SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
MICHAEL FOODS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
[LOGO]
MICHAEL
FOODS INC.
324 PARK NATIONAL BANK BUILDING
5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
March 26, 1999
Dear Shareholder:
You are cordially invited to attend the 1999 Annual Meeting of Shareholders
of Michael Foods, Inc. to be held in the Auditorium of the Lutheran Brotherhood
Building, 625 Fourth Avenue South, Minneapolis, Minnesota on Thursday, April 29,
1999, at 4:00 p.m., local time.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting there will
be a report on the operations of the Company. After the business of the meeting
has been concluded, shareholders will be given an opportunity to ask appropriate
questions.
The items requiring shareholder approval are the election of directors,
ratification of an amendment to the 1997 Stock Incentive Plan of Michael Foods,
Inc. and Affiliated Companies, and ratification of the appointment of auditors
for the year 1999. We recommend that you vote for each of these proposals, which
are set forth in more detail in the accompanying Proxy Statement.
One of the Company's long-standing directors, Miles E. Efron, is retiring.
Miles was instrumental in forming this Company and visionary in his
contributions over the years. We will miss Miles' valuable input and advice, and
thank him for his many years of dedicated service.
Whether or not you can attend the Annual Meeting, please complete, sign,
date and mail the enclosed proxy card promptly. This action will not limit your
right to revoke your proxy in the manner described in the accompanying Proxy
Statement or to vote in person if you wish to attend the Annual Meeting and vote
personally.
Sincerely,
/s/ Gregg A. Ostrander
Gregg A. Ostrander
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MICHAEL FOODS, INC.
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1999
------------------
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Michael
Foods, Inc., a Minnesota corporation, will be held in the Auditorium of the
Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota,
at 4:00 p.m., local time, on Thursday, April 29, 1999.
This meeting is being held for the following purposes:
1. To elect eleven (11) persons to serve as directors until the next
annual election and until their successors are duly elected and
qualified.
2. To ratify an amendment to the 1997 Stock Incentive Plan of
Michael Foods, Inc. and Affiliated Companies (the "1997 Stock
Incentive Plan").
3. To ratify the appointment of Grant Thornton LLP as independent
auditors for the year ending December 31, 1999.
4. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on March 19, 1999 will
be entitled to notice of or to vote at the meeting. Whether or not you plan to
be present at the meeting, please sign and return the accompanying form of proxy
in the enclosed postage prepaid envelope at your earliest convenience.
/s/ Jeffrey M. Shapiro
Jeffrey M. Shapiro
EXECUTIVE VICE PRESIDENT AND SECRETARY
Minneapolis, Minnesota
March 26, 1999
<PAGE>
MICHAEL FOODS, INC.
324 PARK NATIONAL BANK BUILDING
5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 29, 1999
This Proxy Statement is furnished to shareholders of Michael Foods, Inc., a
Minnesota corporation (the "Company"), in connection with the solicitation of
proxies on behalf of the Board of Directors (the "Board") for use at the Annual
Meeting of Shareholders of the Company to be held on April 29, 1999 (the "Annual
Meeting"), for the purposes set forth in the accompanying Notice of Annual
Meeting. The mailing date of this Proxy Statement and enclosed form of proxy is
March 26, 1999.
The cost of preparing, assembling and mailing the Notice of Annual Meeting,
this Proxy Statement and the form of proxy, including the reimbursement of
banks, brokers and other nominees for forwarding proxy materials to beneficial
owners is estimated at $8,000 and will be borne by the Company. Proxies may also
be solicited personally or by telephone by directors, officers and regular
employees of the Company who will receive no additional compensation. A
shareholder giving a proxy may revoke it at any time prior to the voting of the
proxy by filing with any officer of the Company a written notice of revocation
or another proxy bearing a later date. Unless otherwise noted on the proxy, the
proxies will vote for the proposals set forth herein. Any written notice of
revocation or subsequently dated proxy should be mailed or delivered to Jeffrey
M. Shapiro, Executive Vice President and Secretary, Michael Foods, Inc., 324
Park National Bank Building, 5353 Wayzata Boulevard, Minneapolis, Minnesota
55416.
The close of business on March 19, 1999 was fixed by the Board as the
record date for the determination of shareholders entitled to notice of and to
vote at the Annual Meeting. On March 4, 1999, the Company had outstanding
20,937,056 shares of common stock, $.01 par value per share (the "Common
Stock"). The Common Stock is the Company's only class of voting securities and
each share entitles the holder to one vote on all matters to come before the
meeting. There is no cumulative voting in electing directors.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the election inspector appointed for the meeting. The election inspector will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter upon which the shareholder has abstained.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
A copy of the Company's Annual Report for the year 1998, including
financial statements, accompanies this Proxy Statement. The Company will also
provide upon request a copy of its Annual Report on Form 10-K filed with the
Securities and Exchange Commission for its most recent fiscal year. Such request
should be made to the Secretary of the Company at the address shown above.
ELECTION OF DIRECTORS
Pursuant to the by-laws of the Company, the Board has fixed at eleven (11)
the number of directors to be elected at the Annual Meeting. Unless otherwise
indicated thereon, the proxy holders will vote for the election of the nominees
listed below to serve until the next annual meeting of shareholders and until
their successors are elected and qualified. All nominees are members of the
present Board. If any
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nominee shall be unavailable for election to the Board, the holders of proxies
will vote for a substitute. Management has no reason to believe that any of the
nominees will be unable to serve if elected to office.
The eleven (11) nominees who receive the highest number of votes will be
elected directors of the Company. The Board recommends a vote FOR the election
of each of the nominees listed below.
NOMINEES
The following table sets forth certain information regarding the nominees.
<TABLE>
<CAPTION>
FIRST BECAME
A DIRECTOR OF
NAME AGE BIOGRAPHICAL SUMMARY THE COMPANY
---- --- -------------------- -----------
<S> <C> <C> <C>
Maureen B. Bellantoni ..... 50 President and Chief Operating Officer of Bil Mar 1996
Foods, a division of Sara Lee Corporation, from
November 1997 to June 1998. Vice President and Chief
Financial Officer of Sara Lee Meat Group, a division
of Sara Lee Corporation, from 1994 to 1997. Vice
President of Finance and Chief Financial Officer of
PYA Monarch, a division of Sara Lee Corporation,
from 1993 to 1994.
Richard A. Coonrod ........ 67 President of Coonrod Agriproduction Corporation, a 1993
food and agribusiness consulting and investment firm,
since 1985. General Partner of The Food Fund, a
Minneapolis-based limited partnership specializing in
food-related investments, since 1990. Mr. Coonrod is
also a director of Orange-co, Inc. and Packaged Ice, Inc.
Daniel P. Dillon .......... 53 President and Chief Executive Officer of Welch Foods, 1998
Inc., a packaged goods company specializing in juices,
frozen concentrates, jams and jellies, since 1995. Chief
Operating Officer of Welch Foods, Inc. from 1994 to
1995 and Senior Vice President from 1991 to 1994.
Jerome J. Jenko ........... 61 Chief Executive Officer of Jenko & Associates since 1998
October 1997. Senior Advisor-Goldsmith, Agio, Helms
and Company, an investment banking firm, since June
1997. Senior Vice President, General Counsel and
Secretary of The Pillsbury Company from 1989 to 1997.
