UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-15638
MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0498850
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 546-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 1998 was approximately $387 million based on the last
price of such stock as reported by the Nasdaq National Market.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 3, 1998, was 21,869,680 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions G(2) and G(3), the responses to Items 5, 6, 7,
and 8 of Part II of this report are incorporated herein by reference to the
Company's 1997 Annual Report to Shareholders (see Exhibit 13.1) and the
responses to Items 10, 11, 12 and 13 of Part III of this report are incorporated
herein by reference to the information contained in the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders to be held on May 12,
1998, to be filed with the Securities and Exchange Commission on or about April
10, 1998.
PART I
ITEM 1 - BUSINESS
FORWARD-LOOKING STATEMENTS
Certain items in this Form 10-K are forward-looking statements, which are made
in reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to numerous
risks and uncertainties, including the possibility that acquisition synergies
may not be realized as rapidly as management expects. Additional risks and
uncertainties include variances in the demand for the Company's products due to
consumer developments and industry developments, as well as variances in the
costs to produce such products, including normal volatility in egg costs and
feed costs. The Company's actual financial results could differ materially from
the results estimated by, forecasted by, or implied by the Company in such
forward-looking statements.
GENERAL
Michael Foods, Inc. (the "Company") is a diversified producer and distributor of
food products in four areas egg products, refrigerated distribution, dairy
products, and potato products. The Company, through its Egg Products Division,
is the largest producer, processor and distributor of extended shelf-life liquid
eggs and dried, hard-cooked and frozen egg products in the United States. The
Refrigerated Distribution Division distributes a broad line of refrigerated
grocery products directly to supermarkets, including cheese, shell eggs, bagels,
butter, margarine, muffins, potato products, juice and ethnic foods. The Dairy
Products Division processes and distributes soft serve mix, ice cream mix, and
extended shelf-life ultrapasteurized milk and specialty dairy products to
domestic fast food businesses and other foodservice outlets, independent
retailers, ice cream manufacturers and others. The Potato Products Division
processes and distributes refrigerated potato products sold to the foodservice
and retail grocery markets in the United States.
The strategic thrust of the Company is to grow value-added food product sales,
primarily in the foodservice market, by focusing on developing, marketing and
distributing innovative, refrigerated products. The key to this strategy is
"value-added", whether that is in the product, the distribution channel or in
the service provided to customers.
EGG PRODUCTS
The Egg Products Division, comprised of M. G. Waldbaum Company ("Waldbaum") and
Papetti's Hygrade Egg Products, Inc. ("Papetti's"), produces, processes and
distributes numerous egg products and shell eggs. Papetti's was acquired in
February, 1997 and added over $300 million to annual divisional sales, more than
doubling the Division's sales base.
Management believes that the Egg Products Division is the largest egg products
producer in the United States and the Division is believed to be the second
largest egg producer in the United
<PAGE>
States. Principal value-added egg products are ultrapasteurized, extended
shelf-life liquid eggs ("Easy Eggs(R)" and "Table Ready(TM)"), egg white-based
egg substitutes and precooked egg products. Other egg products include frozen,
liquid and dried egg whites, yolks and whole eggs, and hard-cooked eggs. The
Division is the largest supplier of extended shelf-life liquid whole eggs and
hard-cooked eggs in the United States and is a leading supplier of precooked egg
items and frozen, liquid and dried whole eggs, whites and yolks. The Division
distributes its egg products to food processors and foodservice customers
primarily throughout the United States and has some international sales in the
Far East, Europe and South America. The largest selling product line within the
Division, extended shelf-life liquid eggs, and other egg products are marketed
nationally to a wide variety of foodservice and industrial customers. The
division also is a leading supplier of egg white-based egg substitutes sold to
the U. S. retail market. Most of the Division's annual shell egg sales are made
to the Company's Refrigerated Distribution Division which, in turn, distributes
them throughout its 23 state territory.
In 1997, the Division derived approximately 94% of net sales from egg products,
with 6% of net sales coming from shell eggs. Pricing for eggs and certain egg
products in the United States reflects levels reported by Urner Barry Spot Egg
Market Quotations ("Urner Barry"), a recognized industry publication. Prices of
high valued-added products, such as extended shelf-life liquid eggs, egg
substitutes and precooked egg products, are not typically affected by Urner
Barry levels. Such products accounted for approximately 45% of the Division's
1997 sales. Prices for certain of the Division's other products, including
frozen, liquid, dried, and hard-cooked items and, particularly, shell eggs, are
significantly affected by frequently changing market levels as reported by Urner
Barry.
In 1997, approximately one-third of the Division's egg needs were satisfied by
production from Company-owned hens, with the balance being purchased under
grower contracts and in the spot market. The cost of eggs from Company-owned
facilities is largely dependent upon the cost of feed. The cost of eggs
purchased under grower contracts and in the spot market is determined by normal
market forces, with prices largely determined by reference to Urner Barry
quotations. Historically, feed costs have generally been less volatile than have
egg market prices and internally produced eggs generally are lower in cost than
are externally sourced egg. Feed costs are partially hedged by the Company's use
of forward buying of key feed components, such as corn and soybean meal,
including futures contracts. There is no market mechanism for hedging egg
prices.
The Division has endeavored to moderate the effects of egg market commodity
factors through an emphasis on value-added products and the internal production
of eggs, where the egg cost is somewhat controllable. Further, the Division
attempts to match market-affected egg sourcing with the production of egg
products whose selling prices are also market-affected, and cost-affected egg
sourcing, as best can be managed, with higher value-added products priced over
longer-terms, such as 6-12 months, or more. The former allows the Division to
typically realize a modest processing margin on such sales, even though there
are notable commodity influences on both the egg sourcing cost and the egg
products pricing, with each changing as frequently as weekly. Shell eggs are
essentially a commodity and are sold based upon reported egg prices. Egg prices
are significantly influenced by modest shifts in supply and demand. Pricing of
shell eggs is also typically affected by seasonal demand related to increased
consumption during holiday periods.
The Division's principal egg processing plants are located in New Jersey,
Minnesota, Nebraska, Pennsylvania and Iowa. Certain of the Division's facilities
are fully integrated from the production and maintenance of laying flocks
through the processing of egg products. Fully automated laying barns, housing
approximately 13,000,000 producing hens, are located in Nebraska, Minnesota and
Colorado. Major laying facilities also maintain their own grain and feed storage
facilities. In addition, approximately 1,750,000 owned producing hens are housed
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in contract facilities. Further, the production of approximately 5,000,000 hens
is under long-term supply agreements, with an additional 11,500,000 hens under
shorter-term agreements. The Division also maintains facilities with
approximately 2,700,000 pullets located in Nebraska and Minnesota.
REFRIGERATED DISTRIBUTION
The Refrigerated Distribution Division, comprised of Crystal Farms Refrigerated
Distribution Company ("Crystal Farms") and Wisco Farm Cooperative, distributes a
wide range of refrigerated grocery products directly to retailers and to
wholesale warehouses. The Division believes that its strategy of offering
quality branded products has contributed to its growth. These products are sold
under the Crystal Farms name as a lower-priced alternative to national brands.
These distributed refrigerated products, which consist principally of cheese,
eggs, bagels, butter, margarine, muffins, potato products, juice and ethnic
foods, are supplied by vendors, or other divisions of the Company, to the
Division's specifications. Cheese accounts for approximately 54% of divisional
annual sales. The Division operates a cheese packaging facility in Lake Mills,
Wisconsin, which allows for the cutting and wrapping of various cheese products
for its Crystal Farms brand cheese business and for private label customers.
The Division has expanded its market area both directly and through the use of
independent distributors. The Division's market area includes 23 states
primarily in the Midwest and Southwest. Retail locations served by the Division
number over 1,500. In 1997, sales to the warehouse operations of a major
national food wholesaler, and to its owned and franchised stores, represented
approximately 37% of divisional sales. The Division maintains a fleet of
refrigerated tractor-trailers to deliver products daily to its retail customers
from ten distribution centers located centrally in its key marketing areas.
DAIRY PRODUCTS
The Dairy Products Division, comprised of Kohler Mix Specialties, Inc.
("Kohler"), processes and sells soft serve mix, ice cream mix, frozen yogurt
mix, milk and specialty dairy products, many of which are ultra-high temperature
("UHT") pasteurized products. The Division sells its products throughout much of
the United States from processing facilities in Minnesota and Texas.
UHT processing is designed to produce bacteria-free products with delicate
flavors, such as milk, ice cream mixes and specialty dairy products such as
coffee creamers, whipping cream, half and half and cordials. Many of the
Division's products have an extended shelf-life of up to ninety days, which
extends the trade territory which can be effectively served by the Division to
include most of the United States.
Soft serve, frozen yogurt and ice cream mixes are made to customers,
specifications. Currently, the Division produces approximately 110 different
formulations. The Division believes that the customization of high quality
products and high customer service levels are critical to their business.
The Division has approximately 300 customers, including branded ice cream
manufacturers, quick service restaurants, other foodservice outlets and
independent ice cream retailers. The Division has a significant customer, who is
an ice cream manufacturer, whose sales accounted for approximately 20% of 1997
divisional sales. In 1997, most of the Division's sales were generated from
customers who purchased products on a cost-plus basis. This includes sales to
most of the large quick-service restaurant chains operating in its market areas.
Sales of soft serve, shake, and ice cream mixes are more seasonal than the
Company's other products, with higher sales volume occurring between May and
September. The addition of other specialty
<PAGE>
dairy products in recent years has somewhat offset the impact on the Division's
sales and earnings from this seasonality.
POTATO PRODUCTS
Potato products are produced and sold by Northern Star Co. ("Northern Star") and
Farm Fresh Foods, Inc. ("Farm Fresh"). As a result of a business strategy change
in 1997, the Potato Products Division now exclusively processes and sells
refrigerated potato products to both the foodservice and retail markets.
Products consist of hash browns and diced, sliced, mashed, and other specialty
potato products. Refrigerated potato products accounted for approximately 83% of
divisional net sales in 1997. The remainder of net sales related to frozen
potato products, principally french fries. This business was discontinued in
mid-1997 and the related assets were sold. In 1997, approximately 75% of the
Potato Products Division's net sales were to the foodservice market, with the
balance to the retail market.
The Division maintains its main processing facility in Minnesota, with a smaller
facility located in California. The Division typically purchases approximately
80%-90% of its annual potato requirements from contract producers. The balance
of potato requirements are purchased on the spot market. The Division maintains
a high percentage of its contracted supply from irrigated fields and also has
geographical diversification of its potato sources. However, weather remains an
important factor in determining raw potato prices and quality. Small variations
in the purchase price and/or quality of potatoes can have a significant effect
on the Potato Products Division's operating results.
SALES, MARKETING AND CUSTOMER SERVICE
Each of the Company's four divisions has developed a marketing strategy which
emphasizes high quality products and customer service. Michael Foods Sales, an
internal sales group, coordinates the sales of Waldbaum, Kohler and Northern
Star, primarily for national and regional accounts, and is supported by a
centralized order entry and customer service staff. A group of foodservice
brokers is used by Michael Foods Sales to supplement its internal sales efforts.
Further, the Egg Products Division utilizes two separate nationwide systems of
brokers, one for the foodservice market and one for the retail market, and
maintains a small sales group which handles certain industrial egg product
sales. The Company has a small marketing staff, which executes marketing plans
in the foodservice market, with additional resources from outside agencies and
consultants.
Refrigerated Distribution Division sales personnel obtain orders from retail
stores which are usually placed no more than one day ahead of the requested
delivery date. The Division's marketing efforts are primarily focused on
in-store and co-op advertising programs, which are executed with grocers on a
market-by-market basis. During 1997, Crystal Farms increased its consumer
support programs, with largely favorable sales volume results, and is expanding
such programs further in 1998, with television advertising to be used in several
markets. Also, the Egg Products Division has a consumer support program to
support various of its egg products sold to the retail market.
ACQUISITIONS
The institutional refrigerated potato products line of Interstate Food
Processing Corp. was acquired in 1995. The asset purchase was made with cash and
included a customer list, processing equipment, goodwill and certain other
assets. The acquisition increased the Potato Products Division's refrigerated
potato product sales in the U. S. foodservice market.
<PAGE>
On February 26, 1997, the Papetti's acquisition was consummated. The
consideration included cash and stock in the amount of approximately $83.2
million, including approximately 3.2 million shares of the Company's common
stock. Additionally, the Company assumed approximately $22.8 million of
Papetti's debt. The acquisition significantly increased the Company's sales of
further-processed egg products in the U. S. foodservice, industrial and retail
markets.
The Company anticipates that it will continue to make acquisitions as part of
its strategic plan.
PROPRIETARY TECHNOLOGIES
In 1988, the Company acquired an exclusive license to use a patented process,
developed by North Carolina State University, for the ultrapasteurization of
liquid eggs. The patents are scheduled to expire in 2006. The process results in
liquid eggs that are salmonella and listeria negative, pursuant to United States
Department of Agriculture ("USDA") regulations. Salmonella and listeria are
bacteria which can contaminate shell eggs. The process also extends the
shelf-life of liquid eggs from less than two weeks to ten weeks or more. The
Company has an aseptic plant in Gaylord, Minnesota which processes the
ultrapasteurized liquid egg needs of Waldbaum.
The Company and the patent holder have initiated litigation against several
processors of competing liquid egg products, claiming infringement of the
original and subsequent related process patents with respect to ultrapasteurized
liquid egg production. In 1992, a jury for the United States District Court for
the Middle District of Florida found the original patent to be valid and that a
processor, Bartow Food Co., willfully and deliberately infringed the patent. In
another action, against Papetti's, the United States District Court for the
District of New Jersey found in 1992 and 1993 that the defendant had infringed
the patents and that the licensed patents are valid and enforceable. In 1994,
the Court of Appeals for the Federal Circuit upheld this judgment. In 1996 there
were other developments regarding the patentability of the claims under the
patents. See Item 3 "Legal Proceedings." The litigation outstanding between the
Company and Papetti's at the time of the Papetti's acquisition was settled as
part of the acquisition transaction.
As a result of the Papetti's acquisition, the Company also owns an exclusive
sublicense to use a patented process for the electro-heating of liquid eggs. The
patent expires in 2006. The process results in liquid eggs that are salmonella
and listeria negative, pursuant to USDA regulations. This process also extends
the shelf-life of liquid eggs from less than two weeks to ten weeks or more.
TRADENAMES
The Egg Products Division maintains numerous tradenames for its products,
including "Logan Valley", "Wakefield", "Sunny Side Up(R)", "Michael Foods",
"Deep Chill(TM)", "MicroFresh", "MGW", "Simply Eggs(R) Brand", "Better `n
Eggs(TM)", "Chef's Eggs(TM) Brand", "Quaker State Farms", and "Broke N' Ready".
Ultrapasteurized liquid eggs are marketed using the "Easy Eggs(R)" and "Table
Ready(TM)" tradenames.
Refrigerated Distribution Division products are marketed principally under the
"Crystal Farms(R)" tradename. In addition, the Division is the principal
distributor of "Bongards" cheese in Minnesota. The Division also distributes
eggs, butter, cheese, bagels, and ethnic foods under a number of other
customer-owned tradenames.
Within the Dairy Products Division, "Kohler" and "Midwest Mix, Inc." are two
primary tradenames.
<PAGE>
Within the Potato Products Division, Northern Star markets its refrigerated
potato products to foodservice customers under a variety of brands, including
"Northern Star". The "Simply Potatoes(TM)" and "Diner's Choice(TM)" brands are
used for retail refrigerated products. Farm Fresh maintains the "Farm Fresh(TM)"
tradename. The "Quality Farms" brand of Interstate Food Processing Corporation
is controlled by the Potato Products Division and is used in the sale of
foodservice refrigerated potato products.
COMPETITION
All aspects of the Company's businesses are extremely competitive. In general,
food products are price sensitive and affected by many factors beyond the
control of the Company, including changes in consumer tastes, fluctuating
commodity prices, changes in supply due to weather, production variances and
feed costs.
The Company's Egg Products Division is considered the largest egg products
processor and the second largest egg producer in the United States. The Egg
Products Division competes with many suppliers of egg products and eggs. While
the shell egg industry is highly fragmented, and the egg products sector is
fairly fragmented, there has been a trend toward consolidation in recent years
and further consolidation in the industry is expected. Other major egg producers
include Cal-Maine Foods, Inc. and Rose Acres Farms, Inc. The Company believes
its Egg Products Division is among the lowest cost egg producers in the United
States. The Company also believes that Easy Eggs'(R) and Table Ready's(TM)
salmonella-negative aspects, extended shelf-lives and ease of use are
significant competitive advantages in the foodservice and industrial food
markets for eggs. The Company believes its largest competitor in egg products is
the Sunny Fresh Foods, Inc. subsidiary of Cargill, Inc.
The Company's Refrigerated Distribution Division competes with the refrigerated
products of other suppliers such as Beatrice Companies, Inc.; Kraft Foods, Inc.;
Land O' Lakes, Inc.; and Sargento Cheese Company, Incorporated. Dutch Farms,
Inc. also carries some of the same product lines as the Division and competes
with Crystal Farms in much of its trade territory. The Division believes that
its emphasis on a high level of service and lower-priced branded products has
enabled it to compete effectively in its market area with larger national brand
companies.
Within the Dairy Products Division, management believes that Kohler provides the
majority of the soft serve mix, and a significant percentage of ice cream mix,
sold in Minnesota and Wisconsin. Kohler also has a large percentage of the UHT
soft serve mix and UHT fluid milk business with quick service restaurant chains
in the central U. S. Competitors include local dairies utilizing conventional
pasteurization and regional dairies with UHT products.
Through mid-1997, the Potato Products Division competed with significantly
larger potato products producers, such as Carnation Co., J. R. Simplot Co.,
Lamb-Weston, Inc. (a subsidiary of ConAgra, Inc.), Ore-Ida Foods, Inc. (a
subsidiary of H. J. Heinz Co.) and McCain Foods, Inc., in the frozen french fry
business. During 1997, the Company exited the frozen french fry business and
sold the related assets. The Company believes it has a leading market share in
refrigerated potato products sold in the U. S. foodservice and retail markets,
where competitors are generally smaller local or regional companies. One
refrigerated potato products competitor, Reser's Fine Foods, Inc., has a
national presence. Certain of the frozen potato products companies mentioned
above also sell frozen versions of potato products which are sold by the
Division in refrigerated form.
<PAGE>
GOVERNMENT REGULATION
All of the Company's subsidiaries are subject to federal and state regulations
relating to grading, quality control, product branding and labeling, waste
disposal and other aspects of their businesses. The subsidiaries are subject to
USDA or Food and Drug Administration regulation regarding grading, quality,
labeling and sanitary control. Egg Products Division egg breaking plants are
subject to continuous on-site USDA inspection. All other subsidiary plants are
subject to periodic USDA inspections.
Crystal Farms' cheese and butter products and Kohler's soft serve mix and ice
cream mix are affected by milk price supports established by the USDA. The
support price serves as an artificial minimum price for these products, which
may not be indicative of market conditions that would prevail if such supports
were abolished.
All of the Company's divisions must also comply with federal, state and local
waste disposal requirements. Waldbaum disposes of chicken waste primarily to
farmers for use as fertilizer. Northern Star disposes of solid waste from potato
processing by selling the solid waste to a processor who converts it to animal
feed and disposes of effluent under a waste discharge permit issued by the
Minneapolis-St. Paul Metropolitan Waste Control Commission. Farm Fresh holds a
permit with the Los Angeles County Sanitation District to discharge industrial
waste into the Sanitation District's sewage system. Waldbaum and Papetti's have
permits to discharge waste products into available sewer systems and maintain
discharge ponds for certain wastes.
EMPLOYEES
The Company employed approximately 3,870 employees at December 31, 1997. Of this
total, the Egg Products Division employed approximately 2,400 full-time and 400
part-time employees, with approximately 20 of these employees represented by a
union. The Refrigerated Distribution Division employed approximately 330
employees, none of whom are represented by a union. The Dairy Products Division
employed approximately 170 people at December 31, 1997. Its production personnel
are represented by the Milk Drivers and Dairy Employees Union. The Potato
Products Division employed approximately 360 employees, of whom 240 are
represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union
affiliated with the Teamsters. The Michael Foods Corporate, Sales, Distribution
and Customer Service, and Information Systems groups collectively employed
approximately 210 people at December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Officer
Name Age Position Since
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<S> <C> <C> <C>
Gregg A. Ostrander 45 President and Chief Executive Officer 1993
Jeffrey M. Shapiro 50 Executive Vice President and Secretary 1987
John D. Reedy 52 Vice President - Finance, Chief Financial Officer and
Treasurer 1988
Mark D. Witmer 40 Assistant Treasurer 1995
James D. Clarkson 45 President - Northern Star 1995
Bill L. Goucher 51 President - Waldbaum 1993
<PAGE>
Officer
Name Age Position Since
- ----------------------------- -------- ----------------------------------------------------------------------
Kevin O. Kelly 40 President - Michael Foods Sales 1993
James J. Kohler 44 President - Kohler 1988
Arthur N. Papetti 66 President - Papetti's 1997
Norman A. Rodriguez 55 President - Crystal Farms 1989
ITEM 2 - PROPERTIES
</TABLE>
FACILITIES
Corporate
The Company maintains leased space for its headquarters, customer service
office, sales office and information services group in suburban Minneapolis,
Minnesota.
Egg Products Division
The following table summarizes certain information concerning the Egg Products
Division's principal facilities:
Owned/
Location Principal Use Approx. Sq. Ft. Leased
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Elizabeth, NJ Processing 75,000 Leased
Elizabeth, NJ Processing 125,000 Leased
Elizabeth, NJ Sales and Distribution 80,000 Leased
Klingerstown, PA Processing and Distribution 75,000 Leased
Kansas City, MO Processing 63,000 Owned
Lenox, IA Processing and Distribution 87,000 Owned
Gaylord, MN Processing and Distribution 164,000 Owned
LeSueur, MN Processing 29,000 Owned
Wakefield, NE Processing and Distribution 323,000 Owned
Bloomfield, NE Processing and Distribution 80,000 Owned
Hudson, CO Processing and Distribution 49,000 Owned
Gaylord, MN Egg Production 349,000 Owned
Gaylord, MN Pullet Houses 130,000 Owned
LeSueur, MN Egg Production 345,000 Owned
Wakefield, NE Pullet Houses 432,000 Owned
Wakefield, NE Egg Production 782,000 Owned
Plainview, NE Pullet Houses 84,000 Owned
Bloomfield, NE Egg Production 619,000 Owned
Hudson, CO Egg Production 312,000 Owned
The Division leases office space for its headquarters, financial and
administrative services staff in suburban Minneapolis and owns approximately 950
acres of land in Nebraska, Minnesota and Colorado, and also leases land in
Bloomfield, Nebraska.
<PAGE>
Refrigerated Distribution Division
Crystal Farms leases administrative and sales offices in suburban Minneapolis
and several small warehouses across the U. S., and owns a 33,000 square foot
distribution center located near LeSueur, Minnesota. The Division owns and
operates a 48,200 square foot refrigerated warehouse on a 19 acre site in Lake
Mills, Wisconsin. A 19,000 square foot cheese packaging facility is also located
in Lake Mills.
Dairy Products Division
Kohler's facilities in White Bear Lake, Minnesota consist of three owned
buildings, with the main plant containing approximately 95,000 square feet.
Kohler also leases a UHT dairy plant in Sulphur Springs, Texas comprising
approximately 40,000 square feet.
Potato Products Division
Northern Star owns a processing plant and land located in Minneapolis,
Minnesota. The plant contains approximately 175,000 square feet of production
area. Farm Fresh leases five buildings in Bell Gardens, California, comprising
approximately 28,600 square feet.
Management believes that the facilities of the Company, together with budgeted
capital projects in each of its four operating divisions, are adequate to meet
the Company's anticipated requirements for its current lines of business over
the foreseeable future.
NEBRASKA CONSTITUTIONAL PROVISION
A substantial portion of the egg production operations of Waldbaum are located
in the State of Nebraska. With certain exceptions, a provision of the Nebraska
constitution generally prohibits corporations from engaging in farming or
ranching in Nebraska. Although the constitutional provision contains an
exemption for agricultural land operated by a corporation for the purpose of
raising poultry, the Nebraska Attorney General has, in written opinions, taken
the position that facilities devoted primarily to the production of eggs do not
fall within such exemption and therefore are subject to the restrictions
contained in the constitutional provision. The Company believes that the egg
production facilities of Waldbaum are part of Waldbaum's integrated facilities
for the production, processing and distribution of egg products, and therefore,
that any agricultural land presently owned by Waldbaum is being used for
non-farming and non-ranching purposes.
