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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
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Commission file number 0-15568
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MICHAEL FOODS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-1579532
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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
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 14, 1995 was approximately $127,000,000 (based on the
last price of such stock as reported by the NASDAQ National Market System).
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 14, 1995, was 19,332,001 shares.
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Documents Incorporated by Reference
Pursuant to General Instruction G(2), the responses to Items 5, 6, 7 and 8 of
Part II of this report are incorporated herein by reference to the Company's
Annual Report to Stockholders for 1994.
Pursuant to General Instruction G(3), 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 definitive Proxy Statement for its 1995
Annual Meeting of Stockholders to be held on April 27, 1995. The definitive
Proxy Statement was filed with the Securities and Exchange Commission on March
24, 1995.
PART I
ITEM 1 - BUSINESS
GENERAL
Michael Foods, Inc. (the "Company") is a diversified producer and distributor of
food products operating in four basic areas - eggs and egg products,
distribution of refrigerated grocery products, refrigerated and frozen potato
products and dairy products. The Company, through its eggs and egg products
division, is one of the largest producers, processors and distributors of shell
eggs, extended shelf-life liquid eggs and dried, hard-cooked and frozen egg
products in the United States. The refrigerated distribution division
distributes a broad line of refrigerated grocery products directly to
supermarkets, including cheese, shell eggs, bagels, butter, margarine, muffins,
potato products, juice and ethnic foods. The potato products division processes
and distributes refrigerated and frozen potato products for foodservice and
retail markets throughout the United States. The dairy products division
processes and distributes soft serve mix, ice cream mix, frozen yogurt mix and
extended shelf-life ultrapasteurized milk and specialty dairy products to fast
food businesses and other foodservice outlets, independent retailers, ice cream
manufacturers and others.
The following table sets forth the percentage of net sales accounted for by each
of the Company's operating divisions for the periods indicated:
Year Ended December 31,
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1992 1993 1994
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Eggs and Egg Products 43% 43% 41%
Refrigerated Distribution 32 34 33
Potato Products 15 15 15
Dairy Products 14 14 14
Prepared Foods 3 2 2
Intercompany Sales (7) (8) (5)
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TOTAL 100% 100% 100%
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The strategic thrust of the Company is to continue to transition Michael Foods
into a value-added food products company by being a leader in the food industry
in introducing innovative, refrigerated food technology. The key to this
strategy is "value-added", whether that be in the product, the distribution
channel or in the service provided to customers.
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EGGS AND EGG PRODUCTS
M. G. Waldbaum Company ("Waldbaum") is a producer, processor and distributor of
numerous egg products and shell eggs. Principal value-added egg products are
ultrapasteurized "Easy Eggs[REGISTRATED TRADEMARK]", which is a proprietary
extended shelf-life and salmonella-negative (pursuant to United States
Department of Agriculture ("USDA") regulations) liquid egg product, hard-cooked
eggs, and Simply Eggs[REGISTRATED TRADEMARK] Brand Liquid Scrambled Egg Mix.
Other egg products include frozen and dried egg whites, yolks and whole eggs,
pre-cooked frozen egg patties and omelets, and frozen breakfast entrees.
Management believes that Waldbaum is the second largest egg producer in the
United States. Waldbaum is the largest supplier of ultrapasteurized whole eggs
and hard-cooked eggs in the United States and is a leading supplier of dried,
frozen and liquid refrigerated whole eggs, whites and yolks. Waldbaum
distributes its egg products to food processors and foodservice customers
throughout the United States and has international sales in Europe and Japan.
Easy Eggs[REGISTRATED TRADEMARK] and other egg products are marketed nationally
to a wide variety of foodservice and industrial customers. Most of Waldbaum's
shell eggs are sold to the Company's refrigerated distribution division, Crystal
Farms Refrigerated Distribution Company, which, in turn, distributes them
throughout its 23 state territory.
Shell eggs are essentially a commodity and are sold based upon reported egg
prices. Egg prices, in turn, are significantly influenced by shifts in supply
and demand. Pricing of shell eggs is also typically affected by seasonal demand
related to increased consumption during holiday periods. In general, egg market
pricing in the United States reflects levels reported by Urner Barry Spot Egg
Market Quotations ("Urner Barry"), a recognized publication. Prices for certain
of the Company's products are affected by these factors, particularly shell
eggs. The Company has endeavored to moderate these effects primarily through a
continuing emphasis on value-added products and internal production of shell
eggs. In 1994, the Company's egg operations derived approximately 15% of net
sales from shell eggs with the remaining 85% derived from the sales of value-
added egg products. This compares with sales of shell eggs representing over
90% of egg sales in 1987. In 1994, approximately 90% of the Company's egg needs
were satisfied by production from Company-owned hens, with the balance purchased
on the spot market.
The Company's shell egg and egg products businesses are fully integrated from
the production and maintenance of laying flocks through processing of shell eggs
and further processed egg products. The Company maintains facilities with
approximately 2,600,000 pullets located in Nebraska and Minnesota. Fully
automated laying barns, housing approximately 12,500,000 producing hens, are
located in Nebraska, Colorado and Minnesota. In addition, approximately 600,000
Company-owned producing hens are housed in contract facilities. Major laying
facilities also maintain their own grain and feed storage facilities. Principal
egg processing plants are located in Nebraska, Colorado and Minnesota.
The Company had invested in a joint venture with an unrelated company for the
purpose of producing reduced cholesterol liquid whole eggs. Due to significant
continuing losses and lack of adequate market acceptance, the Company decided in
December 1993 to cause the early termination of this joint venture and cease
production and sale of the reduced cholesterol liquid whole eggs product.
During 1994 the Company completed the acquisition of the joint venture partner's
interest and liquidated the joint venture. See Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 1994
Annual Report to Stockholders for discussion of charges recorded in 1993's
fourth quarter relating to this termination.
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REFRIGERATED DISTRIBUTION
Over the past 20 years, Crystal Farms Refrigerated Distribution Company
("Crystal Farms") has augmented its shell egg distribution business by
delivering a wide range of refrigerated grocery products to wholesale warehouses
and directly to retailers. Crystal Farms believes that its strategy of offering
quality branded products, many of which are sold under the Crystal Farms name as
a lower-priced alternative to national brands, has contributed to its growth.
These distributed refrigerated products, which consist principally of cheese,
bagels, butter, margarine, muffins, potato products, juice and ethnic foods, are
supplied by vendors, or other divisions of the Company, to Crystal Farms'
specifications. Cheese accounts for approximately 53% of Crystal Farms' annual
sales. Crystal Farms operates a cheese packaging facility in Lake Mills,
Wisconsin, which allows for the cutting and wrapping of various cheese products
for its Crystal Farms brand cheese business and for private label customers.
Crystal Farms has expanded its market area both directly and through the use of
independent egg producers as distributors. Whereas Crystal Farms' market area
covered only seven states in 1987, it now includes 23 states primarily in the
Midwest, Southeast and Southwest. Retail locations served by Crystal Farms
number over 1,500. In 1994, sales to the warehouse operations of SUPERVALU,
INC., and to SUPERVALU owned and franchised formats, including Cub Foods, were
approximately 30% of Crystal Farms' net sales. Crystal Farms maintains a fleet
of refrigerated tractor-trailers to deliver products daily to its retail
customers from eleven distribution centers located centrally in its key trade
areas.
POTATO PRODUCTS
Potato products are produced and sold by Northern Star Co. ("Northern Star"),
Drallos Potato Co., Inc. ("Drallos") and Farm Fresh Foods, Inc. ("Farm Fresh").
The potato products division processes and sells frozen potato products,
primarily french fries, and refrigerated potato products to both foodservice and
retail markets. The retail refrigerated business of this division did not exist
before 1989. Refrigerated products consist of a line of hash brown, mashed, and
specialty potato products. In 1994, approximately 23% of the potato products
division's net sales were to the retail trade, with the balance to foodservice.
Refrigerated potato products accounted for approximately 51% of divisional net
sales in 1994. The potato products division typically purchases approximately
80%-90% of its annual potato requirements from contract producers, of which a
large majority are grown on irrigated land. The balance of potato requirements
are purchased on the spot market.
The potato products division maintains storage facilities in North Dakota,
Wisconsin and Minnesota. Processing and refrigerated/frozen warehouse
facilities are located principally in Minnesota, with smaller facilities in
California and Michigan. The potato products division maintains a high
percentage of its contracted supply from irrigated fields, as well as
maintaining geographic diversification of its sources. However, weather remains
an important factor in determining raw potato prices and small variations in the
purchase price of potatoes can have a significant effect on the potato products
division's operating results.
DAIRY PRODUCTS
Through Kohler Mix Specialties, Inc. ("Kohler"), the Company 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 Company believes that Kohler supplies the majority of the soft serve mix,
and is a major supplier of ice cream mix, sold in Minnesota, Wisconsin and South
Dakota. Kohler also sells its products through-out much of the balance of the
United States. In 1993 Kohler began leasing a UHT dairy plant in Texas, which
is allowing for a greater emphasis on supplying customers in the southern United
States.
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UHT processing is designed to produce bacteria-free milk, ice cream mixes and
specialty dairy products such as whipping cream, half and half and cordials.
Many of Kohler's products have an extended shelf life of up to ninety days, thus
extending the trade territory which can be effectively served by Kohler to
include much of the United States.
Kohler soft serve, frozen yogurt and ice cream mixes are made to customer's
specifications. Currently, Kohler produces approximately 65 different
formulations. Kohler believes that the customization of high quality products
and high customer service levels are critical to their business.
Kohler has approximately 600 customers, including branded ice cream
manufacturers, distributors to fast food businesses, other foodservice outlets
and independent ice cream retailers. Kohler has a significant customer who is
an ice cream manufacturer. However, sales to this customer represent less than
5% of the consolidated sales of the Company. In 1994, approximately 90% of
Kohler's net sales were generated from customers who purchased products on a
cost-plus basis. This includes sales to most of the large fast food chains
operating in its market area. Sales of soft serve, shake, and ice cream mixes
are more seasonal than the Company's other products, with higher sales volume
occurring between May and September. The addition of fluid milk and specialty
dairy products in recent years has somewhat offset this seasonality.
PREPARED FOODS
In the fourth quarter of 1994, the Company ceased its efforts to restructure
Sunnyside Vegetable Packing, Inc. ("Sunnyside") operations and completed a sale
of Sunnyside's remaining assets. See discussion regarding Sunnyside in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1994 Annual Report to Stockholders.
MARKETING AND CUSTOMER SERVICE
Each of the Company's four divisions has developed a marketing strategy which
emphasizes high quality products and customer service. In 1992, a new group
(Michael Foods Sales) was formed to sell various products nationally to,
primarily, foodservice and industrial customers. Michael Foods Sales handles
egg products, principally Easy Eggs[REGISTRATED TRADEMARK], hard-cooked eggs,
frozen egg patties, and Simply Eggs[REGISTRATED TRADEMARK] Brand Liquid
Scrambled Egg Mix, as well as refrigerated and frozen potato products and
certain specialty dairy products. This sales group is supported by a
centralized order entry and customer service staff. Additionally, Waldbaum
maintains a small sales group in Wakefield, Nebraska, which handles shell egg
sales and certain egg product sales. Shell eggs are sold mainly to Crystal
Farms. Customers for egg products include food manufacturers and foodservice
businesses. Crystal Farms sales personnel obtain orders from retail stores
which are usually placed no more than one day ahead of the requested delivery
date. In-store and co-op advertising programs are utilized with grocers on a
market-by-market basis. Kohler employs customer service representatives to
service individual customer accounts and also benefits from the sale of certain
products through the Michael Foods Sales force.
ACQUISITIONS
While there were no acquisitions in 1992, 1993 or 1994 the Company anticipates
that it will continue to make acquisitions as part of its strategic plan.
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PROPRIETARY TECHNOLOGIES
In 1988, the Company acquired an exclusive license to use a patented process,
developed at North Carolina State University, for the ultrapasteurization of
liquid eggs. The patent expires in 2006. The process results in liquid eggs
that are salmonella and listeria negative, pursuant to USDA regulations.
Salmonella and listeria are bacteria which can contaminate shell eggs. The
process also extends the shelf life of liquid eggs from less than two weeks to
ten weeks or more. The Company has an aseptic plant in Gaylord, Minnesota which
processes all of the ultrapasteurized liquid egg needs of the Company.
The Company and the patent holder have initiated litigation against several
processors of competing liquid egg products, claiming infringement of the
original and subsequent related process patents with respect to ultrapasteurized
liquid egg production. In 1992, a jury for the United States District Court for
the middle district of Florida found the original patent to be valid and that a
processor, Bartow Food Co., willfully and deliberately infringed the patent. In
another action, against Papetti's Hygrade Egg Products, Inc., the United States
District Court for the District of New Jersey found in 1992 and 1993 that the
defendant had infringed the patents and that the licensed patents are valid and
enforceable. In 1994, the United States Circuit Court of Appeals upheld this
judgment. See Item 3 "Legal Proceedings."
TRADENAMES
Waldbaum markets its products using several tradenames including "Logan Valley",
"Wakefield", "Sunny Side Up[REGISTRATED TRADEMARK]", "Michael Foods" and "MGW".
Ultrapasteurized liquid eggs are marketed using the "Easy Eggs[REGISTRATED]
TRADEMARK]" tradename. The Company's liquid scrambled egg mix is marketed under
the tradename "Simply Eggs[REGISTRATED TRADEMARK] Brand".
Crystal Farms products are marketed principally under the "Crystal
Farms[REGISTRATED TRADEMARK]" tradename. In addition, Crystal Farms is the
principal distributor of "Bongards" cheese in Minnesota. Crystal Farms also
distributes eggs, butter, cheese, bagels, and ethnic foods under a number of
other customer-owned tradenames.
Within the potato products division, Northern Star markets its frozen potatoes
to foodservice customers under a variety of brands, including "Northern Star".
The "Simply Potatoes -TM-" brand is used for retail refrigerated products, with
"Farmer Select" used on retail frozen products. Drallos and Farm Fresh also
maintain various tradenames for certain of their products.
Within the dairy products division, there are two main tradenames-"Kohler" and
"Midwest Mix, Inc."
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, and changes in supply due to weather, production and feed
costs.
The Company's egg and egg products division is considered the second largest egg
producer and the second largest egg products supplier in the United States, and
competes with other suppliers of shell eggs and egg products. While the shell
egg and egg products industry is highly 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
Acre Farms, Inc. A major egg products producer is Papetti's Hygrade Egg
Products, Inc. The
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Company believes that Waldbaum is among the lowest cost egg producers in the
United States. The Company also believes that Easy Eggs'[REGISTRATED TRADEMARK]
salmonella-negative aspect, extended shelf-life and ease of use are significant
competitive advantages in the foodservice and industrial food markets for eggs.
The Company's refrigerated distribution division competes with the refrigerated
products of other suppliers such as Beatrice Companies, Inc.; Kraft, Inc.; Land
O' Lakes, Inc.; and Sargento Cheese Company, Incorporated. Crystal Farms
believes that its emphasis on a high level of service and lower-priced branded
products has enabled it to compete in its market area with larger national brand
companies.
Within the potato products division, Northern Star's frozen potato products
compete with larger producers such as Carnation Co., J. R. Simplot Co., Lamb-
Weston, Inc., McCain Foods, Inc. and Universal Foods Corporation. Within the
retail frozen market, Ore-Ida Foods, Inc. is a major competitor. Competition in
refrigerated potato products, where all three of the Company's potato
subsidiaries compete, is generally limited to smaller local or regional
companies.
Within the dairy products division, management believes that Kohler provides the
majority of the soft serve mix, and a significant percentage of ice cream mix,
sold in Minnesota, Wisconsin and South Dakota. Kohler also has a large
percentage of the UHT soft serve mix and UHT fluid milk business with fast food
chains in the Upper Midwest. Competitors in areas outside of its immediate
region generally are local and regional dairies.
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 FDA regulation regarding grading, quality, labeling and sanitary
control. Waldbaum's egg breaking plants are subject to continuous on-site USDA
inspection. All other subsidiaries are subject to periodic USDA inspections.
Crystal Farms' cheese and butter products and Kohler's soft serve mix and ice
cream mix are affected by milk price supports established by the USDA. The
support price serves as an artificial minimum price for these products, which
may not be indicative of market conditions that would prevail if such supports
were abolished.
All of the Company's subsidiaries must also comply with 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. Crystal Foods and Waldbaum
have permits to discharge waste products into available sewer systems and
maintain discharge ponds for certain wastes.
EMPLOYEES
The Company employed approximately 2,700 employees at December 31, 1994. Of
this total, Waldbaum employed approximately 1,500 full-time and 250 part-time
employees, none of whom are represented by a union. Crystal Farms employed
approximately 300 employees, none of whom are represented by a union. Northern
Star employed approximately 350 employees of whom 299 are represented by the
Bakery, Laundry, Allied Sales Drivers and Warehousemen Union affiliated with the
Teamsters. Farm Fresh had 33 employees and Drallos had 4 employees at December
31, 1994 with none being represented by a union. Kohler employed 133 people at
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December 31, 1994. Historically, Kohler increases its number of employees by
approximately 10 to 20 percent during the summer season. Its production
personnel and drivers are represented by the Milk Drivers and Dairy Employees
Union. The Michael Foods Sales, Distribution and Customer Service groups
employed approximately 130 people at December 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officer
Name Age Position Since
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Gregg A. Ostrander 42 President and Chief Executive Officer 1993
Jeffrey M. Shapiro 47 Executive Vice President and Secretary 1987
John D. Reedy 49 Vice President - Finance, Chief 1988
Financial Officer and Treasurer
William L. Goucher 48 President - Waldbaum 1993
James J. Kohler 41 President - Kohler 1988
Kevin S. Murphy 41 Chief Executive Officer - Northern Star 1988
Norman A. Rodriguez 52 President - Crystal Farms 1989
Kevin O. Kelly 37 President - Michael Foods Sales 1993
ITEM 2 - PROPERTIES
FACILITIES
The Company maintains leased space for its executive headquarters, customer
service office and sales office in suburban Minneapolis, Minnesota.
The egg and egg products division owns and operates 29 pullet growing houses,
each containing approximately 14,600 square feet, in Wakefield, Nebraska; two
grain elevators in Wayne, Nebraska; 87 laying houses, each containing
approximately 19,500 square feet, in Wakefield, Nebraska, Bloomfield, Nebraska
and Hudson, Colorado; two feed mills in Wakefield, Nebraska, one in Bloomfield,
Nebraska and one in Hudson, Colorado; processing facilities in Wakefield,
Nebraska (approximately 323,000 square feet), Hudson, Colorado (approximately
49,000 square feet), Bloomfield, Nebraska (approximately 80,000 square feet);
and warehouse, office and distribution facilities aggregating approximately
40,000 square feet located in Wakefield, Nebraska, Hudson, Colorado, Daytona
Beach, Florida, and Bloomfield, Nebraska. Waldbaum owns in the aggregate
approximately 950 acres of land in Nebraska, Colorado and Minnesota and leases
the land in Bloomfield.
The egg and egg products division also operates facilities under the Crystal
Foods subsidiary, including 9 pullet growing houses (approximately 160,000
square feet) at Gaylord, Minnesota; 48 laying houses, each averaging 15,000
square feet, in Gaylord and LeSueur, Minnesota; feed mills in Gaylord, Minnesota
and LeSueur, Minnesota; processing facilities in Gaylord, Minnesota
(approximately 164,000 square feet; a section of this plant was converted into
the joint venture's cholesterol extraction plant in 1992 which was repurchased
by the Company in early 1994) and LeSueur, Minnesota approximately (29,000
square feet). The Gaylord,
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Minnesota facility includes a centralized warehouse for the distribution of the
Company's core refrigerated foodservice products. All of these facilities are
owned by Crystal Foods. Waldbaum owns an unused facility located on eight acres
of land near Richfield, North Carolina. This facility contains approximately
53,000 square feet and is being leased. Waldbaum leases space for its
administrative offices in suburban Minneapolis, Minnesota.
The refrigerated distribution division leases administrative and sales offices
in suburban Minneapolis and several small warehouses across the United States.
In January 1994, a new 33,000 square foot distribution center was opened in
LeSueur, Minnesota. Wisco Farm Cooperative owns and operates a 48,200 square
foot refrigerated warehouse on a 19 acre site in Lake Mills, Wisconsin. A
19,000 square foot cheese packaging facility is also located in Lake Mills.
Within the potato products division, Northern Star owns its processing plant and
five raw potato storage facilities in Minnesota, Wisconsin and North Dakota
totaling over 290,000 square feet. Four of these facilities are located on land
owned by Northern Star. The East Grand Forks, Minnesota facility is located on
leased land. These facilities have an aggregate storage capacity of
approximately 170 million pounds of raw potatoes. The processing plant contains
approximately 175,000 square feet of production area and an automated frozen
storage area with a capacity of over 20 million pounds of finished product.
Farm Fresh leases three buildings in Bell Gardens, California, comprising
approximately 22,000 square feet, from the former owner of Farm Fresh. Drallos
owns a building in Detroit, Michigan comprising approximately 65,000 square
feet.
In the dairy products division, Kohler's facilities in White Bear Lake,
Minnesota consist of three company-owned buildings, with the main plant
containing approximately 104,000 square feet. Kohler also leases a UHT dairy
plant in Sulphur Springs, Texas comprising approximately 20,000 square feet.
A prepared foods facility of approximately 35,000 square feet is under
construction in Lake Mills, Wisconsin.
Management believes that the facilities of the Company, together with budgeted
capital improvements 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 and processing operations of
Waldbaum is 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 eggs
and 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
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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
The Company and the owner of the patents for ultrapasteurizing liquid eggs (see
"Proprietary Technologies") initiated litigation in 1989 against a processor of
liquid egg products, Papetti's Hygrade Egg Products, Inc. ("Papetti's"),
claiming infringement of the process patents with respect to ultrapasteurized
liquid egg production. The action was brought in the United States District
Court for the District of New Jersey. The defendant in this action contended
that their process did not infringe the patents and that the patents are
invalid. In November 1992 the Company was granted summary judgment that
Papetti's had infringed the claims of the patents. In July 1993 the Court
granted summary judgment upholding the validity and enforceability of the
patents. The relief sought by the plaintiffs included damages and costs and
disbursements, including attorneys' fees. The defendant filed an appeal of the
1993 summary judgment with the United States Circuit Court of Appeals. In July
1994 the Circuit Court upheld the District Court's summary judgment. The
defendant's attempt to have the Circuit Court's decision reviewed by the United
States Supreme Court was subsequently rejected. Final determination of the
damage award has been stayed pending United States Patent and Trademark Office
("PTO") proceedings (see Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's 1994 Annual Report to
Stockholders).
In July 1992 Sunny Fresh Foods, Inc. commenced an action in the United States
District Court for the District of Minnesota against the Company and the owner
of the patents for ultrapasteurizing liquid eggs seeking declaratory judgment
that the patents licensed by the Company are invalid and not infringed. The
Company and the patent holder have counterclaimed for infringement of the
patents by the plaintiff. The relief sought by the Company includes damages and
costs and disbursements, including attorneys' fees. Discovery was concluded in
early 1995 and pretrial motions are pending.
