the proxies named in the enclosed
form of proxy to vote on such matters in their sole discretion.
By Order of the Board of Directors,
/s/ Jeffrey M. Shapiro
Jeffrey M. Shapiro
EXECUTIVE VICE PRESIDENT AND SECRETARY
April 10, 1998
17
<PAGE>
MICHAEL FOODS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PROXY
The undersigned hereby appoint Gregg A. Ostrander and Jeffrey M. Shapiro as
Proxies, each with the power to appoint his substitute, and hereby authorize
them to represent and to vote, as designated hereon, all the shares of Common
Stock of Michael Foods, Inc. held of record by the undersigned on March 20,
1998, at the Annual Meeting of Shareholders to be held on May 12, 1998, or any
adjournment thereof.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [X]
1. ELECTION OF DIRECTORS
[ ] VOTE FOR all nominees listed [ ] WITHHOLD AUTHORITY for all
below (except as marked nominees listed below
to the contrary below) **
MAUREEN B. BELLANTONI, RICHARD A. COONROD, DANIEL P. DILLON, MILES E. EFRON,
JEROME J. JENKO, ARVID C. KNUDTSON, JOSEPH D. MARSHBURN, JEFFREY J. MICHAEL,
MARGARET D. MOORE, GREGG A. OSTRANDER, ARTHUR J. PAPETTI, STEPHEN T. PAPETTI
**To withhold authority to vote for any individual nominee, write that name
on the line below.**
-----------------------------------------------------
2. PROPOSAL TO RATIFY THE APPOINTMENT OF GRANT THORNTON LLP as the independent
auditors of the Corporation for the year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED AND TO BE SIGNED ON THE REVERSE.)
<PAGE>
(CONTINUED FROM THE OTHER SIDE)
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting. This Proxy when properly
executed will be voted in the manner directed herein by the undersigned
shareholder. If no direction is made, this Proxy will be voted for
Proposals 1 and 2.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full titles as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign by authorized person.
Date: , 1998
-----------------------------
----------------------------------------
SIGNATURE
----------------------------------------
SIGNATURE (IF HELD JOINTLY)
PLEASE MARK, SIGN, DATE, AND RETURN THIS
PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