The constitution empowers the Nebraska Attorney General, or if the Attorney
General fails to act, a Nebraska citizen, to obtain a court order to, among
other things, force divestiture of land held in violation of the constitutional
provision. If land subject to such a court order is not divested within a
two-year period, the constitutional provision directs the court to declare the
land escheated to the State of Nebraska. The Company is not aware of any
proceedings under such constitutional provision pending or threatened against
either Waldbaum or the Company. Until the scope of such provision has been
clarified by further judicial, legislative, or executive action, there can be no
assurance as to the effect, if any, that it may have on the business of Waldbaum
or the Company.
ITEM 3 - LEGAL PROCEEDINGS
Four patents for ultrapasteurizing liquid eggs licensed by the Company from
North Carolina State University ("NCSU") (see "Proprietary Technologies") are
presently involved in proceedings before the United States Patent and Trademark
Office ("PTO"). In the first commenced proceeding, a reissue proceeding
initiated by NCSU to obtain product claims in
<PAGE>
addition to existing process claims, the objections of an examiner, which had
been sustained by the PTO Board of Patent Appeals and Interferences, were
reversed by the Court of Appeals for the Federal Circuit. All four patents are
presently involved in ongoing reexamination proceedings in the PTO as requested
by various egg industry competitors of the Company. In addition, a second
reissue proceeding has been initiated with respect to the patent in which
product claims were sought and, in this reissue proceeding, both process and
product claims are being reexamined for patentability.
In 1996, NCSU received Final Office Actions issued by the PTO. In these Actions,
the examiner rejected claims under the four process patents held by NCSU. NCSU
and the Company are continuing to process the claims with the examiner and have
appealed the rejection to the PTO's Board of Patent Appeals and Interferences.
An unsatisfactory result of the PTO appeal would be appealed to the Court of
Appeals for the Federal Circuit. Counsel to NCSU and the Company estimates that
a full appeal process could take up to two years to complete. Pending the
outcome of such appeals, the patents remain valid and in full force and effect.
Parties infringing the patents may be liable for damages based upon their
infringement.
On December 31, 1997, the following material litigation was pending with respect
to the Company:
Nulaid Foods, Inc. v. Michael Foods, Inc. and North Carolina State University.
U. S. District Court for the Eastern District of California, Civil Action No.
CIV-S-93-1319WBSJFM. This is an action commenced by Nulaid Foods, Inc. seeking a
declaratory judgment that the patents which are subject to a license between the
Company and NCSU are invalid. The Company and NCSU have counterclaimed for
infringement of the patents by the plaintiff. Further proceedings in this
litigation are stayed pending reexamination of the patents in the PTO as
described above.
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material effect on its consolidated
financial position, liquidity, or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pursuant to General Instruction G(2), information is incorporated by reference
to "Market Price Ranges" and "Listing" on the inside back cover of the Company's
1997 Annual Report to Shareholders (see Exhibit 13.1).
ITEM 6 - SELECTED FINANCIAL DATA
Pursuant to General Instruction G(2), information is incorporated by reference
to "Summary of Consolidated Financial Data" on page 23 of the Company's 1997
Annual Report to Shareholders (see Exhibit 13.1).
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<PAGE>
Pursuant to General Instruction G(2), information is incorporated by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 11 and 12 of the Company's 1997 Annual Report to
Shareholders (see Exhibit 13.1).
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This Item is not applicable to the Registrant for 1997.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pursuant to General Instruction G(2), information is incorporated by reference
to "Report of Independent Certified Public Accountants" and "Consolidated
Financial Statements of Michael Foods, Inc." on pages 13 - 22, and "Quarterly
Financial Data" on page 23, of the Company's 1997 Annual Report to Shareholders
(see Exhibit 13.1).
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3), information is incorporated by reference
to "Election of Directors" in the Proxy Statement of the Company to be filed
with the Securities and Exchange Commission on or about April 10, 1998. For
information with respect to executive officers, reference is made to Part I,
Item 1 of this Report on Form 10-K.
ITEM 11 - EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), information is incorporated by reference
to "Executive Compensation" in the Proxy Statement of the Company to be filed
with the Securities and Exchange Commission on or about April 10, 1998. In
addition, Mark D. Witmer, Assistant Treasurer, and James D. Clarkson, President
of Northern Star Co., were participants in the Severance Plan for Eligible
Employees of Michael Foods, Inc. and its Subsidiaries (the "Plan") in 1997. Mr.
Witmer remains covered by the Plan in 1998.
Under the Plan, certain identified employees of Michael Foods, Inc. are entitled
to severance pay upon termination of employment if such termination of
employment occurs within two years following a change in control, as defined in
the Plan, and such termination is due to reasons other than death, permanent
disability, retirement, cause, or resignation by the employee other than for
Good Reason, as defined. The amount of compensation to which Mr. Witmer would be
entitled to equals two times his Annual Compensation, as defined, which
generally means base compensation excluding bonuses, benefits and allowances.
The Plan automatically terminates unless it is renewed by action of the
Compensation Committee and the Board of Directors of the Company prior to July
1, 1998 and annually thereafter, except that the Plan will remain in effect
after a change in control for at least 24 months unless otherwise terminated by
the Board of Directors of the Company with the consent of 80% of the Plan
participants who were Plan participants at the time of the change in control.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), information is incorporated by reference
to "Security Ownership" in the Proxy Statement of the Company to be filed with
the Securities and Exchange Commission on or about April 10, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), information is incorporated by reference
to "Election of Directors", "Certain Relationships and Related Party
Transactions", and "Security Ownership" in the Proxy Statement of the Company to
be filed with the Securities and Exchange Commission on or about April 10, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. The following consolidated financial statements of the Company,
included in the 1997 Annual Report to Shareholders, are incorporated by
reference in Item 8 and are also incorporated herein by reference (see
Exhibit 13.1):
Consolidated balance sheets - December 31, 1997 and 1996
Consolidated statements of operations - Years ended December 31, 1997,
1996 and 1995
Consolidated statements of shareholders' equity - Years ended December
31, 1997, 1996 and 1995
Consolidated statements of cash flows - Years ended December 31, 1997,
1996 and 1995
Notes to consolidated financial statements
2. Consolidated Financial Statement Schedules
Description
Report of Independent Certified Public Accountants on Schedule (see
Item 14 (d))
Schedule II - Valuation and Qualifying Accounts (see Item 14(d))
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements and/or notes filed under Exhibit 13.1.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of 1997.
(c) Exhibits and Exhibit Index
<PAGE>
Exhibit
No. Description
- ------- -----------
2.1 Agreement and Plan of Reorganization, dated as of December 21, 1995,
together with Amendment No. 1, dated as of September 27, 1996, by and
between Michael Foods, Inc., North Star Universal, Inc. and NSU Merger
Co., with Exhibits (included as Appendix I to the Proxy
Statement/Prospectus that forms part of the Company's Registration
Statement on Form S-4 (Registration No. 333-1863) which Appendix is
incorporated herein by reference (schedules omitted -- the Registrant
agrees to furnish a copy of any schedule to the Commission upon
request)). (1)
3.1 Amended and Restated Articles of Incorporation of the Company dated
February 28, 1997. (2)
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference). (2)
4.1 Form of Common Stock Certificate. (2)
10.2* Michael Foods, Inc. 1987 Non-Qualified Stock Option Plan and
Non-Qualified Stock Option Agreement (filed as Exhibit 10.16 to Michael
Foods, Inc., a Delaware corporation's Registration Statement on Form
S-1 Registration No. 33-12949 and incorporated herein by reference).
(2)
10.3* Form of Michael Foods, Inc. Director Stock Option Agreement (filed as
Exhibit 10.25 to Michael Foods, Inc., a Delaware corporation's
Registration Statement on Form S-1 Registration No. 33-12949 and
incorporated herein by reference). (2)
10.5 Loan Agreement and Promissory Note between Metropolitan Life Insurance
Company and Michael Foods, Inc., dated December 1, 1989 (filed as
Exhibit 10.43 to Michael Foods, Inc., a Delaware corporation's Annual
Report on Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference). (2)
10.6* Amendment to Michael Foods, Inc. Incentive and Non-Qualified Stock
Option Plans, dated November 21,1989 (filed as Exhibit 4.6 to Michael
Foods, Inc., a Delaware corporation's Registration Statement on Form
S-8 effective November 21, 1989, Registration No. 33-31914 and
incorporated herein by reference). (2)
10.7 License Agreement between Michael Foods, Inc. and North Carolina State
University, dated November 28, 1989 (filed as Exhibit 10.56 to Michael
Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated herein by reference).
(2)
10.8 Amendment dated December 18, 1996 to License Agreement between Michael
Foods, Inc., a Delaware corporation, and North Carolina State
University, dated November 28, 1989. (2)
10.9* Severance Plan for Eligible Employees of Michael Foods, Inc. and its
Subsidiaries (incorporated by reference from the Michael Foods, Inc., a
Delaware corporation's Form 8, Amendment No. 1 to Report on Form 10-K
for the year ended December 31, 1990). (2)
10.10 First Amendment to December 1, 1989 Loan Agreement and Promissory Note
between Michael Foods, Inc. and Metropolitan Life Insurance Company,
dated October 14, 1992 (filed as Exhibit 10.67 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference). (2)
10.11* Amendment to the Michael Foods, Inc. Non-Qualified Stock Option Plan
(filed as Exhibit 4.7 to the Michael Foods, Inc., a Delaware
corporation's Registration Statement on Form S-8 effective June 9, 1993
Registration No. 33-64078 and incorporated by reference). (2)
10.12* Stock Option Plan for Non-Employee Directors (filed as Exhibit 4.1 to
the Michael Foods, Inc., a Delaware corporation's Registration
Statement on Form S-8 effective June 9, 1993 Registration No.
33-64076 and incorporated herein by reference). (2)
10.13* Michael Foods, Inc. 1994 Executive Incentive Plan (filed as Exhibit
10.76 to Michael Foods, Inc., a Delaware corporation's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated herein
by reference). (2)
10.14* Michael Foods, Inc. 1994 Executive Performance Stock Award Plan (filed
as Exhibit 10.77 to Michael Foods, Inc., a Delaware corporation's
Annual Report on Form 10-K for the year ended December 31,1993 and
incorporated herein by reference). (2)
10.15* Employment Agreement between Michael Foods, Inc. and Gregg A.
Ostrander, dated January 31, 1994 (filed as Exhibit 10.79 to Michael
Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference).
(2)
10.16 Second Amendment to December 1, 1989 Loan Agreement and Promissory Note
between Michael Foods, Inc. and Metropolitan Life Insurance Company,
dated February 23, 1994 (filed as Exhibit 10.81 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference). (2)
10.17* Michael Foods, Inc. Employee Stock Purchase Plan (filed as Exhibit
10.88 to Michael Foods, Inc., a Delaware corporation's Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein
by reference). (2)
10.18* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
Gregg A. Ostrander, dated December 31, 1994 (filed as Exhibit 10.89 to
the Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by
reference). (2)
10.19* Employment Agreement between Michael Foods, Inc. and Jeffrey M.
Shapiro, dated December 31, 1994 (filed as Exhibit 10.90 to Michael
Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference).
(2)
10.20* Employment Agreement between Michael Foods, Inc. and Norman A.
Rodriguez, dated December 31, 1994 (filed as Exhibit 10.92 to Michael
Foods, Inc., a Delaware corporation's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference).
(2)
10.21* Employment Agreement between Michael Foods, Inc. and James J. Kohler
dated December 31, 1994 (filed as Exhibit 10.93 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference). (2)
10.22* Employment Agreement between Michael Foods, Inc. and Kevin O. Kelly,
dated December 31, 1994 (filed as Exhibit 10.94 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference). (2)
10.23* Employment Agreement between Michael Foods, Inc. and John D. Reedy,
dated December 31, 1994 (filed as Exhibit 10.95 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference). (2)
10.24* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective
January 1, 1995 (filed as Exhibit 10.97 to Michael Foods, Inc., a
Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference). (2)
10.25* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective
January 1, 1996 (filed as Exhibit 10.98 to Michael Foods, Inc., a
Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference). (2)
10.26* Employment Agreement between Michael Foods, Inc. and Bill L. Goucher,
dated December 31, 1995 (filed as Exhibit 10.99 to Michael Foods, Inc.,
a Delaware corporation's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference). (2)
10.28* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
Jeffrey M. Shapiro, dated December 31, 1995 (filed as Exhibit 10.101 to
Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.29* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
Norman A. Rodriguez, dated December 31, 1995 (filed as Exhibit 10.102
to Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.30* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
James J. Kohler, dated December 31, 1995 (filed as Exhibit 10.103 to
Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.31* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
Kevin O. Kelly, dated December 31, 1995 (filed as Exhibit 10.104 to
Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.32* Amendment No. 1 to Employment Agreement between Michael Foods, Inc. and
John D. Reedy, dated December 31, 1995 (filed as Exhibit 10.105 to
Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.33* Amendment No. 2 to Employment Agreement between Michael Foods, Inc. and
Gregg A. Ostrander, dated December 31, 1995 (filed as Exhibit 10.106 to
Michael Foods, Inc., a Delaware corporation's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference). (2)
10.35 Agreement and Plan of Reorganization, and Amendment No. 1, by and among
Michael Foods, Inc., M. G. Waldbaum Company and Papetti's Hygrade Egg
Products, Inc., and Quaker State Farms, Inc., Papetti's of Iowa Food
Products, Inc., Monark Egg Corporation, Egg Specialties, Inc., Papetti
Foods, Inc., Casa Trucking Limited Partnership, Papetti Transport
Leasing Limited Partnership, and Papetti Equipment Leasing Partnership
(filed as Exhibit 10.111 to Michael Foods, Inc., a Delaware
corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated herein by reference). (2)
10.36 Amendment No. 2, dated February 26, 1997, to Agreement and Plan of
Reorganization by and among Michael Foods, Inc., a Delaware
corporation, M. G. Waldbaum Company and Papetti's Hygrade Egg Products,
Inc., and Quaker State Farms, Inc., Papetti's of Iowa Food Products,
Inc., Monark Egg Corporation, Egg Specialties, Inc., Papetti Foods,
Inc., Casa Trucking Limited Partnership, Papetti Transport Leasing
Limited Partnership, and Papetti Equipment Leasing Partnership (filed
as Exhibit B to Arthur J. Papetti Schedule 13D relating to Michael
Foods, Inc. filed March 7, 1997 and incorporated herein by reference).
(2)
10.37* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Arthur J. Papetti dated February 26, 1997. (3)
10.38 Shareholder Agreement, dated February 26, 1997, by and among Michael
Foods, Inc., a Delaware corporation and Arthur N. Papetti as
Representative of and attorney-in-fact for the Shareholders and Sellers
Listed on Schedule I (filed as Exhibit D to Arthur J. Papetti Schedule
13D filed March 7, 1997 and incorporated herein by reference). (2)
10.39 Form of Loan Agreement dated as of February 26, 1997 between Michael
Foods, Inc., a Delaware corporation and various Lenders with regard to
$125,000,000 of 7.58% Senior Notes due February 26, 2009, including
form of Note and Novation and Assumption Agreement. (2)
10.40 Form of Amendment Agreement dated as of February 26, 1997 between
Michael Foods, Inc., a Delaware corporation and Metropolitan Life
Insurance Company regarding up to $50,000,000 of 9.5% Senior Notes due
December 1, 1999, including form of Note and Novation and Assumption
Agreement. (2)
10.41 Form of Revolving Loan Agreement dated as of February 28, 1997 among
Michael Foods, Inc., a Delaware corporation, the Listed Banks and Bank
of America National Trust, including exhibits. (2)
10.42* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Stephen Papetti dated February 26, 1997. (3)
10.43* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Arthur N. Papetti dated February 26, 1997. (2)
10.44 Lease by and between ASA Company, as Landlord and Michael Foods, Inc.,
a Delaware corporation as Tenant dated February 26, 1997. (2)
10.45 Lease by and between Rechsteiner/Papetti, et al., as Landlord and
Michael Foods, Inc., a Delaware corporation as Tenant dated February
26, 1997. (2)
10.46 Lease by and between Jersey Pride Urban Renewal, as Landlord and
Michael Foods, Inc., a Delaware corporation as Tenant dated February
26, 1997. (2)
10.47 Lease by and between Papetti Holding Company, as Landlord and Michael
Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997.
(2)
10.48 Lease by and between Papetti Holding Company, as Landlord and Michael
Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997.
(2)
10.49 Lease by and between Papetti Holding Company, Jack Bernstein, Sherwood
Weiser and Estate of David Levinson, as Landlord and Michael Foods,
Inc., a Delaware corporation as Tenant dated February 26, 1997.
(2)
10.50 Lease by and between A & A Urban Renewal, as Landlord and Michael
Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997.
(2)
10.51* Resolution adopted by the Board of Directors on September 2, 1997,
amending the Severance Plan for Eligible Employees of Michael Foods,
Inc. and Subsidiaries and extending its termination date for one
additional year. (4)
10.52* Employment Agreement between Michael Foods, Inc. and J. D. Clarkson,
dated October 31, 1997.
10.53* Amended and Restated Employment Agreement between Michael Foods, Inc.,
and Gregg A. Ostrander, dated December 31, 1997.
10.54* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Jeffrey M. Shapiro, dated October 31, 1997.
10.55* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Norman A. Rodriguez, dated October 31, 1997.
10.56* Amended and Restated Employment Agreement between Michael Foods, Inc.
and James J. Kohler, dated October 31, 1997.
10.57* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Kevin O. Kelly, dated October 31, 1997.
10.58* Amended and Restated Employment Agreement between Michael Foods, Inc.
and John D. Reedy, dated October 31, 1997.
10.59* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Bill L. Goucher, dated October 31, 1997.
10.60* Michael Foods, Inc. 1997 Incentive Stock Plan (5)
10.61 Sublicense Agreement between R & P Liquid Egg Technology Limited
Partnership and Papetti's Hygrade Egg Products, Inc., dated December
31, 1993.**
10.62 Assignment and Acceptance Agreement between Bank of America National
Trust & Savings Association and Summit Bank dated November 20, 1997.
10.63 Amendment No. 3 to the Agreement and Plan of Reorganization By and
Among Michael Foods, Inc. and Papetti's Hygrade Egg Products, Inc., et.
al., dated February 25, 1998.
13.1 1997 Annual Report to Shareholders
21.1 Schedule of Michael Foods, Inc. Subsidiaries
23.1 Consent of Independent Certified Public Accountants -- Grant Thornton
LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule - September 30, 1997
27.3 Restated Financial Data Schedule - December 31, 1995
* Management Contract or Compensation Plan Arrangement
** Confidential Treatment requested for the deleted portions
(1) Incorporatd by reference from the Company's Amendment No. 2 to Form S-4
filed effective November 8, 1996, Registration No. 333-1863.
(2) Incorporated by reference from the Company's Report on Form 8-K filed March
13, 1997.
(3) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1996, filed March 28, 1997.
(4) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended September 30, 1997, filed November 12, 1997.
(5) Incorporated by reference from the Company's Form S-8 filed effective March
25, 1997, Registration No. 333-23949.
<PAGE>
(d) Schedule
SCHEDULE II
MICHAEL FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- -------------------- ----------------- ---------------------------------- ----------------- -----------------
Col. A Col. B Col. C Col. D Col. E
- -------------------- ----------------- ---------------------------------- ----------------- -----------------
Additions
----------------------------------
(2)
(1) Charges to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Description of Period Expenses Describe (a) Describe (b) Period
- -------------------- ----------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts
For the Year Ended
December 31, 1995: $695,000 $446,000 $0 $358,000 $783,000
For the Year Ended
December 31, 1996: $783,000 $409,000 $0 $294,000 $898,000
For the Year Ended
December 31, 1997: $898,000 $749,000 $658,000 $557,000 $1,748,000
- --------------------------------------------------
(a) Balance acquired as it relates to the Papetti's acquisition
(b) Write-offs of accounts deemed uncollectible
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Report of Independent Certified Public Accountants on Schedule
Board of Directors
Michael Foods, Inc.
In connection with our audits of the consolidated financial statements of
Michael Foods, Inc. and subsidiaries referred to in our report dated February
18, 1998, which is included in the annual report to shareholders and
incorporated by reference in Part II of this form, we have also audited Schedule
II for each of the three years in the period ended December 31, 1997. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
February 18, 1998
<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.
Date: March 26, 1998 By: /s/ Gregg A. Ostrander
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: March 26, 1998 By: /s/ John D. Reedy
John D. Reedy
(Vice-President-Finance, Treasurer, Chief Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ Arvid C. Knudtson March 26, 1998
Arvid C. Knudtson
(Chairman of the Board)
/s/ Gregg A. Ostrander March 26, 1998
Gregg A. Ostrander (Director,
President & Chief Executive Officer)
/s/ Maureen B. Bellantoni March 26, 1998
Maureen B. Bellantoni (Director)
/s/ Miles E. Efron March 26, 1998
Miles E. Efron (Director)
/s/ Richard A. Coonrod March 26, 1998
Richard A. Coonrod (Director)
/s/ Joseph D. Marshburn March 26, 1998
Joseph D. Marshburn (Director)
/s/ Jeffrey J. Michael March 26, 1998
Jeffrey J. Michael (Director)
/s/ Arthur J. Papetti March 26, 1998
Arthur J. Papetti (Director)
/s/ Stephen T. Papetti March 26, 1998
Stephen T. Papetti (Director)
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. No.
- --- ---
10.52 Employment Agreement between Michael Foods, Inc. and J. D. Clarkson,
dated October 31, 1997.
10.53 Amended and Restated Employment Agreement between Michael Foods, Inc.,
and Gregg A. Ostrander, dated December 31, 1997.
10.54 Amended and Restated Employment Agreement between Michael Foods, Inc.
and Jeffrey M. Shapiro, dated October 31, 1997.
10.55 Amended and Restated Employment Agreement between Michael Foods, Inc.
and Norman A. Rodriguez, dated October 31, 1997.
10.56 Amended and Restated Employment Agreement between Michael Foods, Inc.
and James J. Kohler, dated October 31, 1997.
10.57 Amended and Restated Employment Agreement between Michael Foods, Inc.
and Kevin O. Kelly, dated October 31, 1997.
10.58 Amended and Restated Employment Agreement between Michael Foods, Inc.
and John D. Reedy, dated October 31, 1997.
10.59 Amended and Restated Employment Agreement between Michael Foods, Inc.
and Bill L. Goucher, dated October 31, 1997.
10.61 Sublicense Agreement between R & P Liquid Egg Technology Limited
Partnership and Papetti's Hygrade Egg Products, Inc., dated December
31, 1993.
10.62 Assignment and Acceptance Agreement between Bank of America National
Trust & Savings Association and Summit Bank dated November 20, 1997.
10.63 Amendment No. 3 to the Agreement and Plan of Reorganization By and
Among Michael Foods, Inc. and Papetti's Hygrade Egg Products, Inc., et.
al., dated February 25, 1998.
13.1 1997 Annual Report to Shareholders
21.1 Schedule of Michael Foods, Inc. Subsidiaries
23.1 Consent of Independent Certified Public Accountants -- Grant Thornton
LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule - September 30, 1997
27.3 Restated Financial Data Schedule - December 31, 1995
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of October,
1997, by and between MICHAEL FOODS, INC., a Minnesota corporation (hereinafter
referred to as "Michael Foods") and JD CLARKSON (hereinafter referred to as
"Clarkson").
WHEREAS, Clarkson has served as President of Northern Star Co. since
August 1995; and
WHEREAS, Michael Foods and Clarkson have agreed to enter into this
Agreement effective as of January 1, 1998.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1998 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Clarkson to serve
as President of Northern Star Co. and in such capacity Clarkson shall perform
such duties as the Bylaws provide and as the CEO of Michael Foods may from time
to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1998 and
shall continue through December 31, 1998, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement of
the parties hereto.