In August 1993 Nulaid Foods, Inc. commenced an action in the United States
District Court for the Eastern District of California against the Company and
the owner of the patents for ultrapasteurizing liquid eggs seeking declaratory
judgment that the patents licensed by the Company are invalid and not infringed.
The Company and the patent holder have counterclaimed for infringement of the
patents by the plaintiff. The relief sought by the Company includes damages and
costs and disbursements, including attorneys' fees. At the end of discovery in
late 1994, the action was stayed pending PTO proceedings (see Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's 1994 Annual Report to Stockholders).
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material adverse effect upon its
business or consolidated financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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" on the inside back cover of the Company's Annual Report
to Stockholders for 1994.
ITEM 6 - SELECTED FINANCIAL DATA
Pursuant to General Instruction G(2), information is incorporated by reference
to "Summary Consolidated Financial Data" on page 19 of the Company's Annual
Report to Stockholders for 1994.
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 8 and 9 of the Company's Annual Report to Stockholders for
1994.
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. and Subsidiaries" on pages 10 - 18 ,
and "Quarterly Financial Data" on page 20, of the Company's Annual Report to
Stockholders for 1994.
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" on pages 1-3 of the Company's definitive Proxy
Statement for its 1995 Annual Meeting of Stockholders filed with the Securities
and Exchange Commission on March 24, 1995. For information with respect to
executive officers, reference is made to Part I, Item 1 of this Form 10-K.
ITEM 11 - EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), information is incorporated by reference
to "Executive Compensation" on pages 4-11 of the Company's definitive Proxy
Statement for its 1994 Annual Meeting of Stockholders filed with the Securities
and Exchange Commission on March 24, 1995. In addition, William L. Goucher,
President of M. G. Waldbaum Co. is a participant in the Severance Plan for
Eligible Employees of Michael Foods, Inc. and its Subsidiaries (the "Plan").
Under the Plan, certain identified employees of Michael Foods, Inc. are entitled
to severance pay upon termination of employment if such termination of
employment occurs within two years following a change in control, as defined in
the Plan, and such termination is due to reasons other than death, permanent
disability, retirement, cause, or resignation by the employee other than for
11
<PAGE>
Good Reason. Good Reason is a defined term which includes, among other things,
a termination by the employee due to a significant change in his
responsibilities, titles or offices, a requirement that he or she move outside
of his or her geographic location, a reduction in the employee's base salary or
the failure of the employer to increase compensation proportionate to other
similarly situated employees; the failure of the employer to maintain any
benefit plan or a substantial modification in such plan which would reduce the
employee's benefits, and any purported termination of employment by the Company
which is not effected pursuant to a notice of termination as required under the
Plan. The amount of compensation to which Mr. Goucher would be entitled to
equals two times his Annual Compensation, as defined, which generally means base
compensation excluding bonuses, benefits and allowances. The Plan automatically
terminates unless it is renewed by action of the Board of Directors of the
Company prior to July 1, 1995 and annually thereafter, except that the Plan will
remain in effect after a change in control for at least 24 months unless
otherwise terminated by the Board of Directors of the Company with the consent
of 80% of the Plan participants who were Plan participants at the time of the
change in control.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), information is incorporated by reference
to "Security Ownership" on pages 12 and 13 of the Company's definitive Proxy
Statement for its 1995 Annual Meeting of Stockholders filed with the Securities
and Exchange Commission on March 24, 1995.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Certificate of Incorporation of Michael Foods, Inc. (1)
3.2 Certificate of Amendment to Certificate of Incorporation dated April 29,
1988 (2)
3.3 Certificate of Amendment to Certificate of Incorporation dated April 30,
1990 (3)
3.4 Bylaws of Michael Foods, Inc. (1)
3.5 Amendment of the Company's Bylaws dated February 23, 1988 (6)
4.1 Form of Common Stock Certificate (8)
10.15 *Michael Foods, Inc. 1987 Incentive Stock Option Plan and Incentive
Stock Option Agreement (1)
10.16 *Michael Foods, Inc. 1987 Non-Qualified Stock Option Plan and Non-
Qualified Stock Option Agreement (1)
10.25 *Form of Michael Foods, Inc. Director Stock Option Agreement (1)
10.40 *Retirement Compensation Agreement between Milton G. Waldbaum Company
and Daniel W. Gardner dated September 24, 1987 (5)
10.43 Loan Agreement and Promissory Note between Metropolitan Life Insurance
Company and Michael Foods, Inc., dated December 1, 1989 (5)
10.46 Revolving Loan Agreement between Continental Bank, N.A., as Agent, and
Michael Foods, Inc. dated March 30, 1990 (9)
10.48 First Amendment to Revolving Loan Agreement between Continental Bank,
N.A., as Agent, and Michael Foods, Inc., dated March 7, 1991 (9)
12
<PAGE>
10.49 Note Purchase Agreement between Michael Foods, Inc. and The Principal
Mutual Life Insurance Company and Washington Square Capital, as Agent,
dated July 15, 1990 (9)
10.50 Note Purchase Agreement between Michael Foods, Inc. and The Principal
Mutual Life Insurance Company and Washington Square Capital, as Agent,
dated September 15, 1990 (9)
10.55 *Amendment to Michael Foods, Inc. Incentive and Non-Qualified Stock
Option Plans, dated November 21, 1989 (7)
10.56 License Agreement between Michael Foods, Inc. and North Carolina State
University dated November 28, 1989 (9)
10.57 *Severance Plan for Eligible Employees of Michael Foods, Inc. and its
Subsidiaries (4)
10.58 Partnership Agreement between SKW Nature's Products, Inc. and MIKL, Inc.
(10)
10.60 Second Amendment to Revolving Loan Agreement between Continental Bank,
N.A., as Agent, and Michael Foods, Inc., dated February 25, 1992 (11)
10.61 Note Purchase Agreement between Michael Foods, Inc. and The Principal
Mutual Life Insurance Company dated February 24, 1992 (11)
10.62 Third Amendment to Revolving Loan Agreement between Continental Bank ,
N.A., as Agent, and Michael Foods, Inc., dated April 24, 1992 (12)
10.63 Fourth Amendment to Revolving Loan Agreement between Continental Bank ,
N.A., as Agent, and Michael Foods, Inc., dated October 16, 1992 (13)
10.64 First Amendment to July 15, 1990 Note Purchase Agreement between Michael
Foods, Inc. and The Principal Mutual Life Insurance Company and
Washington Square Capital, as Agent, dated October 7, 1992 (13)
10.65 First Amendment to September 15, 1990 Note Purchase Agreement between
Michael Foods, Inc. and The Principal Mutual Life Insurance Company and
Washington Square Capital, as Agent, dated October 7, 1992 (13)
10.66 First Amendment to February 24, 1992 Note Purchase Agreement between
Michael Foods, Inc. and The Principal Mutual Life Insurance Company
dated October 7, 1992 (13)
10.67 First Amendment to December 1, 1989 Loan Agreement and Promissory Note
between Michael Foods, Inc. and Metropolitan Life Insurance Company
dated October 14, 1992 (13)
10.69 *Amendment to the Non-Qualified Stock Option Plan (14)
10.70 *Stock Option Plan for Non-Employee Directors (15)
10.72 *Amendment to Severance Plan for Eligible Employees of Michael Foods,
Inc. and its Subsidiaries adopted by resolution of the Board of
Directors on July 29, 1993 (16)
10.73 *Resolution adopted by the Board of Directors on April 27, 1993
extending the termination date of the Severance Plan for Eligible
Employees of Michael Foods, Inc. and Subsidiaries for one additional
year (16)
10.75 Revolving Note between Michael Foods, Inc. and Toronto Dominion (Texas),
Inc. (16)
10.76 *Michael Foods, Inc. 1994 Executive Incentive Plan (17)
10.77 *Michael Foods, Inc. 1994 Executive Performance Stock Award Plan (17)
10.78 Fifth Amendment to Revolving Loan Agreement between Continental Bank, N.
A., as Agent, and Michael Foods, Inc., dated February 4, 1994 (17)
10.79 *Employment Agreement between Michael Foods, Inc. and Gregg A. Ostrander
dated January 31, 1994 (17)
10.80 *Retirement and Consulting Agreement between Michael Foods, Inc. and
Richard G. Olson dated December 23, 1993 (17)
10.81 Second Amendment to December 1, 1989 Loan Agreement and Promissory Note
between Michael Foods, Inc. and Metropolitan Life Insurance Company
dated February 23, 1994 (17)
10.82 Second Amendment to July 15, 1990 Note Purchase Agreement between
Michael Foods, Inc. and The Principal Mutual Life Insurance Company and
Washington Square Capital, as Agent, dated February 15, 1994 (17)
13
<PAGE>
10.83 Second Amendment to September 15, 1990 Note Purchase Agreement between
Michael Foods, Inc. and The Principal Mutual Life Insurance Company and
Washington Square Capital, as Agent, dated February 15, 1994 (17)
10.84 Second Amendment to February 24, 1992 Note Purchase Agreement between
Michael Foods, Inc. and The Principal Mutual Life Insurance Company
dated February 15, 1994 (17)
10.85 **Purchase and Sale Agreement by and between SKW Nature's Products,
Inc. and Michael Foods, Inc. dated March 11, 1994 (17)
10.86 **Technology License Agreement by and between SKW Trostberg AG and
Michael Foods, Inc. dated March 11, 1994 (17)
10.87 Sixth Amendment to Revolving Loan Agreement between Bank of America
Illinois (formerly known as Continental Bank, N.A.), as Agent, and
Michael Foods, Inc., dated February 24, 1995
10.88 *Employee Stock Purchase Plan
10.89 *Amendment No. 1 to Employment Agreement between Michael Foods, Inc.,
and Gregg A. Ostrander dated December 31, 1994
10.90 *Employment Agreement between Michael Foods, Inc. and Jeffrey M. Shapiro
dated December 31, 1994
10.91 *Employment Agreement between Michael Foods, Inc. and Kevin S. Murphy
dated December 31, 1994
10.92 *Employment Agreement between Michael Foods, Inc. and Norman A.
Rodriguez dated December 31, 1994
10.93 *Employment Agreement between Michael Foods, Inc. and James J. Kohler
dated December 31, 1994
10.94 *Employment Agreement between Michael Foods, Inc. and Kevin O. Kelly
dated December 31, 1994
10.95 *Employment Agreement between Michael Foods, Inc. and John D. Reedy
dated December 31, 1994
10.96 *Resolution adopted by the Board of Directors on April 28, 1994
extending the termination date of the Severance Plan for Eligible
Employees of Michael Foods, Inc. and its Subsidiaries for one additional
year (18)
10.97 *Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended Effective
January 1, 1995
13.1 1994 Annual Report to Stockholders
21.1 Schedule of Michael Foods, Inc. Subsidiaries
23.1 Auditors' Consent - Grant Thornton LLP
27.1 Financial Data Schedule
* Management Contract or Compensation Plan Arrangement
** Request for confidential treatment has been granted for the redacted
portions of these Exhibits
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 Registration No. 33-12949.
(2) Incorporated by reference from the Company's Report on Form 10-Q for the
Quarter ended March 31, 1988.
(3) Incorporated by reference from the Company's Report on Form 10-Q for the
Quarter ended June 30, 1990.
(4) Incorporated by reference from the Company's Form 8, Amendment No. 1 to
Report on Form 10-K for the year ended December 31, 1990.
(5) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1989.
(6) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1987.
14
<PAGE>
(7) Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8 effective November 21, 1989
Registration No. 33-31914.
(8) Incorporated by reference from the Company's Registration Statement on
Form S-3 Registration No. 33-40071.
(9) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1990.
(10) Incorporated by reference to Exhibit 10.58 of the Company's Form 8,
Amendment No. 1 to Report on Form 10-K for the year ended December 31,
1991.
(11) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1991.
(12) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended March 31, 1992.
(13) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1992.
(14) Incorporated by reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-8 effective June 9, 1993 Registration No. 33-64078.
(15) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 effective June 9, 1993 Registration No. 33-64076.
(16) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended June 30, 1993.
(17) Incorporated by reference from the Company's Report on Form 10-K for the
year ended December 31, 1993.
(18) Incorporated by reference from the Company's Report on Form 10-Q for the
quarter ended June 30, 1994.
FINANCIAL STATEMENTS
The consolidated financial statements of Michael Foods, Inc. and Subsidiaries as
of December 31, 1994 and 1993 and for the 3 years ended December 31, 1994 are
incorporated by reference to the Company's Annual Report to Stockholders for
1994, which includes the following:
<TABLE>
<CAPTION>
Page Number
(in the Company's
Annual Report to
Stockholders for 1994)
----------------------
<S> <C>
Report of Independent Certified Public Accountants 18
Consolidated Balance Sheets 10
Consolidated Statements of Operations 11
Consolidated Statements of Stockholders' Equity 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14-17
</TABLE>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Certified Public Accountants on Schedule
Schedule II - Valuation and Qualifying Accounts
Michael Foods, Inc. and Subsidiaries
15
<PAGE>
OTHER FINANCIAL STATEMENT SCHEDULES
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 or notes thereto.
REPORTS ON FORM 8-K
None.
16
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MICHAEL FOODS, INC.
Date: March 31, 1995 By: /s/ Gregg A. Ostrander
----------------------
Gregg A. Ostrander
(President and Chief Executive Officer)
Date: March 31, 1995 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/ James H. Michael March 31, 1995
---------------------
James H. Michael
(Chairman of the Board)
/s/ Gregg A. Ostrander March 31, 1995
-----------------------
Gregg A. Ostrander (Director,
President & Chief Executive Officer)
/s/ Miles E. Efron March 31, 1995
-------------------
Miles E. Efron (Director)
/s/ Richard A. Coonrod March 31, 1995
-----------------------
Richard A. Coonrod (Director)
/s/ Orville L. Freeman March 31, 1995
-----------------------
Orville L. Freeman (Director)
/s/ Arvid C. Knudtson March 31, 1995
----------------------
Arvid C. Knudtson (Director)
/s/ Joseph D. Marshburn March 31, 1995
------------------------
Joseph D. Marshburn (Director)
/s/ Jeffrey J. Michael March 31, 1995
-----------------------
Jeffrey J. Michael (Director)
/s/ Richard G. Olson March 31, 1995
---------------------
Richard G. Olson (Director)
17
<PAGE>
Report of Independent Certified Public Accountants on Schedule
Board of Directors and Stockholders
Michael Foods, Inc.
In connection with our audits of the consolidated financial statements of
Michael Foods, Inc. and Subsidiaries referred to in our report dated February
15, 1995, which is included in the Annual Report to Stockholders 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, 1994. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
February 15, 1995
18
<PAGE>
SCHEDULE II
MICHAEL FOODS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
-------------------------------------------------------------------------------------------------------
Additions
--------------------------
(2)
(1) Charges to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Description of Period Expenses Describe Describe (a) Period
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1992:
Allowance for
Doubtful Accounts $398,000 $380,000 $0 $332,000 $446,000
For the Year Ended
December 31, 1993:
Allowance for
Doubtful Accounts $446,000 $756,000 $0 $319,000 $883,000
For the Year Ended
December 31, 1994:
Allowance for
Doubtful Accounts $883,000 $314,000 $0 $502,000 $695,000
--------------------------------------------------
<FN>
(a) Write-offs of accounts deemed uncollectible
</TABLE>
19
<PAGE>
EXHIBIT INDEX
Exhibits Number Page Number
10.87 Sixth Amendment to Revolving Loan Agreement between Bank of America
Illinois (formerly known as Continental Bank, N.A.), as Agent, and
Michael Foods, Inc., dated February 24, 1995
10.88 *Employee Stock Purchase Plan
10.89 *Amendment No. 1 to Employment Agreement between Michael Foods, Inc.,
and Gregg A. Ostrander dated December 31, 1994
10.90 *Employment Agreement between Michael Foods, Inc. and Jeffrey M.
Shapiro dated December 31, 1994
10.91 *Employment Agreement between Michael Foods, Inc. and Kevin S. Murphy
dated December 31, 1994
10.92 *Employment Agreement between Michael Foods, Inc. and Norman A.
Rodriguez dated December 31, 1994
10.93 *Employment Agreement between Michael Foods, Inc. and James J. Kohler
dated December 31, 1994
10.94 *Employment Agreement between Michael Foods, Inc. and Kevin O. Kelly
dated December 31, 1994
10.95 *Employment Agreement between Michael Foods, Inc. and John D. Reedy
dated December 31, 1994
10.97 *Michael Foods, Inc. 1994 Executive Incentive Plan, as Amended
Effective January 1, 1995
13.1 1994 Annual Report to Stockholders
21.1 Schedule of Michael Foods, Inc. Subsidiaries
23.1 Auditors' Consent - Grant Thornton LLP
27.1 Financial Data Schedule
20
<PAGE>
SIXTH AMENDMENT
Dated as of February 24, 1995
THIS SIXTH AMENDMENT, dated as of February 24, 1995, amends the Revolving
Loan Agreement, dated as of March 30, 1990 (herein, as previously amended,
called the "Credit Agreement") , among MICHAEL FOODS, INC. (herein called the
"Company"), the banks listed therein (herein called the "Banks") and BANK OF
AMERICA ILLINOIS (formerly known as Continental Bank N.A.), as Agent (herein, in
such capacity, called the "Agent"). Terms defined in the Credit Agreement are,
unless otherwise defined herein or the context otherwise requires, used herein
as defined therein.
WHEREAS, the Company, the Banks and the Agent have entered into the Credit
Agreement which provides for the Banks to make Advances to the Company from time
to time; and
WHEREAS, the Company and the Banks have agreed that Bank of America
National Trust and Savings Association shall succeed Bank of America Illinois as
agent; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in certain
other respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence
of) the Sixth Amendment Effective Date (as defined below), the Credit Agreement
shall be amended in accordance with SECTIONS 1.1 through 1.22 below:
SECTION 1.1 PREAMBLE. The preamble of the Agreement is amended by
deleting the phrase beginning "CONTINENTAL BANK" to the end of the sentence and
replacing it with the following:
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national
banking association having its principal office at 1455 Market
Street, Agency Management Services #5596, San Francisco, California
94103, as Agent.
SECTION 1.2 AGENT. The definition of "Agent" contained in Section 1.1 of
the Credit Agreement is amended by deleting the word "Continental" therein and
substituting the word "BofA".
SECTION 1.3 BANKING DAY. The definition of "Banking Day" contained in
Section 1.1 of the Credit Agreement is amended by
<PAGE>
inserting immediately after the words "Chicago, Illinois" the words "and San
Francisco, California".
SECTION 1.4 EBITDA. The definition of "EBITDA" contained in Section 1.1
of the Credit Agreement is deleted in its entirety.
SECTION 1.5 INTERBANK RATE. The definition of "Interbank Rate" contained
in Section 1.1 of the Credit Agreement is amended by deleting the phrase "amount
of the Agent's portion" in the second to last line thereof and replacing it with
the phrase "aggregate amount".
SECTION 1.6 INTERBANK RATE (RESERVE ADJUSTED). The definition of
"Interbank Rate (Reserve Adjusted)" contained in Section 1.1 of the Credit
Agreement is amended by deleting the fraction "1/100" in the third line thereof
and replacing it with the fraction "1/16".
SECTION 1.7 MARGIN. The definition of "Margin" contained in Section 1.1
of the Credit Agreement is amended in its entirety to read as follows:
"MARGIN" means (i) prior to the effectiveness of the Sixth Amendment
to this Agreement, 0.625% and (ii) thereafter, the rate per annum set forth
in the schedule below opposite the applicable Interest Coverage Ratio:
Interest Coverage
Ratio Margin
----------------- -------
Greater than or equal 0.30%
to 5.0 to 1
Greater than or equal 0.35%
to 3.0 to 1 but less
than 5.0 to 1
Less than 3.0 to 1 0.45%.
The Margin shall be 0.35% commencing on the date of the effectiveness
of the Sixth Amendment to this Agreement and thereafter shall be adjusted
60 days or, in the case of the last fiscal quarter of any fiscal year, 90
days after the end of each fiscal quarter (beginning with the fiscal
quarter ended December 31, 1994) based on the Interest Coverage Ratio as of
the last day of such fiscal quarter; IT BEING UNDERSTOOD that (a) if the
Company fails to deliver the financial statements required by Section
8.1(a) or (b) by the 60th (or, if applicable, the 90th) day after any
fiscal quarter, the Margin shall be 0.45% until such financial statements
are delivered; and (b) no decrease in the Margin shall be effected
-2-
<PAGE>
on any date on which an Event of Default exists (but shall be delayed until
the first date on which no Event of Default exists). Any change in the
Margin shall be immediately effective for all outstanding Eurodollar
Advances.
SECTION 1.8 REFERENCE RATE. The definition of "REFERENCE RATE"
contained in Section 1.1 of the Credit Agreement is amended in its entirety to
read as follows:
"REFERENCE RATE" means, for any day, the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by BofA in San
Francisco, California, as its "reference rate." (The "reference rate" is a
rate set by BofA based upon various factors, including BofA's costs and
desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans, which may be priced at, above,
or below such announced rate.) Any change in the reference rate announced
by BofA shall take effect at the opening of business on the day specified
in the public announcement of such change.
SECTION 1.9 RESTRICTED INVESTMENT. The definition of "Restricted
Investment" contained in Section 1.1 of the Credit Agreement is amended by
deleting the word "Continental" wherever it appears in clause (iii) thereof and
replacing it with the words "BofA or any Affiliate thereof".
SECTION 1.10 TERMINATION DATE. The definition of "Termination Date"
contained in Section 1.1 of the Credit Agreement is amended by deleting the date
"January 31, 1996" therein and substituting the date "March 31, 1997" therefor.
SECTION 1.11 DEFINITIONS. Section 1.1 of the Credit Agreement is amended
by adding the following definitions:
"AGENT-RELATED PERSONS" means BofA and any successor agent arising
under Section 12.9, together with their respective Affiliates (including,
in the case of BofA, the Arranger), and the officers, directors, employees,
agents and attorneys-in-fact of such Persons and Affiliates.
"ARRANGER" means BA Securities, Inc., a Delaware corporation.
"BAI" means Bank of America Illinois, an Illinois banking corporation,
formerly known as Continental Bank N.A.
"BofA" means Bank of America National Trust and Savings Association, a
national banking association.
-3-
<PAGE>
"EBIT" means, for any period of determination, the consolidated Net
Income of the Company and its Subsidiaries for such period before deducting
interest expense and tax expense, all as determined in accordance with
generally accepted accounting principles.
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor publication, "H.15(519)") on the preceding Banking Day
opposite the caption "Federal Funds (Effective)"; or, if for any relevant
day such rate is not so published on any such preceding Banking Day, the
rate for such day will be the arithmetic mean as determined by the Agent of
the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by
the Agent.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary
or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
"INTEREST COVERAGE RATIO" means, as of the last day of any fiscal
quarter of the Company, the ratio of (a) EBIT for the period of four fiscal
quarters ending on such day to (b) the consolidated interest expense of the
Company and its subsidiaries for such period.
SECTION 1.12 BORROWING PROCEDURE. Section 2.3 of the Credit Agreement is
amended by:
(a) deleting the words "two (2)" which appear in the fourth and sixth
lines thereof and replacing them with the words "three (3)"; and
(b) deleting the last sentence thereof and replacing it with the following
sentence:
Each borrowing of Advances shall be in an aggregate
principal amount of $500,000 or a higher integral multiple
of $100,000.
