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, 1998
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Commission file number 0-15638
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0498850
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Suite 324, Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 546-1500
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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
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 4, 1999 was approximately $266 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 4, 1999, was 20,937,056 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions G (2) and G (3), the financial information
about industry segments under Item 1 of Part I and the responses to Items 5, 6,
7, and 8 of Part II of this report are incorporated herein by reference to the
Company's 1998 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 1999 Annual Meeting of Shareholders to be held on April 29,
1999, to be filed with the Securities and Exchange Commission on or about March
26, 1999.
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 changes in domestic and international
economic conditions. Additional risks and uncertainties include variances in the
demand for the Company's products due to consumer and industry developments, as
well as variances in the costs to produce such products, including normal
volatility in egg 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 precooked, 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. Financial
information about the Company's business segments is incorporated by reference
to "Note K" in the "Notes to Consolidated Financial Statements" on page 25 of
the Company's 1998 Annual Report to Shareholders (see Exhibit 13.1).
The Company's strategy 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. Management believes that the
Egg Products Division is the largest egg products producer in the United States
and is believed to be the second largest egg producer
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in the United 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 ("Better 'n Eggs(TM)", "Table Ready(TM)", and "All
Whites(TM)") 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 eggs, precooked
egg patties and omelets, and hard-cooked eggs in the United States and is a
leading supplier of 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 with some international sales
in the Far East and Europe. 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 in
the U. S. retail and foodservice markets. 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 1998, the Division derived approximately 94% of net sales from egg products,
with 6% of net sales coming from shell eggs. Pricing for shell 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 certain valued-added products, such as extended shelf-life liquid eggs, egg
substitutes, and precooked egg products typically are not significantly affected
by Urner Barry quoted price levels. Such products accounted for approximately
60% of the Division's 1998 sales. Prices for the Division's other products,
including frozen, short shelf-life liquid, certain dried products, hard-cooked
items and, particularly, shell eggs, are significantly affected by frequently
changing market levels as reported by Urner Barry.
In 1998, 35-40% 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
eggs. Key feed costs, such as corn and soybean meal, are partially hedged
through the use of futures and other purchase 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 13,750,000, producing hens, are located in Nebraska, Minnesota and
Colorado, of which approximately 1,500,000 are housed in contract facilities.
Major laying facilities also maintain their own grain and feed storage
facilities.
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Further, the production of approximately 2,250,000 hens is under long-term
supply agreements, with an additional 21,750,000 hens under shorter-term
agreements. The Division also maintains facilities with approximately 2,800,000
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 at a good value relative to national brands has
contributed to its growth. 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 Company operates a cheese packaging facility
in Lake Mills, Wisconsin, which processes and wraps various cheese products for
its Crystal Farms brand cheese business and for private label customers.
The Division has expanded its market area using both company-owned and leased
resources and 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 1998, sales to the warehouse operations of a
major national food wholesaler, and to its owned and franchised stores,
represented approximately 40% 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 100 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's top three customers represented
approximately 51% of 1998 Divisional sales. Most of the Division's sales are to
customers who purchase 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, milk shake, and ice cream mixes are more seasonal than the
Company's other products, with higher sales volume occurring between April and
October. The addition of other specialty dairy products in recent years, such as
coffee creamers and cartoned items, has somewhat offset the impact on the
Division's sales and earnings from this seasonality.
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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. In 1998, 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. Variations in the
purchase price and/or quality of potatoes can effect 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 available from outside
agencies and consultants as needed.
The Refrigerated Distribution Division's internal and external 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 1998, Crystal Farms increased
its consumer support programs, with largely favorable sales volume results.
Also, the Egg Products Division has a consumer support program to support
various of its egg products sold in the retail market.
ACQUISITIONS
The Company has made acquisitions in prior years and anticipates that it will
continue to make acquisitions as part of its strategic plan. In a pending
transaction, announced in March 1999, the Company's Dairy Products Division will
acquire a dairy products facility in Connecticut, allowing for a broader
expansion of the dairy mix and creamer business into the eastern United States.
This transaction will involve an acquisition of certain production assets and
customer list, and a long-term lease for the land and building, with an option
to purchase the land and building upon the termination of the lease. It is
expected the transaction will be completed by May 1999. The facility generated
1998 net sales of approximately $37 million.
Earlier in 1999, the Company made two investments in Europe. The first
investment was a 25% interest in Belovo S.A., a specialty egg products company,
based in Belgium. The second investment was a 50/50 joint venture with the
founding shareholders of Belovo forming, The
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Lipid Company, a company involved in the extraction of phospholipids from egg
yolks for use in the field of nutraceuticals.
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 over ten weeks. 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, the United States District Court for the District of New Jersey
found in 1992 and 1993 that Papetti's 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."
As a result of the 1997 acquisition of Papetti's, the Company also owns an
exclusive sublicense to use a patented process for the electro-heating of liquid
eggs, which is scheduled to expire 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 refrigerated liquid eggs from less than
two weeks to over ten weeks. The Company has an aseptic plant in Elizabeth, New
Jersey, which processes the ultrapasteurized liquid egg needs of Papetti's.
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 Omelet(TM) Brand", "Express Eggs", "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 the two
primary tradenames.
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.
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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. 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.
Management believes the Dairy Products Division 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
United States. Competitors include local dairies utilizing conventional
pasteurization and regional dairies with UHT products.
The Potato Products Division has a leading market share in refrigerated potato
products sold in the United States 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 companies in the frozen potato products business, such as Ore-Ida Foods,
Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of
ConAgra, Inc.), also sell frozen versions of potato products which are sold by
the Division in refrigerated form.
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 mix products 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.
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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.
In February 1999, Kohler Mix Specialties, Inc. initiated a recall of certain
cartoned dairy products produced at its facility in White Bear Lake, Minnesota.
The plant's carton packaging room was reopened on February 17, 1999 after
cleaning, inspecting and retraining. The Company worked closely with the
Minnesota Department of Agriculture and the United States Food and Drug
Administration in connection with the dairy product recall and the resumption of
carton-filling processes.
EMPLOYEES
The Company employed approximately 4,160 employees at December 31, 1998. Of this
total, the Egg Products Division employed approximately 2,600 full-time and 400
part-time employees, with approximately 20 of these employees represented by a
union. The Refrigerated Distribution Division employed approximately 380
employees, none of whom are represented by a union. The Dairy Products Division
employed approximately 230 people, of which the Milk Drivers and Dairy Employees
Union represented approximately 80 of its production personnel at the Minnesota
facility. The Potato Products Division employed approximately 300 employees, of
whom approximately 200 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 250 people at December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officer
Name Age Position Since
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Gregg A. Ostrander 46 President and Chief Executive Officer 1993
Jeffrey M. Shapiro 51 Executive Vice President and Secretary 1987
John D. Reedy 53 Vice President - Finance, Chief 1988
Financial Officer and Treasurer
Mark D. Witmer 41 Assistant Treasurer 1995
James D. Clarkson 46 President - Northern Star 1995
Bill L. Goucher 52 President - Waldbaum 1993
James J. Kohler 45 President - Kohler 1988
Arthur N. Papetti 67 President - Papetti's 1997
Norman A. Rodriguez 56 President - Crystal Farms 1989
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ITEM 2 - PROPERTIES
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 139,000 Leased
Klingerstown, PA Processing and Distribution 19,000 Leased
Kansas City, MO Processing 63,000 Owned
Lenox, IA Processing and Distribution 87,000 Owned
Gaylord, MN Processing and Distribution 190,000 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 658,000 Owned
Plainview, NE Pullet Houses 112,000 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.
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 also owns and
operates a 48,200 square foot refrigerated warehouse and a 19,000 square foot
cheese packaging facility on a 19 acre site in Lake Mills, Wisconsin.
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.
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Potato Products Division
Northern Star owns a processing plant and land located in Minneapolis,
Minnesota, consisting of 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 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 several years to complete. Pending the outcome
of
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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, 1998, 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
1998 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 27 of the Company's 1998
Annual Report to Shareholders (see Exhibit 13.1).
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 14 - 16 of the Company's 1998 Annual Report to Shareholders
(see Exhibit 13.1).
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to General Instruction G (2), information is incorporated by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations, Market Risk" on page 16 of the Company's 1998 Annual Report to
Shareholders (see Exhibit 13.1).
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
11
<PAGE>
Foods, Inc." on pages 17 - 26, and "Quarterly Financial Data (Unaudited)" on
page 27, of the Company's 1998 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 March 26, 1999. 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 March 26, 1999.
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 March 26, 1999.
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 March 26, 1999.
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 1998 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, 1998 and 1997
Consolidated statements of operations - Years ended December 31, 1998,
1997 and 1996
Consolidated statements of shareholders' equity - Years ended December
31, 1998, 1997 and 1996
12
<PAGE>
Consolidated statements of cash flows - Years ended December 31, 1998,
1997 and 1996
Notes to consolidated financial statements
Report of Independent Certified Public Accountants
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.
3. Exhibits
Reference is made to Item 14 (c), footnote (5) for exhibits filed with
this form.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of 1998.
(c) Exhibits and Exhibit Index
Exhibit
No. Description
- --- -----------
3.1 Amended and Restated Articles of Incorporation of the Company dated
February 28, 1997. (1)
3.2 Amended and Restated Bylaws of the Company as of March 4, 1999. (5)
4.1 Form of Common Stock Certificate. (1)
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).
(1)
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). (1)
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). (1)
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). (1)
13
<PAGE>
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).
(1)
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. (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
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). (1)
14
<PAGE>
10.37* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Arthur J. Papetti dated February 26, 1997. (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. (1)
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. (1)
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. (1)
10.42* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Stephen Papetti dated February 26, 1997. (2)
10.43* Form of Employment Agreement between Michael Foods, Inc., a Delaware
corporation and Arthur N. Papetti dated February 26, 1997. (1)
10.44 Lease by and between ASA Company, as Landlord and Michael Foods, Inc.,
a Delaware corporation as Tenant dated February 26, 1997. (1)
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. (1)
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. (1)
10.47 Lease by and between Papetti Holding Company, as Landlord and Michael
Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997.
(1)
10.48 Lease by and between Papetti Holding Company, as Landlord and Michael
Foods, Inc., a Delaware corporation as Tenant dated February 26, 1997.
(1)
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. (1)
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.
(1)
10.51* Resolution adopted by the Board of Directors on May 12, 1998, amending
the Severance Plan for Eligible Employees of Michael Foods, Inc. and
Subsidiaries and extending its termination date for one additional
year. (5)
10.52* Employment Agreement between Michael Foods, Inc. and J. D. Clarkson,
dated October 31, 1997. (3)
10.53* Amended and Restated Employment Agreement between Michael Foods, Inc.,
and Gregg A. Ostrander, dated December 31, 1997. (3)
10.54* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Jeffrey M. Shapiro, dated October 31, 1997. (3)
10.55* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Norman A. Rodriguez, dated October 31, 1997. (3)
10.56* Amended and Restated Employment Agreement between Michael Foods, Inc.
and James J. Kohler, dated October 31, 1997. (3)
15
<PAGE>
10.58* Amended and Restated Employment Agreement between Michael Foods, Inc.
and John D. Reedy, dated October 31, 1997. (3)
10.59* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Bill L. Goucher, dated October 31, 1997. (3)
10.60* Michael Foods, Inc. 1997 Stock Incentive Plan (4)
10.61 Sublicense Agreement between R & P Liquid Egg Technology Limited
Partnership and Papetti's Hygrade Egg Products, Inc., dated December
31, 1993. (3)
10.62 Assignment and Acceptance Agreement between Bank of America National
Trust & Savings Association and Summit Bank dated November 20, 1997.
(3)
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. (3)
10.64* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective
January 1, 1999. (5)
10.65* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Norman A. Rodriguez, dated January 1, 1999. (5)
10.66* Amended and Restated Employment Agreement between Michael Foods, Inc.
and Bill L. Goucher, dated January 1, 1999. (5)
10.67* Amended and Restated Employment Agreement between Michael Foods, Inc.
and J. D. Clarkson, dated January 1, 1999. (5)
13.1 1998 Annual Report to Shareholders (5)
21.1 Schedule of Michael Foods, Inc. Subsidiaries (5)
23.1 Consent of Independent Certified Public Accountants-- Grant Thornton
LLP (5)
27.1 Financial Data Schedule (5)
* Management Contract or Compensation Plan Arrangement
(1) Incorporated by reference from the Company's Report on Form 8-K filed March
13, 1997.
(2) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1996, filed March 28, 1997.
(3) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1997, filed March 31, 1998.
(4) Incorporated by reference from the Company's Form S-8 filed effective March
25, 1997, Registration No. 333-23949.
(5) Filed as an exhibit to this Form 10-K.
16
<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
---------------------------
(1) (2)
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, 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
For the Year Ended
December 31, 1998: $1,748,000 $861,000 $0 $484,000 $2,125,000
</TABLE>
- -----------------------------------
(a) Balance acquired as it relates to the Papetti's acquisition
(b) Write-offs of accounts deemed uncollectible
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants on Schedule
Board of Directors
Michael Foods, Inc.
In connection with our audit of the consolidated financial statements of Michael
Foods, Inc. and subsidiaries referred to in our report dated February 15, 1999,
which is included in the Michael Foods, Inc. 1998 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, 1998.
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 15, 1999
17
<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 31, 1999 By: /s/ Gregg A. Ostrander
----------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: March 31, 1999 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 31, 1999
- ---------------------
Arvid C. Knudtson
(Chairman of the Board)
/s/ Gregg A. Ostrander March 31, 1999
- ----------------------
Gregg A. Ostrander (Director,
President & Chief Executive Officer)
/s/ Maureen B. Bellantoni March 31, 1999
- -------------------------
Maureen B. Bellantoni (Director)
/s/ Richard A. Coonrod March 31, 1999
- ----------------------
Richard A. Coonrod (Director)
/s/ Daniel P. Dillon March 31, 1999
- --------------------
Daniel P. Dillon (Director)
/s/ Miles E. Efron March 31, 1999
- ------------------
Miles E. Efron (Director)
/s/ Jerome J. Jenko March 31, 1999
- -------------------
Jerome J. Jenko (Director)
/s/ Joseph D. Marshburn March 31, 1999
- -----------------------
Joseph D. Marshburn (Director)
/s/ Jeffrey J. Michael March 31, 1999
- ----------------------
Jeffrey J. Michael (Director)
18
<PAGE>
/s/ Margaret D. Moore March 31, 1999
- ---------------------
Margaret D. Moore (Director)
/s/ Arthur J. Papetti March 31, 1999
- ---------------------
Arthur J. Papetti (Director)
/s/ Stephen T. Papetti March 31, 1999
- ----------------------
Stephen T. Papetti (Director)
19
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- ---
3.2 Amended and Restated Bylaws of the Company as of March 4,
1999.
10.51* Resolution adopted by the Board of Directors on May 12, 1998,
amending the Severance Plan for Eligible Employees of Michael
Foods, Inc. and Subsidiaries and extending its termination
date for one additional year.
10.64* Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended
Effective January 1, 1999.