3. BASE SALARY. For all services rendered by Clarkson, Michael Foods
agrees to pay to Clarkson an annual Base Salary for each calendar year of this
Agreement from January 1, 1998 through December 31, 1998 of at least $176,000
payable in substantially equal bi-weekly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Clarkson shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Clarkson with medical insurance
and shall permit Clarkson to participate in other fringe benefit plans
as Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Clarkson is entitled to take vacations at reasonable times
and for customary and reasonable lengths of time consistent with his
overall responsibilities as President of Northern Star Co.
d. Michael Foods shall reimburse Clarkson for all reasonable
expenses incurred by Clarkson in connection with Michael Foods'
business, including but not limited to,
<PAGE>
expenses of travel and entertainment, upon presentation of itemized
statements therefor.
5. EVENTS OF TERMINATION. The employment of Clarkson hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Clarkson;
b. Upon thirty (30) days' written notice by either party.
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Clarkson's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Clarkson has (i) committed an illegal or dishonest act that directly
reflects upon his fitness to act as President of Northern Star Co.; (ii)
intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Clarkson is unable to perform his job
responsibilities as President of Northern Star Co. as a result of chronic
illness, physical, mental or any other disability for a period of six (6) months
or more.
If Clarkson's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Clarkson shall receive as a termination
payment an amount equal to one year's Base Salary, plus any Incentive
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Such termination payment shall be made in
substantially equal bi-weekly installments beginning on the first day of the
month following termination of employment for twelve (12) months. If Clarkson's
employment is terminated by Clarkson under subsection (b), Clarkson shall
receive no termination payment; however, Clarkson will be entitled to receive
any Incentive Compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. Any Incentive Compensation earned
for any year prior to the year of termination which is unpaid at the date of
termination shall be due and payable in full within 15 days of the determination
by the Board of Directors of the amount of Incentive Compensation to which
Clarkson is entitled to receive, but in no event shall the date of payment be
more than 90 days following termination of employment. If Michael Foods
terminates Clarkson under subsection (c) above, no amount shall be paid beyond
the last day of service by Clarkson and Clarkson shall not be deemed to have
earned any Incentive Compensation or Options for the year of termination. In the
case of Incapacity or death, or termination by Michael Foods without Cause in
accordance
<PAGE>
with sub-paragraphs a., b. and d. above, all options to purchase common stock
previously granted to Clarkson shall become fully vested and not subject to
Clarkson's forfeiture.
If Clarkson's employment is terminated by Michael Foods under
subsection (d), Clarkson shall receive as a termination payment an amount equal
to two year's Base Salary, plus any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of termination.
Such termination payment shall be made in a lump sum within l5 days following
termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Clarkson's express written consent:
(i) the assignment to Clarkson of any duties inconsistent with
Clarkson's positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Clarkson's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Clarkson from, or any failure to re-elect CIarkson
to, any of such positions, except in connection with the termination of
Clarkson's employment for Cause, upon the Incapacity or death of Clarkson, or
upon the voluntary termination by Clarkson;
(ii) a reduction in Clarkson's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
(iii) Michael Foods requiring Clarkson to be based anywhere other than
the geographic location at which Clarkson was based immediately preceding the
Change
<PAGE>
in Control except for required travel on business to an extent substantially
consistent with the business travel obligations Clarkson experienced immediately
preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Clarkson was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Clarkson's participation in or materially reduce
Clarkson's benefits under any of such plans or deprive Clarkson of any material
fringe benefit enjoyed by Clarkson at the time of the Change in Control, but
this provision shall not apply to any stock option plan maintained by Michael
Foods prior to the Change in Control; or the failure by Michael Foods to provide
Clarkson with the number of paid vacation days, holidays and personal days to
which Clarkson was then entitled in accordance with Michael Foods' normal leave
policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Clarkson by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
JD CLARKSON
10464 Shelter Grove
Eden Prairie, MN 55346
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
<PAGE>
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By: /s/ John Reedy
Its VICE PRESIDENT-FINANCE
/s/ J.D. CLARKSON
JD CLARKSON
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of January,
1994 with Amendment No. 1 made and entered into as of the 31st day of December,
1994 and Amendment No. 2 made and entered into the 31st day of December, 1995
and as further amended the 31st day of December, 1997 by and between MICHAEL
FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael
Foods") and GREGG A. OSTRANDER (hereinafter referred to as "Ostrander").
WHEREAS, Ostrander has served as Chief Operating Officer of Michael
Foods from February 1993 through December 1993; and
WHEREAS, Ostrander has served as President and Chief Executive Officer
of Michael Foods since December 1993; and
WHEREAS, Michael Foods wishes to retain the full-time services of
Ostrander as President and Chief Executive Officer of Michael Foods; and
WHEREAS, Michael Foods and Ostrander have agreed to enter into this
Agreement effective as of January 1, 1994.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Ostrander to serve
as President and Chief Executive Officer of Michael Foods and in such capacity
Ostrander shall perform such duties as the Bylaws provide and as the Board of
Directors of Michael Foods may from time to time determine. Ostrander shall
devote his full time and efforts to the business of Michael Foods. Ostrander
shall also serve, at the request of Michael Foods, as a Director of Michael
Foods and each of its subsidiaries.
2. TERM. This Agreement shall be effective as of January 1, 1994 and
shall continue through December 31, 1997, unless earlier terminated as provided
herein. This Agreement is hereby extended automatically and shall continue for
successive two-year terms unless otherwise terminated in accordance with Section
5.
3. BASE SALARY. For all services rendered by Ostrander, Michael Foods
agrees to pay to Ostrander an annual Base Salary for each of the calendar years
of this Agreement from January 1, 1998 an amount of at least $405,000 payable in
substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. On or before February 15, 1994, Michael Foods shall deliver
to Ostrander a non-qualified stock option to purchase 20,000 shares of
Michael
<PAGE>
Foods Common Stock. The date of grant of such option shall be deemed to
be January 3, 1994 and the exercise price shall be determined in
accordance with the Michael Foods Non-Qualified Stock Option Plan as of
the close of business on that date.
b. For each calendar year during the term of this Agreement,
Ostrander shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
c. Michael Foods shall provide Ostrander with medical
insurance and shall permit Ostrander to participate in other fringe
benefit plans as Michael Foods may from time to time establish for its
executive officers. The terms of said benefits shall be no less
generous than those offered to other executive officers of Michael
Foods.
d. Ostrander is entitled to take vacations at reasonable times
and for customary and reasonable lengths of time consistent with his
overall responsibilities as President and Chief Executive Officer of
Michael Foods.
e. Michael Foods shall reimburse Ostrander for all reasonable
expenses incurred by Ostrander in connection with Michael Foods'
business, including but not limited to expenses of travel and
entertainment, upon presentation of itemized statements therefor.
f. On or before January 3, 1995, Michael Foods shall deliver
to Ostrander a non-qualified stock option to purchase 40,000 shares of
Michael Foods Common Stock. The date of grant of such option shall be
deemed to be January 3, 1995 and the exercise price shall be determined
in accordance with the Michael Foods Non-Qualified Stock Option Plan as
of the close of business on that date, or $10.00 per share, whichever
is greater.
g. On or before January 2, 1996, Michael Foods shall deliver
to Ostrander a non-qualified stock option to purchase 40,000 shares of
Michael Foods Common Stock. The date of grant of such option shall be
deemed to be January 2, 1996 and the exercise price shall be determined
in accordance with the Michael Foods Non-Qualified Stock Option Plan as
of the close of business on that date, or $10.00 per share, whichever
is greater.
h. On or before March 5, 1998, Michael Foods shall deliver to
Ostrander a non-qualified stock option to purchase 68,500 shares of
Michael Foods Common Stock. The date of grant of such option shall be
deemed to be December 31, 1997 and the exercise price shall be
determined in accordance with the Michael Foods Non-Qualified Stock
Option Plan as of the close of business on that date, which was $24.375
per share.
<PAGE>
5. EVENTS OF TERMINATION. The employment of Ostrander hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Ostrander;
b. Upon thirty (30) days' written notice by either party; or
c. Without notice by Michael Foods for Cause.
"Cause" for purposes hereof shall mean a determination by Michael Foods
that Ostrander has (i) committed an illegal or dishonest act that directly
reflects upon his fitness to act as President and Chief Executive Officer; (ii)
intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"Incapacity" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Ostrander is unable to perform his job
responsibilities as President and Chief Executive Officer as a result of chronic
illness, physical, mental or any other disability for a period of six (6) months
or more.
If Ostrander's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Ostrander shall receive as a termination
payment all amounts due under this agreement which is defined as two years' Base
Salary, plus Ostrander shall receive fifty percent (50%) of that Base Salary
amount in lieu of any Incentive Compensation or Options for that two-year
period, plus any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. Such termination payment
shall be made in substantially equal monthly installments beginning on the first
day of the month following termination of employment for twenty-four (24)
months. If Ostrander's employment is terminated by Ostrander under subsection
(b), Ostrander shall receive no termination payment; however, Ostrander 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 Michael Foods
terminates Ostrander under subsection (c) above, no amount shall be paid beyond
the last day of service by Ostrander and Ostrander shall not be deemed to have
earned any Incentive Compensation or Options for the year of termination. In the
case of Incapacity or death, or termination by Michael Foods without Cause, all
options to purchase common stock previously granted to Ostrander shall become
fully vested and not subject to forfeiture.
For purposes of this Section 5, this Agreement and Ostrander's
employment hereunder shall be deemed terminated by Michael Foods without Cause
if, after the date hereof there is a Change in Control of Michael Foods and
thereafter Ostrander's Duties are Substantially Reduced or Negatively Altered
without his prior written consent.
"Change in Control" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to
<PAGE>
section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"); provided
that, without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section 14(d) of the
Exchange Act, other than Michael Foods, a subsidiary of Michael Foods or any
employee benefit plan sponsored by Michael Foods or a subsidiary of Michael
Foods, acquires (1) the power to elect, appoint or cause the election or
appointment of at least a majority of the members of the Board of Directors of
Michael Foods through the acquisition of beneficial ownership of capital stock
of Michael Foods or otherwise, or (2) all, or substantially all, of the
properties and assets of Michael Foods; provided, however, that a Change in
Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction, no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act, shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Ostrander's express written consent:
(i) the assignment to Ostrander of any duties inconsistent with
Ostrander's positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Ostrander's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Ostrander from, or any failure to re-elect
Ostrander to, any of such positions, except in connection with the termination
of Ostrander's employment for Cause, upon the Incapacity or death of Ostrander,
or upon the voluntary termination by Ostrander;
(ii) a reduction in Ostrander's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
(iii) Michael Foods requiring Ostrander to be based anywhere other than
the geographic location at which Ostrander was based immediately preceding the
Change in Control except for required travel on business to an extent
substantially consistent with the business travel obligations Ostrander
experienced immediately preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Ostrander was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Ostrander's participation in or materially reduce
Ostrander's benefits under any of such plans or deprive Ostrander of any
material fringe benefit enjoyed by Ostrander at the time of the Change in
Control, but this provision shall not apply to any stock option plan maintained
by Michael Foods prior to the Change in Control; or the
<PAGE>
failure by Michael Foods to provide Ostrander with the number of paid vacation
days, holidays and personal days to which Ostrander was then entitled in
accordance with Michael Foods' normal leave policy in effect immediately
preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Ostrander by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Gregg A. Ostrander
21520 Fairview Street
Greenwood, Minnesota 55331
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
or mailed to such other addresses as the parties hereto may designate by notice
given in like manner. Notice shall be effective three (3) days after mailing or
upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
<PAGE>
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its VP - Finance
/s/ Gregg A. Ostrander
GREGG A. OSTRANDER
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December,
1994, and amended as of the 31st day of December 1995 and amended as of the 31st
day of October 1997 by and between MICHAEL FOODS, INC., a Minnesota corporation
(hereinafter referred to as "Michael Foods") and JEFFREY M. SHAPIRO (hereinafter
referred to as "Shapiro").
WHEREAS, under the date of March 1, 1988, Michael Foods and Shapiro
entered into an Employment Agreement which expires by its terms on December 31,
1994; and
WHEREAS, Shapiro has served as Executive Vice President of Michael
Foods since May 1988; and
WHEREAS, Michael Foods and Shapiro have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that the Employment Agreement dated March 1, 1988
is hereby amended and superseded in its entirety by this Agreement effective as
of January 1, 1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Shapiro to serve
as Executive Vice President and Secretary of Michael Foods and in such capacity
Shapiro shall perform such duties as the Bylaws provide and as the CEO of
Michael Foods may from time to time determine. Shapiro shall also serve, at the
request of Michael Foods, as a Director of each of Michael Foods' subsidiaries.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1999 and shall automatically renew and
extend for additional two year terms unless otherwise terminated in accordance
with the provisions of this agreement.
3. BASE SALARY. For all services rendered by Shapiro, Michael Foods
agrees to pay to Shapiro an annual Base Salary for each of the calendar years of
this Agreement from January 1, 1998 through December 31, 1999 of at least
$260,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Shapiro shall be entitled to participate in the Executive
Incentive Compensation Plan of Michael Foods. Any Incentive
Compensation or Options earned under said Plan shall be
determined and paid or granted in accordance with the Plan.
b. Michael Foods shall provide Shapiro with medical insurance and
shall permit Shapiro to participate in other fringe benefit
plans as Michael Foods may from time to time establish for its
executive officers. The terms of said benefits shall be no
less generous than those offered to other executive officers
of Michael Foods.
<PAGE>
c. Shapiro is entitled to take vacations at reasonable times and
for customary and reasonable lengths of time consistent with
his overall responsibilities as Executive Vice President and
Secretary of Michael Foods.
d. Michael Foods shall reimburse Shapiro for all reasonable
expenses incurred by Shapiro in connection with Michael Foods'
business, including but not limited to, expenses of travel and
entertainment, upon presentation of itemized statements
therefor.
5. EVENTS OF TERMINATION. The employment of Shapiro hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Shapiro;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Shapiro's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Shapiro has (i) committed an illegal or dishonest act that directly
reflects upon his fitness to act as Executive Vice President and Secretary; (ii)
intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Shapiro is unable to perform his job
responsibilities as Executive Vice President and Secretary as a result of
chronic illness, physical, mental or any other disability for a period of six
(6) months or more.
If Shapiro's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Shapiro shall receive as a termination
payment all amounts due under this Agreement as Base Salary, but in any event in
an amount not less than one year's Base Salary, plus Shapiro shall receive fifty
percent (50%) of that Base Salary amount in lieu of any Incentive Compensation
and Options for the remaining term of this Agreement, plus any Incentive
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Such termination payment shall be made in
substantially equal monthly installments beginning on the first day of the month
following termination of employment through the full term of this Agreement or
for twelve (12) months, whichever is later. If Shapiro's employment is
terminated by Shapiro under subsection (b), Shapiro shall receive no termination
payment; however, Shapiro will be entitled to receive any Incentive
<PAGE>
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of termination
shall be due and payable in full within 15 days of the determination by the
Board of Directors of the amount of Incentive Compensation to which Shapiro is
entitled to receive, but in no event shall the date of payment be more than 90
days following termination of employment. If Michael Foods terminates Shapiro
under subsection (c) above, no amount shall be paid beyond the last day of
service by Shapiro and Shapiro shall not be deemed to have earned any Incentive
Compensation or Options for the year of termination. In the case of Incapacity
or death, or termination by Michael Foods without Cause in accordance with
sub-paragraphs a., b. and d. above, all options to purchase common stock
previously granted to Shapiro shall become fully vested and not subject to
Shapiro's forfeiture.
If Shapiro's employment is terminated by Michael Foods under subsection
(d), Shapiro shall receive as a termination payment all amounts due under this
Agreement as Base Salary plus Shapiro shall receive fifty percent (50%) of that
Base Salary amount in lieu of any Incentive Compensation and Options for the
remaining term of this Agreement, but in any event in an amount not less than
two year's Base Salary, plus any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of termination.
Such termination payment shall be made in a lump sum within 15 days following
termination of employment.
Not withstanding the ambiguity of any provisions herein contained, this
employment agreement shall provide for a maximum termination payment of not more
than 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.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
<PAGE>
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Shapiro's express written consent:
(i) the assignment to Shapiro of any duties inconsistent with Shapiro's
positions, duties, responsibilities and status with Michael Foods immediately
prior to a Change in Control, or a change in Shapiro's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Shapiro from, or any failure to re-elect Shapiro
to, any of such positions, except in connection with the termination of
Shapiro's employment for Cause, upon the Incapacity or death of Shapiro, or upon
the voluntary termination by Shapiro;
(ii) a reduction in Shapiro's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
(iii) Michael Foods requiring Shapiro to be based anywhere other than
the geographic location at which Shapiro was based immediately preceding the
Change in Control except for required travel on business to an extent
substantially consistent with the business travel obligations Shapiro
experienced immediately preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Shapiro was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Shapiro's participation in or materially reduce
Shapiro's benefits under any of such plans or deprive Shapiro of any material
fringe benefit enjoyed by Shapiro at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by Michael Foods
prior to the Change in Control; or the failure by Michael Foods to provide
Shapiro with the number of paid vacation days, holidays and personal days to
which Shapiro was then entitled in accordance with Michael Foods' normal leave
policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
<PAGE>
a. To Shapiro by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Jeffrey M. Shapiro
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its Vice President - Finance
/s/ Jeffrey M. Shapiro
JEFFREY M. SHAPIRO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December,
1994, and amended as of the 31st day of December 1995 and amended as of the 31st
day of October 1997 by and between MICHAEL FOODS, INC., a Minnesota corporation
(hereinafter referred to as "Michael Foods") and NORMAN A. RODRIGUEZ
(hereinafter referred to as "Rodriguez").
WHEREAS, Rodriguez has served as President of Crystal Farms
Refrigerated Distribution Company since May 1989; and
WHEREAS, Michael Foods and Rodriguez have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Rodriguez to serve
as President of Crystal Farms Refrigerated Distribution Company and in such
capacity Rodriguez shall perform such duties as the Bylaws provide and as the
CEO of Michael Foods may from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1998, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement of
the parties hereto.
3. BASE SALARY. For all services rendered by Rodriguez, Michael Foods
agrees to pay to Rodriguez an annual Base Salary for each of the calendar years
of this Agreement from January 1, 1998 through December 31, 1998 of at least
$193,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Rodriguez shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Rodriguez with medical
insurance and shall permit Rodriguez to participate in other fringe
benefit plans as Michael Foods may from time to time establish for its
executive officers. The terms of said benefits shall be no less
generous than those offered to other executive officers of Michael
Foods.
c. Rodriguez is entitled to take vacations at reasonable times
and for customary and reasonable lengths of time consistent with his
overall responsibilities as President of Crystal Farms Refrigerated
Distribution Company.
<PAGE>
d. Michael Foods shall reimburse Rodriguez for all reasonable
expenses incurred by Rodriguez in connection with Michael Foods'
business, including but not limited to, expenses of travel and
entertainment, upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Rodriguez hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Rodriguez;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Rodriguez's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Rodriguez has (i) committed an illegal or dishonest act that directly
reflects upon his fitness to act as President of Crystal Farms Refrigerated
Distribution Company; (ii) intentionally breached his fiduciary obligations to
Michael Foods; or (iii) refused or is unable to perform his duties hereunder,
other than as a result of illness or disability, for a period of thirty (30)
days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Rodriguez is unable to perform his job
responsibilities as President of Crystal Farms Refrigerated Distribution Company
as a result of chronic illness, physical, mental or any other disability for a
period of six (6) months or more.
If Rodriguez's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Rodriguez shall receive as a termination
payment an amount equal to one year's Base Salary, plus any Incentive
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Such termination payment shall be made in
substantially equal monthly installments beginning on the first day of the month
following termination of employment for twelve (12) months. If Rodriguez's
employment is terminated by Rodriguez under subsection (b), Rodriguez shall
receive no termination payment; however, Rodriguez will be entitled to receive
any Incentive Compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. Any Incentive Compensation earned
for any year prior to the year of termination which is unpaid at the date of
termination shall be due and payable in full within 15 days of the determination
by the Board of Directors of the amount of Incentive Compensation to which
Rodriguez is entitled to receive, but in no event shall the date of payment be
more than 90 days following termination of employment. If Michael Foods
terminates Rodriguez under subsection (c) above, no amount shall be paid beyond
the last day of service by Rodriguez and Rodriguez shall not be deemed to have
earned
<PAGE>
any Incentive Compensation or Options for the year of termination. In the case
of Incapacity or death, or termination by Michael Foods without Cause in
accordance with sub-paragraphs a., b. and d. above, all options to purchase
common stock previously granted to Rodriguez shall become fully vested and not
subject to Rodriguez's forfeiture.
If Rodriguez's employment is terminated by Michael Foods under
subsection (d), Rodriguez shall receive as a termination payment an amount equal
to two year's Base Salary, plus any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of termination.
Such termination payment shall be made in a lump sum within 15 days following
termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Rodriguez's express written consent:
(i) the assignment to Rodriguez of any duties inconsistent with
Rodriguez's positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Rodriguez's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Rodriguez from, or any failure to re-elect
Rodriguez to, any of such positions, except in connection with the termination
of Rodriguez's employment for Cause, upon the Incapacity or death of Rodriguez,
or upon the voluntary termination by Rodriguez;
(ii) a reduction in Rodriguez's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
<PAGE>
(iii) Michael Foods requiring Rodriguez to be based anywhere other than
the geographic location at which Rodriguez was based immediately preceding the
Change in Control except for required travel on business to an extent
substantially consistent with the business travel obligations Rodriguez
experienced immediately preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Rodriguez was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Rodriguez's participation in or materially reduce
Rodriguez's benefits under any of such plans or deprive Rodriguez of any
material fringe benefit enjoyed by Rodriguez at the time of the Change in
Control, but this provision shall not apply to any stock option plan maintained
by Michael Foods prior to the Change in Control; or the failure by Michael Foods
to provide Rodriguez with the number of paid vacation days, holidays and
personal days to which Rodriguez was then entitled in accordance with Michael
Foods' normal leave policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Rodriguez by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
NORMAN A. RODRIGUEZ
3626 France Avenue So.
St. Louis Park, MN 55416
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
<PAGE>
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its Vice President - Finance
/s/ Norman A. Rodriguez
NORMAN A. RODRIGUEZ
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December,
1994, and amended as of the 31st day of December 1995 and amended as of the 31st
day of October 1997 by and between MICHAEL FOODS, INC., a Minnesota corporation
(hereinafter referred to as "Michael Foods") and JAMES J. KOHLER (hereinafter
referred to as "Kohler").
WHEREAS, Kohler has served as President of Kohler Mix Specialties, Inc.
since May 1987; and
WHEREAS, Michael Foods and Kohler have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Kohler to serve as
President of Kohler Mix Specialties, Inc. and in such capacity Kohler shall
perform such duties as the Bylaws provide and as the CEO of Michael Foods may
from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1998, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement of
the parties hereto.
3. BASE SALARY. For all services rendered by Kohler, Michael Foods
agrees to pay to Kohler an annual Base Salary for each of the calendar years of
this Agreement from January 1, 1998 through December 31, 1998 of at least
$192,400 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Kohler shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Kohler with medical insurance
and shall permit Kohler to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Kohler is entitled to take vacations at reasonable times
and for customary and reasonable lengths of time consistent with his
overall responsibilities as President of Kohler Mix Specialties, Inc.
d. Michael Foods shall reimburse Kohler for all reasonable
expenses incurred by Kohler in connection with Michael Foods' business,
including but not limited to,
<PAGE>
expenses of travel and entertainment, upon presentation of itemized
statements therefor.
5. EVENTS OF TERMINATION. The employment of Kohler hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Kohler;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Kohler's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Kohler has (i) committed an illegal or dishonest act that directly reflects
upon his fitness to act as President of Kohler Mix Specialties, Inc.; (ii)
intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Kohler is unable to perform his job
responsibilities as President of Kohler Mix Specialties, Inc. as a result of
chronic illness, physical, mental or any other disability for a period of six
(6) months or more.