SECTION 1.13 CONTINUATION AND/OR CONVERSION OF ADVANCES. Section 2.4
of the Credit Agreement is amended by (a) deleting the
-4-
<PAGE>
words "two (2)" which appear in the eighth and tenth lines thereof and replacing
them with the words "three (3)"; and (b) adding the following sentence at the
end thereof:
Each conversion or continuation of Advances shall be in an aggregate
principal amount of $500,000 or a higher integral multiple of $100,000.
SECTION 1.14 FACILITY FEE. Section 4.2 of the Credit Agreement is
amended in its entirety (including both clause (a) and clause (b) thereof) to
read as follows:
4.2 FACILITY FEE. The Company agrees to pay to the Agent, for the
ratable benefit of the Banks, a facility fee at a rate per annum equal to
the Facility Fee Rate on the daily average amount of the Credit (whether
used or unused). Such facility fee shall be payable in arrears on (i) the
first day of each January, April, July and October and (ii) on the
Termination Date or, if earlier, the date the Credit terminates for any
period then ending for which such facility fee shall not have been
theretofore paid.
For purposes of this Section 4.2, "Facility Fee Rate" means the rate per
annum set forth in the schedule below opposite the applicable Interest Coverage
Ratio:
Interest Coverage Facility
Ratio Fee Rate
----------------- --------
Greater than or equal 0.15%
to 5.0 to 1
Greater than or equal 0.20%
to 3.0 to 1 but less
than 5.0 to 1
Less than 3.0 to 1 0.25%.
The Facility Fee Rate shall be 0.20% commencing on the date of the
effectiveness of the Sixth Amendment to this Agreement and thereafter shall
be adjusted 60 days or, in the case of the last fiscal quarter of any
fiscal year, 90 days after the end of each fiscal quarter (beginning with
the fiscal quarter ended December 31, 1994) based on the Interest Coverage
Ratio as of the last day of such fiscal quarter; IT BEING UNDERSTOOD that
(a) if the Company fails to deliver the financial statements required by
Section 8.1(a) or (b) by the 60th (or, if applicable, the 90th) day after
any fiscal quarter, the Facility Fee Rate shall be 0.25% until such
statements are delivered; and (b) no decrease in the Facility Fee Rate
shall be effected on any date on which an Event of
-5-
<PAGE>
Default exists (but shall be delayed until the first date on which no Event
of Default exists). Any change in the Facility Fee Rate shall be
immediately effective for computation of the facility fee.
SECTION 1.15 PLACE OF PAYMENT. Section 5.1 of the Credit Agreement is
amended by deleting the address in the ninth and tenth lines thereof and
replacing it with the following: "Agency Management Services #5596, 1455 Market
Street, 12th Floor, San Francisco, California 94103, Re: Michael Foods, Inc."
SECTION 1.16 PREPAYMENTS. Section 5.2 of the Credit Agreement is
amended by inserting the following before the period at the end of the sentence:
"or a higher integral multiple of $100,000".
SECTION 1.17 FINANCIAL STATEMENTS AND OTHER REPORTS. Section 8.1 of the
Credit Agreement is amended by:
(a) in the lead-in sentence thereof, inserting immediately after the words
"to each Bank" the words "and to the Agent"; and
(b) in clause (g) thereof, inserting immediately before the words "any
Bank" the words "the Agent or".
SECTION 1.18 BOOKS, RECORDS AND ACCESS. Section 8.5 of the Credit
Agreement is amended by inserting immediately before the words "any Bank" which
appear in the seventh line thereof, the words "the Agent or".
SECTION 1.19 INSURANCE REPORTS. Section 8.7 of the Credit Agreement is
amended by inserting immediately before the words "the Banks" in the first line
thereof, the words "the Agent and".
SECTION 1.20 CERTIFICATION. Section 9.3 of the Credit Agreement is
amended by inserting immediately before the words "each Bank" in the second line
thereof, the words "the Agent and".
SECTION 1.21 RELATIONSHIP AMONG BANKS. Section 12 of the Credit
Agreement is amended in its entirety to read as follows:
12. THE AGENT
12.1 APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably
(subject to Section 12.9) appoints, designates and authorizes the Agent to
take such action on its behalf under the provisions of this Agreement and
each other document executed in connection with this Agreement (herein, a
"Loan Document") and to exercise such powers and perform such duties as are
expressly
-6-
<PAGE>
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.
12.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
12.3 LIABILITY OF AGENT. None of the Agent-Related Persons shall (i) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Subsidiary or
Affiliate of the Company, or any officer thereof, contained in this Agreement or
in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No Agent-
Related Person shall be under any obligation to any Bank to ascertain or to
inquire as to the observance or performance of any of the agreements contained
in, or conditions of, this Agreement or any other Loan Document, or to inspect
the properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.
-7-
<PAGE>
12.4 RELIANCE BY AGENT. (a) The Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or
telephone message, statement or other document or conversation believed by
it to be genuine and correct and to have been signed, sent or made by the
proper Person or Persons, and upon advice and statements of legal counsel
(including counsel to the Company), independent accountants and other
experts selected by the Agent. The Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other
Loan Document unless it shall first receive such advice or concurrence of
the Majority Banks as it deems appropriate and, if it so requests,
confirmation from the Banks of their obligation to indemnify the Agent
against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Agent shall in
all cases be fully protected in acting, or in refraining from acting, under
this Agreement or any other Loan Document in accordance with a request or
consent of the Majority Banks and such request and any action taken or
failure to act pursuant thereto shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Section 10, each Bank that has executed this Agreement shall
be deemed to have consented to, approved or accepted or to be satisfied
with, each document or other matter either sent by the Agent to such Bank
for consent, approval, acceptance or satisfaction, or required thereunder
to be consented to or approved by or acceptable or satisfactory to the
Bank.
12.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Event of Default or Unmatured
Event of Default, except with respect to defaults in the payment of
principal, interest and fees required to be paid to the Agent for the
account of the Banks, unless the Agent shall have received written notice
from a Bank or the Company referring to this Agreement, describing such
Event of Default or Unmatured Event of Default and stating that such notice
is a "notice of default". The Agent will notify the Banks of its receipt
of any such notice. The Agent shall take such action with respect to such
Event of Default or Unmatured Event of Default as may be requested by the
Majority Banks in accordance with Section 11; PROVIDED, HOWEVER, that
unless and until the Agent has received any such request, the Agent may
(but shall not be obligated to) take such action, or refrain
-8 -
<PAGE>
from taking such action, with respect to such Event of Default or Unmatured
Event of Default as it shall deem advisable or in the best interest of the
Banks.
12.6 CREDIT DECISION. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and
that no act by the Agent hereinafter taken, including any review of the
affairs of the Company and its Subsidiaries, shall be deemed to constitute
any representation or warranty by any Agent-Related Person to any Bank.
Each Bank represents to the Agent that it has, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial
and other condition and creditworthiness of the Company and its
Subsidiaries, and all applicable bank regulatory laws relating to the
transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank
also represents that it will, independently and without reliance upon any -
Agent-Related Person and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit
analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Company. Except for notices, reports and other
documents expressly herein required to be furnished to the Banks by the
Agent, the Agent shall not have any duty or responsibility to provide any
Bank with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or
creditworthiness of the Company which may come into the possession of any
of the Agent-Related Persons.
12.7 INDEMNIFICATION. Whether or not the transactions contemplated
hereby are consummated, the Banks shall indemnify upon demand the Agent-
Related Persons (to the extent not reimbursed by or on behalf of the
Company and without limiting the obligation of the Company to do so), pro
rata, from and against any and all Indemnified Liabilities; PROVIDED,
HOWEVER, that no Bank shall be liable for the payment to the Agent-Related
Persons of any portion of such Indemnified Liabilities resulting solely
from such Person's gross negligence or willful misconduct. Without
limitation of the foregoing,
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<PAGE>
each Bank shall reimburse the Agent upon demand for its ratable share of
any costs or out-of-pocket expenses (including reasonable fees of attorneys
for the Agent (including the allocable costs of internal legal services and
all disbursements of internal counsel)) incurred by the Agent in connection
with the preparation, execution, delivery, administration, modification,
amendment or enforcement (whether through negotiations, legal proceedings
or otherwise) of, or legal advice in respect of rights or responsibilities
under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Company. The
undertaking in this Section shall survive the expiration or termination of
the Credit and payment of the Notes and other liabilities of the Company
hereunder and the resignation or replacement of the Agent.
For the purposes of this Section 12.7, "Indemnified Liabilities" shall
mean: "any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses and disbursements
(including reasonable fees of attorneys for the Agent (including the
allocable costs of internal legal services and all disbursements of
internal counsel)) of any kind or nature whatsoever which may at any time
(including at any time following repayment of the Advances and the
termination, resignation or replacement of the Agent or replacement of any
Bank) be imposed on, incurred by or asserted against any such Person in any
way relating to or arising out of this Agreement or any document
contemplated by or referred to herein, or the transactions contemplated
hereby, or any action taken or omitted by any such Person under or in
connection with any of the foregoing, including with respect to any
investigation, litigation or proceeding (including (a) any case, action or
proceeding before any court or other Governmental Authority relating to
bankruptcy, reorganization, insolvency, liquidation, receivership,
dissolution, winding-up or relief of debtors, or (b) any general assignment
for the benefit of creditors, composition, marshalling of assets for
creditors, or other, similar arrangement in respect of its creditors
generally or any substantial portion of its creditors; undertaken under
U.S. Federal, state or foreign law, including the Bankruptcy Code or
appellate proceeding) related to or arising out of this Agreement or the
Advances or the use of the proceeds thereof, whether or not any Agent-
Related Person, any Bank or any
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<PAGE>
of their respective officers, directors, employees, counsel, agents or
attorneys-in-fact is a party thereto."
12.8 AGENT IN INDIVIDUAL CAPACITY. BofA and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking,
trust, financial advisory, underwriting or other business with the Company
and its Subsidiaries and Affiliates as though BofA were not the Agent
hereunder and without notice to or consent of the Banks. The Banks
acknowledge that, pursuant to such activities, BofA or its Affiliates may
receive information regarding the Company or its Affiliates (including
information that may be subject to confidentiality obligations in favor of
the Company or such Subsidiary) and acknowledge that the Agent shall be
under no obligation to provide such information to them. With respect to
their Loans, BofA and its Affiliates shall have the same rights and powers
under this Agreement as any other Bank and may exercise the same as though
BofA were not the Agent, and the terms "Bank" and "Banks" include BofA and
its Affiliates, to the extent applicable, in their individual capacities.
12.9 SUCCESSOR AGENT. The Agent may, and at the request of the
Majority Banks shall, resign as Agent upon 30 days' notice to the Banks.
If the Agent resigns under this Agreement, the Majority Banks shall appoint
from among the Banks a successor agent for the Banks. If no successor
agent is appointed prior to the effective date of the resignation of the
Agent, the Agent may appoint, after consulting with the Banks and the
Company, a successor agent from among the Banks. Upon the acceptance of
its appointment as successor agent hereunder, such successor agent shall
succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any
retiring Agent's resignation hereunder as Agent, the provisions of this
Section 12 and Section 13.3 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.
If no successor agent has accepted appointment as Agent by the date which
is 30 days following a retiring Agent's notice of resignation, the retiring
Agent's resignation shall nevertheless thereupon become effective and the
Banks shall perform all of the duties of the Agent hereunder until such
time, if any, as the Majority Banks appoint a successor agent as provided
for above.
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<PAGE>
12.10 WITHHOLDING TAX.
(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or
a reduction of, U.S. withholding tax under Sections 1441 or 1442 of
the Code, such Bank agrees with and in favor of the Agent, to deliver
to the Agent:
(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed
IRS Forms 1001 and W-8 before the payment of any interest in the first
calendar year and before the payment of any interest in each third
succeeding calendar year during which interest may be paid under this
Agreement;
(ii) if such Bank claims that interest paid under this
Agreement is exempt from United States withholding tax because it
is effectively connected with a United States trade or business
of such Bank, two properly completed and executed copies of IRS
Form 4224 before the payment of any interest is due in the first
taxable year of such Bank and in each succeeding taxable year of
such Bank during which interest may be paid under this Agreement,
and IRS Form W-9; and
(iii) such other form or forms as may be required under the
Code or other laws of the United States as a condition to
exemption from, or reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent of any change in
circumstances which would modify or render invalid any claimed
exemption or reduction.
(b) If any Bank claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form
1001 and such Bank sells, assigns, grants a participation in, or
otherwise transfers all or part of the Obligations of the Company to
such Bank, such Bank agrees to notify the Agent of the percentage
amount in which it is no longer the beneficial owner of Obligations of
the Company to such Bank. To the extent of such percentage amount,
the Agent will treat such Bank's IRS Form 1001 as no longer valid.
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<PAGE>
(c) If any Bank claiming exemption from United States
withholding tax by filing IRS Form 4224 with the Agent sells, assigns,
grants a participation in, or otherwise transfers all or part of the
Obligations of the Company to such Bank, such Bank agrees to undertake
sole responsibility for complying with the withholding tax
requirements imposed by Sections 1441 and 1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to
such Bank an amount equivalent to the applicable withholding tax after
taking into account such reduction. If the forms or other
documentation required by subsection (a) of this Section are not
delivered to the Agent, then the Agent may withhold from any interest
payment to such Bank not providing such forms or other documentation
an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not
properly withhold tax from amounts paid to or for the account of any
Bank (because the appropriate form was not delivered, was not properly
executed, or because such Bank failed to notify the Agent of a change
in circumstances which rendered the exemption from, or reduction of,
withholding tax ineffective, or for any other reason) such Bank shall
indemnify the Agent fully for all amounts paid, directly or
indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the
amounts payable to the Agent under this Section, together with all
costs and expenses (including reasonable fees of attorneys for the
Agent (including the allocable costs of internal legal services and
all disbursements of internal counsel)). The obligation of the Banks
under this subsection shall survive the expiration or termination of
the Credit and payment of the Notes and other liabilities of the
Company hereunder and the resignation or replacement of the Agent.
SECTION 1.22 SIGNATURE PAGES. The signature pages to the Credit
Agreement with respect to the Banks are amended by (a) deleting The First
National Bank of Boston therefrom and (b)
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<PAGE>
deleting the existing "Amount of Commitment" and "Share" of each Bank and
substituting the following therefor:
<TABLE>
<CAPTION>
Amount of
Commitment Share
---------- -----
<S> <C>
$25,000,000 45.45454546% Bank of America Illinois
$10,000,000 18.18181818% Toronto Dominion (Texas), Inc.
$5,000,000 9.09090909% FirsTier Bank, N.A., Lincoln
$15,000,000 27.27272727% Cooperatieve Centrale
Raiffeisenboerenleenbank B.A.,
"Rabobank Nederland"
</TABLE>
SECTION 2 ASSIGNMENT OF AGENCY. Bank of America Illinois hereby assigns
all of its rights, responsibilities and obligations as agent under the Credit
Agreement, and any documents executed in connection therewith, to Bank of
America National Trust and Savings Association ("BofA"), as successor Agent.
BofA hereby assumes all of the rights, responsibilities and obligations of the
Agent under and pursuant to the terms of the Credit Agreement as amended hereby.
Each of the Banks hereby acknowledges and approves BofA as successor Agent under
the Credit Agreement and any documents executed in connection therewith.
SECTION 3 REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the Banks that (a) each warranty set forth in Section 7 of the
Credit Agreement is true and correct as of the date of the execution and
delivery of this Sixth Amendment by the Company, with the same effect as if made
on such date, except for such changes that do not constitute an Event of Default
or an Unmatured Event of Default under the Credit Agreement, (b) the execution
and delivery by the Company of this Sixth Amendment and the New Notes (as
hereinafter defined) and the performance by the Company of its obligations under
the Credit Agreement, as amended hereby (herein, as so amended, called the
"Amended Credit Agreement"), and under the New Notes (i) are within the
corporate powers of the Company, (ii) have been duly authorized by all necessary
corporate action, (iii) have received all necessary governmental approval and
(iv) do not and will not contravene or conflict with any provision of law or of
the charter or by-laws of the Company or of any indenture, loan agreement or
other contract, order or decree which is binding upon the Company and (c) the
Amended Credit Agreement and the New Notes are the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency or other similar laws of general application affecting the
enforcement of creditors' rights
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<PAGE>
or by general principles of equity limiting the availability of equitable
remedies.
SECTION 4 EFFECTIVENESS. The amendments set forth in SECTION 1 above
and the assignment of the agency function set forth in SECTION 2 above shall
become effective on such date (herein called the "Sixth Amendment Effective
Date") when the Agent shall have received (i) evidence, satisfactory to the
Agent, that the Company has repaid all principal, interest and accrued fees, and
any other amounts then due and payable, to The First National Bank of Boston
under the Credit Agreement and (ii) each of the following documents, each in
form and substance satisfactory to the Agent and the Banks: (a) counterparts of
this Sixth Amendment executed by the parties hereto; (b) new Notes,
substantially in the form of Exhibit A to the Credit Agreement (herein called
the "New Notes"), payable to the order of Bank of America Illinois and
Cooperatieve Centrale Raiffeisenboerenleenbank B.A., "Rabobank Nederland"
("Rabobank") in the respective amounts of their commitments as increased hereby
(it being understood that such Banks shall promptly return to the Company the
Notes previously issued to them, marked to show that such Notes have been
superseded); (c) certified copies of resolutions of the Board of Directors of
the Company authorizing the execution and delivery of this Sixth Amendment and
the New Notes and the performance by the Company of its obligations under the
Amended Credit Agreement and the New Notes; (d) the opinion of Maun & Simon,
PLC, counsel to the Company; and (e) such other documents as the Agent or any
Bank may reasonably request in connection with the Company's authorization,
execution and delivery of this Sixth Amendment and the New Notes.
SECTION 5 DELETION OF BANK; FUNDING BY BANKS TO MAKE ADVANCES PRO RATA.
(a) Concurrently with the effectiveness of this Sixth Amendment pursuant to
SECTION 4, The First National Bank of Boston shall cease to be a "Bank" under
and for all purposes of the Credit Agreement and shall no longer have any rights
or obligations thereunder, except for (i) rights to receive payment of
indemnities, reimbursements and other similar amounts from the Company
(including, without limitation, rights under Section 6.4 of the Credit
Agreement), and (ii) obligations to indemnify, reimburse or make payment to the
Agent, any Bank or the Company with respect to actions, failures to act,
conditions, circumstances or events on or prior to the date of such
effectiveness. The First National Bank of Boston agrees that it will promptly
return to the Company the Note issued to such institution under the Credit
Agreement, marked to show that such Note has been cancelled.
(b) On the Sixth Amendment Effective Date, each of Rabobank and Bank of
America Illinois shall remit to the Agent for delivery to the Company additional
funds in the amount necessary to cause such Bank's share of all outstanding
borrowings of Advances (and all existing Interest Periods) to be equal to such
Bank's pro rata
-15-
<PAGE>
share thereof based on its commitment after giving effect hereto. The Company
agrees that it will indemnify each such Bank upon demand for any loss or expense
which such Bank may sustain or incur as a result of the funding of any Advance
pursuant to the foregoing sentence (based upon the difference, if any, between
the funding cost for such Bank for the remaining portion of the applicable
Interest Period and the funding cost such Bank would have incurred had such Bank
funded such Advance on the first day of such Interest Period); PROVIDED that the
Company shall only be obligated to pay the net loss or expense incurred by any
Bank after taking into account the corresponding benefit, if any, to such Bank
as a result of funding any other Advance pursuant to the foregoing sentence (but
no Bank shall be obligated to reimburse the Company for any net benefit to such
Bank resulting from such fundings).
SECTION 6 NOTICES. As of the date of the effectiveness hereof, all
notices delivered to the Agent shall be delivered to the following address:
Bank of America National Trust and Savings Association
Agency Management Services #5596
1455 Market Street, 12th Floor
Re: Michael Foods, Inc.
San Francisco, California 94103
Telephone: (415) 953-4370
Facsimile: (415) 622-4894
SECTION 7 MISCELLANEOUS.
SECTION 7.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects. After the Sixth Amendment Effective Date, all
references in the Credit Agreement and the Notes to "Revolving Loan Agreement",
"Agreement" or similar terms shall refer to the Amended Credit Agreement.
SECTION 7.2 COUNTERPARTS. This Sixth Amendment may be executed in any
number of counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original but all such
counterparts shall together constitute one and the same Sixth Amendment.
SECTION 7.3 GOVERNING LAW. This Sixth Amendment shall be a contract made
under and governed by the internal laws of the State of Illinois.
SECTION 7.4 SUCCESSORS AND ASSIGNS. This Sixth Amendment shall be
binding upon the Company, the Banks and the Agent and their respective
successors and assigns, and shall inure to the benefit of the Company, the Banks
and the Agent and the respective successors and assigns of the Banks and the
Agent.
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<PAGE>
SECTION 7.5 ACKNOWLEDGEMENT REGARDING FEES. The Company acknowledges
that the fees accrued under Section 4.2 of the Credit Agreement as in effect
prior to the effectiveness of this Sixth Amendment shall (except in the case of
The First National Bank of Boston) be due and payable on April 1, 1995 (or, if
earlier, the date the Credit terminates).
Delivered at Chicago, Illinois, as of the day and year first above written.
MICHAEL FOODS, INC.
By: /s/ John Reedy
-----------------------------------
Title: Vice President, Finance
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By: /s/ Matthew A. Gabel
-----------------------------------
Title: Vice President
---------------------------------
BANK OF AMERICA ILLINOIS, formerly known
as Continental Bank N.A.
By: /s/ R. Guy Stapleton
-----------------------------------
Title: Vice President
---------------------------------
TORONTO DOMINION (TEXAS), INC.
By: /s/ Diane Barley
-----------------------------------
Title: Vice President
---------------------------------
FIRSTIER BANK, N.A., LINCOLN
By: /s/ James M. Williams
-----------------------------------
Title: Vice President
---------------------------------
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<PAGE>
COOPERATIEVE CENTRALE
RAIFFEISENBOERENLEENBANK B.A., "RABOBANK
NEDERLAND"
By: /s/ Ian Reece
-----------------------------------
Title: Vice President & Manager
---------------------------------
By: /s/ W. Jeffrey Vollack
-----------------------------------
Title: Vice President
---------------------------------
Solely for purposes of
Section 5 hereof:
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Rod Guinn
-----------------------------------
Title: Director
---------------------------------
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<PAGE>
MICHAEL FOODS, INC.
EMPLOYEE STOCK PURCHASE PLAN
===============================================================================
1. THE PLAN.
The Michael Foods Employee Stock Purchase Plan (the "Plan") permits eligible
employees of Michael Foods, Inc. and Subsidiaries (the "Company") to purchase
shares of outstanding common stock of the Company through payroll deductions as
provided herein. The Company will make payroll deductions ("Deductions") as
authorized by participating employees ("Participants", or "Participant" in the
singular), and Piper Jaffray Inc. ("Piper Jaffray") will purchase common stock
on the open market with such Deductions and maintain an individual account for
each Participant.
The Plan has been established for the convenience of employees desiring to
acquire common stock of the Company on the open market. The Company does not
recommend or urge participation in the Plan. Participants are not guaranteed
against loss and must accept the risks of ownership of common stock of the
Company.