10.65* Amended and Restated Employment Agreement between Michael
Foods, Inc. and Norman A. Rodriguez, dated January 1, 1999.
10.66* Amended and Restated Employment Agreement between Michael
Foods, Inc. and Bill L. Goucher, dated January 1, 1999.
10.67* Amended and Restated Employment Agreement between Michael
Foods, Inc. and J. D. Clarkson, dated January 1, 1999.
13.1 1998 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
20
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
MICHAEL FOODS, INC.
(AMENDED THROUGH MARCH 4, 1999)
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. REGISTERED OFFICE. The registered office of the
corporation in Minnesota shall be that set forth in the articles of
incorporation or in the most recent amendment of the articles of incorporation
or resolution of the directors filed with the Secretary of State of the State of
Minnesota changing the registered office.
Section 1.02. OTHER OFFICES. The corporation may have such other
offices, within or without the State of Minnesota, as the directors shall,
from time to time, determine.
Section 1.03. CORPORATE SEAL. The corporation shall have no seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided
otherwise by the Minnesota Business Corporation Act, meetings of the
shareholders may be held at any place, within or without the State of Minnesota,
as may from time to time be designated by the directors and, in the absence of
such designation, shall be held at the registered office of the corporation in
the state of Minnesota. The directors shall designate the time of day for each
meeting and, in the absence of such designation, every meeting of shareholders
shall be held at four o'clock p.m.
Section 2.02. REGULAR MEETINGS.
(a) A regular meeting of the shareholders may be held on such date
as the Board of Directors may by resolution establish.
(b) At a regular meeting, the shareholders, voting as provided in
the articles of incorporation and these bylaws, shall elect qualified successors
for directors who serve for an indefinite term or whose terms have expired or
are due to expire within six months after the date of the meeting and shall
transact such other business as may properly come before them.
(c) Any shareholder entitled to vote at a regular meeting of the
shareholders who intends to propose for consideration and vote by the
shareholders at a regular meeting a matter that is not identified in the notice
of such meeting shall give written notice of such proposal to the corporation at
least twenty (20) days prior to the date of the regular meeting. The notice
shall be delivered to the Secretary of the corporation and shall state with
reasonable particularity the substance of the proposal. (ADDED BY AMENDMENT
MARCH 4, 1999)
<PAGE>
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the chief
executive officer, the chief financial officer, two or more directors or by a
shareholder or shareholders holding 10% or more of the voting power of all
shares entitled to vote, except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or effect a business
combination, including any action to change or otherwise affect the composition
of the Board of Directors for that purpose, must be called by 25% or more of the
voting power of all shares entitled to vote. A shareholder or shareholders
holding the requisite percentage of the voting power of all shares entitled to
vote may demand a special meeting of the shareholders by written notice of
demand given to the chief executive officer or chief financial officer of the
corporation and containing the purposes of the meeting. Within 30 days after
receipt of demand by one of those officers, the Board of Directors shall cause a
special meeting of shareholders to be called and held on notice no later than 90
days after receipt of the demand, at the expense of the corporation. Special
meetings shall be held on the date and at the time and place fixed by the chief
executive officer or the Board of Directors, except that a special meeting
called by or at the demand of a shareholder or shareholders shall be held in the
county where the principal executive office is located. The business transacted
at a special meeting shall be limited to the purposes as stated in the notice of
the meeting.
Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority
of the shares entitled to vote at a meeting shall constitute a quorum for the
transaction of business at any regular or special meeting. In case a quorum
shall not be present at a meeting, the meeting may be adjourned, and notice
shall be given (a) by announcement at the time of adjournment of the date, time
and place of the adjourned meeting, or (b) by notice of such adjourned meeting,
setting out the date, time and place of the adjourned meeting, mailed to each
shareholder entitled to vote at a meeting, at least 3 days before the date of
such adjourned meeting. If a quorum is present, a meeting may be adjourned from
time to time without notice other than announcement at the time of adjournment
of the date, time and place of the adjourned meeting. At adjourned meetings at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. If a quorum is present when a
duly called or held meeting is convened, the shareholders present may continue
to transact business until adjournment, notwithstanding the withdrawal of enough
shareholders originally present to leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the articles of incorporation or statutes
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by the
greater of (1) a majority of the voting power of the shares present and entitled
to vote on that item of business, or (2) a majority of the number of shares
entitled to vote that would constitute a quorum for the transaction of business
at the meeting except if otherwise required by statute, the articles of
incorporation, or these bylaws.
-2-
<PAGE>
Section 2.06. DETERMINATION DATE. The Board of Directors may fix a
date, not fewer than ten, nor more than 60 days, preceding the date of any
meeting of shareholders, as the date for the determination of the shareholders
entitled to notice of, and to vote at, such meeting, notwithstanding any
transfer of shares on the books of the corporation after any determination date
so fixed. If the Board of Directors fails to fix a date for determination of the
shareholders entitled to notice of, and to vote at, any meeting of shareholders,
the determination date shall be the 20th day preceding the date of such meeting.
Section 2.07. NOTICE OF MEETINGS. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at such holder's address as shown by the books of the
corporation, a notice setting out the date, time and place of each regular
meeting and each special meeting, except (unless otherwise provided in Section
2.04 hereof) where the meeting is an adjourned meeting and the date, time and
place of the meeting were announced at the time of adjournment, which notice
shall be mailed at least five days prior thereto (unless otherwise provided in
Section 2.04 hereof). Every notice of any special meeting called pursuant to
Section 2.03 hereof shall state the purpose or purposes for which the meeting
has been called, and the business transacted at all special meetings shall be
confined to the purposes stated in the notice. The written notice of any meeting
at which a plan of merger or exchange is to be considered shall so state such as
a purpose of the meeting. A copy or short description of the plan of merger or
exchange shall be included in or enclosed with such notice.
Section 2.08. WAIVER OF NOTICE. Notice of any regular or special
meeting may be waived by any shareholder either before, at or after such
meeting, orally or in a writing signed by such shareholder or a representative
entitled to vote the shares of such shareholder. A shareholder, by attendance at
any meeting of shareholders, shall be deemed to have waived notice of such
meeting, except where the shareholder objects at the beginning of the meeting to
the transaction of business because the meeting is not lawfully called or
convened, or objects before a vote on an item of business because the item may
not lawfully be considered at such meeting and does not participate in the
consideration of the item at that meeting.
ARTICLE III.
DIRECTORS
Section 3.01. GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the authority of the Board of
Directors, except as otherwise permitted by statute.
Section 3.02. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. The size of
the Board of Directors shall be fixed by the Board of Directors within the
limits prescribed by the statute and the articles of incorporation. Directors
shall be natural persons, but need not be shareholders. Each of the directors
shall hold office until the regular meeting of shareholders next held after such
director's election and until such director's successor shall have been elected
and shall qualify, or until the earlier death, resignation, removal, or
disqualification of such director.
-3-
<PAGE>
Section 3.03. BOARD MEETINGS. Meetings of the Board of Directors may
be held from time to time at such time and place within or without the state of
Minnesota as may be designated in the notice of such meeting.
Section 3.04. CALLING MEETINGS; NOTICE. Meetings of the Board of
Directors may be called by the chairman of the Board by giving at least
twenty-four hours' notice, or by any other director by giving at least five
days' notice, of the date, time and place thereof to each director, by mail,
telephone, telegram or in person. If the day or date, time and place of a
meeting of the Board of Directors have been announced at a previous meeting of
the Board, no notice is required. Notice of an adjourned meeting of the Board of
Directors need not be given other than by announcement at the meeting at which
adjournment is taken.
Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the Board
of Directors may be waived by any director either before, at, or after such
meeting, orally or in a writing signed by such director. A director, by his or
her attendance at any meeting of the Board of Directors, shall be deemed to have
waived notice of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and such objecting director does not participate
thereafter in the meeting.
Section 3.06. QUORUM. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. ABSENT DIRECTORS. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted upon at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the director has consented or objected.
Section 3.08. ELECTRONIC COMMUNICATIONS. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 3.08 shall be deemed present in person at
the meeting; and the place of the meeting shall be the place of origination of
the conference telephone conversation or other comparable communication
technique, unless otherwise specified in the notice of such meeting.
Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies on
the Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by the affirmative vote of a majority of the remaining directors of the Board
although less than a quorum; newly created directorships resulting from an
increase in the authorized number of directors by action of the Board of
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<PAGE>
Directors as permitted by Section 3.02 may be filled by the affirmative vote of
a majority vote of the directors serving at the time of such increase; and each
director elected pursuant to this Section 3.09 shall be a director until such
director's successor is elected by the shareholders at their next regular or
special meeting.
Section 3.10. REMOVAL. Any or all of the directors may be removed
from office at any time, with or without cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors, except as otherwise provided by the Minnesota Business Corporation
Act, Section 302A.223, as amended. A director named by the Board of Directors to
fill a vacancy may be removed from office at any time, with or without cause, by
the affirmative vote of the remaining directors if the shareholders have not
elected directors in the interim between the time of the appointment to fill
such vacancy and the time of the removal. In the event that the entire Board or
any one or more directors be so removed, new directors may be elected at the
same meeting.
Section 3.11. COMMITTEES. A resolution approved by the affirmative
vote of a majority of the Board of Directors may establish committees having the
authority of the Board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
natural persons, who need not be directors, appointed by affirmative vote of a
majority of the directors present. Committees are subject to the direction and
control of, and vacancies in the membership thereof shall be filled by, the
Board of Directors, except as provided by the Minnesota Business Corporation
Act, Section 302A.241, Subd. 1.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
Section 3.12. COMMITTEE OF DISINTERESTED PERSONS. The Board may
establish a committee composed of two or more disinterested directors or other
disinterested persons to determine whether it is in the best interests of the
corporation to pursue a particular legal right or remedy of the corporation and
whether to cause the dismissal or discontinuance of a particular proceeding that
seeks to assert a right of remedy on behalf of the corporation. The committee,
once established, is not subject to the direction or control of, or termination
by, the Board. A vacancy on the committee may be filled by a majority vote of
the remaining committee members. The good faith determinations of the committee
are binding upon the corporation and its directors, officers and shareholders.
The committee terminates when it issues a written report of its determinations
to the Board.
Section 3.13. WRITTEN ACTION. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
except for those actions which must be approved by the shareholders, may be
taken without a meeting if done in writing and signed by the number of directors
that would be required to take the same action at a meeting of the Board at
which all directors were present, as permitted by the corporation's articles of
incorporation.
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<PAGE>
Section 3.14. COMPENSATION. Directors who are not salaried officers
of this corporation, shall receive such fixed sum per Board or committee meeting
attended or such fixed annual sum as shall be determined, from time to time, by
resolution of the Board of Directors. Salaried officers of this corporation who
also serve as directors may also receive such fixed sum per Board or committee
meeting attended or such fixed annual sum, in either case, in an amount equal to
that paid to the other directors, at the discretion of the Board of Directors.
The Board of Directors may, by resolution, provide that all directors shall
receive their expenses, if any, of attendance at meetings of the Board of
Directors or any committee thereof. Nothing herein contained shall be construed
to preclude any director from serving this corporation in any other capacity and
receiving proper compensation therefor.
ARTICLE IV.
OFFICERS
Section 4.01. NUMBER. The corporation shall have one or more natural
persons exercising the function of Chief Executive Officer and Chief Financial
Officer. The Board of Directors may elect or appoint such other officers or
agents as it deems necessary for the operation and management of the
corporation, with such rights, powers, duties and responsibilities as may be
determined by these bylaws, or the Board, including, without limitation, a
chairman of the Board, a president, one or more vice presidents, a treasurer and
a secretary. Any number of offices may be held by the same person.
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board
of Directors shall elect or appoint, by resolution approved by the affirmative
vote of a majority of the directors present, from within or without their
number, the president, treasurer and such other officers as may be deemed
advisable, each of whom shall have the powers, rights, duties, responsibilities,
and terms of office provided for in these bylaws or a resolution of the Board of
Directors not inconsistent therewith. The president and all other officers who
may be directors shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier termination of
their directorship.
Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from
office by the affirmative vote of a majority of the Board of Directors at any
time, with or without cause. Such removal, however, shall be without prejudice
to the contract rights of the person so removed. If there be a vacancy in an
office of the corporation by reason of death, resignation, removal,
disqualification or otherwise, such vacancy shall be filled for the unexpired
term by the Board of Directors.
Section 4.04. CHAIRMAN OF THE BOARD. The chairman of the Board, if
one is elected, shall preside at all meetings of the directors and shall have
such other duties as may be prescribed, from time to time, by the Board of
Directors.
Section 4.05. PRESIDENT. The president shall be the chief executive
officer and shall have general active management of the business of the
corporation. In the absence of the chairman of the Board, the president shall
preside at all meetings of the directors. The president shall see that all
orders and resolutions of the Board of Directors are carried into effect. The
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<PAGE>
president shall execute and deliver, in the name of the corporation, any deeds,
mortgages, bonds, contracts or other instruments pertaining to the business of
the corporation unless the authority to execute and deliver is required by law
to be exercised by another person or is expressly delegated by the articles or
bylaws or by the Board of Directors to some other officer or agent of the
corporation. The president shall maintain records of and, whenever necessary,
certify all proceedings of the Board of Directors and the shareholders, and in
general, shall perform all duties usually incident to the office of the
president, and shall have such other duties as may, from time to time, be
prescribed by the Board of Directors.
Section 4.06. VICE PRESIDENT. Each vice president, if one or more is
elected, shall have such powers and shall perform such duties as prescribed by
the Board of Directors or by the president. In the event of the absence or
disability of the president, the vice president(s) shall succeed to the
president's power and duties in the order designated by the Board of Directors.
Section 4.07. SECRETARY. The secretary, if one is elected, shall be
secretary of and shall attend all meetings of the shareholders and Board of
Directors and shall record all proceedings of such meetings in the minute book
of the corporation, shall give or cause to be given proper notice of meetings of
shareholders and directors, and shall perform such other duties as may, from
time to time, be prescribed by the Board of Directors or by the president.
Section 4.08. TREASURER. The treasurer shall be the chief financial
officer and shall keep accurate financial records for the corporation, and shall
deposit all moneys, drafts and checks in the name of, and to the credit of, the
corporation, in such banks and depositories as the Board of Directors shall,
from time to time, designate. The treasurer shall have power to endorse, or
caused to be endorsed, for deposit, all notes, checks and drafts received by the
corporation, and shall disburse the funds of the corporation, as ordered by the
Board of Directors, making proper vouchers therefor. The treasurer shall render
to the president and the directors, whenever requested, an account of all
transactions as treasurer and of the financial condition of the corporation, and
shall perform such other duties as may, from time to time, be prescribed by the
Board of Directors or by the president.
