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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, 1999
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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 3, 2000 was approximately $318 million based on the last
price of such stock as reported by the Nasdaq National Market.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 3, 2000, was 20,062,823 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 1999 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 2000 Annual Meeting of Shareholders to be held on April 26,
2000, to be filed with the Securities and Exchange Commission on or about March
27, 2000.
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 H" in the "Notes to Consolidated Financial Statements" on page 24 of
the Company's 1999 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 third 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 hardcooked eggs. The
Division is the largest supplier of extended shelf-life liquid eggs, precooked
egg patties and omelets, dried, and hardcooked eggs in the United States and is
a leading supplier of frozen and liquid 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 1999, the Division derived approximately 97% of net sales from egg products,
with 3% 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 64% of the Division's 1999 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 1999, approximately 35% 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. Additionally, for a
small, but increasing, proportion of eggs purchased under grower contracts, the
egg cost is determined largely by the cost of feed. For a larger proportion of
eggs purchased under grower contracts, plus eggs purchased in the spot market,
the egg cost is determined by normal market forces. Such costs are 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 daily. Shell eggs are
essentially a commodity and are sold based upon reported egg prices. Egg prices
are significantly influenced by modest shifts in supply and demand. Pricing of
shell eggs is also typically affected by seasonal demand related to increased
consumption during holiday periods.
The Division's principal egg processing plants are located in New Jersey,
Minnesota, Nebraska, Pennsylvania and Iowa. Certain of the Division's facilities
are fully integrated from the production and maintenance of laying flocks
through the processing of egg products. Fully automated laying barns, housing
approximately 13,000,000 producing hens, are located in
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Nebraska and Minnesota, of which approximately 1,500,000 are housed in contract
facilities. Major laying facilities also maintain their own grain and feed
storage facilities. Further, the production of approximately 4,250,000 hens is
under long-term supply agreements, with an additional 22,250,000 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
62% 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 1,600. In 1999, sales to the warehouse operations of a
major national food wholesaler, and to its owned and franchised stores,
represented approximately 43% 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, Texas and
Connecticut.
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 325 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 52% of 1999 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
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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.
POTATO PRODUCTS
Refrigerated potato products are produced and sold by Northern Star Co.
("Northern Star") and Farm Fresh Foods, Inc. ("Farm Fresh") to both the
foodservice and retail markets. Products consist of shredded hash browns and
diced, sliced, mashed, and other specialty potato products. In 1999,
approximately 67% 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
90%-95% 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 1999, 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 May 1999, the
Company's Dairy Products Division acquired a dairy products business in
Connecticut, allowing for a broader expansion of the dairy mix and creamer
business into the eastern United States. This transaction involved an
acquisition of certain production assets and a 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. The facility generated 1999 net
sales of approximately $40 million.
In early 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. The joint
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venture is 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 and 1999 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)", "All Whites(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(R)" and "Diner's Choice(R)" 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 third 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. (a subsidiary of
ConAgra, 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 4,530 employees at December 31, 1999. Of this
total, the Egg Products Division employed approximately 2,900 full-time and 400
part-time employees. The Refrigerated Distribution Division employed
approximately 430 employees, none of whom are represented by a union. The Dairy
Products Division employed approximately 250 people, of which the Milk Drivers
and Dairy Employees Union represented approximately 70 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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Officer
Name Age Position Since
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<S> <C> <C>
Gregg A. Ostrander 47 President and Chief Executive Officer 1993
Jeffrey M. Shapiro 52 Executive Vice President and Secretary 1987
John D. Reedy 54 Executive Vice President, Chief Financial Officer and 1988
Treasurer
Mark D. Witmer 42 Assistant Treasurer 1995
James D. Clarkson 47 President - Northern Star and Kohler 1995
Bill L. Goucher 53 President - Waldbaum 1993
Arthur N. Papetti 68 President - Papetti's 1997
Norman A. Rodriguez 57 President - Crystal Farms 1989
</TABLE>
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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:
<TABLE>
<CAPTION>
Owned/
Location Principal Use Approx. Sq. Ft. Leased
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<S> <C> <C> <C>
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 143,000 Owned
Gaylord, MN Processing and Distribution 190,000 Owned
LeSueur, MN Processing 29,000 Owned
Wakefield, NE Processing and Distribution 380,000 Owned
Bloomfield, NE Processing and Distribution 80,000 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
</TABLE>
The Division leases office space for its headquarters, financial and
administrative services staff in suburban Minneapolis and owns or leases,
primarily for egg production operations, approximately 1,600 acres of land in
Nebraska and Minnesota.
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 two UHT dairy plants. The plant in Sulphur Springs, Texas
comprises approximately 40,000 square feet and the plant in Newington,
Connecticut comprises approximately 70,000 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. Subsequently, all four patents were involved in
reexamination proceedings in the PTO as requested by various egg industry
competitors of the Company (see below). In addition, a second reissue proceeding
was initiated by the Company with respect to the patent in which product claims
were sought and, in this reissue proceeding, both process and product claims
were reexamined for patentability.
In 1996, the examiner rejected claims under the four patents held by NCSU. NCSU
and the Company appealed the rejection to the PTO's Board of Patent Appeals and
Interferences ("PTO
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Board"). In September 1999, the Company and NCSU received a favorable ruling
whereby the PTO Board reversed the examiner's rejections of 57 process claims
under the patents. Hence, process and product claims of all four patents
continue to be valid and in full force and effect. Counsel advises that the four
patents will be reissued in the near future. Parties that had been infringing
the patents since their original issuance may be liable for damages based upon
their infringement.
On December 31, 1999, 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 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 reissuance of the patents by 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
1999 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 26 of the Company's 1999
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 12 - 15 of the Company's 1999 Annual Report to Shareholders
(see Exhibit 13.1).
11
<PAGE> 12
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 15 of the Company's 1999 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 Foods, Inc." on pages 16 - 25, and "Quarterly
Financial Data (Unaudited)" on page 27, of the Company's 1999 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 27, 2000. 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 27, 2000.
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 27, 2000.
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 27, 2000.
12
<PAGE> 13
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 1999 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, 1999 and 1998
Consolidated statements of earnings - Years ended December 31, 1999,
1998 and 1997
Consolidated statements of shareholders' equity - Years ended
December 31, 1999, 1998 and 1997
Consolidated statements of cash flows - Years ended December 31, 1999,
1998 and 1997
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 (7) 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 1999.
(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)
13
<PAGE> 14
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)
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)
14
<PAGE> 15
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)
10.25* 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)
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)
15
<PAGE> 16
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)
10.53* 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) 10.58* Amended and
Restated Employment Agreement between Michael Foods, Inc. and John D.
Reedy, 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)
10.70* Severance Plan for Eligible Employees of Michael Foods, Inc. and its
Subsidiaries, revised August 8, 1999. (6)
10.71* Employment Agreement between Michael Foods, Inc., and Gregg A.
Ostrander, dated as of July 15, 1999. (6)
10.72* Employment Agreement between Michael Foods, Inc. and Jeffrey M. Shapiro,
dated as of July 15, 1999. (6)
10.73* Employment Agreement between Michael Foods, Inc. and John D. Reedy,
dated as of July 15, 1999. (6)
10.74* Employment Agreement between Michael Foods, Inc. and Bill L. Goucher,
dated as of August 6, 1999. (6)
10.75* Employment Agreement between Michael Foods, Inc. and J. D. Clarkson,
dated as of August 6, 1999. (6)
10.76* Employment Agreement between Michael Foods, Inc. and Norman A.
Rodriguez, dated as of August 6, 1999. (6)
10.77 Amendment to the Shareholder Agreement By and Among Michael Foods, Inc.
and Certain Shareholders and Selling Shareholders of Papetti's Hygrade
Egg Products, Inc., et. al., dated as of February 25, 2000. (7)
13.1 1999 Annual Report to Shareholders (7)
21.1 Schedule of Michael Foods, Inc. Subsidiaries (7)
23.1 Consent of Independent Certified Public Accountants-- Grant Thornton LLP
(7)
27.1 Financial Data Schedule (7)
* Management Contract or Compensation Plan Arrangement
(1) Incorporated by reference from the Company's Report on Form 8-K filed March
13, 1997.
16
<PAGE> 17
(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) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1998, filed March 25, 1999.
(6) Incorporated by reference from the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1999, filed November 15, 1999.
(7) Filed as an exhibit to this Form 10-K.
17
<PAGE> 18
(d) Schedule
SCHEDULE II
MICHAEL FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ----------------------------- ----------------- ----------------------------------- ---------------- -----------------
Col. A Col. B Col. C Col. D Col. E
- ----------------------------- ----------------- ----------------------------------- ---------------- -----------------
Additions
-----------------------------------
(2)
(1) Charges to
Balance at Charged to Other Balance at
Beginning of Costs and Accounts- Deductions- End of
Description Period Expenses Describe (a) Describe (b) Period
- ----------------------------- ----------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts
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
For the Year Ended
December 31, 1999: $2,125,000 $504,000 $0 $578,000 $2,051,000
</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 11, 2000,
which is included in the Michael Foods, Inc. 1999 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, 1999.