The cost of administering the Plan, including, as hereinafter provided, the
payment of brokerage commissions charged in connection with the purchase of
shares of common stock of the Company under the Plan, will be borne by the
Company.
2. OPERATION OF THE PLAN.
Piper Jaffray will administer the Plan, maintaining accounts in the names of
Participants and making purchases and sales of common stock of the Company for
such Participants as provided herein.
No expenses for maintaining the accounts under the Plan will be charged to
Participants. Commissions on purchases of shares of common stock of the Company
purchased pursuant to the Plan, including shares of common stock purchased
pursuant to the reinvestment of dividends, as provided herein, and all
bookkeeping and custodial expenses in connection with the Plan, will be paid by
the Company. Commissions and other charges in connection with sales of shares
of common stock pursuant to the Plan will be paid by Participants.
3. PURCHASE OF STOCK.
The Company will forward Deductions monthly, on or about the first day of each
month to Piper Jaffray with a list of Participants and the amount deducted for
the account of each. Piper Jaffray will commingle all Deductions and will
purchase on the open market, as soon as reasonably practicable after the receipt
of Deductions from the Company, as many shares of common stock of the Company as
can be acquired with the commingled Deductions. Funds awaiting investment will
not bear interest. Each Participant's individual account will be credited with
a pro rata share (computed to four decimal places) of the shares purchased with
the commingled funds. Piper Jaffray will send each Participant a statement in
each quarter in which a transaction occurs, showing the number of shares
purchased or sold during the quarter, the price at which purchases and sales
were made and the total number of shares in the Participant's account. An
annual statement also will be provided to each Participant as long as the
Participant has an account balance, showing all transactions during the year and
serving as a permanent record of all purchases and sales of common stock under
the Plan.
Page 1
<PAGE>
Shares of common stock held for a Participant under the Plan will be held by
Piper Jaffray. If a Participant wishes to have stock certificates for any or
all of the full shares in his or her account issued, he or she may obtain such
certificates without charge upon written request to Piper Jaffray. If delivery
of shares is taken, the Participant's name will be registered on the Company's
books as a stockholder. Dividends will then be mailed directly to the
Participant and can no longer be reinvested automatically by Piper Jaffray under
the Plan.
Shares in a Participant's account at Piper Jaffray may, at the Participant's
request, be sold by the Participant at any time at the then current market price
less applicable brokerage commissions and charges, which shall be paid by the
Participant.
4. DIVIDENDS.
All dividends on shares held by Piper Jaffray under the Plan will be reinvested
automatically in additional shares of common stock of the Company. If a
Participant does not want such dividends automatically reinvested, the
Participant should request that shares purchased for the Participant's account
under the Plan be registered in the name of and delivered to the Participant.
Shares of common stock acquired through reinvestment of dividends are allocated
automatically to the accounts of Participants, with each Participant's
individual account credited with a prorata share (computed to four decimal
points) of the shares purchased with the commingled dividend funds. Stock
dividends and stock splits, if any, are credited to the Participant's account
without charge. Brokerage commissions and other charges in connection with the
reinvestment of dividends shall be paid by the Company.
5. NOTICES TO PARTICIPANTS.
Piper Jaffray will deliver to each Participant notices of stockholders' meetings
and proxy statements and other reports distributed by the Company to its
stockholders. Each Participant's shares of common stock held by Piper Jaffray
pursuant to the Plan will be voted in accordance with the Participant's signed
proxy instructions as delivered to Piper Jaffray, or in accordance with
applicable rules of the appropriate regulatory authorities.
6. ELIGIBILITY FOR PARTICIPATION.
Each regular full-time (regularly scheduled to work at least 30 hours per week)
employee of the Company who is at least 21 years of age may participate in the
Plan as long as such employee is employed by the Company. Officers (defined as
being reporting persons under Section 16(a) of the Securities Exchange Act of
1934) and directors of the Company are not eligible to participate in the Plan.
As used in the Plan, the term "employee" shall include only those employees who
are eligible to participate in the Plan as provided in this section 6.
Questions of eligibility shall be resolved by the President, Executive Vice
President, or Chief Financial Officer of the Company, who shall have exclusive
discretion in interpreting these eligibility requirements. The decision of such
officer shall be final, unless it is finally determined by a court of competent
jurisdiction to have been arbitrary and capricious.
Page 2
<PAGE>
7. ENTERING THE PLAN.
Any eligible employee may enter the Plan on the first day of any calendar
quarter (i.e., January 1, April 1, July 1, or October 1), with the exception
that during the initial enrollment period of January 1, 1995 to March 31, 1995
any eligible employee may enter the Plan on January 1, February 1 or March 1,
1995, by executing the following documents and submitting them to Piper Jaffray:
(a) a Payroll Deduction Authorization Form stating the amount of the
Deductions that are to be made from each of the employee's regular payroll
checks; and
(b) an Enrollment Form (which includes a substitute Form W-9) authorizing
Piper Jaffray to establish an account pursuant to the Plan.
A Participant's Deductions under an executed Payroll Deduction Authorization
Form will continue as long as the Plan remains in effect unless the Participant
signs and forwards to the Human Resources office at the location where the
Participant is employed a Payroll Deduction Authorization Form increasing or
decreasing the Participant's regular Deductions to become effective on the first
day of the next calendar quarter, or unless the Participant delivers notice to
the Company that the Participant desires to withdraw from the Plan (as set forth
in section 10 hereof), or unless a Participant's employment with the Company
terminates (as set forth in section 12 hereof).
8. AUTHORIZING PAYROLL DEDUCTIONS.
A Participant may authorize Deductions in any even dollar amount which, in the
aggregate on a monthly basis, is not less than $10.00. Deductions may not
exceed $500.00 in any month.
9. CHANGING PAYROLL DEDUCTIONS.
Deductions may be increased or decreased by a Participant in even dollar
amounts, by signing and forwarding to the Human Resources office at the location
where the Participant is employed a new Payroll Deduction Authorization Form
reflecting the change. However, such changes will not become effective until
the first day of the next calendar quarter and such changes must be made at
least two weeks prior to the effective date.
A decrease in monthly Deductions to zero ($0) will not constitute a withdrawal
unless a Withdrawal Notice is executed by the Participant as described in
Section 10. However, a "zero level" Participant who does not subsequently
change their authorized payroll deduction to at least the $10 per month minimum
within twelve months will be automatically withdrawn from the Plan.
10. WITHDRAWING FROM THE PLAN.
A Participant may withdraw voluntarily from the Plan at any time by signing and
forwarding a Withdrawal Notice to the Human Resources office at the location
where the Participant is employed. If such Participant later decides to re-
enter the Plan, he or she must execute a new Payroll Deduction Authorization
Form, but such authorization shall not become effective until the first payroll
payment date of the next calendar quarter. Upon a Participant's withdrawal from
the Plan, certificates for whole shares credited to the account of the
withdrawing Participant will be
Page 3
<PAGE>
delivered to the Participant by Piper Jaffray. A check will be delivered to the
Participant for the sale price (less brokerage commissions and charges) of any
fractional share interest of the withdrawing Participant. A withdrawing
Participant may request that Piper Jaffray sell all of the shares held in the
Participant's account under the Plan, in which event the proceeds of the sale
(less any brokerage commissions and charges) will be remitted to the
Participant. A Withdrawal Notice will become effective on the next payroll
payment date if it is received by the Human Resources office at least seven
business days before such payroll payment date.
11. CHANGE IN EMPLOYMENT STATUS.
Should a Participant's status as a full-time (i.e., regularly scheduled to work
at least 30 hours per week) employee change to that of a part-time employee, the
Participant will be allowed to maintain their account with Piper Jaffray at the
Company's cost, with dividends being reinvested automatically as described in
Section 4, for up to twelve months. Deductions, however, will cease concurrent
with such a change to part-time status. If the Participant does not return to
full-time status with authorized Deductions within twelve months, he or she will
be automatically withdrawn from the Plan.
Should a Participant become an officer or director of the Company and be subject
to Securities and Exchange Commission reporting, he or she will be immediately
withdrawn from the Plan.
12. TERMINATION OF A PARTICIPANT'S EMPLOYMENT.
A Participant whose employment with the Company has been terminated may continue
his or her account with Piper Jaffray at the Participant's expense, but
participation in the Plan will terminate automatically. If the terminated
Participant does not wish to continue his or her account with Piper Jaffray,
then the terminated Participant must submit a Withdrawal Notice to the Human
Resources office at the location where the terminated Participant was formerly
employed and will receive a distribution of his or her account in accordance
with section 10 hereof.
13. TERM OF THE PLAN: AMENDMENT.
The Plan shall continue until terminated by at least 90 days written notice by
either the Company or Piper Jaffray to the other. The Company may amend or
terminate the Plan at any time. The Company may establish such procedures and
make such other provisions for the administration and operation of the Plan as
it deems appropriate.
14. COMPLIANCE WITH LAW.
The Plan is subject to compliance with all state and federal laws and
regulations and it shall be administered and construed in all respects
accordingly.
15. NOTICE TO PIPER JAFFRAY.
Any notice or instruction to be given to Piper Jaffray hereunder shall be
delivered by United States mail or personally as follows:
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<PAGE>
MAIL: Piper Jaffray Inc.
222 South Ninth Street
Box 28
Minneapolis, Minnesota 55440
Attention: Employee Stock Purchase Plan Services
IF PERSONALLY DELIVERED: Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, MN 55402
Attention: Employee Stock Purchase Plan Services
Any such notice from a Participant shall identify the Participant as a
Participant in the Plan.
Page 5
<PAGE>
AMENDMENT NO.1 TO EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and GREGG A. OSTRANDER (hereinafter referred to as
"Ostrander").
WHEREAS, Michael Foods and Ostrander have heretofore entered into an
employment agreement dated as of January 31, 1994; and
WHEREAS, the parties desire to amend Sections 3, 4 and 5 of said agreement
to amend and clarify certain of the terms thereof,
NOW, THEREFORE, in consideration of the premises and of the terms and
conditions hereinafter set forth, the parties agree as follows:
1. Section 3 of the employment agreement between Michael Foods and
Ostrander dated January 31, 1994 is hereby amended by adding the following to
the end of Section 3:
Effective January 1, 1995 Michael Foods agrees to pay Ostrander an
annual Base Salary for the remaining term of this agreement of at least
$294,000 payable in substantially equal semi-monthly installments.
2. Section 4 of the employment agreement between Michael Foods and
Ostrander dated January 31, 1994 is hereby amended by adding the following to
the end of Section 4:
f. On or before January 3, 1995, Michael Foods shall deliver to
Ostrander a non-qualified stock option to purchase 40,000 shares of Michael
Foods Common Stock. The date of grant of such option shall be deemed to be
January 3, 1995 and the exercise price shall be determined in accordance
with the Michael Foods Non-Qualified Stock Option Plan as of the close of
business on that date, or $10.00 per share, whichever is greater.
g. On or before January 2, 1996, Michael Foods shall deliver to
Ostrander a non-qualified stock option to purchase 40,000 shares of Michael
Foods Common Stock. The date of grant of such option shall be deemed to be
January 2, 1996 and the exercise price shall be determined in accordance
with the Michael Foods Non-Qualified Stock Option Plan as of the close of
business on that date, or $10.00 per share, whichever is greater.
<PAGE>
3. Section 5 of the employment agreement between Michael Foods and
Ostrander dated January 31, 1994 is hereby amended by deleting the last full
paragraph of said Section 5 and adding the following to the end of Section 5:
For purposes of this Section 5, this Agreement and Ostrander's
employment hereunder shall be deemed terminated by Michael Foods
without Cause if, after the date hereof there is a Change in Control
of Michael Foods and thereafter Ostrander's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item l(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Ostrander's express written consent:
(i) the assignment to Ostrander of any duties inconsistent with
Ostrander's positions, duties, responsibilities and status with
Michael Foods immediately prior to a Change in Control, or a change in
Ostrander's reporting responsibilities, titles or offices as in effect
immediately prior to a Change in Control, or any removal of Ostrander
from, or any failure to re-elect Ostrander to, any of such positions,
except in connection with the termination of Ostrander's employment
for Cause, upon the Incapacity or death of Ostrander, or upon the
voluntary termination by Ostrander;
(ii) a reduction in Ostrander's base salary in effect immediately
prior to any Change in Control; or the failure by Michael Foods to
increase such base
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<PAGE>
salary each year after a Change in Control by an amount which at least
equals, on a percentage basis, the mean average percentage increase in
base salary for all employees similarly situated during the two (2)
full calendar years immediately preceding a Change in Control;
(iii) Michael Foods requiring Ostrander to be based anywhere other
than the geographic location at which Ostrander was based immediately
preceding the Change in Control except for required travel on business
to an extent substantially consistent with the business travel
obligations Ostrander experienced immediately preceding a Change in
Control,
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Ostrander was
participating immediately preceding any Change in Control; the taking
of any action by Michael Foods not required by law which would
adversely affect Ostrander's participation in or materially reduce
Ostrander's benefits under any of such plans or deprive Ostrander of
any material fringe benefit enjoyed by Ostrander at the time of the
Change in Control, but this provision shall not apply to any stock
option plan maintained by Michael Foods prior to the Change in
Control; or the failure by Michael Foods to provide Ostrander with the
number of paid vacation days, holidays and personal days to which
Ostrander was then entitled in accordance with Michael Foods' normal
leave policy in effect immediately preceding a Change in Control.
4. Except as otherwise provided herein, the employment agreement between
Michael Foods and Ostrander dated January 31, 1994 shall remain in full force
and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment the day
and year first above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
--------------------------------
Its V P Finance
-----------------------------
/s/ Gregg A. Ostrander
----------------------------------
GREGG A. OSTRANDER
3
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and JEFFREY M. SHAPIRO (hereinafter referred to as
"Shapiro").
WHEREAS, under the date of March 1, 1988, Michael Foods and Shapiro entered
into an Employment Agreement which expires by its terms on December 31, 1994;
and
WHEREAS, Shapiro has served as Executive Vice President of Michael Foods
since May 1988; and
WHEREAS, Michael Foods and Shapiro have agreed to enter into this Agreement
effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that the Employment Agreement dated March 1, 1988
is hereby amended and superseded in its entirety by this Agreement effective as
of January 1, 1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Shapiro to serve as
Executive Vice President and Secretary of Michael Foods and in such
capacity Shapiro shall perform such duties as the Bylaws provide and as the
CEO of Michael Foods may from time to time determine. Shapiro shall also
serve, at the request of Michael Foods, as a Director of each of Michael
Foods' subsidiaries.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as
provided herein. This Agreement may be extended thereafter upon the
written agreement of the parties hereto.
3. BASE SALARY. For all services rendered by Shapiro, Michael Foods
agrees to pay to Shapiro an annual Base Salary for each of the calendar
years of this Agreement from January 1, 1995 through December 31, 1996 of
at least $238,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement, Shapiro
shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Shapiro with medical insurance and
shall permit Shapiro to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
1
<PAGE>
c. Shapiro is entitled to take vacations at reasonable times and for
customary and reasonable lengths of time consistent with his overall
responsibilities as Executive Vice President and Secretary of Michael
Foods.
d. Michael Foods shall reimburse Shapiro for all reasonable expenses
incurred by Shapiro in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Shapiro hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Shapiro;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Shapiro's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Shapiro has (i) committed an illegal or dishonest act that
directly reflects upon his fitness to act as Executive Vice President
and Secretary; (ii) intentionally breached his fiduciary obligations
to Michael Foods; or (iii) refused or is unable to perform his duties
hereunder, other than as a result of illness or disability, for a
period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Shapiro is unable to perform his job
responsibilities as Executive Vice President and Secretary as a result
of chronic illness, physical, mental or any other disability for a
period of six (6) months or more.
If Shapiro's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Shapiro shall receive as a
termination payment all amounts due under this Agreement as Base
Salary, but in any event in an amount not less than one year's Base
Salary, plus Shapiro shall receive fifty percent (50%) of that Base
Salary amount in lieu of any Incentive Compensation and Options for
the remaining term of this Agreement, plus any Incentive Compensation
earned for any year prior to the year of termination which is unpaid
at the date of termination. Such termination payment shall be made in
substantially equal monthly installments beginning on the first day of
the month following termination of employment through the full term of
this Agreement or for twelve (12) months, whichever is later. If
Shapiro's employment is terminated by Shapiro under subsection (b),
Shapiro shall receive no termination payment; however, Shapiro will be
entitled to receive any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at
2
<PAGE>
the date of termination. Any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination shall be due and payable in full within 15 days of the
determination by the Board of Directors of the amount of Incentive
Compensation to which Shapiro is entitled to receive, but in no event
shall the date of payment be more than 90 days following termination
of employment. If Michael Foods terminates Shapiro under subsection
(c) above, no amount shall be paid beyond the last day of service by
Shapiro and Shapiro shall not be deemed to have earned any Incentive
Compensation or Options for the year of termination. In the case of
Incapacity or death, or termination by Michael Foods without Cause in
accordance with sub-paragraphs a., b. and d. above, all options to
purchase common stock previously granted to Shapiro shall become fully
vested and not subject to Shapiro's forfeiture.
If Shapiro's employment is terminated by Michael Foods under
subsection (d), Shapiro shall receive as a termination payment all
amounts due under this Agreement as Base Salary plus Shapiro shall
receive fifty percent (50%) of that Base Salary amount in lieu of any
Incentive Compensation and Options for the remaining term of this
Agreement, but in any event in an amount not less than two year's Base
Salary, plus any Incentive Compensation earned for any year prior to
the year of termination which is unpaid at the date of termination.
Such termination payment shall be made in a lump sum within 15 days
following termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Shapiro's express written consent:
(i) the assignment to Shapiro of any duties inconsistent with
Shapiro's positions, duties, responsibilities and status with Michael
Foods immediately prior to a Change in Control, or a change in
Shapiro's reporting responsibilities, titles or offices as in effect
immediately prior to a Change in Control, or any removal of Shapiro
from, or
3
<PAGE>
any failure to re-elect Shapiro to, any of such positions, except in
connection with the termination of Shapiro's employment for Cause,
upon the Incapacity or death of Shapiro, or upon the voluntary
termination by Shapiro;
(ii) a reduction in Shapiro's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase
such base salary each year after a Change in Control by an amount
which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
(iii) Michael Foods requiring Shapiro to be based anywhere other than
the geographic location at which Shapiro was based immediately
preceding the Change in Control except for required travel on business
to an extent substantially consistent with the business travel
obligations Shapiro experienced immediately preceding a Change in
Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Shapiro was participating
immediately preceding any Change in Control; the taking of any action
by Michael Foods not required by law which would adversely affect
Shapiro's participation in or materially reduce Shapiro's benefits
under any of such plans or deprive Shapiro of any material fringe
benefit enjoyed by Shapiro at the time of the Change in Control, but
this provision shall not apply to any stock option plan maintained by
Michael Foods prior to the Change in Control; or the failure by
Michael Foods to provide Shapiro with the number of paid vacation
days, holidays and personal days to which Shapiro was then entitled in
accordance with Michael Foods' normal leave policy in effect
immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purposes and intent of this Agreement
and to fulfill the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or
of any other term or condition, nor shall any failure to enforce a
provision hereof operate as a waiver of such provisions or of any other
provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Shapiro by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Jeffrey M. Shapiro
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
4
<PAGE>
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time
may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument
in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall
be construed as though such invalid or unenforceable provisions were
omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under the
laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and each
of such counterparts shall for all purposes be deemed to be an original,
but all such counterparts shall together constitute one and the same
instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ John Reedy
-------------------------------------
Its /s/ V.P. Finance
----------------------------------
/s/ Jeffrey M. Shapiro
---------------------------------------
JEFFREY M. SHAPIRO
6
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and KEVIN S. MURPHY (hereinafter referred to as
"Murphy").
WHEREAS, Murphy has served as Chief Executive Officer of Northern Star Co.
since February 1990; and
WHEREAS, Murphy has previously served as an Officer of Michael Foods, since
June 1987; and
WHEREAS, Michael Foods and Murphy have agreed to enter into this Agreement
effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Murphy to serve as
Chief Executive Officer of Northern Star Co. and in such capacity Murphy
shall perform such duties as the Bylaws provide and as the CEO of Michael
Foods may from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as
provided herein. This Agreement may be extended thereafter upon the
written agreement of the parties hereto.
3. BASE SALARY. For all services rendered by Murphy, Michael Foods
agrees to pay to Murphy an annual Base Salary for each of the calendar
years of this Agreement from January 1, 1995 through December 31, 1996 of
at least $185,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement, Murphy
shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Murphy with medical insurance and
shall permit Murphy to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Murphy is entitled to take vacations at reasonable times and for
customary and reasonable lengths of time consistent with his overall
responsibilities as Chief Executive Officer of Northern Star Co.
1
<PAGE>
d. Michael Foods shall reimburse Murphy for all reasonable expenses
incurred by Murphy in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Murphy hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Murphy;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Murphy's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Murphy has (i) committed an illegal or dishonest act that
directly reflects upon his fitness to act as Chief Executive Officer
of Northern Star Co.; (ii) intentionally breached his fiduciary
obligations to Michael Foods; or (iii) refused or is unable to perform
his duties hereunder, other than as a result of illness or disability,
for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Murphy is unable to perform his job
responsibilities as Chief Executive Officer of Northern Star Co. as a
result of chronic illness, physical, mental or any other disability
for a period of six (6) months or more.
If Murphy's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Murphy shall receive as a
termination payment an amount equal to one year's Base Salary, plus
any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. Such
termination payment shall be made in substantially equal monthly
installments beginning on the first day of the month following
termination of employment for twelve (12) months. If Murphy's
employment is terminated by Murphy under subsection (b), Murphy shall
receive no termination payment; however, Murphy will be entitled to
receive any Incentive Compensation earned for any year prior to the
year of termination which is unpaid at the date of termination. Any
Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination shall be due
and payable in full within 15 days of the determination by the Board
of Directors of the amount of Incentive Compensation to which Murphy
is entitled to receive, but in no event shall the date of payment be
more than 90 days following termination of employment. If Michael
Foods terminates Murphy under subsection (c) above, no amount shall be
paid beyond the last day of
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<PAGE>
service by Murphy and Murphy shall not be deemed to have earned any
Incentive Compensation or Options for the year of termination. In the
case of Incapacity or death, or termination by Michael Foods without
Cause in accordance with sub-paragraphs a., b. and d. above, all
options to purchase common stock previously granted to Murphy shall
become fully vested and not subject to Murphy's forfeiture.