Section 4.09. COMPENSATION. The officers of the corporation
shall receive such compensation for their services as may be determined, from
time to time, by resolution of the Board of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, in accordance with the Minnesota Business Corporation Act,
Section 302A.417, Subd. 4. The certificates for such shares shall be numbered in
the order in which they shall be issued and shall be signed, in the name of the
corporation, by the president and by the secretary or an assistant secretary or
by such officers as the Board of Directors may designate. If the certificate is
signed by a transfer agent or registrar, such signatures of the corporate
officers may be by facsimile, if authorized by the
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<PAGE>
Board of Directors. Every certificate surrendered to the corporation for
exchange or transfer shall be canceled, and no new certificate or certificates
shall be issued in exchange for any existing certificate until such existing
certificate shall have been so canceled, except in cases provided for in Section
5.04.
Section 5.02. ISSUANCE OF SHARES. The Board of Directors is
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the articles of incorporation in such amounts and representing
such classes and series, if any, as may be determined by the Board of Directors
and as may be permitted by law and the articles of incorporation. Shares may be
issued for any consideration, including, without limitation, in consideration of
money or other property, tangible or intangible, received or to be received by
the corporation under a written agreement, or of services rendered or to be
rendered to the corporation under a written agreement. At the time of approval
of the issuance of shares, the Board of Directors shall state, by resolution,
its determination of the fair value to the corporation in monetary terms of any
consideration other than cash for which shares are to be issued.
Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner of
shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by
the Minnesota Business Corporation Act, Section 302A.419, as amended, any
shareholder claiming a certificate for shares to be lost, stolen, or destroyed
shall make an affidavit of that fact in such form as the Board of Directors
shall require and shall, if the Board of Directors so requires, give the
corporation a bond of indemnity in form, in an amount, and with one or more
sureties satisfactory to the Board of Directors, to indemnify the corporation
against any claim which may be made against it on account of the reissuance of
such certificate, whereupon a new certificate may be issued in the same tenor
and for the same number of shares as the one alleged to have been lost, stolen
or destroyed.
ARTICLE VI.
DISTRIBUTIONS, RECORD DATE
Section 6.01. DISTRIBUTIONS. Subject to the provisions of the
articles of incorporation, of these bylaws, and of law, the Board of Directors
may authorize and cause the corporation to make distributions whenever, and in
such amounts or forms as, in its opinion, are deemed advisable.
Section 6.02. RECORD DATE. Subject to any provisions of the articles
of incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any distribution as the record date
for the determination of the shareholders entitled to receive payment of the
distribution and, in such case, only shareholders
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<PAGE>
of record on the date so fixed shall be entitled to receive payment of such
distribution notwithstanding any transfer of shares on the books of the
corporation after the record date.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. SHARE REGISTER. The Board of Directors of the
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the Board:
(1) a share register not more than one year old, containing
the names and addresses of the shareholders and the
number and classes of shares held by each shareholder;
and
(2) a record of the dates on which certificates or
transaction statements representing shares were issued.
Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its Minnesota
registered office within ten days after receipt by an officer of the corporation
of a written demand for them made by a shareholder or other person authorized by
the Minnesota Business Corporation Act, Section 302A.461, as amended, originals
or copies of:
(1) records of all proceedings of shareholders for the last
three years;
(2) records of all proceedings of the Board for the last
three years;
(3) its articles of incorporation and all amendments
currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by the Minnesota Business
Corporation Act, Section 302A.463 and the financial
statements for the most recent interim period prepared
in the course of the operation of the corporation for
distribution to the shareholders or to a governmental
agency as a matter of public record;
(6) reports made to shareholders generally within the last
three years;
(7) a statement of the names and usual business addresses of
its directors and principal officers; and
(8) any shareholder voting or control agreements of which
the corporation is aware.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation
shall be determined by the Board of Directors.
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<PAGE>
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present, and:
(1) is in the usual and regular course of business of the
corporation;
(2) is with, or for the benefit of, a related corporation,
an organization in which the corporation has a financial
interest, an organization with which the corporation has
a business relationship, or an organization to which the
corporation has the power to make donations;
(3) is with, or for the benefit of, an officer or other
employee of the corporation or a subsidiary, including
an officer or employee who is a director of the
corporation or a subsidiary, and may reasonably be
expected, in the judgment of the Board, to benefit the
corporation; or
(4) has been approved by (a) the holders of two-thirds of
the voting power of the shares entitled to vote which
are owned by persons other than the interested person or
persons, or (b) the unanimous affirmative vote of the
holders of all outstanding shares whether or not
entitled to vote.
Such loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors present approve, including, without limitation, a
grant of or other security interest in shares of the corporation. Nothing in
this section shall be deemed to deny, limit or restrict the powers of guaranty,
surety or warranty of the corporation at common law or under a statute of the
state of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. INDEMNIFICATION. The corporation shall indemnify all
persons made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person against judgments, penalties,
fines, including without limitation, excise taxes assessed against the person
with respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements incurred by the person in connection
with the proceeding to the full extent permitted by Section 302A.521 of the
Minnesota Business Corporation Act as now enacted or hereafter amended. Such
indemnification shall extend to payment or reimbursement of reasonable expenses,
including attorneys' fees and disbursements incurred by such person in advance
of the final disposition of
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<PAGE>
the proceeding as permitted by Minnesota Statutes Section 302A.521, subd. 3.
(AMENDED MARCH 4, 1999)
Section 9.02. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the corporation would otherwise be required to
indemnify the person against the liability.
ARTICLE X.
AMENDMENTS
These bylaws may be amended or altered by a vote of the majority of
the whole Board of Directors at any meeting. Such authority of the Board of
Directors is subject to the power of the shareholders, exercisable in the manner
provided in the Minnesota Business Corporation Act, Section 302A.181, Subd. 3,
to adopt, amend, or repeal bylaws adopted, amended, or repealed by the Board of
Directors. The Board of Directors shall not adopt, amend or repeal any bylaws
fixing a quorum for meetings of shareholders, prescribing procedures for
removing directors or filling vacancies in the Board of Directors, or fixing the
number of directors or their classifications, qualifications, or terms of
office, except that the Board of Directors may adopt or amend any bylaw to
increase their number.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless
otherwise ordered by the Board of Directors, the president shall have full power
and authority on behalf of the corporation (a) to attend any meeting of security
holders of other corporations in which the corporation may hold securities and
to vote such securities on behalf of this corporation; (b) to execute any proxy
for such meeting on behalf of the corporation; or (c) to execute a written
action in lieu of a meeting of such other corporation on behalf of this
corporation. At such meeting, the president shall possess and may exercise any
and all rights and powers incident to the ownership of such securities that the
corporation possesses. The Board of Directors may, from time to time, grant such
power and authority to one or more other persons and may remove such power and
authority from the president or any other person or persons.
Section 11.02. PURCHASE AND SALE OF SECURITIES. Unless otherwise
ordered by the Board of Directors, the president shall have full power and
authority on behalf of the corporation to purchase, sell, transfer or encumber
any and all securities of any other corporation owned by the corporation, and
may execute and deliver such documents as may be necessary to effectuate such
purchase, sale, transfer or encumbrance. The Board of Directors may, from time
to time, confer like powers upon any other person or persons.
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EXHIBIT 10.51
Resolution of the Board of Directors dated May 12, 1998:
SEVERANCE PLAN EXTENSION RESOLUTION
RESOLVED, that the Severance Pay Plan for Eligible Employees of Michael Foods,
Inc. and its subsidiaries (the "Severance Plan"), as approved and implemented in
accordance with the directives of the Board of Directors on July 26, 1990 and
extended through July 1, 1998, be hereby extended for a period of one additional
year to a new Termination Date of July 1, 1999.
Number of employees covered under the Severance Plan
from July 1, 1997 to July 1, 1998.....................17
Employee added:
Ronald W. Bergman - Michael Foods, Inc.
Employee deleted:
James D. Clarkson - Northern Star Co. (under contract now)
Number of employees covered under the Severance Plan
from July 1, 1998 to July 1, 1999......................17
EXHIBIT 10.64
MICHAEL FOODS, INC.
1994 EXECUTIVE INCENTIVE PLAN
(AS AMENDED EFFECTIVE JANUARY 1, 1999)
I.
PURPOSE
-------
A. The purpose of the Michael Foods, Inc. Executive Incentive Plan (the
"Plan") is to incent and reward the senior management of Michael Foods,
Inc. (the "Company") for delivering or exceeding their annual operating
plan and to motivate those executives to be planning and focusing on
year-over-year trendline earnings growth. Corporate executives will be
rewarded based upon attainment of the Company's EPS growth targets.
Operating company executives will be rewarded based upon individual
operating company growth in profit before taxes ("PBBT"), as well as
overall corporate EPS performance.
B. The Plan will be effective January 1, 1994, will remain in effect until
amended or terminated, and supersedes the Michael Foods, Inc. Amended and
Restated Annual Incentive Compensation Plan, which has been terminated.
II.
ADMINISTRATION
--------------
A. The Plan will be administered by the Chief Executive Officer ("CEO") and
the Chief Financial Officer of the Company under the direction of the
Compensation Committee of the Board of Directors.
B. The Board of Directors will have sole authority to establish the Plan's
terms and conditions.
III.
ELIGIBILITY
-----------
A. Participation in the Plan will be restricted to those positions which have
a clear impact on the Company's financial and operating performance.
B. Eligible participants will include principal officers and select key
employees of the Company and the Company's operating companies.
C. Generally, key employees will be defined as those executive positions
which report to the President of an operating subsidiary or, in the case
of corporate level employees, to the CEO of the Company.
D. Key employees will be recommended by the CEO of the Company and will be
approved by the Compensation Committee of the Board of Directors.
E. Participation will also be limited to executives who are not covered under
another approved incentive plan.
<PAGE>
IV.
INCENTIVE OPPORTUNITY
---------------------
The size of the maximum incentive award opportunity level will vary by the
position's responsibility level, as outlined below:
MAXIMUM INCENTIVE
OPPORTUNITY AS A
LEVEL POSITION(S) PERCENT OF BASE SALARY
====== =================================================== =================
I Corporate CEO, President, Chief Operating Officer, 100%
Executive Vice President, Chief Financial Officer
and Operating Company Presidents
II Other Officers 75%
III Non-Officer Key Employees 50%
V.
PLAN COMPONENTS
---------------
COMPONENT A: CASH AWARD
3/4 of the incentive opportunity for both corporate and operating company
participants will be paid based upon PBBT or EPS achievement against target
objectives.
1. OPERATING COMPANY PARTICIPANTS - CASH AWARD OPPORTUNITY RE:COMPANY EPS TARGET
- -------------------------------------------------------------------------------
A portion of the operating company participants' cash awards will be paid based
upon Michael Foods' EPS achievement against the target objective, in accordance
with the following table:
INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY:
LEVEL I LEVEL II LEVEL III
- --------------------------------------------------------------------------------
ACHIEVEMENT OF TARGET
- ---------------------
Below 94% 0.0% 0.0% 0.0%
94% -94.99% 2.9% 2.2% 1.5%
95% -95.99% 5.7% 4.3% 2.9%
96% -96.99% 8.6% 6.5% 4.3%
97% -97.99% 11.4% 8.6% 5.7%
98% -98.99% 14.3% 10.7% 7.2%
99% -99.99% 17.1% 12.8% 8.6%
100% -100.99% 20.0% 15.0% 10.0%
101% -101.99% 24.0% 18.0% 12.0%
102% -102.99% 28.0% 21.0% 14.0%
103% -103.99% 32.0% 24.0% 16.0%
104% -104.99% 36.0% 27.0% 18.0%
105% or greater 40.0% 30.0% 20.0%
<PAGE>
2. OPERATING COMPANY PARTICIPANTS - CASH AWARD OPPORTUNITY
RE: OPERATING COMPANY TARGETS
- --------------------------------------------------------------------------------
A portion of the operating company participants' cash awards will be paid based
upon their individual operating company PBBT achievement against the target
objective, in accordance with the following table:
INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY:
LEVEL I LEVEL II LEVEL III
- --------------------------------------------------------------------------------
ACHIEVEMENT OF TARGET
Below 94% 0.0% 0.0% 0.0%
94% -94.99% 2.5% 1.9% 1.3%
95% -95.99% 5.0% 3.8% 2.5%
96% -96.99% 7.5% 5.6% 3.8%
97% -97.99% 10.0% 7.5% 5.0%
98% -98.99% 12.5% 9.4% 6.3%
99% -99.99% 15.0% 11.3% 7.5%
100% -100.99% 17.5% 13.1% 8.8%
101% -101.99% 19.3% 14.4% 9.6%
102% -102.99% 21.0% 15.8% 10.5%
103% -103.99% 22.8% 17.1% 11.4%
104% -104.99% 24.5% 18.4% 12.3%
105% -105.99% 26.3% 19.7% 13.1%
106% -106.99% 28.0% 21.0% 14.0%
107% -107.99% 29.8% 22.3% 14.9%
108% -108.99% 31.5% 23.6% 15.8%
109% -109.99% 33.3% 24.9% 16.6%
110% or greater 35.0% 26.3% 17.5%
3. CORPORATE, SALES & DISTRIBUTION PARTICIPANTS CASH AWARD OPPORTUNITY
The corporate, sales and distribution participants' cash awards will be paid
based upon Michael Foods' EPS achievement against the target objective, in
accordance with the following table:
INCENTIVE AWARD OPPORTUNITY AS A PERCENT OF BASE SALARY:
LEVEL I LEVEL II LEVEL III
- --------------------------------------------------------------------------------
ACHIEVEMENT OF TARGET
Below 94% 0.0% 0.0% 0.0%
94% -94.99% 6.0% 4.5% 3.0%
95% -95.99% 11.3% 8.5% 5.7%
96% -96.99% 16.5% 12.4% 8.3%
97% -97.99% 21.8% 16.4% 10.9%
98% -98.99% 27.0% 20.3% 13.5%
99% -99.99% 32.3% 24.2% 16.2%
100% -100.99% 37.5% 28.1% 18.8%
101% -101.99% 45.0% 33.8% 22.5%
102% -102.99% 52.5% 39.4% 26.3%
103% -103.99% 60.0% 45.0% 30.0%
104% -104.99% 67.5% 50.6% 33.8%
105% or greater 75.0% 56.3% 37.5%
<PAGE>
COMPONENT B: STOCK AWARD
1/4 of the incentive opportunity for both corporate and operating company
participants will be paid based upon a three year average trendline earnings
growth. For each Plan year, the three year trendline EPS must average 15% growth
annually to trigger participation in this component of the Plan. This segment of
the Plan is earned over a period of three years and is paid in the Company's
common stock.
- - Year I earns 50% assuming average annual EPS growth of at least 15% for
the three years ending Year I, Year II earns 30% assuming average annual
EPS growth of at least 15% for the three years ending Year II, and Year
III earns the balance (20%) assuming average annual EPS growth of at least
15% for the three years ending Year III. (If at least 15% three year
average EPS growth is not achieved, that yearly portion of the stock award
incentive is forfeited, was well as the ability to receive any prior year
portion that would have vested in the current year.) The number of shares
of common stock that would be awarded to an individual participant is
determined by multiplying the appropriate earned percentage by the 25% of
the maximum incentive opportunity for each individual at the appropriate
level covered by Component B. That amount is then divided by the closing
price of the Company's common stock on the third business day following
the announcement of year-end financial results to determine the number of
shares of common stock to be issued to each participant. Certificates will
be issued as soon as practical following the first quarter Board of
Directors meeting. Further aspects of Component B are covered in the
Michael Foods, Inc. 1994 Executive Performance Stock Award Plan.