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 11, 2000
18
<PAGE> 19
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 29, 2000 By: /s/ Gregg A. Ostrander
----------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: March 29, 2000 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 29, 2000
- ---------------------
Arvid C. Knudtson
(Chairman of the Board)
/s/ Gregg A. Ostrander March 29, 2000
- ----------------------
Gregg A. Ostrander (Director,
President & Chief Executive Officer)
/s/ Maureen B. Bellantoni March 29, 2000
- -------------------------
Maureen B. Bellantoni (Director)
/s/ Richard A. Coonrod March 29, 2000
- ----------------------
Richard A. Coonrod (Director)
/s/ Daniel P. Dillon March 29, 2000
- --------------------
Daniel P. Dillon (Director)
/s/ Jerome J. Jenko March 29, 2000
- -------------------
Jerome J. Jenko (Director)
/s/ Joseph D. Marshburn March 29, 2000
- -----------------------
Joseph D. Marshburn (Director)
/s/ Jeffrey J. Michael March 29, 2000
- ----------------------
Jeffrey J. Michael (Director)
/s/ Margaret D. Moore March 29, 2000
- ---------------------
Margaret D. Moore (Director)
/s/ Arthur J. Papetti March 29, 2000
- ---------------------
Arthur J. Papetti (Director)
19
<PAGE> 20
/s/ Stephen T. Papetti March 29, 2000
- ----------------------
Stephen T. Papetti (Director)
20
<PAGE> 21
EXHIBIT INDEX
Exhibit
No.
10.77 Amendment to the Shareholder Agreement By and Among Michael Foods, Inc.
and Certain Shareholders and Selling Shareholders of Papetti's Hygrade
Egg Products, Inc., et. al., dated as of February 25, 2000
13.1 1999 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
21
<PAGE> 1
EXHIBIT 10.77
AMENDMENT TO SHAREHOLDER AGREEMENT
This Agreement dated as of February 25, 2000 by and between MICHAEL FOODS,
INC. a Minnesota corporation ("MICHAEL"); the Shareholders of Michael listed on
Schedule I (individually "SHAREHOLDER" and collectively "SHAREHOLDERS"); the
other former Shareholders and Partners of Papetti's Hygrade Egg Products, Inc.
("PAPETTI'S HYGRADE") and the Acquired Entities identified in the
Reorganization Agreement described below and listed on Schedule I (the
"SELLERS") and the Representative of the Shareholders and Sellers;
WHEREAS, under date of June 29, 1996, Michael, M.G. Waldbaum Company, a
Nebraska corporation ("ACQUISITION"), Papetti's Hygrade and the Acquired
Entities defined therein entered into a Plan and Agreement of Reorganization
(as amended, the "REORGANIZATION AGREEMENT") whereby Michael acquired Papetti's
Hygrade by merger and Acquisition acquired each of the Acquired Entities by
mergers or through asset purchases and liability assumption; and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Reorganization Agreement, the parties hereto entered into a
Shareholder Agreement dated as of February 26, 1997 providing the Shareholders
with certain registration rights as described therein which rights expire on
February 25, 2000; and
WHEREAS, Michael, the Shareholders and the Sellers desire to extend the
expiration date of the registration rights of the Shareholders under Section 8
of the Shareholder Agreement to permit Michael and such Shareholders to
negotiate an agreement that will permit the Shareholders to make an orderly
disposition of all or a portion of their shares of common stock of Michael; to
consider continued registration rights as part of a new agreement; and to
define terms and conditions of continued board representation;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and of the terms and
conditions hereinafter set forth, the parties agree that the rights and
obligations of the parties that expired only on the third anniversary of the
Shareholder Agreement, specifically Sections 4, 5(b),7 and 8 thereof shall be
amended to extend the expiration date thereof until May 26, 2000. In all other
respects, the Shareholder Agreement dated February 26, 1997 shall be
unaffected. However, should the Shareholders wish to register any shares during
the ninety (90) day extension, all printing, legal and accounting expenses
incurred by Michael directly attributable to the request for such registration
by the Shareholders, and all registration and filing fees imposed by the SEC,
any state securities commission or the NASDAQ-NMS, and any brokerage fees
or commissions, and any taxes of any kind, incurred by the Shareholders, with
respect to any disposition, sale or transfer of Registerable Securities, will
be the sole responsibility of the registering Shareholders.
IN WITNESS WHEREOF, the undersigned have executed this Agreement the day
and year first above written.
MICHAEL FOODS, INC.
By: /s/Gregg A. Ostrander
----------------------
Gregg A. Ostrander
Its: President
/s/ Arthur N. Papetti
----------------------
ARTHUR N. PAPETTI
as Representative of and attorney-in-fact for the
Shareholders and Sellers listed on Schedule I
2
<PAGE> 3
SCHEDULE I
LIST OF SHAREHOLDERS AND SELLERS
A. SHAREHOLDERS
Stephen Papetti
Alfred Papetti
Arthur J. Papetti
B. SELLERS
Arthur N. Papetti
Anthony Papetti
The Alfred Papetti S Corporation Stock Trust
The Stephen Papetti S Corporation Stock Trust
The Tina Marie Noll S Corporation Stock Trust
The Arthur J. Papetti S Corporation Stock Trust
The Mary Barbara Papetti S Corporation Stock Trust
Declaration of Irrevocable Living Trust by Anthony Papetti FBO Stephen
Papetti U/D 2/1/95
Declaration of Irrevocable Living Trust by Anthony Papetti FBO Alfred
Papetti U/D 2/1/95
Declaration of Irrevocable Living Trust by Arthur N. Papetti FBO Arthur J.
Papetti U/D 12/1/93
Declaration of Irrevocable Living Trust by Arthur N. Papetti FBO Tina
Marie Papetti-Noll U/D 12/1/93
Declaration of Irrevocable Living Trust by Arthur N. Papetti FBO Mary
Barbara Papetti U/D 12/1/93
Arthur J. Papetti Family Limited Partnership
Stephen Papetti Family Limited Partnership
Alfred Papetti Family Limited Partnership
Tina Marie Noll Family Limited Partnership
Alfred Papetti Family Trust
Stephen Papetti Family Trust
Arthur J. Papetti Family Trust
Tina Marie Noll Family Trust
1995 Irrevocable Living GSTE Trust by Barbara Papetti FBO Arthur J.
Papetti U/D 8/10/95
1995 Irrevocable Living GSTE Trust by Lillian Papetti FBO Alfred Papetti
U/D 8/10/95
1995 Irrevocable Living GSTE Trust by Lillian Papetti FBO Stephen Papetti
U/D 8/10/95
1995 Irrevocable Living Trust by Tina Marie Noll FBO Tina Marie Noll U/D
8/10/95 Mary Barbara Papetti
<PAGE> 1
Exhibit 13.1
A Year of Record Earnings
1999
MICHAEL
FOODS INC
Annual
Report
<PAGE> 2
FINANCIAL SUMMARY MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales....................................................... $1,053,272 $1,020,484 $956,223
Net earnings.................................................... 44,056 40,257 32,439
===========================================
Net earnings per share diluted.................................. $ 2.12 $ 1.83 $ 1.51
Dividends per share............................................. $ .27 $ .23 $ .20
Weighted average shares outstanding-diluted..................... 20,750 21,980 21,446
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
Working capital................................................. $ 51,764 $ 61,297 $ 54,788
Total assets.................................................... 597,917 551,516 503,655
Long-term debt, including current maturities.................... 178,534 166,107 146,028
Shareholders equity............................................. 264,599 244,149 229,246
========== ========== ========
</TABLE>
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
TABLE OF CONTENTS
PRESIDENTS LETTER 1
CORPORATE OVERVIEW 3
EGG PRODUCTS DIVISION 4
REFRIGERATED DISTRIBUTION DIVISION 6
POTATO PRODUCTS DIVISION 8
DAIRY PRODUCTS DIVISION 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12
CONSOLIDATED FINANCIAL STATEMENTS 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20
Certain items in this annual report are forward-looking statements, which are
made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
numerous risks and uncertainties, including 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.
<PAGE> 3
To Our Shareholders
Your company had another record-setting year in 1999. New records were achieved
for net sales, net earnings, earnings per share and dividends. We also improved
our return on shareholders' equity.
1999 FINANCIAL RESULTS
- - Record net sales for the year exceeded $1.05 billion, an increase of 3%. This
was a notable accomplishment during a period of severe deflation in both egg
prices and butterfat-related items, such as cheese and butter. Adjusting for a
small facility sale in mid-1999, unit sales, or "real" sales, growth was 6% in
1999.
- - Record net earnings of $44.1 million were achieved, an increase of almost $4
million, or 9%.
- - Record earnings per share of $2.12 were attained, a gain of 16% over 1998's
record level of $1.83.