Arvid C. Knudtson ......... 72 Chairman of the Board since 1997. Consultant. Principal 1987
in ACK Financial, a financial services firm serving the
agricultural market, from 1988 to 1993.
Joseph D. Marshburn ....... 70 Senior Vice President of Citrus World, Inc., a citrus 1987
processing and marketing cooperative, since 1993.
Jeffrey J. Michael ........ 42 President and Chief Executive Officer of ENStar Inc., 1990
a holding company owning 25% of CorVel Corporation
and businesses engaged in voice and data connectivity
and networking products and services, since 1997. Held
same positions with North Star Universal, Inc. from
1990 to 1996. Mr. Michael is also a director of ENStar
Inc. and CorVel Corporation.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FIRST BECAME
A DIRECTOR OF
NAME AGE BIOGRAPHICAL SUMMARY THE COMPANY
---- --- -------------------- -----------
<S> <C> <C> <C>
Margaret D. Moore ......... 51 Senior Vice President/Treasurer of The Pepsi Bottling 1998
Group, a wholly-owned subsidiary of PepsiCo, Inc.,
which manufactures and distributes non-alcoholic
beverages, since November 1998. From 1987 to October
1998, Vice President of Investor Relations of PepsiCo, Inc.
Gregg A. Ostrander ........ 46 President and Chief Executive Officer of the Company 1994
since 1994. Mr. Ostrander is also a director of Arctic
Cat Inc. and Celestial Seasonings, Inc.
Arthur J. Papetti ......... 34 Executive Vice President of Papetti's Hygrade Egg 1997
Products, Inc., a wholly-owned subsidiary of the
Company, since 1992.
Stephen T. Papetti ........ 41 Executive Vice President of Papetti's Hygrade Egg 1997
Products, Inc., a wholly-owned subsidiary of the
Company, since 1992.
</TABLE>
CERTAIN INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
AUDIT COMMITTEE. The Company has a standing Audit Committee which
currently consists of Mr. Michael as Chairman, Mr. Marshburn and Ms.
Bellantoni. The Audit Committee reviews, recommends and reports to the Board on
(1) the independent auditors, (2) the quality and effectiveness of internal
controls, (3) the engagement or discharge of the independent auditors, (4) the
professional services provided by the independent auditors, and (5) the review
and approval of major changes in the Company's accounting principles and
practices. During 1998, the Audit Committee held three meetings.
COMPENSATION COMMITTEE. The Company has a standing Compensation Committee
which currently consists of Mr. Coonrod as Chairman, Mr. Dillon and Mr. Jenko.
The Compensation Committee considers and recommends to the Board salary
schedules and other remuneration for the Company's executive officers. This
committee also administers the Company's 1987 Non-Qualified Stock Option Plan,
1994 Executive Incentive Plan, 1994 Executive Performance Stock Award Plan and
the 1997 Stock Incentive Plan. During 1998, the Compensation Committee held
three meetings.
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE. The Company has a standing
Corporate Governance and Nominating Committee which currently consists of Mr.
Marshburn as Chairman, Mr. Knudtson and Mr. Ostrander. The Corporate Governance
and Nominating Committee acts on behalf of the Board to review the size,
composition and effectiveness of the Board and to consider corporate governance
matters. During 1998, the Corporate Governance and Nominating Committee held
three meetings.
During the year ended December 31, 1998, the Board held four regular
meetings and one special meeting. All directors attended more than 75% of the
meetings of the Board and committees on which they sit.
Directors who are not officers or employees of the Company receive an
annual retainer of $20,000. The Chairman of the Board is paid an annual retainer
of $28,000. Directors are paid $500 for each committee meeting attended, with
committee chairs paid $1,000 per meeting. Directors incurring travel expenses to
attend meetings are reimbursed in full. Directors' fees and travel expense
reimbursements in 1998 totaled $218,760.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The rules of the Securities and Exchange Commission require disclosure of
late Section 16 filings by Company directors and executive officers. Based on
the information provided to the Company, all directors or executive officers
timely filed reports required to be filed, except for Mr. Goucher who filed
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<PAGE>
a Form 5 on February 5, 1999 for an option exercise that should have been
reported in December 1998 and Mr. Marshburn who filed a Form 5 on February 3,
1999 for the purchase of 1,000 shares of Common Stock that should have been
reported in August 1998 and an option grant that should have been reported in
November 1997.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
of the Company's Chief Executive Officer and each of the Company's four other
most highly compensated executive officers during each of the last three fiscal
years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION
------------------------
FISCAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- ------------------------------------- -------- ----------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Gregg A. Ostrander .................. 1998 $418,269 $384,260 9,000 $7,125
President & Chief Executive Officer 1997 326,850 319,000 124,500 6,965
1996 309,000 -- 40,000 6,528
Jeffrey M. Shapiro .................. 1998 280,000 258,991 6,000 7,408
Executive Vice President & Secretary 1997 250,538 245,988 34,000 7,096
1996 250,000 -- -- 6,696
John D. Reedy ....................... 1998 232,885 214,800 6,000 7,166
Vice President -- Finance, Chief 1997 197,019 193,169 34,000 7,235
Financial Officer & Treasurer 1996 195,000 -- -- 6,835
Bill L. Goucher ..................... 1998 227,692 186,035 6,000 7,264
President, M.G. Waldbaum Company 1997 191,708 187,858 39,000 7,195
1996 188,000 -- 15,000 6,349
Arthur N. Papetti(4) ................ 1998 225,000 173,251 -- 6,400
President, Papetti's Hygrade Egg 1997 204,328 100,000 -- --
Products, Inc. 1996 -- -- -- --
</TABLE>
- ------------------
(1) 1998 amounts include Common Stock incentive awards paid under the 1994
Executive Incentive Plan, as Amended Effective January 1, 1996, for 1998
performance, plus Common Stock incentive awards paid for 1997 performance,
as such awards vested based upon 1998 performance, as follows (total dollar
value of awards/1998 shares/1997 shares): Mr. Ostrander $70,552/2,807/981;
Mr. Shapiro $48,984/1,879/751; Mr. Reedy $40,118/1,563/591; Mr. Goucher
$39,168/1,528/575; Mr. Papetti $28,124/1,510/0. Awards for 1998 represent
50% of the amount conditionally earned for 1998 performance and 30% of the
amount conditionally earned for 1997 performance under the vesting schedule
of the 1994 Executive Incentive Plan, as Amended Effective January 1, 1996
(see "REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION"). 1997
amounts include Common Stock incentive awards paid under the 1994 Executive
Incentive Plan, as Amended Effective January 1, 1996, for 1997 performance,
plus Common Stock incentive awards paid under the 1994 Executive Incentive
Plan, as Amended Effective January 1, 1995, for 1995 performance, as such
awards vested based upon 1997 performance, as follows (total dollar value of
awards/1997 shares/1995 shares): Mr. Ostrander $73,875/1,634/1,321; Mr.