COMPONENT C: OPTION AWARD
Stock options will be awarded to the operating company presidents and certain
executive corporate officers for achieving EPS growth in excess of 15% annually.
- - Qualified individuals for 1999 and later years:
Gregg Ostrander Norman Rodriguez
Jeffrey Shapiro JD Clarkson
John Reedy James Kohler
Bill Goucher
- - Stock option awards will be for a specific number of shares of
common stock based upon a rising scale which is triggered with a
year-over-year increase in EPS of at least 15% as follows:
<TABLE>
<CAPTION>
PRESIDENT /CEO OF MICHAEL ALL OTHER
FOODS, INC. PARTICIPANTS
--------------------------- --------------------------
MAXIMUM STOCK OPTION OPPORTUNITY
(COMMON STOCK SHARES)..................................... 36,000/YR. 24,000/YR.
- ----------------------------------------------------------------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Below 15% Earnings Per Share Growth.............. 0 0
15% - 19.99%...................................................... 4,500 3,000
20% - 24.99%...................................................... 9,000 6,000
25% - 29.99%...................................................... 13,500 9,000
30% - 34.99%...................................................... 18,000 12,000
35% - 39.99%...................................................... 22,500 15,000
40% - 44.99%...................................................... 27,000 18,000
45% - 49.99%...................................................... 31,500 21,000
50% or Greater..................................................... 36,000 24,000
</TABLE>
<PAGE>
Options will be priced based upon the closing price of the Company's
common stock on the third business day following the announcement of
year-end financial results each year and will be issued following the
March Board of Directors meeting. The diluted earnings per share for each
year will be computed in accordance with Generally Accepted Accounting
Principles ("GAAP"), but before accrual of bonuses and stock option awards
under this plan.
VI.
ORGANIZATION AND INDIVIDUAL PERFORMANCE MEASURES
------------------------------------------------
The following measures of organization performance will be used to determine
actual incentive awards:
Michael Foods, Inc. Diluted net earnings per share. Measured by actual
diluted earnings per share for the current year as compared to the target
level. Calculated in accordance with GAAP.
Operating Companies. A portion of cash award based upon profit before
bonus and taxes (PBBT). Measured by actual pre-tax profits for the Plan
year as compared to the target level. For the purposes of the Plan, PBBT
will be defined as operating profits, calculated in accordance with GAAP,
before federal and state taxes, any interest charges associated with
acquisition debt, and before accrual of bonuses. The remaining portion of
the cash award to Operating Company participants will be based upon the
relative achievement of the Michael Foods, Inc. diluted net earnings per
share target, as defined above.
VII.
ADMINISTRATIVE PROCEDURES
-------------------------
A. Additions of Individuals. All eligible participants must be designated by
the CEO of the Company as of the beginning of the Plan year.
B. Establishment of "Target or Maximum" Goals. The CEO retains the right to
set or adjust the operating company and corporate "target or maximum"
incentive goals based upon an assessment of overall business conditions at
the beginning of the Plan year.
C. Adjustments to Targets and/or Goals. The CEO retains the right to adjust
the targets and/or goals of the Plan based upon his/her assessment of
business conditions at the end of the second quarter of the Plan year.
D. Down Earnings Year. No cash incentive shall be paid to a participant if
their operating company or, in the case of corporate level participants,
the Company has a decline in earnings for the Plan year, except at the
discretion of the CEO with the approval of the Compensation Committee.
However, this provision would not preclude an individual from
participating in a Component B Stock Incentive Award.
E. Termination/Death/Disability. Plan participants must be in the employ of
the Company on the day the incentive award is actually paid in order to be
eligible for incentive award payments except at the discretion of the CEO.
However, should a participant die or become disabled, the incentive award
for the year in which such death or disability occurs shall be prorated by
the number of months of service during the applicable Plan year and shall
be paid to the participant or the participant's estate, as the case may
be.
F. Change in Position. Eligible employees under the Plan who have a change in
position during a Plan year will have their incentive award calculated
under the Plan award levels for both positions, prorating the incentive
award by the months of service at each level.
<PAGE>
G. Interpolation. When the actual performance figure does not result in a
whole number, the individual calculating the formula should interpolate to
the closest percent.
H. Exceptions. In each instance, exceptions must be approved in advance by
the appropriate officer and the CEO of the Company, and must be submitted
to the Compensation Committee of the Board of Directors for their
concurrence.
VIII.
AMENDMENT AND TERMINATION
-------------------------
The Board of Directors may at any time amend the Plan for the purposes of
satisfying the requirements of any changes in applicable laws or for any purpose
that may be permitted by law. The Board of Directors may also terminate the Plan
at any time. No such amendment or termination shall, however, adversely affect
the rights of any participant (without his/her prior consent) with regard to any
award previously made.
IX.
RIGHT TO CONTINUED EMPLOYMENT
-----------------------------
No participant shall have any claim or right to be granted an incentive (bonus)
award under this Plan and the granting of an incentive (bonus) award shall not
be construed as giving the participant the right of continued employment with
the Company. The Company further reserves the right to dismiss a participant at
any time, with or without cause, free from any claim or liability other than
provided under this Plan document.
X.
CHANGE IN CONTROL
-----------------
If the Company is merged into, acquired by or consolidated with another
corporation, or if all or substantially all of the assets of the Company are
sold or transferred to another party or if more than fifty percent (50%) of the
outstanding Common Stock is transferred to one or more parties so as to affect a
change in the control of the Company, the Common Stock granted under Component B
of the Plan and the options granted under Component C of the Plan shall become
immediately exercisable. Accordingly, said immediate vesting shall not apply to
any transaction where the Company stockholders, directly or indirectly, retain
in excess of fifty percent (50%) of the voting control over the Company.
EXHIBIT 10.65
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, the 31st day of
October 1997, and the 1st day of January 1999 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, 1999, 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, 1999 through
December 31, 1999 of at least $203,000 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.
1
<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
2
<PAGE>
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 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 l(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;
3
<PAGE>
(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,
(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
4
<PAGE>
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.
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
5
EXHIBIT 10.66
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, and the 1st day of January
1999, 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, 1999 and
shall continue through December 31, 1999, 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 4, 1999 through
December 31, 1999 of at least $230,000 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.
d. Michael Foods shall reimburse Goucher for all
reasonable expenses incurred by Goucher in connection
with Michael Foods' business, including but not limited
to,
1
<PAGE>
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
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 Incentive Compensation or Options for the year of
termination. In the case of Incapacity or death, or
termination by Michael
2
<PAGE>
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 A1TERED"
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;
3
<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. WAIVE. 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
4
<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
5
EXHIBIT 10.67
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of October
1997, and amended as of the 1st day of January 1999, by and between MICHAEL
FOODS, INC., a Minnesota corporation (hereinafter referred to as "Michael
Foods") and JAMES D. CLARKSON (hereinafter referred to as "Clarkson").
WHEREAS, Clarkson has served as President of Northern Star Company
since 1995; and
WHEREAS, Michael Foods and Clarkson have agreed to enter into this
Agreement effective as of October 31, 1997.
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties agree that this Agreement is effective as of
October 31, 1997 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Clarkson to
serve as President of Northern Star Company 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, 1999 and
shall continue through December 31, 1999, 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 of the
calendar years of this Agreement from January 1, 1999 through
December 31, 1999 of at least $194,000 payable in substantially
equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this
Agreement, 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 Company.
d. Michael Foods shall reimburse Clarkson for all
reasonable expenses incurred by Clarkson in connection
with Michael Foods' business, including but not limited
to,
1
<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 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
determination by Michael Foods in its sole discretion
that Clarkson is unable to perform his job
responsibilities as President of Northern Star Company
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 monthly 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
2
<PAGE>
Foods without Cause in accordance 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 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 A1TERED"
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 Clarkson 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;
3
<PAGE>
(iii) Michael Foods requiring Clarkson to be based
anywhere other than the geographic location at which
Clarkson was based immediately preceding the Change 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. WAIVE. 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:
JAMES D. CLARKSON
10464 Shelter Grove
Eden Prairie, MN 55347
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
4
<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/ James D. Clarkson
----------------------------------------
JAMES D. CLARKSON
5
EXHIBIT 13.1
ANNUAL REPORT
[Lab Technician Photo here]
1998
Michael Foods
[Logo Art here]
<PAGE>
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
<PAGE>
[Light Bulb Art here]
TABLE OF CONTENTS
PRESIDENT'S LETTER 1
CORPORATE OVERVIEW 3
EGG PRODUCTS DIVISION 4
REFRIGERATED DISTRIBUTION DIVISION 8
DAIRY PRODUCTS DIVISION 10
POTATO PRODUCTS DIVISION 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14
CONSOLIDATED FINANCIAL STATEMENTS 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
(In thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ........................................... $1,020,484 $956,223 $616,395
Net earnings (loss) ................................. 40,257 32,439 (3,073)
===========================================
Net earnings (loss) per share - diluted ........... $ 1.83 $ 1.51 $ (.16)
Dividends per share ............................... $ .23 $ .20 $ .20
Weighted average shares outstanding - diluted ..... 21,980 21,446 19,386
===========================================
<CAPTION>
AT DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
Working capital ..................................... $ 61,297 $ 54,788 $ 56,677
Total assets ........................................ 551,516 503,655 364,659
Long-term debt, including current maturities ........ 166,107 146,028 112,901
Shareholders' equity ................................ 244,149 229,246 174,042
===========================================
</TABLE>
Certain items in this annual
report are forward-looking
statements, which are made
in reliance upon the safe
FRESHER THINKING harbor provisions of the
Private Securities Litigation
Reform Act of 1995. Such
forward-looking statements
are subject to numerous
risks and uncertainties,
[Light Bulb Art here] including change in domestic
and international economic
conditions. Additional risks
and uncertainties include
variances in the demand for
the Company's products due
to consumer and industry
developments as well as
variances in the costs to
produce such products,
including normal volatility in
egg 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>
TO OUR SHAREHOLDERS
[CEO PHOTO HERE]
Your company had a record-setting 1998. Unit sales gains, particularly of
value-added products, and improved operating efficiencies resulted in record
annual net earnings.
1998 FINANCIAL RESULTS
* Record net sales for the year exceeded $1 billion, an increase of 7%.
* Record net earnings of $40 million were achieved, with record diluted earnings
per share of $1.83, an increase of 21%.
* Return on average shareholders' equity increased to 17%.
* Excellent cash flows continued. Our balance sheet remains strong, with debt to
total capital at 40%.
INVESTING IN OUR FUTURE
* Two investments in Europe were completed in early 1999: we acquired a 25%
interest in Belovo S.A., a specialty egg products company based in Bastogne,
Belgium, and we entered into a 50/50 joint venture with Belovo's founding
shareholders to form The Lipid Company ("TLC"), a company involved in the
extraction of phospholipids from egg yolks. TLC will build a phospholipid
extraction plant in Luxembourg which should be operational the first half of
2000. This investment will be our first move into the field of nutraceuticals,
whereby specialty ingredients extracted from egg yolks will be used to enhance
other food items, such as infant formulas.
[EMPLOYEE
PHOTO HERE]
* We are acquiring a dairy products operation in Connecticut from HP Hood. This
transaction will allow us to expand our dairy products operations to the East
Coast and is the next step in our strategy to build Kohler Mix Specialties into
a nationwide business.
[EMPLOYEE
PHOTO HERE]
* We had record capital spending in 1998. Spending on capital projects is
projected to be even higher in 1999. This spending is focused on expanding our
production capacity for value-added products, particularly further-processed egg
and specialty dairy products, in order to meet rising demand.
[EMPLOYEE
PHOTO HERE]
* During the year, we repurchased nearly one million shares of our stock,
resulting in higher earnings per share.
OUR PEOPLE
* The focus of our annual report this year is on the people of Michael Foods.
Our company is over 4,000 people strong and our employees come to work each day
dedicated to improving our business and delivering value to our customers and,
in turn, providing growth for our investors. I thank them for their considerable
efforts and look forward with them to a future filled with growth opportunities,
both for Michael Foods as a company and for them as individuals as they grow
with us in their careers.
[EMPLOYEE
PHOTO HERE]
[EMPLOYEE
PHOTO HERE]
<PAGE>
* Late last year we filled a new position, Vice President of Operations, for the
Dairy Products Division.
* Early in 1999, we made a number of promotions within our Michael Foods Sales
Group, broadening and strengthening the management group running our foodservice
sales efforts.
* At the beginning of 1999, we had a voluntary, precautionary recall of certain
cartoned dairy products made by our Dairy Products Division. This recall was
handled expertly and efficiently by a team of dedicated employees, including the
Kohler Mix staff, the Sales Group, company-wide Quality Assurance personnel and,
particularly, our customer service and distribution employees. Their superb
responsiveness and professionalism helped us manage this unforeseen situation
with the utmost concern for our customers and the consuming public. I personally
thank those employees directly involved in the recall efforts for going the
"extra mile" to help safeguard the public health and to take care of our
customers' needs.
* On behalf of my fellow directors, and all of the shareholders and employees of
Michael Foods, I thank Miles Efron, who is retiring after 11 years of dedicated
service to our Board of Directors, for his valuable contributions to Michael
Foods. Miles' insightful comments and wise counsel will be missed.
THE OUTLOOK
* In 1995, we established the first strategic plan for Michael Foods, which we
called MFI 2000. Among its goals was to achieve $1 billion in annual net sales
by the year 2000. We were pleased to achieve this goal two years early. With
this goal and other MFI 2000 goals reached, or being within reach, this past
year we established new goals for the next five years. Our new strategic plan,
which we call MFI 2003, includes the following goals:
- $2 billion in net sales by the year 2003, with the growth coming from
both internal and external sources (i.e., acquisitions).
- Compounded average annual net earnings per share gains of 15% per year,
driven by internal growth from value-added products as well as
acquisitions and joint ventures.
- A return on average shareholders' equity of 18% per year.
On behalf of all of the employees of Michael Foods, I thank you for your
ongoing support as shareholders. We take our commitment to our customers and to
our owners very seriously, and are working diligently to meet your expectations
and grow Michael Foods in order to provide you with the return on your
investment which you expect. We see ample opportunities to deliver this growth
in the years ahead. New product introductions, cost savings from operating
synergies, and new opportunities presented by both acquisitions and joint
ventures, should all provide sources for earnings growth in the years ahead. Our
employees are justifiably proud of what they have accomplished in recent years,
but they believe, as do I, that our best days lie ahead.