If Murphy's employment is terminated by Michael Foods under subsection
(d), Murphy shall receive as a termination payment an amount equal to
two year's Base Salary, plus any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in a lump sum
within 15 days following termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Murphy's express written consent:
(i) the assignment to Murphy of any duties inconsistent with Murphy's
positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Murphy's
reporting responsibilities, titles or offices as in effect immediately
prior to a Change in Control, or any removal of Murphy from, or any
failure to re-elect Murphy to, any of such positions, except in
connection with the termination of Murphy's employment for Cause, upon
the Incapacity or death of Murphy, or upon the voluntary termination
by Murphy;
(ii) a reduction in Murphy's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase
such base salary each year after a Change in Control by an amount
which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
3
<PAGE>
(iii) Michael Foods requiring Murphy to be based anywhere other than
the geographic location at which Murphy was based immediately
preceding the Change in Control except for required travel on business
to an extent substantially consistent with the business travel
obligations Murphy experienced immediately preceding a Change in
Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Murphy was participating
immediately preceding any Change in Control; the taking of any action
by Michael Foods not required by law which would adversely affect
Murphy's participation in or materially reduce Murphy's benefits under
any of such plans or deprive Murphy of any material fringe benefit
enjoyed by Murphy at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by
Michael Foods prior to the Change in Control; or the failure by
Michael Foods to provide Murphy with the number of paid vacation days,
holidays and personal days to which Murphy was then entitled in
accordance with Michael Foods' normal leave policy in effect
immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purposes and intent of this Agreement
and to fulfill the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or
of any other term or condition, nor shall any failure to enforce a
provision hereof operate as a waiver of such provisions or of any other
provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Murphy by first class, certified mail, postage prepaid, return
receipt requested, addressed as follows:
KEVIN S. MURPHY
1483 Red Cedar Road
Eagan, MN 55121
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
4
<PAGE>
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time
may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument
in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall
be construed as though such invalid or unenforceable provisions were
omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under
the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and
each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
------------------------------------------
Its /s/ Pres./CEO
---------------------------------------
/s/ Kevin S. Murphy
--------------------------------------------
KEVIN S. MURPHY
5
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and NORMAN A. RODRIGUEZ (hereinafter referred to as
"Rodriguez").
WHEREAS, Rodriguez has served as President of Crystal Farms Refrigerated
Distribution Company since May 1989; and
WHEREAS, Michael Foods and Rodriguez have agreed to enter into this
Agreement effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Rodriguez to serve
as President of Crystal Farms Refrigerated Distribution Company and in such
capacity Rodriguez shall perform such duties as the Bylaws provide and as
the CEO of Michael Foods may from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as
provided herein. This Agreement may be extended thereafter upon the
written agreement of the parties hereto.
3. BASE SALARY. For all services rendered by Rodriguez, Michael Foods
agrees to pay to Rodriguez an annual Base Salary for each of the calendar
years of this Agreement from January 1, 1995 through December 31, 1996 of
at least $176,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement,
Rodriguez shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Rodriguez with medical insurance and
shall permit Rodriguez to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Rodriguez is entitled to take vacations at reasonable times and
for customary and reasonable lengths of time consistent with his
overall responsibilities as President of Crystal Farms Refrigerated
Distribution Company.
d. Michael Foods shall reimburse Rodriguez for all reasonable
expenses incurred by Rodriguez in connection with Michael Foods'
business, including but not limited to,
1
<PAGE>
expenses of travel and entertainment, upon presentation of itemized
statements therefor.
5. EVENTS OF TERMINATION. The employment of Rodriguez hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Rodriguez;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Rodriguez's Duties are
Substantially Reduced or Negatively Altered without his prior
written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Rodriguez has (i) committed an illegal or dishonest act
that directly reflects upon his fitness to act as President of Crystal
Farms Refrigerated Distribution Company; (ii) intentionally breached
his fiduciary obligations to Michael Foods; or (iii) refused or is
unable to perform his duties hereunder, other than as a result of
illness or disability, for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Rodriguez is unable to perform his
job responsibilities as President of Crystal Farms Refrigerated
Distribution Company as a result of chronic illness, physical, mental
or any other disability for a period of six (6) months or more.
If Rodriguez's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Rodriguez shall receive as a
termination payment an amount equal to one year's Base Salary, plus
any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. Such
termination payment shall be made in substantially equal monthly
installments beginning on the first day of the month following
termination of employment for twelve (12) months. If Rodriguez's
employment is terminated by Rodriguez under subsection (b), Rodriguez
shall receive no termination payment; however, Rodriguez will be
entitled to receive any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of
termination. Any Incentive Compensation earned for any year prior to
the year of termination which is unpaid at the date of termination
shall be due and payable in full within 15 days of the determination
by the Board of Directors of the amount of Incentive Compensation to
which Rodriguez is entitled to receive, but in no event shall the date
of payment be more than 90 days following termination of employment.
If Michael Foods terminates Rodriguez under subsection (c) above, no
amount shall be paid beyond the last day of service by Rodriguez and
Rodriguez shall not be deemed to have earned any Incentive
Compensation or Options for the year of termination. In the case of
Incapacity or death, or termination by Michael Foods without Cause in
accordance
2
<PAGE>
with sub-paragraphs a., b. and d. above, all options to purchase
common stock previously granted to Rodriguez shall become fully vested
and not subject to Rodriguez's forfeiture.
If Rodriguez's employment is terminated by Michael Foods under
subsection (d), Rodriguez shall receive as a termination payment an
amount equal to two year's Base Salary, plus any Incentive
Compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. Such termination payment
shall be made in a lump sum within 15 days following termination of
employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Rodriguez's express written consent:
(i) the assignment to Rodriguez of any duties inconsistent with
Rodriguez's positions, duties, responsibilities and status with
Michael Foods immediately prior to a Change in Control, or a change in
Rodriguez's reporting responsibilities, titles or offices as in effect
immediately prior to a Change in Control, or any removal of Rodriguez
from, or any failure to re-elect Rodriguez to, any of such positions,
except in connection with the termination of Rodriguez's employment
for Cause, upon the Incapacity or death of Rodriguez, or upon the
voluntary termination by Rodriguez;
(ii) a reduction in Rodriguez's base salary in effect immediately
prior to any Change in Control; or the failure by Michael Foods to
increase such base salary each year after a Change in Control by an
amount which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
3
<PAGE>
(iii) Michael Foods requiring Rodriguez to be based anywhere other
than the geographic location at which Rodriguez was based immediately
preceding the Change in Control except for required travel on business
to an extent substantially consistent with the business travel
obligations Rodriguez experienced immediately preceding a Change in
Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Rodriguez was
participating immediately preceding any Change in Control; the taking
of any action by Michael Foods not required by law which would
adversely affect Rodriguez's participation in or materially reduce
Rodriguez's benefits under any of such plans or deprive Rodriguez of
any material fringe benefit enjoyed by Rodriguez at the time of the
Change in Control, but this provision shall not apply to any stock
option plan maintained by Michael Foods prior to the Change in
Control; or the failure by Michael Foods to provide Rodriguez with the
number of paid vacation days, holidays and personal days to which
Rodriguez was then entitled in accordance with Michael Foods' normal
leave policy in effect immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purposes and intent of this Agreement
and to fulfill the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or
of any other term or condition, nor shall any failure to enforce a
provision hereof operate as a waiver of such provisions or of any other
provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Rodriguez by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
NORMAN A. RODRIGUEZ
3626 France Avenue So.
St. Louis Park, MN 55416
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
4
<PAGE>
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time
may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument
in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall
be construed as though such invalid or unenforceable provisions were
omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under the
laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and each
of such counterparts shall for all purposes be deemed to be an original,
but all such counterparts shall together constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
------------------------------------------
Its President/CEO
---------------------------------------
/s/ Norman A. Rodriguez
--------------------------------------------
NORMAN A. RODRIGUEZ
5
ex10-<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and JAMES J. KOHLER (hereinafter referred to as
"Kohler").
WHEREAS, Kohler has served as President of Kohler Mix Specialties, Inc.
since May 1987; and
WHEREAS, Michael Foods and Kohler have agreed to enter into this Agreement
effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Kohler to serve as
President of Kohler Mix Specialties, Inc. and in such capacity Kohler shall
perform such duties as the Bylaws provide and as the CEO of Michael Foods
may from time to time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as
provided herein. This Agreement may be extended thereafter upon the
written agreement of the parties hereto.
3. BASE SALARY. For all services rendered by Kohler, Michael Foods
agrees to pay to Kohler an annual Base Salary for each of the calendar
years of this Agreement from January 1, 1995 through December 31, 1996 of
at least $176,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement, Kohler
shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Kohler with medical insurance and
shall permit Kohler to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Kohler is entitled to take vacations at reasonable times and for
customary and reasonable lengths of time consistent with his overall
responsibilities as President of Kohler Mix Specialties, Inc..
d. Michael Foods shall reimburse Kohler for all reasonable expenses
incurred by Kohler in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
1
<PAGE>
5. EVENTS OF TERMINATION. The employment of Kohler hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Kohler;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d. , below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Kohler's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Kohler has (i) committed an illegal or dishonest act that
directly reflects upon his fitness to act as President of Kohler Mix
Specialties, Inc.; (ii) intentionally breached his fiduciary
obligations to Michael Foods; or (iii) refused or is unable to perform
his duties hereunder, other than as a result of illness or disability,
for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Kohler is unable to perform his job
responsibilities as President of Kohler Mix Specialties, Inc. as a
result of chronic illness, physical, mental or any other disability
for a period of six (6) months or more.
If Kohler's employment is terminated under subsection (a) or by
Michael Foods under subsection (b), Kohler shall receive as a
termination payment an amount equal to one year's Base Salary, plus
any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. Such
termination payment shall be made in substantially equal monthly
installments beginning on the first day of the month following
termination of employment for twelve (12) months. If Kohler's
employment is terminated by Kohler under subsection (b), Kohler shall
receive no termination payment; however, Kohler will be entitled to
receive any Incentive Compensation earned for any year prior to the
year of termination which is unpaid at the date of termination. Any
Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination shall be due
and payable in full within 15 days of the determination by the Board
of Directors of the amount of Incentive Compensation to which Kohler
is entitled to receive, but in no event shall the date of payment be
more than 90 days following termination of employment. If Michael
Foods terminates Kohler under subsection (c) above, no amount shall be
paid beyond the last day of service by Kohler and Kohler shall not be
deemed to have earned any Incentive Compensation or Options for the
year of termination. In the case of Incapacity or death, or
termination by Michael Foods without Cause in accordance with sub-
paragraphs a., b. and d. above, all options to purchase common stock
previously granted to Kohler shall become fully vested and not subject
to Kohler's forfeiture.
2
<PAGE>
If Kohler's employment is terminated by Michael Foods under subsection
(d), Kohler shall receive as a termination payment an amount equal to
two year's Base Salary, plus any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in a lump sum
within 15 days following termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Kohler's express written consent:
(i) the assignment to Kohler of any duties inconsistent with Kohler's
positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Kohler's
reporting responsibilities, titles or offices as in effect immediately
prior to a Change in Control, or any removal of Kohler from, or any
failure to re-elect Kohler to, any of such positions, except in
connection with the termination of Kohler's employment for Cause, upon
the Incapacity or death of Kohler, or upon the voluntary termination
by Kohler;
(ii) a reduction in Kohler's base salary in effect immediately prior
to any Change in Control; or the failure by Michael Foods to increase
such base salary each year after a Change in Control by an amount
which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
(iii) Michael Foods requiring Kohler to be based anywhere other than
the geographic location at which Kohler was based immediately
preceding the Change in Control except for required travel on business
to an extent substantially consistent with the business travel
obligations Kohler experienced immediately preceding a Change in
Control;
3
<PAGE>
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Kohler was participating
immediately preceding any Change in Control; the taking of any action
by Michael Foods not required by law which would adversely affect
Kohler's participation in or materially reduce Kohler's benefits under
any of such plans or deprive Kohler of any material fringe benefit
enjoyed by Kohler at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by
Michael Foods prior to the Change in Control; or the failure by
Michael Foods to provide Kohler with the number of paid vacation days,
holidays and personal days to which Kohler was then entitled in
accordance with Michael Foods' normal leave policy in effect
immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purposes and intent of this Agreement
and to fulfill the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or
of any other term or condition, nor shall any failure to enforce a
provision hereof operate as a waiver of such provisions or of any other
provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Kohler by first class, certified mail, postage prepaid, return
receipt requested, addressed as follows:
JAMES J. KOHLER
3673 Big Fox Road
Gem Lake, MN 55110
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
4
<PAGE>
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time
may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument
in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall
be construed as though such invalid or unenforceable provisions were
omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under
the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and
each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
--------------------------------------
Its /s/ President/CEO
----------------------------------
/s/ James J. Kohler
---------------------------------------
JAMES J. KOHLER
5
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and KEVIN O. KELLY (hereinafter referred to as "Kelly").
WHEREAS, Kelly has served as President Michael Foods Sales since June 1992;
and
WHEREAS, Kelly has previously served as an Officer of Crystal Farms
Refrigerated Distribution Company and Kohler Mix Specialties, Inc., each of
which is a wholly-owned subsidiary of Michael Foods, since June 1987; and
WHEREAS, Michael Foods and Kelly have agreed to enter into this Agreement
effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Kelly to serve as
President Michael Foods Sales and in such capacity Kelly shall perform such
duties as the Bylaws provide and as the CEO of Michael Foods may from time to
time determine.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as provided
herein. This Agreement may be extended thereafter upon the written agreement
of the parties hereto.
3. BASE SALARY. For all services rendered by Kelly, Michael Foods agrees
to pay to Kelly an annual Base Salary for each of the calendar years of this
Agreement from January 1, 1995 through December 31, 1996 of at least $165,000
payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement, Kelly
shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Kelly with medical insurance and
shall permit Kelly to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Kelly is entitled to take vacations at reasonable times and for
customary and reasonable lengths of time consistent with his overall
responsibilities as President Michael Foods Sales.
1
<PAGE>
d. Michael Foods shall reimburse Kelly for all reasonable expenses
incurred by Kelly in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Kelly hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Kelly;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d. , below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Kelly's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Kelly has (i) committed an illegal or dishonest act that
directly reflects upon his fitness to act as President Michael Foods
Sales; (ii) intentionally breached his fiduciary obligations to
Michael Foods; or (iii) refused or is unable to perform his duties
hereunder, other than as a result of illness or disability, for a
period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Kelly is unable to perform his job
responsibilities as President Michael Foods Sales as a result of
chronic illness, physical, mental or any other disability for a period
of six (6) months or more.
If Kelly's employment is terminated under subsection (a) or by Michael
Foods under subsection (b), Kelly shall receive as a termination
payment an amount equal to one year's Base Salary, plus any Incentive
Compensation earned for any year prior to the year of termination
which is unpaid at the date of termination. Such termination payment
shall be made in substantially equal monthly installments beginning on
the first day of the month following termination of employment for
twelve (12) months. If Kelly's employment is terminated by Kelly
under subsection (b), Kelly shall receive no termination payment;
however, Kelly will be entitled to receive any Incentive Compensation
earned for any year prior to the year of termination which is unpaid
at the date of termination. Any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination shall be due and payable in full within 15 days of the
determination by the Board of Directors of the amount of Incentive
Compensation to which Kelly is entitled to receive, but in no event
shall the date of payment be more than 90 days following termination
of employment. If Michael Foods terminates Kelly under subsection (c)
above, no amount shall be paid beyond the last day of service by Kelly
and Kelly shall not be deemed to have earned any Incentive
Compensation or Options for the year of termination. In the case of
Incapacity or death, or termination by Michael Foods without Cause in
accordance with sub-paragraphs a., b. and d. above, all options to
purchase common stock
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<PAGE>
previously granted to Kelly shall become fully vested and not subject
to Kelly's forfeiture.
If Kelly's employment is terminated by Michael Foods under subsection
(d), Kelly shall receive as a termination payment an amount equal to
two year's Base Salary, plus any Incentive Compensation earned for any
year prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in a lump sum
within 15 days following termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Kelly's express written consent:
(i) the assignment to Kelly of any duties inconsistent with Kelly's
positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Kelly's
reporting responsibilities, titles or offices as in effect immediately
prior to a Change in Control, or any removal of Kelly from, or any
failure to re-elect Kelly to, any of such positions, except in
connection with the termination of Kelly's employment for Cause, upon
the Incapacity or death of Kelly, or upon the voluntary termination by
Kelly;
(ii) a reduction in Kelly's base salary in effect immediately prior to
any Change in Control; or the failure by Michael Foods to increase
such base salary each year after a Change in Control by an amount
which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
(iii) Michael Foods requiring Kelly to be based anywhere other than
the geographic location at which Kelly was based immediately preceding
the Change in Control except for required travel on business to an
extent substantially consistent with the
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<PAGE>
business travel obligations Kelly experienced immediately preceding a
Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Kelly was participating
immediately preceding any Change in Control; the taking of any action
by Michael Foods not required by law which would adversely affect
Kelly's participation in or materially reduce Kelly's benefits under
any of such plans or deprive Kelly of any material fringe benefit
enjoyed by Kelly at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by
Michael Foods prior to the Change in Control; or the failure by
Michael Foods to provide Kelly with the number of paid vacation days,
holidays and personal days to which Kelly was then entitled in
accordance with Michael Foods' normal leave policy in effect
immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably required
in order to carry out the purposes and intent of this Agreement and to fulfill
the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or of any
other term or condition, nor shall any failure to enforce a provision hereof
operate as a waiver of such provisions or of any other provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Kelly by first class, certified mail, postage prepaid, return
receipt requested, addressed as follows:
Kevin O. Kelly
14610 43rd Ave. N.
Plymouth, MN 55446
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
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<PAGE>
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any
time may by written agreement extend or modify this Agreement. This
Agreement shall not be altered or otherwise amended except pursuant to an
instrument in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall be
construed as though such invalid or unenforceable provisions were omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under
the laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and
each of such counterparts shall for all purposes be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
---------------------------------
Its /s/ President/CEO
-----------------------------
/s/ Kevin O. Kelly
-----------------------------------
KEVIN O. KELLY
5
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of this 31st day of December, 1994,
by and between MICHAEL FOODS, INC., a Delaware corporation (hereinafter referred
to as "Michael Foods") and JOHN D. REEDY (hereinafter referred to as "Reedy").
WHEREAS, Reedy has served as Vice President - Finance and Chief Financial
Officer of Michael Foods since May 1988; and
WHEREAS, Michael Foods and Reedy have agreed to enter into this Agreement
effective as of January 1, 1995.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties agree that this Agreement is effective as of January 1,
1995 as follows:
1. EMPLOYMENT AND DUTIES. Michael Foods shall employ Reedy to serve as
Vice President - Finance and Chief Financial Officer of Michael Foods and
in such capacity Reedy shall perform such duties as the Bylaws provide and
as the CEO of Michael Foods may from time to time determine. Reedy shall
also serve, at the request of Michael Foods, as a Director of any of
Michael Foods' subsidiaries.
2. TERM. This Agreement shall be effective as of January 1, 1995 and
shall continue through December 31, 1996, unless earlier terminated as
provided herein. This Agreement may be extended thereafter upon the
written agreement of the parties hereto.
3. BASE SALARY. For all services rendered by Reedy, Michael Foods agrees
to pay to Reedy an annual Base Salary for each of the calendar years of
this Agreement from January 1, 1995 through December 31, 1996 of at least
$185,000 payable in substantially equal semi-monthly installments.
4. ADDITIONAL BENEFITS AND WORKING FACILITIES.
a. For each calendar year during the term of this Agreement, Reedy
shall be entitled to participate in the Executive Incentive
Compensation Plan of Michael Foods. Any Incentive Compensation or
Options earned under said Plan shall be determined and paid or granted
in accordance with the Plan.
b. Michael Foods shall provide Reedy with medical insurance and
shall permit Reedy to participate in other fringe benefit plans as
Michael Foods may from time to time establish for its executive
officers. The terms of said benefits shall be no less generous than
those offered to other executive officers of Michael Foods.
c. Reedy is entitled to take vacations at reasonable times and for
customary and reasonable lengths of time consistent with his overall
responsibilities as Vice President - Finance and Chief Financial
Officer of Michael Foods.
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<PAGE>
d. Michael Foods shall reimburse Reedy for all reasonable expenses
incurred by Reedy in connection with Michael Foods' business,
including but not limited to, expenses of travel and entertainment,
upon presentation of itemized statements therefor.
5. EVENTS OF TERMINATION. The employment of Reedy hereunder shall
terminate as follows:
a. Upon the Incapacity or death of Reedy;
b. Upon thirty (30) days' written notice by either party, other than
as provided in sub-paragraphs c. and d., below;
c. Without notice by Michael Foods for Cause; or
d. By Michael Foods without Cause if there is a Change in Control of
Michael Foods and thereafter Reedy's Duties are Substantially
Reduced or Negatively Altered without his prior written consent.
"CAUSE" for purposes hereof shall mean a determination by Michael
Foods that Reedy has (i) committed an illegal or dishonest act that
directly reflects upon his fitness to act as Vice President - Finance
and Chief Financial Officer; (ii) intentionally breached his fiduciary
obligations to Michael Foods; or (iii) refused or is unable to perform
his duties hereunder, other than as a result of illness or disability,
for a period of thirty (30) days.
"INCAPACITY" for purposes hereof shall mean a determination by Michael
Foods in its sole discretion that Reedy is unable to perform his job
responsibilities as Vice President - Finance and Chief Financial
Officer as a result of chronic illness, physical, mental or any other
disability for a period of six (6) months or more.
If Reedy's employment is terminated under subsection (a) or by Michael
Foods under subsection (b), Reedy shall receive as a termination
payment all amounts due under this Agreement as Base Salary, but in
any event in an amount not less than one year's Base Salary, plus
Reedy shall receive fifty percent (50%) of that Base Salary amount in
lieu of any Incentive Compensation and Options for the remaining term
of this Agreement, plus any Incentive Compensation earned for any year
prior to the year of termination which is unpaid at the date of
termination. Such termination payment shall be made in substantially
equal monthly installments beginning on the first day of the month
following termination of employment through the full term of this
Agreement or for twelve (12) months, whichever is later. If Reedy's
employment is terminated by Reedy under subsection (b), Reedy shall
receive no termination payment; however, Reedy will be entitled to
receive any Incentive Compensation earned for any year prior to the
year of termination which is unpaid at the date of termination. Any
Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination shall be due
and payable in full within 15 days of the determination by the Board
of Directors of the amount of Incentive Compensation to which Reedy is
entitled to receive, but in no event shall
2
<PAGE>
the date of payment be more than 90 days following termination of
employment. If Michael Foods terminates Reedy under subsection (c)
above, no amount shall be paid beyond the last day of service by Reedy
and Reedy shall not be deemed to have earned any Incentive
Compensation or Options for the year of termination. In the case of
Incapacity or death, or termination by Michael Foods without Cause in
accordance with sub-paragraphs a., b. and d. above, all options to
purchase common stock previously granted to Reedy shall become fully
vested and not subject to Reedy's forfeiture.
If Reedy's employment is terminated by Michael Foods under subsection
(d), Reedy shall receive as a termination payment all amounts due
under this Agreement as Base Salary plus Reedy shall receive fifty
percent (50%) of that Base Salary amount in lieu of any Incentive
Compensation and Options for the remaining term of this Agreement, but
in any event in an amount not less than two year's Base Salary, plus
any Incentive Compensation earned for any year prior to the year of
termination which is unpaid at the date of termination. Such
termination payment shall be made in a lump sum within 15 days
following termination of employment.