Shapiro $58,075/1,253/1,070; Mr. Reedy $45,400/985/831; Mr. Goucher
$44,075/959/804; Mr. Papetti received no such awards. Awards for 1997
represent 50% of the amount conditionally earned for 1997 performance under
the vesting schedule of the 1994 Executive Incentive Plan, as Amended
Effective January 1, 1996, and 20% of the amount conditionally earned for
1995 performance under the vesting schedule of the 1994 Executive Incentive
Plan, as Amended Effective January 1, 1995 which vested based upon 1997
performance (see "REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION"). Common Stock incentive awards made for 1998 performance were
calculated using the closing price of the Common Stock on February 25, 1999
of $18.625. Common Stock incentive awards (shares) made for 1997 performance
were calculated using the closing price of the Common Stock on March 3, 1998
of $25.00, which were then valued when vested, using the closing price of
the Common Stock on February 25, 1999 of $18.625. Common Stock incentive
awards (shares) made for 1995 performance were calculated using the closing
price of the Common Stock on February 20, 1996 of $11.125, which were then
valued when vested, using the closing price of the Common Stock on March 3,
1998 of $25.00. There were no Common Stock incentive awards under the 1994
Executive Incentive Plan, as Amended Effective January 1, 1996, for 1996
performance.
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<PAGE>
(2) Number of shares of Common Stock purchasable under option grants. Pursuant
to the 1994 Executive Incentive Plan, as Amended Effective January 1, 1996,
stock option awards were made to certain executive officers in February 1999
based upon 1998 performance. The number of shares of Common Stock
purchasable under such option awards made to named executive officers were:
Mr. Ostrander 9,000 shares; Mr. Shapiro 6,000 shares; Mr. Reedy 6,000
shares; Mr. Goucher 6,000 shares; and Mr. Papetti received no such award.
Pursuant to the 1994 Executive Incentive Plan, as Amended Effective January
1, 1996, stock option awards were made to certain executive officers in
March 1998 based upon 1997 performance. The number of shares of Common Stock
purchasable under such option awards made to named executive officers were:
Mr. Ostrander 36,000 shares; Mr. Shapiro 24,000 shares; Mr. Reedy 24,000
shares; Mr. Goucher 24,000 shares; and Mr. Papetti received no such award.
Option grants are reflected in year earned, rather than year of grant. In
addition, the following stock option grants were made at the discretion of
the Compensation Committee in the years indicated (number of shares covered
by grants): Mr. Ostrander 68,500 in 1997 and 40,000 in 1996; Mr. Shapiro
10,000 in 1997; Mr. Reedy 10,000 in 1997; Mr. Goucher 15,000 in 1997 and
15,000 in 1996.
(3) Reflects the value of the Company's contributions under the Retirement
Savings Plan and the value of life insurance premiums paid by the Company.
(4) Mr. Papetti was not an executive officer of the Company during 1996.
OSTRANDER, SHAPIRO, REEDY, GOUCHER AND PAPETTI EMPLOYMENT AGREEMENTS
In early 1998, the Company and Mr. Ostrander amended and restated Mr.
Ostrander's employment agreement (the "Ostrander Employment Agreement"). The
Ostrander Employment Agreement provides for successive two-year terms following
its December 31, 1999 term unless the Ostrander Employment Agreement is
terminated in accordance with certain provisions. The Ostrander Employment
Agreement provides that Mr. Ostrander will receive an annual base salary of at
least $405,000 and that he will participate in the 1994 Executive Incentive Plan
and other fringe benefit plans established by the Company for its executive
officers. Effective January 4, 1999, the Compensation Committee established Mr.
Ostrander's annual base salary as $506,000. Pursuant to the Ostrander Employment
Agreement, the Company delivered to Mr. Ostrander in early 1998 a non-qualified
stock option to purchase 68,500 shares of Common Stock with an effective grant
date of December 31, 1997 and an exercise price of $24.375 per share.
Effective October 31, 1997, the Company and Mr. Shapiro extended his
employment agreement until December 31, 1999 (the "Shapiro Employment
Agreement"). The Shapiro Employment Agreement provides for successive two-year
terms unless it is terminated in accordance with certain provisions and
establishes Mr. Shapiro's minimum annual base salary at $260,000. Effective
January 1, 1998, the Compensation Committee established Mr. Shapiro's annual
base salary as $270,000. The Shapiro Employment Agreement also entitles Mr.
Shapiro to participate in the 1994 Executive Incentive Plan and other fringe
benefit plans established by the Company for its executive officers.
Effective October 31, 1997, the Company and Mr. Reedy extended his
employment agreement until December 31, 1999 (the "Reedy Employment Agreement").
The Reedy Employment Agreement provides for successive two-year terms unless the
Reedy Employment Agreement is terminated in accordance with certain provisions
and establishes Mr. Reedy's minimum annual base salary at $205,000. Effective
January 1, 1998, the Compensation Committee established Mr. Reedy's annual base
salary as $225,000. Effective January 4, 1999, the Compensation Committee
established Mr. Reedy's annual base salary as $260,000. The Reedy Employment
Agreement also entitles Mr. Reedy to participate in the 1994 Executive Incentive
Plan and other fringe benefit plans established by the Company for its executive
officers.
Effective October 31, 1997, the Company and Mr. Goucher extended his
employment agreement until December 31, 1998 (the "Goucher Employment
Agreement") and established Mr. Goucher's minimum annual base salary at
$200,000. Effective January 1, 1998, the Compensation Committee established Mr.
Goucher's annual base salary as $220,000. Effective January 4, 1999, the
Compensation Committee established Mr. Goucher's annual base salary as $230,000
and amended the Goucher Employment Agreement to extend its term through December
31, 1999. The Goucher Employment Agreement also entitles Mr. Goucher to
participate in the 1994 Executive Incentive Plan and other fringe benefit plans
established by the Company for its executive officers.
Effective February 26, 1997, the Company and Mr. Arthur N. Papetti entered
into a three year employment agreement (the "Papetti Employment Agreement").
The Papetti Employment Agreement
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established Mr. Papetti's annual base salary to be at least $225,000 and
entitles Mr. Papetti to participate in other fringe benefit plans established by
the Company for its other executive officers. The Papetti Employment Agreement
also includes non-competition and non-solicitation clauses that prohibit Mr.
Papetti from competing with the Company or soliciting the business of its
customers for a period of three years following termination of employment. The
Papetti Employment Agreement also specifies that he will be the president of
Papetti's for the term of the agreement.
1994 EXECUTIVE INCENTIVE PLAN
On January 1, 1994, the Company established the 1994 Executive Incentive
Plan. The 1994 Executive Incentive Plan, as Amended Effective January 1, 1995,
1996, and 1999, is described in the "REPORT OF COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION."
CHANGE IN CONTROL AGREEMENTS/EXECUTIVE EMPLOYMENT AGREEMENT TERMINATION
PROVISIONS
Certain key employees of the Company and its subsidiaries are covered under
the Severance Plan for Eligible Employees of Michael Foods, Inc. and its
Subsidiaries (the "Severance Plan") should they be terminated without cause
within 24 months following a change in control. Generally, the Severance Plan
defines a change in control as occurring when a person acquires the power to
elect, appoint or cause the election or appointment of at least a majority of
the Board or purchases all or substantially all of the properties and assets of
the Company; provided, however, that a change in control does not include
certain acquisitions pursuant to a merger, consolidation or sale of properties
and assets. Under the Severance Plan, certain key employees would be entitled to
receive a lump sum payment equal to one time total annual compensation. Annual
compensation is defined as the employee's highest annual rate of salary
(excluding bonuses, benefits, allowances, etc.) within the three calendar year
periods prior to the date of termination of employment; provided, however, that
if the employee has been employed by the Company or a predecessor for less than
three years, total annual compensation means the highest annualized salary
during the period of employment.