Sincerely,
[CEO SIGNATURE HERE]
Gregg A. Ostrander
President and Chief Executive Officer
2
<PAGE>
CORPORATE OVERVIEW
1998 FINANCIAL HIGHLIGHTS
NET SALES: $1.02 BILLION +7%
NET EARNINGS: $40.3 MILLION +24%
EARNINGS PER SHARE (DILUTED): $1.83 +21%
RETURN ON AVERAGE SHAREHOLDERS'EQUITY: 17%
<TABLE>
<CAPTION>
CONTRIBUTION TO COMPANY TOTALS
EGG PRODUCTS DIVISION NET SALES OPERATING PROFIT
<S> <C> <C> <C>
* VALUE-ADDED PRODUCTS 60% OF SALES
(extended shelf-life, precooked,
egg substitutes, dried)
* OTHER EGG PRODUCTS 34% OF SALES 59% 79%
(frozen, hardcooked, short shelf-life)
* SHELL EGGS 6% OF SALES Chart Art here Chart Art here
REFRIGERATED DISTRIBUTION DIVISION
* PRIMARILY CRYSTAL FARMS(R)
BRANDED PRODUCTS
* CHEESE, BAGELS, BUTTER, MARGARINE, 22% 8%
MUFFINS, CARTONED EGGS, JUICE AND
ETHNIC FOODS
Chart Art here Chart Art here
* 23 STATE TERRITORY
* 400+ PRODUCTS AND LINE EXTENSIONS
DAIRY PRODUCTS DIVISION
* ULTRA-PASTEURIZED DAIRY PRODUCTS-
PRIMARILY FOODSERVICE 14% 8%
* ICE MILK AND ICE CREAM MIXES
Chart Art here Chart Art here
* COFFEE CREAMERS
* SPECIALTY RETAIL PRODUCTS
POTATO PRODUCTS DIVISION
* REFRIGERATED HASH BROWNS, MASHED,
SLICED, AND RED SKIN POTATOES 5% 5%
* FOODSERVICE MARKET 75% OF SALES
Chart Art here Chart Art here
* RETAIL GROCERY MARKET 25% OF SALES
(Simply Potatoes(TM), Diner's Choice(TM))
</TABLE>
3
<PAGE>
[EMPLOYEE
PHOTO HERE]
EGG PRODUCTS
DIVISION
JOHN BURKE SANTOS REYES (FOREGROUND)
PLANT MANAGER BREAKING LINE OPERATOR
46 YEARS OF SERVICE 7 YEARS OF SERVICE
[EMPLOYEE
PHOTO HERE]
RICH MEYERS
VICE PRESIDENT-NATIONAL ACCOUNTS
9 YEARS OF SERVICE
SANDY HABERMAN [EMPLOYEE
CUSTOMER SERVICE PHOTO HERE]
REPRESENTATIVE
3 YEARS OF SERVICE
4
<PAGE>
"GOOD PROGRESS HAS BEEN
MADE IN MELDING THE TWO EGG
PRODUCTS OPERATIONS WITH
INCREASINGLY COORDINATED SALES,
LUIS DINIS PRODUCTION AND DISTRIBUTION
TRAFFIC MANAGER EFFORTS."
15 YEARS OF SERVICE
[EMPLOYEE
PHOTO HERE]
Sales and earnings rose to record levels for the Egg Products Division in
1998. This was on the heels of very substantial growth in 1997. Since the
acquisition of Papetti's Hygrade Egg Products, Inc. two years ago, good progress
has been made in melding the two egg products operations, with increasingly
coordinated sales, production and distribution efforts. The benefits from the
synergies achieved within the Egg Products Division, along with the Division's
sources of growth, are discussed below:
* COST SAVINGS FROM SYNERGIES--We estimate that we have achieved approximately
$12 million in pretax cost savings through the end of 1998 from synergies. These
savings have come from improvements in the areas of plant operations, purchasing
and distribution. We estimate that further opportunities exist to realize
another $2-3 million in 1999, mostly from transportation savings.
* STRONG GROWTH IN PRECOOKED ITEMS--The precooked patty and omelet business
experienced tremendous growth in 1998. These microwaveable products directly
meet consumers' interest in high quality foods that can be easily prepared,
while also satisfying foodservice operators' heightened interest in reducing
labor costs in the restaurant kitchen. Divisional sales volumes of these
precooked products increased over 100% in 1998, with more growth ahead. Among
the factors driving this growth was the conversion of a major customer from
extended shelf-life liquid eggs to precooked items in late 1998 and early 1999.
* STRONG EGG SUBSTITUTES GROWTH--The growth of egg substitutes (egg white based,
low-or no-fat/cholesterol products) was impressive in 1998. Sales gains were
approximately 20%. The growth came from consumers' greater focus on healthier
eating, market share gains in the private label sector, plus the introduction of
All Whites(TM) late in the year.
* NEW PRODUCTS--All Whites(TM), as the name implies, is an all-whites egg
product that has been ultra-pasteurized for an extended, refrigerated
shelf-life. It is ideal for health drinks, as a protein supplement, and
specialty cooking and baking applications. Another new product launch in late
1998 was the Chef's Omelet(TM) line. These high quality frozen, microwaveable
omelets come in six varieties and are being distributed on the east coast
through major retail customers. As production capacity is expanded in 1999,
distribution will be broadened.
The above items were earnings growth drivers in 1998 and should provide
additional growth in 1999
(CONTINUED ON PAGE 7)
[EMPLOYEE ED HAGLUND (L)
PHOTO HERE] BIG RED FARMS
PRODUCTION SUPERVISOR
9 YEARS OF SERVICE
BRENDA HENDERSON (R)
HUSKER PRIDE FARMS
LEAD PERSON
14 YEARS OF SERVICE
5
<PAGE>
EGG PRODUCTS
DIVISION
[EMPLOYEE
PHOTO HERE]
[EMPLOYEE
PHOTO HERE]
GEORGE SERRANO
MANUFACTURING SUPPORT DRIVER
19 YEARS OF SERVICE
[EMPLOYEE
PHOTO HERE]
MARIA KLEIN DELANA BARNO
CUSTOMER SERVICE MANAGER RECEPTIONIST
20 YEARS OF SERVICE 12 YEARS OF SERVICE
6
<PAGE>
"...ANTICIPATE A FUTURE WITH AMPLE
OPPORTUNITIES FOR PROFITABLE GROWTH
AS WE FURTHER THE DIVISION'S MISSION
TO BE THE WORLD-LEADER IN VALUE-
ADDED EGG PRODUCTS."
[EMPLOYEE
PHOTO HERE]
LORI MISCHKE
LEAD PERSON-HARDCOOKED
9 YEARS OF SERVICE
and beyond. Additional sources of future earnings growth include:
* EXPANDING CAPACITY FOR VALUE-ADDED PRODUCTS-The Division had record spending
in 1998 to build capacity for the production of value-added egg products, mainly
precooked items. Capital spending will remain high in 1999 in order to meet
customers' rising orders for precooked products. The Lenox, Iowa egg products
plant will be expanded to handle precooked products production, becoming the
third facility in the Division with these capabilities. Additionally, the
Division is building a new dried products plant in Wakefield, Nebraska where an
expanded line of specialty egg powders will be made for both domestic and
international industrial food customers.
JON SINDELAR
MAINTENANCE LEADMAN
4 YEARS OF SERVICE
* DECLINING COSTS: FEED AND EGGS-1999 should see a continuation of the trend
toward lower feed costs, which began in 1997. Declines in grain costs helped
Divisional earnings in 1998, thanks to large domestic crops for corn and
soybeans along with depressed export demand. These trends appear intact for the
new year. Regarding egg procurement costs, prices in the egg market are
projected by experts to be modestly below 1998 levels this year, which should
keep costs at reasonable levels.
LAURA MCCARTHY
SYSTEMS ANALYST
1 YEAR OF SERVICE
[EMPLOYEE
PHOTO HERE]
* EUROPEAN INVESTMENTS-Two investments were made in Europe in early 1999. The
first investment was a 25% interest in Belovo S.A., a 29 year old firm based in
Bastogne, Belgium. Belovo specializes in customized dried egg products, lysozyme
extractions from eggs and certain nutraceutical egg products. We plan on
bringing the proprietary dried egg products technology that Belovo has developed
to the U.S. at our Nebraska location. Belovo will explore taking Michael Foods'
in-shell pasteurization technology to the European egg products market.
CARINE BERG [EMPLOYEE
REGIONAL SALES ANALYST PHOTO HERE]
2 YEARS OF SERVICE
The second investment was a 50% interest in a joint venture with the
founding shareholders of Belovo. This joint venture, called The Lipid Company
("TLC"), will build a plant in Luxembourg, which is scheduled to open in the
first half of 2000. TLC, which has a pilot plant at the Belovo facility in
Bastogne, is in the business of commercialized phospholipid extractions from egg
yolks. These extractions provide highly absorbable content of omega-3 and
omega-6 long-chain fatty acids for use in infant formulas, such that they better
replicate mother's milk, and in senior citizen dietary supplements to help the
elderly with their mental acuity. TLC and its customers are also exploring using
highly purified egg phospholipids with omega-3 fatty acid, called DHA, in
pharmaceutical applications.
The technologies we have gained access to through these two investments
represent the highest value-added applications for eggs in the world. We are
excited to be partners with Belovo and its founders and anticipate a future with
ample opportunities for profitable growth as we further the Division's mission
to be the world-leader in value-added egg products.
7
<PAGE>
REFRIGERATED DISTRIBUTION
DIVISION
[EMPLOYEE
PHOTO HERE]
VIRGIL HEIMKES
TRUCK DRIVER
17 YEARS OF SERVICE
SCOTT ADAMS [EMPLOYEE
LEAD BATCHER PHOTO HERE]
3 YEARS OF SERVICE
WAYNE SANDEEN
FUELER/DRIVER
4 YEARS OF SERVICE GINI LOCH
INSIDE SALES REPRESENTATIVE
MICHELLE SCHNITZLER 2 YEARS OF SERVICE
RECEPTIONIST/INVENTORY
CONTROL CLERK [EMPLOYEE
4 YEARS OF SERVICE PHOTO HERE]
8
<PAGE>
"...SUCCESS IN RECENT YEARS SERVING THE LARGE
GROCERY RETAILING CUSTOMERS THROUGH DISTRIBUTION TO
THEIR WAREHOUSES WILL GROW IN IMPORTANCE AS THE
RETAIL GROCERY MARKET CONTINUES TO CONSOLIDATE."
1998 was a mixed year for the Refrigerated Distribution Division. Net sales
rose 3%, despite the loss of two chain accounts. The Division had its second
best year ever financially, but operating earnings were below those of 1997's
record levels. Unusually high cheese and butter costs during the latter part of
the year compressed Crystal Farms' operating margins. Since year end, these
costs have declined to levels more in line with historical averages and sales
volumes have improved, leaving Crystal Farms well positioned for 1999.
[EMPLOYEE
PHOTO HERE]
MIKE JOHNSON (L)
VICE PRESIDENT-SALES,
MIDWEST DIVISION
19 YEARS OF SERVICE
CHRIS JOHNSON (R)
REGIONAL SALES MANAGER
11 YEARS OF SERVICE
Divisional highlights for 1998 included:
* Crystal Farms gained entry into a 100+ store supermarket chain in the fourth
quarter and is seeking additional CHAIN STORE GROWTH opportunities in 1999 to
supplement its direct - store - delivery ("DSD") system.
* BUILDING BRAND AWARENESS by consumers for the Crystal Farms name was continued
through TV advertising in limited markets, billboards, point-of-sale materials,
and theme promotions.
* SIGNIFICANT NEW PRODUCT ACTIVITY during the year included the introductions
of:
- Cheezoids(R) aerosol and string cheese products (oriented toward fun
snacking)
- Cheese Waves(R) bite-sized cheese squares (available in three flavors)
DONNIE BENZ [EMPLOYEE
RECEIVER PHOTO HERE]
41 YEARS OF SERVICE
- Crystal Farms Bread Sticks-Original and Garlic varieties
- Crystal Farms Soft Cream Cheese-Garden Vegetable and Cranberry varieties
- Crystal Farms Real Whipped Light Cream
* PRODUCT DEVELOPMENT WORK will also lead to these introductions slated for the
first half of 1999:
- Honey Wheat Bagels (under the David's Deli and Manhattan Bagel Exchange
brands)
- Aerosol Cream Cheese-Plain and Strawberry varieties
- 2 lb. Finely Shredded Cheddar Cheese
* Crystal Farms LEVERAGED ITS DISTRIBUTION CAPABILITIES by becoming the regional
distributor for Papetti's Better `n Eggs(TM) retail egg substitute product in
1998.
Growth opportunities for the Refrigerated Distribution Division include new
product introductions, such as those noted above, growing with existing
supermarket customers as they open new locations, adding new grocery accounts in
current marketing areas, and expanding Crystal's operations beyond its current
23 state territory. Further, the Division has seen success in recent years
serving large grocery retailing customers through distribution to their
warehouses. This channel of distribution, complimenting the core DSD business,
will grow in importance as the retail grocery market continues to
consolidate.
9
<PAGE>
DAIRY PRODUCTS
DIVISION
[EMPLOYEE
PHOTO HERE]
[EMPLOYEE
PHOTO HERE]
MARK DVORAK
FORK LIFT OPERATOR
4 YEARS OF SERVICE
[EMPLOYEE
PHOTO HERE]
CHRIS COLLINS
FLUID HANDLER
6 YEARS OF SERVICE
10
<PAGE>
"...[WITH] ONLY A 12% SHARE OF THE
230 MILLION GALLON U.S. MIX MARKET
AND JUST 5% OF THE 35-40 MILLION
CASE NATIONAL CREAMER MARKET...
KOHLER MIX HAS SIGNIFICANT
OPPORTUNITIES FOR GROWTH."
[EMPLOYEE
PHOTO HERE]
LINDA BOHRER
QUALITY ASSURANCE MANAGER
11 YEARS OF SERVICE
1998 was a challenging, but strong, year for the Dairy Products Division.
Sales were at new record levels, driven by outstanding unit sales growth. Volume
rose over 15%, the twelfth annual record in a row, paced by notable success with
value-added items such as ultra-high temperature ("UHT") pasteurized ice milk
mixes and shelf-stable coffee creamers. Unit sales of mixes rose over 20% and
creamer sales rose more than 35% compared to 1997 levels.
During the summer, this strong growth presented challenges for the Division,
with sales growth pushing both the Minnesota and Texas plants to near capacity
levels, resulting in additional labor costs to meet orders. Last year also saw
unprecedented dairy ingredient costs, with the butter fat market skyrocketing
for most of the year. As a result, the Division was unable to adjust pricing
quickly enough to keep pace with rising costs. Further, costs were charged
against 1998 results related to an early 1999 product recall. These issues kept
earnings from being as strong as they otherwise could have been.
DAVE KIRCHOFF
CARTON LINE OPERATOR
1 YEAR OF SERVICE
A number of factors are driving strong growth for the Division, among them:
* a consumer TREND TOWARD MORE INDULGENCE, where there is less guilt involved
with treating oneself to a creamy dessert;
* a focus by foodservice operators on the INCREASED FOOD SAFETY, and
accompanying reduction in spoilage and waste, offered by dairy products which
have been ultra-pasteurized, as opposed to standard pasteurization;
* a focus by both public health departments and foodservice chains on the
BENEFITS OF ASEPTIC (NO-CHILL) COFFEE CREAMERS, with fewer food safety concerns
and improved ease of use;
* foodservice customers have begun PROMOTING THE MILK SHAKE AND DESSERT PORTIONS
OF THEIR MENUS more aggressively, finding that these items offer profitable
growth opportunities.