If Kohler's employment is terminated under subsection (a) or by Michael
Foods under subsection (b), Kohler shall receive as a termination payment an
amount equal to one year's Base Salary, plus any Incentive Compensation earned
for any year prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in substantially equal
monthly installments beginning on the first day of the month following
termination of employment for twelve (12) months. If Kohler's employment is
terminated by Kohler under subsection (b), Kohler shall receive no termination
payment; however, Kohler will be entitled to receive any Incentive Compensation
earned for any year prior to the year of termination which is unpaid at the date
of termination. Any Incentive Compensation earned for any year prior to the year
of termination which is unpaid at the date of termination shall be due and
payable in full within 15 days of the determination by the Board of Directors of
the amount of Incentive Compensation to which Kohler is entitled to receive, but
in no event shall the date of payment be more than 90 days following termination
of employment. If Michael Foods terminates Kohler under subsection (c) above, no
amount shall be paid beyond the last day of service by Kohler and Kohler shall
not be deemed to have earned any Incentive Compensation or Options for the year
of termination. In the case of Incapacity or death, or termination by Michael
Foods without Cause in accordance with sub-paragraphs a., b. and d. above, all
options to
<PAGE>
purchase common stock previously granted to Kohler shall become fully vested and
not subject to Kohler's forfeiture.
If Kohler's employment is terminated by Michael Foods under subsection
(d), Kohler shall receive as a termination payment an amount equal to two year's
Base Salary, plus any Incentive Compensation earned for any year prior to the
year of termination which is unpaid at the date of termination. Such termination
payment shall be made in a lump sum within 15 days following termination of
employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Kohler's express written consent:
(i) the assignment to Kohler of any duties inconsistent with Kohler's
positions, duties, responsibilities and status with Michael Foods immediately
prior to a Change in Control, or a change in Kohler's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Kohler from, or any failure to re-elect Kohler to,
any of such positions, except in connection with the termination of Kohler's
employment for Cause, upon the Incapacity or death of Kohler, or upon the
voluntary termination by Kohler;
(ii) a reduction in Kohler's base salary in effect immediately prior to
any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
(iii) Michael Foods requiring Kohler to be based anywhere other than
the geographic location at which Kohler was based immediately preceding the
Change in Control except for required travel on business to an extent
substantially consistent with the
<PAGE>
business travel obligations Kohler experienced immediately preceding a Change in
Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Kohler was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Kohler's participation in or materially reduce
Kohler's benefits under any of such plans or deprive Kohler of any material
fringe benefit enjoyed by Kohler at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by Michael Foods
prior to the Change in Control; or the failure by Michael Foods to provide
Kohler with the number of paid vacation days, holidays and personal days to
which Kohler was then entitled in accordance with Michael Foods' normal leave
policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Kohler by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
JAMES J. KOHLER
3673 Big Fox Road
Gem Lake, MN 55110
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
<PAGE>
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its Vice President - Finance
/s/ James J. Kohler
JAMES J. KOHLER
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December,
1994, and amended as of the 31st day of December 1995 and amended as of the 31st
day of October 1997 by and between MICHAEL FOODS, INC., a Minnesota corporation
(hereinafter referred to as "Michael Foods") and KEVIN O. KELLY (hereinafter
referred to as "Kelly").
WHEREAS, Kelly has served as President Michael Foods Sales since June
1992; and
WHEREAS, Kelly has previously served as an Officer of Crystal Farms
Refrigerated Distribution Company and Kohler Mix Specialties, Inc., each of
which is a wholly-owned subsidiary of Michael Foods, since June 1987; and
WHEREAS, Michael Foods and Kelly have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Kelly to serve as
President Michael Foods Sales and in such capacity Kelly shall perform such
duties as the Bylaws provide and as the CEO of Michael Foods may from time to
time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1998, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement of
the parties hereto.
3. BASE SALARY. For all services rendered by Kelly, Michael Foods
agrees to pay to Kelly an annual Base Salary for each of the calendar years of
this Agreement from January 1, 1998 through December 31, 1998 of at least
$174,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Kelly shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Kelly with medical insurance
and shall permit Kelly to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Kelly is entitled to take vacations at reasonable times and
for customary and reasonable lengths of time consistent with his
overall responsibilities as President Michael Foods Sales.
<PAGE>
d. Michael Foods shall reimburse Kelly for all reasonable
expenses incurred by Kelly in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Kelly hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Kelly;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Kelly's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Kelly has (i) committed an illegal or dishonest act that directly reflects
upon his fitness to act as President Michael Foods Sales; (ii) intentionally
breached his fiduciary obligations to Michael Foods; or (iii) refused or is
unable to perform his duties hereunder, other than as a result of illness or
disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Kelly is unable to perform his job
responsibilities as President Michael Foods Sales as a result of chronic
illness, physical, mental or any other disability for a period of six (6) months
or more.
If Kelly's employment is terminated under subsection (a) or by Michael
Foods under subsection (b), Kelly shall receive as a termination payment an
amount equal to one year's Base Salary, plus any Incentive Compensation earned
for any year prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in substantially equal
monthly installments beginning on the first day of the month following
termination of employment for twelve (12) months. If Kelly's employment is
terminated by Kelly under subsection (b), Kelly shall receive no termination
payment; however, Kelly will be entitled to receive any Incentive Compensation
earned for any year prior to the year of termination which is unpaid at the date
of termination. Any Incentive Compensation earned for any year prior to the year
of termination which is unpaid at the date of termination shall be due and
payable in full within 15 days of the determination by the Board of Directors of
the amount of Incentive Compensation to which Kelly is entitled to receive, but
in no event shall the date of payment be more than 90 days following termination
of employment. If Michael Foods terminates Kelly under subsection (c) above, no
amount shall be paid beyond the last day of service by Kelly and Kelly shall not
be
<PAGE>
deemed to have earned any Incentive Compensation or Options for the year of
termination. In the case of Incapacity or death, or termination by Michael Foods
without Cause in accordance with sub-paragraphs a., b. and d. above, all options
to purchase common stock previously granted to Kelly shall become fully vested
and not subject to Kelly's forfeiture.
If Kelly's employment is terminated by Michael Foods under subsection
(d), Kelly shall receive as a termination payment an amount equal to two year's
Base Salary, plus any Incentive Compensation earned for any year prior to the
year of termination which is unpaid at the date of termination. Such termination
payment shall be made in a lump sum within 15 days following termination of
employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Kelly's express written consent:
(i) the assignment to Kelly of any duties inconsistent with Kelly's
positions, duties, responsibilities and status with Michael Foods immediately
prior to a Change in Control, or a change in Kelly's reporting responsibilities,
titles or offices as in effect immediately prior to a Change in Control, or any
removal of Kelly from, or any failure to re-elect Kelly to, any of such
positions, except in connection with the termination of Kelly's employment for
Cause, upon the Incapacity or death of Kelly, or upon the voluntary termination
by Kelly;
(ii) a reduction in Kelly's base salary in effect immediately prior to
any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
<PAGE>
(iii) Michael Foods requiring Kelly to be based anywhere other than the
geographic location at which Kelly was based immediately preceding the Change in
Control except for required travel on business to an extent substantially
consistent with the business travel obligations Kelly experienced immediately
preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Kelly was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Kelly's participation in or materially reduce
Kelly's benefits under any of such plans or deprive Kelly of any material fringe
benefit enjoyed by Kelly at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by Michael Foods
prior to the Change in Control; or the failure by Michael Foods to provide Kelly
with the number of paid vacation days, holidays and personal days to which Kelly
was then entitled in accordance with Michael Foods' normal leave policy in
effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Kelly by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Kevin O. Kelly
16100 48th Ave. N.
Plymouth, MN 55446
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
<PAGE>
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its Vice President - Finance
/s/ Kevin O. Kelly
KEVIN O. KELLY
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December,
1994, and amended as of the 31st day of December 1995 and amended as of the 31st
day of October 1997 by and between MICHAEL FOODS, INC., a Minnesota corporation
(hereinafter referred to as "Michael Foods") and JOHN D. REEDY (hereinafter
referred to as "Reedy").
WHEREAS, Reedy has served as Vice President - Finance and Chief
Financial Officer of Michael Foods since May 1988; and
WHEREAS, Michael Foods and Reedy have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Reedy to serve as
Vice President - Finance and Chief Financial Officer of Michael Foods and in
such capacity Reedy shall perform such duties as the Bylaws provide and as the
CEO of Michael Foods may from time to time determine. Reedy shall also serve, at
the request of Michael Foods, as a Director of any of Michael Foods'
subsidiaries.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1999 and shall automatically renew and
extend for additional two year terms unless otherwise terminated in accordance
with the provisions of this agreement.
3. BASE SALARY. For all services rendered by Reedy, Michael Foods
agrees to pay to Reedy an annual Base Salary for each of the calendar years of
this Agreement effective from January 1, 1998 through December 31, 1999 of at
least $205,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Reedy shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Reedy with medical insurance
and shall permit Reedy to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Reedy is entitled to take vacations at reasonable times and
for customary and reasonable lengths of time consistent with his
overall responsibilities as Vice President - Finance and Chief
Financial Officer of Michael Foods.
<PAGE>
d. Michael Foods shall reimburse Reedy for all reasonable
expenses incurred by Reedy in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Reedy hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Reedy;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Reedy's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Reedy has (i) committed an illegal or dishonest act that directly reflects
upon his fitness to act as Vice President - Finance and Chief Financial Officer;
(ii) intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Reedy is unable to perform his job
responsibilities as Vice President - Finance and Chief Financial Officer as a
result of chronic illness, physical, mental or any other disability for a period
of six (6) months or more.
If Reedy's employment is terminated under subsection (a) or by Michael
Foods under subsection (b), Reedy shall receive as a termination payment all
amounts due under this Agreement as Base Salary, but in any event in an amount
not less than one year's Base Salary, plus Reedy shall receive fifty percent
(50%) of that Base Salary amount in lieu of any Incentive Compensation and
Options for the remaining term of this Agreement, plus any Incentive
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Such termination payment shall be made in
substantially equal monthly installments beginning on the first day of the month
following termination of employment through the full term of this Agreement or
for twelve (12) months, whichever is later. If Reedy's employment is terminated
by Reedy under subsection (b), Reedy shall receive no termination payment;
however, 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. Any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination shall be due and payable
in full within 15 days of the determination by the Board of Directors of the
amount of
<PAGE>
Incentive Compensation to which Reedy is entitled to receive, but in no event
shall the date of payment be more than 90 days following termination of
employment. If Michael Foods terminates Reedy under subsection (c) above, no
amount shall be paid beyond the last day of service by Reedy and Reedy shall not
be deemed to have earned any Incentive Compensation or Options for the year of
termination. In the case of Incapacity or death, or termination by Michael Foods
without Cause in accordance with sub-paragraphs a., b. and d. above, all options
to purchase common stock previously granted to Reedy shall become fully vested
and not subject to Reedy's forfeiture.
If Reedy's employment is terminated by Michael Foods under subsection
(d), Reedy shall receive as a termination payment all amounts due under this
Agreement as Base Salary plus Reedy shall receive fifty percent (50%) of that
Base Salary amount in lieu of any Incentive Compensation and Options for the
remaining term of this Agreement, but in any event in an amount not less than
two year's Base Salary, plus any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of termination.
Such termination payment shall be made in a lump sum within 15 days following
termination of employment.
Not withstanding the ambiguity of any provisions herein contained, this
employment agreement shall provide for a maximum termination payment of not more
than 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.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Reedy's express written consent:
(i) the assignment to Reedy of any duties inconsistent with Reedy's
positions, duties, responsibilities and status with Michael Foods immediately
prior to a Change in
<PAGE>
Control, or a change in Reedy's reporting responsibilities, titles or offices as
in effect immediately prior to a Change in Control, or any removal of Reedy
from, or any failure to re-elect Reedy to, any of such positions, except in
connection with the termination of Reedy's employment for Cause, upon the
Incapacity or death of Reedy, or upon the voluntary termination by Reedy;
(ii) a reduction in Reedy's base salary in effect immediately prior to
any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
(iii) Michael Foods requiring Reedy to be based anywhere other than the
geographic location at which Reedy was based immediately preceding the Change in
Control except for required travel on business to an extent substantially
consistent with the business travel obligations Reedy experienced immediately
preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Reedy was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Reedy's participation in or materially reduce
Reedy's benefits under any of such plans or deprive Reedy of any material fringe
benefit enjoyed by Reedy at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by Michael Foods
prior to the Change in Control; or the failure by Michael Foods to provide Reedy
with the number of paid vacation days, holidays and personal days to which Reedy
was then entitled in accordance with Michael Foods' normal leave policy in
effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Reedy by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
John D. Reedy
7262 Gordon Drive
<PAGE>
Eden Prairie, MN 55346
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
Its President
/s/ John D. Reedy
JOHN D. REEDY
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December
1995, and amended as of the 31st day of October 1997, by and between MICHAEL
FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael
Foods") and BILL L. GOUCHER (hereinafter referred to as "Goucher").
WHEREAS, Goucher has served as President of M. G. Waldbaum Company
since March 1993; and
WHEREAS, Michael Foods and Goucher have agreed to enter into this
Agreement effective as of January 1, 1996.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1996 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Goucher to serve
as President of M. G. Waldbaum Company and in such capacity Goucher shall
perform such duties as the Bylaws provide and as the CEO of Michael Foods may
from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1996 and
shall continue through December 31, 1998, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement of
the parties hereto.
3. BASE SALARY. For all services rendered by Goucher, Michael Foods
agrees to pay to Goucher an annual Base Salary for each of the calendar years of
this Agreement from January 1, 1996 through December 31, 1998 of at least
$200,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Goucher shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Goucher with medical insurance
and shall permit Goucher to participate in other fringe benefit plans
as Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Goucher is entitled to take vacations at reasonable times
and for customary and reasonable lengths of time consistent with his
overall responsibilities as President of M. G. Waldbaum Company.
<PAGE>
d. Michael Foods shall reimburse Goucher for all reasonable
expenses incurred by Goucher in connection with Michael Foods'
business, including but not limited to, expenses of travel and
entertainment, upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Goucher hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Goucher;
b. Upon thirty (30) days' written notice by either party,
other than as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in
Control of Michael Foods and thereafter Goucher's Duties are
Substantially Reduced or Negatively Altered without his prior written
consent.
"CAUSE" for purposes hereof shall mean a determination by Michael Foods
that Goucher has (i) committed an illegal or dishonest act that directly
reflects upon his fitness to act as President of M. G. Waldbaum Company; (ii)
intentionally breached his fiduciary obligations to Michael Foods; or (iii)
refused or is unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Goucher is unable to perform his job
responsibilities as President of M. G. Waldbaum Company as a result of chronic
illness, physical, mental or any other disability for a period of six (6) months
or more.
If Goucher's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Goucher shall receive as a termination
payment an amount equal to one year's Base Salary, plus any Incentive
Compensation earned for any year prior to the year of termination which is
unpaid at the date of termination. Such termination payment shall be made in
substantially equal monthly installments beginning on the first day of the month
following termination of employment for twelve (12) months. If Goucher's
employment is terminated by Goucher under subsection (b), Goucher shall receive
no termination payment; however, Goucher will be entitled to receive any
Incentive Compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. Any Incentive Compensation earned
for any year prior to the year of termination which is unpaid at the date of
termination shall be due and payable in full within 15 days of the determination
by the Board of Directors of the amount of Incentive Compensation to which
Goucher is entitled to receive, but in no event shall the date of payment be
more than 90 days following termination of employment. If Michael Foods
terminates Goucher under subsection (c) above, no amount shall be paid beyond
the last day of service by Goucher and Goucher shall not be deemed to have
earned any
<PAGE>
Incentive Compensation or Options for the year of termination. In the case of
Incapacity or death, or termination by Michael Foods without Cause in accordance
with sub-paragraphs a., b. and d. above, all options to purchase common stock
previously granted to Goucher shall become fully vested and not subject to
Goucher's forfeiture.
If Goucher's employment is terminated by Michael Foods under subsection
(d), Goucher shall receive as a termination payment an amount equal to two
year's Base Salary, plus any Incentive Compensation earned for any year prior to
the year of termination which is unpaid at the date of termination. Such
termination payment shall be made in a lump sum within 15 days following
termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a) of Michael
Food's Current Report on Form 8-K, as in effect on the effective date of this
agreement, pursuant to Section 13 of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a Change in Control
shall be deemed to have occurred at such time as any "person" within the meaning
of Section 14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods or a
subsidiary of Michael Foods, acquires (1) the power to elect, appoint or cause
the election or appointment of at least a majority of the members of the Board
of Directors of Michael Foods through the acquisition of beneficial ownership of
capital stock of Michael Foods or otherwise, or (2) all, or substantially all,
of the properties and assets of Michael Foods; provided, however, that a Change
in Control shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation, or sale
of properties and assets and (y) by reason of such transaction no person, or
related persons constituting a "group" for purposes of Section 13(d) of the
Exchange Act shall acquire the power to elect, appoint or cause the election or
appointment of a majority of the members of the Board of Directors of such
successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Goucher's express written consent:
(i) the assignment to Goucher of any duties inconsistent with Goucher's
positions, duties, responsibilities and status with Michael Foods immediately
prior to a Change in Control, or a change in Goucher's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
in Control, or any removal of Goucher from, or any failure to re-elect Goucher
to, any of such positions, except in connection with the termination of
Goucher's employment for Cause, upon the Incapacity or death of Goucher, or upon
the voluntary termination by Goucher;
(ii) a reduction in Goucher's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase such base
salary each year after a Change in Control by an amount which at least equals,
on a percentage basis, the mean average percentage increase in base salary for
all employees similarly situated during the two (2) full calendar years
immediately preceding a Change in Control;
<PAGE>
(iii) Michael Foods requiring Goucher to be based anywhere other than
the geographic location at which Goucher was based immediately preceding the
Change in Control except for required travel on business to an extent
substantially consistent with the business travel obligations Goucher
experienced immediately preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or compensation plans
or arrangements in which Goucher was participating immediately preceding any
Change in Control; the taking of any action by Michael Foods not required by law
which would adversely affect Goucher's participation in or materially reduce
Goucher's benefits under any of such plans or deprive Goucher of any material
fringe benefit enjoyed by Goucher at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by Michael Foods
prior to the Change in Control; or the failure by Michael Foods to provide
Goucher with the number of paid vacation days, holidays and personal days to
which Goucher was then entitled in accordance with Michael Foods' normal leave
policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Goucher by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
BILL L. GOUCHER
3060 Quinwood Ln.
Plymouth, MN 55441
b. To Michael Foods by first class, certified mail, postage
prepaid, return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
<PAGE>
or mailed to such other addresses as the parties hereto may designate
by notice given in like manner. Notice shall be effective three (3)
days after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party shall
be liable or bound to another in any manner by any warranties, representations
or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument in
writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective legal
representatives, successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed
under the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date
and year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
Its Vice President - Finance
/s/ Bill L. Goucher
BILL L. GOUCHER
SUBLICENSE AGREEMENT
THIS SUBLICENSE AGREEMENT made as of December 31, 1993, by and between R
& P Liquid Egg Technology Limited Partnership, a New Jersey limited partnership,
(the "Licensor"), 1 Papetti Plaza, Elizabeth, New Jersey 07296, and Papetti's
Hygrade Egg Products, Inc., a New Jersey corporation, (the "Licensee"), having a
place of business at 1 Papetti Plaza, Elizabeth, New Jersey 07296.
RECITALS:
WHEREAS, Raztek Corporation ("Raztek"), having a place of business at
562 Weddell Drive, Suite 1, Sunnyvale, California 94089, is the owner of U.S.
Patent No. 4,739,140 and of a disclosure document filed with the United States
Patent and Trademark Office on July 3, 1989, entitled "Coagulation of Egg Whites
and Yolk by Electro-heating," and has developed and owns various other technical
information relating to the processing and/or treatment of eggs, the processing
and/or treatment of foodstuffs generally, and/or the processing and/or treatment
and/or development of non-food related products and processes;
WHEREAS, Raztek has granted the Licensor (i) the exclusive U.S. license
to make, have made, use, sell and/or sublicense technology applying Raztek's
patent and know-how for liquid egg products and (ii) the nonexclusive right
outside of the U. S. to make, have made, use, sell and/or sublicense Raztek's
liquid egg technology; and
WHEREAS, the Licensee and its affiliates desire to license the
exclusive U.S. right possessed by the Licensor to make, use and sell Raztek's
liquid egg technology;
NOW THEREFORE, in consideration of the mutual promises set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
<PAGE>
Article I - Definitions
Section 1.1. The term "Affiliates of Licensee" includes any subsidiary
company in which the Licensee owns a controlling interest, provided that such
subsidiary company agrees in writing to be bound by the terms of this Sublicense
Agreement. The term "Affiliates of Licensee" also includes any corporation,
partnership, joint venture, or limited liability company in which one or more of
the owners of the Licensee singly or collectively own a controlling interest,
provided that any such entity agrees in writing to be bound by the terms of this
Sublicense Agreement. "Controlling interest" for purposes of this Section 1.1
means at least fifty percent (50%) ownership, or, if the entity is a
corporation, such ownership as is sufficient to elect and/or appoint officers
and members of the board of directors.
Section 1.2. The term "Gross Income" means the gross income of the
Licensee and the Affiliates of the Licensee less any credit actually given and
less any charges for delivery.
Section 1.3. The term "Licensee" means Papetti's Hygrade Egg Products,
Inc., and any of its divisions.
Section 1.4. The term "New Technology" shall have the same definition as
set forth in Section 3.15 of the Partnership Agreement.
Section 1.5. The term "Partnership Agreement" means the Agreement of
Limited Partnership organizing the Licensor and dated as of the date of this
Sublicense Agreement, pursuant to which the Licensor has acquired the exclusive
U.S. and a nonexclusive worldwide license to make, use, sell, and sublicense the
Raztek Liquid Egg Technology and the New Technology.
Section 1.6. The term "Raztek Liquid Egg Technology" shall have the same
definition as set forth in Section 3.19 of the Partnership Agreement.
Article II - Grant of License
Section 2.1. The Licensor hereby grants to the Licensee and to the
Affiliates of the Licensee the exclusive license in the United States and the
nonexclusive license outside of the United States to make, have made, use,
and/or sell Raztek Liquid Egg Technology and New Technology.
<PAGE>
Notwithstanding the grant of the exclusive U.S. license to the Licensee, the
Licensor and the Licensee agree that the Licensor shall continue to possess the
right to sublicense the right to make, have made, use, and/or sell Raztek Liquid
Egg Technology and New Technology within the United States for so long as the
Licensee's interest as a limited partner in the Licensor has not been assigned
to a person who is admitted as a substituted limited partner in the Licensor in
place of the Licensee.
Section 2.2. The grant of the license in Section 2.1 shall be effective
as to the Licensee as of the date of this Agreement and shall be effective as to
any Affiliates of the Licensee as of the date each such Affiliate consents in
writing to be bound by the terms of this Sublicense Agreement.
Section 2.3. The Licensee and the Affiliates of the Licensee shall have
the option to discontinue the exclusive license in the United States granted in
Section 2.1 and convert it into a nonexclusive license in the United States.
This option must be exercised in writing signed by the Licensee and Affiliates
of the Licensee and delivered to the place of business of the Licensor, with a
copy delivered by telefax and by first class mail to Raztek, at least twelve
(12) months prior to the date that discontinuation of the exclusive license is
to become effective.
Article III - Royalties
Section 3.1. During any period that the Licensee and the Affiliates of
the Licensee retain exclusive license rights in the United States, the Licensee
shall pay the Licensor for the rights granted to said Licensee and Affiliates
with respect to both the Raztek Liquid Egg Technology and the New Technology
__*__ the Affiliates of the Licensee shall pay the Licensor for the rights
granted to said Licensee and Affiliates with respect to both the Raztek Liquid
Egg Technology and the New Technology an amount equal to __*__ processed with
the use of the Raztek Liquid Egg Technology. Royalties shall be paid on a
monthly basis at, generally, a minimum rate of __*__ to reflect the minimum
royalty of __*__ by the Licensee over a 12 month period. Any royalty payment
based on __*__ shall be paid within thirty (30) days of the end of
__*__ Confidentiality requested for this portion.
<PAGE>
the month in which such gross income was earned under the accrual method of
accounting. Notwithstanding the requirement that minimum royalties generally be
paid at the rate of __*__, the Licensor and Licensee agree that all minimum
royalties for a 12 month period shall be completely creditable against royalties
paid by the Licensee for such 12 month period based on __*__, but only for such
12 month period.