"CHANGE IN CONTROL" means a Change in Control of Michael Foods of a
nature that would be required to be reported in response to Item 1(a)
of Michael Food's Current Report on Form 8-K, as in effect on the
effective date of this agreement, pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that,
without limitation, such a Change in Control shall be deemed to have
occurred at such time as any "person" within the meaning of Section
14(d) of the Exchange Act, other than Michael Foods, a subsidiary of
Michael Foods or any employee benefit plan sponsored by Michael Foods
or a subsidiary of Michael Foods, acquires (1) the power to elect,
appoint or cause the election or appointment of at least a majority of
the members of the Board of Directors of Michael Foods through the
acquisition of beneficial ownership of capital stock of Michael Foods
or otherwise, or (2) all, or substantially all, of the properties and
assets of Michael Foods; provided, however, that a Change in Control
shall not be deemed to have occurred if (x) the acquisition of such
power or properties and assets is pursuant to a merger, consolidation,
or sale of properties and assets and (y) by reason of such transaction
no person, or related persons constituting a "group" for purposes of
Section 13(d) of the Exchange Act shall acquire the power to elect,
appoint or cause the election or appointment of a majority of the
members of the Board of Directors of such successor or transferee.
"DUTIES ARE SUBSTANTIALLY REDUCED OR NEGATIVELY ALTERED" means, after
any Change in Control and without Reedy's express written consent:
(i) the assignment to Reedy of any duties inconsistent with Reedy's
positions, duties, responsibilities and status with Michael Foods
immediately prior to a Change in Control, or a change in Reedy's
reporting responsibilities, titles or offices as in effect immediately
prior to a Change in Control, or any removal of Reedy from, or any
failure to re-elect Reedy to, any of such positions, except in
connection with the termination of Reedy's employment for Cause, upon
the Incapacity or death of Reedy, or upon the voluntary termination by
Reedy;
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<PAGE>
(ii) a reduction in Reedy's base salary in effect immediately prior to
any Change in Control; or the failure by Michael Foods to increase
such base salary each year after a Change in Control by an amount
which at least equals, on a percentage basis, the mean average
percentage increase in base salary for all employees similarly
situated during the two (2) full calendar years immediately preceding
a Change in Control;
(iii) Michael Foods requiring Reedy to be based anywhere other than
the geographic location at which Reedy was based immediately preceding
the Change in Control except for required travel on business to an
extent substantially consistent with the business travel obligations
Reedy experienced immediately preceding a Change in Control;
(iv) the failure by Michael Foods to continue in effect benefit and
compensation plans substantially equivalent to the benefit or
compensation plans or arrangements in which Reedy was participating
immediately preceding any Change in Control; the taking of any action
by Michael Foods not required by law which would adversely affect
Reedy's participation in or materially reduce Reedy's benefits under
any of such plans or deprive Reedy of any material fringe benefit
enjoyed by Reedy at the time of the Change in Control, but this
provision shall not apply to any stock option plan maintained by
Michael Foods prior to the Change in Control; or the failure by
Michael Foods to provide Reedy with the number of paid vacation days,
holidays and personal days to which Reedy was then entitled in
accordance with Michael Foods' normal leave policy in effect
immediately preceding a Change in Control.
6. ADDITIONAL DOCUMENTS. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purposes and intent of this Agreement
and to fulfill the obligations of the respective parties hereunder.
7. WAIVER. Any waiver of any term or condition of this Agreement shall
not operate as a waiver of any other breach of such term or condition, or
of any other term or condition, nor shall any failure to enforce a
provision hereof operate as a waiver of such provisions or of any other
provision hereof.
8. NOTICES. All communications with respect to this Agreement shall be
considered given if delivered or sent as follows:
a. To Reedy by first class, certified mail, postage prepaid, return
receipt requested, addressed as follows:
John D. Reedy
7262 Gordon Drive
Eden Prairie, MN 55346
b. To Michael Foods by first class, certified mail, postage prepaid,
return receipt requested, addressed as follows:
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<PAGE>
Michael Foods, Inc.
5353 Wayzata Boulevard
324 Park National Bank Building
Minneapolis, MN 55416
or mailed to such other addresses as the parties hereto may designate by
notice given in like manner. Notice shall be effective three (3) days
after mailing or upon personal delivery.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement of
the parties hereto with respect to the subject matter hereof and no party
shall be liable or bound to another in any manner by any warranties,
representations or guarantees, except as specifically set forth herein.
10. MODIFICATIONS, AMENDMENTS AND WAIVERS. The parties hereto at any time
may by written agreement extend or modify this Agreement. This Agreement
shall not be altered or otherwise amended except pursuant to an instrument
in writing executed by the parties hereto.
11. SEVERABILITY. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provisions herein, and this Agreement shall
be construed as though such invalid or unenforceable provisions were
omitted.
12. MISCELLANEOUS.
a. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective legal representatives,
successors and assigns of the party thereto.
b. This Agreement is made pursuant to and shall be construed under the
laws of the State of Minnesota.
c. This Agreement may be executed in one or more counterparts and each
of such counterparts shall for all purposes be deemed to be an original,
but all such counterparts shall together constitute one and the same
instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the date and
year above written.
MICHAEL FOODS, INC.
By /s/ Gregg A. Ostrander
------------------------------------------
Its /s/ President/CEO
---------------------------------------
/s/ John Reedy
--------------------------------------------
JOHN D. REEDY
6
<PAGE>
MICHAEL FOODS, INC.
1994 EXECUTIVE INCENTIVE PLAN
(AS AMENDED EFFECTIVE JANUARY 1, 1995)
I.
PURPOSE
A. The purpose of the Michael Foods, Inc. Executive Incentive Plan (the
"Plan") is to incent and reward the senior management of Michael Foods,
Inc. (the "Company") for delivering or exceeding their annual operating
plan and to motivate those executives to be planning and focusing on year-
over-year trendline earnings growth. Corporate executives will be rewarded
based upon attainment of the Company's EPS growth targets. Operating
company executives will be rewarded based upon individual operating company
growth in profit before taxes ("PBT"), as well as overall corporate EPS
performance.
B. The Plan will be effective January 1, 1994, will remain in effect until
amended or terminated, and supersedes the Michael Foods, Inc. Amended and
Restated Annual Incentive Compensation Plan, which has been terminated.
II.
ADMINISTRATION
A. The Plan will be administered by the Chief Executive Officer ("CEO") and
the Chief Financial Officer of the Company under the direction of the
Compensation Committee of the Board of Directors.
B. The Board of Directors will have sole authority to establish the Plan's
terms and conditions.
III.
ELIGIBILITY
A. Participation in the Plan will be restricted to those positions which have
a clear impact on the Company's financial and operating performance.
B. Eligible participants will include principal officers and select key
employees of the Company and the Company's operating companies.
C. Generally, key employees will be defined as those executive positions which
report to the President of an operating subsidiary or, in the case of
corporate level employees, to the CEO of the Company.
D. Key employees will be recommended by the CEO of the Company and will be
approved by the Compensation Committee of the Board of Directors.
E. Participation will also be limited to executives who are not covered under
another approved incentive plan.
<PAGE>
IV.
INCENTIVE OPPORTUNITY
The size of the maximum incentive award opportunity level will vary by the
position's responsibility level, as outlined below:
MAXIMUM INCENTIVE
OPPORTUNITY AS A
LEVEL POSITION(S) PERCENT OF BASE SALARY
-------------------------------------------------------------------------------
I Corporate CEO, President, Chief Operating 100%
Officer, Executive Vice President, Chief
Financial Officer and Operating Company
Presidents
II Other Officers 75%
III Non-Officer Key Employees 50%
V.
PLAN COMPONENTS
COMPONENT A: CASH AWARD
3/4 of the incentive opportunity for both corporate and operating company
participants will be paid based upon PBT or EPS achievement against target
objectives, in accordance with the following table:
INCENTIVE AWARD OPPORTUNITY
AS A PERCENT OF BASE SALARY:
LEVEL I LEVEL II LEVEL III
-------------------------------------------------------------------------------
ACHIEVEMENT OF TARGET
---------------------
Below 94% 0.0% 0.0% 0.0%
94% - 94.99% 6.0% 4.5% 3.0%
95% - 95.99% 11.3% 8.5% 5.6%
96% - 96.99% 16.5% 12.4% 8.3%
97% - 97.99% 21.8% 16.4% 10.9%
98% - 98.99% 27.0% 20.3% 13.5%
99% - 99.99% 32.3% 24.2% 16.1%
100% - 100.99% 37.5% 28.1% 18.8%
101% - 101.99% 41.3% 31.0% 20.6%
102% - 102.99% 45.0% 33.8% 22.5%
103% - 103.99% 48.8% 36.6% 24.4%
104% - 104.99% 52.5% 39.4% 26.3%
105% - 105.99% 56.3% 42.2% 28.1%
106% - 106.99% 60.0% 45.0% 30.0%
107% - 107.99% 63.8% 47.9% 31.9%
108% - 108.99% 67.5% 50.6% 33.8%
109% - 109.99% 71.3% 53.5% 35.6%
110% or Greater 75.0% 56.3% 37.5%
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COMPONENT B: STOCK AWARD
1/4 of the incentive opportunity for both corporate and operating company
participants will be paid based upon year-over-year trendline earnings growth.
For each Plan year, trendline EPS must increase 15% over the prior year level to
trigger participation in this component of the Plan. This segment of the Plan
is earned over a period of three years and is paid in the Company's common
stock.
-- Year I earns 50%, Year II earns 30% assuming EPS growth of at least 15% in
Year II, and Year III earns the balance (20%) assuming EPS growth of at
least 15% in Year III. (If at least 15% year-over-year EPS growth is not
achieved, that yearly portion of the stock award incentive is forfeited.)
The number of shares of common stock that would be awarded to an individual
participant is determined by multiplying the appropriate earned percentage
by the 25% of the maximum incentive opportunity for each individual at the
appropriate level covered by Component B. That amount is then divided by
the closing price of the Company's common stock on the third business day
following the announcement of year-end financial results to determine the
number of shares of common stock to be issued to each participant.
Certificates will be issued as soon as practical following the March Board
of Directors meeting. Further aspects of Component B are covered in the
Michael Foods, Inc. 1994 Executive Performance Stock Award Plan.
COMPONENT C: OPTION AWARD
Stock options will be awarded to the operating company presidents and executive
corporate officers for achieving EPS growth in excess of 15% annually.
-- Initial qualified individuals:
Gregg Ostrander Norman Rodriguez
Jeffrey Shapiro Kevin Murphy
John Reedy James Kohler
William Goucher Kevin Kelly
-- Stock option awards will be for a specific number of shares of common stock
based upon a rising scale which is triggered with a year-over-year increase
in EPS of at least 15% as follows:
PRESIDENT/CEO
OF MICHAEL ALL OTHER
FOODS, INC. PARTICIPANTS
MAXIMUM STOCK OPTION OPPORTUNITY ------------- ------------
(COMMON STOCK SHARES)..................... 36,000/YR. 24,000/YR.
----------------------------------------------------------------------------
Below 15% Earnings Per Share Growth....... 0 0
15% - 19.99%.............................. 4,500 3,000
20% - 24.99%.............................. 9,000 6,000
25% - 29.99%.............................. 13,500 9,000
30% - 34.99%.............................. 18,000 12,000
35% - 39.99%.............................. 22,500 15,000
40% - 44.99%.............................. 27,000 18,000
45% - 49.99%.............................. 31,500 21,000
50% or Greater............................ 36,000 24,000
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Options will be priced based upon the closing price of the Company's common
stock on the third business day following the announcement of year-end
financial results each year and will be issued following the March Board of
Directors meeting. The fully diluted earnings per share for each year will
be computed in accordance with GAAP, but before accrual of bonuses and
stock option awards under this plan.
VI.
ORGANIZATION AND INDIVIDUAL PERFORMANCE MEASURES
The following measures of organization performance will be used to determine
actual incentive awards:
MICHAEL FOODS, INC. Fully diluted net earnings per share. Measured by
actual fully diluted earnings per share for current year as compared to the
target level. Calculated in accordance with GAAP, but before accrual of
bonuses and stock option awards under this Plan.
OPERATING COMPANIES. Profit before taxes (PBT). Measured by actual pre-
tax profits for the Plan year as compared to the target level. For the
purposes of the Plan, PBT will be defined as operating profits, calculated
in accordance with GAAP, before federal and state taxes, any interest
charges associated with acquisition debt, and before accrual of bonuses and
stock option awards under this Plan.
VII.
ADMINISTRATIVE PROCEDURES
A. ADDITIONS OF INDIVIDUALS. All eligible participants must be designated by
the CEO of the Company as of the beginning of the Plan year.
B. ESTABLISHMENT OF "TARGET OR MAXIMUM" Goals. The CEO retains the right to
set or adjust the operating company and corporate "target or maximum"
incentive goals based upon an assessment of overall business conditions at
the beginning of the Plan year.
C. ADJUSTMENTS TO TARGETS AND/OR GOALS. The CEO retains the right to adjust
the targets and/or goals of the Plan based upon his/her assessment of
business conditions at the end of the second quarter of the Plan year.
D. DOWN EARNINGS YEAR. No incentive shall be paid to a participant if their
operating company or, in the case of corporate level participants, the
Company has a decline in earnings for the Plan year, except at the
discretion of the CEO with the approval of the Compensation Committee.
E. TERMINATION/DEATH/DISABILITY. Plan participants must be in the employ of
the Company on the last day of the year to which the incentive award
relates in order to be eligible for incentive award payments. However,
should a participant die or become disabled, the incentive award for the
year in which such death or disability occurs shall be prorated by the
number of months of service during the applicable Plan year and shall be
paid to the participant or the participant's estate, as the case may be.
F. CHANGE IN POSITION. Eligible employees under the Plan who have a change in
position during a Plan year will have their incentive award calculated
under the Plan award levels for both positions, prorating the incentive
award by the months of service at each level.
G. INTERPOLATION. When the actual performance figure does not result in a
whole number, the individual calculating the formula should interpolate to
the closest whole percent.
4
<PAGE>
H. EXCEPTIONS. In each instance, exceptions must be approved in advance by
the appropriate officer and the CEO of the Company, and must be submitted
to the Compensation Committee of the Board of Directors for their
concurrence.
VIII.
AMENDMENT AND TERMINATION
The Board of Directors may at any time amend the Plan for the purposes of
satisfying the requirements of any changes in applicable laws or for any purpose
that may be permitted by law. The Board of Directors may also terminate the
Plan at any time. No such amendment or termination shall, however, adversely
affect the rights of any participant (without his/her prior consent) with regard
to any award previously made.
IX.
RIGHT TO CONTINUED EMPLOYMENT
No participant shall have any claim or right to be granted an incentive (bonus)
award under this Plan and the granting of an incentive (bonus) award shall not
be construed as giving the participant the right of continued employment with
the Company. The Company further reserves the right to dismiss a participant at
any time, with or without cause, free from any claim or liability other than
provided under this Plan document.
5
<PAGE>
THE COMPANY
MICHAEL FOODS, INC. AND SUBSIDIARIES
Michael Foods, Inc. is a diversified food processor and distributor with
businesses in egg products, refrigerated grocery products, frozen and
refrigerated potato products and specialty dairy products. Our thrust is to
continue to transition Michael Foods into a value-added food products company by
being a leader in the food industry in introducing innovative, refrigerated food
technology. The key to this strategy is "value-added", whether that be in the
product, the distribution channel or in the service we provide to our customers.
Principal subsidiaries include M.G. Waldbaum Company and its related egg
businesses, Crystal Farms Refrigerated Distribution Company, Northern Star Co.
and its related potato businesses and Kohler Mix Specialties, Inc.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $505,965 $474,783 $442,734
Net earnings (loss). . . . . . . . . . . . . . . 15,189 (16,320) 3,850
-----------------------------------
Net earnings (loss) per share. . . . . . . . . . $.79 $(.84) $.20
Cash dividends per share . . . . . . . . . . . . $.20 $.20 $.20
Weighted average common shares outstanding . . . 19,315 19,416 19,516
-----------------------------------
At December 31,
---------------
Cash and cash equivalents. . . . . . . . . . . . $1,641 $223 $6,064
Working capital. . . . . . . . . . . . . . . . . 33,589 22,267 54,826
Total assets . . . . . . . . . . . . . . . . . . 336,645 329,087 370,218
Long-term debt . . . . . . . . . . . . . . . . . 88,795 94,194 128,855
Stockholders' equity . . . . . . . . . . . . . . 166,029 155,003 177,037
-----------------------------------
</TABLE>
<PAGE>
TO OUR STOCKHOLDERS
The strong earnings recovery in core operations which began in 1993 continued in
1994. All four divisions showed earnings improvement for the year. Earnings
results were particularly strong in our Egg Products and Potato Products
divisions. The former was challenged all year by poor industry pricing for
commodity-sensitive items, particularly shell eggs. Excellent sales growth in
value-added egg products such as Easy Eggs[REGISTERED TRADEMARK] and MicroFresh
-TM-, our frozen specialty products line, more than offset this weakness. In
the Potato Products Division, strong unit sales growth for refrigerated products
in both the foodservice and retail markets resulted in a significant earnings
increase.
We are seeing success in our efforts to reduce the exposure to volatility
in our earnings from commodity price swings. In particular, unit sales of shell
eggs continued their planned decline last year, with dozens sold down
approximately 13% for the year. This was accomplished, in part, by the sale of a
small egg production and grading facility in Wisconsin last summer. We will seek
similar arrangements whereby the exposure to egg market price fluctuations can
be transferred to other parties, while we continue to have a secure supply of
shell eggs for our Refrigerated Distribution Company.
We continue to be pleased with the contributions of the Michael Foods Sales
Group. This 100-person organization has made considerable strides in the past
two years in presenting the core value-added egg, potato and dairy products to
foodservice and industrial customers across North America. In line with our
strategic plan to drive more value-added refrigerated food offerings through our
national salesforce, last year we added refrigerated pastas and sauces to our
sales mix via a sales and distribution pact with Romance Foods Co., Inc. Sales
training has been completed and initial sales of this new product line have
begun.
At year's end we sold the assets of Sunnyside Vegetable Packing, Inc. to a
privately-held east coast food company. The sale removed an operation that was
not a solid fit with our strategic thrust for the future.
Looking ahead, we should benefit from the good harvests of last Fall,
relative to our raw material costs, through at least the first half of 1995. The
quantity and quality of the corn, soybean and potato crops were excellent. On
the negative side, most industry observers forecast a continuation of the poor
egg market pricing environment well into 1995, which will affect our shell egg
results. As mentioned earlier, we are pleased to be positioned now such that
this type of a "headwind", while still an issue, is less of a factor on our
bottom line.
Lastly, 1994 saw a continuation of positive developments in our long patent
infringement suit with an east coast egg products competitor. The infringing
party lost an appeal of a federal court summary judgment which found that our
licensed patents for ultrapasteurizing liquid whole eggs are 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
challenging the validity of one or more claims under the patents. While these
challenges remain unresolved we will continue to experience delays in bringing
our claims to a final resolution and, as a result, litigation in at least two
suits has been stayed. It is expected that our various patent infringement suits
will continue to be met with similar challenges which will take time to
overcome. However, we remain steadfast in our resolve to protect our proprietary
rights and bring these suits to a successful conclusion.
Sincerely,
/S/ Gregg A. Ostrander
GREGG A. OSTRANDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1
<PAGE>
MICHAEL FOODS' STRATEGIC THRUST
[Photograph]
Michael Foods' Strategic Thrust defines what we are, what we want to become and
how we will accomplish the steps that lie between today and our vision of
tomorrow. What we are today and how we define "our reason for being" in the food
industry follows:
MICHAEL FOODS, INC. IS PRESENTLY A DIVERSIFIED FOOD PROCESSOR AND DISTRIBUTOR
WITH BUSINESSES IN EGG PRODUCTS, REFRIGERATED GROCERY PRODUCTS, FROZEN AND
REFRIGERATED POTATO PRODUCTS AND SPECIALTY DAIRY PRODUCTS. OUR THRUST IS TO
CONTINUE TO TRANSITION MICHAEL FOODS INTO A VALUE-ADDED FOOD PRODUCTS COMPANY BY
BEING A LEADER IN THE FOOD INDUSTRY IN INTRODUCING INNOVATIVE, REFRIGERATED FOOD
TECHNOLOGY. THE KEY TO THIS STRATEGY IS "VALUE-ADDED", WHETHER THAT BE IN THE
PRODUCT, THE DISTRIBUTION CHANNEL OR IN THE SERVICE WE PROVIDE TO OUR CUSTOMERS.
Along with this Strategic Thrust statement, we have developed a number of
specific goals and directives that will guide our thinking and planning in the
years ahead. We have chosen three of these items to highlight and discuss.
MICHAEL FOODS WILL UNDERSTAND THE NEEDS OF ITS CUSTOMERS, AND CONSUMERS, AND
DESIGN UNIQUE PRODUCTS AND SERVICES TO SATISFY THOSE NEEDS.
A cornerstone of our strategic thrust is our focus on developing extended
shelf-life, refrigerated food products that fit a need in the marketplace. With
this focus comes an emphasis on food safety, which is a topic of increasing
concern across the food industry, particularly in the foodservice sector. Many
of our long shelf-life items are specially heat treated using a method referred
to as ultra-high temperature (UHT) pasteurization. This process is applied to
many of our dairy products, as well as to our refrigerated liquid whole eggs
where the process is patented. In other product areas, "clean room" processing
and proprietary skills enable us to offer refrigerated products that have
significant competitive advantages with respect to shelf-life, safety, quality
and convenience.
In recent years we have increased the resources devoted to the research and
development of new food products. R & D is carried out on two fronts at Michael
Foods. Internally, our three food processing divisions maintain their own staffs
of food scientists
2
<PAGE>
[Photograph]
who are on the front lines of both quality assurance and research and
development activities. Externally, we sponsor a number of research projects
across the country at universities respected for their food science expertise.
Through this tandem approach we are able to keep the pipeline flowing with new
ideas that are in various stages of examination and testing, while keeping
spending at a prudent level.
Special recipe mashed potatoes were a newer product that performed well for
the Potato Products Division last year in the foodservice market. Mashed
potatoes have re-emerged as a staple on menus across the foodservice spectrum
and are an ideal product for the application of our refrigerated food processing
technology. The result is a heat-and-serve product with home-made quality. On
the retail side of the Potato Products Division, Country Mashed potatoes, made
with skins and butter, were introduced under the Simply Potatoes -TM- brand and
have been well received by the market. Two additional items are being introduced
early in 1995. Simply Potatoes -TM- Sliced Home Fries are rolling-out in the
retail market and frozen potato pancakes are being tested in the foodservice
market. Both hold promise as high quality line extensions in their respective
markets.
Simply Potatoes' -TM- national retail distribution has expanded to the
point where well-placed advertising has become cost effective. Initial results
of a three market advertising test begun in 1994 are encouraging and the program
is being expanded to an additional eleven markets in early 1995. We see the
strong possibility that this television and print campaign will be expanded to
additional markets in 1995 and 1996.
Early in 1994, Simply Eggs -TM- was re-introduced into the retail and
foodservice markets as a cholesterol and fat-reduced scrambled egg mix. Unlike
its predecessor product, reduced cholesterol liquid whole eggs, the new product
has achieved profitability. We are also pleased to report that a recent issue of
CONSUMER REPORTS rated Simply Eggs -TM- Brand the best tasting egg
3
<PAGE>
[Photograph]
substitute of the 13 tested. This reaffirmed our belief that this product is the
finest available in its category.