To meet rising demand for its products, the Dairy Products Division has expanded
its production capacity in a number of areas:
* cartoned products capacity was expanded at the Minnesota plant in early 1998;
* aseptic creamer capacity was expanded at the Texas plant in mid-1998;
* UHT mix capacity was expanded at the Texas plant by over 40% in late 1998 and
early 1999.
Overseeing the rising output of the Division's plants is Erich Fritz who joined
Kohler Mix as Vice President of Operations in December. Erich brings a wealth of
processing knowledge from his years at Nabisco and is a key addition to the
management team at Kohler.
Plans call for the Dairy Products Division to become the nation's leader in
specialty UHT foodservice dairy products. Such growth, by acquisition and/or
building new facilities, would allow Kohler Mix to capture a larger share of the
national markets for packaged mix and creamers. It is estimated that Kohler Mix
only has a 12% share of the 230 million gallon U. S. mix market and just 5% of
the 35-40 million case national creamer market. As a result, Kohler Mix has
significant opportunities for growth.
[EMPLOYEE
PHOTO HERE]
SUZIE SMITH
ADMINISTRATIVE ASSISTANT
9 YEARS OF SERVICE
11
<PAGE>
[EMPLOYEE
PHOTO HERE]
POTATO PRODUCTS
DIVISION
[EMPLOYEE
PHOTO HERE]
TERESA CERVANTES (L)
CUSTOMER SERVICE
REPRESENTATIVE
3 YEARS OF SERVICE [EMPLOYEE
PHOTO HERE]
ALEJANDRA TAMAYO (R) JEANETTE WEIDNER
HUMAN RESOURCES/SAFETY ADMINISTRATOR PRODUCTION PLANNING
1 YEAR OF SERVICE 19 YEARS OF SERVICE
12
<PAGE>
"...AN EXPANDING CUSTOMER BASE,
A STRONG FOCUS ON NEW PRODUCT
INTRODUCTIONS AND MUCH IMPROVED
PRODUCTION CAPABILITIES..."
ELIZABETH HERNANDEZ
LINE OPERATOR
6 YEARS OF SERVICE
[EMPLOYEE
PHOTO HERE]
The Potato Products Division saw a strong turn-around in 1998, with a return to
profitability. With the frozen french fry business closed in 1997, the Division
was able, for the first time in its history, to focus all of its energies on
value-added refrigerated potato products--mainly hash browns and mashed items.
These efforts met with notable success. Unit sales rose 5%-10% in 1998 and are
poised for further gains in 1999.
The improvements during 1998 in the Potato Products Division came from three
different areas:
ESTHER BROOKS
MACHINE OPERATOR
30 YEARS OF SERVICE
* RISING SALES VOLUME--While more national accounts are targeted, good success
was seen with regional foodservice customers in the second half of the year.
These customers have collectively added significant new business to the
Division. Much of this is driven by the success of Northern Star's mashed potato
products and the Division's ability to create customized mashed potatoes for
chain restaurant customers. Mashed potatoes are "hot" as a side dish and
Northern Star is playing strongly into that consumer trend. A case in point is
that the Division's foodservice mashed potato unit sales rose by over 20%.
Another major development in 1998 was the signing of multi-year contracts with
several major foodservice distributors. These partnering arrangements should
provide for growth in the years ahead.
JACOBO GARCIA [EMPLOYEE
RECEIVING CLERK PHOTO HERE]
13 YEARS OF SERVICE
* NEW PRODUCTS--Beyond the customized mashed recipes developed for certain
customers, there were several product line extensions for foodservice mashed
products last year, including red skin garlic, onion, sour cream and other
varieties. The retail side saw the introduction of a mashed potatoes with gravy
"heat `n eat" line in late 1998 under the Diner's Choice(TM) label. There are
two sizes--an individual serving size and a family pack--and two gravies, soon
to be three. Also, red skin wedges were introduced in early 1998. These new
items are meeting with good success in the grocery market.
* PLANT OPERATIONS--The main potato products plant in Minneapolis was
re-engineered and revamped in 1997 after the french fry equipment was removed.
As a result of these re-engineering efforts, the plant is operating better than
ever, achieving record yields of finished product from raw material and
significant labor savings. The Farm Fresh unit in suburban Los Angeles also
enjoyed a very successful 1998, with strong sales and improved production costs.
The Potato Products Division is the national leader, in both the foodservice and
retail markets, in producing and distributing refrigerated potato products. The
high quality of these products and their ease-of-use are resulting in good
growth for the category. With an expanding customer base, a strong focus on new
product introductions and much improved production capabilities, the Division is
poised for an exciting future.
13
<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 1-13 of this annual report.
GENERAL
The Company utilizes a fifty-two, fifty-three week fiscal year. The years
ended December 31, 1998 and 1996 consisted of fifty-two weeks, whereas the year
ended December 31, 1997 consisted of fifty-three weeks. Certain financial
information of the Company's operating segments is as follows (in thousands):
<TABLE>
<CAPTION>
EGG REFRIGERATED DAIRY POTATO
PRODUCTS DISTRIBUTION PRODUCTS PRODUCTS CORPORATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
External net sales ........... $607,688 $221,586 $138,865 $ 52,345 $ - $1,020,484
Operating profit (loss) ...... 69,295 7,288 6,748 3,890 (7,668) 79,553
YEAR ENDED DECEMBER 31, 1997
External net sales ........... $575,684 $214,892 $104,902 $ 60,745 $ - $ 956,223
Operating profit (loss) ...... 55,708 8,900 6,823 (505) (4,647) 66,279
YEAR ENDED DECEMBER 31, 1996
External net sales ........... $231,336 $210,177 $ 90,860 $ 84,022 $ - $ 616,395
Operating profit (loss) ...... 19,364 6,117 (a) 5,871 (23,601) (b) (3,930) 3,821
</TABLE>
(a) includes a $1,300 impairment loss
(b) includes charges of $9,172 and $12,225 relating to the exit of the frozen
french fry product line
RESULTS OF OPERATIONS
The Egg Products Division had higher unit sales in 1998, compared to 1997
levels, most notably for value-added product lines such as precooked patties and
omelets, and dried egg products. Sales of value-added egg products represented
approximately 60 percent of the Division's 1998 dollar sales. Egg prices
decreased approximately 6 percent in 1998, as compared to 1997 levels, as
reported by Urner Barry Publications--a widely quoted industry pricing service.
This decrease helped reduce the cost of purchased eggs, while also reducing
selling prices for certain egg products and shell eggs. Feed costs, which
typically represent two-thirds of the cost of producing an egg, were lower in
1998 as compared to 1997 levels. This decrease lowered the cost of eggs from
Division owned flocks. Approximately two-thirds of the Division's annual egg
needs come from external sources, either from contract flocks or open market
purchases, with approximately one-third of egg needs coming from flocks owned by
the Division. The Division also realized benefits from economies of scale and
synergistic savings as a result of the Papetti acquisition in 1997. The
Division's higher sales and earnings in 1997, as compared to the results of
1996, reflected the added volume and earnings from Papetti's, sales increases
for egg products, particularly value-added lines such as extended shelf-life
liquid eggs and precooked items, and pricing and productivity improvements. Feed
costs also declined in 1997, as compared to 1996 levels, which reduced the cost
of internally supplied eggs for the Division. Approximately three-fourths of the
Division's 1996 egg needs came from owned flocks. Feed costs were unusually high
in 1996 as a result of poor domestic crops and strong export demand.
The Refrigerated Distribution Division had higher unit sales in 1998, as
compared to 1997 levels, particularly for core distributed products. Volume
growth and effective expense controls were not enough to offset margin pressures
caused by an unprecedented increase in costs of products tied to the national
butterfat market, particularly cheese and butter. Normal delays in adjusting
product pricing for raw material cost changes reduced margins and earnings for
the Division. The Division's higher sales and higher earnings in 1997, as
compared to the results of 1996, were due primarily to increased unit sales and
related productivity gains.
The Dairy Products Division had significantly higher unit sales in 1998,
compared to 1997 levels, due mainly to an increase in core UHT ("ultra-high
temperature" pasteurized) dairy mixes and strong growth in shelf-stable coffee
creamers. Margins were lower in 1998 than 1997 as a result of unusually high
dairy ingredient costs related to an elevated national butterfat market. Strong
volume gains, while generally beneficial to Division earnings, also resulted in
some margin pressure due to the Division's plants running near capacity. This
resulted in higher than expected processing costs, including additional labor
costs for overtime. Costs charged against 1998 results for an early 1999 product
recall also affected earnings. The Division's higher sales and higher earnings
in 1997, as compared to the results of 1996, were mainly due to a significant
increase in unit sales of UHT dairy mixes and coffee creamers.
The Potato Products Division had higher refrigerated products unit sales in
1998, compared to 1997 levels, and plant operations improved significantly (see
below). Foodservice units sales were particularly strong, with mashed potatoes
showing meaningful sales gains, and new products also contributing to the sales
increase. The Division's lower dollar sales in 1998 and 1997 related primarily
to the discontinuation of the unprofitable frozen french fry business 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. Production yield improvements and reduced
production costs allowed for a significantly reduced loss in 1997 and a return
to profitability in 1998. The Division's loss in 1996 was due primarily to
losses in the frozen french fry business and to the recording of an asset
impairment and a product line inventory markdown related to exiting the frozen
french fry business.
14
<PAGE>
The gross profit margin of the Company was 17.0 percent in 1998, as compared
to 14.9 percent in 1997 and 9.6 percent in 1996. The increase in gross profit
margin in 1998 reflected a higher portion of value-added product sales relative
to the Company's total net sales, reduced feed and egg costs, synergistic
savings in the Egg Products Division as a result of the Papetti's acquisition,
and a decrease in potato products processing costs. The 1997 increase reflected
a decrease in feed and potato products processing costs, synergistic savings in
the Egg Products Division, 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 9.2 percent of net sales
in 1998, as compared to 8.0 percent in 1997 and 7.3 percent in 1996. The
increase in 1998 reflected, among other factors, increased staffing for certain
functions such as information systems and sales support, increased marketing and
advertising, expenses related to company-wide information systems upgrades, and
increased incentive compensation accruals. The increase in 1997 reflected, among
other factors, increased spending on foodservice marketing activities, including
increased 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 gain of
approximately $1,300,000. Also in 1997, severance expenses for certain potato
products employees and sales personnel affected by a restructuring, connected to
the discontinuation of the frozen french fry business, were approximately
$2,400,000.
Net interest expense declined slightly in 1998, as compared to 1997. Strong
cash flows resulted in reduced bank line of credit borrowings on average in
1998. Net interest expense in 1997 was nearly 50 percent higher than 1996
levels. Bank line of credit borrowings declined during 1997 and were eliminated
by year end, but incremental interest expense was recorded on $125 million of
senior notes issued in early 1997.
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 egg 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 shell eggs. The Company's Refrigerated Distribution Division
derives approximately 80 percent of net sales from refrigerated products, with
the balance coming from shell egg sales. 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. 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 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 typically not greatly affected by raw ingredient price
fluctuations, although 1998 saw unprecedented increases in dairy ingredient
costs. Other than fluctuations in raw material costs, largely related to supply
and demand variances, in recent years, inflation has not been a significant
factor in the Company's operations. 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.
CAPITAL SPENDING
The Company plans to invest approximately $70 million in capital projects in
1999 and expects to fund such spending from operating cash flow and bank
borrowings. The Company invested $65 million in capital expenditures in 1998,
$37 million in 1997 and $29 million in 1996. Capital expenditures in 1998 were
mainly related to expanding capacity for the Company's value-added products,
especially egg products and dairy products. Significant capital was also devoted
to implementing an enterprise-wide financial and operations software system. 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 NSU merger, the Company effectively
repurchased approximately 1.8 million shares of its common stock through the
assumption of $21.25 million of NSU debt. There were no acquisitions in 1998 or
1996.
15
<PAGE>
DEBT STRUCTURE
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, 1998, there were borrowings
of $28,800,000 outstanding under this line of credit.
MARKET RISK
COMMODITY HEDGING
The Company is exposed to cash flow and earnings market risk from changes in
grain prices, primarily corn and soybean meal, relative to the cost to feed its
14 million hens. To minimize this risk, the Company utilizes derivative
commodity instruments, principally futures contracts. The following table is a
sensitivity analysis that estimates the Company's exposure to market risk
associated with these futures contracts. The notional value of the Company's
monthly commodity position represents the notional value of the corn and soybean
meal futures contracts for 1998. Market risk is estimated as the potential loss
in fair value resulting from a hypothetical 10% adverse change in commodity
prices (amounts in thousands).
NOTIONAL VALUE MARKET RISK
- --------------------------------------------------------------------------------
Corn futures contracts
Highest position .......... $15,596 $1,560
Lowest position ........... 6,205 621
Average position .......... 12,479 1,248
Soybean meal futures contracts
Highest position .......... $11,165 $1,117
Lowest position ........... 4,817 482
Average position .......... 8,841 884
INTEREST RATES
At December 31, 1998, the fair value of the Company's fixed rate debt was
$144,540,000, and the fair value of the Company's variable rate line of credit
was $28,800,000. The fair value of the Company's debt was determined using
discounted future cash flows based upon the Company's current incremental
borrowing rates for similar types of borrowings. Market risk on the Company's
fixed rate debt, which represents the impact on the fair value from a
hypothetical 100 basis point adjustment in interest rates, is $7,727,000.
DIVIDENDS
The Company maintains a cash dividend that is paid quarterly. Historically,
the dividend pay-out rate has approximated 15%-20% of the prior year's net
earnings. The Company strives to increase dividends in-line with the long-term
growth of earnings per share, while sustaining dividends in down years. The
current annualized dividend rate of $0.24 per share represents approximately 13%
of 1998 diluted earnings per share.
SHARE REPURCHASE PROGRAM
During 1998, the Company repurchased and retired 982,700 shares of common
stock on the open market for $24.1 million, or an average cost of $24.49 per
share. These purchases were made under an authorization of the Board of
Directors to repurchase up to two million shares of Company common stock. It is
likely additional purchases will occur in 1999 given the Company's cash flow
trends and debt capacity.
YEAR 2000
The Company's Year 2000 initiative is separated into several projects:
legacy systems, personal computer components, wide area network components,
local area network components, and non-computer components. The approach for
each of these projects includes an inventory of possible Year 2000 components,
an assessment of Year 2000 compliance of each component, and identification and
execution of corrective actions for items that fail the assessment phase.
In 1995, Michael Foods undertook implementation of the SAP Enterprise
Resource Planning system as a means to present a single interface with customers
and to have better information available for management to make more effective
decisions. The SAP system encompasses all significant processes and has been
certified Year 2000 compliant by an outside party. This project addresses a
majority of the Company's legacy systems and is scheduled for completion before
the end of 1999. In addition, if needed, the Company has the ability to modify
and test any remaining legacy systems for Year 2000 compliance prior to the end
of 1999. Beyond the SAPproject, several non-critical legacy systems are being
addressed throughout 1999. The costs to modify and test any remaining legacy
systems, if necessary, would not be material to the consolidated financial
position, liquidity or results of operations of the Company.