Section 3.2. During any period that the Licensee and the Affiliates of
the Licensee have discontinued, in accordance with Section 2.2 above, exclusive
license rights in the United states, the Licensee shall pay the Licensor for the
rights granted to said Licensee and Affiliates with respect to both the Raztek
Liquid Egg Technology and the New Technology __*__ with the use of the Raztek
Liquid Egg Technology or (b) __*__ the Affiliates of the Licensee shall pay the
Licensor for the rights granted to said Licensee and Affiliates with respect to
both the Raztek Liquid Egg Technology and the New Technology an amount equal to
__*__ with the use of the Raztek Liquid Egg Technology. Royalties shall be paid
on a monthly basis at, generally, __*__. Any royalty payment based on __*__
shall be paid within thirty (30) days of the end of the month in which such
gross income was earned under the accrual method of accounting. Notwithstanding
the requirement that minimum royalties generally be paid at the __*__ the
Licensor and Licensee agree that all minimum royalties for a 12 month period
shall be completely creditable against royalties paid by the Licensee for such
12 month period based __*__, but only for such 12 month period.
Section 3.3. The Licensee and the Affiliates of the Licensee shall pay
the Licensor __*__. Any royalty payment based __*__ shall be paid within thirty
(30) days of the end of the month in which such gross income was earned under
the accrual method of accounting. The Licensor and Licensee agree that minimum
royalties for a 12 month period payable pursuant to Section 3.1 or Section 3.2,
as the case may be, shall also be completely creditable against royalties paid
by the Licensee for such 12 month period based __*__, but only for such 12 month
period and only to the extent that
__*__ Confidentiality requested for this portion.
<PAGE>
such minimum royalties have not been credited against gross income royalties
under Section 3.1 or Section 3.2 or as the case may be.
Section 3.4. The Licensor may, from time to time, within __*__ in which
a royalty payment under this Article III was due, audit the records of relevant
transactions for such month(s), at the Licensor's expense. If, upon performing
such audit, it is determined that the Licensee and the Affiliates of the
Licensee have underpaid the Licensor by __*__ due the Licensor in the period
being audited, the Licensee will bear all reasonable expenses and costs of such
audit in addition to the obligation to make full payment. In all other cases,
the Licensor will bear the cost of such audit; provided, however, that in all
cases in which an audit identifies any underpayment by the Licensee and/or
Affiliates of the Licensee to the Licensor, the Licensor shall be promptly paid
the full amount of any such underpayment, together with interest on all overdue
amounts __*__.
Article IV - Termination
Section 4.1. The Licensor has the right to terminate this Sublicense
Agreement if the Licensee and the Affiliates of the Licensee fail to make the
royalty payments required by Article III. However, prior to termination, the
Licensor will provide the Licensee with a written notice, with a copy delivered
by telefax and first class mail to Raztek, which will state, with particularity,
the grounds for termination. Thereafter, the Licensee and the Affiliates of the
Licensee shall have a period of thirty (30) days from the date of receipt of the
written notice in which to cure any deficiencies or make any necessary payments.
If the Licensee and the Affiliates of the Licensee take such action within such
thirty-day period, the Sublicense Agreement will continue in force.
Section 4.2. The Licensee has the right to terminate this Sublicense
Agreement by written notice for any reason or no reason. The written notice
terminating this Sublicense Agreement must be signed by the Licensee and
Affiliates of the Licensee and delivered to the place of business of the
Licensor, with a copy delivered by telefax and by first class mail to Raztek, at
least twelve (12)
__*__ Confidentiality requested for this portion.
<PAGE>
months prior to the date that termination is to become effective (which "date of
termination" must be specified in the written notice).
Section 4.3. This Sublicense Agreement shall also automatically
terminate in the event that the Licensor dissolves as a result of an event of
dissolution specified in Section 19.2(c) or (d) of the Partnership Agreement.
The "date of termination" under this Section 4.3 shall be effective as of the
date of dissolution of the Licensor pursuant to Section 19.2(c) or (d) of the
Partnership Agreement.
Section 4.4. In the event of termination, all of the rights of the
Licensee and Affiliates of the Licensee to the Raztek Liquid Egg Technology and
the New Technology will terminate as of the date of termination. However, the
Licensee and Affiliates of the Licensee shall remain liable for payment of
royalties accrued to the date of dissolution.
ARTICLE V
CONFIDENTIALITY
Section 5.1. Except as provided in Section 5.3, the Licensor,
Licensee, and Affiliates of Licensee mutually agree to maintain in confidence
and not to use any Confidential Information of any other party which is received
during the course of this Agreement. The Licensor's Confidential Information is
the Raztek Liquid Egg Technology, the New Technology, and any other information
marked as confidential. The Confidential Information of the Licensee and
Affiliates of the Licensee is any information marked confidential.
Section 5.2. All parties agree not to use any of the other
parties Confidential Information except in furtherance of this Sublicense
Agreement. Furtherance of this Sublicense Agreement includes the validation of
products and/or procedures to any appropriate agency of the United States
Federal Government, or any state or foreign government, and contracting with
vendors or consultants on various matters in connection with any of the
transactions contemplated by this Agreement.
Section 5.3. Confidential Information will not include information
which:
<PAGE>
(a) is now, or hereafter becomes, through no act or failure
to act on the part of the receiving party, generally known or available to the
public;
(b) can be shown by written records to have been acquired by
the receiving party before receiving such information from the disclosing party
and without restriction as to use or disclosure;
(c) is hereafter rightfully furnished to the receiving party
by a third party, without restriction as to use or disclosure;
(d) is information which the receiving party can document was
independently developed by the receiving party;
(e) is required to be disclosed pursuant to law, provided the
receiving party uses reasonable efforts to avoid disclosure; or
(f) is disclosed with the prior written consent of the
disclosing party.
Section 5.4. The obligations of confidentiality in this Article V
shall survive the termination of this Sublicense Agreement.
ARTICLE VI
MISCELLANEOUS
Section 6.1. This Agreement (together with those provisions of the
Partnership Agreement incorporated herein by reference) constitutes the entire
agreement among the parties. It supersedes any prior agreement or understandings
among them, and it may not be modified or amended in any manner other than in
writing signed by the Licensor and the Licensee.
Section 6.2. This Agreement and the rights of the parties hereunder
shall be governed by and interpreted in accordance with the laws of the State of
New Jersey.
Section 6.3. Except as herein otherwise specifically provided, this
Sublicense Agreement shall be binding upon and inure to the benefit of the
parties and their legal representatives, heirs, administrators, executors,
successors and assigns.
<PAGE>
Section 6.4. Wherever from the context it appears appropriate, each
term stated in either the singular or the plural shall include the singular and
the plural and pronouns stated in either the masculine, the feminine or the
neuter gender shall include the masculine, feminine and neuter.
Section 6.5. Captions contained in this Sublicense Agreement are
inserted only as a matter of convenience and in no way define, limit, or extend
the scope or intent of this Agreement or any provision hereof.
Section 6.6. If any provision of this Agreement or the application
of such provision to any person or circumstance, shall be held invalid, the
remainder of this Agreement or the application of such provision to persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
Section 6.7. This Sublicense Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument. In addition, this Agreement may contain
more than one counterpart of the signature page, and this Agreement may be
executed by the affixing of the signatures of each of the Partners to one of
such counterpart signature pages; all of such counterpart signature pages shall
be read as though one, and they shall have the same force and effect as though
all of the signers had signed a single signature page.
IN WITNESS WHEREOF, the undersigned have executed this Sublicense
Agreement on the 31 day of December, 1993, intending it to be effective as of
such date.
LICENSOR:
R & P Liquid Egg Technology
Limited Partnership
By: Papetti Electroheating
Corporation,
Its General Partner
By: /s/ Stephen Papetti
Stephen Papetti, President
<PAGE>
LICENSEE:
Papetti Hygrade Egg
Products, Inc.
By: /s/ Arthur Papetti
Arthur Papetti, President
ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and
Acceptance") dated as of NOVEMBER 20, 1997 is made between BANK OF AMERICA
NATIONAL TRUST & SAVINGS ASSOCIATION (the "Assignor") and SUMMIT BANK (the
"Assignee").
RECITALS
WHEREAS, the Assignor is party to that certain Revolving Loan Agreement
dated as of February 28, 1997 (as amended, amended and restated, modified,
supplemented or renewed, the "Credit Agreement") among Michael Foods, Inc., a
Minnesota corporation (the "Company"), the several financial institutions from
time to time party thereto (including the Assignor, the "Banks"), and Bank of
America National Trust and Savings Association, as agent for the Banks (the
"Agent"). Any terms defined in the Credit Agreement and not defined in this
Assignment and Acceptance are used herein as defined in the Credit Agreement;
WHEREAS, as provided under the Credit Agreement, the Assignor has
committed to making Loans (the "Committed Loans") to the Company in an aggregate
amount not to exceed $25,000,000.00 (the "Commitment");
WHEREAS, the Assignor has made Committed Loans in the aggregate
principal amount of $0.00 to the Company; and
WHEREAS, the Assignor wishes to assign to the Assignee part of the
rights and obligations of the Assignor under the Credit Agreement in respect of
its Commitment, in an amount equal to $5,000,000.00 (the "Assigned Amount") on
the terms and subject to the conditions set forth herein and the Assignee wishes
to accept assignment of such rights and to assume such obligations from the
Assignor on such terms and subject to such conditions;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
1. Assignment and Acceptance.
(a) Subject to the terms and conditions of this Assignment and
Acceptance, (i) the Assignor hereby sells, transfers and assigns to the
Assignee, and (ii) the Assignee hereby purchases, assumes and undertakes from
the Assignor, without recourse and without representation or warranty (except as
provided in this Assignment and Acceptance) 20.00% (the "Assignee's Percentage
Share") of (A) the Commitment and the Committed Loans of the Assignor and (B)
all related rights, benefits, obligations, liabilities and indemnities of the
Assignor under and in connection with the Credit Agreement and the Loan
Documents.
(b) With effect on and after the Effective Date (as defined in Section
5 hereof), the Assignee shall be a party to the Credit Agreement and succeed to
all of the rights and be obligated to perform all of the obligations of a Bank
under the Credit Agreement, including the payment of indemnification, with a
commitment in an amount equal to the Assigned Amount. The Assignee agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of the Credit Agreement are required to be performed by it as a Bank.
It is the intent of the parties hereto that the Commitment of the Assignor
shall, as of the Effective Date, be reduced by an amount equal to the Assigned
Amount and the Assignor shall relinquish its rights and be released from its
obligations under the Credit Agreement to the extent such obligations have been
assumed by the Assignee; provided, however, the Assignor shall not relinquish
its
<PAGE>
rights under SECTION 14. 3 of the Credit Agreement to the extent such rights
related to the time prior to the Effective Date.
(c) After giving effect to the assignment and assumption set forth
herein, on the Effective Date the Assignee's commitment will be $5,000,000.00.
(d) After giving effect to the assignment and assumption set forth
herein, on the Effective Date the Assignor's commitment will be $20,000,000.00.
2. Payments.
(a) As consideration for the sale, assignment and transfer contemplated
in Section 1 hereof, the Assignee shall pay to the Assignor on the Effective
Date in immediately available funds and amount equal to $0.00, representing the
Assignee's pro rata share of the principal amount of all Committed Loans.
(b) The Assignor further agrees to pay to the Agent a processing fee in
the amount specified in Section 14.11 (a) of the Credit Agreement.
3. Reallocation of Payment.
Any interest, fees and other payments accrued to the Effective Date
with respect to the Commitment and Committed Loans shall be for the account of
the Assignor. Any interest, fees and other payments accrued on and after the
Effective Date with respect to the Assigned Amount shall be for the account of
the Assignee. Each of the Assignor and the Assignee agrees that it will hold in
trust for the other party any interest, fees and other amounts which it may
receive to which the other party is entitled pursuant to the preceding sentence
and pay to the other party any such amounts which it may receive promptly upon
receipt.
4. Independent Credit Decision.
The Assignee (a) acknowledges that it has received a copy of the Credit
Agreement and the Schedules and Exhibits thereto, together with copies of the
most recent financial statements referred to in Section 8.1 of the Credit
Agreement, and such other documents and information as it has deemed appropriate
to make its own credit and legal analysis and decision to enter into this
Assignment and Acceptance; and (b) agrees that it will, independently and
without reliance upon the Assignor, the Agent or any other Bank and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit and legal decisions in taking or not taking
action under the Credit Agreement.
5. Effective Date; Notices.
(a) As between the Assignor and the Assignee, the effective date for
this Assignment and Acceptance shall be NOVEMBER 20, 1997 (the"Effective Date");
provided that the following conditions precedent have been satisfied on or
before the Effective Date:
(i) this Assignment and Acceptance shall be executed and
delivered by the Assignor and the Assignee;
(ii) the consent of the Company and the Agent required for an
effective assignment of the Assigned Amount by the Assignor to the
Assignee under Section 14.11(a) of the Credit Agreement shall have been
duly obtained and shall be in full force and effect as of the Effective
Date;
(iii) the Assignee shall pay to the Assignor all amounts due
to the Assignor under this Assignment and Acceptance; and
<PAGE>
(iv) the processing fee referred to in Section 2 (b) hereof
and in Section 14.11 (a) of the Credit Agreement shall have been paid
to the Agent.
(b) Promptly, following the execution of this Assignment and
Acceptance, the Assignor shall deliver to the Company and the Agent for
acknowledgment by the Agent, a Notice of Assignment substantially in the form
attached hereto as Schedule 1.
6. Agent.
(a) The Assignee hereby appoints and authorizes the Assignor to take
such action as agent on its behalf and to exercise such powers under the Credit
Agreement as are delegated to the Agent by the Banks pursuant to the terms of
the Credit Agreement.
(b) The Assignee shall assume no duties or obligations held by the
Assignor in its capacity as Agent under the Credit Agreement.
7. Withholding Tax.
The Assignee (a) represents and warrants to the Bank, the Agent and the
Company that under applicable law and treaties no tax will be required to be
withheld by the Bank with respect to any payments to be made to the Assignee
hereunder, (b) agrees to furnish (if it is organized under the laws of any
jurisdiction other than the United States or any State thereof) to the Agent and
the Company prior to the time that the Agent or Company is required to make any
payment of principal, interest or fees hereunder, duplicate executed originals
of either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue
Service Form 1001 (wherein the Assignee claims entitlement to the benefits of a
tax treaty that provides for a complete exemption from U.S. federal income
withholding tax on all payments hereunder) and agrees to provide new Forms 4224
or 1001 upon the expiration of any previously delivered form or comparable
statements in accordance with applicable U.S. law and regulations and amendments
thereto, duly executed and completed by the Assignee, and (c) agrees to comply
with all applicable US laws and regulations with regard to such withholding tax
exemption.
8. Representations and Warranties
(a) The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any Lien or other adverse claim; (ii) it is duly
organized and existing and it has the full power and authority to take, and has
taken, all action necessary to execute and deliver this Assignment and
Acceptance and any other documents required or permitted to be executed or
delivered by it in connection with this Assignment and Acceptance and to fulfill
its obligations hereunder; (iii) not notices to, or consents, authorizations or
approvals of, any Person are required (other than any already given or obtained)
for its due execution, delivery and performance of this Assignment and
acceptance, and apart from any agreements or undertakings or filings required by
the Credit Agreement, no further action by, or notice to, or filing with, any
Person is required of it for such execution, delivery or performance; and (iv)
this Assignment and Acceptance has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor in
accordance with the terms hereof, subject, as to enforcement, to bankruptcy,
insolvency, moratorium, reorganization and other laws of general application
relating to or affecting creditors' rights and to general equitable principles.
(b) The Assignor makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representation made
in or in connection with the Credit Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Credit
Agreement or any other instrument or document furnished pursuant thereto. The
Assignor makes no representation or warranty in connection with, and assumes no
responsibility with respect to, the solvency, financial condition or statements
of the Company, or the performance or observance by the Company, of
<PAGE>
any of its respective obligation under the Credit Agreement or any other
instrument or document furnished in connection therewith.
(c) The Assignee represents and warrants that (i) it is duly organized
and existing and it has full power and authority to take, and has taken, all
action necessary to execute and deliver this Assignment and Acceptance and any
other documents required or permitted to be executed or delivered by it in
connection with this Assignment and Acceptance, and to fulfill its obligations
hereunder; (ii) no notices to, or consents, authorizations or approvals of, any
Person are required (other than any already given or obtained) for its due
execution, delivery and performance of this Assignment and Acceptance; and apart
from any agreements or undertaking or filings required by the Credit Agreement,
no further action by, or notice to, or filing with, any Person is required of it
for such execution, delivery or performance; (iii) this Assignment and
Acceptance has been duly executed and delivered by it and constitutes the legal,
valid and binding obligation of the Assignee, enforceable against the Assignee
in accordance with the terms hereof, subject, as to enforcement, to bankruptcy,
insolvency, moratorium, reorganization and other laws of general application
relating to or affecting creditors' rights and to general equitable principles;
and (iv) it is an Eligible Assignee.
9. Further Assurances.
The Assignor and the Assignee each hereby agree to execute and deliver
such other instruments, and take such other action, as either party may
reasonably request in connection with the transactions contemplated by this
Assignment and Acceptance, transaction contemplated by this Assignment and
Acceptance, including the delivery of any notices or other document or
instruments to the Company or the agent, which may be required in connection
with the assignment and assumption contemplated hereby.
10. Miscellaneous.
(a) Any amendment or waiver of any provision of this Assignment and
Acceptance shall be in writing and signed by the parties hereto. No failure or
delay by either party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof and any waiver of any breach of the
provisions of this Assignment and Acceptance shall be without prejudice to any
rights with respect to any other or further breach thereof.
(b) All payments made hereunder shall be made without any set-off or
counterclaim.
(c) The Assignor and the Assignee shall each pay its own costs and
expensed incurred in connection with the negotiation, preparation, execution and
performance of this Assignment and Acceptance.
(d) This Assignment and Acceptance may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
(e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. The Assignor and the
Assignee each irrevocably submits to the non-exclusive jurisdiction of any State
or Federal court sitting in Illinois over any suit, action or proceeding arising
out of or relating to this Assignment and Acceptance and irrevocably agrees that
all claims in respect of such action or proceeding may be heard and determined
in such Illinois State or Federal court. Each party to this Assignment and
Acceptance hereby irrevocably waives, to the fullest extent it may effectively
do so, the defense of an inconvenient forum to the maintenance of such action or
proceeding.
(f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL
<PAGE>
BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR
IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE CREDIT AGREEMENT, ANY
RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR
STATEMENTS (WHETHER ORAL OR WRITTEN).
IN WITNESS WHEREOF, the Assignor and the Assignee have caused
this Assignment and Acceptance to be executed and delivered by their duly
authorized officers as of the date first above written.
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION, AS ASSIGNOR
By: /s/ R. Guy Stapleton
Title: Managing Director
SUMMIT BANK, AS ASSIGNEE
By: /s/ Thomas D. Knoop
Title: Vice President
AMENDMENT NO. 3 TO AGREEMENT AND
PLAN OF REORGANIZATION
BY AND AMONG MICHAEL FOODS, INC.,
M.G. WALDBAUM COMPANY AND
PAPETTI'S HYGRADE EGG PRODUCTS, INC., AND
QUAKER STATE FARMS, INC.,
PAPETTI'S OF IOWA FOOD PRODUCTS, INC.,
MONARK EGG CORPORATION,
EGG SPECIALTIES, INC.,
PAPETTI FOODS, INC.,
CASA TRUCKING LIMITED PARTNERSHIP,
PAPETTI TRANSPORT LEASING LIMITED PARTNERSHIP, AND
PAPETTI EQUIPMENT LEASING LIMITED PARTNERSHIP
THIS AMENDMENT ("Amendment No. 3") is entered into as of February 25,
1998 (effective as of February 26, 1997) by and among MICHAEL FOODS, INC., a
Delaware corporation ("Michael"), M.G. WALDBAUM COMPANY, a Nebraska corporation
("Acquisition") and PAPETTI'S HYGRADE EGG PRODUCTS, INC., a New Jersey
corporation ("Papetti's Hygrade") and QUAKER STATE FARMS, INC., a Pennsylvania
corporation ("Quaker"), PAPETTI'S OF IOWA FOOD PRODUCTS, INC., an Iowa
corporation ("Papetti's of Iowa"), MONARK EGG CORPORATION, a Missouri
corporation ("Monark"), EGG SPECIALTIES, INC., a Pennsylvania corporation ("Egg
Specialties"), PAPETTI FOODS, INC., a New Jersey corporation ("Papetti Foods",
and collectively with Quaker, Papetti's of Iowa, Monark, and Egg Specialties,
the "Acquired Companies"), CASA TRUCKING LIMITED PARTNERSHIP, a New Jersey
limited partnership ("Casa Trucking"), PAPETTI TRANSPORT LEASING LIMITED
PARTNERSHIP, a New Jersey limited partnership ("Papetti Transport"), and PAPETTI
EQUIPMENT LEASING LIMITED PARTNERSHIP, a New Jersey limited partnership
("Papetti Equipment" and together with Casa Trucking and Papetti Transport, the
"Acquired Partnerships") (the Acquired Companies and the Acquired Partnerships
are collectively referred to herein as the "Acquired Entities").
RECITALS:
As of June 28, 1996, Michael, Acquisition and Papetti's Hygrade and the
Acquired Entities executed and delivered an Agreement and Plan of Reorganization
which was amended and modified by Amendment No. 1 to the Agreement and Plan of
Reorganization dated October 18, 1996 and by Amendment No. 2 to the Agreement
and Plan of Reorganization dated February 26, 1997 (together, the "Agreement")
which the parties now desire to further modify and amend in certain respects.
NOW, THEREFORE, the parties hereto covenant and agree as follows:
1. Unless the context otherwise requires, all capitalized terms used
herein shall have the meanings ascribed thereto in the Agreement.
<PAGE>
2. Section 11.4 of the Agreement is hereby amended in its entirety to
read as follows:
"11.4 De Minimus Claims. No party indemnified under Sections 11.1 or
11.3 above shall make a claim for indemnification unless and until such
party has incurred cumulative Losses for which such party is entitled
to indemnification in excess of the sum of $700,000 and then only for
cumulative Losses in excess of $700,000."
3. Except as otherwise provided for herein, the Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, each of the parties have caused this Amendment to
the Agreement to be executed and delivered as of the day and year first above
written.
PAPETTI'S HYGRADE EGG PRODUCTS, INC.
By: /s/ Arthur N. Papetti
--------------------------------------
Arthur N. Papetti, President
QUAKER STATE FARMS, INC.
By: /s/ Arthur N. Papetti
--------------------------------------
Arthur N. Papetti, Vice President
PAPETTI'S OF IOWA FOOD PRODUCTS, INC.
By: /s/ Arthur N. Papetti
--------------------------------------
Arthur N. Papetti, Vice President
MONARK EGG CORPORATION
By: /s/ Arthur N. Papetti
--------------------------------------
Arthur N. Papetti, Vice President
EGG SPECIALTIES, INC.
By: /s/ Arthur J. Papetti
--------------------------------------
Arthur J. Papetti, President
<PAGE>
PAPETTI FOODS, INC.
By: /s/ Stephen Papetti
--------------------------------------
Stephen Papetti, President
CASA TRUCKING LIMITED PARTNERSHIP
BY CASA TRUCKING CORPORATION,
GENERAL PARTNER
By: /s/ Alfred Papetti
--------------------------------------
Alfred Papetti, President
PAPETTI TRANSPORT LEASING LIMITED
PARTNERSHIP
BY PAPETTI TRANSPORT LEASING
CORPORATION, GENERAL PARTNER
By: /s/ Arthur J. Papetti
--------------------------------------
Arthur J. Papetti, President
PAPETTI EQUIPMENT LEASING LIMITED
PARTNERSHIP
BY PAPETTI EQUIPMENT LEASING
CORPORATION, GENERAL PARTNER
By: /s/ Arthur J. Papetti
--------------------------------------
Arthur J. Papetti, President
MICHAEL FOODS, INC.
By: /s/ Jeffrey M. Shapiro
--------------------------------------
Jeffrey M. Shapiro
Executive Vice President
<PAGE>
M.G. WALDBAUM COMPANY
By: /s/ Jeffrey M. Shapiro
--------------------------------------
Jeffrey M. Shapiro
Secretary
EXHIBIT 13.1
1997 ANNUAL REPORT
[LOGO]
MICHAEL FOODS, INC.