- - Strong cash flow was utilized, in part, by repurchasing 920,000 shares of our
stock during the year, boosting earnings per share. Despite these repurchases
and a record level of capital spending, our debt level remained moderately low
at year-end, with debt to total capital at 39.8%.
- - Dividends per share rose 17% last year, following a 15% increase in 1998.
- - Return on shareholders' equity rose to 17.3% from 17.0% the prior year. Our
goal of achieving 18% with this important yardstick is well within reach.
1999 KEY DEVELOPMENTS
- - The Board of Directors and management spent a considerable amount of time last
year evaluating various strategic alternatives to enhance shareholder value.
However, none of the alternatives investigated satisfied the Board's criteria
and the process was concluded in early 2000. Should follow-on opportunities
arise which could lead to a transaction that would meet our valuation
parameters, the Board may resume the formal strategic review process at any
time. In the mean time we are aggressively executing our growth plans, which are
focused on driving earnings growth by furthering our position as the leader in
value-added egg, potato and dairy products throughout the U.S.
- - There were several major developments in the Dairy Products Division:
As discussed in my letter to you last year, we had a voluntary product recall,
affecting only our cartoned products, at Kohler Mix Specialties last winter.
While there were no confirmed illnesses reported and the recall was efficiently
handled, this portion of the business has not yet returned to pre-recall levels.
Additionally, a large industrial customer discontinued business with Kohler last
fall.
[PHOTO]
As discussed in the Dairy Products section of this annual report, there were
several senior management changes in organization, including the president of
the Division. I expect new management team reestablish the long growth record
Kohler enjoyed prior to last year While the process of getting Kohler "back on
course" will happen overnight, I am confident we have the right team in place
get the job done.
In May of last year we made a dairy products acquisition in Connecticut,
giving Kohler their first East Coast production facility. The transition from
the previous owner to Kohler Mix went very smoothly, with all of the business
retained. 1999 financial results for this acquisition exceeded our expectations.
- - The Potato Products Division has been successfully restructured and is a
significant earnings contributor once again. Our strategic decision to exit the
frozen french fry business three years ago and to focus all of our energies in
this Division on the value-added refrigerated product lines is paying good
dividends to us. Sales and earnings are rising, with 1999 results showing a
strong rebound in profitability. Further, plant operations have never been
better and the team is in-place to drive growth into the future.
- - The Refrigerated Distribution Division (Crystal Farms) had an outstanding
1999. Sales and, particularly, earnings rose to record levels, paced by store
additions, broader product line penetrations, new product launches, effective
promotional activities and consumer advertising, tight cost controls, and
favorable raw material costs during most of the year.
1
<PAGE> 4
- - We made three investments in international egg products businesses last
year:
- We acquired a 25% interest in Belovo, S. A., a specialty egg products
company based in Belgium, early in the year. Belovo produces specialty
dried egg products which are sold mainly to industrial customers
worldwide.
- In conjunction with the founding shareholders of Belovo, we entered into a
50/50 joint venture to form The Lipid Company ("TLC"). TLC produces
phospholipid extracts from a pilot plant in Belgium. The extracts are used
in nutraceutical applications to enhance the nutritional value of certain
food items.
- Last summer, we formed a Canadian egg products joint venture-Trilogy Egg
Products-with two Canadian partners. Our partners bring egg supply and
manufacturing capabilities to the venture, while we provide processing
know-how for value-added egg products and marketing expertise. Sales of egg
products by Trilogy to Canadian foodservice customers began late in the
year.
- - The Egg Products Division had an excellent year against a challenging industry
backdrop. Record sales and operating profits were recorded. Also, two large
capital projects involving value-added egg products were completed in the fall
of 1999. These projects give us ample capacity to i) grow the precooked egg
products business, where capacity has been a constraint for the past few years,
and ii) expand our dried egg products offerings into specialty items, where our
processing expertise affords us a competitive advantage in the marketplace.
DRIVING GROWTH
Beyond the items discussed above, we have a number of other initiatives underway
to fuel our growth:
- - The further consolidation of our two egg products operating companies into a
single entity is underway. We have realized significant synergies since the
acquisition of Papetti's Hygrade Egg Products three years ago. However, we see
further benefits ahead as we start to combine the senior management teams, plant
operations, customer service and distribution capabilities of the two egg
products companies. Bill Goucher, President - M. G. Waldbaum Co., will lead our
efforts to consolidate Waldbaum and Papetti's into a single Michael Foods Egg
Products Co. in the months ahead. Under this new structure, Arthur Papetti will
work directly with me on industry issues and international expansion
opportunities. The new Michael Foods Egg Products Co. will build on the strength
of the Papetti and Waldbaum people and brands.
- - Our rising free cash flow offers many opportunities to invest in the future of
your company. Spending on capital projects will decline sharply this year and is
expected to stay relatively low in 2001, as we have most of the capacity in
place that we need to continue to expand the sales of value-added products. Our
rising free cash flow will be used for a number of initiatives:
- Stock buy-backs - A good use of our cash in periods of depressed valuation
on the stock is to repurchase shares, which is accretive to our earnings
per share. In late February of this year, the Board authorized an
additional two million shares under our repurchase program.
- Acquisitions and joint venture opportunities - This activity was halted the
second half of 1999 while the Board explored strategic options to unlock
shareholder value. With that process completed, we are again actively
searching for domestic and international acquisition candidates and joint
venture partners.
- - We will take greater advantage of the powerful tool we have in our information
systems capabilities to interface with our customers and suppliers more
effectively to reduce our costs. Additionally, we have made major strides in the
area of EDI (electronic data interchange) with many of our large customers,
further supporting efforts to enhance the efficiency of our supply chain
initiatives. We now receive over 35% of all orders via EDI and we expect that
figure to grow substantially in the years ahead.
As you can see, we have a full plate! The challenges ahead will be met with
enthusiasm as we execute our growth plans and work to attain the MFI 2003
(strategic plan) targets I shared with you last year. Your company has never
been stronger, nor has it had a brighter outlook than it does today. We are
excited about our future and what it should mean for your investment in Michael
Foods. Thank you for your continuing support.
Sincerely,
/s/ Gregg A. Ostrander
Gregg A. Ostrander
President and Chief Executive Officer
2
<PAGE> 5
CORPORATE OVERVIEW
<TABLE>
<CAPTION>
1999 FINANCIAL HIGHLIGHTS
<S> <C> <C>
Net Sales: $1.05 Billion +3%
Net Earnings: $44.1 Million +9%
Earnings Per Share (diluted): $2.12 +16%
Return on Average Shareholders' Equity: 17.3%
</TABLE>
CONTRIBUTION TO COMPANY TOTALS
<TABLE>
<CAPTION>
EGG PRODUCTS DIVISION NET SALES OPERATING PROFIT
<S> <C> <C>
- - Value-added products 64% of Sales [PIE CHART] [PIE CHART]
(extended shelf-life,
precooked, egg substitutes,
dried)
- - Other egg products 33% of Sales
(frozen, hardcooked,
short shelf-life)
- - Shell eggs 3% of Sales
REFRIGERATED DISTRIBUTION DIVISION
- - Primarily Crystal Farms(R) [PIE CHART] [PIE CHART]
branded products
- - Cheese, bagels, butter, margarine,
muffins, cartoned eggs, juice and
ethnic foods
- - 23 state territory
- - 400+ products and line extensions
POTATO PRODUCTS DIVISION
- - Refrigerated hash browns, [PIE CHART] [PIE CHART]
mashed, sliced, and
red skin potatoes
- - Foodservice market 67% of Sales
- - Retail grocery market 33% of Sales
(Simply Potatoes(R),
Diners Choice(R))
DAIRY PRODUCTS DIVISION
- - Ultra-pasteurized dairy products [PIE CHART] [PIE CHART]
primarily foodservice focus
- - Ice milk and ice cream mixes
- - Coffee creamers
- - Specialty retail products
</TABLE>
3
<PAGE> 6
EGG PRODUCTS
Division
...we had our strongest financial performance ever.
As the cornerstone of Michael Foods, the Egg Products Division had a
successful 1999 on the heels of an outstanding 1998. Net sales rose 2%
and operating profit increased 6%. A sharp drop in egg prices during the
year masked a solid 4%-5% unit sales growth performance. The good sales
performance was paced by excellent precooked and dried products results.
Following are the key events for the Division in 1999 and their
expected impact in 2000:
- TWO MAJOR CAPITAL PROJECTS were completed in the fall and will both
provide increased capacity for key value-added product lines:
- The Lenox, IA plant was expanded to add precooked capacity. In early
1999, we completed the conversion of a major quick-service restaurant
chain from our extended shelf-life eggs to precooked patties, which
proved a success for both our customer and us. However, the addition
of this business taxed our precooked production capabilities. The
addition of four bake lines at the Iowa facility greatly adds to our
ability to supply precooked egg patties, omelets, egg curds, and
other specialty items to foodservice, retail and industrial
customers. These "heat 'n eat" items offer very high quality taste
and texture, combined with minimal end-user preparation time and
labor.