The Company completed corrective actions for all personal computer hardware
in late 1998. An evaluation and any needed remediation of personal computer
software is expected to be completed by July 1999. The remaining information
technology systems for wide area networking and local area networking are
currently being assessed for Year 2000 compliance, with corrective action to be
completed by June 1999. The Company's overall business risk from these systems
is not significant.
The Company's non-computer components are now being assessed for Year 2000
compliance. The assessment of these systems will be completed by spring 1999.
Any corrective actions are expected to be completed by September 1999.
The Year 2000 projects also include an evaluation of critical vendors,
suppliers and customers relative to their Year 2000 readiness. Electronic data
communications with customers will be tested. Information is being solicited
from these important business partners and will be evaluated as it is received.
Based upon the assessment completed at this time, the Company does not
anticipate any significant Year 2000 issues. All Year 2000 projects are
proceeding according to management's expectations. However, if there are
significant delays in their completion, or if major suppliers or customers
experience Year 2000 issues with their systems, Year 2000 issues could adversely
affect the operations of the Company. After assessing the information received
from customers and suppliers and evaluating the status of the Year 2000
projects, the Company will develop an appropriate contingency plan, as required.
It is anticipated that this plan will be developed by September 1999.
Achieving Year 2000 compliance for the Company will largely be a by-product
of the SAP system installation. The costs of achieving Year 2000 compliance for
software not affected by the SAP system, computer components, and non-computer
components is estimated to be less than $3,000,000, of which approximately
$2,000,000 has already been incurred and expensed through December 31, 1998.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents................................ $ 2,047,000 $ 4,038,000
Accounts receivable, less allowances................ 97,639,000 83,495,000
Inventories......................................... 74,250,000 68,929,000
Prepaid expenses and other.......................... 3,884,000 1,676,000
---------------------------------
Total current assets............................. 177,820,000 158,138,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land................................................ 4,336,000 4,336,000
Buildings and improvements.......................... 105,567,000 99,023,000
Machinery and equipment............................. 328,067,000 274,980,000
---------------------------------
437,970,000 378,339,000
Less accumulated depreciation and amortization...... 187,759,000 160,800,000
---------------------------------
250,211,000 217,539,000
OTHER ASSETS
Goodwill, net....................................... 120,172,000 123,711,000
Other............................................... 3,313,000 4,267,000
---------------------------------
123,485,000 127,978,000
---------------------------------
$551,516,000 $503,655,000
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................ $ 10,663,000 $ 8,509,000
Accounts payable.................................... 44,376,000 46,910,000
Accrued liabilities
Compensation..................................... 11,034,000 10,064,000
Insurance........................................ 7,369,000 4,782,000
Customer programs................................ 19,624,000 15,217,000
Other............................................ 23,457,000 17,868,000
---------------------------------
Total current liabilities 116,523,000 103,350,000
LONG-TERM DEBT, less current maturities................ 155,444,000 137,519,000
DEFERRED INCOME TAXES.................................. 35,400,000 33,540,000
COMMITMENTS AND CONTINGENCIES.......................... - -
SHAREHOLDERS' EQUITY
Common stock........................................ 211,000 218,000
Additional paid-in capital.......................... 119,871,000 140,188,000
Retained earnings................................... 124,067,000 88,840,000
---------------------------------
244,149,000 229,246,000
---------------------------------
$551,516,000 $503,655,000
=================================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................................. $1,020,484,000 $956,223,000 $ 616,395,000
Cost of sales .............................. 847,383,000 813,771,000 545,055,000
Product line inventory markdown ............ - - 12,225,000
------------------------------------------------
Gross profit ......................... 173,101,000 142,452,000 59,115,000
Selling, general and administrative expenses 93,548,000 76,173,000 44,822,000
Product line asset impairment .............. - - 10,472,000
------------------------------------------------
Operating profit ..................... 79,553,000 66,279,000 3,821,000
Interest expense, net ...................... 10,136,000 10,830,000 7,264,000
------------------------------------------------
Earnings (loss) before income taxes .. 69,417,000 55,449,000 (3,443,000)
Income tax expense (benefit) ............... 29,160,000 23,010,000 (370,000)
------------------------------------------------
NET EARNINGS (LOSS) .................. $ 40,257,000 $ 32,439,000 $ (3,073,000)
=================================================
NET EARNINGS (LOSS) PER SHARE
Basic ................................ $ 1.86 $ 1.53 $ (.16)
Diluted .............................. 1.83 1.51 (.16)
=================================================
Weighted average shares outstanding
Basic ................................ 21,642,000 21,181,000 19,386,000
Diluted .............................. 21,980,000 21,446,000 19,386,000
=================================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES ISSUED AMOUNT CAPITAL EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.................. 19,332,001 $193,000 $112,374,000 $ 67,528,000 $180,095,000
Repurchase of common stock............... (13,543) - (500,000) - (500,000)
Incentive plan stock compensation........ 47,273 1,000 525,000 - 526,000
Stock options exercised.................. 94,000 1,000 869,000 - 870,000
Net loss ................................ - - - (3,073,000) (3,073,000)
Dividends ($.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
Acquisition of Papetti's................. 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
Dividends ($.20 per share)............... - - - (4,178,000) (4,178,000)
---------------------------------------------------------------------------------
Balance at December 31, 1997................ 21,816,098 218,000 140,188,000 88,840,000 229,246,000
Repurchase of common stock............... (982,700) (10,000) (24,058,000) - (24,068,000)
Incentive plan stock compensation........ 24,532 1,000 613,000 - 614,000
Stock options exercised, net of shares
surrendered for exercise price and
income taxes.......................... 237,137 2,000 2,099,000 - 2,101,000
Tax benefit from stock options exercised. - - 1,029,000 - 1,029,000
Net earnings............................. - - - 40,257,000 40,257,000
Dividends ($.23 per share)............... - - - (5,030,000) (5,030,000)
---------------------------------------------------------------------------------
Balance at December 31, 1998................ 21,095,067 $211,000 $119,871,000 $124,067,000 $244,149,000
=================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................... $40,257,000 $ 32,439,000 $ (3,073,000)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization....................................... 32,105,000 30,152,000 24,732,000
Amortization of other assets........................................ 3,699,000 3,171,000 1,944,000
Deferred income taxes............................................... 1,860,000 8,230,000 (2,894,000)
Product line impairment and inventory markdowns..................... - - 22,697,000
Changes in operating assets and liabilities,
net of effect of product line impairment
and inventory markdowns and business
acquisitions:
Accounts receivable.............................................. (14,144,000) 2,409,000 (10,811,000)
Inventories...................................................... (5,321,000) 7,733,000 (12,356,000)
Prepaid expenses and other....................................... (2,208,000) 28,000 (1,354,000)
Accounts payable................................................. (2,534,000) (6,317,000) 4,784,000
Accrued liabilities.............................................. 15,196,000 9,156,000 (1,859,000)
--------------------------------------------------
Net cash provided by operating activities................................. 68,910,000 87,001,000 21,810,000
Cash flows from investing activities:
Capital expenditures................................................... (64,777,000) (36,901,000) (29,334,000)
Business acquisition, net of cash acquired............................. - (42,720,000) -
Other.................................................................. 794,000 (531,000) 214,000
--------------------------------------------------
Net cash used in investing activities..................................... (63,983,000) (80,152,000) (29,120,000)
Cash flows from financing activities:
Payments on long-term debt............................................. (58,221,000) (238,541,000) (146,934,000)
Proceeds from long-term debt........................................... 78,300,000 227,593,000 158,414,000
Repurchase of common stock ............................................ (24,068,000) - (500,000)
Proceeds from issuance of common stock................................. 2,101,000 9,730,000 870,000
Dividends.............................................................. (5,030,000) (4,178,000) (3,876,000)
--------------------------------------------------
Net cash provided by (used in) financing activities....................... (6,918,000) (5,396,000) 7,974,000
--------------------------------------------------
Net increase (decrease) in cash and equivalents........................... (1,991,000) 1,453,000 664,000
Cash and equivalents at beginning of year................................. 4,038,000 2,585,000 1,921,000
--------------------------------------------------
Cash and equivalents at end of year....................................... $ 2,047,000 $ 4,038,000 $ 2,585,000
==================================================
Non-cash investing and financing transactions
Acquisition of Papetti's:
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............................................................ $11,414,000 $ 9,449,000 $ 7,810,000
Income taxes........................................................ 20,415,000 11,750,000 2,953,000
</TABLE>
Tax benefits derived from the exercise of stock options reduced income tax
obligations and increased additional paid-in capital by $1,029,000 in 1998 and
$2,083,000 in 1997.
In connection with the merger with North Star Universal, Inc., Michael Foods,
Inc. assumed $21,250,000 of net indebtedness in exchange for 1,783,036 shares of
its common stock (see Note H).
The accompanying notes are an integral part of these statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
NOTE A
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, related revenues and expenses and disclosure about contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from the estimates used by management.
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of Michael Foods,
Inc. ("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, but for clarity of presentation, describes all periods
as if the year end is December 31. The year ended December 31, 1997 consisted of
fifty-three weeks and the years ended December 31, 1998 and 1996 consisted of
fifty-two weeks.
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.
Inventories consist of the following:
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------
Raw materials and supplies ........ $15,389,000 $16,047,000
Work in process and
finished goods ................. 36,977,000 30,374,000
Flocks ............................ 21,884,000 22,508,000
--------------------------
$74,250,000 $68,929,000
==========================
The Company purchases exchange traded futures contracts to manage its
exposure to changes in grain prices, primarily corn and soybean meal which are
the main components of chicken feed. Such contracts are hedges of the Company's
firm purchase commitments and anticipated production requirements as they reduce
the Company's exposure to changes in grain prices. These contracts generally
extend for less than one year. Gains and losses on futures contracts are
deferred and recognized as an adjustment to the cost of the related inventory
item, with the ultimate recognition in cost of sales when the finished egg
products are sold. The cost or benefit of contracts closed prior to the
execution of the underlying purchase is deferred until the anticipated grain
purchase occurs.
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 $1,048,000, $720,000 and $743,000 of interest costs
during 1998, 1997 and 1996 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. Goodwill is amortized on a straight-line
basis over 40 years. Accumulated amortization was $16,662,000 and $13,123,000 at
December 31, 1998 and 1997. 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 (see Note C).
REVENUE RECOGNITION
Sales are recognized when goods are shipped to customers and are recorded net
of estimated customer programs.
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 method of accounting is provided in Note H.
NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of outstanding common shares. 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
12,060, 141,311 and 1,948,721 shares of common stock with weighted average
exercise prices of $29.39, $13.94 and $10.91 were outstanding during 1998, 1997
and 1996, but were excluded from the computation of common share equivalents
because they were anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, is effective for fiscal years
beginning after June 15, 1999. SFAS 133 requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS 133 also specifies new methods of accounting for
derivatives used in risk management strategies (hedging activities), prescribes
the items and transactions that may be hedged, and specifies detailed criteria
required to qualify for hedge accounting. Management believes the adoption of
SFAS 133 will not have a material effect on the consolidated financial
statements.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED
OR OBTAINED FOR INTERNAL USE. SOP 98-1 is effective for the Company beginning in
1999 and should not have a material effect on the financial position, results of
operations, or cash flows of the Company when adopted.
RECLASSIFICATIONS
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
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 are included in the consolidated financial statements 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 are approximately
$2,100,000 per year through February 2007.
The following unaudited consolidated pro forma information combines the
audited information of the Company with the unaudited information for Papetti's
for the period from January 1, 1997 through February 26, 1997 and for 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 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 its 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, 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
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.
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 and 1996 were as follows: net sales were $10,281,000
and $26,908,000; cost of sales were $10,112,000 and $28,572,000; and selling,
general and administrative expenses were $1,814,000 and $2,987,000. Operating
losses directly attributable to this product line were $1,645,000 in 1997 and
$4,651,000 in 1996.
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 that was determined to
not be consistent with the current needs of the business. This loss is included
in the caption "Product line asset impairment" in the statement of operations.
Note D
LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------
Revolving line
of credit (a) .......... $ 28,800,000 $ -
7.58% senior promissory
notes (b) .............. 125,000,000 125,000,000
9.5% senior promissory
note (c) ............... 10,000,000 18,000,000
Other ..................... 2,307,000 3,028,000
- ----------------------------------------------------------------
166,107,000 146,028,000
Less current maturities ... 10,663,000 8,509,000
- ----------------------------------------------------------------
$155,444,000 $137,519,000
================================================================
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
Aggregate maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------
1999 ........................................ $ 10,663,000
2000 ........................................ 707,000
2001 ........................................ 465,000
2002 ........................................ 29,107,000
2003 ........................................ 114,000
Thereafter .................................. 125,051,000
------------
$166,107,000
============
(a) At December 31, 1998, the Company had an unsecured revolving line of
credit with its principal banks for $80,000,000. This line is due
February 2002 and bears interest at the principal bank's reference rate,
or at eurodollar rates at the Company's option (effective rate of 6.9% at
December 31, 1998).
(b) These notes are due in five 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.
The majority of the long-term debt agreements contain restrictive covenants,
including minimum net worth, interest coverage and limitations on additional
indebtedness and liens.
The fair value of long-term debt is approximately $173,340,000, determined
using discounted future cash flows based upon the Company's current incremental
borrowing rates for similar types of borrowings.
NOTE E
INCOME TAXES
Income tax expense (benefit) consists of the following:
YEARS ENDED
DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------
Current
Federal ...... $22,757,000 $11,342,000 $2,013,000
State ........ 4,543,000 3,438,000 511,000
-------------------------------------------
27,300,000 14,780,000 2,524,000
Deferred
Federal ...... 1,691,000 7,410,000 (2,621,000)
State ........ 169,000 820,000 (273,000)
-------------------------------------------
1,860,000 8,230,000 (2,894,000)
-------------------------------------------
$29,160,000 $23,010,000 $ (370,000)
===========================================
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, 1998 1997
- -----------------------------------------------------------------
Depreciation ................. $31,442,000 $29,930,000
Flock inventories ............ 5,747,000 5,959,000
Goodwill ..................... 1,998,000 1,653,000
Other ........................ (3,787,000) (4,002,000)
---------------------------
$35,400,000 $33,540,000
===========================
The following is a reconciliation of the Federal statutory income tax rate to
the consolidated effective tax rate:
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------
Federal statutory rate .......... 35.0% 35.0% (35.0)%
State taxes ..................... 4.2 5.0 (3.4)
Goodwill ........................ 1.4 1.4 40.0
Other ........................... 1.4 0.1 (12.3)
------------------------
42.0% 41.5% (10.7)%
========================
NOTE F
EMPLOYEE RETIREMENT PLAN
Full-time employees who meet certain 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
$1,786,000, $1,520,000 and $1,488,000 in 1998, 1997 and 1996.