RECORD YEAR [GRAPHIC] MOMENTUM
LIGHTBULB
FRESHER
THINKING(TM)
<PAGE>
10 YEAR SALES & NET 10 YEAR STOCK PRICE HISTORY
EARNINGS HISTORY
(AMOUNTS IN MILLIONS)
[PLOT POINTS GRAPH] [PLOT POINTS GRAPH]
FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................... $ 956,223 $ 616,395 $ 536,627
Net earnings ................................ 32,439 (3,073) 17,591
====================================
Net earnings (loss) per share - diluted ..... $ 1.51 $ (.16) $ .90
Cash dividends per share .................... $ .20 $ .20 $ .20
Weighted average shares outstanding - diluted 21,446 19,386 19,530
====================================
AT DECEMBER 31,
- -------------------------------------------------------------------------------------
Working capital ............................. $ 54,788 $ 56,677 $ 42,095
Total assets ................................ 503,655 364,659 359,227
Long-term debt .............................. 137,519 104,491 89,690
Shareholders' equity ........................ 229,246 174,042 180,095
====================================
</TABLE>
CERTAIN ITEMS IN THIS ANNUAL REPORT ARE FORWARD-LOOKING STATEMENTS, WHICH ARE
MADE IN RELIANCE UPON THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO NUMEROUS RISKS AND UNCERTAINTIES, INCLUDING THE POSSIBILITY THAT ACQUISITION
SYNERGIES MAY NOT BE REALIZED AS RAPIDLY AS MANAGEMENT EXPECTS. ADDITIONAL
RISKS AND UNCERTAINTIES INCLUDE VARIANCES IN THE DEMAND FOR THE COMPANY'S
PRODUCTS DUE TO CONSUMER DEVELOPMENTS AND INDUSTRY DEVELOPMENTS, AS WELL AS
VARIANCES IN THE COSTS TO PRODUCE SUCH PRODUCTS, INCLUDING NORMAL VOLATILITY
IN EGG COSTS AND FEED COSTS. THE COMPANY'S ACTUAL FINANCIAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS ESTIMATED BY, FORECASTED BY, OR IMPLIED
BY THE COMPANY IN SUCH FORWARD-LOOKING STATEMENTS.
<PAGE>
[PHOTO] [PHOTO]
MICHAEL FOODS, INC. IS A DIVERSIFIED FOOD PROCESSOR AND DISTRIBUTOR
WITH BUSINESSES IN EGG PRODUCTS, REFRIGERATED GROCERY PRODUCTS,
SPECIALTY DAIRY PRODUCTS AND REFRIGERATED POTATO PRODUCTS.
OUR STRATEGIC THRUST IS TO FURTHER TRANSITION MICHAEL FOODS
INTO A VALUE-ADDED FOOD PRODUCTS COMPANY BY BEING A LEADER IN
THE FOOD INDUSTRY IN INTRODUCING INNOVATIVE FOOD TECHNOLOGY AND
CUSTOMER SOLUTIONS. THE KEY TO THIS STRATEGY IS "VALUE-ADDED",
WHETHER THAT IS IN THE PRODUCT, THE DISTRIBUTION CHANNEL OR IN
THE SERVICE WE PROVIDE TO OUR CUSTOMERS. FOR FURTHER
INFORMATION, PLEASE VISIT MICHAEL FOODS, INC. ON THE INTERNET:
WWW.MICHAELFOODS.COM
[PHOTO] [PHOTO]
<PAGE>
MICHAEL FOODS' FIRST 10 YEARS
IN 1997, MICHAEL FOODS, INC. CELEBRATED ITS TEN YEAR
ANNIVERSARY, AS THE COMPANY WAS FORMED IN EARLY 1987
AND WENT PUBLIC IN APRIL, 1987. HIGHLIGHTS OF COMPANY
DEVELOPMENTS DURING THE PAST TEN YEARS ARE LISTED BELOW.
1987 SPIN-OUT FROM NORTH STAR UNIVERSAL, INC.; INITIAL PUBLIC OFFERING AT $7.11
PER SHARE, NET SALES $170 MILLION
1988 FOUR ACQUISITIONS, INCLUDING FIRST HALF OF M.G. WALDBAUM COMPANY;
TECHNOLOGY FOR PRODUCING LONG SHELF-LIFE LIQUID WHOLE EGGS (EASY EGGS(R))
SECURED; 3-FOR-2 STOCK SPLIT; COMMON STOCK OFFERING AT $10.67 PER SHARE
1989 EGG ULTRAPASTEURIZATION FACILITY COMPLETED IN GAYLORD, MN; EASY EGGS(R)
INTRODUCED IN FOODSERVICE AND INDUSTRIAL MARKETS; NET SALES SURPASS $250
MILLION
1990 SECOND HALF OF M.G. WALDBAUM COMPANY ACQUIRED; FOCUS ON GROWTH OF
REFRIGERATED POTATO PRODUCTS
1991 TWO ACQUISITIONS; CHEESE PACKAGING PLANT OPENED IN LAKE MILLS, WI; 3-FOR-2
STOCK SPLIT; COMMON STOCK OFFERING AT $19.38 PER SHARE
1992 REDUCED CHOLESTEROL LIQUID WHOLE EGGS INTRODUCED; FOODSERVICE SALES FORCE
CONSOLIDATED
1993 RESTRUCTURING YEAR; EXITED REDUCED CHOLESTEROL LIQUID WHOLE EGGS BUSINESS
1994 DIVESTED SUNNYSIDE VEGETABLE PACKING, INC.; TEST MARKETED PASTA AND SAUCES
IN FOODSERVICE MARKET; NET SALES SURPASS $500 MILLION
1995 MFI 2000 (STRATEGIC PLAN) IMPLEMENTATION STARTS; ACQUISITION OF
REFRIGERATED POTATO PRODUCTS LINE FROM INTERSTATE FOOD PROCESSING CORP.
1996 ACQUISITION OF PAPETTI'S HYGRADE EGG PRODUCTS, INC. ANNOUNCED; POTATO
PRODUCTS DIVISION RESTRUCTURING
1997 PAPETTI'S ACQUISITION COMPLETED; NORTH STAR MERGER COMPLETED; BANK AND
LONG-TERM DEBT FINANCING COMPLETED; EXITED FRENCH FRY BUSINESS; RECORD NET
EARNINGS; STOCK HITS ALL-TIME HIGH OF $28.375
<PAGE>
[PHOTO]
Caption: SALES APPROACHED $1 BILLION AND NET EARNINGS SET A NEW RECORD.
TO OUR SHAREHOLDERS
I am pleased to report to you about Michael Foods' record setting 1997. Thanks
to strong core operations and benefits from our acquisition of Papetti's Hygrade
Egg Products, Inc., sales approached $1 billion and net earnings set a new
record by over $12 million. Additionally, and most importantly, your stock
responded to these strong earnings by nearly doubling last year, adding
approximately $250 million to the Company's market value.
The strong results of last year were largely related to plans initiated and
efforts begun in 1996, or earlier. You may recall that during 1995 we agreed to
merge with our former parent, North Star Universal, Inc., and in mid-1996 we
announced the Papetti's transaction. Both of these transactions closed in
February, 1997. As a result of the North Star merger, Michael Foods emerged as
the surviving entity with a reduced share base, enhancing both earnings per
share and flexibility for pursuing our growth plans. With the Papetti's
transaction came the joining of the world's two largest egg products companies
and the inherent savings and efficiencies that result from producing a combined
egg products volume of roughly ONE BILLION pounds annually.
The Egg Products Division had an excellent year. Unit sales were strong in
several categories, particularly extended shelf-life liquid whole eggs (Easy
Eggs(R) and Table Ready(TM)) and precooked frozen patties and omelets. Capacity
for frozen specialty items was expanded last year and will be expanded again
this year, as we grow to meet customers' needs. On the cost side, feed costs
were favorable in 1997 and outside egg sourcing costs were at reasonable levels
during most of the year.
The Refrigerated Distribution Division also had an excellent year. Crystal
Farms' unit sales rose impressively, which resulted in distribution efficiencies
and improved operations. The upgrading of the Crystal Farms(R) brand in 1996
continued to bear fruit in 1997, with sales also reflecting new grocery store
chain accounts and new product introductions.
Dairy Products Division results were very good last year. Significant unit
sales gains for ultrapasteurized dairy mixes resulted in improved operations.
The roll-out of shelf-stable coffee creamers and the utilization of new capacity
at Kohler's Texas plant also contributed nicely to the Division's results.
Performance in the Potato Products Division was less than satisfactory, but
we see signs that the business is turning around and beginning to gain momentum.
Closure of the frozen french fry business and the loss of a major foodservice
customer for refrigerated products resulted in a sales decline for the Division.
However, losses in 1996, largely due to charges taken in the french fry
business, turned into modest profits last year.
We continue to make good progress against our strategic plan--MFI 2000. The
restructuring of the sales force last spring has worked well and we now have a
good balance between direct and brokered sales. Our information systems project
is rolling forward, with additional phases of the project to be implemented in
1998. We also have made excellent progress in achieving synergistic savings. In
particular, substantial dollars have been saved since the Papetti's acquisition
and we see ample opportunities to realize additional savings within our Egg
Products Division in 1998 and beyond as we further coordinate our egg products
operations.
Our first ten years of corporate life saw strong sales growth and somewhat
volatile, but rising, earnings. As we enter Michael Foods' second decade, we are
optimistic that we have laid the ground work to allow for more predictable net
earnings growth. With this, we trust, will come a satisfying return on your
investment. I thank you for your continued support and confidence in Michael
Foods and its many dedicated employees.
Sincerely,
/s/ Gregg A. Ostrander
Gregg A. Ostrander
President and Chief Executive Officer
1
<PAGE>
EGG PRODUCTS DIVISION
[LOGO] PAPETTI'S [LOGO] M.G. WALDBAUM
HYGRADE EGG PRODUCTS, INC. INNOVATIVE EGG PRODUCTS
The addition of Papetti's Hygrade Egg Products, Inc. to the Michael Foods family
of companies was a major event in 1997. The acquisition brought the world's
largest egg products company-- Papetti's--together with the second
largest--Waldbaum. It has proven to be an excellent fit, with the Egg Products
Division positioning Michael Foods as the world's preeminent egg products
company.
Papetti's reputation for high quality products and award winning service
dates back to 1908, when the Papetti family started a store-front fresh poultry
business. Sales gradually switched entirely to egg products as business
opportunities arose during the 1950's. Papetti's operations have grown
dramatically since that time to include breaking and processing facilities in
New Jersey, Pennsylvania and Iowa. To this day, third and fourth generation
members of the Papetti family are actively involved in management.
Papetti's currently breaks over 16 million eggs per day, producing an array
of products including whole eggs, scramble mixes, reduced-cholesterol products,
bakery blends, hardcooked eggs and precooked omelets and patties. These products
complement those produced by Waldbaum. Also, the increasing coordination of
customer service related activities, from sales to distribution, between
Papetti's and Waldbaum is serving to more efficiently and thoroughly provide the
high level of service that egg products customers have come to expect from
Papetti's and Waldbaum.
THE WORLD'S PREEMINENT EGG PRODUCTS COMPANY
In most respects, 1997 was a strong come-back year for Waldbaum. Feed costs
improved, helping to boost earnings to a record level. Internal operations had
performed well in 1996, but a nearly 50% increase in feed costs, due to crop
problems, hampered the bottom line that year. While the reduced 1997 feed bill
was of much help, there were other factors behind Waldbaum's highly successful
year. Chief among them was a strong unit sales performance which resulted in
operating efficiencies.
[GRAPHIC] BETTER'N EGGS
In total, the Division experienced strong volume growth last year, paced by
value-added products such as Easy Eggs(R) and Table Ready(TM) extended
shelf-life liquid eggs. Volume for these products rose by approximately 10% in
1997. Also showing good growth were reduced-cholesterol products and precooked
patties and omelets. The former saw strong unit sales gains aided by the
addition of new retail branded and private label customers. Within the retail
egg substitute market, Papetti's has seen notable success with its Better `N
Eggs(TM) and Chef's Eggs(TM) brands, plus numerous private label brands. Looking
at the line of precooked egg patties and omelets shows volume surged in 1997. In
1998 this business should benefit from capital projects aimed at significantly
expanding capacity. Another value-added segment, dried products, also saw a
notable unit sales increase last year. Overall, these healthy sales volume gains
allowed our plants to operate at improved efficiency levels, which, in turn,
helped to improve operating results.
CONTINUED ON PAGE 4
2
<PAGE>
[PHOTO]
PRECOOKED EGG PATTIES ARE A FAST-GROWING SEGMENT FOR THE DIVISION.
3
<PAGE>
EGG PRODUCTS DIVISION
[LOGO] PAPETTI'S [LOGO] M.G. WALDBAUM
HYGRADE EGG PRODUCTS, INC. INNOVATIVE EGG PRODUCTS
Certain capital spending projects provided immediate pay-back on the
investments last year. Among them were Waldbaum egg laying barn renovations and
capacity expansion for the Minnesota precooked egg patty (MicroFresh) facility.
For the former, several of the older laying barns were updated in 1997,
resulting in the barns becoming more efficient, with improved feeding and waste
disposal systems. For the latter, a new tunnel oven line was added at the
MicroFresh facility, which greatly expanded egg patty production capacity during
a period of burgeoning demand.
A leading egg industry publication estimated in January, 1998 that Michael
Foods' Egg Products Division broke nearly 800 million dozen eggs last year,
representing a leading share of the domestic egg products market. With Papetti's
and Waldbaum operating in tandem, and with their substantial combined volumes,
there are significant areas of synergies to be realized. Cost savings synergies
lie in the areas of plant operations, distribution/freight, egg and ingredient
sourcing, sales force optimization, and supplies and packaging purchases.
Substantial dollar savings were realized in 1997 and work is in process to
capture additional synergistic savings in 1998 and beyond. Through these efforts
we expect to make the egg products production processes and distribution
networks more efficient, allowing us to better serve our egg products customers.
CAPITAL PROJECTS HAVE THE DIVISION POSITIONED FOR CONTINUED GROWTH
Looking ahead to 1998, recently completed and in-process capital projects
have the Division positioned for continued growth. New ovens for precooked egg
patty production will allow those operations to meet substantial volume gains
which are on the horizon. On the front end of the egg products process, the
Division expects to see benefits from greater liquid egg output as a result of
investments in state-of-the-art egg breaking machines in several locations. This
will improve operating efficiencies, while reducing labor costs.
[GRAPHIC] CHEF'S EGGS
Approximately 45% of Egg Products Division annual dollar sales now come from
true value-added egg products, such as extended shelf-life liquid eggs, egg
substitutes and precooked items. Hence, the Division is fulfilling the corporate
promise of reducing commodity-sensitive products' impact on earnings, while
setting the stage for more consistent divisional sales and earnings growth.
4
<PAGE>
[PHOTO]
WALDBAUM CONTINUED TO EXPAND ITS PACKAGING CAPABILITIES IN 1997.
5
<PAGE>
REFRIGERATED DISTRIBUTION DIVISION
[LOGO] CRYSTAL FARMS
After having an excellent 1996, Crystal Farms Refrigerated Distribution Company
repeated with another strong showing in 1997. Sales growth across a number of
product categories continued to provide the foundation for the Division's
success.
Volume growth is critical to the success of a distribution business, as
increasing tonnage helps absorb more labor, fuel and utility costs, making each
incremental pound more valuable than the preceding pound. Generally, when volume
is moving in the right direction, so is profitability. That certainly was the
case for Crystal Farms in 1997. Volume for core refrigerated products increased
9%. To put this in context, the wholesale food distribution industry covets unit
growth in excess of the 1%-2% increase in the general population base. So, last
year's growth was outstanding by any measure.
Six areas stood out as being the main factors behind this growth:
NEW PACKAGING. In 1996 the Crystal Farms logo and packaging were upgraded. With
this came increased consumer support, such as advertising, couponing, and
product sampling. As a result, consumer awareness of the Crystal Farms line as a
high quality, lower cost alternative to the national brands in the dairy case
increased.
VOLUME FOR CORE REFRIGERATED PRODUCTS INCREASED 9%
NEW PRODUCTS. As shown in the accompanying photograph, several new products were
introduced last year. They include Italian and Fiesta shredded cheese blends and
four varieties of shingled sliced cheeses. These items have shown good momentum
early on and are positioned to become core items in the Crystal Farms line.
SUPERSTORE SEGMENT. Superstores-large stores selling general merchandise,
pharmaceuticals and, increasingly, groceries-have become a meaningful factor in
the U.S. grocery market. Crystal Farms has had success placing select products
with leading chains in this segment.
EMERGING DELI BUSINESS. Having entered the deli market in 1996 with specialty
cheeses, Crystal Farms saw momentum build in this business in 1997.
NEW CHAIN CUSTOMERS. While growth with core retail grocery customers was
notable, 1997 also saw the addition of 12 new grocery chains to the customer
base, representing over 500 additional stores carrying Crystal Farms branded
products.
ADDITIONAL WAREHOUSES. An agreement with a leading grocery wholesaler led to the
introduction of Crystal Farms products into six additional warehouses in 1997,
bringing the total served to 10.
These factors largely defined the Division's success in 1997. With more ahead
on all of these fronts, Crystal Farms entered 1998 with good momentum and plans
to deliver high quality, reasonably priced products to even more consumers in
the coming year.
6
<PAGE>
[PHOTO]
NEW PRODUCTS AND LINE EXTENSIONS IN 1997.
7
<PAGE>
DAIRY PRODUCTS DIVISION
[LOGO] KOHLER
MIX SPECIALTIES
1997 capped the 11th consecutive year of record volume for Kohler Mix
Specialties. Gallons sold by Kohler Mix increased by more than 15%, which is
outstanding relative to the industry's estimated 2%-3% unit growth. This volume
growth helped the Division reach record earnings levels for the fourth year in a
row. Further benefits were seen from a new product, increased capacity, and
significant growth with core quick service restaurant chain customers.
The new product which helped both the top line and bottom line for the
Division was shelf-stable coffee creamers. These ultra-high temperature ("UHT")
pasteurized and asepticly packaged creamers have been well received by
foodservice customers. The benefits of the product are convenience, reduced
waste and enhanced food safety. To meet rising creamer demand, capacity was
added at the main White Bear Lake, Minnesota plant in 1997. Also, more capacity
for this product is being added in early 1998 at the Kohler Mix facility in
Sulphur Springs, Texas.
Additional growth was seen last year in cartoned products which Kohler Mix
"co-packs" (contract packages) for other companies. These items are packaged for
the retail grocery market. Notable growth occurred in the production of whipping
cream, half and half (regular and fat-free versions), and holiday cordials.
These products represent a good base of business for the Division, particularly
the cordials, as significant production of the products occurs late in the year
when demand for core products, such as ice milk mix, is down due to seasonal
weather factors.
11TH CONSECUTIVE YEAR OF RECORD VOLUME
Beyond the capacity expansion already noted for coffee creamers, additional
capacity was added at the Texas plant in 1997. This included the addition of
aseptic carton filling capabilities and was the second major capacity expansion
at the plant in the four years it has existed. As a result of the increased
capacity and rapidly growing southern-based customer list, the Texas plant saw
volume grow by an outstanding 77% last year.
Also of note last year was the excellent growth in the Division's core
product line--UHT ice milk mixes. These mixes are sold largely to quick service
restaurant chains and are converted to soft-serve ice cream used in shakes,
cones and sundaes. A number of the large quick service chains showed significant
growth with Kohler Mix products in 1997. This reflected improved customer counts
and chain sales in many cases, but also the addition of incremental stores
served by Kohler Mix within the large foodservice networks maintained by these
chains. In particular, there was success in penetrating foodservice accounts in
the eastern United States.
Kohler Mix continued to make notable investments in "R & D" last year and has
potential new products under development. Testing of certain products in the
pipeline should occur this year. Kohler Mix stands ready to provide the customer
solutions and the production capacity to help Michael Foods' customers grow
their businesses.
8
<PAGE>
[PHOTO]
CAPACITY FOR SHELF-STABLE COFFEE CREAMERS WAS EXPANDED LAST YEAR.
9
<PAGE>
POTATO PRODUCTS DIVISION
[LOGO] NORTHERN STAR
POTATO PRODUCTS
1997 was a major transitional year for the Potato Products Division. We decided
early in the year to exit the frozen french fry business due to on-going losses
and the inherent challenges presented by being a small factor in an industry
dominated by large companies.
The Division is now focused on one overriding goal--to expand its status as
the country's leading producer of refrigerated potato products. With dominant
market shares of hashbrowns, mashed, diced and sliced refrigerated potato
products sold in both the foodservice and retail markets, a strong foundation
exists from which to grow. Growth should come as a result of an increased sales
focus, improved production capabilities, and new product introductions.
[PHOTO]
A MAJOR TRANSITIONAL YEAR FOR THE POTATO PRODUCTS DIVISION
On the sales front, we have increased the focus on our foodservice product
line. We have increased sales training and customer incentives to stimulate
foodservice sales of hashbrowns and mashed potatoes, in particular. Also, we
recently promoted one of our regional sales managers to the new position of Vice
President-Business Development at Northern Star Co.
FOODSERVICE MASHED POTATOES ARE CONTRIBUTING TO A TURN-AROUND AT NORTHERN STAR.
Internally, the production difficulties of late 1996, caused largely by the
transferring of volume from an acquired foodservice potato products line to the
Minneapolis plant, were overcome in early 1997. Significant portions of
production lines were reengineered and rebuilt. Further, the removal of the
french fry production equipment allowed the main plant to be reconfigured into a
more efficient facility that is dedicated solely to the production of
refrigerated products. Thanks to several capital projects that were largely
completed by late 1997, the production efficiencies of the Minneapolis plant are
now at targeted levels. Volume growth, particularly from the foodservice
segment, is expected to further improve manufacturing efficiencies.
Several new products have been, or are about to be, launched in the Division.
Within the retail grocery market the Diner's Choice(R) label is being developed
as a complimentary brand to the popular Simply Potatoes(R) brand. Diner's
Choice, positioned as an upscale brand, has had red skin wedges, hashbrowns and
mashed potatoes launched in recent months. New Potato Wedges were also
introduced under the Simply Potatoes label in 1997. On the foodservice side, red
skin wedges were introduced last year and sales are growing as potatoes, in
general, enjoy rising popularity as a side dish. Several "special recipe" mashed
potatoes were developed for restaurant operators last year. Under development
for introduction in 1998 are red skin mashed and garlic mashed potatoes for the
foodservice market.
With the red ink of frozen french fries gone, the main plant revamped, and
the new products pipeline full, the Division is positioned for renewed earnings
momentum as we enter 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MICHAEL FOODS, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this report. Readers are
also encouraged to read the letter to shareholders and the operating division
overviews contained on pages 1-10 of this annual report.
GENERAL
The Company utilizes a fifty-two, fifty-three week fiscal year. The year ended
December 31, 1997 consisted of fifty-three weeks. The following table sets forth
the percentage of net sales accounted for by each of the Company's operating
divisions:
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------
Egg Products ................ 63% 43% 42%
Refrigerated Distribution ... 22 34 34
Dairy Products .............. 11 15 14
Potato Products ............. 7 14 16
Inter-company Sales ......... (3) (6) (6)
---------------------------------
Total ..................... 100% 100% 100%
=================================
The following table sets forth the percentage of operating earnings (before
corporate, interest and income tax expenses, and, in 1996, before product line
inventory markdown and product line asset impairment charges) accounted for by
each of the Company's operating divisions:
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------
Egg Products ................ 77% 64% 59%
Refrigerated Distribution ... 12 26 15
Dairy Products .............. 10 21 14
Potato Products ............. 1 11 12
---------------------------------
Total ..................... 100% 100% 100%
=================================
RESULTS OF OPERATIONS
The Egg Products Division had higher dollar sales and higher dollar earnings in
1997, as compared to the results for 1996. The February, 1997 acquisition of
Papetti's Hygrade Egg Products, Inc. and related companies ("Papetti's") caused
divisional annual sales to more than double. Additionally, unit sales increased
for egg products, most notably for value-added product lines such as extended
shelf-life liquid whole eggs and specialty precooked patties and omelets. Egg
prices decreased approximately 8% in 1997, as compared to 1996 levels, as
reported by Urner Barry Publications--a widely quoted industry pricing service.