- A new drying plant was built in Wakefield, NE. This new tower drier
allows for the production of specialty dried egg products. These
value-added, specialized products are being sold into the industrial
market, both in the U.S. and Japan, as ingredients in other food
items and are a new thrust for us in 2000.
- WE SOLD A SMALL SHELL EGG FACILITY. The sale of the Hudson, CO layer
facility reduces our exposure to commodity fluctuations from the sale of
shell eggs. We recorded a small gain on this asset sale and entered into
a multi-year market-based egg supply agreement with the buyer. This was
another step in our on-going evolution away from the commodity sensitive
parts of the egg industry and toward value-added products.
- WE MADE INTERNATIONAL INVESTMENTS. Our 25% interest in Belovo S. A., a
Belgium-based egg processor, gives us our first direct exposure to the
European value-added egg products market, as well as a related
investment in a joint venture. A national feed contamination crisis in
Belgium resulted in Belovo operating at a loss last year, but improved
results are anticipated in 2000. Also, we formed a joint venture in
Canada with two Canadian partners to produce and sell value-added egg
products there. Trilogy Egg Products, Inc. has started selling products
imported from our facilities to foodservice operators and expects to be
in production in Canada within one year.
- GRAIN MARKETS REMAINED FAVORABLE. Because of low cost grains, feed
costs, which turned favorable in 1998, remained favorable in 1999. Good
crops from the 1998 harvest and large carry-over supplies of corn and
soybean meal from the prior U.S. harvest held these grain costs near the
low end of their recent historical ranges. Grain costs for 2000 are
expected to be higher than those in 1999, though they are expected to
remain below average.
- SALES OF PREPARED OMELETS ROSE. The Chef's Omelet(TM) line, introduced
in late 1998, saw success last year with limited distribution in the
eastern U.S. This line contains six varieties of frozen, microwaveable
omelets sold at retail. Also, our Papetti's subsidiary introduced a line
of similar omelets into the foodservice market last year under the
Express Eggs brand name. Further, we are beginning to supply a new
omelet patty line to a major foodservice operator. Specialty precooked
items represent a strong growth category for the Division.
- THE EXPORT MARKET WAS WEAK. The after-shocks of the late 1998 economic
downturn in the Far East sharply reduced demand for our egg products in
those countries in 1999. Exports to Japanese industrial customers were
particularly hard hit. Late last year, however, there was an improvement
in orders, which has carried into the new year. We expect improved
export sales, especially for dried products, this year due to the
rebound in Far East economies, the low inventory levels held by our
customers, and good demand for new high performance egg white products
being produced at the new Nebraska plant.
Our value-added products strategy served us well last year, which was
the most difficult pricing environment seen by the egg industry in seven
years. Against this backdrop we had our strongest financial performance
ever. This demonstrates that the investments we have made, and continue
to make, to position Michael Foods as the premiere egg products company
in the world, are providing superior returns for our shareholders and a
platform for further growth.
4
<PAGE> 7
[PICTURE]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Value-Added
Products Unit
Sales 50.00% 52.00% 53.00%
(As a percent
of Divisional
Unit Sales)
</TABLE>
5
<PAGE> 8
REFRIGERATED DISTRIBUTION
Division
Paced by the strong unit sales growth, earnings rose sharply in 1999.
Crystal Farms had an outstanding 1999, with solid gains in net sales
(+4%) and unit sales (+8%), and a very strong increase in operating
profit (+46%). Unit sales grew through a combination of increasing
existing account sales and success in obtaining new accounts. Trade
promotion, consumer support programs, new products and an intense focus
on providing superior customer service all contributed to building the
business. Sales grew in all of the Crystal Farms territories, because
our high quality products, which are priced attractively versus other
brands, offer both the store and the consumer a winning proposition.
Strong growth continued in the south central U.S., which broadened
product distribution outside of our core market area. However, deflation
in key product lines, such as butter and eggs, resulted in dollar sales
growth lagging the unit sales growth.
Paced by the strong unit sales growth, earnings rose
sharply in 1999. While 1998 had seen unusually high
cheese and butter costs, which compressed operating
margins for much of the year, last year saw cost declines
for these key items, bringing prices and margins back
toward normal levels.
New products are another important aspect of the growth strategy for
Crystal Farms. There were 23 line extensions introduced last year,
including:
o Honey Wheat Bagels (under the David's Deli and Manhattan Bagel
Exchange brands)
o 2 lb. Finely Shredded Cheddar Cheese
o Aerosol Cream Cheese - Plain and Strawberry varieties
New products slated for launch in early 2000 include Cheezoids(R)
Stick Cheeses-individually wrapped snack cheeses available in cheddar
and marble jack.
Regarding Crystal Farms' growth strategy, building brand awareness
continues to be a key priority. Television and radio advertising are
being used in selected markets, in conjunction with billboards and point
of sale materials, to help support the Crystal Farms brand and
strengthen ties with consumers through increased awareness.
While Crystal Farms' history lies largely with servicing independent
grocery stores and small chains on a direct-to-store-delivery, we
experienced notable success in 1999 dealing with larger chains and the
warehouse delivery of goods. We are working with key retailers and
wholesalers to develop partnerships and respond to the changing needs of
the grocery industry. Mergers, reorganizations, and advances in
technology are presenting challenges and opportunities for the industry.
We believe we can help our customers prosper through change by providing
technical data services, such as category management, and providing
in-store services, such as merchandising. Changing times in the grocery
retailing market demand flexibility and nimbleness. Crystal Farms has
the ability to meet these challenges head-on as the grocery industry
evolves into the 21st century.
6
<PAGE> 9
[PICTURE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C> <C>
Distributed
Products Unit
Sales Growth 8.00% 9.00% 4.00% 9.00%
</TABLE>
7
<PAGE> 10
POTATO PRODUCTS
Division
...focused on meeting our customers' needs by offering the highest quality and
longest shelf-life products in the marketplace...
The Potato Products Division had excellent growth in 1999 after
returning to profitability in 1998. Last year saw a strong divisional
sales performance, with unit sales growth exceeding 8%. Operating profit
rose by more than 70%.
Last year's impressive growth resulted from several factors:
- Mashed potatoes continue to be a "hot" category, both in the retail
grocery and foodservice markets. The strongest growth is in the
foodservice area, which is currently growing at nearly a 30% annual
rate.
- Products processed with red skin potatoes performed well. This was the
second fastest growing product category for us, with sales ahead over
20% in 1999.
- We had success developing proprietary products. Special recipe mashed
potatoes, such as garlic mashed, continue to sell well, as do special
cuts, such as thick sliced russets.
- Long-term customer agreements with leading U. S. foodservice
distributors, mostly signed in 1998, provided a strong foundation of
business and new growth opportunities, with our partnering relationships
being more fully developed last year.
- The shelf-lives of our mashed potato products were extended.
Foodservice mashed items were increased from 30 days to 40 days, while
retail items were increased from 50 days to 75 days. Both lead the
competition by a wide margin in the refrigerated category and have
resulted in diminished returns of out-of-code products from grocers.
- Plant operations were outstanding, with record processing yields
experienced in both plants. The investments made in the main plant in
Minneapolis over the past three years have yielded strong returns.
Productivity is up, labor costs are down and the conversion rate of raw
potatoes into finished products is significantly above the prior record
levels.
The investments made in recent years in the main processing plant in
Minneapolis have positioned the Division for growth in the coming years.
We have state-of-the-art capacity in-place, along with a focused
research and development effort, which should allow for the sale of
greater quantities of an increasing variety of refrigerated potato
products. As the national leader in refrigerated potato products, the
Potato Products Division, comprised of Northern Star Co. and Farm Fresh
Foods, Inc., is focused on meeting our customers' needs by offering the
highest quality and longest shelf-life products in the marketplace,
introducing innovative new products, developing customized products to
fill specific customer needs, and providing a high level of customer
service.
8
<PAGE> 11
[PICTURE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C> <C>
Retail Sales
(As a percent of
Divisional Sales*) 27.00% 32.00% 32.00% 33.00%
(*)Refrigerated
Operations only in
96 & 97
</TABLE>
9
<PAGE> 12
DAIRY PRODUCTS
Division
...refocused on several growth opportunities, with a revitalized management team
in place.
For the Dairy Products Division, much of 1999 was spent dealing with
a cartoned products recall and its aftermath. We are pleased to report
that our precautionary recall resulted in no confirmed illnesses caused
by our products. As a result of the recall, we have redoubled our
efforts to assure good manufacturing processes and to thoroughly train
our production personnel, especially regarding quality assurance
practices. Our quality control systems and procedures are now at an
industry-leading level. Kohler Mix has been sought out by customers to
make presentations to their other vendors about the "learnings" of the
recall and what constitutes a state-of-the-art Quality Assurance system.