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 patents. The Company may apply costs of defending the
patents to future royalty payments. In connection with the acquisition of
Papetti's, a defendant in one of the patent infringement cases, a settlement of
$6,000,000 was received. Under the terms of the license agreement, the Company
applied this settlement as a reduction of its prepaid royalty payments.
The U.S. Federal Court of Appeals has 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.
OTHER LITIGATION
The Company is engaged in routine litigation incidental to its business.
Management believes the ultimate outcome of this litigation
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
will not have a material effect on the Company's 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 approximately
38% of the Company's common stock. On February 28, 1997, the Company merged into
NSU and immediately distributed NSU's subsidiary, ENStar Inc., in a tax-free
distribution to the former shareholders of NSU. At the time of the merger, NSU
changed its name to Michael Foods, Inc. and the management and operations of the
continuing entity are those of the Company. The merger was accounted for as a
reverse acquisition utilizing the purchase method of accounting. As a result of
the merger, the Company assumed approximately $21,250,000 of net subordinated
indebtedness and received 1,783,036 shares of its common stock of approximately
equal value, which were effectively retired in the form of a treasury stock
redemption. The Company extinguished the subordinated indebtedness during 1997.
CAPITAL STOCK
Authorized capital stock of 50,000,000 shares consists of 40,000,000 shares
of $.01 par value common stock and 10,000,000 shares of undesignated stock. The
Board of Directors has the authority to determine voting, conversion and other
rights of the undesignated stock. There were no shares of undesignated stock
issued or outstanding at December 31, 1998 or 1997.
REPURCHASES OF COMMON STOCK
During 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of its common stock. During 1998, the Company repurchased and
retired 982,700 shares for $24,068,000.
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.
INCENTIVE PLAN
The Company has an incentive compensation plan for certain key employees. The
Company utilizes unissued common stock for a portion of the incentive
compensation in this plan. The Company accrues for all incentive compensation as
earned.
STOCK OPTION PLANS
The Company maintains non-qualified stock option plans. The officer and key
employee plans had 261,000 shares of common stock available for issue at
December 31, 1998 and the non-employee director plan had 80,000 shares available
for issue at December 31, 1998. 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.
Stock options totaling 631,098, 809,656 and 1,574,304 shares with weighted
average exercise prices of $12.18, $11.65 and $10.91 were exercisable at
December 31, 1998, 1997 and 1996.
Option transactions under these plans for each of the three years ended
December 31 are summarized as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
- -------------------------------------------------------------------
Outstanding at
January 1, 1996 ......... 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
Granted .............. 683,000 24.95
Exercised ............ (269,960) 11.23
----------------------------------
Outstanding at
December 31, 1998 ....... 1,637,868 $17.79
==================================
The following table summarizes information concerning currently
outstanding and exercisable stock options at December 31, 1998:
OPTIONS OUTSTANDING
-------------------
WEIGHTED WEIGHTED
RANGE OF REMAINING NUMBER AVERAGE AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
- --------------------------------------------------------------------------------
$ 7.63 - $11.13 472,372 5.4 years $ 9.97
11.50 - 15.13 336,106 4.8 years 12.67
17.83 - 24.38 161,390 6.4 years 21.43
24.69 - 29.75 668,000 9.5 years 25.02
---------
1,637,868 17.79
=========
OPTIONS EXERCISABLE
-------------------
WEIGHTED
RANGE OF NUMBER AVERAGE
EXERCISE PRICES OF SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
$ 7.63 - $11.13 310,772 $ 9.66
11.50 - 15.13 234,736 12.90
17.83 - 24.38 85,590 19.36
---------
631,098 12.18
=========
Pro forma net earnings (loss) and diluted net earnings (loss) per share would
have been $39,273,000, $32,160,000 and $(3,261,000), or $1.81, $1.50 and $(.17)
per share had the fair value method been used for valuing options granted in
1998, 1997 and 1996. 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 1998, 1997 and 1996
were $11.95, $8.51 and $4.20 per share, computed by applying the following
weighted average assumptions to the Black Scholes options pricing model:
dividend yield of 1% in 1998 and 2% in 1997 and 1996; risk-free rate of return
of 5.9% in 1998 and 6.6% in 1997 and 1996; volatility of 40% in 1998, 48% in
1997 and 31% in 1996; and an average term of 7 years.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MICHAEL FOODS, INC.
NOTE I
RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the Company and its business partners will not
be fully determinable until the year 2000 and thereafter. If Year 2000
modifications are not properly completed either by the Company or entities with
whom the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
NOTE J
SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company's subsidiary, Kohler Mix
Specialties, Inc., initiated a voluntary product recall for certain cartoned
dairy products due to potential contamination. Management believes this product
recall will not have a material effect on the Company's consolidated financial
statements.
NOTE K
BUSINESS SEGMENTS
During 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. The Company operates in four reportable
segments:
Egg Products produces, processes and distributes numerous egg products and
shell eggs primarily through its facilities in the upper Midwest and
northeastern United States. Sales of egg products are made through an internal
sales force and independent brokers to the foodservice and retail markets
primarily throughout the United States.
Refrigerated Distribution distributes a wide range of refrigerated grocery
products, including various cheese products packaged at its Wisconsin cheese
packaging facility. Sales of refrigerated grocery products are made through an
internal sales force to retail and wholesale markets primarily throughout the
Midwest and southwestern United States.
Dairy Products processes and distributes soft serve mix, ice cream mix,
frozen yogurt mix, milk and specialty dairy products, many of which are
ultra-high temperature pasteurized, from its facilities in Minnesota and Texas.
Sales of dairy products are made through an internal sales force to domestic
quick service restaurants and other foodservice outlets, independent retailers
and ice cream manufacturers throughout the United States.
Potato Products processes and distributes refrigerated potato products from
its manufacturing facilities in Minnesota and California. Sales of potato
products are made through an internal sales force to foodservice and retail
markets throughout the United States.
The Company identifies its segments based on the Company's organizational
structure, which is primarily by principal products. Operating profit represents
earnings before interest expense, interest income, and income taxes.
Intersegment sales are made at market prices. Corporate maintains a majority of
the Company's cash under its cash management policy.
Sales to one customer, primarily by the Refrigerated Distribution segment,
accounted for 12% of 1996 consolidated net sales. Certain financial information
on the Company's operating segments is as follows (in thousands):
<TABLE>
<CAPTION>
EGG REFRIGERATED DAIRY POTATO
PRODUCTS DISTRIBUTION PRODUCTS PRODUCTS CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
External net sales .......................... $607,688 $221,586 $138,865 $52,345 $ - $1,020,484
Intersegment sales .......................... 21,224 127 1,846 2,048 - 25,245
Operating profit (loss) ..................... 69,295 7,288 6,748 3,890 (7,668) 79,553
Total assets ................................ 425,568 39,886 28,097 50,385 7,580 551,516
Depreciation and amortization ............... 26,712 1,518 1,755 5,710 109 35,804
Capital expenditures ........................ 54,443 1,132 4,477 4,671 54 64,777
YEAR ENDED DECEMBER 31, 1997
External net sales .......................... $575,684 $214,892 $104,902 $60,745 $ - $ 956,223
Intersegment sales .......................... 23,583 144 1,803 1,435 - 26,965
Operating profit (loss) ..................... 55,708 8,900 6,823 (505) (4,647) 66,279
Total assets ................................ 377,740 35,272 25,824 53,307 11,512 503,655
Depreciation and amortization ............... 24,407 1,973 1,723 5,098 122 33,323
Capital expenditures ........................ 28,260 (a) 1,043 2,505 9,225 29 41,062 (b)
YEAR ENDED DECEMBER 31, 1996
External net sales .......................... $231,336 $210,177 $ 90,860 $84,022 $ - $ 616,395
Intersegment sales .......................... 31,997 301 1,873 1,395 - 35,566
Operating profit (loss) ..................... 19,364 6,117 (c) 5,871 (23,601) (d) (3,930) 3,821
Total assets ................................ 242,216 33,192 20,423 59,028 9,800 364,659
Depreciation and amortization ............... 16,512 2,040 1,718 6,087 319 26,676
Capital expenditures ........................ 19,971 912 1,877 6,446 128 29,334
</TABLE>
(a) Excludes the Papetti's acquisition (see Note B)
(b) Consolidated financial statement amount is net of $4,161 of proceeds from
the sale of property, plant and equipment
(c) Includes a $1,300 impairment loss (see Note C)
(d) Includes charges of $9,172 and $12,225 relating to the exit of the frozen
french fry product line (see Note C)
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MICHAEL FOODS, INC.
[LOGO HERE]
BOARD OF DIRECTORS
MICHAEL FOODS, INC.
We have audited the accompanying consolidated balance sheets of Michael
Foods, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 15, 1999
26
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL DATA MICHAEL FOODS, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997* 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $1,020,484 $956,223 $616,395 $536,627 $505,965
Cost of sales.......................................... 847,383 813,771 545,055 454,652 430,917
Product line inventory markdown........................ - - 12,225 - -
-----------------------------------------------------------------------
Gross profit........................................... 173,101 142,452 59,115 81,975 75,048
Selling, general and administrative expenses........... 93,548 76,173 44,822 45,729 41,851
Product line asset impairment.......................... - - 10,472 - -
-----------------------------------------------------------------------
Operating profit....................................... 79,553 66,279 3,821 36,246 33,197
Interest expense, net.................................. 10,136 10,830 7,264 7,635 8,498
-----------------------------------------------------------------------
Earnings (loss) before income taxes.................... 69,417 55,449 (3,443) 28,611 24,699
Income tax expense (benefit)........................... 29,160 23,010 (370) 11,020 9,510
-----------------------------------------------------------------------
Net earnings (loss)................................. $ 40,257 $ 32,439 $ (3,073) $ 17,591 $ 15,189
=======================================================================
Net earnings (loss) per share
Basic............................................... $ 1.86 $ 1.53 $ (.16) $ .91 $ .79
Diluted............................................. 1.83 1.51 (.16) .90 .78
=======================================================================
Weighted average shares outstanding
Basic............................................... 21,642 21,181 19,386 19,328 19,315
Diluted............................................. 21,980 21,446 19,386 19,530 19,460
Dividends per common share............................. $ .23 $ .20 $ .20 $ .20 $ .20
BALANCE SHEET DATA (At December 31,)
Working capital........................................ $ 61,297 $ 54,788 $ 56,677 $ 42,095 $ 33,589
Total assets........................................... 551,516 503,655 364,659 359,227 336,645
Long-term debt, including current maturities........... 166,107 146,028 112,901 101,421 100,604
Shareholders' equity................................... 244,149 229,246 174,042 180,095 166,029
=======================================================================
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
Net sales................................................................. $245,589 $243,685 $253,790 $277,420
Gross profit.............................................................. 40,156 44,454 43,433 45,058
Net earnings.............................................................. 8,258 11,313 10,516 10,170
Net earnings per share
Basic................................................................. $ .38 $ .52 $ .49 $ .48
Diluted............................................................... .37 .51 .48 .47
Weighted average shares outstanding
Basic................................................................. 21,846 21,939 21,627 21,156
Diluted............................................................... 22,208 22,337 21,922 21,454
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
</TABLE>
* Amounts include 53 weeks of operations and the results of Papetti's operations
only from February 26, 1997, the date of acquisition.
27
<PAGE>
[PHOTO HERE]
[PHOTO HERE]
BOARD OF DIRECTORS
SEATED, LEFT TO RIGHT: GREGG A. OSTRANDER, MILES E. EFRON,
ARVID C. KNUDTSON; STANDING, LEFT TO RIGHT: MARGARET D.MOORE,
JEROME J. JENKO, ARTHUR J. PAPETTI, JOSEPH D. MARSHBURN,
JEFFREY J. MICHAEL, RICHARD A. COONROD, MAUREEN B. BELLANTONI,
DANIEL P. DILLON, STEPHEN T. PAPETTI
CORPORATE OFFICERS
SEATED: GREGG A. OSTRANDER; STANDING, LEFT TO RIGHT: JOHN D.
REEDY, JEFFREY M. SHAPIRO, MARK D. WITMER
BOARD OF DIRECTORS
ARVID C. KNUDTSON
CHAIRMAN OF THE BOARD OF DIRECTORS
CONSULTANT
MAUREEN B. BELLANTONI
CONSULTANT
RICHARD A. COONROD
(CHAIR, COMPENSATION COMMITTEE)
PRESIDENT
COONROD AGRIPRODUCTION CORP.
DANIEL P. DILLON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WELCH FOODS, INC.
MILES E. EFRON
RETIRED CHIEF EXECUTIVE OFFICER
NORTH STAR UNIVERSAL, INC.
JEROME J. JENKO
CHIEF EXECUTIVE OFFICER
JENKO & ASSOCIATES
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.
MARGARET D. MOORE
SENIOR VICE PRESIDENT AND TREASURER
THE PEPSI BOTTLING GROUP
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.
28
<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 April 29, 1999, 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 Commission, 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 1998 and 1997.
1998 LOW HIGH
- -----------------------------------------------
First Quarter......... 22 1/2 29
Second Quarter........ 25 1/2 31 1/8
Third Quarter......... 21 1/4 29 5/8
Fourth Quarter........ 20 1/4 30
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
The following table sets forth the regular quarterly cash dividends per share
paid in 1998 and 1997.
1998 1997
- -----------------------------------------------
First Quarter...... $.05 $.05
Second Quarter..... .06 .05
Third Quarter...... .06 .05
Fourth Quarter..... .06 .05
At year end 1998 the Company had 387 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>
MICHAEL FOODS
[LOGO ART HERE]
324 PARK NATIONAL BANK BUILDING
5353 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
www.michaelfoods.com
EXHIBIT 21.1
SUBSIDIARIES OF MICHAEL FOODS, INC.
STATE OF
NAME INCORPORATION
- --------------------------------------------------------------------------------
Crystal Farms Refrigerated Distribution Company Minnesota
Northern Star Company Minnesota
Kohler Mix Specialties, Inc. Minnesota
Kohler Mix Specialties of Connecticut, Inc. Connecticut
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
MFI Food Canada, Ltd. Canada
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 15, 1999 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, 1998. 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 15, 1999
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,047
<SECURITIES> 0
<RECEIVABLES> 99,764
<ALLOWANCES> 2,125
<INVENTORY> 74,250
<CURRENT-ASSETS> 177,820
<PP&E> 437,970
<DEPRECIATION> 187,759
<TOTAL-ASSETS> 551,516
<CURRENT-LIABILITIES> 116,523
<BONDS> 155,444
0
0
<COMMON> 211
<OTHER-SE> 243,938
<TOTAL-LIABILITY-AND-EQUITY> 551,516
<SALES> 1,020,484
<TOTAL-REVENUES> 1,020,484
<CGS> 847,383
<TOTAL-COSTS> 847,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 861
<INTEREST-EXPENSE> 10,136
<INCOME-PRETAX> 69,417
<INCOME-TAX> 29,160
<INCOME-CONTINUING> 40,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,257
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.83
</TABLE>