This decrease helped reduce the price of purchased eggs, while also reducing
selling prices for certain egg products and shell eggs. Feed costs, which
typically represent roughly two-thirds of the cost of producing an egg, were
significantly lower in 1997 as compared to unusually high levels in 1996. This
decrease lowered the cost of eggs from owned flocks. As a result of the
Papetti's acquisition, the Division now receives approximately two-thirds of its
annual egg supply from external sources, either from contract flocks or open
market purchases, with approximately one-third of egg needs coming from flocks
owned by the Company. The Division also realized benefits from economies of
scale and synergistic savings as a result of the acquisition. The Division had
higher dollar sales and lower dollar earnings in 1996, as compared to the
results of 1995. Sales increased for egg products, particularly value-added
lines, in 1996, and pricing and productivity improved. However, these favorable
developments were not enough to offset a sharp rise in feed costs. Approximately
three-fourths of the Division's 1996 and 1995 egg needs came from owned flocks,
where feed costs are the key determinant of egg costs.
The Refrigerated Distribution Division had higher dollar sales and higher
dollar earnings in 1997, as compared to the results for 1996. Unit sales
increased compared to 1996 levels, particularly for core distributed products.
The combination of volume growth, lower ingredient costs and effective expense
control allowed for divisional profit improvement. The Division had higher
dollar sales and higher dollar earnings in 1996, as compared to the results of
1995, due primarily to increased unit sales.
The Dairy Products Division had higher dollar sales and higher dollar
earnings in 1997, as compared to the results for 1996. Unit sales rose
significantly due to an increase in core UHT ("ultra-high temperature"
pasteurized) dairy mixes and the emergence of shelf-stable coffee creamers as an
important product line. Volume gains enhanced plant operations, allowing for
modest margin improvement over 1996 levels. The Division had higher dollar sales
and higher dollar earnings in 1996, as compared to the results of 1995, due to
increased unit sales of UHT dairy mixes. This increase, along with pricing
improvements, helped offset higher raw material costs caused by a tight milk
supply.
The Potato Products Division had lower dollar sales in 1997, as compared to
the results for 1996, and the division operated at a profit in 1997 compared to
a loss in 1996. The unprofitable frozen french fry business was discontinued in
1997. The remaining refrigerated potato products business recorded higher retail
sales volumes in 1997 than in 1996, while the larger foodservice segment saw
lower unit sales volumes. Starting in late 1996, and continuing into 1997,
certain refrigerated potato products production lines were upgraded. Also during
1997, the main potato products plant was reconfigured after removing the french
fry production equipment. These efforts have resulted in more efficient
production of refrigerated potato products. Resultant production yield
improvements and reduced production costs have returned operations to
profitability. In 1996, the Potato Products Division had flat dollar sales as
compared to the results for 1995. The Division operated at a loss in 1996, due
primarily to losses in the frozen french fry business and to the recording of an
asset impairment ($9,172,000) and a product line inventory markdown
($12,225,000) related to the frozen french fry business.
The gross profit margin of the Company was 14.9 percent in 1997, as compared
to 9.6 percent in 1996 and 15.3 percent in 1995. The 1997 increase reflected the
factors discussed above, particularly the decreased feed and potato processing
costs, the synergistic savings, and the discontinuation of the unprofitable
french fry business. The 1996 gross profit included the frozen french fry
product line inventory markdown, which reduced the gross profit margin. It is
management's strategy to increase value-added product sales as a percent of
total sales over time, while decreasing commodity-sensitive products'
contribution to consolidated sales. These efforts historically have been
beneficial to gross profit margins.
Selling, general and administrative expenses were 8.0 percent of net sales in
1997, as compared to 7.3 percent in 1996 and 8.5 percent in 1995. The increase
in 1997 reflected, among other factors, increased spending on foodservice
marketing activities, including increased
11
<PAGE>
promotional activities for certain products, staffing additions related to the
Papetti's acquisition and increased incentive compensation. The french fry
production assets were sold in 1997, resulting in a pre-tax gain of
approximately $1,300,000. Severance expenses for certain potato products
employees and sales personnel affected by a restructuring, connected to the
discontinuation of the frozen french fry business, of approximately $2,400,000
(pre-tax) were also recorded in 1997. The decrease in 1996 was due mainly to the
significant corporate sales increase, modest incentive compensation and
effective expense management.
Net interest expense in 1997 was nearly 50% higher than 1996 levels, while
1996 levels were lower than 1995 levels. While bank line of credit borrowings
declined and were eventually eliminated during 1997, incremental interest
expense was recorded on $125 million of senior notes issued in early 1997. In
1996, the effect of increased borrowings under the Company's unsecured revolving
line of credit was offset by lower average interest rates on these borrowings
compared to 1995 levels.
Certain of the Company's products are sensitive to changes in commodity
prices. Currently, the Company's Egg Products Division derives approximately six
percent of net sales from shell eggs, which are sensitive to commodity price
changes. The remainder of Egg Products Division sales are derived from the sale
of egg products that are value-added to varying degrees. Gross profit from shell
eggs is primarily dependent upon the relationship between shell egg prices and
feed costs, both of which can fluctuate significantly and at variance to each
other. While certain egg products exhibit commodity price sensitivity, gross
margins from egg products are generally less sensitive to commodity price
fluctuations than are shell eggs. The Company's refrigerated distribution
operations derive approximately 70 percent of net sales from refrigerated
products, with the balance coming from shell egg sales. As a majority of these
eggs are supplied by the Egg Products Division and are, in-turn, sold on a
distribution or non-commodity basis by the Refrigerated Distribution Division,
this division's sales are generally not sensitive to commodity price
fluctuations. The Potato Products Division typically purchases approximately 80
to 90 percent of its estimated annual potato needs under annual grower
contracts. The remainder is purchased at market prices to satisfy short-term
production requirements or to take advantage of spot prices when they are lower
than contract prices. Variances in potato prices or selling prices of end
products can significantly effect the earnings of the Potato Products Division.
The Dairy Products Division sells its products primarily on a cost-plus basis.
Therefore, the earnings of this division are not typically greatly affected by
raw ingredient price fluctuations.
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.
Competitors have infringed the Company's exclusive license for a patented
technology to safely extend the shelf-life of liquid eggs and the Company is
pursuing its legal rights. The Company has prevailed in U.S. District Court
cases in Florida and New Jersey. The judgment in the New Jersey case was
appealed in 1994 and the Court of Appeals for the Federal Circuit upheld the
summary judgment of the U.S. District Court, which found the patents valid and
enforceable. Since then, present and potential extended shelf-life liquid egg
competitors have filed protests with the U. S. Patent and Trademark Office
("PTO") challenging the validity of one or more of the claims under the patents.
As a result, litigation in two patent infringement lawsuits where the Company is
a plaintiff were stayed and another lawsuit was dismissed without prejudice. One
of the stayed suits was settled as a result of the Company's acquisition of
Papetti's in 1997. During 1995 and 1996, the PTO issued actions in which an
examiner rejected claims under the patents licensed by the Company. The Company
and patent holder are appealing the rejections to the PTO's Board of Patent
Appeals and Interferences and will, if necessary, appeal further to the Court of
Appeals for the Federal Circuit. The patents remain valid and in full force and
effect during this appeal process.
While management is resolved to protect the Company's proprietary rights and
expects those rights to continue to be upheld, the number of present and
potential competitors in this egg product category continues to increase. As a
result of such competition, pricing pressure in the category may increase beyond
that which has already been experienced. Sales of extended shelf-life liquid
eggs represent the largest contributor to operating profits within the Egg
Products Division.
CAPITAL RESOURCES AND LIQUIDITY
The Company's investments in acquisitions and capital expenditures have been a
significant use of capital. The Company plans to continue to invest in
state-of-the-art production facilities to enhance its competitive position.
Historically, the Company has financed its growth principally from internally
generated funds, bank borrowings, issuance of senior debt and the sale of common
stock. The Company believes that these financing alternatives will continue to
meet its anticipated needs.
The Company plans to invest approximately $90 million in capital projects in
1998 and expects to fund such spending from operating cash flow and bank
borrowings. The Company invested $38,193,000 in capital expenditures in 1997,
$29,334,000 in 1996 and $22,893,000 in 1995. In 1997, the Company acquired
Papetti's for approximately $83.2 million and the assumption of $22.8 million of
debt. Also during 1997, a merger with North Star Universal, Inc. ("NSU") was
completed, with the Company being the surviving post-merger entity. As a result
of the transactions affecting the merger, the Company effectively repurchased
approximately 1.8 million shares of its common stock with a discounted value of
$21.25 million through the assumption of NSU debt of approximately the same
amount. There were no acquisitions in 1996. In 1995, the Company acquired the
institutional refrigerated potato products line of Interstate Food Processing
Corp.
During 1997, the Company issued $125 million of unsecured notes. The proceeds
were used in the Papetti's acquisition, the NSU merger and for general working
capital purposes. The Company has an unsecured line of credit for $80 million
with its principal banks. As of December 31, 1997, there were no borrowings
outstanding under this line of credit.
The Company has already installed, or is currently implementing, software
which is expected to be century compliant. The Company capitalizes the cost of
new software and the costs to configure new software to the Company's business
processes, and expenses costs related to reengineering its business processes.
12
<PAGE>
CONSOLIDATED BALANCE SHEETS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents .......................................... $ 4,038,000 $ 2,585,000
Accounts receivable, less allowances .......................... 83,495,000 51,394,000
Inventories ................................................... 68,929,000 58,976,000
Prepaid expenses and other .................................... 1,676,000 2,976,000
------------------------------
Total current assets .......................... 158,138,000 115,931,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land .......................................................... 4,336,000 4,317,000
Buildings and improvements .................................... 99,023,000 99,133,000
Machinery and equipment ....................................... 274,980,000 230,725,000
------------------------------
378,339,000 334,175,000
Less accumulated depreciation ................................. 160,800,000 149,014,000
------------------------------
217,539,000 185,161,000
OTHER ASSETS
Goodwill, net ................................................. 123,711,000 53,602,000
Other ......................................................... 4,267,000 9,965,000
------------------------------
127,978,000 63,567,000
------------------------------
$503,655,000 $364,659,000
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt .......................... $ 8,509,000 $ 8,410,000
Accounts payable .............................................. 46,910,000 28,412,000
Accrued liabilities
Compensation .......................................... 10,064,000 4,604,000
Insurance ............................................. 4,782,000 6,471,000
Discounts and allowances .............................. 15,217,000 5,548,000
Other ................................................. 17,868,000 5,809,000
------------------------------
Total current liabilities ..................... 103,350,000 59,254,000
LONG-TERM DEBT, less current maturities ............................... 137,519,000 104,491,000
DEFERRED INCOME TAXES ................................................. 33,540,000 26,872,000
CONTINGENCIES ......................................................... -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 40,000,000 shares authorized,
shares issued-21,816,098 in 1997 and 19,459,731 in 1996 218,000 195,000
Additional paid-in capital .................................... 140,188,000 113,268,000
Retained earnings ............................................. 88,840,000 60,579,000
------------------------------
Total shareholders' equity .................... 229,246,000 174,042,000
------------------------------
$503,655,000 $364,659,000
==============================
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ......................................... $ 956,223,000 $ 616,395,000 $ 536,627,000
Cost of sales ..................................... 813,771,000 545,055,000 454,652,000
Product line inventory markdown ................... -- 12,225,000 --
----------------------------------------------------
Gross profit ...................... 142,452,000 59,115,000 81,975,000
Selling, general and administrative expenses ...... 76,173,000 44,822,000 45,729,000
Product line asset impairment ..................... -- 10,472,000 --
----------------------------------------------------
Operating profit .................. 66,279,000 3,821,000 36,246,000
Interest expense, net ............................. 10,830,000 7,264,000 7,635,000
----------------------------------------------------
Earnings (loss) before income taxes 55,449,000 (3,443,000) 28,611,000
Income tax expense (benefit) ...................... 23,010,000 (370,000) 11,020,000
----------------------------------------------------
NET EARNINGS (LOSS) ............... $ 32,439,000 $ (3,073,000) $ 17,591,000
====================================================
NET EARNINGS (LOSS) PER SHARE
Basic ............................. $ 1.53 $ (.16) $ .91
Diluted ........................... 1.51 (.16) .90
====================================================
Weighted average shares outstanding
Basic ............................. 21,181,000 19,386,000 19,328,000
Diluted ........................... 21,446,000 19,386,000 19,530,000
====================================================
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES ISSUED AMOUNT CAPITAL EARNINGS STOCK EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 ............ 19,915,489 $ 199,000 $ 117,640,000 $ 53,801,000 $ (5,611,000) $ 166,029,000
Treasury stock retired ..... (613,912) (6,000) (5,605,000) -- 5,611,000 --
Incentive plan stock
compensation ....... 30,424 -- 339,000 -- -- 339,000
Net earnings ............... -- -- -- 17,591,000 -- 17,591,000
Cash dividends
($.20 per share) ... -- -- -- (3,864,000) -- (3,864,000)
--------------------------------------------------------------------------------------------
Balance at
December 31, 1995 .......... 19,332,001 193,000 112,374,000 67,528,000 -- 180,095,000
Purchase of shares ......... (13,543) -- (500,000) -- -- (500,000)
Incentive plan stock
compensation ....... 47,273 1,000 525,000 -- -- 526,000
Stock options exercised .... 94,000 1,000 869,000 -- -- 870,000
Net loss ................... -- -- -- (3,073,000) -- (3,073,000)
Cash dividends
($.20 per share) ... -- -- -- (3,876,000) -- (3,876,000)
--------------------------------------------------------------------------------------------
Balance at
December 31, 1996 .......... 19,459,731 195,000 113,268,000 60,579,000 -- 174,042,000
Papetti's acquisition ...... 3,195,455 32,000 38,827,000 -- -- 38,859,000
Merger with
North Star Universal (1,783,036) (18,000) (23,711,000) -- -- (23,729,000)
Stock options exercised .... 943,948 9,000 9,721,000 -- -- 9,730,000
Tax benefit from stock
options exercised .. -- -- 2,083,000 -- -- 2,083,000
Net earnings ............... -- -- -- 32,439,000 -- 32,439,000
Cash dividends
($.20 per share) ... -- -- -- (4,178,000) -- (4,178,000)
--------------------------------------------------------------------------------------------
Balance at
December 31, 1997 .......... 21,816,098 $ 218,000 $ 140,188,000 $ 88,840,000 $ -- $ 229,246,000
============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) .................................... $ 32,439,000 $ (3,073,000) $ 17,591,000
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation ................................... 31,444,000 24,732,000 22,461,000
Amortization ................................... 3,171,000 1,944,000 1,575,000
Deferred income taxes .......................... 8,230,000 (2,894,000) 5,241,000
Product line impairment and inventory
markdowns .............................. -- 22,697,000 --
Incentive plan stock compensation .............. -- 526,000 339,000
Changes in operating assets and liabilities,
net of effect of product line impairment
and inventory markdowns and business
acquisitions:
Accounts receivable .................... 2,409,000 (10,811,000) (3,961,000)
Inventories ............................ 7,733,000 (12,356,000) (4,214,000)
Prepaid expenses and other ............. 28,000 (1,354,000) (531,000)
Accounts payable ....................... (6,317,000) 4,784,000 1,002,000
Accrued liabilities .................... 9,156,000 (2,385,000) 1,456,000
-------------------------------------------------
Net cash provided by operating activities ...................... 88,293,000 21,810,000 40,959,000
Cash flows from investing activities:
Capital expenditures ................................... (38,193,000) (29,334,000) (22,893,000)
Business acquisitions, net of cash acquired,
and other assets ............................... (43,251,000) 214,000 (15,419,000)
-------------------------------------------------
Net cash used in investing activities .......................... (81,444,000) (29,120,000) (38,312,000)
Cash flows from financing activities:
Payments on notes payable and long-term debt ........... (238,541,000) (146,934,000) (100,806,000)
Proceeds from notes payable and long-term debt ......... 227,593,000 158,414,000 102,303,000
Repurchase of shares ................................... -- (500,000) --
Proceeds from issuance of common stock ................. 9,730,000 870,000 --
Cash dividends ......................................... (4,178,000) (3,876,000) (3,864,000)
-------------------------------------------------
Net cash provided by (used in) financing activities ............ (5,396,000) 7,974,000 (2,367,000)
-------------------------------------------------
Net increase in cash and equivalents ........................... 1,453,000 664,000 280,000
Cash and equivalents at beginning of year ...................... 2,585,000 1,921,000 1,641,000
-------------------------------------------------
Cash and equivalents at end of year ............................ $ 4,038,000 $ 2,585,000 $ 1,921,000
=================================================
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 .......................... (82,405,000)
Liabilities assumed .................................... 73,874,000
-------------
Purchase price in excess of fair value of
assets acquired ................................ $ 73,048,000
=============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................... $ 9,449,000 $ 7,810,000 $ 8,183,000
Income taxes ................................... 11,750,000 2,953,000 6,363,000
</TABLE>
Tax benefits derived from the exercise of stock options reduced income tax
obligations and increased additional paid-in capital in the amount of $2,083,000
during 1997.
In connection with the merger with North Star Universal, Inc., Michael Foods,
Inc. assumed $21,250,000 of net indebtedness and effectively repurchased
1,783,036 shares of its common stock (see Note H).
The accompanying notes are an integral part of these statements.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Michael Foods, Inc. (the "Company") is engaged in food processing and
distribution primarily throughout the United States. Principal products for the
years ended December 31, as a percent of net sales, are as follows:
1997 1996 1995
- ---------------------------------------------------------------
Egg Products ................ 63% 43% 42%
Refrigerated Distribution ... 22 34 34
Dairy Products .............. 11 15 14
Potato Products ............. 7 14 16
Inter-company Sales ......... (3) (6) (6)
---------------------------------
100% 100% 100%
=================================
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated cfinancial statements follows:
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. The Company utilizes a fifty-two, fifty-three
week fiscal year ending on the Saturday nearest to December 31. For clarity of
presentation, the Company describes all periods as if the year end is December
31. The year ended December 31, 1997 includes the results of fifty-three weeks
of operations and the years ended December 31, 1996 and 1995 each contain
fifty-two weeks of operations.
CASH AND EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories, other than flocks, are stated at the lower of cost (determined
on a first-in, first-out basis) or market. Flock inventory represents the cost
of purchasing and raising flocks to laying maturity, at which time their cost is
amortized to operations over their expected useful lives of generally one to two
years, assuming no residual value.
Inventories consist of the following:
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------
Raw materials and supplies ..... $16,047,000 $11,065,000
Work in process and
finished goods ......... 30,374,000 21,235,000
Flocks ......................... 22,508,000 26,676,000
---------------------------
$68,929,000 $58,976,000
===========================
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on the straight-line basis. Estimated service lives range from 10-40 years for
buildings and improvements and 3-10 years for machinery and equipment.
Accelerated and straight-line methods are used for income tax purposes.
The Company capitalized approximately $720,000, $743,000 and $172,000 of
interest costs during 1997, 1996 and 1995 relating to the construction and
installation of property, plant and equipment.
GOODWILL
The Company's acquisitions have been accounted for as purchases and the
excess of the total acquisition costs over the fair value of the net assets
acquired were recorded as goodwill. Currently, goodwill is amortized on a
straight-line basis over 40 years. Accumulated amortization was $13,123,000 and
$10,184,000 at December 31, 1997 and 1996. The Company evaluates its goodwill
annually to determine potential impairment by comparing the carrying value of
the goodwill to the undiscounted future cash flows of the related assets. The
Company adjusts the value of a subsidiary's goodwill if an impairment is
identified (see Note C).
REVENUE RECOGNITION
Sales of the Company's products are recognized when the goods are shipped to
customers and are recorded net of estimated discounts and allowances.
STOCK-BASED COMPENSATION
The Company utilizes the intrinsic value method of accounting for its
stock-based employee compensation plans. Pro forma information related to the
fair value based method of accounting is contained in Note H.
NET EARNINGS (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings per Share". All current and prior year
earnings (loss) per share data have been restated to conform to the provisions
of SFAS 128.
The Company's basic net earnings (loss) per share is computed by dividing net
earnings (loss) by the weighted average number of outstanding common shares. The
Company's diluted net earnings (loss) per share is computed by dividing net
earnings (loss) by the weighted average number of outstanding common shares and
common share equivalents relating to stock options, when dilutive. Options to
purchase 141,311, 1,948,721 and 613,341 shares of common stock with weighted
average exercise prices of $13.94, $10.91 and $13.87
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
were outstanding during 1997, 1996 and 1995, but were excluded from the
computation of common share equivalents because they were anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information" are effective for
fiscal years beginning after December 15, 1997. SFAS 130 requires a company to
display an amount representing comprehensive income, as defined by the
statement, as part of the company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities and foreign currency items. The adoption of SFAS 130
should not affect the Company's consolidated financial statements.
SFAS 131 requires a company to disclose financial and other information, as
defined by the statement, about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information. The Company will include the required SFAS 131 business segment
disclosures in its 1998 annual report.
USE OF ESTIMATES
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
NOTE B
ACQUISITION OF PAPETTI'S
On February 26, 1997, the Company completed its acquisition of Papetti's
Hygrade Egg Products, Inc. and affiliated companies (collectively "Papetti's").
The acquisition was accounted for as a purchase and the results of Papetti's
operations were included in the Company's 1997 consolidated statements of
operations from the date of acquisition. Total consideration included the
issuance of 3,195,455 of newly issued common shares valued at $38,859,000,
$44,315,000 in cash and closing costs, and the assumption of $22,825,000 of
notes payable and long-term debt. The total consideration exceeded the fair
value of the net assets acquired by $73,048,000, which has been recorded as
goodwill and is being amortized on a straight-line basis over forty years.
In connection with the acquisition, the Company received $6,000,000 as a
settlement for existing patent litigation between Papetti's and the Company and
the patent licensor (see Note G). The Company also entered into leases with the
previous owners of Papetti's for the majority of Papetti's operating facilities.
The future minimum rental commitments under these leases is approximately
$2,100,000 per year through February, 2007. Additionally, two of the Papetti's
shareholders became directors of the Company following the acquisition.
The following unaudited consolidated pro forma information utilizes the
audited information for the Company for 1997 and 1996 and unaudited information
for Papetti's for the period from January 1, 1997 through February 26, 1997 and
for calendar year 1996. The pro forma data assumes the Papetti's acquisition,
the merger with North Star Universal, Inc. (see Note H) and the 1997 long-term
debt borrowings (see Note D) had occurred on January 1, 1997 and 1996,
respectively (in thousands of dollars except per share amounts).
YEARS ENDED DECEMBER 31, 1997 1996
- ----------------------------------------------------------
Net sales .................... $ 1,004,818 $ 982,532
Net earnings (loss) .......... 32,992 (1,146)
Net earnings (loss) per share
Basic ................ $ 1.54 $ (.06)
Diluted .............. 1.52 (.06)
The unaudited consolidated pro forma information is not necessarily
indicative of the combined results that would have occurred had the acquisition,
merger and borrowings occurred on those dates, nor is it indicative of the
results that may occur in the future.
NOTE C
PRODUCT LINE AND ASSET IMPAIRMENT
FROZEN FRENCH FRY PRODUCT LINE
The Company's frozen french fry product line experienced significant profit
margin and volume declines during the second half of 1996. Continued projected
losses for this product line resulted in management's decision that this product
line's long-lived assets had incurred an impairment of the assets' carrying
cost. In December, 1996, a loss of $9,172,000 was recorded to eliminate goodwill
directly attributable to this product line and to reduce the carrying value of
the remaining long-lived assets to their estimated fair market value. The
estimated fair market value was based upon the projected future cash flows of
these assets. In addition, the Company recorded a fourth quarter 1996 markdown
of $12,225,000 to reduce its frozen french fry product line inventory to the
lower of cost or market. This adjustment also reduced the product line's raw
potato costs, that were estimated to be in excess of the Company's production
plans, to estimated net realizable value. During 1997, the Company disposed of
this product line.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
The approximate revenues and expenses directly associated with this frozen
french fry product line, prior to the impairment loss and inventory markdown,
for each of the years 1997, 1996 and 1995 were as follows: net sales were
$10,281,000, $26,908,000 and $34,718,000; cost of sales were $10,112,000,
$28,572,000 and $32,867,000; and selling, general and administrative expenses
were $1,814,000, $2,987,000 and $3,961,000. Therefore, the Company recorded
operating losses directly attributable to this product line of $1,645,000 in
1997, $4,651,000 in 1996 and $2,110,000 in 1995.