Crystal Farms, our retail refrigerated distribution company, had a number
of additions to its broad product line last year. In the cheese category,
strawberry flavored cream cheese, processed Swiss singles and reduced fat and
non-fat versions of processed American singles debuted. Crystal Farms brand
refrigerated pizza was also introduced into test markets in 1994.
The Michael Foods Sales Group continued to expand its presence last year.
Sales began for select Dairy Products Division products, particularly coffee
creamers, and refrigerated pastas and sauces were also added to the sales mix.
The latter was accomplished through a marketing, selling and distribution
arrangement with Romance Foods Co., Inc. Romance, of Kenosha, Wisconsin, is a
producer of high quality pasta and sauce products distributed to the U. S.
foodservice and retail markets. Romance's pasta goods are processed using a
post-packaging microwave pasteurization step, which results in high quality
products with extended shelf-lives and quick cooking times. Sales training has
been completed for this product line and initial sales have begun.
Our consolidated customer service and distribution group significantly
enhanced their efficient consumer response (ECR) capabilities last year. We are
meeting customers' demands for vendor inventory management, which involves more
frequent deliveries with less lead time. In many cases this results in
just-in-time delivery of goods. Our systems are being upgraded to provide
customers with greater flexibility, order turn-around speed and off-site
inventory management. Additionally, measurement of service has become a prime
item with certain key accounts. Michael Foods receives formal monthly "report
cards" in some cases and in other cases reports its service level statistics to
customers. Some of our customers have gone a step further in their service level
feedback by comparing the performance of all their vendors.
MICHAEL FOODS WILL SEEK TO ATTRACT AND DEVELOP THE BEST PROFESSIONALS AVAILABLE
IN OUR INDUSTRY. WE WILL DO MORE WITH LESS BY HAVING THE BEST.
We firmly believe that a company is only as good as its people. Each of the
Michael Foods operating companies
4
<PAGE>
[Photograph]
seeks out the most qualified individuals available when building staff. A focus
on quality, dedication to the effort and an ability to work on a team are
attributes that are highly valued within Michael Foods.
To attract the best professionals available, we do more than offer
competitive compensation. Michael Foods has an attractive benefits package,
including a retirement savings plan (401(k) plan) that is considered by outside
experts to be among the best of all such plans in the country. Most recently, an
Employee Stock Purchase Plan was instituted which allows employees to purchase
the common stock of the Company, without paying commissions, through payroll
deductions. Management strongly believes that having more employee-owners over
time will result in an enhanced performance by the Company.
Along these lines, the relatively new Executive Incentive Plan has a stock
award component as approved by the stockholders in 1994. Under the Executive
Incentive Plan, a portion of an executive's incentive compensation is paid in
the form of common stock if the Company achieves a predetermined, significant
annual earnings per share improvement. Such awards then vest over a three year
period based upon whether a meaningful "trendline" improvement in earnings per
share is sustained. In this way, the executive group, over time, can build a
meaningful equity stake in the Company. With management's goals being directly
aligned with those of our stockholder owners, we anticipate an intense focus on
the common goal of building wealth over time.
Team building has arisen in many parts of the Company in the past two
years. Two examples include the formation of the Michael Foods Sales Group and
the closely related Customer Service Group. Two years ago Michael Foods was
heavily dependent upon a broker sales network in the foodservice and industrial
sectors of the food industry. We then embarked on a major strategic shift which
resulted in the hiring and training of a 100 person internal salesforce and a
sharp reduction in the usage of food brokers. A fully staffed and trained
professional sales group has been in place for over a year now and is becoming a
force in the foodservice marketplace. Supporting this group is our
5
<PAGE>
[Photograph]
Customer Service office. Over the same time frame that the Sales Group was being
formed, this group came together from the various operating companies within
Michael Foods to form a single Customer Service office. They function as a team,
servicing the needs of the sales staff and our customers in ensuring a smooth
flow from customer inquiry to the accurate, timely delivery of goods.
MICHAEL FOODS' INDEPENDENT OPERATING COMPANIES WILL CAPITALIZE ON SYNERGIES
AFFORDED BY CENTRALIZATION WHERE IMPROVEMENTS IN MEETING CUSTOMER NEEDS CAN BE
ACHIEVED.
The best examples of synergistic centralization at work within Michael Foods are
the Michael Foods Sales Group and Customer Service office as previously
discussed. Tied into these areas is a centralized shipping function for the
foodservice market. The Gaylord, Minnesota distribution center now serves as the
central warehousing and shipping point for our refrigerated foodservice
business. Goods from the egg products, potato products and dairy products
companies are combined into full truck loads for efficient and timely
distribution to the warehouses of both chain customers and foodservice
distributors.
The Michael Foods Operating Council, comprised of key operating managers,
was formed in 1994. It is charged with finding operating cost savings,
principally by examining areas of major purchases across the various facilities
of the Company, with those purchases then pooled to take advantage of the buying
power the consolidated volume represents. The Council has already made in-roads
in pooling purchases of packaging materials and plant operating supplies. Other
items such as long-distance phone service and energy audits have also been
examined on a corporate-wide basis, with savings realized. We will continue to
explore for other benefits that can be achieved through centralization without
compromising the inherent benefits of having entrepreneurial independent
operating companies.
We have made a significant commitment to management information systems
(MIS) in order to enhance communications across the operating companies. Last
Fall we created a new corporate
6
<PAGE>
[Photograph]
position and hired a Chief Information Officer. Our MIS strategy is to move to a
common, integrated system across the operating companies. During the
implementation of this integrated system, we will re-engineer many of our
business processes by using "best practices" from across our company and the
food industry. These re-engineered processes will allow Michael Foods to provide
a single company view to our customers and the marketplace, while sustaining the
autonomy of our operating companies.
In parallel with the integrated system, we will further leverage
information technology in support of the efficient consumer response (ECR)
initiatives underway across the operating companies. We will expand the use of
our wide area network (WAN) and several local area networks (LANs) across the
operating companies, as well as with key business partners. This will allow for
more efficient and timely communication and information flow between operating
companies and provide "real time" operating information at the corporate office
level. These efforts will enhance our ability to meet the increasing demands of
our customers for paperless ordering, inventory management, invoicing and cash
receipts, while transforming information into an even stronger management tool
than it is today at Michael Foods.
During 1994 the Dairy Products Division benefited from a geographical
expansion move made in 1993, which highlights how synergies emerge at the
divisional level of the Company. Faced with capacity constraints at its
Minnesota plant, and a growing customer base in the southern U. S., Kohler Mix
entered into a multi-year lease for a dairy plant in Texas. This move gave
Kohler access to both a modern UHT dairy facility and a steady supply of raw
milk. Additionally, service levels with southern customers have been improved
and freight costs greatly lowered. The move has proven so successful, that an
expansion of the Texas plant has been approved for 1995.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following table sets forth information derived from the Consolidated
Statements of Operations of the Company expressed as a percentage of net sales.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . 85.2 87.4 88.1
----------------------------
Gross profit . . . . . . . . . . . . . . . . . . 14.8 12.6 11.9
Selling, general and administrative expenses . . 8.3 8.2 8.3
Disposal of product line . . . . . . . . . . . . - 4.8 -
Restructuring charges. . . . . . . . . . . . . . - 2.4 -
----------------------------
Operating profit (loss). . . . . . . . . . . . . 6.5 (2.8) 3.6
Interest expense, net. . . . . . . . . . . . . . 1.6 1.8 2.2
----------------------------
Earnings (loss) before income taxes. . . . . . . 4.9 (4.6) 1.4
Income tax expense (benefit) . . . . . . . . . . 1.9 (1.1) 0.5
----------------------------
Net earnings (loss). . . . . . . . . . . . . . . 3.0% (3.5)% 0.9%
----------------------------
----------------------------
</TABLE>
RESULTS OF OPERATIONS
Net earnings for 1994 were $15,189,000, an increase of $31,509,000 from a 1993
net loss of $16,320,000. Net earnings (loss) per share were $.79 in 1994,
compared with $(.84) in 1993 and $.20 in 1992.
Net sales were $505,965,000 in 1994, an increase of 6.6 percent from 1993
net sales of $474,783,000. Unit sales gains for most product categories
accounted for over one-half of the sales increase, with improved pricing
accounting for the balance. Net sales in 1993 increased 7.2 percent from net
sales of $442,734,000 in 1992 due to improved unit sales for most product
categories and improved pricing for certain commodity-sensitive products. Net
sales include $4,664,000 and $2,397,000 in 1993 and 1992, respectively, directly
attributable to a discontinued product line.
Gross profit amounted to 14.8 percent of net sales in 1994, compared with
12.6 percent in 1993 and 11.9 percent in 1992. Volume related production
efficiencies for most product lines and the elimination of gross losses from a
discontinued product line accounted for the majority of the increase in gross
profit margin in 1994. Volume related production efficiencies for most product
lines accounted for the majority of the gross profit margin improvement in 1993.
In 1993, a gross loss from a discontinued product line of $5,881,000 was
recorded, or 1.2 percent of net sales. In 1992, a gross loss from a discontinued
product line of $1,529,000 was recorded, or .3 percent of net sales.
Selling, general and administrative expenses amounted to 8.3 percent of net
sales in 1994, compared with 8.2 percent of net sales in 1993 and 8.3 percent in
1992. Selling expenses increased in 1992 due to the formation of a corporate
sales group and related additions to the sales staff. Since then, selling,
general and administrative expenses have grown at a rate approximately
comparable with that of net sales growth. Selling, general and administrative
expenses include $2,505,000 and $3,722,000 in 1993 and 1992, respectively,
directly attributable to a discontinued product line.
Disposal of product line costs in 1993 relate to the elimination of an egg
product. The Company had invested in a joint venture with an unrelated company
for the purpose of producing reduced cholesterol liquid whole eggs. Due to
significant continuing losses and lack of adequate market acceptance, the
Company decided in December 1993 to cause the early termination of this joint
venture. Consequently, in 1993 the Company accrued $11,500,000 to acquire the
interest of its joint venture partner and $1,202,000 to cover other costs
associated with the termination. In total, the Company recorded a one-time
charge of approximately $22,769,000, and a related income tax benefit of
$8,485,000, in 1993 related to the disposal of the product line. The Company
recorded pre-tax losses directly attributable to the discontinued product line
in 1993 and 1992 of approximately $7,689,000 and $4,902,000, respectively.
During 1994, the Company completed the acquisition of the joint venture
partner's interest for $11,500,000 and liquidated the joint venture. Certain of
the net assets held for sale by the Company from the defunct joint venture were
sold during 1994. The remaining net assets held for sale are expected to be sold
in 1995.
Restructuring charges in 1993 relate to a number of items, the largest
being costs from a significant reorganization of Sunnyside Vegetable Packing,
Inc. ("Sunnyside"), as Sunnyside had incurred losses since its acquisition in
1991. The Sunnyside portion of the
8
<PAGE>
restructuring charges included $5,129,000 for the elimination of unamortized
goodwill and $2,108,000 for site abandonment, relocation and other costs. In the
fourth quarter of 1994, the Company ceased its efforts to restructure
Sunnyside's operations and completed a sale of Sunnyside's remaining assets.
During the fourth quarter of 1993, in conjunction with restructuring its egg
operations, the Company recorded additional restructuring charges of $3,927,000,
primarily related to certain egg production facilities held for sale to reflect
their then current net realizable value. One facility was sold during 1994 and
another was held for sale as of December 31, 1994.
Interest expense was $8,538,000 in 1994, compared with $9,094,000 in 1993
and $9,986,000 in 1992. The decrease in 1994 primarily resulted from continued
principal payments on long-term debt and lower average borrowings under the
Company's unsecured revolving line of credit. Generally, interest rates on the
Company's bank borrowings were higher, on average, in 1994 than in 1993, but
were lower in 1993 than in 1992.
Interest income in 1994 was $40,000 compared with $731,000 in 1993 and
$398,000 in 1992. Interest income in 1993 and 1992 consists of $697,000 and
$349,000, respectively, related to interest received on notes receivable from
the joint venture that produced the discontinued product line.
Certain of the Company's products are sensitive to changes in commodity
prices. Currently, the Company's egg operations derive approximately 15 percent
of net sales from shell eggs which are sensitive to commodity price changes. The
remainder of egg products division sales are derived from the sale of egg
products that are value-added to varying degrees. Gross profit from shell eggs
is primarily dependent upon the relationship between shell egg prices and feed
costs, both of which can fluctuate significantly. While certain egg products
exhibit commodity price sensitivity, gross margins from egg products are
generally less sensitive to commodity price fluctuations than are shell eggs.
The Company's refrigerated distribution operations derive approximately 70
percent of net sales from refrigerated products, with the balance coming from
shell egg sales. As a majority of these eggs are supplied by the egg products
division and are, in-turn, sold on a distribution or non-commodity basis by the
refrigerated distribution division, this division's sales are generally not
sensitive to commodity price fluctuations. The potato products division
typically purchases approximately 80 to 90 percent of its estimated annual
potato needs under fixed price 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. French fry pricing for
both the industry and the Company is significantly influenced by the size and
quality of the annual U.S. potato crop, as well as consumer demand. While small
variations in potato prices or selling prices of end products can have a
significant effect on the earnings of the potato products division, such impacts
have been lessened in recent years through significant increases in higher
value-added refrigerated potato product sales. The dairy products division sells
its products primarily on a cost-plus basis. Therefore, the earnings of this
division are not typically affected by raw ingredient price fluctuations.
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of inflation
through a combination of productivity gains and price increases.
Competitors have infringed the Company's exclusive license for a patented
technology to safely extend the shelf-life of liquid eggs and the Company is
pursuing its legal rights. The Company has prevailed in U. S. District Court
cases in Florida and New Jersey. The judgment in the New Jersey case was
appealed during 1994 and the Federal appellate court 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 certain claims under the patents. As a result,
litigation in two patent infringement lawsuits involving the Company has been
stayed pending the outcome of the protests in the PTO. It is expected that the
patent infringement suits may continue to be met with similar challenges.
Management intends to protect the Company's proprietary rights and expects those
rights to continue to be upheld. However, pending the outcome of PTO actions and
related patent litigation, competition in this egg product category may
increase, which could result in pricing pressure for the Company's products
produced using this licensed technology. Sales of extended shelf-life liquid
eggs provide the largest contribution to the operating profits of the Company's
egg products division.
CAPITAL RESOURCES AND LIQUIDITY
The Company's investments in acquisitions and capital expenditures have been a
significant use of capital. The Company plans to continue to invest in
state-of-the-art production facilities to enhance its competitive position.
Historically, the Company has financed its growth principally from internally
generated funds, bank borrowings, issuance of senior debt and the sale of common
stock. The Company believes that these financing alternatives will continue to
meet its anticipated needs.
The Company invested $22,839,000 in capital expenditures in 1994,
$8,669,000 in 1993 and $28,723,000 in 1992. There were no acquisitions in 1994,
1993 or 1992.
The Company has an unsecured line of credit for $55,000,000 from its
principal banks. As of December 31, 1994, $29,400,000 was borrowed under this
line of credit.
9
<PAGE>
CONSOLIDATED BALANCE SHEETS
MICHAEL FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,641,000 $ 223,000
Accounts receivable, less allowances. . . . . . . . . . . . . . . . . . . . . . . 36,622,000 33,087,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,631,000 49,138,000
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,091,000 1,279,000
-------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,985,000 83,727,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,149,000 4,201,000
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,807,000 89,980,000
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,805,000 166,655,000
-------------------------------
280,761,000 260,836,000
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 99,702,000 80,398,000
-------------------------------
181,059,000 180,438,000
OTHER ASSETS
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,439,000 48,844,000
Net assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,761,000 11,939,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,401,000 4,139,000
-------------------------------
61,601,000 64,922,000
-------------------------------
$336,645,000 $329,087,000
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . . . $ 11,809,000 $ 9,814,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,360,000 20,536,000
Accrued compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,168,000 3,720,000
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,326,000 6,701,000
Accrued product line disposal costs . . . . . . . . . . . . . . . . . . . . . . . -- 12,702,000
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,633,000 7,987,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,100,000 --
-------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 60,396,000 61,460,000
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . . . . . . 88,795,000 94,194,000
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,425,000 18,430,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 3,000,000 shares authorized, none issued . . . . -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
shares issued 19,915,489 in 1994 and 1993. . . . . . . . . . . . . . . . . . . 199,000 199,000
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,640,000 117,640,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,801,000 42,475,000
Treasury stock, shares held 613,912 in 1994 and 599,350 in 1993 at cost . . . . . (5,611,000) (5,311,000)
-------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 166,029,000 155,003,000
-------------------------------
$336,645,000 $329,087,000
-------------------------------
-------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
MICHAEL FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $505,965,000 $474,783,000 $442,734,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . 430,917,000 414,965,000 390,185,000
--------------------------------------------------------------
Gross profit . . . . . . . . . . . . . . . . . . . . 75,048,000 59,818,000 52,549,000
Selling, general and administrative expenses . . . . . . . 41,851,000 39,122,000 36,936,000
Disposal of product line . . . . . . . . . . . . . . . . . -- 22,769,000 --
Restructuring charges. . . . . . . . . . . . . . . . . . . -- 11,164,000 --
-------------------------------------------------------------
41,851,000 73,055,000 36,936,000
-------------------------------------------------------------
Operating profit (loss). . . . . . . . . . . . . . . 33,197,000 (13,237,000) 15,613,000
Interest (income) expense
Interest expense. . . . . . . . . . . . . . . . . . . . 8,842,000 9,210,000 10,247,000
Interest capitalized. . . . . . . . . . . . . . . . . . (304,000) (116,000) (261,000)
-------------------------------------------------------------
8,538,000 9,094,000 9,986,000
Interest income . . . . . . . . . . . . . . . . . . . . (40,000) (731,000) (398,000)
-------------------------------------------------------------
8,498,000 8,363,000 9,588,000
-------------------------------------------------------------
Earnings (loss) before income taxes. . . . . . . . . 24,699,000 (21,600,000) 6,025,000
Income tax expense (benefit) . . . . . . . . . . . . . . . 9,510,000 (5,280,000) 2,175,000
-------------------------------------------------------------
NET EARNINGS (LOSS). . . . . . . . . . . . . . . . . $ 15,189,000 $(16,320,000) $ 3,850,000
-------------------------------------------------------------
-------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE. . . . . . . . . . . . $ .79 $ (.84) $ .20
-------------------------------------------------------------
-------------------------------------------------------------
Weighted average shares outstanding. . . . . . . . . . . . 19,315,000 19,416,000 19,516,000
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MICHAEL FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES ISSUED AMOUNT CAPITAL EARNINGS STOCK EQUITY
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1992 . . . . . . . 19,843,989 $198,000 $116,872,000 $62,734,000 $(3,483,000) $176,321,000
Exercise of non-qualified
stock options to acquire
common stock . . . . . . . 71,500 1,000 768,000 -- -- 769,000
Net earnings for the year . . -- -- -- 3,850,000 -- 3,850,000
Cash dividends
of $.20 per share. . . . . -- -- -- (3,903,000) -- (3,903,000)
-------------------------------------------------------------------------------------------
Balance at
December 31, 1992 . . . . . . 19,915,489 199,000 117,640,000 62,681,000 (3,483,000) 177,037,000
Purchase of shares
for treasury . . . . . . . -- -- -- -- (1,828,000) (1,828,000)
Net loss for the year . . . . -- -- -- (16,320,000) -- (16,320,000)
Cash dividends
of $.20 per share. . . . . -- -- -- (3,886,000) -- (3,886,000)
-------------------------------------------------------------------------------------------
Balance at
December 31, 1993 . . . . . . 19,915,489 199,000 117,640,000 42,475,000 (5,311,000) 155,003,000
Purchase of shares
for treasury . . . . . . . -- -- -- -- (300,000) (300,000)
Net earnings for the year . . -- -- -- 15,189,000 -- 15,189,000
Cash dividends
of $.20 per share. . . . . -- -- -- (3,863,000) -- (3,863,000)
-------------------------------------------------------------------------------------------
Balance at
December 31, 1994 . . . . . . 19,915,489 $199,000 $117,640,000 $53,801,000 $(5,611,000) $166,029,000
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MICHAEL FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . $ 15,189,000 $(16,320,000) $ 3,850,000
Adjustments to reconcile net earnings (loss) to
net cash provided from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . 21,616,000 22,446,000 21,454,000
Amortization . . . . . . . . . . . . . . . . . . . . 1,633,000 1,741,000 1,596,000
Deferred income taxes. . . . . . . . . . . . . . . . 6,095,000 (7,660,000) (640,000)
Disposal of product line . . . . . . . . . . . . . . (10,820,000) 22,769,000 --
Restructuring charges. . . . . . . . . . . . . . . . (525,000) 11,164,000 --
Cash provided from (used in) changes in
working capital employed, net of effect
of disposal of product line and
restructuring charges:
Accounts receivable . . . . . . . . . . . . . . . (3,535,000) 392,000 (595,000)
Inventories . . . . . . . . . . . . . . . . . . . (5,493,000) 2,968,000 8,011,000
Prepaid expenses and other. . . . . . . . . . . . 188,000 (122,000) (320,000)
Accounts payable. . . . . . . . . . . . . . . . . 5,824,000 3,440,000 (3,625,000)
Accrued expenses. . . . . . . . . . . . . . . . . 1,706,000 2,708,000 1,443,000
-------------------------------------------------------------
Total adjustments. . . . . . . . . . . . . . . 16,689,000 59,846,000 27,324,000
-------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . 31,878,000 43,526,000 31,174,000
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . (22,839,000) (8,669,000) (28,723,000)
Net assets held for sale. . . . . . . . . . . . . . . . 1,786,000 -- --
Joint venture and other assets. . . . . . . . . . . . . (1,840,000) (3,194,000) (12,961,000)
-------------------------------------------------------------
Net cash used in investing activities. . . . . . . . . . . (22,893,000) (11,863,000) (41,684,000)
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . -- -- 769,000
Payments on long-term debt. . . . . . . . . . . . . . . (100,604,000) (109,713,000) (90,622,000)
Proceeds from long-term debt. . . . . . . . . . . . . . 97,200,000 77,923,000 105,775,000
Purchase of shares for treasury . . . . . . . . . . . . (300,000) (1,828,000) --
Cash dividends. . . . . . . . . . . . . . . . . . . . . (3,863,000) (3,886,000) (3,903,000)
-------------------------------------------------------------
Net cash provided by (used in) financing activities. . . . (7,567,000) (37,504,000) 12,019,000
-------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . 1,418,000 (5,841,000) 1,509,000
Cash and cash equivalents at beginning of year . . . . . . 223,000 6,064,000 4,555,000
-------------------------------------------------------------
Cash and cash equivalents at end of year . . . . . . . . . $ 1,641,000 $ 223,000 $ 6,064,000
-------------------------------------------------------------
-------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 8,853,000 $ 9,445,000 $ 9,972,000
Income taxes . . . . . . . . . . . . . . . . . . . . 4,432,000 3,858,000 2,281,000
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHAEL FOODS, INC. AND SUBSIDIARIES
NOTE A
SUMMARY OF ACCOUNTING POLICIES
Michael Foods, Inc. (the "Company") is a holding company which, through its
operating subsidiaries, is engaged in the food processing and distribution
business primarily throughout the United States. Principal products are eggs,
egg products, refrigerated food products, fresh and frozen potato products, ice
milk mix, ice cream mix and milk.