The Company's employment agreements with Messrs. Ostrander, Shapiro, Reedy,
Goucher, and Papetti contain severance compensation provisions. The Ostrander
Employment Agreement provides that if Mr. Ostrander's employment is terminated
by incapacity, death or thirty days' written notice by the Company without
cause, Mr. Ostrander will receive a termination payment equal to two years' base
salary, plus 50% of such base salary amount in lieu of any incentive
compensation or options to purchase Common Stock 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. The Ostrander Employment Agreement
provides that the agreement shall be deemed terminated by the Company without
cause if there is a change of control and thereafter Mr. Ostrander's duties are
substantially reduced or negatively altered without his prior written consent.
If Mr. Ostrander's employment is terminated by Mr. Ostrander providing thirty
days' written notice, he is to receive no termination payment, but he will
receive any incentive compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. In the case of
termination by the Company for cause, no amount will be paid beyond the last day
of service by Mr. Ostrander and he will not be entitled to any incentive
compensation or options to purchase Common Stock for the year of termination. In
the case of death, incapacity, or termination by the Company without cause, the
Ostrander Employment Agreement provides that all options to purchase Common
Stock previously granted to Mr. Ostrander become fully vested.
The Shapiro Employment Agreement provides that in the event Mr. Shapiro's
employment is terminated by incapacity, death, or thirty days' written notice by
the Company, Mr. Shapiro will receive as a termination payment all amounts due
under the Agreement as base salary, but in any event not less than one year's
base salary, plus 50% of such base salary amount in lieu of any incentive
compensation and options to purchase Common Stock for the remaining term of the
agreement, plus any incentive compensation earned for any year prior to the year
of termination unpaid at the date of termination. If Mr. Shapiro's employment is
terminated by Mr. Shapiro on thirty days' notice, he will receive no termination
payment. However, Mr. Shapiro is entitled to receive any incentive compensation
earned for any year prior to the year of termination which is unpaid at the date
of termination. If the Company terminates Mr. Shapiro for cause, no amount is to
be paid beyond the last day of service by Mr. Shapiro and he will not be
entitled to any incentive compensation or options to purchase Common Stock for
the
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<PAGE>
year of termination. In the case of incapacity, death, or termination by the
Company without cause (which is defined to include termination after a change in
control), all options to purchase Common Stock granted to Mr. Shapiro become
fully vested. If Mr. Shapiro's employment is terminated by the Company without
cause due to a change in control of the Company and thereafter Mr. Shapiro's
duties are substantially reduced or negatively altered without his prior written
consent, Mr. Shapiro will receive as a termination payment all amounts due under
the agreement as base salary, plus 50% of such base salary amount in lieu of any
incentive compensation and options to purchase Common Stock for the remaining
term of the agreement, but in any event not less than two years' base salary,
plus any incentive compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. In all events, the
maximum termination payment to Mr. Shapiro is two years' base salary plus
incentive compensation earned for any year prior to the year of termination
which is unpaid at the date of termination.
The Reedy, Goucher and Papetti Employment Agreements each contain severance
provisions that are similar to the severance provisions contained in the Shapiro
Employment Agreement. However, the Papetti Employment Agreement does not contain
a provision for any incentive compensation payment upon termination, nor for any
stock option vesting upon termination without cause.
STOCK COMPENSATION PLANS FOR KEY EMPLOYEES
Common Stock option awards and other stock-based awards may be granted to
key employees, officers, consultants, or independent contractors providing
services to the Company or its affiliates under the 1997 Stock Incentive Plan
("1997 Stock Incentive Plan"), as adopted by the Board and approved by the
shareholders in 1997. Grants can be in the form of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock and
restricted stock units, performance awards and other stock-based awards. To
date, only stock options awards have been made under the 1997 Stock Incentive
Plan. One million (1,000,000) shares of Common Stock were available for grants
under the 1997 Stock Incentive Plan when it was established; as of March 4,
1999, 126,800 shares remain available for grants under the 1997 Stock Incentive
Plan. To date, stock option awards covering 873,200 shares have been granted to
approximately 108 persons under the 1997 Stock Incentive Plan. Generally,
options granted under the 1997 Stock Incentive Plan cannot be exercised during
the first 12 months after the date of grant, become exercisable ratably over the
first five years, and expire not later than 10 years after the grant. The option
price per share for options granted is not less than the fair market value of a
share of Common Stock on the date of grant. Under the 1997 Stock Incentive Plan,
an optionee may pay the full exercise price of an option in cash or by
delivering shares of Common Stock which have been held by such person for more
than six months, or a combination thereof.
In 1994, the Company's shareholders approved the Company's 1994 Executive
Performance Stock Award Plan ("Performance Plan"). The purpose of this plan was
to attract, retain and reward key executives of the Company and awards were
limited to Common Stock share awards earned in accordance with the Company's
1994 Executive Incentive Plan. See "REPORT OF COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION." A total of 300,000 shares of Common Stock were reserved
for issuance under the Performance Plan and, as of March 4, 1999, a total of
163,129 shares remained available for issuance under the Performance Plan.
The Company had two stock option plans, which expired by their terms in
1997, under which options to purchase Common Stock were granted: the 1987
Incentive Stock Option Plan (the "Incentive Stock Option Plan") and the 1987
Non-Qualified Stock Option Plan (the "Non-Qualified Stock Option Plan")
(collectively, the "Stock Option Plans"). The Stock Option Plans provided for
the grant of options to purchase shares of Common Stock to key employees of the
Company and its subsidiaries as determined by the Compensation Committee of the
Board. The aggregate number of shares of Common Stock as to which options could
be awarded under the Stock Option Plans was 2,332,500. The Stock Option Plans
played a critical role in the Company's compensation strategy of providing
performance incentives to attract and retain certain key individuals and to give
such individuals a direct financial interest in the future success and
profitability of the Company.
No options were granted under the Incentive Stock Option Plan. The
Non-Qualified Stock Option Plan provided for the granting of options which did
not qualify as "incentive stock options" within the
7
<PAGE>
meaning of Section 422A of the Internal Revenue Code of 1986 (the "Code").
Options granted under the Non-Qualified Stock Option Plan were not, in general,
exercisable during the first 12 months after the date of grant, became
exercisable ratably over the first five years, and expire not later than 10
years after the grant. The option price per share for options granted under the
Stock Option Plans was not less than the fair market value of a share of Common
Stock on the date of grant. The Stock Option Plans required optionees to pay the
full exercise price of an option in cash or by delivering shares of Common Stock
which were held by such person for more than six months, or a combination
thereof. No further stock option grants will be made under the Stock Option
Plans, although exercises may occur over the next eight years. At March 4, 1999,
approximately 54 persons held options to purchase 801,529 shares of the
Company's Common Stock granted under the Stock Option Plans.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In 1992, the Company adopted the Stock Option Plan for Non-Employee
Directors (the "Director Plan"). The purpose of the Director Plan is to aid the
Company in attracting and retaining non-employee directors by enabling the
acquisition of a financial interest in the Company by non-employee directors
through the issuance of shares of Common Stock with respect to their services as
a director of the Company. The Director Plan memorialized the Company's practice
of granting options to purchase Common Stock to non-employee directors upon
their election or appointment as a director.