Nearly all of our cartoned products customers returned after the recall
period and we are seeing rising sales volumes with these customers.
Another setback that we did not foresee, which appears related to the
distractions the recall caused throughout the Division, was the loss of
a large industrial mix customer in the fall. While we don't know if this
loss of sales is permanent, we have the challenge of replacing several
million gallons of production and sales in 2000.
The factors noted above, combined with general inefficiencies with
plant operations, resulted in a decline in earnings for the Division
last year. As a result of these challenges and disappointing bottom line
results, the management of the Division has been reorganized. In total,
eight key management roles were added or changed between early 1999 and
early 2000. In January of this year the President of the Division
resigned. His replacement brings a strong management track record to
Kohler Mix, including heading the recent turnaround at the Potato
Products Division.
Even with the Division's struggles, there were some bright spots in
1999. Most importantly, we added a significant East Coast presence with
the acquisition of a dairy business in Newington, CT in May. The
addition of this plant has increased our share of business with some key
national quick service restaurant chains and also resulted in a new
exclusive mix supply relationship with a major national steakhouse
chain. The plant has produced investment returns in excess of our
expectations over the first nine months. Additionally, between the
second half of 1999 and the first half of 2000, several million dollars
have been committed to expanding and modernizing this facility.
Other 1999 achievements for Kohler Mix included:
- A successful capacity expansion project at our Texas plant, with the
capacity for ultra-pasteurized mix products increased by approximately
50%.
- Excellent growth in creamers, with total creamer volume up 36% and
aseptic (or "no-chill") creamer sales ahead 58%. Additional growth will
be fueled by the installation of our fourth aseptic processing line at
the Connecticut facility.
- The enterprise resource planning system which is being installed
company-wide was implemented at Kohler Mix in early 1999, with the
Connecticut plant converted soon after the acquisition closed.
With lessons learned from a difficult 1999, the Dairy Products
Division is refocused on several growth opportunities, with a
revitalized management team in place. We anticipate an improved
financial performance for the Division as a result of creamer sales
growth through capacity expansion, new ice milk mix customer
opportunities, especially in the east, reestablished growth in cartoned
products, a stronger research and development program, and notable cost
savings through improved plant operations.
10
<PAGE> 13
[PICTURE]
<TABLE>
<CAPTION>
1996 1997 1998 1999
<S> <C> <C> <C> <C>
Creamers Unit
Sales Growth 66.00% 95.00% 36.00% 36.00%
</TABLE>
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS MICHAEL FOODS, INC.
OF 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 1-11 of this annual report.
GENERAL
The Company utilizes a fifty-two, fifty-three week fiscal year. The years
ended December 31, 1999 and 1998 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, 1999
External net sales $620,719 $230,335 $144,865 $57,353 $ - $1,053,272
Operating profit loss) 73,531 10,656 3,750 6,751 (8,358) 86,330
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
</TABLE>
RESULTS OF OPERATIONS
The Egg Products Division had higher unit sales in 1999, compared to 1998
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 64 percent of the Division's 1999 dollar sales. Sales of other egg
products represented approximately 33 percent of 1999 sales, with shell eggs
contributing three percent. The portion of divisional sales represented by shell
eggs was one-half of the 1998 level due to a focus on reducing
commodity-sensitive sales and due to the sale of a small shell egg facility at
mid-year. Egg prices decreased approximately 13 percent in 1999, as compared to
1998 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 1999 as compared to 1998 levels. This decrease lowered the cost of
eggs from internal 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 Egg Products Division had higher unit sales in 1998, compared to 1997
levels, primarily 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. This decrease helped reduce the cost of
purchased eggs, while also reducing selling prices for certain egg products and
shell eggs. Feed costs were lower in 1998 as compared to 1997 levels. This
decrease lowered the cost of eggs from Division-owned flocks. In 1998, the
Division also realized benefits from economies of scale and synergistic savings
as a result of the Papetti's acquisition (see Note B).
The Refrigerated Distribution Division had significantly higher unit sales in
1999, as compared to 1998 levels, particularly for core distributed products.
Strong volume growth resulted from notable new account activity, effective
promotional activity, and increased consumer advertising. The combination of
volume growth, effective expense controls, and more normalized costs of products
tied to the national butterfat market, as compared to 1998 levels, resulted in
profit margin expansion.
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
12
<PAGE> 15
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 in 1998.
The Dairy Products Division had higher unit sales in 1999, compared to 1998
levels, due mainly to the acquisition of an East Coast dairy mix business near
mid-year and sales growth in shelf-stable coffee creamers. Margins were lower in
1999 than 1998 as a result of costs, and reduced sales, related to a product
recall early in the year, the loss of a large industrial mix customer later in
the year, and generally inefficient plant operations.
The Dairy Products Division had significantly higher unit sales in 1998,
compared to 1997 levels, due mainly to an increase in core 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.
The Potato Products Division had higher unit sales in 1999, compared to 1998
levels, and plant operations continued to improve, with record processing yields
recorded. Foodservice unit sales were particularly strong, with mashed potatoes
showing significant sales gains, and newer products also contributing to the
sales increase. Sales were also strong for retail items and a reduction in
retail returns contributed to earnings growth.
The Potato Products Division's lower dollar sales in 1998, compared to 1997
levels, related primarily to the discontinuation of the unprofitable frozen
french fry business in 1997. The Division had higher refrigerated products unit
sales in 1998, compared to 1997 levels, and plant operations improved
significantly. Foodservice unit sales were particularly strong, with mashed
potatoes showing meaningful sales gains, and new products also contributing to
the sales increase. 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 return to profitability for the Division in 1998.
The gross profit margin of the Company was 18.3 percent in 1999, as compared
to 17.0 percent in 1998 and 14.9 percent in 1997. The increase in gross profit
margin in both 1999 and 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. 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 10.1 percent of net sales
in 1999, as compared to 9.2 percent in 1998 and 8.0 percent in 1997. The
increase in 1999 reflected, among other factors, increased marketing, expenses
related to company-wide information systems upgrades, and increased incentive
compensation accruals. 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
french fry production assets were sold in 1997, resulting in a gain of
approximately $1.3 million. 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 $2.4
million.
Net interest expense increased in 1999, as compared to 1998. Bank line of
credit borrowings increased, on average, in 1999 as a result of funding record
capital spending and repurchases of the Company's common stock. 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.
Certain of the Company's products are sensitive to changes in commodity
prices. Currently, the Company's Egg Products Division derives approximately
three 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
13
<PAGE> 16
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 portion 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 90-95 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, in response to challenges by egg products competitors, rejected claims
under the patents licensed by the Company. This action was appealed by the
Company and patent holder to the PTO's Board of Patent Appeals and
Interferences. In 1999, the PTO reversed the examiner's rejections of 57 process
claims under the four patents held by the Company's licensor. The patents,
therefore, remain in full force and effect. 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, joint ventures 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 $55 million in capital projects in
2000 and expects to fund such spending from operating cash flow and bank
borrowings. The Company invested $74 million in capital expenditures in 1999,
$65 million in 1998 and $37 million in 1997. Capital expenditures in 1999 were
mainly related to expanding capacity for the Company's value-added products,
especially dried and precooked egg products. Significant capital was also
devoted to implementing an enterprise-wide financial and operations software
system. In 1999, the Company acquired a dairy mix operation in Connecticut
through a combination of a long-term lease commitment and the purchase, for
approximately $5.7 million, of production assets. Also in 1999, the Company
invested approximately $10 million in three foreign egg products joint ventures.
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-merg-
14
<PAGE> 17
er 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.
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, 1999, there were borrowings of
$42.3 million 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
approximately 13 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 1999. Market risk is estimated as the
potential loss in fair value resulting from a hypothetical 10% adverse change in
commodity prices (amounts in thousands).
<TABLE>
<CAPTION>
NOTIONAL VALUE MARKET RISK
- -------------------------------------------------------------------------
<S> <C> <C>
Corn futures contracts
Highest position....................... $14,681 $1,468
Lowest position........................ 4,102 410
Average position....................... 9,333 933
Soybean meal futures contracts
Highest position....................... $ 7,911 791
Lowest position........................ 1,930 193
Average position....................... 4,295 430
</TABLE>
Interest Rates
At December 31, 1999, the fair value of the Company's fixed rate debt was
$136.3 million, and the fair value of the Company's variable rate line of credit
was $42.3 million. 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 $6.76 million.
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 per share. 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 $0.28 per share represents
approximately 13% of 1999 diluted earnings per share.
Share Repurchase Program
During 1999, the Company repurchased and retired 920,100 shares of common
stock on the open market for $18.9 million, or an average cost of $20.57 per
share. 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. In
February 2000, the Board of Directors authorized an additional two million
shares for repurchase. It is likely additional purchases will occur in 2000
given the Company's cash flow trends and debt capacity.
Year 2000
The year 2000 conversion went smoothly for the Company and, as a result, no
contingency plans were implemented, nor were there any data losses.