At December 31, 1994, North Star Universal, Inc. ("NSU") held 7,354,950
shares of the issued and outstanding common stock of the Company or 38.1%.
Certain directors of the Company are also officers and directors of NSU.
1. PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated. Beginning in 1994, the Company
utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday
nearest to December 31.
2. CASH AND CASH EQUIVALENTS
The Company considers its highly liquid temporary investments with maturities of
three months or less to be cash equivalents.
3. INVENTORIES
Inventories other than raw potatoes and potato products are stated at the lower
of cost (determined on a first-in, first-out basis) or market. Raw potatoes and
potato products are stated at the lower of average cost for the year in which
produced or at market.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Work in process and
finished goods. . . . . . . . . . . $16,233,000 $14,386,000
Raw materials and supplies . . . . . . 15,327,000 17,028,000
Flocks . . . . . . . . . . . . . . . . 23,071,000 17,724,000
--------------------------------
$54,631,000 $49,138,000
--------------------------------
--------------------------------
</TABLE>
4. DEPRECIATION
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.
5. GOODWILL AND AMORTIZATION
Goodwill has resulted from various acquisitions made by the Company. All
acquisitions were accounted for as purchases and the excess of the total
acquisition cost over the fair value of the net assets acquired was recorded as
goodwill. Currently, goodwill is being amortized on the straight-line basis over
40 years. Accumulated amortization was $7,330,000 and $5,925,000 at December 31,
1994 and 1993, respectively. The Company maintains separate financial records
for each of its acquired entities and performs periodic strategic and long-range
planning for each entity. The Company evaluates its goodwill annually
to determine potential impairment by comparing the carrying value to the
undiscounted future cash flows of the related assets. The Company modifies the
life or adjusts the value of a subsidiary's goodwill if an impairment is
identified. See Note C for an impairment identified during 1993.
NOTE B
DISPOSAL OF PRODUCT LINE
The Company invested in a joint venture with an unrelated company for the
purpose of producing reduced cholesterol liquid whole eggs. Due to significant
continuing losses and lack of adequate market acceptance, the Company decided in
December 1993 to cause early termination of this joint venture. Consequently,
the Company accrued $11,500,000 in 1993 to acquire the interest of its joint
venture partner and $1,202,000 to cover other costs associated with the
termination and recorded a one-time charge of approximately $22,769,000 and a
related income tax benefit of $8,485,000. The Company recorded the acquired
partnership assets at their appraised value and included them in net assets held
for sale in the consolidated balance sheet.
14
<PAGE>
During 1994, the Company completed the acquisition of the joint venture
partner interest for $11,500,000 and liquidated the joint venture. Certain of
the net assets held for sale were sold during 1994. The remaining net assets
held for sale are expected to be sold in 1995.
In 1993, the revenues and expenses directly attributable to the
discontinued product line were net sales of $4,664,000, cost of sales of
$10,545,000, selling, general and administrative expenses of $2,505,000 and
interest income of $697,000. In 1992, the revenues and expenses directly
attributable to the discontinued product line were net sales of $2,397,000, cost
of sales of $3,926,000, selling, general and administrative expenses of
$3,722,000 and interest income of $349,000. The Company thus recorded pre-tax
losses directly attributable to the discontinued product line in 1993 and 1992
of approximately $7,689,000 and $4,902,000, respectively.
NOTE C
RESTRUCTURING CHARGES
During the fourth quarter of 1993, the Company recorded a restructuring charge
to provide for the significant reorganization of the operations of Sunnyside
Vegetable Packing, Inc. ("Sunnyside"). Sunnyside had incurred losses since its
acquisition in 1991. The restructuring charge included $5,129,000 for the
elimination of unamortized goodwill and $2,108,000 for site abandonment,
relocation and other costs. In the fourth quarter of 1994, the Company ceased
its efforts to restructure these operations and completed a sale of Sunnyside's
remaining assets.
During the fourth quarter of 1993, in conjunction with restructuring its
egg operations, the Company recorded restructuring charges of $3,927,000,
primarily related to certain egg production facilities held for sale to reflect
their current net realizable value. At December 31, 1994, one of these
production facilities remained held for sale.
NOTE D
LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of
credit (a). . . . . . . . . . . . . $ 29,400,000 $ 23,100,000
9.5% senior promissory
notes (b) . . . . . . . . . . . . . 38,000,000 42,000,000
9.85% senior promissory
notes (c) . . . . . . . . . . . . . 17,200,000 20,000,000
10.4% senior promissory
notes (d) . . . . . . . . . . . . . 12,500,000 15,000,000
Other. . . . . . . . . . . . . . . . . 3,504,000 3,908,000
---------------------------------
100,604,000 104,008,000
Less current maturities. . . . . . . . 11,809,000 9,814,000
---------------------------------
$ 88,795,000 $ 94,194,000
---------------------------------
---------------------------------
</TABLE>
Under the discounted cash flow method, the fair value of total long-term
debt approximates $99,325,000 and $108,221,000 at December 31, 1994 and 1993,
respectively.
Aggregate minimum annual principal payments of long-term debt maturing in
years subsequent to December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
--------------------------------------------------------------------------------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,809,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,846,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,236,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,672,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,625,000
2000 and subsequent. . . . . . . . . . . . . . . . . . . . . 4,416,000
------------
$100,604,000
------------
------------
</TABLE>
(a) The Company has an unsecured revolving line of credit with its principal
banks for $55,000,000 with interest at the principal banks' reference rate, or
alternative variable rates, at the Company's option. At December 31, 1994, the
Company had $1,400,000 outstanding at the reference rate of 8.5% and $28,000,000
outstanding at an average variable rate of 6.4%. This revolving line of credit,
which matures on March 31, 1997, contains certain restrictive covenants similar
to the covenants contained in the senior promissory notes. At December 31, 1994,
$25,600,000 of this line was unused.
15
<PAGE>
(b) The 9.5% senior promissory notes are due in varying semi-annual installments
of $3,000,000 to $5,000,000 from June, 1995 through December, 1999. Interest is
payable semi-annually. The notes are unsecured and contain certain restrictive
covenants. The most significant covenants are: minimum net worth requirements,
limitations on additional indebtedness and liens, minimum interest coverage and
limitations on a change in control of the Company.
(c ) The 9.85% senior promissory notes are due in annual installments of
$2,800,000 from October 1995 through October 1999, with the remaining principal
of $3,200,000 due in October, 2000. Interest is payable quarterly. The notes are
unsecured and contain certain restrictive covenants similar to the covenants
contained in the 9.5% senior promissory notes.
(d) The 10.4% senior promissory notes are due in annual installments of
$2,500,000 from December, 1995 through December, 1999, with interest payable
semi-annually. The notes are unsecured and contain certain restrictive covenants
similar to the 9.5% senior promissory notes.
NOTE E
INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal . . . . . . . $2,888,000 $ 1,968,000 $2,390,000
State . . . . . . . . 527,000 412,000 425,000
------------------------------------------------
3,415,000 2,380,000 2,815,000
Deferred
Federal . . . . . . . 5,510,000 (6,746,000) (544,000)
State . . . . . . . . 585,000 (914,000) (96,000)
------------------------------------------------
6,095,000 (7,660,000) (640,000)
------------------------------------------------
$9,510,000 $(5,280,000) $2,175,000
------------------------------------------------
------------------------------------------------
</TABLE>
Included in the 1993 provision for deferred income taxes is a $1,200,000
expense resulting from the increase in enacted Federal income tax rates.
Deferred income taxes arise from temporary differences between financial
and tax reporting. The tax effects of the cumulative temporary differences
resulting in the deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Depreciation . . . . . . . . . . . . . $33,941,000 $31,609,000
Farm inventory
accounting. . . . . . . . . . . . . 5,726,000 2,349,000
AMT credit . . . . . . . . . . . . . . (3,975,000) (3,275,000)
Disposal of
product line. . . . . . . . . . . . (6,948,000) (8,485,000)
Other. . . . . . . . . . . . . . . . . (4,219,000) (3,768,000)
--------------------------------
$24,525,000 $18,430,000
--------------------------------
--------------------------------
</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, 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate . . . . . . . . . 35.0% (35.0)% 34.0%
State tax effect . . . . . . . . . . . . 2.9 (1.5) 3.6
Goodwill . . . . . . . . . . . . . . . . 2.0 10.8 7.4
Tax rate change. . . . . . . . . . . . . - 5.6 -
Other. . . . . . . . . . . . . . . . . . (1.4) (4.3) (9.0)
---------------------------------
38.5% (24.4)% 36.0%
---------------------------------
---------------------------------
</TABLE>
NOTE F
EMPLOYEE RETIREMENT PLANS
Full-time employees of the Company who meet service requirements are eligible to
participate in the Michael Foods, Inc. Retirement Savings Plan. The Company will
match up to 4% of each participant's eligible compensation. Contributions of
$1,256,000, $1,088,000 and $1,204,000 were charged to operations for the years
ended December 31, 1994, 1993 and 1992, respectively.
16
<PAGE>
NOTE G
STOCKHOLDERS' EQUITY
During 1994, the Company purchased 14,562 shares of its common stock for
$300,000 under the terms of a put agreement that was part of a business
acquisition completed in 1989. In 1993, the Company purchased 220,600 shares of
its common stock for $1,828,000 on the open market under a stock repurchase
plan. These shares are held as treasury stock.
The Company's Non-Qualified Stock Option Plan (the "Plan") was adopted by
the Board of Directors on March 20, 1987. The Plan provides for the grant
of options to officers and other key employees of the Company and its
subsidiaries. The ten-year options are generally not exercisable in the first
year and vest ratably over the first five years. The exercise price of the
options granted is typically the fair market value at the date of grant.
Option transactions under the Plan during each of the three years ended
December 31, are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
January 1, 1992 . . . . . . . . . . . . . 1,518,461 $7.11-$18.63
Granted. . . . . . . . . . . . . . . . . . . 83,252 8.38- 18.88
Exercised. . . . . . . . . . . . . . . . . . (26,500) 7.11- 12.42
Cancelled. . . . . . . . . . . . . . . . . . (75,599) 8.58- 17.83
---------------------------
Outstanding at
December 31, 1992 . . . . . . . . . . . . 1,499,614 7.11- 18.88
Granted. . . . . . . . . . . . . . . . . . . 226,847 8.00- 10.13
Cancelled. . . . . . . . . . . . . . . . . . (50,231) 9.33- 18.88
---------------------------
Outstanding at
December 31, 1993 . . . . . . . . . . . . 1,676,230 7.11- 18.88
Granted. . . . . . . . . . . . . . . . . . . 59,000 8.13- 12.25
Cancelled. . . . . . . . . . . . . . . . . . (5,253) 10.13- 17.83
---------------------------
Outstanding at
December 31, 1994 . . . . . . . . . . . . 1,729,977 $ 7.11-$18.88
---------------------------
---------------------------
</TABLE>
Options to purchase 1,477,161 shares were exercisable at December 31, 1994.
The Company also has an Incentive Stock Option Plan (the "ISO Plan");
however, no shares have been granted under its provisions. The Company has
reserved 2,142,500 shares for the Plan and the ISO Plan.
The Company's Non-Qualified Stock Option Plan for Non-Employee Directors
(the "Director Plan") was approved by the Stockholders on April 27, 1993. The
Director Plan provides for 150,000 shares reserved for grant. All options are
exercisable one year from the date of grant and have a term of ten years.
Previous to adopting the Director Plan, the Company had a policy of granting
options to non-employee directors upon election or appointment.
Option transactions under the Director Plan during each of the three years
ended December 31, are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
January 1, 1992 . . . . . . . . . . . . . 90,000 $7.11-$14.67
Exercised. . . . . . . . . . . . . . . . . . (45,000) 7.11- 9.78
-------------------------
Outstanding at
December 31, 1992 . . . . . . . . . . . . 45,000 9.67- 14.67
Granted. . . . . . . . . . . . . . . . . . . 20,000 7.63- 10.13
Cancelled. . . . . . . . . . . . . . . . . . (16,250) 9.67- 11.25
-------------------------
Outstanding at
December 31, 1993 . . . . . . . . . . . . 48,750 7.63- 14.67
Granted. . . . . . . . . . . . . . . . . . . 5,000 13.00
Cancelled. . . . . . . . . . . . . . . . . . (11,250) 12.42
-------------------------
Outstanding at
December 31, 1994 . . . . . . . . . . . . 42,500 $7.63-$14.67
-------------------------
-------------------------
</TABLE>
NOTE H
MAJOR CUSTOMER
Sales to one customer accounted for 10% of consolidated net sales in 1994.
17
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
MICHAEL FOODS, INC.
We have audited the accompanying consolidated balance sheets of Michael Foods,
Inc. and Subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Michael Foods,
Inc. and Subsidiaries as of December 31, 1994 and 1993 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
February 15, 1995
18
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales. . . . . . . . . . . . . . . . . . . . . $505,965 $474,783 $442,734 $454,735 $461,229
Cost of sales. . . . . . . . . . . . . . . . . . . 430,917 414,965 390,185 380,270 376,170
------------------------------------------------------
Gross profit . . . . . . . . . . . . . . . . . . . 75,048 59,818 52,549 74,465 85,059
Selling, general and administrative expenses . . . 41,851 39,122 36,936 34,217 44,240
Disposal of product line . . . . . . . . . . . . . - 22,769 - - -
Restructuring charges. . . . . . . . . . . . . . . - 11,164 - - -
------------------------------------------------------
41,851 73,055 36,936 34,217 44,240
------------------------------------------------------
Operating profit (loss). . . . . . . . . . . . . . 33,197 (13,237) 15,613 40,248 40,819
Interest expense, net. . . . . . . . . . . . . . . 8,498 8,363 9,588 9,511 9,830
------------------------------------------------------
Earnings (loss) before income taxes and
minority interest . . . . . . . . . . . . . . 24,699 (21,600) 6,025 30,737 30,989
Income tax expense (benefit) . . . . . . . . . . . 9,510 (5,280) 2,175 11,070 11,350
------------------------------------------------------
Earnings (loss) before minority interest . . . . . 15,189 (16,320) 3,850 19,667 19,639
Minority interest. . . . . . . . . . . . . . . . . - - - - (1,053)
------------------------------------------------------
Net earnings (loss) . . . . . . . . . . . . . $15,189 $(16,320) $3,850 $19,667 $18,586
------------------------------------------------------
------------------------------------------------------
Net earnings (loss) per share (1). . . . . . . . . $.79 $ (.84) $.20 $1.07 $1.11
------------------------------------------------------
------------------------------------------------------
Weighted average shares outstanding (1). . . . . . 19,315 19,416 19,516 18,400 16,730
Dividends per common share (1) . . . . . . . . . . $.20 $.20 $.20 $.20 $.15
BALANCE SHEET DATA (end of period)
Working capital. . . . . . . . . . . . . . . . . . $33,589 $22,267 $54,826 $58,988 $13,342
Total assets . . . . . . . . . . . . . . . . . . . 336,645 329,087 370,218 357,171 304,210
Long-term debt, including current maturities . . . 100,604 104,008 135,798 120,645 105,643
Stockholders' equity . . . . . . . . . . . . . . . 166,029 155,003 177,037 176,321 110,840
------------------------------------------------------
------------------------------------------------------
<FN>
(1) All share and per share data have been adjusted for a three-for-two Common
Stock split effected in the form of a stock dividend paid on May 9, 1991.
</TABLE>
19
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Net sales. . . . . . . . . . . . . . . . . . $121,641 $125,530 $127,878 $130,916
Gross profit . . . . . . . . . . . . . . . . 17,168 18,331 18,323 21,226
Net earnings . . . . . . . . . . . . . . . . 3,211 3,693 3,640 4,645
Net earnings per share . . . . . . . . . . . $.17 $.19 $.19 $.24
Weighted average shares outstanding. . . . . 19,316 19,316 19,316 19,311
1993
Net sales. . . . . . . . . . . . . . . . . . $104,931 $119,447 $120,709 $129,696
Gross profit . . . . . . . . . . . . . . . . 12,764 15,286 15,705 16,063
Net earnings (loss). . . . . . . . . . . . . 511 2,134 1,347 (20,312)
Net earnings (loss) per share. . . . . . . . $.03 $.11 $.07 $(1.05)
Weighted average shares outstanding. . . . . 19,537 19,447 19,365 19,316
</TABLE>
BOARD OF DIRECTORS
JAMES H. MICHAEL
CHAIRMAN OF THE BOARD OF DIRECTORS
OF THE COMPANY
CHAIRMAN OF THE EXECUTIVE COMMITTEE
OF THE BOARD OF DIRECTORS
NORTH STAR UNIVERSAL, INC.
RICHARD A. COONROD
PRESIDENT
COONROD AGRIPRODUCTION CORP.
MILES E. EFRON
(CHAIR, COMPENSATION COMMITTEE)
CHAIRMAN OF THE BOARD OF DIRECTORS
NORTH STAR UNIVERSAL, INC.
ORVILLE L. FREEMAN
OF COUNSEL
POPHAM, HAIK, SCHNOBRICH &
KAUFMAN, LTD.
ARVID C. KNUDTSON
(CHAIR, AUDIT COMMITTEE)
CONSULTANT
JOSEPH D. MARSHBURN
SENIOR VICE PRESIDENT
CITRUS WORLD, INC.
JEFFREY J. MICHAEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NORTH STAR UNIVERSAL, INC.
RICHARD G. OLSON
RETIRED PRESIDENT AND CHIEF EXECUTIVE
OFFICER OF THE COMPANY
GREGG A. OSTRANDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
THE COMPANY
20
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING:
Stockholders and members of the investment community are cordially invited to
attend the Annual Meeting, which will be held at 4:00 p.m., local time, on
Thursday, April 27, 1995, in the auditorium of the Lutheran Brotherhood
Building, 625 Fourth Avenue South in Minneapolis, Minnesota.
INVESTOR INQUIRIES:
Requests for financial publications, including Form 10-K filed with the
Securities and Exchange Commission, should be addressed to:
Michael Foods, Inc.
Attention: Mark D. Witmer
Director of Corporate Communications
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
CERTIFIED PUBLIC ACCOUNTANTS:
Grant Thornton LLP
500 Pillsbury Center
Minneapolis, Minnesota 55402
CORPORATE COUNSEL:
Maun & Simon
2900 Norwest Center
Minneapolis, Minnesota 55402
TRANSFER AGENT AND REGISTRAR:
The First National Bank of Boston
Investor Relations
Mail Stop 45-02-09
P.O. Box 644
Boston, Massachusetts 02102-0644
Stockholder Inquiries:
800-442-2001
LISTING:
The Company's common stock trades on The Nasdaq Stock Market under the symbol:
MIKL.
MARKET PRICE RANGES:
The following table sets forth the high and low daily sale prices for each
quarter of 1994 and 1993.
<TABLE>
<CAPTION>
1994 Low High
----------------------------------------
<S> <C> <C>
First Quarter. . . . 7 7/8 11 1/4
Second Quarter . . . 9 12 3/8
Third Quarter. . . . 10 1/8 13 1/4
Fourth Quarter . . . 9 1/4 13
1993 Low High
----------------------------------------
First Quarter. . . . 8 1/8 11 1/2
Second Quarter . . . 6 1/2 9 3/8
Third Quarter. . . . 7 5/8 10 3/4
Fourth Quarter . . . 7 1/2 9 3/4
</TABLE>
The following table sets forth the regular quarterly cash dividends paid per
share in 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
----------------------------------------
<S> <C> <C>
First Quarter. . . . $.05 $.05
Second Quarter . . . .05 .05
Third Quarter. . . . .05 .05
Fourth Quarter . . . .05 .05
</TABLE>
At year end 1994 the Company had 685 common stockholders of record and an
estimated 7,000 beneficial owners whose shares were held by nominees or broker
dealers.
OTHER INFORMATION
CORPORATE HEADQUARTERS:
Michael Foods, Inc.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
612-546-1500
CORPORATE EXECUTIVE OFFICERS:
Gregg A. Ostrander
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Jeffrey M. Shapiro
EXECUTIVE VICE PRESIDENT AND SECRETARY
John D. Reedy
VICE PRESIDENT-FINANCE,
CHIEF FINANCIAL OFFICER AND TREASURER
SUBSIDIARY OFFICES:
Crystal Farms Refrigerated
Distribution Company
Park Place West, Suite 200
6465 Wayzata Boulevard
Minneapolis, Minnesota 55426
Drallos Potato Co., Inc.
6500 East Warren
Detroit, Michigan 48207
Farm Fresh Foods, Inc.
6602 Clara Street
Bell Gardens, California 90201
Kohler Mix Specialties, Inc.
4041 Highway 61
White Bear Lake, Minnesota 55110
M.G. Waldbaum Company
500 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
Morning Glory Eggs, Inc.
Highway 49 South
Richfield, North Carolina 28137
Northern Star Co.
3171 Fifth Street Southeast
Minneapolis, Minnesota 55414
Wisco Farm Cooperative
450 North CP Avenue
Lake Mills, Wisconsin 53551
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF MICHAEL FOODS, INC.
STATE OF
NAME INCORPORATION
--------------------------------------------------------------------------------
Crystal Foods, Inc. Minnesota
Crystal Farms Refrigerated Distribution Company Minnesota
Northern Star Co. Minnesota
Kohler Mix Specialties, Inc. Minnesota
Morning Glory Eggs, Incorporated North Carolina
M. G. Waldbaum Company Nebraska
Wayne Grain & Feed, Inc. Nebraska
Wisco Farm Cooperative Wisconsin
WFC, Inc. Wisconsin
Farm Fresh Foods, Inc. California
Drallos Potato Co., Inc. Michigan
Reddi Egg America, Inc. Minnesota
M. G. Waldbaum Company of Florida Florida
Midwest Mix, Inc. Minnesota
B.C.K. Company Minnesota
Minnesota Products, Inc. Minnesota
MIKL, Inc. Minnesota
Super Critical Venturers (a general partnership) 50% Interest Minnesota
<PAGE>
EXHIBIT 23.1
Auditors' Consent
We have issued our reports dated February 15, 1995 accompanying the
consolidated financial statements and schedule incorporated by reference or
included in the Annual Report of Michael Foods, Inc. on Form 10-K for the year
ended December 31, 1994. 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; File Nos. 33-64076 and
33-64078, effective June 9, 1993; and File No. 33-57969, effective March 7,
1995).
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
March 17, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated statements of operations and condensed consolidated
balance sheets on pages 10 & 11 of the company's Annual Report for the year
ended December 31, 1994, 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-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,641
<SECURITIES> 0
<RECEIVABLES> 36,622
<ALLOWANCES> 0
<INVENTORY> 54,631
<CURRENT-ASSETS> 93,985
<PP&E> 280,761
<DEPRECIATION> 99,702
<TOTAL-ASSETS> 336,645
<CURRENT-LIABILITIES> 60,396
<BONDS> 88,795
<COMMON> 199
0
0
<OTHER-SE> 165,830
<TOTAL-LIABILITY-AND-EQUITY> 336,645
<SALES> 505,965
<TOTAL-REVENUES> 505,965
<CGS> 430,917
<TOTAL-COSTS> 430,917
<OTHER-EXPENSES> 41,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,498
<INCOME-PRETAX> 24,699
<INCOME-TAX> 9,510
<INCOME-CONTINUING> 15,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,189
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