The Director Plan provides that non-employee directors will receive, upon
their initial election or appointment, an option to purchase 5,000 shares of
Common Stock at the then fair market value of the Common Stock. The Director
Plan also provides for the grant of an option to purchase an additional 5,000
shares of Common Stock upon each director's subsequent five year anniversary of
participation on the Board. The options become exercisable in full one year
after the date of grant and expire ten years from the date of grant. Subsequent
to the Annual Meeting of Shareholders, the Board will have eight non-employee
directors.
There are 70,000 shares of Common Stock currently subject to options
granted to non-employee directors under the Director Plan. The number of shares
of Common Stock remaining available for issuance under the Director Plan is
80,000. This number will be subject to adjustment in the event of stock splits,
reclassifications of shares of Common Stock, recapitalizations, stock dividends
or similar adjustments in the Common Stock.
The Board may amend the Director Plan to conform it to securities laws or
other laws, or to comply with stock exchange rules or requirements. However, the
Board may not, without shareholder approval, amend the Director Plan to change:
(i) the total number of shares of Common Stock as to which options may be
granted; (ii) the class of persons eligible to receive options under the
Director Plan; (iii) the manner of determining option prices; (iv) the period
during which the options may be granted or exercised; or (v) the provisions
relating to the administration of the Director Plan by the Board. The Board may
terminate the Director Plan without shareholder approval.
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE PRICE OPTION TERM(4)
OPTIONS EMPLOYEES IN PER SHARE ------------------------
NAME GRANTED(1) LAST YEAR ($/SH)(2) EXPIRATION DATE(3) 5% 10%
- ---- ---------- --------- --------- ------------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregg A. Ostrander ......... 36,000 5.3% $ 24.9375 03/03/08 $564,606 $1,430,766
Jeffrey M. Shapiro ......... 24,000 3.5 24.9375 03/03/08 376,404 953,844
John D. Reedy .............. 24,000 3.5 24.9375 03/03/08 376,404 953,844
Bill L. Goucher ............ 24,000 3.5 24.9375 03/03/08 376,404 953,844
Arthur N. Papetti .......... -- -- -- -- -- --
</TABLE>
- ------------------
(1) All options granted are exercisable in cumulative 20% installments
commencing one year from date of grant, with full vesting occurring on the
fifth anniversary date. Vesting may be accelerated in certain events
relating to a change in control of the Company.
(2) The exercise price may be paid by delivery of already owned shares. The tax
withholding obligations related to exercises may be paid by offset of the
underlying shares, subject to certain conditions.
8
<PAGE>
(3) All options have a ten year term, with vesting subject to discontinuation if
employment is terminated in the first five years.
(4) Potential gains are reported net of the option exercise price, but before
taxes associated with an exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall stock
market conditions, as well as the optionholder's continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be realized.
OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
The following table provides information related to stock option exercises
in 1998 and the number and value of shares of Common Stock represented by
options held at December 31, 1998 by the named executive officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(2)
--------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregg A. Ostrander ......... 25,000 $532,025 100,500 153,500 $1,835,163 $1,685,713
Jeffrey M. Shapiro ......... -- -- 42,294 39,800 772,829 425,975
John D. Reedy .............. 12,750 232,654 29,110 44,600 541,330 521,975
Bill L. Goucher ............ 5,000 85,940 37,200 54,800 753,525 685,600
Arthur N. Papetti .......... -- -- -- -- -- --
</TABLE>
- ------------------
(1) Messrs. Ostrander, Reedy and Goucher exercised options to purchase 25,000,
12,750 and 5,000 shares and delivered or returned 13,787, 7,635 and 2,831
shares, respectively, to exercise these options or pay withholding taxes
due.
(2) The closing price for the Common Stock on December 31, 1998 was $30.00 per
share. The value is calculated on the basis of the difference between the
option exercise prices and $30.00 multiplied by the number of shares of
Common Stock underlying the options.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In February 1997, the Company acquired Papetti's Hygrade Egg Products, Inc.
and affiliated companies ("Papetti's"). Consideration included the issuance of
3,195,455 shares of Common Stock to Papetti family members (the "Papetti Family
Shareholders") as follows: Arthur J. Papetti, 1,597,727 shares; Stephen T.
Papetti, 798,864 shares; Alfred Papetti, 798,864 shares (see "SECURITY
OWNERSHIP"). Consideration also included $42,913,000 in cash, payable to various
Papetti family members, Papetti family trusts and limited partnerships, and
others. In conjunction with the acquisition, the Company entered into various
agreements with certain Papetti family members and related entities. These
agreements included several leases as discussed below. These agreements also
included employment contracts with six Papetti family members for a period of
three years each, with annual base salary amounts as follows: Arthur N. Papetti
at least $225,000; Anthony Papetti at least $225,000; Alfred Papetti at least
$180,000; Arthur J. Papetti at least $180,000; Stephen T. Papetti at least
$180,000; Tina M. Noll at least $150,000. Additionally, in early 1998 the Board
approved various discretionary incentive payments related to 1997 performance to
certain Papetti family members as follows: Arthur N. Papetti $100,000; Anthony
Papetti $75,000; Alfred Papetti $75,000; Arthur J. Papetti $75,000; Stephen T.
Papetti $75,000. In early 1998, the Board added Arthur N. Papetti, Alfred
Papetti, Arthur J. Papetti and Stephen T. Papetti as participants in the 1994
Executive Incentive Plan for 1998. Arthur N. Papetti is Arthur J. Papetti's and
Tina M. Noll's father. Anthony Papetti is the brother of Arthur N. Papetti and
the father of Stephen T. Papetti and Alfred Papetti.
A shareholder agreement executed between the Company and the Papetti Family
Shareholders (the "Shareholder Agreement") at the time of acquisition provides
that the Papetti Family Shareholders may, for a three year period, nominate one
or two directors depending upon the percent of the Papetti Family Shareholder's
Common Stock holdings relative to the total shares outstanding. Current Common
Stock holdings allow the family to nominate two directors. Those nominees, who
are also current directors, are Arthur J. Papetti and Stephen T. Papetti (see
"ELECTION OF DIRECTORS -- Nominees"). Further, the Shareholder Agreement
provides the Papetti Family Shareholders with registration rights during the
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<PAGE>
same three year period should the Company register equity securities for a
public offering under the Securities Act of 1933, as amended. Also, the
Shareholder Agreement placed restrictions on the Papetti Family Shareholders'
ability to sell shares of Common Stock in the period two years from the date of
acquisition. Further, for a period three years from the date of acquisition, or
until the Papetti Family Shareholders own less than 5% of the shares of Common
Stock outstanding (or the voting power thereof), whichever is earlier, the
Papetti Family Shareholders may not sell more than 5% of the outstanding shares
of Common Stock (or the voting power thereof), or sell any shares to a person or
group that holds, or would hold as a result of such a transaction, 5% or more of
the shares of Common Stock, without giving the Company a right to first purchase
said shares. Effective February 25, 1998, the Company and the parties to the
various Papetti's acquisition agreements entered into an amendment to the
acquisition documents. The amendment provides that neither party shall make a
claim for indemnification unless and until either party has incurred such losses
for which such party is entitled to indemnification in the sum of $700,000, and
then only for cumulative losses in excess of $700,000. This level had been
previously established at $200,000.