CONSTRUCTION PROJECT IMPAIRMENT
During 1996, the Company recorded a loss of $1,300,000 related to
management's decision to abandon completion of a building. Use of this building,
originally intended for use in the Company's refrigerated distribution business,
was determined to not be consistent with the current needs of the business. The
Company has included this loss in the caption "Product line asset impairment" in
the statement of operations.
NOTE D
LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31, 1997 1996
- ---------------------------------------------------------------
Revolving line
of credit (a) ......... $ - $ 60,700,000
7.58% senior promissory
notes (b) ............. 125,000,000 -
9.5% senior promissory
note (c) .............. 18,000,000 26,000,000
9.85%-10.4% senior
promissory notes (d) .. - 19,100,000
Other ......................... 3,028,000 7,101,000
-------------------------------
146,028,000 112,901,000
Less current maturities ....... 8,509,000 8,410,000
-------------------------------
$137,519,000 $104,491,000
===============================
Aggregate maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31,
- ---------------------------------------------------------------
1998 ............................................ $ 8,509,000
1999 ............................................ 10,557,000
2000 ............................................ 694,000
2001 ............................................ 465,000
2002 307,000
Thereafter ...................................... 125,496,000
------------
$146,028,000
============
(a) At December 31, 1997, the Company had an unsecured revolving line of credit
with its principal banks for $80,000,000. The revolving line is due
February, 2002 and bears interest at the principal bank's reference rate, or
at Eurodollar rates at the Company's option.
At December 31, 1996, the Company had an unsecured revolving line of
credit with its principal banks for $65,000,000 (effective interest rate of
6.1% at December 31, 1996). This revolving line was retired in February,
1997.
(b) These notes are due in equal annual principal installments beginning in
February, 2005, are unsecured, and require semi-annual interest payments.
(c) This note is due in varying semi-annual installments through December, 1999,
is unsecured, and requires semi-annual interest payments.
(d) These unsecured notes were retired in February, 1997, in connection with the
merger with North Star Universal (see Note H).
The majority of the Company's long-term debt agreements described above
contain similar restrictive covenants, the most significant of which are minimum
net worth and interest coverage, limitations on additional indebtedness and
liens, and changes in control of the Company.
The fair value of long-term debt approximates its carrying value, based upon
rates currently available to the Company.
NOTE E
INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED
DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------
Current
Federal ...... $ 11,342,000 $ 2,013,000 $ 4,893,000
State ........ 3,438,000 511,000 886,000
----------------------------------------------
14,780,000 2,524,000 5,779,000
Deferred
Federal ...... 7,410,000 (2,621,000) 4,804,000
State ........ 820,000 (273,000) 437,000
----------------------------------------------
8,230,000 (2,894,000) 5,241,000
----------------------------------------------
$ 23,010,000 $ (370,000) $11,020,000
==============================================
The tax effects of the cumulative temporary differences between the tax bases
of assets and liabilities and their carrying amounts for financial reporting
purposes are as follows:
DECEMBER 31, 1997 1996
- ---------------------------------------------------------
Depreciation .......... $ 29,930,000 $ 31,035,000
Farm inventory
accounting .... 5,959,000 5,312,000
Goodwill .............. 1,653,000 -
Inventory writedowns .. - (4,550,000)
Other ................. (4,002,000) (4,925,000)
---------------------------------
$ 33,540,000 $ 26,872,000
=================================
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
The following is a reconciliation of the Federal statutory income tax rate to
the consolidated effective tax rate:
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------
Federal statutory rate ....... 35.0% (35.0)% 35.0%
State tax effect ............. 5.0 (3.4) 3.0
Goodwill ..................... 1.4 40.0 1.7
Other ........................ 0.1 (12.3) (1.2)
---------------------------
41.5% (10.7)% 38.5%
===========================
NOTE F
EMPLOYEE RETIREMENT PLAN
Full-time employees of the Company who meet service requirements are eligible
to participate in a defined contribution retirement plan. The Company matches up
to 4% of each participant's eligible compensation. Company contributions totaled
$1,520,000, $1,488,000 and $1,312,000 for the years ended December 31, 1997,
1996 and 1995.
NOTE G
COMMITMENTS AND CONTINGENCIES
PATENT LITIGATION
The Company has an exclusive license agreement for a patented process for the
production and sale of extended shelf-life liquid egg products. Under the
license agreement, the Company has the right to defend and prosecute
infringement of the licensed patents. The Company can offset up to 50% of
required royalty payments under the agreement with costs incurred to defend the
licensed patents. To the extent defense costs exceed the required royalty
payments, the agreement permits the Company to apply the excess costs to future
royalty payments. At December 31, 1997 and 1996, the Company had prepaid royalty
payments in other assets totaling approximately $1,382,000 and $7,923,000. In
connection with the February 26, 1997 acquisition of Papetti's, which was a
defendant in one of the patent infringement cases, a settlement of $6,000,000
was received by the Company. Under the terms of its license agreement, the
Company applied this settlement as a reduction of its prepaid royalty payments.
In 1994, the U.S. Federal Court of Appeals upheld the validity of the patents
subject to the license agreement. Subsequently, a patent examiner at the U.S.
Patent and Trademark Office rejected the patents. The Company is appealing the
decision of the examiner and believes the validity of the patents will
ultimately be upheld. During the appeal process, the patents remain valid and in
full force and effect. These patents are scheduled to expire in 2006.
PRODUCT LITIGATION
In the fall of 1994, a customer of the Company recalled potentially
contaminated product and began settling claims with consumers. The customer
filed a suit, whereby the Company was a co-defendant with other companies
alleged to have supplied contaminated product to the customer's plant. In May,
1997, this suit was settled within the Company's insurance coverage.
OTHER LITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes the ultimate outcome of this litigation will not have a
material effect on its consolidated financial position, liquidity or results of
operations.
NOTE H
SHAREHOLDERS' EQUITY
MERGER WITH NORTH STAR UNIVERSAL
At December 31, 1996, North Star Universal, Inc. ("NSU") held 7,354,950
shares of the issued and outstanding common stock of the Company (approximately
38.0%). On February 28, 1997, the Company merged into NSU and immediately
distributed NSU's subsidiary, ENStar Inc. ("ENStar"), in a tax-free distribution
to the former shareholders of NSU. At the time of the merger, NSU changed its
name to Michael Foods, Inc. and the management and operations of the continuing
entity are those of the Company. The merger was accounted for as a reverse
acquisition utilizing the purchase method of accounting. As a result of the
merger, NSU delivered approximately $21,250,000 of net subordinated indebtedness
together with 1,783,036 shares of Company common stock of approximately equal
value, which the Company effectively retired in the form of a treasury stock
redemption. The Company subsequently extinguished the subordinated indebtedness
during 1997. Two former officers and directors of NSU remain directors of the
Company.
As a condition of the merger with NSU, ENStar has indemnified the Company
against any and all liabilities related to the operations of NSU prior to this
merger, including the tax-free distribution of ENStar.
CAPITAL STOCK
The Company's Articles of Incorporation provide that the authorized capital
stock consists of 50,000,000 shares: 40,000,000 shares of $.01 par value common
stock and 10,000,000 shares of undesignated stock, which are issuable by the
Board of Directors. The Board of Directors also has the authority to determine
voting, conversion and other rights of the undesignated stock when issued.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
SHARE REPURCHASES
In December, 1995, the Company's Board of Directors authorized the retirement
of all 613,912 shares of treasury stock. During 1996, the Company repurchased
and retired 13,543 shares of its common stock for $500,000, related to put
agreements issued in certain business acquisitions.
STOCK OPTION PLANS
The Company maintains certain non-qualified stock option plans. The officer
and key employee plans had 924,000 shares of common stock available for issue at
December 31, 1997 and the non-employee director plan had 100,000 shares
available for issue at December 31, 1997. The stock options granted under these
plans generally have a ten year term, vest ratably over five years, and have an
exercise price equal to the fair market value of the stock on the date of grant.
Option transactions under these plans during each of the three years ended
December 31 are summarized as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
- ----------------------------------------------------------
Outstanding at
January 1, 1995 ....... 1,772,477 $10.73
Granted ....... 176,000 10.71
Canceled ...... (17,461) 10.83
--------------------------
Outstanding at
December 31, 1995 ..... 1,931,016 10.73
Granted ....... 149,620 11.74
Exercised ..... (94,000) 7.52
Canceled ...... (33,860) 13.67
--------------------------
Outstanding at
December 31, 1996 ..... 1,952,776 10.91
Granted ....... 221,500 16.07
Exercised ..... (943,948) 10.31
Canceled ...... (5,500) 7.66
--------------------------
Outstanding at
December 31, 1997 ..... 1,224,828 $12.33
==========================
Options exercisable
at December 31:
1995 .................. 1,599,226 $10.74
==========================
1996 .................. 1,574,304 $10.91
==========================
1997 .................. 809,656 $11.65
==========================
The following table summarizes information concerning currently
outstanding and exercisable stock options:
OPTIONS OUTSTANDING
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE
-------------------------------------------------------------
$ 7.63 - $11.33 652,671 5.2 years $10.10
11.50 - 15.13 423,070 4.9 years 12.67
17.83 - 24.38 149,087 7.1 years 21.16
---------
1,224,828
=========
OPTIONS EXERCISABLE
WEIGHTED
AVERAGE
RANGE OF NUMBER EXERCISE
EXERCISE PRICES OF SHARES PRICE
---------------------------------------------
$ 7.63 - $11.33 436,871 $ 9.91
11.50 - 15.13 309,698 12.84
17.83 - 24.38 63,087 17.87
-------
809,656
=======
The Company's 1997, 1996 and 1995 pro forma net earnings (loss) and diluted
net earnings (loss) per share would have been $32,160,000, $(3,261,000) and
$17,521,000, or $1.50, $(.17) and $.90 per share had the fair value method been
used for valuing options granted in 1997, 1996 and 1995. The impact on net
earnings (loss) may not be representative of future disclosures because they do
not take into effect pro forma compensation expense related to grants made
before 1995.
The weighted average fair value of options granted in 1997, 1996 and 1995
were $8.51, $4.20, and $4.23 per share, computed by applying the following
weighted average assumptions to the Black Scholes options pricing model:
dividend yield of 2%; risk-free rate of return of 6.6%; volatility of 48.2% in
1997 and 31.4% in 1996 and 1995; and an average term of 7 years.
NOTE I
CONCENTRATIONS
Sales to one customer accounted for 12% and 11% of consolidated net sales in
1996 and 1995.
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED MICHAEL FOODS, INC.
PUBLIC ACCOUNTANTS
[LOGO] GRANT THORNTON
GRANT THORNTON LLP ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
THE U.S. MEMBER FIRM OF
GRANT THORNTON INTERNATIONAL
BOARD OF DIRECTORS
MICHAEL FOODS, INC.
We have audited the accompanying consolidated balance sheets of Michael Foods,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Michael Foods,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 18, 1998
22
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL DATA MICHAEL FOODS, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997* 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales .................................. $ 956,223 $ 616,395 $ 536,627 $ 505,965 $ 474,783
Cost of sales .............................. 813,771 545,055 454,652 430,917 414,965
Product line inventory markdown ............ -- 12,225 -- -- --
------------------------------------------------------
Gross profit ............................... 142,452 59,115 81,975 75,048 59,818
Selling, general and administrative expenses 76,173 44,822 45,729 41,851 39,122
Product line asset impairment .............. -- 10,472 -- -- --
Disposal of product line ................... -- -- -- -- 22,769
Restructuring charges ...................... -- -- -- -- 11,164
------------------------------------------------------
76,173 55,294 45,729 41,851 73,055
------------------------------------------------------
Operating profit (loss) .................... 66,279 3,821 36,246 33,197 (13,237)
Interest expense, net ...................... 10,830 7,264 7,635 8,498 8,363
------------------------------------------------------
Earnings (loss) before income taxes ........ 55,449 (3,443) 28,611 24,699 (21,600)
Income tax expense (benefit) ............... 23,010 (370) 11,020 9,510 (5,280)
------------------------------------------------------
Net earnings (loss) ................ $ 32,439 $ (3,073) $ 17,591 $ 15,189 $ (16,320)
======================================================
Net earnings (loss) per share
Basic .............................. $ 1.53 $ (.16) $ .91 $ .79 $ (.84)
Diluted ............................ 1.51 (.16) .90 .78 (.84)
======================================================
Weighted average shares outstanding
Basic .............................. 21,181 19,386 19,328 19,315 19,416
Diluted ............................ 21,446 19,386 19,530 19,460 19,416
Dividends per common share ................. $ .20 $ .20 $ .20 $ .20 $ .20
BALANCE SHEET DATA (end of period)
Working capital ............................ $ 54,788 $ 56,677 $ 42,095 $ 33,589 $ 22,267
Total assets ............................... 503,655 364,659 359,227 336,645 329,087
Long-term debt, including current maturities 146,028 112,901 101,421 100,604 104,008
Shareholders' equity ....................... 229,246 174,042 180,095 166,029 155,003
======================================================
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------
FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997*
Net sales ......................... $ 195,418 $ 237,861 $ 245,868 $ 277,076
Gross profit ...................... 23,729 39,461 38,354 40,908
Net earnings ...................... 3,962 8,352 10,828 9,297
Net earnings per share
Basic ..................... $ .20 $ .39 $ .50 $ .43
Diluted ................... .20 .39 .49 .42
Weighted average shares outstanding
Basic ..................... 20,091 21,258 21,583 21,793
Diluted ................... 20,233 21,423 21,947 22,184
1996
Net sales ......................... $ 143,872 $ 151,678 $ 159,928 $ 160,917
Gross profit ...................... 18,913 18,198 15,100 6,904
Net earnings (loss) ............... 3,278 3,277 1,325 (10,953)
Net earnings (loss) per share
Basic ..................... $ .17 $ .17 $ .07 $ (.56)
Diluted ................... .17 .17 .07 (.56)
Weighted average shares outstanding
Basic ..................... 19,353 19,389 19,396 19,408
Diluted ................... 19,493 19,520 19,538 19,408
</TABLE>
* Amounts include the results of Papetti's operations from February 26, 1997,
the date of acquisition, and 53 weeks of operations.
23
<PAGE>
[PHOTO] [PHOTO]
CORPORATE OFFICERS
CLOCKWISE FROM LEFT TO RIGHT: GREGG A. OSTRANDER, JEFFREY M. SHAPIRO, MARK D.
WITMER, JOHN D. REEDY
BOARD OF DIRECTORS
FRONT, SEATED, LEFT TO RIGHT: GREGG A. OSTRANDER, ARVID C. KNUDTSON; SEATED
MIDDLE, LEFT TO RIGHT: JEFFREY J. MICHAEL, ARTHUR J. PAPETTI; STANDING, LEFT TO
RIGHT: MILES E. EFRON, MAUREEN B. BELLANTONI, RICHARD A. COONROD, JOSEPH D.
MARSHBURN, STEPHEN T. PAPETTI
BOARD OF DIRECTORS
ARVID C. KNUDTSON
CHAIRMAN OF THE BOARD OF DIRECTORS
CONSULTANT
MAUREEN B. BELLANTONI
PRESIDENT AND CHIEF OPERATING OFFICER
BIL MAR FOODS
RICHARD A. COONROD
PRESIDENT
COONROD AGRIPRODUCTION CORP.
MILES E. EFRON
(CHAIR, COMPENSATION COMMITTEE)
RETIRED CHIEF EXECUTIVE OFFICER
NORTH STAR UNIVERSAL, INC.
JOSEPH D. MARSHBURN
(CHAIR, CORPORATE GOVERNANCE
AND NOMINATING COMMITTEE)
SENIOR VICE PRESIDENT
CITRUS WORLD, INC.
JEFFREY J. MICHAEL
(CHAIR, AUDIT COMMITTEE)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ENSTAR INC.
GREGG A. OSTRANDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF THE COMPANY
ARTHUR J. PAPETTI
EXECUTIVE VICE PRESIDENT
PAPETTI'S HYGRADE EGG PRODUCTS, INC.
STEPHEN T. PAPETTI
EXECUTIVE VICE PRESIDENT
PAPETTI'S HYGRADE EGG PRODUCTS, INC.
24
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING:
Shareholders and members of the investment community are cordially invited to
attend the Annual Meeting of Shareholders, which is scheduled to be held at 4:00
p.m., local time, on May 12, 1998, in the auditorium of the Lutheran Brotherhood
Building, 625 Fourth Avenue South in Minneapolis, Minnesota.
INVESTOR INQUIRIES:
Requests for financial publications, including Form 10-K filed with the
Securities and Exchange Commis sion, should be addressed to:
MICHAEL FOODS, INC.
Attention: Mark D. Witmer
Assistant Treasurer
324 Park National Bank Bldg.
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
CERTIFIED PUBLIC ACCOUNTANTS:
Grant Thornton LLP
200 South Sixth Street
500 Pillsbury Center North
Minneapolis, Minnesota 55402
CORPORATE COUNSEL:
Maun & Simon
2000 Midwest Plaza
801 Nicollet Mall
Minneapolis, Minnesota 55402
TRANSFER AGENT AND REGISTRAR:
Norwest Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Shareholder Inquiries:
800-468-9716
LISTING:
The Company's common stock trades on the National Market tier of the Nasdaq
Stock Market under the symbol: MIKL.
MARKET PRICE RANGES:
The following table sets forth the high and low daily sale prices for the common
stock for each quarter of 1997 and 1996.
1997 LOW HIGH
- ---------------------------------------
First Quarter....... 10 1/4 13
Second Quarter...... 10 19
Third Quarter....... 18 3/8 25 3/4
Fourth Quarter...... 19 3/4 28 3/8
1996 LOW HIGH
- ---------------------------------------
First Quarter....... 9 7/8 12 3/4
Second Quarter...... 10 1/4 11 7/8
Third Quarter....... 9 1/2 13 1/2
Fourth Quarter...... 10 1/8 13 1/8
The following table sets forth the regular quarterly cash dividends per share
paid in 1997 and 1996.
1997 1996
- ----------------------------------------
First Quarter...... $.05 $.05
Second Quarter..... .05 .05
Third Quarter....... .05 .05
Fourth Quarter...... .05 .05
- ----------------------------------------
At year end 1997 the Company had 575 common shareholders of record and an
estimated 4,000 beneficial owners whose shares were held by nominees or broker
dealers.
OTHER INFORMATION
CORPORATE HEADQUARTERS:
MICHAEL FOODS, INC.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
612-546-1500
CORPORATE EXECUTIVE OFFICERS:
GREGG A. OSTRANDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JEFFREY M. SHAPIRO
EXECUTIVE VICE PRESIDENT AND SECRETARY
JOHN D. REEDY
VICE PRESIDENT-FINANCE, CHIEF FINANCIAL
OFFICER AND TREASURER
MARK D. WITMER
ASSISTANT TREASURER
PRINCIPAL SUBSIDIARY OFFICES:
CRYSTAL FARMS REFRIGERATED
DISTRIBUTION COMPANY
Park Place West, Suite 200
6465 Wayzata Boulevard
Minneapolis, Minnesota 55426
FARM FRESH FOODS, INC.
6602 Clara Street
Bell Gardens, California 90201
KOHLER MIX SPECIALTIES, INC.
4041 Highway 61
White Bear Lake, Minnesota 55110
M.G. WALDBAUM COMPANY
500 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
NORTHERN STAR CO.
3171 Fifth Street Southeast
Minneapolis, Minnesota 55414
PAPETTI'S HYGRADE
EGG PRODUCTS, INC.
1 Papetti Plaza
Elizabeth, New Jersey 07206
WISCO FARM COOPERATIVE
450 North CP Avenue
Lake Mills, Wisconsin 53551
<PAGE>
[LOGO]
MICHAEL FOODS, INC.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
http//www.michaelfoods.com
EXHIBIT 21.1
SUBSIDIARIES OF MICHAEL FOODS, INC.
STATE
NAME OF INCORPORATION
- --------------------------------------------------------------------------------
Crystal Farms Refrigerated Distribution Company Minnesota
Northern Star Co. Minnesota
Kohler Mix Specialties, Inc. Minnesota
M. G. Waldbaum Company Nebraska
Papetti's Hygrade Egg Products, Inc. Minnesota
Casa Trucking, Inc. Minnesota
Wisco Farm Cooperative Wisconsin
WFC, Inc. Wisconsin
Farm Fresh Foods, Inc. California
Michael Foods of Delaware, Inc. Delaware
Midwest Mix, Inc. Minnesota
Minnesota Products, Inc. Minnesota
MIKLFS Corporation Virgin Islands
R&P Liquid Egg Technology Limited Partnership New Jersey
Papetti Electroheating Corporation New Jersey
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We have issued our reports dated February 18, 1998 accompanying the consolidated
financial statements and schedule of Michael Foods, Inc. and subsidiaries which
are incorporated by reference or included in the Annual Report on Form 10-K of
Michael Foods, Inc. for the year ended December 31, 1997. We hereby consent to
the incorporation by reference of said reports in the Registration Statements of
Michael Foods, Inc. on Forms S-8 (File No. 33-31914 effective November 21, 1989,
and March 25, 1997 as amended; File Nos. 33-64076 and 33-64078 effective June 9,
1993, and March 25, 1997 as amended; File No. 33-57969 effective March 7, 1995,
and March 25, 1997 as amended; and File No. 333-23949 effective March 25, 1997).
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
February 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,038
<SECURITIES> 0
<RECEIVABLES> 85,243
<ALLOWANCES> 1,748
<INVENTORY> 68,929
<CURRENT-ASSETS> 158,138
<PP&E> 378,339
<DEPRECIATION> 160,800
<TOTAL-ASSETS> 503,655
<CURRENT-LIABILITIES> 103,350
<BONDS> 137,519
0
0
<COMMON> 218
<OTHER-SE> 229,028
<TOTAL-LIABILITY-AND-EQUITY> 503,655
<SALES> 959,223
<TOTAL-REVENUES> 959,223
<CGS> 813,771
<TOTAL-COSTS> 813,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 749
<INTEREST-EXPENSE> 10,830
<INCOME-PRETAX> 55,449
<INCOME-TAX> 23,010
<INCOME-CONTINUING> 32,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,439
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION, PER FAS NO. 128,
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
EARNINGS INCLUDED IN THE COMPANY'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,742
<SECURITIES> 0
<RECEIVABLES> 93,415
<ALLOWANCES> 2,101
<INVENTORY> 64,639
<CURRENT-ASSETS> 162,676
<PP&E> 370,346
<DEPRECIATION> 153,340
<TOTAL-ASSETS> 501,277
<CURRENT-LIABILITIES> 101,425
<BONDS> 144,163
0
0
<COMMON> 217
<OTHER-SE> 219,615
<TOTAL-LIABILITY-AND-EQUITY> 501,277
<SALES> 679,147
<TOTAL-REVENUES> 679,147
<CGS> 577,603
<TOTAL-COSTS> 577,603
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,954
<INCOME-PRETAX> 39,561
<INCOME-TAX> 16,419
<INCOME-CONTINUING> 23,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,142
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION, PER FAS NO. 128,
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS ON PAGES 9 & 10 OF THE COMPANY'S ANNUAL
REPORT FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,921
<SECURITIES> 0
<RECEIVABLES> 40,583
<ALLOWANCES> 0
<INVENTORY> 58,845
<CURRENT-ASSETS> 102,971
<PP&E> 302,783
<DEPRECIATION> 118,642
<TOTAL-ASSETS> 359,227
<CURRENT-LIABILITIES> 60,876
<BONDS> 89,690
0
0
<COMMON> 193
<OTHER-SE> 179,902
<TOTAL-LIABILITY-AND-EQUITY> 359,227
<SALES> 536,627
<TOTAL-REVENUES> 536,627
<CGS> 454,652
<TOTAL-COSTS> 454,652
<OTHER-EXPENSES> 45,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,635
<INCOME-PRETAX> 28,611
<INCOME-TAX> 11,020
<INCOME-CONTINUING> 17,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,591
<EPS-PRIMARY> .91
<EPS-DILUTED> .90
</TABLE>