15
<PAGE> 18
CONSOLIDATED BALANCE SHEETS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents .................... $ 4,961,000 $ 2,047,000
Accounts receivable, less allowances .... 92,493,000 97,639,000
Inventories ............................. 71,197,000 74,250,000
Prepaid expenses and other .............. 4,604,000 3,884,000
---------------------------
Total current assets .............. 173,255,000 177,820,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land .................................... 4,104,000 4,336,000
Buildings and improvements .............. 133,778,000 105,567,000
Machinery and equipment ................. 357,724,000 328,067,000
---------------------------
495,606,000 437,970,000
Less accumulated depreciation ........... 208,807,000 187,759,000
---------------------------
286,799,000 250,211,000
OTHER ASSETS
Goodwill, net ........................... 116,729,000 120,172,000
Joint ventures and other assets ......... 21,134,000 3,313,000
---------------------------
137,863,000 123,485,000
---------------------------
$597,917,000 $ 551,516,000
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt .... $ 3,130,000 $ 10,663,000
Accounts payable ........................ 47,009,000 44,376,000
Accrued liabilities
Compensation ......................... 13,143,000 11,034,000
Insurance ............................ 7,229,000 7,369,000
Customer programs .................... 20,999,000 19,624,000
Income taxes ......................... 11,805,000 7,979,000
Other ................................ 18,176,000 15,478,000
---------------------------
Total current liabilities .......... 121,491,000 116,523,000
LONG-TERM DEBT, less current maturities .... 175,404,000 155,444,000
DEFERRED INCOME TAXES ...................... 36,423,000 35,400,000
COMMITMENTS AND CONTINGENCIES .............. - -
SHAREHOLDERS EQUITY
Common stock ............................ 203,000 211,000
Additional paid-in capital .............. 102,777,000 119,871,000
Retained earnings ....................... 162,577,000 124,067,000
Accumulated comprehensive income ........ 958,000 -
---------------------------
264,599,000 244,149,000
---------------------------
$597,917,000 $ 551,516,000
===========================
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF EARNINGS MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ..................................... $1,053,272,000 $1,020,484,000 $956,223,000
Cost of sales ................................. 860,256,000 847,383,000 813,771,000
------------------------------------------------
Gross profit ............................. 193,016,000 173,101,000 142,452,000
Selling, general and administrative expenses... 106,686,000 93,548,000 76,173,000
------------------------------------------------
Operating profit ......................... 86,330,000 79,553,000 66,279,000
Interest expense, net ......................... 11,664,000 10,136,000 10,830,000
------------------------------------------------
Earnings before income taxes ............. 74,666,000 69,417,000 55,449,000
Income tax expense ............................ 30,610,000 29,160,000 23,010,000
------------------------------------------------
NET EARNINGS ............................. $ 44,056,000 $ 40,257,000 $ 32,439,000
================================================
NET EARNINGS PER SHARE
Basic .................................... $ 2.15 $ 1.86 $ 1.53
Diluted .................................. 2.12 1.83 1.51
================================================
Weighted average shares outstanding
Basic .................................... 20,500,000 21,642,000 21,181,000
Diluted .................................. 20,750,000 21,980,000 21,446,000
================================================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
Consolidated Statements of Shareholders' Equity MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
------------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS
SHARES ISSUED AMOUNT CAPITAL EARNINGS INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ............. 19,459,731 $ 195,000 $ 113,268,000 $ 60,579,000 $ - $174,042,000
Acquisition of Papettis .............. 3,195,455 32,000 38,827,000 - - 38,859,000
Merger with North Star Universal ..... (1,783,036) (18,000) (23,711,000) - - (23,729,000)
Stock options exercised .............. 943,948 9,000 9,721,000 - - 9,730,000
Tax benefit from stock options
exercised .......................... - - 2,083,000 - - 2,083,000
Net earnings ......................... - - - 32,439,000 - 32,439,000
Dividends ($.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 ($.23 per share) ........... - - - (5,030,000) - (5,030,000)
---------------------------------------------------------------------------------------
Balance at December 31, 1998 ........... 21,095,067 211,000 119,871,000 124,067,000 - 244,149,000
Repurchase of common stock ........... (920,100) (10,000) (18,918,000) - - (18,928,000)
Incentive plan stock compensation .... 32,989 1,000 617,000 - - 618,000
Stock options exercised, net of
shares surrendered for exercise
price and income taxes ............. 93,668 1,000 837,000 - - 838,000
Tax benefit from stock options
exercised .......................... - - 370,000 - - 370,000
Net earnings ......................... - - - 44,056,000 - 44,056,000
Foreign currency translation
adjustment loss .................... - - - - (958,000) (958,000)
------------
Comprehensive income ............... - - - - - 43,098,000
Dividends ($.27 per share) ........... - - - (5,546,000) - (5,546,000)
---------------------------------------------------------------------------------------
Balance at December 31, 1999 ........... 20,301,624 $ 203,000 $ 102,777,000 $ 162,577,000 $ (958,000) $264,599,000
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
Consolidated Statements of Cash Flows MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................... $ 44,056,000 $ 40,257,000 $ 32,439,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation ................................. 37,537,000 32,105,000 30,152,000
Amortization ................................. 5,027,000 3,699,000 3,171,000
Deferred income taxes ........................ 1,023,000 1,860,000 8,230,000
Changes in operating assets and liabilities,
net of effect of business acquisitions:
Accounts receivable ......................... 5,146,000 (14,144,000) 2,409,000
Inventories ................................. 3,053,000 (5,321,000) 7,733,000
Prepaid expenses and other .................. (720,000) (2,208,000) 28,000
Accounts payable ............................ 2,633,000 (2,534,000) (6,317,000)
Accrued liabilities ......................... 9,898,000 15,196,000 9,156,000
-----------------------------------------------
Net cash provided by operating activities ........ 107,653,000 68,910,000 87,001,000
Cash flows from investing activities:
Capital expenditures ........................... (74,125,000) (64,777,000) (36,901,000)
Business acquisition, net of cash acquired ..... - - (42,720,000)
Joint ventures and other assets ................ (19,405,000) 794,000 (531,000)
-----------------------------------------------
Net cash used in investing activities ............ (93,530,000) (63,983,000) (80,152,000)
Cash flows from financing activities:
Payments on long-term debt ..................... (188,075,000) (58,221,000) (238,541,000)
Proceeds from long-term debt ................... 200,502,000 78,300,000 227,593,000
Repurchase of common stock ..................... (18,928,000) (24,068,000) -
Proceeds from issuance of common stock ......... 838,000 2,101,000 9,730,000
Dividends ...................................... (5,546,000) (5,030,000) (4,178,000)
-----------------------------------------------
Net cash used in financing activities ............ (11,209,000) (6,918,000) (5,396,000)
-----------------------------------------------
Net increase (decrease) in cash and equivalents .. 2,914,000 (1,991,000) 1,453,000
Cash and equivalents at beginning of year ........ 2,047,000 4,038,000 2,585,000
-----------------------------------------------
Cash and equivalents at end of year .............. $ 4,961,000 $ 2,047,000 $ 4,038,000
===============================================
Non-cash investing and financing transactions
Acquisition of Papettis:
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 ..................................... $ 12,895,000 $ 11,414,000 $ 9,449,000
Income taxes ................................. 23,663,000 20,415,000 11,750,000
</TABLE>
Tax benefits derived from the exercise of stock options reduced income tax
obligations and increased additional paid-in capital by $370,000 in 1999,
$1,029,000 in 1998 and $2,083,000 in 1997.
In connection with the merger with North Star Universal, Inc. in 1997,
Michael Foods, Inc. assumed $21,250,000 of net indebtedness in exchange for
1,783,036 shares of its common stock (see Note G).
The accompanying notes are an integral part of these statements.
19
<PAGE> 22
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 accounting principles generally accepted in the United States 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 years ended December 31, 1999 and 1998
consisted of fifty-two weeks, the year ended December 31, 1997 was fifty-three
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials and
supplies................... $15,720,000 $15,389,000
Work in process and
finished goods............. 35,447,000 36,977,000
Flocks....................... 20,030,000 21,884,000
---------------------------------
$71,197,000 $74,250,000
=================================
</TABLE>
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 $1,054,000, $1,048,000, and $720,000of interest costs
during 1999, 1998 and 1997 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 $20,106,000 and $16,662,000 at
December 31, 1999 and 1998. The Company evaluates its good-will annually to
determine potential impairment by comparing the carrying value of the goodwill
to the undiscounted future cash flows of the related assets.
Foreign Joint Ventures and Currency Translation
The Company made investments in foreign joint ventures in Europe and Canada
during 1999 of approximately $10,000,000, related to its Egg Products Division.