In connection with the Papetti's acquisition, the Company entered into six
separate leases for the principal properties used by Papetti's in its
operations. The properties are owned by six separate partnerships, of which four
are wholly-owned by Papetti family members and two are fifty percent (50%) owned
by Papetti family members. The leases all expire in 2007 and are renewable for
two successive five-year terms. The aggregate annual net rent paid by the
Company under the leases in 1998 was $2,162,148 and in 1997 was $2,157,348. In
addition, the Company pays all real estate taxes, utilities, insurance and other
operating expenses associated with the properties and is required to maintain
the properties.
The Company's Egg Products Division purchases eggs under an egg supplier
agreement with a partnership in which certain affiliates are general partners.
Such purchases totaled approximately $11,900,000 in 1998 and approximately
$10,400,000 in 1997. Papetti Farms, Inc. is a 50% general partner in the
partnership, Sunbest-Papetti Farms, and is owned as follows: Arthur J. Papetti,
50%; Alfred Papetti, 25%; Stephen T. Papetti, 25%.
In February 1997, the Company completed an Agreement and Plan of
Reorganization between North Star Universal, Inc. ("North Star"), Michael Foods,
Inc. and NSU Merger Co. The effect of these transactions was that Michael Foods,
Inc., a Delaware corporation, merged with North Star, with the Company emerging
as the post-merger entity. Members of the James H. Michael and Jeffrey J.
Michael family were the controlling shareholders of North Star. An effect of the
merger transaction was that approximately 76% of the shares of Common Stock
formerly held by North Star were transferred directly to North Star's
shareholders, with the balance being effectively retired. Three limited
partnerships established for the benefit of certain Michael family members
("Michael Family Shareholders") now hold 1,588,489, 1,459,514 and 134,442 shares
of Common Stock, respectively (see "SECURITY OWNERSHIP"). Jeffrey J. Michael is
a partner in these limited partnerships and is a director of the Company. An
agreement entered into with the Michael Family Shareholders at the time of the
merger allowed the Michael family to nominate two representatives to the Board
through February 1999 if their Common Stock holdings exceed 10% of the
outstanding shares. One of these nominees was Jeffrey J. Michael (see "ELECTION
OF DIRECTORS -- Nominees").
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation of the Company's executive officers is based on four
components: base salary, incentive cash payments, incentive Common Stock
payments and Common Stock option awards. Base salary is fixed by contract in
the case of the Chief Executive Officer and named executive officers. See
"EXECUTIVE COMPENSATION -- Ostrander, Shapiro, Reedy, Goucher, and Papetti
Employment Agreements."
The Company has established the base salaries for its executive officers,
including the Chief Executive Officer, by reference to competitive salaries of
executives with similar positions and responsibilities. These base salaries are
established through negotiations and are not dependent upon the Company's
performance. As part of this process, the Company has referenced national
executive
10
<PAGE>
compensation studies. In the case of the named executive officers, other than
Mr. Papetti, the compensation provided for under their employment agreements for
1998 was principally determined by referencing the noted compensation studies to
compare job titles and duties of Company executives to comparable positions at
companies in the U.S. food industry. Mr. Papetti's base compensation was
determined by an agreement entered into with the Company related to the
acquisition of Papetti's by the Company in 1997. The Committee believes the
Company should provide the Chief Executive Officer and other executive officers
with base salaries that are competitive with those offered by food companies of
comparable size. Toward this end, in 1998, executive officers' annual base
salary adjustments were made which aggregated approximately $168,600 as compared
to the base salary levels which prevailed as of December 31, 1997 for the then
executive officer group. Of this amount, $110,000 was for the named executive
officers: $60,000 was pursuant to Mr. Ostrander's employment agreement, $10,000
was pursuant to Mr. Shapiro's employment agreement, $20,000 was pursuant to Mr.
Reedy's employment agreement, and $20,000 was pursuant to Mr. Goucher's
employment agreement. The balance was paid to other executive officers.
The Committee periodically reviews its compensation criteria and programs
to consider changing business conditions and the Company's needs. The executive
compensation program presently in-place, known as the 1994 Executive Incentive
Plan, provides for three incentive components: cash awards, Common Stock awards
and Common Stock option awards. All participants in the 1994 Executive Incentive
Plan are eligible to earn awards under the first two components, with cash
awards being limited to a maximum of 75% of base salary and with Common Stock
awards being limited to a maximum of 25% of base salary. Additionally, certain
executive officers can qualify for Common Stock option awards if a targeted
earnings per share level is met for a given year. Since its adoption, the 1994
Executive Incentive Plan has been amended three times - effective January 1,
1995, 1996, and 1999 (the "Incentive Plan").
The Incentive Plan rewards participants upon the attainment of specific
performance goals. Corporate executives are rewarded based upon the attainment
of the Company's earnings per share growth targets and operating company
executives are rewarded partially based upon individual operating company growth
in profit before bonuses and taxes, and partially based upon overall corporate
earnings per share growth. Cash awards under the Incentive Plan are dependent
upon attainment of annually established guidelines, or targets, determined by
the Chief Executive Officer and approved by the Committee. The purpose of the
Incentive Plan is to incent and reward the senior management of the Company for
delivering or exceeding their annual operating plan and to motivate those
executives to plan and focus on long-term earnings growth. Generally, there is
no provision for incentive awards when there is a decrease in earnings
year-over-year at the appropriate business unit level, except at the discretion
of the Chief Executive Officer with the concurrence of the Committee. However,
should an operating company have an earnings decline, but the Company still
achieves an earnings per share level within, or above, the established target
range for the same year (see discussion in following paragraph), officers of
such operating company are eligible to receive the Common Stock award portion of
their incentive opportunity tied to overall Company results as specified in the
Incentive Plan. Additionally, the Incentive Plan attempts to foster longer-term
performance by tying Common Stock awards to year-over-year earnings per share
growth over a three year period.
As described above, all participants are eligible to receive cash awards
and Common Stock awards under the Incentive Plan. Cash awards are determined by
the relative attainment of target profit amounts using a scale of increasing
percentages, which starts at the attainment of 94% of the target profit amount,
with maximum awards achieved upon the attainment of 110% of the target profit
amount. The calculation of the relative performance level, in turn, determines
the percent of a participant's base salary which can be awarded under the cash
award component of the Incentive Plan. Maximum incentive cash awards are: 75% of
base salary for corporate executive officers and operating company presidents,
56.3% of base salary for other officers and 37.5% of base salary for key
employees.
Effective January 1, 1998, the Committee established target levels for 1998
performance under the Incentive Plan. For 1998 performance, there were $990,391
in cash incentive awards paid to the named executive officers under the
Incentive Plan, with Mr. Ostrander earning a $313,708 cash incentive award. The
awards were determined in accordance with the Incentive Plan, based upon the
achieved 1998
11
<PAGE>
earnings per share as compared to the target level and, in the case of operating
company officers, partially based upon 1998 profit before bonuses and taxes as
compared to the target levels for the respective operating companies. The
Company achieved 105% of targeted earnings per share in 1998 and individual
operating companies achieved from 78% to 104% of their operating profit targets.