These investments are accounted for using the equity method of accounting. The
financial statements for these entities are measured in their local currency and
then translated into U.S. dollars. Their balance sheet accounts are translated
at the balance sheet date using the current exchange rate on that date and the
operating results are translated using the average rates prevailing throughout
the year. Accumulated translation gains or losses are recorded in the
shareholders' equity section of the balance sheet and are included as
20
<PAGE> 23
Notes to Consolidated Financial Statements MICHAEL FOODS, INC.
a component of comprehensive income in the Statement of Shareholders' Equity.
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 G.
Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares. Diluted net earnings per
share is computed by dividing net earnings by the weighted average number of
outstanding common shares and common share equivalents relating to stock
options, when dilutive. Options to purchase 717,588, 12,060 and 141,311 shares
of common stock with weighted average exercise prices of $24.90, $29.39, and
$13.94 were outstanding during 1999, 1998 and 1997, 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, 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. SFAS 137 deferred the effective date
of SFAS 133 to fiscal years beginning after June 15, 2000. Management believes
the adoption of SFAS 133 will not have a material effect on the consolidated
financial statements.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
$8,616,000, $6,277,000 and $4,975,000 during 1999, 1998 and 1997.
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.
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.
NOTE C
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Revolving line of
credit (a) ............................... $ 42,300,000 $ 28,800,000
7.58% senior
promissory
notes (b) ................................ 125,000,000 125,000,000
Other ...................................... 11,234,000 12,307,000
---------------------------
178,534,000 166,107,000
Less current
maturities ............................... 3,130,000 10,663,000
---------------------------
$175,404,000 $155,444,000
===========================
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------
<S> <C>
2000..................................... $3,130,000
2001..................................... 2,831,000
2002..................................... 45,007,000
2003..................................... 2,515,000
2004..................................... 33,000
Thereafter............................... 125,018,000
------------
$178,534,000
============
</TABLE>
21
<PAGE> 24
Notes to Consolidated Financial Statements MICHAEL FOODS, INC.
(a) At December 31, 1999, 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 6.8% at
December 31, 1999).
(b) These notes are due in five equal annual principal installments beginning
in February 2005, are unsecured, and require semi-annual interest
payments.
The major 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 $178,602,000, determined
using discounted future cash flows based upon the Company's current incremental
borrowing rates for similar types of borrowings.
NOTE D
INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ................ $24,843,000 $22,757,000 $11,342,000
State .................. 4,744,000 4,543,000 3,438,000
----------------------------------------
29,587,000 27,300,000 14,780,000
Deferred
Federal ................ 979,000 1,691,000 7,410,000
State .................. 44,000 169,000 820,000
----------------------------------------
1,023,000 1,860,000 8,230,000
----------------------------------------
$30,610,000 $29,160,000 $23,010,000
========================================
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Depreciation ................... $ 32,290,000 $ 31,442,000
Flock inventories .............. 4,750,000 5,747,000
Goodwill ....................... 2,390,000 1,998,000
Other .......................... (3,007,000) (3,787,000)
----------------------------
$ 36,423,000 $ 35,400,000
============================
</TABLE>
The following is a reconciliation of the Federal statutory income tax rate to
the consolidated effective tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------
<S> <C> <C> <C>
Federal statutory
rate ................... 35.0% 35.0% 35.0%
State taxes .............. 4.2 4.2 5.0
Goodwill ................. 1.1 1.4 1.4
Other .................... 0.7 1.4 0.1
---------------------
41.0% 42.0% 41.5%
=====================
</TABLE>
NOTE E
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
$2,491,000, $1,786,000 and $1,520,000 in 1999, 1998 and 1997.
NOTE F
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.
The U.S. Federal Court of Appeals has upheld the validity of the patents
which are the subject of the license agreement. Subsequently, a patent examiner
at the U.S. Patent and Trademark Office rejected the patents. The Company
appealed the decision of the examiner and the validity of the patents was
upheld. 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 will not have a
material effect on the Company's consolidated financial position, liquidity or
results of operations.
22
<PAGE> 25
Notes to Consolidated Financial Statements MICHAEL FOODS, INC.
NOTE G
SHAREHOLDERS' EQUITY
Merger with North Star Universal
On January 1, 1997, 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, 1999 or 1998.
Repurchases of Common Stock
During 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of common stock. During 1999 and 1998, the Company repurchased
and retired 1,902,800 shares for $42,996,000. In February 2000, the Board of
Directors authorized the repurchase
of an additional 2,000,000 shares.
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 1,155,200 shares of common stock available for issue at
December 31, 1999 and the non-employee director plan had 53,300 shares available
for issue at December 31, 1999. 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 766,434, 631,098 and 809,656 shares with weighted
average exercise prices of $14.86, $12.18 and $11.65 were exercisable at
December 31, 1999, 1998 and 1997.
Option transactions under these plans for each of the three years ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding at
January 1, 1997 ............... 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
Granted ...................... 200,900 21.82
Exercised .................... (113,887) 11.41
Canceled ..................... (86,340) 21.57
--------------------------
Outstanding at
December 31, 1999 ............. 1,638,541 $ 18.53
==========================
</TABLE>
The following tables summarize information concerning currently outstanding
and exercisable stock options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------------
EXERCISE PRICES
- ---------------------------------
WEIGHTED AVERAGE
WEIGHTED NUMBER REMAINING
RANGE AVERAGE OF SHARES CONTRACTUAL LIFE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
$ 7.63 - $11.13 $10.06 410,065 4.9 years
11.50 - 15.13 12.55 266,580 4.9 years
17.83 - 24.56 21.71 357,796 7.5 years
24.69 - 29.75 25.03 604,100 8.5 years
---------
18.53 1,638,541
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
---------------------------------------------------
EXERCISE PRICES
-----------------------------------
WEIGHTED NUMBER
RANGE AVERAGE OF SHARES
---------------------------------------------------
<S> <C> <C>
$ 7.63 - $11.13 $ 9.86 317,965
11.50 - 15.13 12.67 205,373
17.83 - 24.56 20.17 102,596
24.69 - 29.75 25.52 140,500
-------
14.86 766,434
=======
</TABLE>
23
<PAGE> 26
Notes to Consolidated Financial Statements MICHAEL FOODS, INC.
Pro forma net earnings and diluted net earnings per share would have been
$42,630,000, $39,273,000 and $32,160,000, or $2.09, $1.81 and $1.50 per share
had the fair value method been used for valuing options granted in 1999, 1998
and 1997. The impact on net earnings 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 1999, 1998 and 1997
were $9.53, $11.95 and $8.51 per share, computed by applying the following
weighted average assumptions to the Black Scholes options pricing model:
dividend yield of 1% in 1999, 1% in 1998 and 2% in 1997; risk-free rate of
return of 6.5%in 1999, 5.9% in 1998 and 6.6% in 1997; volatility of 40% in 1999
and 1998 and 48% in 1997; and an average term of 7 years.
NOTE H
BUSINESS SEGMENTS
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 south-western 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 Connecticut,
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 Egg Products segment, accounted for
12% of 1999 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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
External net sales ....................... $ 620,719 $ 230,335 $ 144,865 $ 57,353 $ - $1,053,272
Intersegment sales ....................... 15,854 101 1,384 2,360 - 19,699
Operating profit (loss) ................. 73,531 10,656 3,750 6,751 (8,358) 86,330
Total assets ............................. 455,943 36,901 48,686 47,792 8,595 597,917
Depreciation and amortization ............ 31,824 1,316 3,671 5,626 127 42,564
Capital expenditures ..................... 65,467 762 6,115 1,781 - 74,125
Year Ended December 31, 1998
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)
</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
24
<PAGE> 27
Report of Independent Certified Public Accountants MICHAEL FOODS, INC.
[GRANT THORNTON LLP LETTERHEAD]
BOARD OF DIRECTORS
MICHAEL FOODS, INC.
We have audited the accompanying consolidated balance sheets of Michael
Foods, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 11, 2000
25
<PAGE> 28
SUMMARY OF CONSOLIDATED FINANCIAL DATA MICHAEL FOODS, INC.
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Net sales .............................................. $1,053,272 $1,020,484 $ 956,223 $ 616,395 $ 536,627
Cost of sales .......................................... 860,256 847,383 813,771 545,055 454,652
Product line inventory markdown ........................ 0 0 0 12,225 0
-----------------------------------------------------------------------
Gross profit ........................................... 193,016 173,101 142,452 59,115 81,975
Selling, general and administrative expenses ........... 106,686 93,548 76,173 44,822 45,729
Product line asset impairment .......................... 0 0 0 10,472 0
-----------------------------------------------------------------------
Operating profit ....................................... 86,330 79,553 66,279 3,821 36,246
Interest expense, net .................................. 11,664 10,136 10,830 7,264 7,635
-----------------------------------------------------------------------
Earnings (loss) before income taxes .................... 74,666 69,417 55,449 (3,443) 28,611
Income tax expense (benefit) ........................... 30,610 29,160 23,010 (370) 11,020
-----------------------------------------------------------------------
Net earnings (loss)................................ $ 44,056 $ 40,257 $ 32,439 $ (3,073) $ 17,591
=======================================================================
Net earnings (loss) per share
Basic ............................................. $ 2.15 $ 1.86 $ 1.53 $ (0.16) $ 0.91
Diluted ........................................... 2.12 1.83 1.51 (.16) 0.90
=======================================================================
Weighted average shares outstanding
Basic ............................................. 20,500 21,642 21,181 19,386 19,328
Diluted ........................................... 20,750 21,980 21,446 19,386 19,530
Dividends per common share ............................. $ 0.27 $ 0.23 $ 0.20 $ 0.20 $ 0.20
BALANCE SHEET DATA (At December 31,)
Working capital ........................................ $ 51,764 $ 61,297 $ 54,788 $ 56,677 $ 42,095
Total assets ........................................... 597,917 551,516 503,655 364,659 359,227
Long-term debt, including current maturities ........... 178,534 166,107 146,028 112,901 101,421
Shareholders equity .................................... 264,599 244,149 229,246 174,042 180,095
=======================================================================
</TABLE>
26
<PAGE> 29
QUARTERLY FINANCIAL DATA (UNAUDITED) MICHAEL FOODS, INC.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Net sales .............................................. $253,378 $258,031 $269,911 $271,952
Gross profit ........................................... 42,131 50,139 46,749 53,997
Net earnings ........................................... 8,417 11,746 10,713 13,180
Net earnings per share
Basic ............................................. $ 0.40 $ 0.57 $ 0.53 $ 0.65
Diluted ........................................... 0.40 0.57 0.52 0.64
Weighted average shares outstanding
Basic ............................................. 21,009 20,463 20,251 20,278
Diluted ........................................... 21,230 20,702 20,522 20,544
1998
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 ............................................. $ 0.38 $ 0.52 $ 0.49 $ 0.48
Diluted ........................................... 0.37 0.51 0.48 0.47
Weighted average shares outstanding
Basic ............................................. 21,846 21,939 21,627 21,156
Diluted ........................................... 22,208 22,337 21,922 21,454
</TABLE>
27
<PAGE> 30
CORPORATE OFFICERS
Seated: Gregg A. Ostrander; Standing, left to right: [PHOTO]
Jeffrey M. Shapiro, Mark D. Witmer, John D. Reedy
BOARD OF DIRECTORS Seated, left to right:
Margaret D. Moore, Arvid C. Knudtson, [PHOTO]
Gregg A. Ostrander, Jerome J. Jenko;
Standing, left to right:
Richard A. Coonrod, Arthur J. Papetti,
Stephen T. Papetti, Joseph D. Marshburn,
Jeffrey J. Michael, Daniel P. Dillon,
Not pictured: Maureen B. Bellantoni
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
ARVID C. KNUDTSON JEROME J. JENKO MARGARET D. MOORE
Chairman of the Board of Directors Chief Executive Officer Senior Vice President-
Consultant Jenko &Associates Human Resources
PepsiCo, Inc.
MAUREEN B. BELLANTONI JOSEPH D. MARSHBURN
Chief Financial Officer (Chair, Corporate Governance GREGG A. OSTRANDER
Burger King North America and Nominating Committee) President and Chief Executive Officer
General Partner of the Company
RICHARD A. COONROD Lake Florence Partners, Ltd.
(Chair, Compensation Committee) ARTHUR J. PAPETTI
General Partner JEFFREY J. MICHAEL Executive Vice President
Food Fund L.P. (Chair, Audit Committee) Papetti's Hygrade Egg Products, Inc.
President and Chief Executive Officer
DANIEL P. DILLON Corstar Holdings Inc. STEPHEN T. PAPETTI
President and Chief Executive Officer Executive Vice President
Welch Foods, Inc. Papetti's Hygrade Egg Products, Inc.
</TABLE>
<PAGE> 31
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
Annual Meeting: Certified Public Accountants: Market Price Ranges:
Shareholders and members of the Grant Thornton LLP The following table sets forth the
investment community are cordially 200 South Sixth Street high and low daily sale prices for
invited to attend the Annual 500 Pillsbury Center North the common stock for each quarter
Meeting of Shareholders, which is Minneapolis, Minnesota 55402 of 1999 and 1998.
scheduled to be held at 4:00 p.m.,
local time, on April 26, 2000, in the Corporate Counsel: 1999 Low High
auditorium of the Lutheran Maun & Simon First Quarter............... 16 11/16 28 3/4
Brotherhood Building, 625 Fourth 2000 Midwest Plaza Second Quarter.............. 18 1/4 25
Avenue South in Minneapolis, 801 Nicollet Mall Third Quarter............... 21 3/8 28 1/16
Minnesota. Minneapolis, Minnesota 55402 Fourth Quarter.............. 22 1/2 27 7/16
Investor Inquiries: Transfer Agent and Registrar: 1998 Low High
Requests for financial publications, Norwest Shareowner Services First Quarter............... 22 1/2 29
including Form 10-K filed with the P.O. Box 64854 Second Quarter.............. 25 1/2 31 1/8
Securities and Exchange Commission, St. Paul, Minnesota 55164-0854 Third Quarter............... 21 1/4 29 5/8
should be addressed to: Shareholder Inquiries: Fourth Quarter.............. 20 1/4 30
800-468-9716
MICHAEL FOODS, INC. The following table sets forth the
Attention: Mark D. Witmer Listing: regular quarterly cash dividends
Assistant Treasurer The Company's common stock per share paid in 1999 and 1998.
324 Park National Bank Bldg. trades on the National Market tier
5353 Wayzata Boulevard of the Nasdaq Stock Market under 1999 1998
Minneapolis, Minnesota 55416 the symbol: MIKL. First Quarter............... $.06 $.05
Second Quarter.............. .07 .06
Internet Address: Third Quarter............... .07 .06
http//www.michaelfoods.com Fourth Quarter.............. .07 .06
At year end 1999 the Company had 388 common
shareholders of record and an estimated 4,000
beneficial owners whose shares were held by
nominees or broker dealers.
</TABLE>
OTHER INFORMATION
<TABLE>
<S> <C> <C>
Corporate Headquarters: Principal Subsidiary Offices:
MICHAEL FOODS, INC. CRYSTAL FARMS REFRIGERATED NORTHERN STAR CO.
324 Park National Bank Building DISTRIBUTION COMPANY 3171 Fifth Street Southeast
5353 Wayzata Boulevard Park Place West, Suite 200 Minneapolis, Minnesota 55414
Minneapolis, Minnesota 55416 6465 Wayzata Boulevard
612-546-1500 Minneapolis, Minnesota 55426 PAPETTI'S HYGRADE EGG PRODUCTS, INC.
Corporate Executive Officers: 1 Papetti Plaza
FARM FRESH FOODS, INC. Elizabeth, New Jersey 07206
GREGG A. OSTRANDER 6602 Clara Street
President and Chief Executive Bell Gardens, California 90201 WISCO FARM COOPERATIVE
Officer 450 North CP Avenue
KOHLER MIX SPECIALTIES, INC. Lake Mills, Wisconsin 53551
JEFFREY M. SHAPIRO 4900 Constellation Dr., Suite 200
Executive Vice President and White Bear Township, Minnesota
Secretary 55127
JOHN D. REEDY M.G. WALDBAUM COMPANY
Executive Vice President, 500 Park National Bank Building
Chief Financial Officer 5353 Wayzata Boulevard
and Treasurer Minneapolis, Minnesota 55416
MARK D. WITMER
Assistant Treasurer
</TABLE>
<PAGE> 32
1999
MICHAEL FOODS INC.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, MN 55416
http//www.michaelfoods.com
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MICHAEL FOODS, INC.
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- --------------------------------------------------------------------------------------
<S> <C>
Crystal Farms Refrigerated Distribution Company Minnesota
Northern Star Co. 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
</TABLE>
22
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We have issued our reports dated February 11, 2000 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, 1999. 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 Nos. 333-23949 and 333-85251 effective
March 25, 1997 and August 16, 1999 as amended).
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
February 11, 2000
23
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,961
<SECURITIES> 0
<RECEIVABLES> 94,544
<ALLOWANCES> 2,051
<INVENTORY> 71,197
<CURRENT-ASSETS> 173,255
<PP&E> 495,606
<DEPRECIATION> 208,807
<TOTAL-ASSETS> 597,917
<CURRENT-LIABILITIES> 121,491
<BONDS> 175,404
0
0
<COMMON> 203
<OTHER-SE> 264,396
<TOTAL-LIABILITY-AND-EQUITY> 597,917
<SALES> 1,053,272
<TOTAL-REVENUES> 1,053,272
<CGS> 860,256
<TOTAL-COSTS> 860,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 504
<INTEREST-EXPENSE> 11,664
<INCOME-PRETAX> 74,666
<INCOME-TAX> 30,610
<INCOME-CONTINUING> 44,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,056
<EPS-BASIC> 2.15
<EPS-DILUTED> 2.12
</TABLE>