Certain discretionary adjustments, which affected executive officers other than
the named executive officers, were proposed by the Chief Executive Officer and
were approved by the Committee.
Common Stock awards have been triggered by the Company attaining at least
15% year-over-year earnings per share growth. Effective January 1, 1999, the
Compensation Committee amended this portion of the Incentive Plan to provide
that the share award component of the plan will be determined upon whether
average annual diluted earnings per share growth of at least 15% is achieved
over the prior three fiscal years. Common Stock incentive awards are 25% of base
salary for corporate executive officers and operating company presidents, 18.75%
of base salary for other officers and 12.5% of base salary for key employees.
When the 15% average earnings per share growth threshold is achieved,
participants receive a fixed percentage of their base salary, as previously
described, dependent upon their participation level in the Incentive Plan. This
is an "all or nothing" award. That is, if the threshold is not achieved, the
Common Stock incentive award opportunity for that year is forfeited. Such a
forfeiture occurred in 1996. Fifty percent of the earned Common Stock award
amount vests immediately in the year it is earned, 30% vests the next year if at
least 15% average annual earnings per share growth has been achieved over the
three year period ending with that year, and the remaining 20% vests the
subsequent year if at least 15% average annual earnings per share growth has
been achieved over the three year period ending with that year.
For 1998 performance, the Company exceeded the 15% earnings per share
growth threshold. Relative to this performance, there were 12,185 shares of
Common Stock awarded to the named executive officer participants in the
Incentive Plan, including 3,788 shares awarded to Mr. Ostrander. A portion of
the awarded Common Stock shares related to the 30% amount provisionally earned
for 1997 performance, which vested based upon 1998 performance (see footnote (1)
of "EXECUTIVE COMPENSATION -- Summary Compensation Table"). Additionally, for
1998 performance, there were grants of options to purchase 45,000 shares of
Common Stock under the Incentive Plan, including a Common Stock option grant
covering 9,000 shares of Common Stock made to Mr. Ostrander. These incentive
Common Stock awards and Common Stock option grants were made in March 1999.
In 1998, the Committee commissioned a study prepared by a national
consulting firm specializing in executive compensation. The study, presented in
1999, indicated that the Company's salary structure and longer-term compensation
incentives for its senior executive officers remained below those levels
prevailing in the market for companies of similar annual sales and assets,
including, specifically, food companies of comparable size. Based upon these
findings, the Committee revised its base salary determinations for certain
executive officers, including Mr. Ostrander, which were effective as of January
4, 1999.
The Company has no policy with respect to Section 162(m) of the Code, which
precludes a deduction by any publicly-held corporation for certain compensation
paid to any covered employee to the extent that the compensation for the taxable
year exceeds $1,000,000.
The Compensation Committee
Richard A. Coonrod, Chairman
Daniel P. Dillon
Jerome J. Jenko
12
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock during the five years
ended December 31, 1998 with the cumulative total return on the S&P 500 Index
and the S&P Food Group Index. The comparison assumes $100 was invested on
December 31, 1993 in the Company's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends.
[PLOT POINTS CHART]
<TABLE>
<CAPTION>
DEC 93 DEC 94 DEC 95 DEC 96 DEC 97 DEC 98
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Michael Foods, Inc. $100.00 $126 $151 $168 $326 $405
S&P Food Group Index 100.00 112 143 169 242 262
S&P 500 Index 100.00 101 139 171 229 294
</TABLE>
SECURITY OWNERSHIP
The following table sets forth certain information as of March 4, 1999 with
respect to the beneficial holdings of each person or entity known by the Company
to own beneficially more than 5% of the Company's outstanding Common Stock.
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS
- ---------------- --------------------- --------
4J2R1C Ltd. Partnership(2) ......... 1,588,489 7.4%
Arthur J. Papetti(3) ............... 1,486,133 7.1
3J2R Ltd. Partnership(2) ........... 1,459,514 6.8
- ------------------
(1) Owned of record and beneficially, except as otherwise noted.
(2) c/o 6479 City West Parkway, Eden Prairie MN 55344
(3) c/o O'Connor, Morss & O'Connor, P.C., Liberty Hall Center, 1085 Morris
Avenue, Union NJ 07083.
13
<PAGE>
The following table sets forth certain information as of March 4, 1999 with
respect to the beneficial holdings of each director and nominee, each named
executive officer, and all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
- ------------------------ --------------------- --------
<S> <C> <C>
Directors and Nominees:
Maureen B. Bellantoni ......................... 5,303(2) *
Richard A. Coonrod ............................ 11,000(3) *
Daniel P. Dillon .............................. 7,000(2) *
Miles E. Efron ................................ 108,550(2) *
Jerome J. Jenko . ............................. 5,250(2) *
Arvid C. Knudtson ............................. 11,000(3) *
Joseph D. Marshburn ........................... 11,000(3) *
Jeffrey J. Michael . . ........................ 3,193,735(2)(5) 15.3%
Margaret D. Moore . ........................... 5,000(2) *
Gregg A. Ostrander . .......................... 157,704(4) *
Arthur J. Papetti ............................. 1,486,133 7.1
Stephen T. Papetti . . ........................ 748,520 3.6
Executive Officers:
Jeffrey M. Shapiro . . ........................ 168,913(6) *
John D. Reedy . ............................... 66,239(7) *
Bill L. Goucher ............................... 64,694(8) *
Arthur N. Papetti ............................. 11,510 *
All Directors and Executive Officers as a Group:
(20 persons) .................................. 6,300,758(9) 29.4
</TABLE>
- ------------------
* Less than 1%
(1) Owned of record and beneficially, except as otherwise noted.
(2) Includes 5,000 shares of Common Stock as to which Ms. Bellantoni, Ms. Moore
and Messrs. Dillon, Efron, Jenko and Michael each have the right to acquire
beneficial ownership within 60 days by the exercise of options granted to
non-employee directors upon their election or appointment. See "EXECUTIVE
COMPENSATION -- Stock Option Plan for Non-Employee Directors." Mr. Efron is
not standing for re-election as a director.
(3) Includes 10,000 shares of Common Stock as to which Messrs. Coonrod, Knudtson
and Marshburn each have right to acquire beneficial ownership within 60 days
by the exercise of options granted to non-employee directors upon their
election or appointment. See "EXECUTIVE COMPENSATION -- Stock Option Plan
for Non-Employee Directors."
(4) Includes 1,000 shares of Common Stock held in Mr. Ostrander's Individual
Retirement Account and 132,600 shares of Common Stock as to which Mr.
Ostrander has the right to acquire beneficial ownership within 60 days by
the exercise of options granted.
(5) Includes three limited partnership holdings of 1,588,489; 1,459,514; and
134,442 shares of Common Stock, respectively, two of which are noted in the
above Security Ownership table, of which Mr. Michael disclaims beneficial
ownership except to the extent of his pecuniary interest in the limited
partnerships' assets. Also includes 730 shares held by a minor child.
(6) Includes 3,110 shares of Common Stock held in Mr. Shapiro's Individual
Retirement Account and includes 52,694 shares of Common Stock as to which
Mr. Shapiro has the right to acquire beneficial ownership within 60 days by
the exercise of options granted.
(7) Includes 10,000 shares of Common Stock held for Mr. Reedy's benefit in a
Money Purchase Pension (Keogh) Account and 41,910 shares of Common Stock as
to which Mr. Reedy has the right to acquire beneficial ownership within
60 days by the exercise of options granted.
(8) Includes 52,600 shares of Common Stock as to which Mr. Goucher has the right
to acquire beneficial ownership within 60 days by the exercise of options
granted.
(9) Includes 2,696 shares of Common Stock held in three other executive
officers' Individual Retirement Accounts; 384 shares held in a Simplified
Employee Plan for another executive officer; 144 shares held by two minor
children of another executive officer; 2,100 shares held in trust for the
benefit of three minor children of another executive officer; and 467,397
shares of Common Stock as to which certain executive officers and directors
have the right to acquire beneficial ownership within 60 days by the
exercise of options granted.
14
<PAGE>
AMENDMENT TO 1997 STOCK INCENTIVE PLAN
The Board has approved unanimously an amendment to the Company's 1997 Stock
Incentive Plan increasing the number of shares which may be issued under the
1997 Stock Incentive Plan from 1,000,000 to 2,000,000 and has voted unanimously
to recommend that the Company's shareholders ratify such amendment. The 1997
Stock Incentive Plan first became effective in March 1997. The 1997 Stock
Incentive Plan, as originally adopted, limited to 1,000,000 the number of shares
of Common Stock which in the aggregate could be issued pursuant to the 1997
Stock Incentive Plan. As of March 4, 1999, the Company had utilized 873,200
shares of Common Stock reserved under the 1997 Stock Incentive Plan to satisfy
awards made under the 1997 Stock Incentive Plan. All of these awards have been
options to purchase Common Stock. In order to provide an adequate reserve for
awards in the future, the Board approved unanimously, subject to shareholder
approval, the amendment to increase the number of shares from 1,000,000 to
2,000,000 effective March 4, 1999. The Board believes the 1997 Stock Incentive
Plan serves a critical role in the compensation of key employees and that the
amendment should be ratified so that awards under the 1997 Stock Incentive Plan
will remain available as a component of compensation. Additional information
concerning the 1997 Stock Incentive Plan and other compensation plans affecting
Company employees eligible to participate in the 1997 Stock Incentive Plan is
included elsewhere in this proxy statement. See "EXECUTIVE COMPENSATION -- Stock
Compensation Plans For Key Employees."
Shareholders are asked to ratify the amendment to the 1997 Stock Incentive
Plan increasing the number of shares issuable under the 1997 Stock Incentive
Plan from 1,000,000 shares of Common Stock to 2,000,000 shares of Common Stock.
The affirmative vote of at least a majority of the shares represented at the
meeting either in person or by proxy and entitled to vote is required to ratify
this amendment.
The Board unanimously recommends a vote FOR ratification of this amendment
to the Company's 1997 Stock Incentive Plan.
APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board recommends that the shareholders ratify the Board's appointment
of Grant Thornton LLP as independent auditors of the Company for the year ending
December 31, 1999. Grant Thornton LLP has served as the Company's principal
auditors since the Company's formation in 1987.
Representatives of Grant Thornton LLP will be present at the Annual Meeting
and will have an opportunity to make a statement if they desire to do so. They
also will be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR THE 2000
ANNUAL MEETING OF SHAREHOLDERS
Any shareholder who wishes to present a proposal for action at the next
Annual Meeting of Shareholders and who wishes to have it set forth in the Proxy
Statement and identified in the form of proxy prepared by the Company must
notify the Company so that such notice is received by the Secretary by January
1, 2000. Any such proposal must be in the form required under the rules and
regulations promulgated by the Securities and Exchange Commission. In addition,
any shareholder who intends to propose any matter that is not identified in the
notice of such meeting must comply with the Company's Bylaws which require at
least twenty (20) days' written notice prior to the meeting stating with
reasonable particularity the substance of the proposal.
15
<PAGE>
OTHER MATTERS
The Board knows of no other matters that are intended to be brought before
the Annual Meeting. If other matters, of which the Board is not aware, are
presented for action, it is the intention of the proxies named in the enclosed
form of proxy to vote on such matters in their sole discretion.
By Order of the Board of Directors,
/s/ Jeffrey M. Shapiro
Jeffrey M. Shapiro
EXECUTIVE VICE PRESIDENT AND SECRETARY
March 26, 1999
16
<PAGE>
MICHAEL FOODS INC.
ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, APRIL 29, 1999
4:00 P.M.
AUDITORIUM OF THE
LUTHERAN BROTHERHOOD BUILDING
625 FOURTH AVENUE SOUTH
MINNEAPOLIS, MINNESOTA
- --------------------------------------------------------------------------------
[LOGO] MICHAEL FOODS INC.
MICHAEL 324 PARK NATIONAL BANK BUILDING
FOODS INC. 5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416 PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoint Gregg A. Ostrander and Jeffrey M. Shapiro as
Proxies, each with the power to appoint his substitute, and hereby authorize
them to represent and to vote, as designated hereon, all the shares of Common
Stock of Michael Foods, Inc. held of record as shown on the reverse side on
March 19, 1999, at the Annual Meeting of Shareholders to be held on April 29,
1999, or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE.)
<PAGE>
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Michael Foods, Inc., c/o Shareowner Services(SM),
P.O. Box 64873, St. Paul, MN 55164-0873.
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [X]
PLEASE DETACH HERE
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS:
01 Maureen B. Bellantoni 07 Jeffrey J. Michael [ ] Vote FOR all [ ] Vote WITHHELD
02 Richard A. Coonrod 08 Margaret D. Moore nominees (except from all nominees
03 Daniel P. Dillon 09 Gregg A. Ostrander those nominees listed
04 Jerome J. Jenko 10 Arthur J. Papetti in the box below)
05 Arvid C. Knudtson 11 Stephen T. Papetti
06 Joseph D. Marshburn
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY ________________________________________________
INDICATED NOMINEE, WRITE THE NUMBER(S) OF THE | |
NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) |________________________________________________|
2. PROPOSAL TO RATIFY THE AMENDMENT TO THE 1997 STOCK INCENTIVE PLAN
[ ] For [ ] Against [ ] Abstain
3. PROPOSAL TO RATIFY THE APPOINTMENT OF GRANT THORNTON LLP as the independent
auditors of the Corporation for the year ending December 31, 1999
[ ] For [ ] Against [ ] Abstain
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting. This Proxy when properly
executed will be voted in the manner directed herein by the undersigned
shareholder. If no direction is made, this Proxy will be voted for Proposals
1, 2 and 3.
Address Change? Mark Box [_] Indicate changes below: Dated: _________________________, 1999.
________________________________________________
| |
|________________________________________________|
Signature(s) in Box
Please sign exactly as name appears below. When
shares are held by joint tenants, both should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full titles as
such. If a corporation, please sign in full
corporate name by president or other authorized
officer. If a partnership, please sign by authorized
person.
</TABLE>
